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Loan Agreement - HALLMARK FINANCIAL SERVICES INC - 3-28-1997

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Loan Agreement - HALLMARK FINANCIAL SERVICES INC - 3-28-1997 Powered By Docstoc
					LOAN AGREEMENT THIS LOAN AGREEMENT (the "Agreement") is made and entered into on this day of March, 1997, by and between Hallmark Financial Services, Inc., a Nevada corporation (the "Borrower"), and DORINCO REINSURANCE COMPANY (the Lender ), a Michigan corporation. Borrower and Lender agree as follows: 1. Definitions. For purposes of this Agreement, the following terms have the following meanings: a. "ACO" means ACO Holdings, Inc., a Texas corporation which is wholly owned by HFS. b. "Affiliates" means the Subsidiaries, Hallmark Underwriting, Inc., a Texas corporation, and American Hallmark Agencies, Inc., a Texas corporation. "Affiliate" means any of the Affiliates. c. "Agreement" means this Loan Agreement, as amended, modified or supplemented from time to time in writing. d. "AH" means American Hallmark Insurance Company of Texas, a Texas domiciled insurance company which is wholly owned by HFS. e. "AHGA" means American Hallmark General Agency, Inc., a Texas corporation which is wholly owned by ACO. f. "Borrower" means Hallmark Financial Services, Inc., a Nevada corporation. g. "Business Day" means a day other than a Saturday, Sunday or other day on which Lender is not open for business. h. "Code" means the Internal Revenue Code of 1986, as amended from time to time. i. "Combined Ratio" means a combined ratio determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas. j. "Commissioner" means the Commissioner of the Texas Department of Insurance. k. "Environment" means any water, including, but not limited to, surface water, ground water and water vapor, any land, including land surface or subsurface, stream sediments, air, fish, wildlife, plants and all other natural resources or environmental media. l. "Environmental Laws" means all federal, state and local environmental, land use, zoning, health, chemical use, safety, and sanitation laws, statutes, ordinances, regulations, codes and rules relating to the protection of the Environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of hazardous substances (as defined in 42 U.S.C. Section 9601(14)) and the policies, guidelines, procedures,

interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto. m. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. n. "Events of Default" means the occurrence of one or more events set forth in Section 8 of this Agreement. o. "Federal Bankruptcy Code" means Title 11 of the United States Code, entitled "Bankruptcy," as amended, or

interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto. m. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. n. "Events of Default" means the occurrence of one or more events set forth in Section 8 of this Agreement. o. "Federal Bankruptcy Code" means Title 11 of the United States Code, entitled "Bankruptcy," as amended, or any successor federal bankruptcy law. p. "Gross Premium Written" means gross premiums determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas. q. "HCS" means Hallmark Claims Services, Inc., a Texas corporation which is wholly owned by ACO. r. " H FC" means Hallmark Finance Corporation, a Texas corporation which is wholly owned by ACO. s. "HFC Interest Coverage Ratio" means, for any period specified below, the ratio of (i) the sum obtained by adding (A) HFC's pre-tax net income determined in accordance with generally accepted accounting principles (but before deduction of dividends, distributions, management fees and marketing fees) for such period, plus (B) HFC Interest Expense for such period, to (ii) HFC Interest Expense for such period. The Interest Coverage Ratio shall be determined (x) as of the last day of the fiscal quarters ending September 30, 1997, December 31, 1997, and March 31, 1998, for the period commencing on July 1, 1997, and ending on the last day of each such fiscal quarter, and (y) as of the last day of each fiscal quarter ending in the period beginning April 1, 1998 through and including the Expiration Date, for the twelve-month period ending on the last day of such fiscal quarter. t. "HFC Interest Expense" means for any period the sum of (i) HFC's aggregate interest expense determined in accordance with generally accepted accounting principles (including the portion of any obligation allocable to interest expense under a capital lease) for such period, plus (ii) HFC's bad debt expense determined in a manner consistent with the Borrower's internally prepared financial statements dated November 30, 1996. u. "Indebtedness" means any obligation, indebtedness or liability now or hereafter owed by Borrower to Lender pursuant to the Transaction Documents. v. "Lender" means Dorinco Reinsurance Company, a Michigan corporation, and any successors or assigns.

w. " L o ss Ratio" means the loss ratio determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas. x. "NationsBank Loan Documents" means the Loan Documents described and defined in that certain Loan Agreement of even date herewith between HFC and NationsBank of Texas, N.A. y. "Net Premium Written" means net premiums determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas. z. "Outstanding Debt" means any obligation, indebtedness or liability now or hereafter owed by HFC pursuant to the NationsBank Loan Documents. aa. "Pledge Agreement" means the Stock Pledge and Security Agreement described in Section 3 pursuant to which Borrower pledges to Lender, as security for the Indebtedness, the Pledged Stock. bb. "Pledged Stock" means all of the following, whether now owned or hereafter acquired: (i) all of the issued

w. " L o ss Ratio" means the loss ratio determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas. x. "NationsBank Loan Documents" means the Loan Documents described and defined in that certain Loan Agreement of even date herewith between HFC and NationsBank of Texas, N.A. y. "Net Premium Written" means net premiums determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas. z. "Outstanding Debt" means any obligation, indebtedness or liability now or hereafter owed by HFC pursuant to the NationsBank Loan Documents. aa. "Pledge Agreement" means the Stock Pledge and Security Agreement described in Section 3 pursuant to which Borrower pledges to Lender, as security for the Indebtedness, the Pledged Stock. bb. "Pledged Stock" means all of the following, whether now owned or hereafter acquired: (i) all of the issued and outstanding capital stock of HFC, (ii) all certificates, options, rights, warrants and other securities issued as an addition to, in substitution or exchange for, or on account of such shares of capital stock, and (iii) all proceeds of the foregoing. cc. "Promissory Note" means the Promissory Note of even date herewith in the original principal amount of $7,000,000.00 from Borrower, as maker, payable to the order of Lender, in the form attached hereto as Exhibit A, and all extensions, renewals, substitutions and modifications thereof. dd. "Restricted Stock" means all of the following, whether now owned or hereafter acquired: (i) all of the issued and outstanding capital stock of AH and AHGA, (ii) all certificates, options rights, warrants and other securities issued as an addition to, in substitution or exchange for, or on account of such shares of capital stock, and (iii) all proceeds of the foregoing. ee. "Solvent" means, with respect to any person or entity, on a particular determination date, that on such date such person or entity is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business. ff. "Statutory Capital and Surplus" means capital and surplus determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas.

gg. "Subsidiaries" means ACO, AH, AHGA, HCS, and HFC. "Subsidiary" means any of the Subsidiaries. hh. "Transaction Documents" means this Agreement, the Promissory Note, the Pledge Agreement, and all amendments, renewals, substitutions and restatements of any of the preceding documents. 2. Promissory Note Commitment. Lender will loan to Borrower the sum of $7,000,000.00 upon the terms and conditions set forth in this Agreement and the Promissory Note for the purpose of enabling Borrower to make a $7,000,000 capital contribution to HFC. 3. Collateral. In order to secure the Indebtedness, Borrower has caused ACO to pledge to Lender the Pledged Stock pursuant to the terms of the Pledge Agreement attached hereto as Exhibit B. Lender shall not presently have or claim any security interest in the Restricted Stock. Upon the occurrence of any "triggering event" specified below, Borrower shall, and shall cause ACO to, within ten (10) days, execute and deliver to Lender a Stock Pledge and Security Agreement in substantially the same form as Exhibit B (without any material change thereto) covering the Restricted Stock, together with certificates representing the Restricted Stock, and thereafter such Restricted Stock shall be deemed Pledged Stock for purposes of this Agreement. For purposes of this Section 3, a "triggering event" means:

gg. "Subsidiaries" means ACO, AH, AHGA, HCS, and HFC. "Subsidiary" means any of the Subsidiaries. hh. "Transaction Documents" means this Agreement, the Promissory Note, the Pledge Agreement, and all amendments, renewals, substitutions and restatements of any of the preceding documents. 2. Promissory Note Commitment. Lender will loan to Borrower the sum of $7,000,000.00 upon the terms and conditions set forth in this Agreement and the Promissory Note for the purpose of enabling Borrower to make a $7,000,000 capital contribution to HFC. 3. Collateral. In order to secure the Indebtedness, Borrower has caused ACO to pledge to Lender the Pledged Stock pursuant to the terms of the Pledge Agreement attached hereto as Exhibit B. Lender shall not presently have or claim any security interest in the Restricted Stock. Upon the occurrence of any "triggering event" specified below, Borrower shall, and shall cause ACO to, within ten (10) days, execute and deliver to Lender a Stock Pledge and Security Agreement in substantially the same form as Exhibit B (without any material change thereto) covering the Restricted Stock, together with certificates representing the Restricted Stock, and thereafter such Restricted Stock shall be deemed Pledged Stock for purposes of this Agreement. For purposes of this Section 3, a "triggering event" means: a. If as of the end of any fiscal quarter AH's Combined Ratio for the four (4) immediately preceding fiscal quarters of AH's operations exceeds 107%; b. If as of the end of any fiscal quarter AH's Loss Ratio for the four (4) immediately preceding fiscal quarters of AH's operations exceeds 83%; c. If as of the end of any fiscal quarter the HFC Interest Coverage Ratio is less than 1.8 to 1.0; d. As of the date of any reporting period required by law or the Texas Department of Insurance, the stockholders' equity of HFC (determined in accordance with generally accepted accounting principles) shall be less than the amount set forth below for the calendar year indicated:
1997 1998 1999 2000 2001 and thereafter $7,890,000 $8,200,000 $8,650,000 $9,200,000 $9,450,000; or

e. As of the date of any reporting period required by law or the Texas Department of Insurance, the Statutory Capital and Surplus of AH shall be less than $4,200,000 or shall have decreased by more than 15% from the comparable reporting period of the preceding calendar year. 4. Conditions to this Agreement. This Agreement is effective only upon fulfillment of the following conditions to the satisfaction of Lender on or prior to the date of execution of this Agreement:

a. C o rporate Action. Borrower shall have taken all necessary and appropriate corporate action authorizing Borrower to enter into and perform this Agreement and to execute and deliver to Lender this Agreement, the Promissory Note, the Pledge Agreement and any other documents reasonably requested by Lender. Further, Borrower shall have delivered to Lender certified copies of such corporate resolutions and such other corporate documents as Lender may reasonably request. b. Corporate Documents. Borrower shall have furnished to Lender: (i) a certificate of Borrower's and a certificate of AH's, HFC s and AHGA s good standing in the State of Texas, issued as of a date satisfactory to Lender; (ii) c e r tificate of incumbency specifying the officers of Borrower; and

a. C o rporate Action. Borrower shall have taken all necessary and appropriate corporate action authorizing Borrower to enter into and perform this Agreement and to execute and deliver to Lender this Agreement, the Promissory Note, the Pledge Agreement and any other documents reasonably requested by Lender. Further, Borrower shall have delivered to Lender certified copies of such corporate resolutions and such other corporate documents as Lender may reasonably request. b. Corporate Documents. Borrower shall have furnished to Lender: (i) a certificate of Borrower's and a certificate of AH's, HFC s and AHGA s good standing in the State of Texas, issued as of a date satisfactory to Lender; (ii) c e r tificate of incumbency specifying the officers of Borrower; and (iii) such other documents as Lender may reasonably request. c. Borrower's Opinion. Borrower shall have delivered to Lender an opinion of Borrower's counsel in form and content satisfactory to Lender and its counsel. d. Transaction Documents. Borrower shall have delivered or caused to have been delivered to Lender all Transaction Documents in form and content satisfactory to Lender and its counsel. e. Reinsurance Treaty. Borrower shall have caused AH to offer, for the time period set forth in the table contained in this paragraph, to reinsure a portion of its Personal Lines Auto Quota Share Reinsurance with Lender, the form and content of such reinsurance treaty to be substantially similar to Exhibit D attached to and made a part of this Agreement, in amounts sufficient to allow for the following schedule of ceded premiums:
Treaty Years Ceded Premium $ $ $ $ $ $ $ 20,000,000 21,600,000 23,328,000 25,194,240 27,209,779 29,386,562 31,737,486

07/01/97 07/01/98 07/01/99 07/01/00 07/01/01 07/01/02 07/01/03

to to to to to to to

06/30/98 06/30/99 06/30/00 06/30/01 06/30/02 06/30/03 06/30/04

f. Due Diligence. Lender shall have conducted a due diligence investigation of Borrower and its Affiliates in scope and content satisfactory to Lender. g. Other Documents. Borrower shall provide copies of all documentation as Lender reasonably requests. h. Other Matters. All matters incidental to the execution and delivery of the Transaction Documents and all actions required by the Transaction Documents shall be satisfactory to Lender.

5. Representations and Warranties. To induce Lender to enter into this Agreement and to loan to Borrower the funds described in this Agreement, Borrower represents and warrants. a. C o r p orate Existence. Borrower and its Affiliates are duly organized, validly existing and in good standing under the laws of the State of their incorporation, and each has the power to own its assets and carry on its business as now being conducted. b. Corporate Capacity. The execution, delivery and performance of the Transaction Documents to which Borrower is a party are within Borrower's corporate powers, have been duly authorized by all necessary and appropriate corporate action, and are not in contravention of any law or regulation or the terms of Borrower's Articles of Incorporation, Bylaws or amendments thereto, or of any agreement, undertaking or other document to which Borrower is a party or by which Borrower or any of Borrower's property is bound or affected. T h e

5. Representations and Warranties. To induce Lender to enter into this Agreement and to loan to Borrower the funds described in this Agreement, Borrower represents and warrants. a. C o r p orate Existence. Borrower and its Affiliates are duly organized, validly existing and in good standing under the laws of the State of their incorporation, and each has the power to own its assets and carry on its business as now being conducted. b. Corporate Capacity. The execution, delivery and performance of the Transaction Documents to which Borrower is a party are within Borrower's corporate powers, have been duly authorized by all necessary and appropriate corporate action, and are not in contravention of any law or regulation or the terms of Borrower's Articles of Incorporation, Bylaws or amendments thereto, or of any agreement, undertaking or other document to which Borrower is a party or by which Borrower or any of Borrower's property is bound or affected. T h e execution, delivery and performance of the Pledge Agreement is within ACO's corporate powers, has been duly authorized by all necessary and appropriate corporate action, and is not in contravention of any law or regulation or the terms of ACO's Articles of Incorporation, Bylaws or amendments thereto, or of any agreement, undertaking or other document to which Borrower or ACO is a party or by which Borrower or ACO or any of their respective property is bound or affected. c. Financial Condition. (i) Borrower has furnished to Lender its and AH's most current audited annual financial statements, which s t atements fairly and accurately reflect the financial condition and results of operations of Borrower and AH as of the date and for the period referred to, and have been prepared in accordance with generally accepted accounting principles consistently applied during the interval involved and from interval to interval. Since the date of such financial statements, there have not been any materially adverse changes in the financial condition or results of operations reflected in such financial statements, nor has AH's Statutory Capital and Surplus decreased by $250,000 or more. (ii) Borrower has furnished to Lender its and AH's most current quarterly consolidated and consolidating financial statements. Since the date of these financial statements, there have not been any material adverse changes in the financial condition or results of operations reflected in such financial statements, except as disclosed to Lender. d. Taxes. All federal and other tax returns required to be filed by Borrower and by AH have been filed and all taxes required by such returns have been paid, except to the extent that the same are now being contested in good faith and by appropriate proceedings. Neither Borrower nor AH has received any notice from the Internal Revenue Service or any other taxing authority proposing additional taxes.

e. Litigation. Except as disclosed to Lender, there are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened against Borrower or AH or any basis therefor, which, if adversely determined, could, in any case or in the aggregate, materially adversely affect the property, assets, financial condition or business of Borrower or AH, or impair the right or ability of Borrower or AH to carry on its operations substantially as conducted on the date of this Agreement. For purposes of this paragraph, "material" means a $250,000 or more decrease in AH's Statutory Capital and Surplus. f. V a l idity of Transaction Documents. The Transaction Documents to which Borrower is a party constitute t h e legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy and insolvency laws and the laws affecting creditors' rights generally. The Pledge Agreement constitutes the legal, valid and binding obligation of ACO, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy and insolvency laws and the laws affecting creditors' rights generally. g. Consents, Licenses, etc. No consent, license, approval or authorization of, or registration, declaration or filing with, any court, regulatory or governmental body, authority or person or entity is required in connection with t h e valid execution, delivery or performance of the Transaction Documents. h. No Violations. Borrower and AH are not in violation of any term of their Articles of Incorporation, Bylaws or,

e. Litigation. Except as disclosed to Lender, there are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened against Borrower or AH or any basis therefor, which, if adversely determined, could, in any case or in the aggregate, materially adversely affect the property, assets, financial condition or business of Borrower or AH, or impair the right or ability of Borrower or AH to carry on its operations substantially as conducted on the date of this Agreement. For purposes of this paragraph, "material" means a $250,000 or more decrease in AH's Statutory Capital and Surplus. f. V a l idity of Transaction Documents. The Transaction Documents to which Borrower is a party constitute t h e legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy and insolvency laws and the laws affecting creditors' rights generally. The Pledge Agreement constitutes the legal, valid and binding obligation of ACO, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy and insolvency laws and the laws affecting creditors' rights generally. g. Consents, Licenses, etc. No consent, license, approval or authorization of, or registration, declaration or filing with, any court, regulatory or governmental body, authority or person or entity is required in connection with t h e valid execution, delivery or performance of the Transaction Documents. h. No Violations. Borrower and AH are not in violation of any term of their Articles of Incorporation, Bylaws or, except as disclosed to Lender, any agreement or instrument to which they or their property are a party or are bound, and the execution and delivery of the Transaction Documents shall not cause a default or result in the violation of any such agreements. i. Contingent Liabilities. Except as set forth in the NationsBank Loan Documents, there are no suretyship agreements, guaranties or other contingent liabilities of Borrower and AH that have not been disclosed in writing to Lender. j. Compliance with Laws. Borrower and AH each are in compliance with all applicable laws, rules, regulations and other legal requirements with respect to its business, and the use, maintenance and operation of the real and personal property owned or leased by it in the conduct of its business, except where the failure to so comply would not have a material adverse effect on the financial condition, business or operation of either Borrower or AH.

k. Affiliates' Capital Stock. Each Affiliate's total authorized capital shares, the par value of such shares, a n d the number of such shares authorized, issued and outstanding, are as set forth on Exhibit C. All shares of each Affiliate are of one class and all shares of each Affiliate have been validly issued in full compliance with all federal and state laws, and are fully paid and non-assessable. No other shares of any class or type are authorized or outstanding respecting each Affiliate. The record and beneficial ownership of the issued and outstanding capital stock of each Affiliate is as set forth in Exhibit C. l. No Defaults. Except as disclosed to Lender, no event or condition is existing which constitutes, or upon the lapse of time or the giving of notice, or both, would constitute an event of default under any agreement or evidence of indebtedness relating to any obligation of Borrower or any Affiliate, except where such default would not have a material adverse effect on the financial condition, business or operation of Borrower or any Affiliate. m. R e s trictions on Pledged Stock. Neither Borrower nor any Affiliate is a party to any buy-sell agreement or similar agreement restricting the pledge or t r ansfer of its capital stock other than restrictions contained in the Transaction Documents and the NationsBank Loan Documents. n. No Options, Warrants, etc. Except as disclosed to Lender, there is not outstanding any option, warrant or other right requiring or permitting Borrower or others to purchase or convert any obligation into shares of any Affiliate's capital stock. o. Title to Assets. As of the date of execution of this Agreement, Borrower and its Subsidiaries each are the legal and beneficial owner of all of their assets and properties (including, without limitation, the Pledged Stock and the Restricted Stock) as disclosed in Borrower's and its Subsidiaries' consolidated and consolidating financial

k. Affiliates' Capital Stock. Each Affiliate's total authorized capital shares, the par value of such shares, a n d the number of such shares authorized, issued and outstanding, are as set forth on Exhibit C. All shares of each Affiliate are of one class and all shares of each Affiliate have been validly issued in full compliance with all federal and state laws, and are fully paid and non-assessable. No other shares of any class or type are authorized or outstanding respecting each Affiliate. The record and beneficial ownership of the issued and outstanding capital stock of each Affiliate is as set forth in Exhibit C. l. No Defaults. Except as disclosed to Lender, no event or condition is existing which constitutes, or upon the lapse of time or the giving of notice, or both, would constitute an event of default under any agreement or evidence of indebtedness relating to any obligation of Borrower or any Affiliate, except where such default would not have a material adverse effect on the financial condition, business or operation of Borrower or any Affiliate. m. R e s trictions on Pledged Stock. Neither Borrower nor any Affiliate is a party to any buy-sell agreement or similar agreement restricting the pledge or t r ansfer of its capital stock other than restrictions contained in the Transaction Documents and the NationsBank Loan Documents. n. No Options, Warrants, etc. Except as disclosed to Lender, there is not outstanding any option, warrant or other right requiring or permitting Borrower or others to purchase or convert any obligation into shares of any Affiliate's capital stock. o. Title to Assets. As of the date of execution of this Agreement, Borrower and its Subsidiaries each are the legal and beneficial owner of all of their assets and properties (including, without limitation, the Pledged Stock and the Restricted Stock) as disclosed in Borrower's and its Subsidiaries' consolidated and consolidating financial statements. Borrower and its Subsidiaries own such assets and properties free and clear of all security interests, liens and other encumbrances other than the encumbrances created by (i) ACO's pledge of the Pledged Stock, (ii) the NationsBank Loan Documents, (iii) existing encumbrances disclosed in B o r rower's consolidated and consolidating financial statements, (iv) p u rchase money security interests in equipment used in the normal course of Borrower's or an Affiliate's business, and (v) operating or capital equipment leases for use in the ordinary course of business.

p. ERISA. Borrower and its Affiliates are in compliance with all of the provisions of ERISA and no events or circumstances have occurred or exist which could result in Borrower or any Affiliate incurring a material liability or contingent liability under the provisions of ERISA. q. E n vironmental Matters. Borrower and its Affiliates are not subject to any existing, pending or threatened suit, claim, notice of violation or request for information under any Environmental Laws. Borrower and its Affiliates have not provided any notice or information to regulatory authorities under any Environmental Laws. Borrower and its Affiliates are in compliance with all Environmental Laws. r. Solvency. Borrower and its Affiliates are S o l vent, both before and after giving effect to the transactions contemplated by the Transaction Documents. s. Lien on Pledged Stock. Upon execution and delivery of the Pledge Agreement and delivery of the Pledged Stock to Lender, the Pledge Agreement shall create a valid lien upon and first priority perfected security interest in the Pledged Stock and the proceeds of the Pledged Stock, s u b ject to no prior security interest, lien, charge, encumbrance or agreement purporting to grant to any third party a security interest in the Pledged Stock. The representations and warranties contained in this Agreement survive closing of the transactions described in this Agreement.

p. ERISA. Borrower and its Affiliates are in compliance with all of the provisions of ERISA and no events or circumstances have occurred or exist which could result in Borrower or any Affiliate incurring a material liability or contingent liability under the provisions of ERISA. q. E n vironmental Matters. Borrower and its Affiliates are not subject to any existing, pending or threatened suit, claim, notice of violation or request for information under any Environmental Laws. Borrower and its Affiliates have not provided any notice or information to regulatory authorities under any Environmental Laws. Borrower and its Affiliates are in compliance with all Environmental Laws. r. Solvency. Borrower and its Affiliates are S o l vent, both before and after giving effect to the transactions contemplated by the Transaction Documents. s. Lien on Pledged Stock. Upon execution and delivery of the Pledge Agreement and delivery of the Pledged Stock to Lender, the Pledge Agreement shall create a valid lien upon and first priority perfected security interest in the Pledged Stock and the proceeds of the Pledged Stock, s u b ject to no prior security interest, lien, charge, encumbrance or agreement purporting to grant to any third party a security interest in the Pledged Stock. The representations and warranties contained in this Agreement survive closing of the transactions described in this Agreement. 6. Affirmative Covenants. So long as any part of the Indebtedness remains unpaid or this Agreement remains in effect, Borrower shall comply with the affirmative covenants listed below: a. I n f o rmation to be Furnished to Lender. Borrower shall and shall cause AH to furnish to Lender: (i) as soon as available, a copy of each annual or quarterly report of, including but not limited to finances and results of the National Association of Insurance Commissioners Insurance Regulatory Information System tests, Borrower and AH filed with the Texas Department of Insurance or any other insurance regulatory authority; (ii) as soon as available, but no later than one hundred twenty (120) days after the end of each fiscal y e a r, audited consolidated and consolidating financial statements of Borrower, AH and HFC, as of the end of such year, which have been prepared in accordance with generally a c c epted accounting principles and present fairly and accurately the financial condition and results of operations of Borrower, AH and HFC, for said period, which statements shall consist of balance sheets and related statements of income, retained earnings and cash flow, all in reasonable d e t ail and certified by Borrower's independent public accountants;

(iii) as soon as available, but no later than forty-five (45) days after the end of each fiscal quarter, unaudited consolidated and consolidating financial statements of Borrower, AH and HFC, as of the end of such fiscal quarter, which contain non-material variations from generally accepted accounting principles and present fairly a n d accurately the financial condition and results of operations of Borrower, AH and HFC, for said period, which statements shall consist of balance sheets and related statements of income, retained earnings and cash flow, all in reasonable detail and certified to be true and correct by Borrower's chief financial officer or President; (iv) as soon as available, copies of all of Borrower's reports on Form 10-KSB, Form 10-QSB and Form 8-K filed with the Securities and Exchange Commission; (v) as soon as available all independent third party audits, insurance regulatory agency audits and actuarial reports of Borrower, AH, or HFC; (vi) i m m ediate notice in writing of any material event or circumstance which bears upon the accuracy or reliability of the information previously furnished to Lender; (vii) prompt notice in writing, in such detail as Lender may reasonably request, of all material litigation and all material proceedings before any governmental or regulatory agencies affecting Borrower, AH, or HFC; (viii) within ten (10) days after Borrower obtains knowledge of the occurrence of any Event of Default under this Agreement, or any Transaction Document which is continuing or of any condition not remedied which, upon the

(iii) as soon as available, but no later than forty-five (45) days after the end of each fiscal quarter, unaudited consolidated and consolidating financial statements of Borrower, AH and HFC, as of the end of such fiscal quarter, which contain non-material variations from generally accepted accounting principles and present fairly a n d accurately the financial condition and results of operations of Borrower, AH and HFC, for said period, which statements shall consist of balance sheets and related statements of income, retained earnings and cash flow, all in reasonable detail and certified to be true and correct by Borrower's chief financial officer or President; (iv) as soon as available, copies of all of Borrower's reports on Form 10-KSB, Form 10-QSB and Form 8-K filed with the Securities and Exchange Commission; (v) as soon as available all independent third party audits, insurance regulatory agency audits and actuarial reports of Borrower, AH, or HFC; (vi) i m m ediate notice in writing of any material event or circumstance which bears upon the accuracy or reliability of the information previously furnished to Lender; (vii) prompt notice in writing, in such detail as Lender may reasonably request, of all material litigation and all material proceedings before any governmental or regulatory agencies affecting Borrower, AH, or HFC; (viii) within ten (10) days after Borrower obtains knowledge of the occurrence of any Event of Default under this Agreement, or any Transaction Document which is continuing or of any condition not remedied which, upon the lapse of time or the giving of notice, or both, would constitute an Event of Default under this Agreement, or any Transaction Document notice of such occurrence together with a detailed statement of the steps taken to cure the effect of such event or condition; and (ix) as soon as practicable, but in no event later than thirty (30) days after Lender's request, such other information respecting the financial condition and results of operations of Borrower, AH, or HFC, as Lender may reasonably request from time to time. b. Examinations. Borrower shall and shall cause AH and HFC to, at any time during normal working hours and from time to time, permit Lender or its agents to inspect Borrower's, AH s and/or HFC s books and records, which books and records shall be kept in good order and reasonable detail. c. Taxes. Borrower shall and shall cause its A f f i liates to promptly pay and discharge all taxes, assessments and other governmental charges prior to the date on which penalties are attached thereto.

d. Good Standing; Business. Borrower shall and shall cause its Affiliates to take all reasonable steps to preserve their corporate existence and their right to conduct business as presently conducted. e. Compliance with Laws. Borrower shall and shall cause its Affiliates to comply with any applicable federal, state or local laws, rules, regulations and other legal requirements with respect to their business, including but not limited to compliance with all Environmental Laws and the provisions of ERISA and the Code with respect to all pension plans. f. License, Permits, etc. Borrower shall and s h a ll cause its Affiliates to maintain all of their franchises, grants, authorizations, licenses, permits, consents, certificates and orders, if any, in full force and effect until their respective expiration dates, except where the failure to maintain such items will not have a material adverse effect on either Borrower or its Affiliates, their financial condition, business or operation. g. Maintenance of Ownership. Borrower shall cause its Affiliates to at all times maintain the percentage ownership of each class of their issued and outstanding capital stock as set forth in Exhibit C. h. Insurance. Borrower shall and shall cause its Affiliates to maintain or cause to be maintained insurance with responsible and reputable insurance companies acceptable to Lender in such amounts and covering such risks as may be reasonably required by Lender; provided, however, that Lender acknowledges and agrees that the current insurance carriers, amounts and risks covered are now satisfactory.

d. Good Standing; Business. Borrower shall and shall cause its Affiliates to take all reasonable steps to preserve their corporate existence and their right to conduct business as presently conducted. e. Compliance with Laws. Borrower shall and shall cause its Affiliates to comply with any applicable federal, state or local laws, rules, regulations and other legal requirements with respect to their business, including but not limited to compliance with all Environmental Laws and the provisions of ERISA and the Code with respect to all pension plans. f. License, Permits, etc. Borrower shall and s h a ll cause its Affiliates to maintain all of their franchises, grants, authorizations, licenses, permits, consents, certificates and orders, if any, in full force and effect until their respective expiration dates, except where the failure to maintain such items will not have a material adverse effect on either Borrower or its Affiliates, their financial condition, business or operation. g. Maintenance of Ownership. Borrower shall cause its Affiliates to at all times maintain the percentage ownership of each class of their issued and outstanding capital stock as set forth in Exhibit C. h. Insurance. Borrower shall and shall cause its Affiliates to maintain or cause to be maintained insurance with responsible and reputable insurance companies acceptable to Lender in such amounts and covering such risks as may be reasonably required by Lender; provided, however, that Lender acknowledges and agrees that the current insurance carriers, amounts and risks covered are now satisfactory. i. Books and Records. Borrower shall and shall cause its Affiliates to maintain, at their own cost and expense, accurate and complete books and records which comply in all material respects with generally accepted accounting principles and, with respect to AH, with statutory accounting principles. j. Defend Pledged and Restricted Stock. (i) Borrower shall cause all stock certificates representing shares of the issued and outstanding capital stock of AHGA and AH to contain a reference to this Agreement in the form attached hereto as Exhibit E. (ii) Borrower shall, and shall cause ACO to, defend at its own expense, the Pledged Stock and Restricted Stock against the claims and demands of all third parties. k. Use of Proceeds. Borrower shall use the proceeds of the Promissory Note to purchase additional shares of the capital stock or otherwise contribute to the equity capital of HFC.

l. Management. Borrower may make changes in and additions to its management group so long as either Ramon D. Phillips or Linda H. Sleeper remains primarily responsible for t h e management of Borrower. In the event of death, resignation, or incapacity of both Ramon D. Phillips and Linda H. Sleeper, Borrower shall obtain Lender's acceptance of the named replacement, such acceptance not to be unreasonably withheld. m. Statutory Capital and Surplus. (i) B o rrower shall cause AH to maintain Statutory Capital and Surplus of at least $2,650,000 as of the date of each reporting period required by law or required by the Texas Department of Insurance. (ii) Borrower shall cause HFC to maintain the f o l l owing minimum stockholders' equity (determined in accordance with generally accepted accounting principles) as of the date of each reporting period required by law or required by the Texas Department of Insurance:
1997 1998 1999 2000 2001 Board $ 7,780,000 $ 8,000,000 $ 8,300,000 $ 8,800,000 $ 9,300,000 Borrower shall advise Lender

n.

Meetings.

l. Management. Borrower may make changes in and additions to its management group so long as either Ramon D. Phillips or Linda H. Sleeper remains primarily responsible for t h e management of Borrower. In the event of death, resignation, or incapacity of both Ramon D. Phillips and Linda H. Sleeper, Borrower shall obtain Lender's acceptance of the named replacement, such acceptance not to be unreasonably withheld. m. Statutory Capital and Surplus. (i) B o rrower shall cause AH to maintain Statutory Capital and Surplus of at least $2,650,000 as of the date of each reporting period required by law or required by the Texas Department of Insurance. (ii) Borrower shall cause HFC to maintain the f o l l owing minimum stockholders' equity (determined in accordance with generally accepted accounting principles) as of the date of each reporting period required by law or required by the Texas Department of Insurance:
1997 1998 1999 2000 2001 Board $ 7,780,000 $ 8,000,000 $ 8,300,000 $ 8,800,000 $ 9,300,000 Borrower shall advise Lender

n.

Meetings.

of and hereby grants to Lender the right to be present at all Board meetings of Borrower. Borrower shall cause each Affiliate to advise Lender and grant to Lender the right to be present at all Board meetings of such Affiliate. o. Reinsurance Treaty. Borrower shall cause AH to continue to offer, for the time period set forth in the table contained in this paragraph, to reinsure a portion of its Personal Lines Auto Quota Share Reinsurance with Lender, the f o r m and content of such reinsurance treaty to be substantially similar to Exhibit D attached hereto, in amounts sufficient to allow for the following schedule of ceded premiums:
Treaty Years Ceded Premium $ $ $ $ $ $ $ 20,000,000 21,600,000 23,328,000 25,194,240 27,209,779 29,386,562 31,737,486

07/01/97 07/01/98 07/01/99 07/01/00 07/01/01 07/01/02 07/01/03 p. Affiliate

to to to to to to to

06/30/98 06/30/99 06/30/00 06/30/01 06/30/02 06/30/03 06/30/04

Transactions.

All transactions for

the duration of the Transaction Documents between or among Borrower, each Affiliate, and any director, officer, employee and/or agent of Borrower or any Affiliate shall be in good faith and commercially reasonably.

7. Negative Covenants. a. Ratios. (i) Borrower shall not permit AH's ratio of gross premium to surplus (calculated by dividing Gross Premium Written by Statutory Capital and Surplus) to be above 10.0:1 as of the date of any report required by law or the Texas Department of Insurance. (ii) Borrower shall not permit AH's ratio of net premium to surplus (calculated by dividing Net Premium Written by Statutory Capital and Surplus) to be above 3.0:1 as of the date of any report required by law or the Texas Department of Insurance.

7. Negative Covenants. a. Ratios. (i) Borrower shall not permit AH's ratio of gross premium to surplus (calculated by dividing Gross Premium Written by Statutory Capital and Surplus) to be above 10.0:1 as of the date of any report required by law or the Texas Department of Insurance. (ii) Borrower shall not permit AH's ratio of net premium to surplus (calculated by dividing Net Premium Written by Statutory Capital and Surplus) to be above 3.0:1 as of the date of any report required by law or the Texas Department of Insurance. (iii) Borrower shall not permit the average of AH's Combined Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations to exceed 115%. (iv) Borrower shall not permit the average of AH's Loss Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations to exceed 87%. (v) Borrower shall not permit the HFC Interest Coverage Ratio as of the end of any fiscal quarter to be less than 1.5 to 1.0. b. Change in Ownership or Business. (i) Borrower shall not, nor permit AH, HFC or AHGA to, change the nature of their respective business except as provided in this Agreement. (ii) Borrower shall not permit AH to write directly or indirectly the following lines of business, or its e q u ivalent: mortgage guaranty, ocean marine, financial guaranty, medical malpractice, earthquake (as a separate coverage), group accident and health, credit accident and health (group and individual), other accident and health, workers compensation, products liability, aircraft (all perils), fidelity, surety, boiler and machinery, credit, and international. c. Dividends. Borrower shall not pay or declare any cash or other dividends or distributions on its corporate stock. Borrower shall not permit AH to pay or declare any cash or other dividends or distributions on its corporate stock if such payment or declaration would result in an Event of Default. d. Intercompany Service Agreements. Borrower shall not, nor permit AH to, amend or adjust the commission structure of its intercompany service agreements in place at the date of execution of this Agreement, to the extent that it materially adversely affects AH financially.

e. Disposition of Assets, Security Interests and other Encumbrances. Borrower shall not, nor permit AH, HFC or AHGA to, sell, assign, transfer or otherwise dispose of any of its assets or properties or any interest therein, or create, incur or suffer to exist any mortgage, security interest, lien, license or other encumbrance upon any of its properties or assets, whether nor owned or hereafter acquired, except (a) ACO's pledge of the Pledged Shares (and Borrower's and ACO's pledge of the Restricted Shares, if effected) pursuant to this Agreement, (b) security interests created or arising pursuant to the NationsBank Loan Documents, (c) purchase money security interests in equipment used in the normal course of B o rrower's, AH's, HFC's or AHGA's respective business, (d) operating or capital equipment leases for use in the ordinary course of business, and (e) existing encumbrances d i s closed in Borrower's consolidated and consolidating financial statements. f. Investments and Advances. Borrower shall not, nor permit AH to, make any investment in or advance to any person, firm or corporation, other than advances (i) to or investments in Affiliates, and (ii) to employees in the ordinary course of business, not to exceed $50,000.00 to any employee. g. Guaranties. Borrower shall not, nor permit AH to, become a guarantor, surety or otherwise liable for the debts or other obligations of any other person, firm or corporation, except for (a) obligations arising under the NationsBank Loan Documents, (b) obligations under reinsurance agreements, and (c) obligations of Affiliates,

e. Disposition of Assets, Security Interests and other Encumbrances. Borrower shall not, nor permit AH, HFC or AHGA to, sell, assign, transfer or otherwise dispose of any of its assets or properties or any interest therein, or create, incur or suffer to exist any mortgage, security interest, lien, license or other encumbrance upon any of its properties or assets, whether nor owned or hereafter acquired, except (a) ACO's pledge of the Pledged Shares (and Borrower's and ACO's pledge of the Restricted Shares, if effected) pursuant to this Agreement, (b) security interests created or arising pursuant to the NationsBank Loan Documents, (c) purchase money security interests in equipment used in the normal course of B o rrower's, AH's, HFC's or AHGA's respective business, (d) operating or capital equipment leases for use in the ordinary course of business, and (e) existing encumbrances d i s closed in Borrower's consolidated and consolidating financial statements. f. Investments and Advances. Borrower shall not, nor permit AH to, make any investment in or advance to any person, firm or corporation, other than advances (i) to or investments in Affiliates, and (ii) to employees in the ordinary course of business, not to exceed $50,000.00 to any employee. g. Guaranties. Borrower shall not, nor permit AH to, become a guarantor, surety or otherwise liable for the debts or other obligations of any other person, firm or corporation, except for (a) obligations arising under the NationsBank Loan Documents, (b) obligations under reinsurance agreements, and (c) obligations of Affiliates, provided the aggregate liability of either Borrower or AH on obligations of all other Affiliates shall not exceed $500,000, further provided no single transaction shall exceed $200,000. h. Disposition of Pledged Stock. Without limiting the generality of any other provision of this Section 7, Borrower shall not, nor permit ACO to, (i) s e l l, convey, transfer or otherwise dispose of any of the Pledged Stock or Restricted Stock or any interest therein, or create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Pledged Stock or the Restricted Stock or the proceeds thereof, other than that created under the Transaction Documents; (ii) consent to or approve or permit the issuance of any additional shares of any class of capital stock of HFC, AH or AHGA or any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or non-occurrence of any event or condition into, or exchangeable for, any such shares, or any warrants, options, rights or other commitments entitling any person to purchase or otherwise acquire any such shares;

(iii) consent to or approve or permit any amendment, restatement or substitution of the Articles of Incorporation and/or Bylaws of HFC, AH or AHGA without the prior written consent of Lender, it being hereby acknowledged b y B orrower that any such amendment, restatement or substitution shall not be effective unless so consented to by Lender and that Lender may give or withhold such consent in each instance in Lender's sole and absolute discretion; or (iv) consent to or approve or permit HFC, AH or AHGA to sell, dispose of, encumber or grant a lien on or security interest in all or any material portion of its property or assets. i. Affiliates' Stock. Borrower shall not permit any Affiliates to consent to or approve or permit the issuance of any additional shares of any class of capital stock of any Affiliate, or any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or non- occurrence of any event or condition into, or exchangeable for, any such shares, or any warrants, options, rights or o t her commitments entitling any person to purchase or otherwise acquire any such shares other than to the present owner of the capital stock of such Affiliate as set forth in Exhibit C. j. Miscellaneous. So long as any part of the Indebtedness remains unpaid or this Agreement remains in effect, Borrower shall not, nor permit AH to, without the express prior written consent of Lender: (i) Create, incur or permit to exist or otherwise become liable for, directly or indirectly, any indebtedness for borrowed money or for the deferred purchase price of real or personal property in excess of $500,000 in the aggregate, provided, however, no individual transaction shall exceed $200,000 except (i) trade indebtedness

(iii) consent to or approve or permit any amendment, restatement or substitution of the Articles of Incorporation and/or Bylaws of HFC, AH or AHGA without the prior written consent of Lender, it being hereby acknowledged b y B orrower that any such amendment, restatement or substitution shall not be effective unless so consented to by Lender and that Lender may give or withhold such consent in each instance in Lender's sole and absolute discretion; or (iv) consent to or approve or permit HFC, AH or AHGA to sell, dispose of, encumber or grant a lien on or security interest in all or any material portion of its property or assets. i. Affiliates' Stock. Borrower shall not permit any Affiliates to consent to or approve or permit the issuance of any additional shares of any class of capital stock of any Affiliate, or any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or non- occurrence of any event or condition into, or exchangeable for, any such shares, or any warrants, options, rights or o t her commitments entitling any person to purchase or otherwise acquire any such shares other than to the present owner of the capital stock of such Affiliate as set forth in Exhibit C. j. Miscellaneous. So long as any part of the Indebtedness remains unpaid or this Agreement remains in effect, Borrower shall not, nor permit AH to, without the express prior written consent of Lender: (i) Create, incur or permit to exist or otherwise become liable for, directly or indirectly, any indebtedness for borrowed money or for the deferred purchase price of real or personal property in excess of $500,000 in the aggregate, provided, however, no individual transaction shall exceed $200,000 except (i) trade indebtedness incurred in the ordinary course of business, (ii) the Indebtedness, and (iii) the Outstanding Debt. (ii) M e rge or consolidate with any other company or companies; enter into any joint venture or partnership with any person, firm or corporation other than an Affiliate; or convey, lease or sell all or any material portion of its property or assets or business to any other person, firm or corporation, other than the purchase or sale of assets in the ordinary course of business. (iii) Consent to or approve or permit any m a terial amendment, restatement or substitution of the Articles of Incorporation and/or Bylaws of AH, it being hereby acknowledged by Borrower that any such amendment, restatement or substitution shall not be effective unless so consented to by Lender and that Lender may give or withhold such consent in each instance in Lender's sole and absolute discretion. For purposes of this Section 7, and without limiting the scope of this Section 7, any change in capital structure or in the

relative rights, preferences or limitations relating to capital stock shall be deemed a material change. 8. Events of Default. a. D e f aults. Each of the following shall constitute an Event of Default for purposes of this Agreement: (i) Borrower fails to pay within ten (10) Business Days of the due date principal, interest, costs or expenses due under the Transaction Documents; (ii) Borrower makes a misstatement of material fact in the Transaction Documents or any other document or certificate relating to the Agreement; (iii) Borrower fails to observe or perform any covenant, term or agreement set forth in Section 3 hereof; (iv) Borrower fails to observe or perform any other covenant, term or agreement of the Transaction Documents and such failure is not cured within thirty (30) days following notice thereof from Lender; (v) Filing by or against Borrower or AH of a petition or request for liquidation, reorganization, arrangement, adjudication as a bankrupt, relief as a debtor, or other relief under the bankruptcy, insolvency or similar laws of the United States or any state thereof now or hereafter in effect;

relative rights, preferences or limitations relating to capital stock shall be deemed a material change. 8. Events of Default. a. D e f aults. Each of the following shall constitute an Event of Default for purposes of this Agreement: (i) Borrower fails to pay within ten (10) Business Days of the due date principal, interest, costs or expenses due under the Transaction Documents; (ii) Borrower makes a misstatement of material fact in the Transaction Documents or any other document or certificate relating to the Agreement; (iii) Borrower fails to observe or perform any covenant, term or agreement set forth in Section 3 hereof; (iv) Borrower fails to observe or perform any other covenant, term or agreement of the Transaction Documents and such failure is not cured within thirty (30) days following notice thereof from Lender; (v) Filing by or against Borrower or AH of a petition or request for liquidation, reorganization, arrangement, adjudication as a bankrupt, relief as a debtor, or other relief under the bankruptcy, insolvency or similar laws of the United States or any state thereof now or hereafter in effect; (vi) If Borrower or AH seeks, consents to or is subjected to the appointment or taking possession of a receiver, liquidator, assignee, trustee, custodian or other similar official for it or for any substantial portion of its property, or if a court of competent jurisdiction shall enter any decree effectuating such an appointment or ordering the winding up or liquidation of Borrower or AH; (vii) B o r rower or AH ceases business operations, makes a general assignment for the benefit of creditors or consents to or has filed against it any formal or informal proceeding for the dissolution, liquidation or winding-up of the affairs of Borrower or AH; provided however, if such action is brought against Borrower or AH, Borrower shall have 60 days to cause such action to be dismissed; (viii) An admission in writing by Borrower or AH that it is not Solvent; (ix) If any judgment against Borrower or AH not covered by insurance or any attachment or other levy against any of its property for an amount in excess of $200,000.00 remains unpaid, unstayed on appeal, undischarged, unbonded or undismissed for more than thirty (30) consecutive days;

(x) If any governmental agency, department, commission or authority delivers to Borrower or AH a cease and desist order, letter of unsafe practices or conditions, an order of correction, or similar directive under applicable law o r commences any action which could result in taking possession, reorganization or liquidation of Borrower or AH, and such letter, action or other directive is permitted to remain uncured or undismissed for more than fortyfive (45) consecutive days; (xi) All or a controlling interest in the capital stock of Borrower is sold, assigned or otherwise transferred or a security interest or other encumbrance is granted or otherwise acquired therein or in respect thereto, in a single transaction or series of related transactions; (xii) Borrower or AH commences any action or proceeding to contest the validity or enforceability of any Transaction Document or any lien or security interest granted or obligations evidenced by any Transaction Document; or (xii) A writ or order of attachment or garnishment in excess of $250,000 is issued or made against any of the property, assets or income of Borrower. b. Remedies upon Default. Upon the occurrence of an Event of Default under this Agreement, Lender may

(x) If any governmental agency, department, commission or authority delivers to Borrower or AH a cease and desist order, letter of unsafe practices or conditions, an order of correction, or similar directive under applicable law o r commences any action which could result in taking possession, reorganization or liquidation of Borrower or AH, and such letter, action or other directive is permitted to remain uncured or undismissed for more than fortyfive (45) consecutive days; (xi) All or a controlling interest in the capital stock of Borrower is sold, assigned or otherwise transferred or a security interest or other encumbrance is granted or otherwise acquired therein or in respect thereto, in a single transaction or series of related transactions; (xii) Borrower or AH commences any action or proceeding to contest the validity or enforceability of any Transaction Document or any lien or security interest granted or obligations evidenced by any Transaction Document; or (xii) A writ or order of attachment or garnishment in excess of $250,000 is issued or made against any of the property, assets or income of Borrower. b. Remedies upon Default. Upon the occurrence of an Event of Default under this Agreement, Lender may declare all of the Indebtedness due and owing, without notice to Borrower, whereupon all such Indebtedness and other amounts shall thereupon be and become immediately due and payable. In addition, Lender may pursue or exercise any and all other rights, remedies, privileges and powers given Lender by this Agreement, the Promissory Note, or any other instrument or document now or hereafter given as security for payment of the Indebtedness or any other obligations under this Agreement or any applicable law due to a default thereunder. No failure on the part of Lender to exercise, and no delay in exercising, any right hereunder, under the Promissory Note, or under any documents securing the Indebtedness shall operate as a waiver thereof, nor shall any singular or partial exercise by Lender hereunder or under the Promissory Note or such other documents preclude any other or further exercise thereof, or the exercise of any other right. Borrower agrees that upon the occurrence of an Event of Default under this Agreement, the proceeds of any property or collateral in the possession of Lender or in which Lender has a security interest, whether or not such property or collateral is held as security for the Indebtedness under this Agreement, may be held and/or applied by Lender, at its discretion, to the payment of the Promissory Note, the Indebtedness and any other indebtedness owed to Lender by Borrower, at such times and in such order as Lender may from time to time deem appropriate. 9. Miscellaneous.

a. P e r formance of Borrower's Duties. Upon Borrower's failure to perform any of its duties under the T r a n saction Documents, Lender has the right, but no obligation, to perform any or all such duties. b. Notice of Sale. Without in any way requiring notice to be given in the following manner, Borrower agrees that any notice by Lender of sale, disposition or other intended action under or in connection with this Agreement, whether required by the Uniform Commercial Code of the State of Michigan or otherwise, constitutes reasonable notice to Borrower if such notice is given in the manner described in Section 9.j. of this Agreement and at least fifteen (15) days prior to such action. c. Exercise of Lender's Rights. No course of dealing between Lender and Borrower and no delay or omission by Lender in exercising any right or remedy under the Transaction Documents or with respect to the Indebtedness shall operate as a waiver of any such right or remedy, or of any other right or remedy, and no single or partial exercise of any such right or remedy shall preclude any other right or remedy, or exercise of, or further exercise of any other right or remedy. All rights and remedies of Lender are cumulative. d. Successors and Assigns. Lender and Borrower as used in this Agreement include the successors and assigns of those parties, except Borrower does not have the right to assign its rights under or any interest in this Agreement.

a. P e r formance of Borrower's Duties. Upon Borrower's failure to perform any of its duties under the T r a n saction Documents, Lender has the right, but no obligation, to perform any or all such duties. b. Notice of Sale. Without in any way requiring notice to be given in the following manner, Borrower agrees that any notice by Lender of sale, disposition or other intended action under or in connection with this Agreement, whether required by the Uniform Commercial Code of the State of Michigan or otherwise, constitutes reasonable notice to Borrower if such notice is given in the manner described in Section 9.j. of this Agreement and at least fifteen (15) days prior to such action. c. Exercise of Lender's Rights. No course of dealing between Lender and Borrower and no delay or omission by Lender in exercising any right or remedy under the Transaction Documents or with respect to the Indebtedness shall operate as a waiver of any such right or remedy, or of any other right or remedy, and no single or partial exercise of any such right or remedy shall preclude any other right or remedy, or exercise of, or further exercise of any other right or remedy. All rights and remedies of Lender are cumulative. d. Successors and Assigns. Lender and Borrower as used in this Agreement include the successors and assigns of those parties, except Borrower does not have the right to assign its rights under or any interest in this Agreement. e. Indemnification. Borrower agrees to pay, indemnify and hold Lender harmless from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including reasonable attorneys' fees, costs and expenses) which arise out of, relate to or are connected in any manner with the negligent or willful acts or omissions of Borrower, including, without limitation, any costs or expenses incurred by Lender in connection with enforcing its rights to indemnification pursuant to this subparagraph. The provisions of this subparagraph survive payment of the Indebtedness. f. Severability. The provisions of this Agreement are independent and separable from each other, and no such p r o v i sion shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other provision may be invalid or unenforceable in whole or in part. If any provision of this Agreement is prohibited or u n e n forceable in any jurisdiction, such provision is ineffective in such jurisdiction only to the extent of such prohibition or unenforceability, and such prohibition or unenforceability does not invalidate the balance of such provision to the extent it is not prohibited or unenforceable nor render prohibited or unenforceable such provision in any other jurisdiction.

g. Modifications. No modification or waiver of any provision of, nor consent to any departure by Borrower from this Agreement is effective unless in writing signed by an authorized representative of Lender and Borrower, and such waiver or consent is effective only in the specific instance and for the purpose for which given. No notice to or demand on Borrower in any case entitles Borrower to any other or further notice or demand in similar or other circumstances. h. G o v erning Law. This Agreement and the Transaction Documents delivered in connection with this Agreement are governed by and construed in accordance with the laws of the State of Michigan. Exercise of any right or remedy in the event of default is likewise governed by the laws of Michigan. i. Further Assurances. Borrower agrees to take such additional actions and execute such further documents as Lender may reasonably request in order to give effect to the transactions described in this Agreement. j. N o t ices. Except as otherwise expressly provided in this Agreement or any other Transaction Document, each notice, request or demand pursuant to this Agreement or any Transaction Document shall be in writing and mailed by United States mail, postage prepaid, certified mail, return receipt requested, addressed as follows: If to Borrower: Hallmark Financial Services, Inc. 14651 Dallas Parkway, Suite 900 Dallas, TX 75240

g. Modifications. No modification or waiver of any provision of, nor consent to any departure by Borrower from this Agreement is effective unless in writing signed by an authorized representative of Lender and Borrower, and such waiver or consent is effective only in the specific instance and for the purpose for which given. No notice to or demand on Borrower in any case entitles Borrower to any other or further notice or demand in similar or other circumstances. h. G o v erning Law. This Agreement and the Transaction Documents delivered in connection with this Agreement are governed by and construed in accordance with the laws of the State of Michigan. Exercise of any right or remedy in the event of default is likewise governed by the laws of Michigan. i. Further Assurances. Borrower agrees to take such additional actions and execute such further documents as Lender may reasonably request in order to give effect to the transactions described in this Agreement. j. N o t ices. Except as otherwise expressly provided in this Agreement or any other Transaction Document, each notice, request or demand pursuant to this Agreement or any Transaction Document shall be in writing and mailed by United States mail, postage prepaid, certified mail, return receipt requested, addressed as follows: If to Borrower: Hallmark Financial Services, Inc. 14651 Dallas Parkway, Suite 900 Dallas, TX 75240 Attention: Ramon D. Phillips (214) 404-1637 (214) 788 0520 (facsimile) If to Lender: Dorinco Reinsurance Company 1320 Waldo Avenue Midland, MI 48642 Attention: David E. Chamberlain (517) 636-7156 (517) 638-9963 (facsimile) N o tices shall be deemed given five (5) days following the date deposited in the United States mail as evidenced by the postmark of the United States Post Office in which the notice was deposited. k. Singular and Plural. Whenever used, the singular number includes the plural, and the plural numbers includes the singular, and the use of any gender applies to all genders.

l. Counterparts. This Agreement may be executed in any number of counterparts, and by Borrower and Lender on separate counterparts, each of which when so executed and delivered will be an original, but all of which together shall constitute one in the same Agreement. m. Section Headings. The captions and headings of the sections and subsections of this Agreement are for convenience of reference only and are not to be used to interpret or define the provisions of this Agreement. n. ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU ( B O R R OWER) AND US (LENDER) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US,

l. Counterparts. This Agreement may be executed in any number of counterparts, and by Borrower and Lender on separate counterparts, each of which when so executed and delivered will be an original, but all of which together shall constitute one in the same Agreement. m. Section Headings. The captions and headings of the sections and subsections of this Agreement are for convenience of reference only and are not to be used to interpret or define the provisions of this Agreement. n. ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU ( B O R R OWER) AND US (LENDER) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BORROWER: HALLMARK FINANCIAL SERVICES, INC.
By: Name: Title:

Linda H. Sleeper Executive Vice President

ATTEST: [CORPORATE SEAL] LENDER: DORINCO REINSURANCE COMPANY
By: Name: Title: Paul D. Brink President & CEO

EXHIBIT E

STOCK CERTIFICATE RESTRICTIONS "Sale, transfer, pledge or other disposition of the shares represented by this certificate is restricted pursuant to a Loan Agreement dated March , 1997, between Hallmark Financial Services, Inc. and Dorinco Reinsurance Company."

PROMISSORY NOTE $7,000,000.00 March 11, 1997

EXHIBIT E

STOCK CERTIFICATE RESTRICTIONS "Sale, transfer, pledge or other disposition of the shares represented by this certificate is restricted pursuant to a Loan Agreement dated March , 1997, between Hallmark Financial Services, Inc. and Dorinco Reinsurance Company."

PROMISSORY NOTE $7,000,000.00 March 11, 1997 FOR VALUE RECEIVED, the undersigned, Hallmark Financial Services, Inc., a Nevada corporation with its principal offices at 14651 Dallas Parkway, Suite 900, Dallas, TX 75240, ("Maker"), hereby unconditionally promises to pay to the order of DORINCO REINSURANCE COMPANY, a Michigan corporation with its principal offices at 1320 Waldo Avenue, Midland, MI 48642 ("Payee"), by wire transfer so as to constitute immediately available funds, or as otherwise directed, the principal sum of Seven Million Dollars ($7,000,000.00), in lawful money of the United States of America, together with interest (calculated on the basis of a 360 day year), on the unpaid principal balance from day-to-day remaining, computed from the date of advance until maturity at the rate per annum which shall from day-to-day be equal to the lesser of (a) the maximum rate allowable by law, or (b) eight and one-quarter percent (8.25%). The principal of and interest upon this Note shall be due and payable as follows: (a) Interest, computed as aforesaid, shall be due and payable monthly as it accrues, beginning on March 31, 1997, and thereafter, on the last business day of each succeeding month thereafter and on March 31, 2004 (the "Termination Date"); and (b) The unpaid principal amount of this Note shall be payable in sixty consecutive monthly installments commencing on March 31, 1999, and continuing on the last business day of each calendar month thereafter until and including the Termination Date. Each such installment shall be in an amount equal to one- sixtieth (1/60th) (rounded to the nearest $1.00) of the original principal amount of this Note, provided, however, that the final payment on the Termination Date shall be an amount equal to the then-unpaid principal of this Note plus any other amounts payable hereunder. All past-due principal and, to the extent permitted by applicable law, past-due interest upon this Note shall bear interest at the lesser of maximum rate allowable by law, or the rate per annum which shall from day-to-day be equal to thirteen percent (13%). All payments shall be made to Citibank, N.A., New York (ABA #021- 00-0089) for credit to the account of Payee, Account Number 3900-6944, if by wire, or, if by check, to Box #8157, Citibank, P.O. Box 7247-8157, Philadelphia, PA 19170. The occurrence of any one or more of the following events shall constitute an Event of Default under this Note: (a) t h e failure to pay any amount hereunder within ten (10) business days of the due date (whether at maturity, by reason of acceleration or otherwise); or (b) any other event of default under that certain Loan Agreement, dated as of March 10, 1997, between Maker and Payee.

PROMISSORY NOTE $7,000,000.00 March 11, 1997 FOR VALUE RECEIVED, the undersigned, Hallmark Financial Services, Inc., a Nevada corporation with its principal offices at 14651 Dallas Parkway, Suite 900, Dallas, TX 75240, ("Maker"), hereby unconditionally promises to pay to the order of DORINCO REINSURANCE COMPANY, a Michigan corporation with its principal offices at 1320 Waldo Avenue, Midland, MI 48642 ("Payee"), by wire transfer so as to constitute immediately available funds, or as otherwise directed, the principal sum of Seven Million Dollars ($7,000,000.00), in lawful money of the United States of America, together with interest (calculated on the basis of a 360 day year), on the unpaid principal balance from day-to-day remaining, computed from the date of advance until maturity at the rate per annum which shall from day-to-day be equal to the lesser of (a) the maximum rate allowable by law, or (b) eight and one-quarter percent (8.25%). The principal of and interest upon this Note shall be due and payable as follows: (a) Interest, computed as aforesaid, shall be due and payable monthly as it accrues, beginning on March 31, 1997, and thereafter, on the last business day of each succeeding month thereafter and on March 31, 2004 (the "Termination Date"); and (b) The unpaid principal amount of this Note shall be payable in sixty consecutive monthly installments commencing on March 31, 1999, and continuing on the last business day of each calendar month thereafter until and including the Termination Date. Each such installment shall be in an amount equal to one- sixtieth (1/60th) (rounded to the nearest $1.00) of the original principal amount of this Note, provided, however, that the final payment on the Termination Date shall be an amount equal to the then-unpaid principal of this Note plus any other amounts payable hereunder. All past-due principal and, to the extent permitted by applicable law, past-due interest upon this Note shall bear interest at the lesser of maximum rate allowable by law, or the rate per annum which shall from day-to-day be equal to thirteen percent (13%). All payments shall be made to Citibank, N.A., New York (ABA #021- 00-0089) for credit to the account of Payee, Account Number 3900-6944, if by wire, or, if by check, to Box #8157, Citibank, P.O. Box 7247-8157, Philadelphia, PA 19170. The occurrence of any one or more of the following events shall constitute an Event of Default under this Note: (a) t h e failure to pay any amount hereunder within ten (10) business days of the due date (whether at maturity, by reason of acceleration or otherwise); or (b) any other event of default under that certain Loan Agreement, dated as of March 10, 1997, between Maker and Payee.

Maker agrees that if such Event of Default under this Note occurs, then, at the option of Payee, all or any part of the unpaid principal balance of this Note and accrued interest shall immediately become due and payable without notice or demand. Failure of Payee hereof to assert any right contained herein shall not be deemed to be a waiver thereof. Maker may prepay this Note, in whole or in part, with the payment of liquidated damages. If Maker prepays, in whole or in part, before the first anniversary date of this Note but before the second anniversary date, the liquidated damages are equal to $120,000.00. If Maker prepays, in whole or in part, after the second anniversary date of this Note but before the third anniversary date, the liquidated damages are equal to $100,000.00. If Maker prepays, in whole or in part, after the third anniversary date of this Note but before the fourth anniversary date, the liquidated damages are equal to $80,000.00. However, Maker may repay up to 40% of this Note at any time after the second anniversary without liquidated damages. Maker may prepay all or any portion of this Note after the fourth anniversary date without liquidated damages or other penalty.

Maker agrees that if such Event of Default under this Note occurs, then, at the option of Payee, all or any part of the unpaid principal balance of this Note and accrued interest shall immediately become due and payable without notice or demand. Failure of Payee hereof to assert any right contained herein shall not be deemed to be a waiver thereof. Maker may prepay this Note, in whole or in part, with the payment of liquidated damages. If Maker prepays, in whole or in part, before the first anniversary date of this Note but before the second anniversary date, the liquidated damages are equal to $120,000.00. If Maker prepays, in whole or in part, after the second anniversary date of this Note but before the third anniversary date, the liquidated damages are equal to $100,000.00. If Maker prepays, in whole or in part, after the third anniversary date of this Note but before the fourth anniversary date, the liquidated damages are equal to $80,000.00. However, Maker may repay up to 40% of this Note at any time after the second anniversary without liquidated damages. Maker may prepay all or any portion of this Note after the fourth anniversary date without liquidated damages or other penalty. In the event any one or more of the provisions of the Note shall for any reason be held to be invalid, illegal, or unenforceable, in whole or in part or in any respect, or in the event that any one or more of the provisions of this Note operate or could prospectively operate to invalidate this Note, then and in either of those events, such provision or provisions shall be modified to the minimum extent necessary to make the application of such provision or provisions valid and enforceable and shall not affect any other provision of this Note and the remaining provisions of this Note shall remain operative and in full force and effect and shall in no way be affected, prejudiced, or disturbed thereby. Maker hereby forever waives presentment, demand for payment, protest, notice of protest, notice of dishonor of this Note, and all other demands and notices in connection with the delivery, acceptance, performance, and enforcement of this Note. Maker further agrees to indemnify and hold harmless Payee for all costs of collection including reasonable attorneys' fees and expenses that Payee may incur by reason of Maker's failure promptly to pay when due the indebtedness evidenced by this Note. This Note shall be paid without deduction by reason of any setoff, defense, or counterclaim of Maker. No amendment or waiver of any provision of this Note nor consent to any departure by Maker therefrom shall in any event be effective unless the same shall be in writing and signed by Payee, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Payee to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.

This Note shall be governed by and construed in accordance with the laws of the State of Michigan and shall be binding upon the successors and assigns of Maker and shall inure to the benefit of the successors and assigns of Payee. HALLMARK FINANCIAL SERVICES, INC. By: Name: Linda H. Sleeper Title: Executive Vice President

ACO HOLDINGS, INC. STOCK PLEDGE AND SECURITY AGREEMENT THIS STOCK PLEDGE AND SECURITY AGREEMENT ("Agreement") is made this 11th day of March,

This Note shall be governed by and construed in accordance with the laws of the State of Michigan and shall be binding upon the successors and assigns of Maker and shall inure to the benefit of the successors and assigns of Payee. HALLMARK FINANCIAL SERVICES, INC. By: Name: Linda H. Sleeper Title: Executive Vice President

ACO HOLDINGS, INC. STOCK PLEDGE AND SECURITY AGREEMENT THIS STOCK PLEDGE AND SECURITY AGREEMENT ("Agreement") is made this 11th day of March, 1997, by and between ACO HOLDINGS, INC., a Texas corporation ("Pledgor"), and DORINCO REINSURANCE COMPANY ("Lender"). RECITALS T h e following recitals constitute a material part of this Agreement: I. Pursuant to the terms of a Loan Agreement (hereinafter "Loan Agreement") of even date herewith between Lender and Hallmark Financial S e r v i ces, Inc., a Nevada corporation ("Borrower"), Lender is concurrently herewith extending to Borrower a loan in the principal amount of $7,000,000.00, to be evidenced by Borrower's promissory note (the "Note") which is secured by Pledgor's pledge of the Pledged Stock (as defined below) pursuant to this Agreement. II. For convenience, the Loan Agreement, the Note and this Agreement, as the same are hereafter modified, amended or extended, are sometimes hereinafter collectively referred to as the "Transaction Documents". III. Pledgor represents and warrants to Lender that Pledgor has and will continue to receive substantial benefit from the loans by Lender to Borrower and that, in consideration of such benefit, Pledgor is pledging the Pledged Stock to Lender to secure the Obligations (as defined below). IV. Pledgor further represents and warrants to Lender that Pledgor has received reasonably equivalent value in exchange for the pledge of the Pledged Stock to Lender and that Pledgor (i) was not insolvent on the date of the pledge of the Pledged Stock to Lender; (ii) was not engaged in and was not about to engage in a business or transaction for which it had unreasonably small capital; or (iii) did not intend to incur, or believe that it would incur, debts that would be beyond Pledgor's ability to pay as such debts matured. V. This Agreement and the rights hereby granted shall secure the following (the "Obligations"): A. All present and future liabilities, indebtedness and obligations of Borrower to Lender of every kind, type, nature and description, arising under the Transaction Documents; B. All costs and expenses, including attorneys' fees, of all legal actions or proceedings brought by Lender to enforce this Agreement or any other Transaction Document, all other costs and expenses paid or incurred in respect of or in connection with the Pledged Stock, and any other sums that may become due and payable to Lender by Pledgor; and C. The observance and performance by Pledgor of all terms, provisions, covenants and obligations of Pledgor under this Agreement and all other Transaction Documents.

ACO HOLDINGS, INC. STOCK PLEDGE AND SECURITY AGREEMENT THIS STOCK PLEDGE AND SECURITY AGREEMENT ("Agreement") is made this 11th day of March, 1997, by and between ACO HOLDINGS, INC., a Texas corporation ("Pledgor"), and DORINCO REINSURANCE COMPANY ("Lender"). RECITALS T h e following recitals constitute a material part of this Agreement: I. Pursuant to the terms of a Loan Agreement (hereinafter "Loan Agreement") of even date herewith between Lender and Hallmark Financial S e r v i ces, Inc., a Nevada corporation ("Borrower"), Lender is concurrently herewith extending to Borrower a loan in the principal amount of $7,000,000.00, to be evidenced by Borrower's promissory note (the "Note") which is secured by Pledgor's pledge of the Pledged Stock (as defined below) pursuant to this Agreement. II. For convenience, the Loan Agreement, the Note and this Agreement, as the same are hereafter modified, amended or extended, are sometimes hereinafter collectively referred to as the "Transaction Documents". III. Pledgor represents and warrants to Lender that Pledgor has and will continue to receive substantial benefit from the loans by Lender to Borrower and that, in consideration of such benefit, Pledgor is pledging the Pledged Stock to Lender to secure the Obligations (as defined below). IV. Pledgor further represents and warrants to Lender that Pledgor has received reasonably equivalent value in exchange for the pledge of the Pledged Stock to Lender and that Pledgor (i) was not insolvent on the date of the pledge of the Pledged Stock to Lender; (ii) was not engaged in and was not about to engage in a business or transaction for which it had unreasonably small capital; or (iii) did not intend to incur, or believe that it would incur, debts that would be beyond Pledgor's ability to pay as such debts matured. V. This Agreement and the rights hereby granted shall secure the following (the "Obligations"): A. All present and future liabilities, indebtedness and obligations of Borrower to Lender of every kind, type, nature and description, arising under the Transaction Documents; B. All costs and expenses, including attorneys' fees, of all legal actions or proceedings brought by Lender to enforce this Agreement or any other Transaction Document, all other costs and expenses paid or incurred in respect of or in connection with the Pledged Stock, and any other sums that may become due and payable to Lender by Pledgor; and C. The observance and performance by Pledgor of all terms, provisions, covenants and obligations of Pledgor under this Agreement and all other Transaction Documents.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and other good and valuable c o n sideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Pledged Stock. The term "Pledged Stock" shall mean the shares of capital stock described in Schedule 1 which is attached hereto and made a part hereof and all other shares of capital stock, options, rights and warrants issued to Pledgor by the issuer of the aforesaid capital stock described in Schedule 1, together with all certificates, options, rights and other distributions issued as an addition to, in substitution or exchange for, or on account of, any such shares of capital stock, options, rights and warrants arising from any and all of the foregoing or relating thereto, and all proceeds of all the foregoing, whether now owned or hereafter acquired by Pledgor. 2. Pledged Stock; Security For Obligations.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and other good and valuable c o n sideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Pledged Stock. The term "Pledged Stock" shall mean the shares of capital stock described in Schedule 1 which is attached hereto and made a part hereof and all other shares of capital stock, options, rights and warrants issued to Pledgor by the issuer of the aforesaid capital stock described in Schedule 1, together with all certificates, options, rights and other distributions issued as an addition to, in substitution or exchange for, or on account of, any such shares of capital stock, options, rights and warrants arising from any and all of the foregoing or relating thereto, and all proceeds of all the foregoing, whether now owned or hereafter acquired by Pledgor. 2. Pledged Stock; Security For Obligations. (a) As security for the prompt payment, performance and satisfaction of the Obligations, Pledgor hereby pledges, assigns, hypothecates and transfers to Lender the Pledged Stock, and grants Lender a lien on and security interest therein. (b) If Pledgor shall become entitled to receive or shall receive at any time or from time to time, in connection with any of the Pledged Stock, any: (i) stock certificate, including, but not limited to, any certificate representing a stock dividend or in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split, spin-off or splitoff; (ii) o p tion, warrant or right, whether as an addition to or in substitution or exchange for the Pledged Stock or otherwise; (iii) dividend or distribution payable in property, including, but not limited to, any securities issued by other than the issuer of the Pledged Stock; or (iv) dividends or distributions of any kind, type, nature or description; Then Pledgor shall, subject to subparagraph 2(d) below, accept the same as Lender's agent, in trust for Lender, and shall deliver them forthwith to Lender or its nominee in the exact form received with, as applicable, Pledgor's endorsement in blank for transfer when necessary, or appropriate stock powers duly executed in blank for transfer, to be held by Lender, or its nominee, subject to the terms hereof, as part of the Pledged Stock. (c) Upon the occurrence of an Event of Default (as herein defined), Lender, at its option, may have any or all of the Pledged Stock registered in the name of Lender or its nominee, and Pledgor hereby covenants that, upon Lender's request, Pledgor will cause the issuer of the Pledged Stock to effect such registration. In connection with such registration, Pledgor hereby designates and

appoints Lender as the agent and attorney-in-fact of Pledgor to execute any and all documents and instruments in the name of Pledgor and to do any and every act which Pledgor might do on its own behalf in order to effectuate the change in registered ownership of any or all of the Pledged Stock upon the occurrence of an Event of Default. Pledgor hereby agrees that the foregoing powers granted to Lender hereunder are coupled with an interest and are irrevocable so long as any of the Obligations remain unpaid. Pledgor shall nevertheless retain all voting rights with respect to the Pledged Stock until the occurrence of an Event of Default. Immediately and without further notice, upon the occurrence of an Event of Default, Lender or its nominee shall have, with respect to the Pledged Stock, at Lender's option, the right but not the obligation to exercise all voting rights, all other corporate rights and all conversion, exchange, subscription or other rights, privileges or options pertaining thereto as if it were the absolute owner thereof, including, but not limited to, the right to exchange any or all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, or upon the exercise by such issuer of any right, privilege or option pertaining to the Pledged Stock, and, in connection therewith, to deliver any of the Pledged Stock to any c o m m ittee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for

appoints Lender as the agent and attorney-in-fact of Pledgor to execute any and all documents and instruments in the name of Pledgor and to do any and every act which Pledgor might do on its own behalf in order to effectuate the change in registered ownership of any or all of the Pledged Stock upon the occurrence of an Event of Default. Pledgor hereby agrees that the foregoing powers granted to Lender hereunder are coupled with an interest and are irrevocable so long as any of the Obligations remain unpaid. Pledgor shall nevertheless retain all voting rights with respect to the Pledged Stock until the occurrence of an Event of Default. Immediately and without further notice, upon the occurrence of an Event of Default, Lender or its nominee shall have, with respect to the Pledged Stock, at Lender's option, the right but not the obligation to exercise all voting rights, all other corporate rights and all conversion, exchange, subscription or other rights, privileges or options pertaining thereto as if it were the absolute owner thereof, including, but not limited to, the right to exchange any or all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other readjustment of the issuer thereof, or upon the exercise by such issuer of any right, privilege or option pertaining to the Pledged Stock, and, in connection therewith, to deliver any of the Pledged Stock to any c o m m ittee, depository, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine, all without liability except to account for property actually received by it; but Lender shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible to Pledgor for any failure to do so or delay in so doing. (d) So long as no Event of Default has occurred and is continuing, all cash dividends on all or any portion of the Pledged Stock shall be paid to Borrower and Borrower shall not be deemed to accept said dividends as Lender's agent in trust for Lender. Following the occurrence of an Event of Default, any cash dividends on all or any portion of the Pledged Stock shall be paid to Lender in reduction of the Obligations unless Lender otherwise consents in writing. 3. Events of Default. The occurrence of any of the following events shall constitute and is hereby defined to be an "Event of Default" hereunder: (a) any failure or neglect to observe or perform any of the terms, provisions, promises, agreements or covenants of this Agreement within thirty (30) days of written notice of such failure or neglect; or (b) any warranty, representation or statement contained in this Agreement or otherwise made or furnished to Lender by or on behalf of Pledgor in connection with the Obligations shall be or shall prove to have been false or incorrect when made or furnished or shall at any time hereafter become false or incorrect; or (c) the occurrence of an Event of Default under the Loan Agreement after all applicable cure periods, if any.

4. Remedies. Upon the occurrence of an Event of Default and at any time thereafter, Lender may, at its option, in its sole and absolute discretion and, except as otherwise expressly set forth herein, without further demand or notice of any kind, pursue any or all of its rights and remedies under any or all of the Transaction Documents or at law or in equity in such order and manner as Lender may elect in its sole discretion, including, without limitation, any one or more of the following: (a) Lender may declare all Obligations to be immediately due and payable, without presentment, protest or notice of any kind to Pledgor or any other person (all of which are hereby expressly waived by Pledgor). (b) Lender may, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below with respect to the time and place of public or private sale) to or upon Pledgor or any other person (all of which are, to the extent permitted by law, hereby expressly waived), forthwith realize upon the Pledged Stock or any part thereof or interest therein, and may forthwith sell or otherwise dispose of and deliver the Pledged Stock or any part thereof or interest therein, or agree to do so, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Lender's offices or elsewhere, at such prices and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Pledged Stock purchase the shares constituting the Pledged Stock for investment and without any intention to make a distribution thereof) as it may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right to Lender or any purchaser to purchase at any such sale the whole or any part of the Pledged Stock free of any right or equity of redemption in Pledgor which right or equity o f r e d emption is hereby expressly waived and released. Notwithstanding any other provision in this Agreement

4. Remedies. Upon the occurrence of an Event of Default and at any time thereafter, Lender may, at its option, in its sole and absolute discretion and, except as otherwise expressly set forth herein, without further demand or notice of any kind, pursue any or all of its rights and remedies under any or all of the Transaction Documents or at law or in equity in such order and manner as Lender may elect in its sole discretion, including, without limitation, any one or more of the following: (a) Lender may declare all Obligations to be immediately due and payable, without presentment, protest or notice of any kind to Pledgor or any other person (all of which are hereby expressly waived by Pledgor). (b) Lender may, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below with respect to the time and place of public or private sale) to or upon Pledgor or any other person (all of which are, to the extent permitted by law, hereby expressly waived), forthwith realize upon the Pledged Stock or any part thereof or interest therein, and may forthwith sell or otherwise dispose of and deliver the Pledged Stock or any part thereof or interest therein, or agree to do so, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Lender's offices or elsewhere, at such prices and on such terms (including, without limitation, a requirement that any purchaser of all or any part of the Pledged Stock purchase the shares constituting the Pledged Stock for investment and without any intention to make a distribution thereof) as it may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right to Lender or any purchaser to purchase at any such sale the whole or any part of the Pledged Stock free of any right or equity of redemption in Pledgor which right or equity o f r e d emption is hereby expressly waived and released. Notwithstanding any other provision in this Agreement to the contrary, Pledgor agrees that Lender, in its sole discretion, may determine that a sale, public or private, of all or any portion of the Pledged Stock is not in Lender's best interest, and Lender is hereby expressly authorized to retain all or any part of the P l edged Stock indefinitely until Lender deems in its sole discretion that a sale would be in its best interest. Until such sale, Lender may, in its sole discretion, elect to hold all or any part of the Pledged Stock and be treated as the beneficial owner thereof and shall be entitled to collect all income and proceeds therefrom and Pledgor shall cause the issuer of the Pledged Stock to treat Lender in all respects as if Lender were a shareholder of issuer and with all the rights applicable to such status as to the Pledged Stock. (c) The proceeds of any such disposition or other action by Lender shall be applied as follows: (i) first, to the costs and expenses incurred in connection therewith or incidental thereto or to the care or safekeeping of any of the Pledged Stock or in any way relating to the rights of Lender hereunder, including, but not limited to, attorneys' fees and legal expenses;

(ii) second, to the satisfaction of the Obligations in such order of priority as Lender shall determine in its sole discretion; (iii) third, to the payment of any other amounts required by applicable law (including, without limitation, Section 9-504(1)(c) of the Uniform Commercial Code); and (iv) fourth, to the extent of any surplus proceeds, to the person(s) legally entitled thereto. (d) Lender need not give more than fifteen (15) days' notice of the time and place of any public sale or of the time after which a private sale may take place, which notice Pledgor hereby deems and agrees to be commercially reasonable. (e) Pledgor hereby waives to the fullest extent permitted by applicable law any right Pledgor may have to require Lender to marshall assets or sell the Pledged Stock, or any other collateral, in any particular order of priority. 5. Rights and Remedies Not Exclusive. Notwithstanding any provision in this Agreement or in any Transaction Document to the contrary, the rights and remedies provided herein and in the other Transaction Documents and in all other agreements, instruments and documents delivered pursuant to or in connection with the Transaction Documents are cumulative and are in addition to and not exclusive of any rights or remedies provided by law or under the principles of equity, including, without limitation, the rights and remedies of a secured party under the Uniform Commercial Code, and all such rights and remedies may be enforced partially, successively, alternatively

(ii) second, to the satisfaction of the Obligations in such order of priority as Lender shall determine in its sole discretion; (iii) third, to the payment of any other amounts required by applicable law (including, without limitation, Section 9-504(1)(c) of the Uniform Commercial Code); and (iv) fourth, to the extent of any surplus proceeds, to the person(s) legally entitled thereto. (d) Lender need not give more than fifteen (15) days' notice of the time and place of any public sale or of the time after which a private sale may take place, which notice Pledgor hereby deems and agrees to be commercially reasonable. (e) Pledgor hereby waives to the fullest extent permitted by applicable law any right Pledgor may have to require Lender to marshall assets or sell the Pledged Stock, or any other collateral, in any particular order of priority. 5. Rights and Remedies Not Exclusive. Notwithstanding any provision in this Agreement or in any Transaction Document to the contrary, the rights and remedies provided herein and in the other Transaction Documents and in all other agreements, instruments and documents delivered pursuant to or in connection with the Transaction Documents are cumulative and are in addition to and not exclusive of any rights or remedies provided by law or under the principles of equity, including, without limitation, the rights and remedies of a secured party under the Uniform Commercial Code, and all such rights and remedies may be enforced partially, successively, alternatively or concurrently, and any action by Lender to enforce any of its rights and/or remedies shall not stop or prevent Lender from pursuing any other right or remedy which it may have hereunder or by law. 6. Notices. Pledgor will promptly deliver to Lender all written notices, and will promptly give Lender written notice of any other notices received by it with respect to the Pledged Stock, and Lender will promptly give like notice to Pledgor of any such notices received by it or its nominee. Any notice given pursuant to this Agreement shall be in writing and shall be deemed received upon (i) receipt of actual notice by Pledgor or Lender, or (ii) five (5) business days after such notice is deposited in the United States Mail, certified or registered mail, return receipt requested with postage prepaid, and addressed as follows: To Lender: Dorinco Reinsurance Company 1320 Waldo Avenue Midland, MI 48642 Attention: David E. Chamberlain (517) 636-7156 (517) 636-9963 (facsimile)

To Pledgor: ACO Holdings, Inc. c/o Hallmark Financial Services, Inc. 14651 Dallas Parkway, Suite 900 Dallas, TX 75240 Attention: Ramon D. Phillips (214) 404-1637 (214) 788-0520 (facsimile) Any party may from time to time change its address to which notices are to be sent or delivered hereunder by giving prior written notice of such change to the other party hereto as above provided. 7. Further Documents. Pledgor shall at any time, and from time to time, upon the written request of Lender, execute and deliver such further documents and do such further acts and things as Lender may reasonably request to effect the purposes of this Agreement, including, but not limited to, delivering to Lender upon the occurrence of an Event of Default irrevocable proxies with respect to the Pledged Stock in a form satisfactory to Lender. Until receipt thereof, this Agreement shall constitute Pledgor's proxy to Lender or its nominee to vote all

To Pledgor: ACO Holdings, Inc. c/o Hallmark Financial Services, Inc. 14651 Dallas Parkway, Suite 900 Dallas, TX 75240 Attention: Ramon D. Phillips (214) 404-1637 (214) 788-0520 (facsimile) Any party may from time to time change its address to which notices are to be sent or delivered hereunder by giving prior written notice of such change to the other party hereto as above provided. 7. Further Documents. Pledgor shall at any time, and from time to time, upon the written request of Lender, execute and deliver such further documents and do such further acts and things as Lender may reasonably request to effect the purposes of this Agreement, including, but not limited to, delivering to Lender upon the occurrence of an Event of Default irrevocable proxies with respect to the Pledged Stock in a form satisfactory to Lender. Until receipt thereof, this Agreement shall constitute Pledgor's proxy to Lender or its nominee to vote all shares of Pledged Stock then registered in Pledgor's name upon the occurrence of an Event of Default. 8. Return of Pledged Stock. Upon the satisfaction in full of all Obligations and the satisfaction of all additional costs and expenses of Lender as provided herein, this Agreement shall terminate and Lender shall deliver to Pledgor at Pledgor's expense, such of the Pledged Stock as shall not have been sold or otherwise applied pursuant to this Agreement. 9. Lender's Duties. Beyond the exercise of reasonable care to assure the safe custody of the Pledged Stock while held hereunder, Lender shall have no duty or liability to preserve any rights pertaining thereto and shall be relieved of all responsibility for the Pledged Stock upon surrendering it or tendering surrender of it to Pledgor. 10. Specific Performance. Pledgor acknowledges that a breach of any of its covenants set forth in this Agreement may cause irreparable injury to Lender; that Lender will have no adequate remedy at law with respect to such breach; and that, as a consequence thereof, all of Pledgor's covenants set forth in this Agreement shall be specifically enforceable against Pledgor and Pledgor hereby waives, to the extent such waiver is enforceable under law, and shall not assert, any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred. 11. No Waiver. No course of dealing between Pledgor and Lender, nor any failure to exercise, nor any delay in exercising any right, remedy, power or privilege of Lender hereunder or under any other Loan Document shall operate as a waiver thereof nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other remedy or the further exercise thereof or the exercise of any other right, remedy, power or privilege.

12. Prohibition of Indirect Action. Any act which Pledgor is prohibited from doing hereunder or under any other Transaction Document shall not be done or allowed to be done indirectly through an affiliate thereof or by any other indirect means. 13. Expenses. Pledgor agrees to promptly pay all expenses, costs, c h arges, fees and disbursements of any kind, type, nature and description, including reasonable attorneys' fees and all court costs, incurred by Lender in connection with the enforcement of this Agreement. 14. Severability. The provisions of this Agreement are severable, and if any clause or provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision or part thereof in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision in this Agreement. 15. Governing Law; Construction. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan,

12. Prohibition of Indirect Action. Any act which Pledgor is prohibited from doing hereunder or under any other Transaction Document shall not be done or allowed to be done indirectly through an affiliate thereof or by any other indirect means. 13. Expenses. Pledgor agrees to promptly pay all expenses, costs, c h arges, fees and disbursements of any kind, type, nature and description, including reasonable attorneys' fees and all court costs, incurred by Lender in connection with the enforcement of this Agreement. 14. Severability. The provisions of this Agreement are severable, and if any clause or provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision or part thereof in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision in this Agreement. 15. Governing Law; Construction. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, except as to matters covered by applicable Federal law or regulation. (b) I n construing this Agreement, words of masculine, feminine or neuter gender shall mean and include the correlative words of the other genders, and words importing the singular number shall mean and include the plural number, and vice versa. The term " p e r s on" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution or other entity, or any combination of any of the foregoing, as the context may require. The headings in the paragraphs of this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. (c) No inference in favor of, or against, any party shall be drawn from the fact that such party has drafted any portion of this Agreement, each party having been represented by counsel of its choice in connection with the negotiation and preparation of this Agreement and the other Transaction Documents. 16. Sole Discretion of Lender. Whenever Lender's judgment, consent or approval is required hereunder for any matter or Lender shall have an option or election hereunder ("Decision Power"), such Decision Power shall be exercised in the good faith, reasonable discretion of Lender. Pledgor acknowledges that unless specifically limited herein, Lender is entitled to exercise its Decision Power in a manner most beneficial to it. 17. Amendments. This Agreement may be amended only by a written instrument signed by all the parties hereto. 18. Conflict Among Provision. In the event of a conflict between any provision of this Agreement and the provisions of any other document, instrument or agreement which grants Lender a security interest in all or any part of the Pledged Stock, the provisions of this Agreement shall control.

19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, personal and legal representatives, executors, successors, transferees and assigns; provided, however, that Pledgor shall not be permitted to assign any of its obligations hereunder. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and shall be binding upon any person executing the same (whether or not all intended signatures hereon are obtained), and all of which together shall constitute one and the same instrument. 21. Venue. Venue of any action brought pursuant to this Agreement or any other Transaction Document shall, at the election of Lender, be in (and, if any such action is originally brought in another venue, such action shall, at the election of Lender, be transferred to) a state or F e deral court of appropriate jurisdiction located in or having jurisdiction over Midland County, Michigan. Each party to this Agreement hereby waives any objection to the jurisdiction of or venue in any such court and to the service of process described in the Michigan or Federal Rules of Civil Procedure. Each party to this Agreement hereby waives any right to claim that any such court is an inconvenient forum or any similar defense.

19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, administrators, personal and legal representatives, executors, successors, transferees and assigns; provided, however, that Pledgor shall not be permitted to assign any of its obligations hereunder. 20. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and shall be binding upon any person executing the same (whether or not all intended signatures hereon are obtained), and all of which together shall constitute one and the same instrument. 21. Venue. Venue of any action brought pursuant to this Agreement or any other Transaction Document shall, at the election of Lender, be in (and, if any such action is originally brought in another venue, such action shall, at the election of Lender, be transferred to) a state or F e deral court of appropriate jurisdiction located in or having jurisdiction over Midland County, Michigan. Each party to this Agreement hereby waives any objection to the jurisdiction of or venue in any such court and to the service of process described in the Michigan or Federal Rules of Civil Procedure. Each party to this Agreement hereby waives any right to claim that any such court is an inconvenient forum or any similar defense. 22. NO SETOFF OR COUNTERCLAIM; WAIVER OF JURY TRIAL (A) NO SETOFF OR COUNTERCLAIM OF ANY KIND CLAIMED BY PLEDGOR SHALL STAND AS A DEFENSE TO THE JUDICIAL ENFORCEMENT OF THIS AGREEMENT AGAINST PLEDGOR, IT BEING HEREBY SPECIFICALLY AGREED AND STIPULATED THAT ANY SUCH SETOFF OR COUNTERCLAIM SHALL BE MAINTAINED BY SEPARATE SUIT. (B) LENDER AND PLEDGOR HEREBY AGREE TO TRIAL BY COURT AND I R R EVOCABLY WAIVE JURY TRIAL IN ANY ACTION OR PROCEEDING (INCLUDING, BUT NOT LIMITED TO, ANY COUNTERCLAIM) ARISING OUT OF OR IN ANY WAY RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, THE RELATIONSHIP CREATED THEREBY, OR THE ORIGINATION, ADMINISTRATION OR ENFORCEMENT OF THE INDEBTEDNESS EVIDENCED AND/OR SECURED BY THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. IN WITNESS WHEREOF, the parties have executed this as of the day and year first above written. PLEDGOR: ACO HOLDINGS, INC.
By: Name: Title: ATTEST:

Linda H. Sleeper Executive Vice President

By: Raymond A. Kilgore, Secretary [CORPORATE SEAL]

EXHIBIT 1 PLEDGED STOCK All of the issued and outstanding capital stock of Hallmark Financial Corporation

EXHIBIT 1 PLEDGED STOCK All of the issued and outstanding capital stock of Hallmark Financial Corporation

Loan Agreement As of March 17, 1997 Between BORROWER HALLMARK FINANCE CORPORATION 14651 Dallas Parkway, Suite 900 Dallas, Texas 75240 BANK NATIONSBANK OF TEXAS, N.A. 901 Main Street, 7th Floor P.O. Box 83100 Dallas, Texas 75283-1000 In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1.0 CERTAIN DEFINITIONS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: "ACO" means ACO Holdings, Inc., a Texas corporation which is wholly owned by HFS. "Adjusted Eligible Premium Finance Agreements" at any time, means the Eligible Premium Finance Agreements adjusted to reflect the addition or subtraction, as appropriate of: (a) amendments to any Eligible Premium Finance Agreement; (b) miscellaneous corrections to Eligible Premium Finance Agreements; (c) cash receipts (not otherwise included in the definition of Eligible Premium Finance Agreements); (d) any Eligible Premium Finance Agreement which has been canceled; (e) earned late charges; (f) earned set up fees; (g) returned checks (uncollected net of returned check charges); (h) interest and write-offs; (i) change in unearned interest; and (j) return premiums in course of collections. "Adjusted LIBO Rate" means, for any Interest Period, a rate of interest per annum equal to the sum of two and eight-tenths of one percent (2.80%) plus the LIBO Rate for the applicable Interest Period. "Adjusted Prime Rate" means a rate of interest per annum equal to the Prime Rate plus three-eighths of one percent (0.375%). "Affiliate" of any person means any other person or entity (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such person or entity, (ii) which beneficially owns or holds 15% or more of the equity of such person or entity, or (iii) of which 15% or more of the equity is beneficially owned or held by such person or entity or a subsidiary of such person or entity; "control" means the power to direct the management and policies of such person or entity directly or indirectly, whether through the ownership of equity, by contract or otherwise.

Loan Agreement As of March 17, 1997 Between BORROWER HALLMARK FINANCE CORPORATION 14651 Dallas Parkway, Suite 900 Dallas, Texas 75240 BANK NATIONSBANK OF TEXAS, N.A. 901 Main Street, 7th Floor P.O. Box 83100 Dallas, Texas 75283-1000 In consideration of the Loan or Loans described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1.0 CERTAIN DEFINITIONS. In addition to any other terms defined herein, the following terms shall have the meaning set forth with respect thereto: "ACO" means ACO Holdings, Inc., a Texas corporation which is wholly owned by HFS. "Adjusted Eligible Premium Finance Agreements" at any time, means the Eligible Premium Finance Agreements adjusted to reflect the addition or subtraction, as appropriate of: (a) amendments to any Eligible Premium Finance Agreement; (b) miscellaneous corrections to Eligible Premium Finance Agreements; (c) cash receipts (not otherwise included in the definition of Eligible Premium Finance Agreements); (d) any Eligible Premium Finance Agreement which has been canceled; (e) earned late charges; (f) earned set up fees; (g) returned checks (uncollected net of returned check charges); (h) interest and write-offs; (i) change in unearned interest; and (j) return premiums in course of collections. "Adjusted LIBO Rate" means, for any Interest Period, a rate of interest per annum equal to the sum of two and eight-tenths of one percent (2.80%) plus the LIBO Rate for the applicable Interest Period. "Adjusted Prime Rate" means a rate of interest per annum equal to the Prime Rate plus three-eighths of one percent (0.375%). "Affiliate" of any person means any other person or entity (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such person or entity, (ii) which beneficially owns or holds 15% or more of the equity of such person or entity, or (iii) of which 15% or more of the equity is beneficially owned or held by such person or entity or a subsidiary of such person or entity; "control" means the power to direct the management and policies of such person or entity directly or indirectly, whether through the ownership of equity, by contract or otherwise.

"AH" means American Hallmark Insurance Company of Texas, a Texas domiciled insurance company which is wholly owned by HFS. "AHGA" means American Hallmark General Agency, Inc., a Texas corporation which is wholly owned by ACO. "Bank Reserve" means, for any period, the amount applicable to such period as set forth in Schedule 1.0 attached hereto.

"AH" means American Hallmark Insurance Company of Texas, a Texas domiciled insurance company which is wholly owned by HFS. "AHGA" means American Hallmark General Agency, Inc., a Texas corporation which is wholly owned by ACO. "Bank Reserve" means, for any period, the amount applicable to such period as set forth in Schedule 1.0 attached hereto. "Board" means the Board of Governors of the Federal Reserve System of the United States of America or any successor governmental body. "Borrowing Base" at any time, shall be equal to the remainder of (i) the sum of (A) 60% of Adjusted Eligible Premium Finance Agreements plus (B) 60% of Eligible Return Premiums as determined in accordance with this Agreement, minus (ii) the Bank Reserve. "Business Day" means (i) a day other than Saturday, Sunday or a day on which Bank is authorized to be closed in the State of Texas, and (ii) if the applicable Business Day relates to a LIBO Rate Tranche, a day on which dealings in Dollar deposits are also carried on in the London interbank market and banks are open for business in London. "Combined Ratio" means a combined ratio of AH calculated in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners. "Consequential Loss" means any loss, cost, or expense incurred by Bank because Borrower pays all or some portion of the Loan prior to the last day of the applicable Interest Period and includes, without limitation, the amount (if any) by which (i) the interest which would have been payable on the prepaid amount had it not been paid prior to the last day of the Interest Period exceeds (ii) the interest earned to the extent Bank is able to redeposit the same so prepaid for the balance of such Interest Period and also includes all expenses and penalties incurred by Bank in so redepositing such sum. "Contested in Good Faith" means, as to any payment, tax, assessment, charge, levy, lien, encumbrance or claim, contesting the amount, applicability or validity thereof in good faith by appropriate proceedings or other appropriate actions promptly initiated and diligently conducted in a manner satisfactory to Bank, provided (a) a deposit of funds or other security satisfactory to Bank in the full amount of such contested payment, tax, assessment, charge, levy, lien, encumbrance or claim has been provided for in a manner satisfactory to Bank, and (b) the enforcement of the contested payment, tax, assessment, charge, levy, lien, encumbrance or claim is stayed in a manner satisfactory to Bank pending the resolution of such contest. "Default" means any act or occurrence specified in Section 9.0, without regard to whether any requirement for notice or lapse of time, or both, or any other condition has been satisfied. "Dollars" or "$" means lawful money of the United States of America.

"Dorinco Loan Documents" means that certain loan agreement dated as of March 10, 1997, by and between HFS and Dorinco Reinsurance Company, the promissory note, the security agreement, and all other documents, instruments, security agreements, pledge agreements, negative pledge agreements, certificates and agreements executed and/or delivered by Borrower, any Guarantor or any third party to Dorinco Reinsurance Company in connection with such loan agreement dated March 10, 1997. "Eligible Premium Finance Agreements" means all amounts due from makers pursuant to those Premium Finance Agreements prepared on a form approved by the Texas Department of Insurance which comply with all requirements of the Texas Insurance Code and the Texas Department of Insurance Regulations and which have been created in the ordinary course of Borrower's business and upon which Borrower's right to receive payment is absolute, unconditional and not contingent upon the fulfillment of any condition whatsoever, and shall not include any of the following:

"Dorinco Loan Documents" means that certain loan agreement dated as of March 10, 1997, by and between HFS and Dorinco Reinsurance Company, the promissory note, the security agreement, and all other documents, instruments, security agreements, pledge agreements, negative pledge agreements, certificates and agreements executed and/or delivered by Borrower, any Guarantor or any third party to Dorinco Reinsurance Company in connection with such loan agreement dated March 10, 1997. "Eligible Premium Finance Agreements" means all amounts due from makers pursuant to those Premium Finance Agreements prepared on a form approved by the Texas Department of Insurance which comply with all requirements of the Texas Insurance Code and the Texas Department of Insurance Regulations and which have been created in the ordinary course of Borrower's business and upon which Borrower's right to receive payment is absolute, unconditional and not contingent upon the fulfillment of any condition whatsoever, and shall not include any of the following: (a) any Premium Finance Agreement, the payment of which an insurer or reinsurer has disputed or denied; (b) any Premium Finance Agreement, the payment of which an insurer or reinsurer has a right of setoff, defense or discount; (c) any Premium Finance Agreement which reflects a transaction having less than ten percent (10%) equity in the premium (i.e., representing the financing of more than 90% of the insurance premium of the particular insurance product); (d) any Premium Finance Agreement in default which has a balance due from its maker after realization against all collateral securing such Premium Finance Agreement; (e) any Premium Finance Agreement arising out of the funding of an insurance premium for an insurance product issued by, pursuant to, or in the Texas Automobile Insurance Plan; (f) any Premium Finance Agreement arising out of the funding of an insurance premium for any insurance product originated by an agent doing business outside of the State of Texas or which is an insurance product otherwise governed by or subject to the laws of a state other than the State of Texas; (g) any Premium Finance Agreement arising out of a transaction where the insurance product is issued or written by an entity other than AH on behalf of State and County Mutual Fire Insurance Company; (h) any Premium Finance Agreement which does not have 75% or more of the premium balance reinsured by a third party insurance company with an A.M. Best rating of A- or higher; or (i) any Premium Finance Agreement arising out of a transaction where the managing agent therefor is an entity other than AHGA "Eligible Return Premiums" means amounts owed to Borrower by insurers or reinsurers which are not more than 5 days past due from the original due date as required by applicable Governmental Authorities, the obligation of insurers or reinsurers to pay Borrower having arisen

from the cancellation of an insurance policy funded by Borrower; provided, however, this definition shall not include any amounts included in the definition of Eligible Premium Finance Agreements. "Event of Default" means any act or occurrence specified in Section 9.0 hereof. "Expiration Date" means 2 p.m. on September 17, 1998 or any other date on which the Loans become due and payable pursuant to the terms of this Agreement. "GAAP" means those accounting principles applied on a consistent basis generally accepted from time to time in the certified public accounting profession (including those set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or statements of the Financial Accounting

from the cancellation of an insurance policy funded by Borrower; provided, however, this definition shall not include any amounts included in the definition of Eligible Premium Finance Agreements. "Event of Default" means any act or occurrence specified in Section 9.0 hereof. "Expiration Date" means 2 p.m. on September 17, 1998 or any other date on which the Loans become due and payable pursuant to the terms of this Agreement. "GAAP" means those accounting principles applied on a consistent basis generally accepted from time to time in the certified public accounting profession (including those set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants or statements of the Financial Accounting Standards Board which may be applicable at the time in question); and "applied on a consistent basis" means that the accounting principles observed in the period covered by any report required under the terms of this Agreement are compatible in all material respects with those applied in any preceding period and report. "Governmental Authority" means any nation or government, any federal, state, local, or other political subdivision thereof, any department, commission, board, bureau, agency, public authority, instrumentality, court, or other entity exercising executive, legislative, judicial, regulatory, or administrative functions of government. "Gross Premium" means the gross premium(s) of AH calculated in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners. "HCS" means Hallmark Claims Services, Inc., a Texas corporation which is wholly owned by ACO. "HFS" means Hallmark Financial Services, a Nevada corporation. "Hazardous Materials" include all materials defined as hazardous wastes or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. "Indebtedness" means (a) indebtedness or liability for borrowed money; (b) obligations evidenced by bonds, debentures, notes, or other similar instruments; (c) obligations for the deferred purchase price of property or services (including trade obligations); (d) obligations as lessee under leases which should have been or should be, in accordance with GAAP, recorded as capital leases; (e) current liabilities in respect of unfunded vested benefits under plans covered by Title IV of the Employee Retirement Income Security Act of 1974; (f) obligations under letters of credit; (g) obligations under acceptance facilities; (h) all guarantees, endorsements (other than for collection or deposit in the ordinary course of business), and other contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any person or entity, or otherwise to assure a creditor against loss; (i) obligations secured by any mortgage, lien, pledge or security interest

or other charge or encumbrance on property, whether or not the obligations have been assumed; and (j) obligations to redeem or repurchase any capital stock, warrants or stock equivalents. "Interest Expense" means for any period the sum of (i) the aggregate interest expense for such period determined in accordance with GAAP, including the portion of any obligation allocable to interest expense under a capital lease for such period plus (ii) bad debt expense of Borrower, determined in a manner consistent with the Borrower's internally prepared financial statements dated November 30, 1996. "Interest Payment Date" means (i) the last Business Day of each calendar month, or if earlier occurring in any calendar month with respect to any LIBO Rate Tranche, the last day of the Interest Period applicable to such LIBO Rate Tranche, and (ii) the Expiration Date. "Interest Period" means for each LIBO Rate Tranche, the period commencing on the date such LIBO Rate Tranche is made or, in the case of a rollover to a successive Interest Period, the last day of the immediately preceding Interest Period and, except as provided below, ending three (3), six (6) or twelve (12) calendar

or other charge or encumbrance on property, whether or not the obligations have been assumed; and (j) obligations to redeem or repurchase any capital stock, warrants or stock equivalents. "Interest Expense" means for any period the sum of (i) the aggregate interest expense for such period determined in accordance with GAAP, including the portion of any obligation allocable to interest expense under a capital lease for such period plus (ii) bad debt expense of Borrower, determined in a manner consistent with the Borrower's internally prepared financial statements dated November 30, 1996. "Interest Payment Date" means (i) the last Business Day of each calendar month, or if earlier occurring in any calendar month with respect to any LIBO Rate Tranche, the last day of the Interest Period applicable to such LIBO Rate Tranche, and (ii) the Expiration Date. "Interest Period" means for each LIBO Rate Tranche, the period commencing on the date such LIBO Rate Tranche is made or, in the case of a rollover to a successive Interest Period, the last day of the immediately preceding Interest Period and, except as provided below, ending three (3), six (6) or twelve (12) calendar months thereafter, as Borrower may select in accordance with the terms of this Agreement; provided that all Interest Periods are subject to the following terms and conditions: (A) all Interest Periods which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day unless such next succeeding Business Day falls in the next succeeding calendar month, in which case such Interest Period shall end on the next preceding Business Day; (B) no Interest Period may be selected that ends later than the Expiration Date; (C) an Interest Period once selected by Borrower shall be binding upon Borrower and irrevocable; and (D) each Interest Period shall terminate on the numerical day of the last calendar month of such Interest Period which corresponds to the day such Interest Period began unless there is no such corresponding day in such month, in which case such Interest Period shall terminate on the last Business Day of such calendar month. "Interest Rate Option" means the Adjusted LIBO Rate or the Adjusted Prime Rate. "Lending Office" means for each LIBO Rate Tranche the office of Bank (or its Affiliate) designated for such LIBO Rate Tranche from time to time by Bank. "LIBO Rate" means, for each Interest Period, a rate per annum (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent) determined by Bank to be equal to the quotient obtained by dividing (a) the London Interbank Offered Rate for the relevant Interest Period by (b) the remainder of one (1) minus the applicable Reserve Requirement on the first day of the relevant Interest Period (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent). "LIBO Rate Tranche" means each Tranche the interest on which is calculated with reference to an Adjusted LIBO Rate. "Loan(s)" means collectively any and all loans or advances heretofore or hereafter made by Bank to Borrower.

"Loan Documents" means this Agreement, the Note, the Guaranty Agreements, the Security Agreement, and all other documents, instruments, guarantees, security agreements, deeds of trust, pledge agreements, certificates and agreements executed and/or delivered by Borrower, any Guarantor or third party to Bank in connection with any Loan. "London Interbank Offered Rate" means, for the relevant Interest Period, the rate of interest per annum (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent) equal to the rate at which Dollar deposits would be offered by Bank (or its affiliate) at its in London, England (or if Bank, at the time any determination is made, does not maintain an office in London, England, the principal office of any affiliate of Bank in London, England) to major banks in the London interbank market at 11:00 a. m. London, England two (2) Business Days prior to the commencement of the relevant Interest Period for a period of time equal or comparable to and commencing on such Interest Period and in an amount equal or comparable to the principal balance of the Loan to be disbursed or outstanding during such Interest Period. "Loss Ratio" means the loss ratio of AH calculated in accordance with accounting practices prescribed or

"Loan Documents" means this Agreement, the Note, the Guaranty Agreements, the Security Agreement, and all other documents, instruments, guarantees, security agreements, deeds of trust, pledge agreements, certificates and agreements executed and/or delivered by Borrower, any Guarantor or third party to Bank in connection with any Loan. "London Interbank Offered Rate" means, for the relevant Interest Period, the rate of interest per annum (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent) equal to the rate at which Dollar deposits would be offered by Bank (or its affiliate) at its in London, England (or if Bank, at the time any determination is made, does not maintain an office in London, England, the principal office of any affiliate of Bank in London, England) to major banks in the London interbank market at 11:00 a. m. London, England two (2) Business Days prior to the commencement of the relevant Interest Period for a period of time equal or comparable to and commencing on such Interest Period and in an amount equal or comparable to the principal balance of the Loan to be disbursed or outstanding during such Interest Period. "Loss Ratio" means the loss ratio of AH calculated in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners. "Maximum Amount" means the lesser of $8,000,000 or the Borrowing

"Maximum Rate" means the higher of the maximum interest rate allowed by applicable United States or Texas law as amended from time to time and in effect on the date for which a determination of interest is made. "Net Operating Income Available For Distribution" of Borrower means for any period an amount equal to the remainder of (i) Net Operating Income for such period, minus (ii) any charges for federal, state, local and foreign income taxes for such period; provided, however, in no event shall such remainder be less than zero. As used herein, "Net Operating Income" of Borrower means for any period an amount equal to the remainder of (i) total revenues, minus (ii) the aggregate Interest Expense for such period, minus (iii) normal and customary operating expenses determined in accordance with GAAP. "Net Premium" means the net premium of AH calculated in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners. "Notice of Borrowing" means an irrevocable notice signed by Borrower requesting that a particular advance be made and specifying a permitted Interest Rate Option to be applicable to all or a portion of such advance and containing the information and delivered to Bank from time to time as required by Section 2.5 and Section 2.6. "Obligations" means the obligations of Borrower:

(a) to pay all Indebtedness arising out of this Agreement, any future advances under this Agreement, and all renewals, extensions or amendments of such Indebtedness or any part thereof or any such future advances; (b) to pay the principal of and interest on the Note in accordance with the terms thereof, and all renewals, extensions, modifications and amendments of such Note or any part thereof, and any future advances made pursuant thereto; (c) to pay any and all other Indebtedness of Borrower to Bank of every kind, nature or description, direct or indirect, primary or secondary, secured or unsecured (including overdrafts), joint or several, absolute or contingent, due or to become due, now existing or hereafter arising, regardless of how it may be evidenced, and all future advances, whether or not presently contemplated by the parties; (d) to perform fully all of the terms and provisions of each of the instruments constituting the Loan Documents; and (e) to reimburse Bank, on demand, for all of Bank's expenses and costs, plus interest thereon at the Maximum

"Maximum Rate" means the higher of the maximum interest rate allowed by applicable United States or Texas law as amended from time to time and in effect on the date for which a determination of interest is made. "Net Operating Income Available For Distribution" of Borrower means for any period an amount equal to the remainder of (i) Net Operating Income for such period, minus (ii) any charges for federal, state, local and foreign income taxes for such period; provided, however, in no event shall such remainder be less than zero. As used herein, "Net Operating Income" of Borrower means for any period an amount equal to the remainder of (i) total revenues, minus (ii) the aggregate Interest Expense for such period, minus (iii) normal and customary operating expenses determined in accordance with GAAP. "Net Premium" means the net premium of AH calculated in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners. "Notice of Borrowing" means an irrevocable notice signed by Borrower requesting that a particular advance be made and specifying a permitted Interest Rate Option to be applicable to all or a portion of such advance and containing the information and delivered to Bank from time to time as required by Section 2.5 and Section 2.6. "Obligations" means the obligations of Borrower:

(a) to pay all Indebtedness arising out of this Agreement, any future advances under this Agreement, and all renewals, extensions or amendments of such Indebtedness or any part thereof or any such future advances; (b) to pay the principal of and interest on the Note in accordance with the terms thereof, and all renewals, extensions, modifications and amendments of such Note or any part thereof, and any future advances made pursuant thereto; (c) to pay any and all other Indebtedness of Borrower to Bank of every kind, nature or description, direct or indirect, primary or secondary, secured or unsecured (including overdrafts), joint or several, absolute or contingent, due or to become due, now existing or hereafter arising, regardless of how it may be evidenced, and all future advances, whether or not presently contemplated by the parties; (d) to perform fully all of the terms and provisions of each of the instruments constituting the Loan Documents; and (e) to reimburse Bank, on demand, for all of Bank's expenses and costs, plus interest thereon at the Maximum Rate, from the date Bank expends any funds until reimbursed, including the reasonable fees and expenses of its counsel, incurred in connection with the preparation, administration, amendment, modification, or enforcement of this Agreement or any of the Loan Documents or other documents required hereunder. "Pledged Stock" means all of the following, whether now owned or hereafter acquired: (i) all of Borrower's capital stock; (ii) all certificates (if any), options, rights, warrants, coupons, and other distributions issued as an addition to, in substitution or exchange for, or on account of, such shares of capital stock, and (iii) all proceeds of the foregoing. "Premium Finance Agreement" means an agreement by which an insured or prospective insured promises to pay Borrower the amount advanced under the agreement to AH on behalf of State and County Mutual Fire Insurance Company or to AHGA in payment of premium on an insurance contract. "Prime Rate" means the fluctuating rate of interest established by Bank from time to time, at its discretion, whether or not such rate shall be otherwise published. The Prime Rate is established by Bank as an index and may or may not at any time be the best or lowest rate charged by Bank on any loan. "Prime Rate Tranche" means a Tranche the interest on which is calculated with reference to an Adjusted Prime Rate. "Reinsurance Agreements" means (a) that certain 100% Quota Share Reinsurance Agreement effective July 1,

(a) to pay all Indebtedness arising out of this Agreement, any future advances under this Agreement, and all renewals, extensions or amendments of such Indebtedness or any part thereof or any such future advances; (b) to pay the principal of and interest on the Note in accordance with the terms thereof, and all renewals, extensions, modifications and amendments of such Note or any part thereof, and any future advances made pursuant thereto; (c) to pay any and all other Indebtedness of Borrower to Bank of every kind, nature or description, direct or indirect, primary or secondary, secured or unsecured (including overdrafts), joint or several, absolute or contingent, due or to become due, now existing or hereafter arising, regardless of how it may be evidenced, and all future advances, whether or not presently contemplated by the parties; (d) to perform fully all of the terms and provisions of each of the instruments constituting the Loan Documents; and (e) to reimburse Bank, on demand, for all of Bank's expenses and costs, plus interest thereon at the Maximum Rate, from the date Bank expends any funds until reimbursed, including the reasonable fees and expenses of its counsel, incurred in connection with the preparation, administration, amendment, modification, or enforcement of this Agreement or any of the Loan Documents or other documents required hereunder. "Pledged Stock" means all of the following, whether now owned or hereafter acquired: (i) all of Borrower's capital stock; (ii) all certificates (if any), options, rights, warrants, coupons, and other distributions issued as an addition to, in substitution or exchange for, or on account of, such shares of capital stock, and (iii) all proceeds of the foregoing. "Premium Finance Agreement" means an agreement by which an insured or prospective insured promises to pay Borrower the amount advanced under the agreement to AH on behalf of State and County Mutual Fire Insurance Company or to AHGA in payment of premium on an insurance contract. "Prime Rate" means the fluctuating rate of interest established by Bank from time to time, at its discretion, whether or not such rate shall be otherwise published. The Prime Rate is established by Bank as an index and may or may not at any time be the best or lowest rate charged by Bank on any loan. "Prime Rate Tranche" means a Tranche the interest on which is calculated with reference to an Adjusted Prime Rate. "Reinsurance Agreements" means (a) that certain 100% Quota Share Reinsurance Agreement effective July 1, 1996, between State and County Mutual Fire Insurance Company and AH, (b) that certain Quota Share Retrocession Agreement effective July 1, 1996, among AH, and the subscribing reinsurers who are additional parties thereto, (c) that certain Automobile Physical Damage Catastrophe Excess of Loss Reinsurance Agreement effective July 1, 1996, among AH, and the subscribing reinsurer who is an additional party thereto, (d) that

certain Guaranty Agreement effective July 1, 1996 between State and County Mutual Fire Insurance Company and Kemper Reinsurance Company; (e) that certain Guaranty Agreement effective July 1, 1996 between State and County Mutual Fire Insurance Company and Skandia America Reinsurance Corporation; (f) that certain Guaranty Agreement effective July 1, 1996 between State and County Mutual Fire Insurance Company and Dorinco Reinsurance Company; (g) that certain Guaranty of Performance and Hold Harmless Agreement effective July 1, 1996 between Hallmark Financial and Kemper Reinsurance Company; (h) that certain Guaranty of Performance and Hold Harmless Agreement effective July 1, 1996 between HFS and Skandia America Reinsurance Corporation; (i) that certain Guaranty of Performance and Hold Harmless Agreement effective July 1, 1996 between HFS and Dorinco Reinsurance Company; and (j) all amendments and modifications of, or substitutions and replacements for, each of the foregoing documents. "Regulation D" means Regulation D (12 C.F.R. 204) and all amendments and supplements thereof and any successors or replacements therefor as promulgated from time to time by the Board.

certain Guaranty Agreement effective July 1, 1996 between State and County Mutual Fire Insurance Company and Kemper Reinsurance Company; (e) that certain Guaranty Agreement effective July 1, 1996 between State and County Mutual Fire Insurance Company and Skandia America Reinsurance Corporation; (f) that certain Guaranty Agreement effective July 1, 1996 between State and County Mutual Fire Insurance Company and Dorinco Reinsurance Company; (g) that certain Guaranty of Performance and Hold Harmless Agreement effective July 1, 1996 between Hallmark Financial and Kemper Reinsurance Company; (h) that certain Guaranty of Performance and Hold Harmless Agreement effective July 1, 1996 between HFS and Skandia America Reinsurance Corporation; (i) that certain Guaranty of Performance and Hold Harmless Agreement effective July 1, 1996 between HFS and Dorinco Reinsurance Company; and (j) all amendments and modifications of, or substitutions and replacements for, each of the foregoing documents. "Regulation D" means Regulation D (12 C.F.R. 204) and all amendments and supplements thereof and any successors or replacements therefor as promulgated from time to time by the Board. "Reserve Requirement" with respect to each Interest Period means the daily average of the stated maximum rate (expressed as a decimal) at which reserves (including all basic, supplemental, marginal, emergency, special, and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements during such Interest Period) are required by the Board (including those under Regulation D) to be maintained during such Interest Period with respect to the LIBO Rate, for Eurocurrency liabilities (as such term is defined in Regulation D) but without benefit or credit for prorations, exemptions or offsets that might otherwise be available from time to time under Regulation D. The Reserve Requirement shall reflect any other reserves required to be maintained against with respect to LIBO Rate Tranches (1) any category of liabilities that includes deposits by reference to which the LIBO Rate is to be determined or (2) any category of extension of credit or other assets that includes LIBO Rate Tranches. "Solvent" means as of any time of determination with respect to a person or entity (i) the fair market value of its assets exceeds the amount of its liabilities (including contingent liabilities), (ii) the present fair saleable value of its assets exceeds the probable liability on existing debts as they become due, (iii) such person or entity is then able and expects to be able to pay its debts (including contingent liabilities) as they become due, and (iv) such person or entity has and expects to have sufficient capital (having due regard for the prevailing practice in the industry in which it is engaged) to carry on its business as conducted or proposed to be conducted. "Statutory Capital and Surplus" means capital and surplus determined in accordance with statutory accounting practices from time to time prescribed or permitted by the Texas Department of Insurance or the National Association of Insurance Commissioners for stock property and casualty insurance companies in Texas.

"Tangible Net Worth" means the sum of the excess of total assets over Total Liabilities, each determined in accordance with GAAP consistent with those applied in the preparation of the financial statements previously furnished to Bank, excluding however, from the determination of total assets all assets which would be classified as intangible assets under GAAP. "Total Liabilities" means as of any date the Indebtedness of Borrower and its subsidiaries reflected on the balance sheet of Borrower as of such date, determined in accordance with GAAP. "Tranche" means either a LIBO Rate Tranche or a Prime Rate Tranche. "Trigger Event" means the occurrence of one or more of the following events: (i) As of the end of any fiscal quarter, AH's Combined Ratio for the four (4) immediately preceding fiscal quarters of AH's operations is greater than 107%; (ii) As of the end of any fiscal quarter, AH's Loss Ratio for the four (4) immediately preceding fiscal quarters of AH's operations is greater than 83%; (iii) Borrower's Interest Coverage Ratio (as defined in Section 6.1 hereof) as of the end of any fiscal quarter is less than 1.80 to 1.0;

"Tangible Net Worth" means the sum of the excess of total assets over Total Liabilities, each determined in accordance with GAAP consistent with those applied in the preparation of the financial statements previously furnished to Bank, excluding however, from the determination of total assets all assets which would be classified as intangible assets under GAAP. "Total Liabilities" means as of any date the Indebtedness of Borrower and its subsidiaries reflected on the balance sheet of Borrower as of such date, determined in accordance with GAAP. "Tranche" means either a LIBO Rate Tranche or a Prime Rate Tranche. "Trigger Event" means the occurrence of one or more of the following events: (i) As of the end of any fiscal quarter, AH's Combined Ratio for the four (4) immediately preceding fiscal quarters of AH's operations is greater than 107%; (ii) As of the end of any fiscal quarter, AH's Loss Ratio for the four (4) immediately preceding fiscal quarters of AH's operations is greater than 83%; (iii) Borrower's Interest Coverage Ratio (as defined in Section 6.1 hereof) as of the end of any fiscal quarter is less than 1.80 to 1.0; (iv) As of the date of any reporting period required by law or the Texas Department of Insurance, the Tangible Net Worth of Borrower (determined in accordance with GAAP) is less than the amount set forth below for the calendar year indicated: 1997 - $7,890,000 1998 - $8,200,000; or (v) As of the date of any reporting period required by law or the Texas Department of Insurance, the Statutory Capital and Surplus of AH is less than $4,200,000 or shall have decreased more than 15% from the comparable reporting period of the preceding calendar year. 2.0 LOANS. 2.1 Loans. Bank agrees, subject to the terms and conditions hereof, to extend to Borrower a revolving line of credit, pursuant to which Bank will lend Borrower at any time and from time to time on or before the Expiration Date, sums which may be repaid and reborrowed as provided herein and which shall not exceed at any one time outstanding the Maximum Amount. Whenever Borrower desires to borrow hereunder, it shall deliver a Notice of Borrowing to Bank in the manner specified in Section 2.5 and Section 2.6 hereof and in a manner otherwise satisfactory to Bank. Borrower agrees that the Loans shall be used solely to finance Premium Finance Agreements. 2.2 Note. The obligation of Borrower to repay the aggregate principal balance of all Loans hereunder outstanding at any one time shall be evidenced by a promissory note (such instrument, together with any and all renewals and extensions and rearrangements thereof being collectively referred to herein as the "Note"). The Note shall (a) be

dated March 17, 1997, (b) be payable in the manner described in Section 2.3 hereof, (c) bear interest from the date thereof until paid in the manner provided in the Note, (d) be entitled to the benefits of this Agreement and the security provided for herein, and (e) be in such form as is acceptable to Bank. 2.3 Amortization. Accrued interest on the unpaid principal balance of the Note shall be due and payable in arrears on each Interest Payment Date applicable to each Tranche. The unpaid principal balance of the Note, and all accrued, unpaid interest thereon, shall be due and payable on the Expiration Date. 2.4 Interest on the Loan and Other Obligations.

dated March 17, 1997, (b) be payable in the manner described in Section 2.3 hereof, (c) bear interest from the date thereof until paid in the manner provided in the Note, (d) be entitled to the benefits of this Agreement and the security provided for herein, and (e) be in such form as is acceptable to Bank. 2.3 Amortization. Accrued interest on the unpaid principal balance of the Note shall be due and payable in arrears on each Interest Payment Date applicable to each Tranche. The unpaid principal balance of the Note, and all accrued, unpaid interest thereon, shall be due and payable on the Expiration Date. 2.4 Interest on the Loan and Other Obligations. (a) Except as otherwise provided in subsections (b) and (c), the outstanding principal balance of the Loan shall bear interest from the date funded until paid, at a rate per annum equal to the lesser of (x) the Maximum Rate or (y) the rate for each Tranche determined according to the following: (A) for the Prime Rate Tranche, a fluctuating rate per annum equal to the Adjusted Prime Rate; or (B) for each LIBO Rate Tranche, a rate equal to the Adjusted LIBO Rate. (b) If, at any time with respect to the Prime Rate Tranche or during the Interest Periods of LIBO Rate Tranche, the interest rate then in effect with respect to such Tranche or Tranches would exceed the Maximum Rate Bank could charge, then, notwithstanding the other provisions hereof and Borrower's election, the interest rate chargeable with respect to such affected Tranche or Tranches shall immediately become the Maximum Rate, provided that such affected Tranche or Tranches shall thereafter accrue interest at the Maximum Rate until such time as Bank has received a sum equal to the amount of interest which would have accrued on such affected Tranche or Tranches had such Tranche or Tranches accrued interest at the interest rate otherwise applicable thereto. So long as interest is calculated pursuant to this provision, Borrower is not entitled to elect that any Tranche be, or to convert the interest rate to the rate applicable to, a LIBO Rate Tranche and the interest rate for the Prime Rate Tranche shall not be reinstated. (c) All past due payments of principal and, past due interest to the extent permitted by law, shall bear interest until paid at a default rate equal to the Maximum Rate, or if there is no such Maximum Rate, then at a rate equal to 6.0% above the interest rate then in effect. (d) With respect to a LIBO Rate Tranche, in the event no selection of an Interest Period is made by Borrower, the relevant Interest Period shall be for three (3) calendar months. (e) The amount of the monthly payment of interest shall be determined by Bank, and Bank's determination thereof shall be conclusive and binding, absent manifest error. 2.5 Procedure to Establish Interest Rates.

(a) Except as provided in subsection (g) hereof, the interest rate or rates applicable to each Tranche shall be

(a) Except as provided in subsection (g) hereof, the interest rate or rates applicable to each Tranche shall be established pursuant to a Notice of Borrowing which shall be delivered to Bank not later than 10:00 a.m. (Dallas, Texas time) on the date it is required to be delivered. If the Interest Rate Option to be applicable is the Adjusted Prime Rate, the Notice of Borrowing shall be delivered on the initial funding date (in the case of the initial advance) or the date of conversion (in the case of a conversion to a Prime Rate Tranche). If the Interest Rate Option to be applicable is the Adjusted LIBO Rate, the Notice of Borrowing shall be delivered not less than three (3) Business Days prior to the initial funding date (in the case of the initial advance) or the date of renewal or conversion (in the case of the renewal of or conversion to a LIBO Rate Tranche). (b) Each Notice of Borrowing shall specify (i) the principal amount of the Loan applicable to the Tranche; (ii) the Interest Rate Option selected; (iii) the effective date of the renewal or conversion of the Interest Rate Option applicable to the Tranche involved, which shall be a Business Day; and (iv) if the Interest Rate Option is the Adjusted LIBO Rate, the Interest Period for such Tranche; provided that the minimum principal amount of each Tranche shall be $250,000. (c) Borrower may have in effect at any one time no more than twelve (12) Tranches in the aggregate and so long as any Default or Event of Default continues may not select the Adjusted LIBO Rate to apply to any Tranche. (d) No renewal or conversion of a LIBO Rate Tranche may be made except on the last day of the Interest Period applicable thereto. (e) The election of the Adjusted LIBO Rate is effective only for the Interest Period specified; and after the end of such Interest Period, unless Borrower has effectively elected a renewal or conversion, the applicable Interest Rate Option shall be the Adjusted Prime Rate until Borrower effectively elects a different interest rate. (f) No election of or renewal of or conversion to an Adjusted LIBO Rate may occur while any Default or Event of Default exists or if such conversion would occur at a time when the Maximum Rate would be less than the rate of interest which would be applicable to such LIBO Rate Tranche. (g) If Borrower does not specify in accordance with the terms hereof or is not entitled to elect the type of rate to apply to a Tranche, Borrower shall be deemed to have specified the Adjusted Prime Rate for such Tranche. 2.6 Advances. Whenever Borrower desires to borrow hereunder, it shall make its request by delivering to Bank a Notice of Borrowing in the form of Exhibit A attached hereto. Bank shall be under no obligation to make any advance to Borrower if the sum of the requested advance plus the then outstanding principal balance of the Note will exceed the Maximum Amount.

2.7 Mandatory Payment. In the event the aggregate principal balance of advances outstanding under the Note exceeds the Maximum Amount, Borrower shall immediately and without notice or demand of any kind, make such payments as shall be necessary to reduce the principal balance of the Note to or below the Maximum Amount. 2.8 Prepayments. Borrower may from time to time upon five (5) Business Days' prior written notice to Bank and subject to any other limitations in this Agreement prepay the Loan in whole or in part without penalty or premium, except as may be incurred in connection with a prepayment of a LIBO Rate Tranche prior to the end of the applicable Interest Period, provided any partial prepayment shall be not less than One Hundred Thousand And No/100 DOLLARS ($100,000) or an integral multiple thereof. Prepayments of principal shall be applied first to the Prime Rate Tranche and then to LIBOR Tranches selected by Borrower; provided that Borrower shall select such LIBOR Tranches as will minimize the Consequential Loss resulting from such prepayment; provided further, that if a Default or an Event of Default exists or if Borrower fails to select the Tranches to be prepaid, Bank may select such Tranches. Any such prepayment shall be made subject to the requirements of Section 2.12, 2.13 and 2.14. 2.9 Computations, Etc. Interest shall be computed on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable,

2.7 Mandatory Payment. In the event the aggregate principal balance of advances outstanding under the Note exceeds the Maximum Amount, Borrower shall immediately and without notice or demand of any kind, make such payments as shall be necessary to reduce the principal balance of the Note to or below the Maximum Amount. 2.8 Prepayments. Borrower may from time to time upon five (5) Business Days' prior written notice to Bank and subject to any other limitations in this Agreement prepay the Loan in whole or in part without penalty or premium, except as may be incurred in connection with a prepayment of a LIBO Rate Tranche prior to the end of the applicable Interest Period, provided any partial prepayment shall be not less than One Hundred Thousand And No/100 DOLLARS ($100,000) or an integral multiple thereof. Prepayments of principal shall be applied first to the Prime Rate Tranche and then to LIBOR Tranches selected by Borrower; provided that Borrower shall select such LIBOR Tranches as will minimize the Consequential Loss resulting from such prepayment; provided further, that if a Default or an Event of Default exists or if Borrower fails to select the Tranches to be prepaid, Bank may select such Tranches. Any such prepayment shall be made subject to the requirements of Section 2.12, 2.13 and 2.14. 2.9 Computations, Etc. Interest shall be computed on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable, unless such calculation would result in a usurious rate, in which case interest shall be calculated on a per annum basis of a year of 365 or 366 days, as the case may be. Each determination by Bank of an interest rate or fee hereunder shall, except for manifest error, be final, conclusive and binding for all purposes. 2.10 Usage Fee. Borrower will pay on the last day of each calendar quarter commencing on September 30, 1997 and on the Expiration Date, a usage fee accruing at a rate per annum of one-fourth of one percent (0.25%) of the average daily unused portion of the Loan for the period from and including July 1, 1997 through and including the Expiration Date. 2.11 Loan Commitment Fee. Borrower has agreed to pay Bank a loan commitment fee of $27,000 as compensation for Bank's commitment to extend the Loan to Borrower. On the closing date Borrower shall pay Bank the full amount of the commitment fee. 2.12 Payment of Funding Losses. (a) Borrower shall indemnify Bank against any loss or expense incurred by it as a result of any failure by Borrower to fulfill, on or before the date specified for any renewal or conversion of the interest rate applicable to any Tranche, the conditions thereof, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or re-employment of deposits or other funds when such renewal or conversion of the interest rate applicable to any Tranche is not made on such date as a result of such failure. A certificate in reasonable detail as to the amount of any such loss or expense submitted to Borrower shall be conclusive as to the amount thereof except in cases of manifest error. A copy of any such statement submitted by Bank shall be given to Borrower.

(b) If for any reason Bank receives all or part of its portion of the principal amount of a LIBO Rate Tranche prior to the last day of the Interest Period applicable thereto, Borrower shall pay Bank the amount (if any) of the Consequential Loss occasioned by such payment. A certificate of such Bank submitted to Borrower shall be conclusive absent manifest error. 2.13 Change in Circumstances. (a) If Bank determines (which determination shall be made in good faith and shall be conclusive and binding upon Borrower) that (i) adequate and reasonable means do not or will not exist for ascertaining the interest rate, (ii) Dollar deposits in the relevant amounts and for the relevant Interest Period are not available to Bank in the London interbank market, or (iii) the LIBO Rate does not accurately reflect the cost of funds to Bank, then Bank shall forthwith give notice of such determination to Borrower, whereupon, until Bank notifies Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of Bank to permit an Adjusted LIBO Rate election shall be suspended and the Adjusted LIBO Rate shall be converted on the last day of the then

(b) If for any reason Bank receives all or part of its portion of the principal amount of a LIBO Rate Tranche prior to the last day of the Interest Period applicable thereto, Borrower shall pay Bank the amount (if any) of the Consequential Loss occasioned by such payment. A certificate of such Bank submitted to Borrower shall be conclusive absent manifest error. 2.13 Change in Circumstances. (a) If Bank determines (which determination shall be made in good faith and shall be conclusive and binding upon Borrower) that (i) adequate and reasonable means do not or will not exist for ascertaining the interest rate, (ii) Dollar deposits in the relevant amounts and for the relevant Interest Period are not available to Bank in the London interbank market, or (iii) the LIBO Rate does not accurately reflect the cost of funds to Bank, then Bank shall forthwith give notice of such determination to Borrower, whereupon, until Bank notifies Borrower that the circumstances giving rise to such suspension no longer exist, the obligation of Bank to permit an Adjusted LIBO Rate election shall be suspended and the Adjusted LIBO Rate shall be converted on the last day of the then current applicable Interest Period to the Adjusted Prime Rate. (b) If after the date of this Agreement the introduction of or any change in any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof or compliance by Bank with any request or directive (whether or not having the force of law) of any authority makes it unlawful or not reasonably possible for Bank (or its Lending Office) to make, maintain or fund the Loan, Bank shall forthwith give notice thereof to Borrower. Before giving any notice pursuant to this Section, Bank shall if possible designate a different Lending Office if such designation will avoid the need for giving such notice and in Bank's sole judgment will not be otherwise disadvantageous to Bank. Upon receipt of such notice, the Adjusted Prime Rate will be substituted for the Adjusted LIBO Rate. If circumstances subsequently change so that Bank is not further affected, the obligation to permit election of the Adjusted LIBO Rate shall be reinstated upon written request of Borrower. 2.14 Capital Adequacy and Increased Costs. (a) If after the date hereof (i) the adoption or implementation, change, or phasing in of any law or regulation or in the interpretation thereof by any domestic or foreign Governmental Authority charged with the administration thereof or (ii) compliance with any directive, guideline or request from any central bank or domestic or foreign Governmental Authority (whether or not having the force of law) promulgated or made after the date hereof, in either case, affects or would affect the amount of capital required or expected to be maintained by Bank or any corporation directly or indirectly controlling Bank, or has or would have the effect of reducing the rate of return on such capital or the asset value of the Loan made hereunder to a level below that which Bank or such controlling corporation could have achieved but for such adoption, implementation, change, phasing in, or compliance (after taking into account Bank's or such corporation's policies regarding capital adequacy) by an amount deemed by Bank to be material to Bank or such corporation, then, within ten (10) days after

written demand by Bank (accompanied by a statement of the type referred to below), Borrower shall pay to Bank such additional amount or amounts as shall be sufficient to compensate Bank or such controlling corporation for any such reduction. (b) If any law, regulation, treaty, or directive hereafter enacted, promulgated, approved, or issued or any change in any presently existing law, regulation, treaty, or directive therein or in the interpretation or application thereof by any Governmental Authority charged with the administration thereof (whether or not having the force of law) or compliance by Bank or any corporation directly or indirectly owning or controlling Bank (in each case, the "Affected Person") with any request or directive from any central bank or other Governmental Authority, agency, or instrumentality (i) subjects such Affected Person to any tax, duty, or other charge of any kind whatsoever with respect to the Loan, or its obligations under this Agreement to make the Loan, or any amounts payable to it hereunder (and any additional income or franchise taxes resulting therefrom), or changes the basis of taxation of payments to such Affected Person of principal, interest, or any other amount payable hereunder in respect of the Loan (except for imposition of, or change in the rate of, any tax (A) on the overall net income of such Affected Person or direct

written demand by Bank (accompanied by a statement of the type referred to below), Borrower shall pay to Bank such additional amount or amounts as shall be sufficient to compensate Bank or such controlling corporation for any such reduction. (b) If any law, regulation, treaty, or directive hereafter enacted, promulgated, approved, or issued or any change in any presently existing law, regulation, treaty, or directive therein or in the interpretation or application thereof by any Governmental Authority charged with the administration thereof (whether or not having the force of law) or compliance by Bank or any corporation directly or indirectly owning or controlling Bank (in each case, the "Affected Person") with any request or directive from any central bank or other Governmental Authority, agency, or instrumentality (i) subjects such Affected Person to any tax, duty, or other charge of any kind whatsoever with respect to the Loan, or its obligations under this Agreement to make the Loan, or any amounts payable to it hereunder (and any additional income or franchise taxes resulting therefrom), or changes the basis of taxation of payments to such Affected Person of principal, interest, or any other amount payable hereunder in respect of the Loan (except for imposition of, or change in the rate of, any tax (A) on the overall net income of such Affected Person or direct substitute for such tax, or (B) which would not have been imposed if such Affected Person complied with any certification, information, documentation or other reporting requirement); or (ii) imposes, modifies, or makes applicable any reserve, special deposit, compulsory loan, assessment, increased cost, or similar requirement against assets held by, or deposits of, or advances or loans or letters of credit by, or other credit extended by, or any other acquisition of funds by, any office of such Affected Person in respect of the Loan which is not otherwise expressly included in the determination of the applicable rate or rates of interest hereunder, and the result of any of the foregoing is to increase the cost of making, renewing, or maintaining the Loan or to reduce any amount receivable by Bank hereunder in respect of any of the foregoing then, in any such case, Borrower shall promptly pay Bank upon demand any additional amounts necessary to compensate Bank for such additional cost (including any penalties, interest, and out-of-pocket expenses paid to third parties, but excluding any late payment penalties which resulted solely from Bank's inaction in seeking indemnification hereunder) or reduction in such amount receivable. (c) Bank will, if possible, designate a different lending office if such will avoid the need for, or reduce the amount of, any compensation hereunder and is not otherwise disadvantageous to Bank. This Section shall apply and Bank is entitled to payment hereunder, notwithstanding any possible invalidity or inapplicability of any event or provision which may require payment hereunder. A statement setting forth the calculations of any additional amounts payable submitted by Bank to Borrower shall be conclusive absent manifest error. No delay by Bank in demanding the payment of any additional amounts pursuant to this Section shall constitute a waiver of its right to demand payment of such amounts at any subsequent time. In determining the additional amount payable pursuant to this Section, Bank shall take into account any transitional adjustment or phase-in provisions of such reserve requirements which would reduce the reserve requirement otherwise applicable; provided,

however, Bank, in its sole discretion, may determine the allocation of reserve requirements. Each such determination made by Bank, and each notification to Borrower under this Section, shall be presumptive as to the matters therein set forth in the absence of manifest error in calculation. Bank agrees to provide on request by Borrower such certificates as are reasonably required, and take such other actions as are reasonably necessary to claim such exemptions as Bank may be entitled to claim in respect of all or a portion of any sums which are otherwise required to be paid or deducted or withheld pursuant to this Section. This Section shall not be construed, nor shall it operate, to require Borrower to pay any sums not permitted or in excess of the limits imposed by applicable law. 2.15 Collateral. The payment and performance of the Note and all of the other Obligations of Borrower to Bank pursuant to the Loan Documents shall be secured by the following: (a) The collateral assignment of, and pledge and grant of a first priority security interest against all of Borrower's assets, including, without limitation, all of Borrower's Premium Finance Agreements (but excluding those Premium Finance Agreements sold to Peregrine Premium Finance L.C. prior to the date hereof) now existing or hereafter created, and all accounts receivable now existing or hereafter created (including those arising from the

however, Bank, in its sole discretion, may determine the allocation of reserve requirements. Each such determination made by Bank, and each notification to Borrower under this Section, shall be presumptive as to the matters therein set forth in the absence of manifest error in calculation. Bank agrees to provide on request by Borrower such certificates as are reasonably required, and take such other actions as are reasonably necessary to claim such exemptions as Bank may be entitled to claim in respect of all or a portion of any sums which are otherwise required to be paid or deducted or withheld pursuant to this Section. This Section shall not be construed, nor shall it operate, to require Borrower to pay any sums not permitted or in excess of the limits imposed by applicable law. 2.15 Collateral. The payment and performance of the Note and all of the other Obligations of Borrower to Bank pursuant to the Loan Documents shall be secured by the following: (a) The collateral assignment of, and pledge and grant of a first priority security interest against all of Borrower's assets, including, without limitation, all of Borrower's Premium Finance Agreements (but excluding those Premium Finance Agreements sold to Peregrine Premium Finance L.C. prior to the date hereof) now existing or hereafter created, and all accounts receivable now existing or hereafter created (including those arising from the Reinsurance Agreements, Premium Finance Agreements and unearned premium reimbursements), and all notes receivable, general intangibles and chattel paper of Borrower pursuant to the terms of an agreement (the "Security Agreement") which shall be satisfactory to Bank. (b) The unconditional guaranties of HFS, ACO, AHGA, HCS, and American Hallmark Agencies, Inc. ("Guarantors") pursuant to the terms of one or more guaranty agreements (each a "Guaranty Agreement") which shall be satisfactory to Bank. 3.0 CONDITIONS PRECEDENT. The obligations of Bank as set forth herein are subject to the satisfaction (in the opinion of Bank), unless waived in writing by Bank, of each of the following conditions (Sections 3.1, 3.3, 3.4, 3.6 and 3.7 are conditions to closing and Sections 3.2, 3.5 and 3.8 are conditions to the initial funding): 3.1 Effectiveness of Loan Documents. Each of the Loan Documents shall be in full force and effect. 3.2 Opinion. There shall have been delivered a favorable opinion of counsel for Borrower and Guarantors covering such matters incident to the Loan or the Loan Documents as Bank may reasonably request, including those matters described in Sections 8.1, 8.2, 8.3, 8.4, 8.5, 8.6, 8.12 and 8.13 hereof. 3.3 Representations and Warranties. All representations and warranties contained herein or in the documents referred to herein or otherwise made in writing in connection herewith or therewith shall be true and correct with the same force and effect as though such representations and warranties have been made on and as of this date.

3.4 Documentation and Proceedings. Bank shall have received such evidence as Bank requires of the existence, good standing, authority and capacity of Borrower and each Guarantor to execute, deliver and perform the Loan Documents. 3.5 Portfolio Audit. There shall have been delivered to Bank a portfolio audit of Borrower's portfolio (currently owned by Peregrine Premium Finance L.C.) of Premium Finance Agreements performed by an independent entity which is satisfactory to Bank. 3.6 Expenses. Borrower shall have paid all reasonable expenses of Bank in connection with the preparation of the Loan Documents and the making of the Loan, including but not limited to, the fees and expenses of counsel for Bank. 3.7 Closing of Dorinco Loan Transaction. HFS shall have consummated the transactions contemplated by the Dorinco Loan Documents in form and content satisfactory to Bank and shall have made an equity capital contribution to Borrower in an amount not less than $7,000,000. 3.8 Form of Premium Finance Agreement Approved by the State Board of Insurance. Bank shall have received such evidence as Bank requires of the approval by the Texas State Board of Insurance of the form of Premium

3.4 Documentation and Proceedings. Bank shall have received such evidence as Bank requires of the existence, good standing, authority and capacity of Borrower and each Guarantor to execute, deliver and perform the Loan Documents. 3.5 Portfolio Audit. There shall have been delivered to Bank a portfolio audit of Borrower's portfolio (currently owned by Peregrine Premium Finance L.C.) of Premium Finance Agreements performed by an independent entity which is satisfactory to Bank. 3.6 Expenses. Borrower shall have paid all reasonable expenses of Bank in connection with the preparation of the Loan Documents and the making of the Loan, including but not limited to, the fees and expenses of counsel for Bank. 3.7 Closing of Dorinco Loan Transaction. HFS shall have consummated the transactions contemplated by the Dorinco Loan Documents in form and content satisfactory to Bank and shall have made an equity capital contribution to Borrower in an amount not less than $7,000,000. 3.8 Form of Premium Finance Agreement Approved by the State Board of Insurance. Bank shall have received such evidence as Bank requires of the approval by the Texas State Board of Insurance of the form of Premium Finance Agreement to be utilized by Borrower in its premium finance business. 4.0 CONDITIONS PRECEDENT TO SUBSEQUENT LOANS. The obligation of Bank to make each Loan to Borrower is subject, at the time of the funding of each such Loan, to the satisfaction (in the opinion of Bank), unless waived in writing by Bank, of each of the following conditions: 4.1 Effectiveness of Loan Documents. Each of the Loan Documents shall be in full force and effect. 4.2 Availability. The sum of the then outstanding principal balance of the Note and the amount of the requested Loan shall be equal to or less than the Maximum Amount. 4.3 Representations and Warranties. All representations and warranties contained herein or in the documents referred to herein or otherwise made in writing in connection herewith or therewith shall be true and correct with the same force and effect as though such representations and warranties have been made on and as of the funding date. 4.4 No Default. There shall exist no event of default hereunder or under the Dorinco Loan Documents and no condition, event or act which, with the giving of notice or lapse of time or both, would constitute an event of default hereunder or under the Dorinco Loan Documents. 4.5 Change in Condition. No adverse change in condition (financial or otherwise) of Borrower or any Guarantor or any other event shall have occurred which materially adversely affects (i) the condition (financial or otherwise) of Borrower or any Guarantor, or (ii) the validity or enforceability of any of the Loan Documents, or (iii) the ability of Borrower or any Guarantor to meet and carry out its Obligations under the Loan Documents or to perform the transactions contemplated hereby or thereby.

5.0 AFFIRMATIVE COVENANTS. Until full payment and performance of all Obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): 5.1 Financial Statements and Other Information. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. The financial statements described in paragraphs (e), (f) and (g) below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition,

5.0 AFFIRMATIVE COVENANTS. Until full payment and performance of all Obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): 5.1 Financial Statements and Other Information. Maintain a system of accounting satisfactory to Bank and in accordance with GAAP applied on a consistent basis throughout the period involved, permit Bank's officers or authorized representatives to visit and inspect Borrower's books of account and other records at such reasonable times and as often as Bank may desire, and pay the reasonable fees and disbursements of any accountants or other agents of Bank selected by Bank for the foregoing purposes. Unless written notice of another location is given to Bank, Borrower's books and records will be located at Borrower's chief executive office set forth above. The financial statements described in paragraphs (e), (f) and (g) below shall be prepared in form and content acceptable to Bank and by independent certified public accountants acceptable to Bank. In addition, Borrower will: (a) Furnish to Bank a monthly borrowing base certificate in the form of Exhibit B attached hereto, together with a "back-up tape" containing comprehensive data regarding the portfolio of Premium Finance Agreements and all information necessary to substantiate the calculation of the Borrowing Base in such monthly borrowing base certificate, within thirty (30) days following the end of each calendar month. (b) Furnish to Bank an aging of its Premium Finance Agreements and other accounts and notes receivable in the form of Exhibit D hereto within thirty (30) days following the end of each calendar month. (c) Upon request of Bank, furnish to Bank internally routinely prepared monthly financial statements (including a balance sheet and an income statement) of Borrower for each calendar month of each calendar year of Borrower, within forty-five (45) days after the request is made by Bank. (d) Furnish to Bank quarterly internally prepared consolidated and consolidating financial statements (including a balance sheet and an income statement) of HFS, ACO and Borrower for each fiscal quarter of each fiscal year of HFS, ACO and Borrower, within forty-five (45) days after the close of each such fiscal quarter. (e) Furnish to Bank annual audited financial statements (including a balance sheet, and statements of financial condition, income, cash flows and changes in shareholders' equity) of Borrower for each fiscal year of Borrower prepared in accordance with GAAP on an audited basis within one hundred twenty (120) days following the end of Borrower's fiscal year. (f) Furnish to Bank annual audited consolidated financial statements (including a balance sheet, and statements of financial condition, income, cash flows and changes in shareholders' equity) of AH, prepared in accordance with statutory requirements and any other applicable requirements of the Texas Department of Insurance within one hundred twenty (120) days following each fiscal year of AH.

(g) Furnish to Bank annual audited financial statements (including a balance sheet, and statements of financial condition, income, cash flows and changes in shareholders' equity) of HFS prepared in accordance with GAAP within one hundred twenty (120) days of the end of the fiscal year of such entity. (h) Furnish to Bank a copy of the annual report on Form 10-KSB filed with the Securities and Exchange Commission of HFS as soon as available, and in any event within one hundred twenty (120) days of the end of the fiscal year of such entity. (i) Furnish to Bank a compliance certificate in the form of Exhibit C attached hereto for (and executed by an authorized representative of) Borrower concurrently with and dated as of the date of delivery of each of the financial statements as required in Sections 5.1(c), 5.1(d) and 5.1(e) above, containing (1) a certification that the financial statements of even date are true and correct and that Borrower is not in default under the terms of this Agreement, and (2) computations and conclusions, in such detail as Bank may request, with respect to compliance with this Agreement, and the other Loan Documents, including computations of all quantitative covenants.

(g) Furnish to Bank annual audited financial statements (including a balance sheet, and statements of financial condition, income, cash flows and changes in shareholders' equity) of HFS prepared in accordance with GAAP within one hundred twenty (120) days of the end of the fiscal year of such entity. (h) Furnish to Bank a copy of the annual report on Form 10-KSB filed with the Securities and Exchange Commission of HFS as soon as available, and in any event within one hundred twenty (120) days of the end of the fiscal year of such entity. (i) Furnish to Bank a compliance certificate in the form of Exhibit C attached hereto for (and executed by an authorized representative of) Borrower concurrently with and dated as of the date of delivery of each of the financial statements as required in Sections 5.1(c), 5.1(d) and 5.1(e) above, containing (1) a certification that the financial statements of even date are true and correct and that Borrower is not in default under the terms of this Agreement, and (2) computations and conclusions, in such detail as Bank may request, with respect to compliance with this Agreement, and the other Loan Documents, including computations of all quantitative covenants. (j) Furnish to Bank promptly such additional information, reports and statements respecting the business operations and financial condition of Borrower and Guarantors, respectively, from time to time, as Bank may reasonably request. 5.2 Quarterly Portfolio Audits. Submit to, and bear the expense of (not to exceed $1,500.00 per audit), four portfolio audits of Borrower's portfolio of Premium Finance Agreements performed by Bank or its representatives or agents during any period of twelve (12) consecutive calendar months. The portfolio audit delivered pursuant to Section 3.5 hereof shall be considered the first portfolio audit for purposes of this Section. 5.3 Insurance. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, workers compensation insurance and liability insurance, all to be with such companies and in such amounts as are satisfactory to Bank and providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank prior to the initial funding under the Loan and prior to each policy renewal. 5.4 Existence and Compliance. Maintain its existence, good standing and qualification to do business, where required and comply with all laws, regulations and governmental requirements including, without limitation, (a) environmental laws applicable to it or to any of its property, business operations and transactions, and (b) Chapter 24 of the Insurance Code, Title 28 of the Texas Administrative Code, the Truth in Lending Act and Regulation Z promulgated thereunder, and the rules, regulations and orders of the Texas Department of Insurance and any other Governmental Authority having jurisdiction over any aspect of the business of Borrower.

5.5 Right to Receive Unearned Premiums. Notify the insurer whose premiums are being financed of the existence of each insurance Premium Finance Agreement within the time required by Section 24.22 of Chapter 24 of the Insurance Code and give such notices and take all other actions as may be necessary or required in order that Borrower shall be entitled to receive all unearned premiums from such insurer or reinsurer in the event a Premium Finance Agreement is canceled. 5.6 Notice of Adverse Conditions or Events. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's or any Guarantor's financial condition or operations, any collateral, or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower or any Guarantor claiming an amount in excess of $100,000, (iii) any event that has occurred that would constitute an event of default under any Loan Documents or under any Dorinco Loan Documents, and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $100,000. Borrower will advise Bank in writing of any change, amendment, renewal, modification, cancellation or substitution of any Reinsurance Agreement within ten (10) days thereof. 5.7 Taxes and Other Obligations. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes and assessments and lawful claims which, if unpaid, might by law become a lien against the assets of

5.5 Right to Receive Unearned Premiums. Notify the insurer whose premiums are being financed of the existence of each insurance Premium Finance Agreement within the time required by Section 24.22 of Chapter 24 of the Insurance Code and give such notices and take all other actions as may be necessary or required in order that Borrower shall be entitled to receive all unearned premiums from such insurer or reinsurer in the event a Premium Finance Agreement is canceled. 5.6 Notice of Adverse Conditions or Events. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that would or might materially adversely affect Borrower's or any Guarantor's financial condition or operations, any collateral, or Bank's rights under the Loan Documents, (ii) any litigation filed by or against Borrower or any Guarantor claiming an amount in excess of $100,000, (iii) any event that has occurred that would constitute an event of default under any Loan Documents or under any Dorinco Loan Documents, and (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $100,000. Borrower will advise Bank in writing of any change, amendment, renewal, modification, cancellation or substitution of any Reinsurance Agreement within ten (10) days thereof. 5.7 Taxes and Other Obligations. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes and assessments and lawful claims which, if unpaid, might by law become a lien against the assets of Borrower, as the same become due and payable, except to the extent the same are being Contested in Good Faith. 5.8 Maintenance. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. 5.9 Environmental. Immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws, ordinances or regulations relating to any Hazardous Materials affecting Borrower's business operations; and (ii) all claims made or threatened by any third party against Borrower relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Borrower shall immediately notify Bank of any remedial action taken by Borrower with respect to Borrower's business operations. Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws; Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous

Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefor. 5.10 Delivery of Endorsed Premium Finance Agreements. Upon the occurrence of a Default or an Event of Default or any Trigger Event, within one (1) Business Day, Borrower shall immediately notify Bank of the occurrence of such Default, Event of Default or Trigger Event and deliver to Bank all Premium Finance Agreements of Borrower (excluding those Premium Finance Agreements sold to Peregrine Premium Finance L.C. prior to the date hereof), appropriately endorsed, with full recourse and warranty and execute, acknowledge, and deliver to Bank and file or cause to be filed any and all other documents, agreements and instruments and do all other acts or things as Bank may reasonably request in order more fully to effect the assignment of the Premium Finance Agreements to Bank. 6.0 NEGATIVE COVENANTS. Until full payment and performance of all Obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents):

Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefor. 5.10 Delivery of Endorsed Premium Finance Agreements. Upon the occurrence of a Default or an Event of Default or any Trigger Event, within one (1) Business Day, Borrower shall immediately notify Bank of the occurrence of such Default, Event of Default or Trigger Event and deliver to Bank all Premium Finance Agreements of Borrower (excluding those Premium Finance Agreements sold to Peregrine Premium Finance L.C. prior to the date hereof), appropriately endorsed, with full recourse and warranty and execute, acknowledge, and deliver to Bank and file or cause to be filed any and all other documents, agreements and instruments and do all other acts or things as Bank may reasonably request in order more fully to effect the assignment of the Premium Finance Agreements to Bank. 6.0 NEGATIVE COVENANTS. Until full payment and performance of all Obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): 6.1 Interest Coverage Ratio. For any period specified below, permit the ratio (the "Interest Coverage Ratio") of (i) the sum obtained by adding (A) Borrower's pre-tax net income determined in accordance with GAAP (before dividends, distributions, management fees and marketing fees) for any period, plus (B) Interest Expense for such period, to (ii) Interest Expense for such period to be less than 1.50 to 1.0. The Interest Coverage Ratio shall be determined (i) as of the last day of each fiscal quarter ending in 1997, for the period commencing on January 1, 1997 and ending on the last day of such fiscal quarter, and (ii) as of the last day of each fiscal quarter ending in the period beginning January 1, 1998 through and including the Expiration Date, for the twelve-month period ending on the last day of such fiscal quarter. 6.2 Capital Expenditures. Make capital expenditures during each fiscal year (including capitalized leases) exceeding $100,000 in the aggregate. 6.3 Minimum Tangible Net Worth. Permit the Tangible Net Worth of Borrower at any time during 1997 to be less than $7,700,000 or at any time during 1998 to be less than $8,000,000. 6.4 Transfer of Assets or Control. Sell, lease, assign or otherwise dispose of or transfer any assets, except in the normal course of its business, or enter into any merger or consolidation, or transfer control or ownership of Borrower (other than a transfer made pursuant to the Dorinco Loan Documents), or form or acquire any subsidiary. 6.5 Liens. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets, except (a) liens in favor of Bank, (b) liens for taxes, assessments or similar charges, incurred in the ordinary course of business that are not yet due and payable, (c) liens of mechanics, materialmen, warehousemen, carriers, operators and other like liens securing obligations incurred in the ordinary course of business that are not yet due and payable; (d) landlord's liens for rentals not yet due and payable; and (e) liens securing any purchase money Indebtedness permitted hereunder (if any) if such liens do not encumber any property other than the property for which such

Indebtedness was incurred and do not secure payment of any amount other than the amount from time to time owing on the property for which such Indebtedness was incurred and the Indebtedness initially secured by such lien does not exceed $100,000. 6.6 Extensions of Credit. Make, or permit any subsidiary to make, any loan or advance to any person or entity, except for loans by Borrower in the ordinary course of business, or purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise acquire, any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any entity, or participate as a partner or joint venturer with any person or entity, except for (a) the purchase of direct obligations of the United States or any agency thereof with maturities of less than one year, (b) certificates of deposit issued by or money market deposits with Merrill, Lynch, Pierce, Fenner & Smith Incorporated or any bank or trust company organized under the laws of the United States of America or any

Indebtedness was incurred and do not secure payment of any amount other than the amount from time to time owing on the property for which such Indebtedness was incurred and the Indebtedness initially secured by such lien does not exceed $100,000. 6.6 Extensions of Credit. Make, or permit any subsidiary to make, any loan or advance to any person or entity, except for loans by Borrower in the ordinary course of business, or purchase or otherwise acquire, or permit any subsidiary to purchase or otherwise acquire, any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any entity, or participate as a partner or joint venturer with any person or entity, except for (a) the purchase of direct obligations of the United States or any agency thereof with maturities of less than one year, (b) certificates of deposit issued by or money market deposits with Merrill, Lynch, Pierce, Fenner & Smith Incorporated or any bank or trust company organized under the laws of the United States of America or any state thereof and having combined capital, surplus and undivided profits of not less than $500,000,000 (as of the date of its most recent financial statements), and (c) repurchase agreements with respect to the investments referred to in clauses (a) and (b) above with any bank or trust company organized under the laws of the United States of America or any state thereof having combined capital, surplus and undivided profits of not less than $500,000,000 (as of the date of its most recent financial statements). 6.7 Borrowings. Create, incur, assume or become liable in any manner for any Indebtedness (for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for (a) normal trade debts incurred in the ordinary course of Borrower's business, (b) intracompany debt and debt owed to insurers and reinsurers created in the ordinary course of business which is offset dollar for dollar by cash and receivables, and (c) and except for existing Indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. 6.8 Character of Business. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted. 6.9 Dividends, Distributions, Management Fees and Marketing Fees. Make any distribution (other than dividends payable in capital stock of Borrower) on any shares of any class of its capital stock or apply any of its property or assets to the purchase, redemption or other retirement of any shares of any class of its capital stock or in any way amend its capital structure, or pay or become obligated to pay any management, marketing or other similar fees to any person or entity; provided, however, so long as no Default or Event of Default has occurred and is continuing hereunder or under the Dorinco Loan Documents, the Borrower may distribute cash dividends or pay management or other similar fees to HFS in an amount not in excess of the Net Operating Income Available For Distribution of Borrower. 6.10 Affiliate Transactions. Engage or permit any of its subsidiaries to engage in any transaction with any Affiliate of Borrower, HFS or ACO or any shareholder or investor in Borrower, or make an assignment or other transfer of its properties or assets to any Affiliate, whether or

not any ordinary course of business, other than on terms and conditions substantially as favorable to Borrower or any subsidiary of Borrower as would be obtainable by Borrower or any such subsidiary at the time in a comparable arms-length transaction with any party other than an Affiliate. 6.11 Character of its Underwriting Guidelines. Change any material underwriting guidelines utilized by Borrower as of the date hereof in underwriting Premium Finance Agreements. 6.12 Amend the Dorinco Loan Documents. Amend or modify any material terms or provisions of any of the Dorinco Loan Documents. 7.0 COVENANTS OF HALLMARK FINANCIAL SERVICES, INC.. Until full payment and performance of all Obligations of Borrower under the Loan Documents, or until Bank consents to the contrary and the Borrower receives the prior written approval of the contrary from Bank, HFS and ACO will comply or cause compliance with each of the following covenants:

not any ordinary course of business, other than on terms and conditions substantially as favorable to Borrower or any subsidiary of Borrower as would be obtainable by Borrower or any such subsidiary at the time in a comparable arms-length transaction with any party other than an Affiliate. 6.11 Character of its Underwriting Guidelines. Change any material underwriting guidelines utilized by Borrower as of the date hereof in underwriting Premium Finance Agreements. 6.12 Amend the Dorinco Loan Documents. Amend or modify any material terms or provisions of any of the Dorinco Loan Documents. 7.0 COVENANTS OF HALLMARK FINANCIAL SERVICES, INC.. Until full payment and performance of all Obligations of Borrower under the Loan Documents, or until Bank consents to the contrary and the Borrower receives the prior written approval of the contrary from Bank, HFS and ACO will comply or cause compliance with each of the following covenants: 7.1 Statutory Capital and Surplus. HFS will not permit at any time AH's Statutory Capital and Surplus to be less than $2,650,000 as of the date of any reporting period required by law or required by the Texas Department of Insurance. 7.2 Minimum Tangible Net Worth. Neither HFS nor ACO will permit at any time Borrower's Tangible Net Worth as of the date of any reporting period required by law or required by the Texas Department of Insurance during the following calendar years to be less than the following amounts: 1997 $7,700,000 1998 $8,000,000 7.3 Transactions With Affiliates. All transactions between or among HFS or ACO, any Affiliate(s), and any director, officer, employee and/or agent of HFS or ACO, and Affiliate(s) shall be in good faith and commercially reasonably. 7.4 Ratio of Gross Premium to Statutory Capital and Surplus. HFS shall cause AH to maintain its ratio of Gross Premium to Statutory Capital and Surplus at or below 10.0 to 1.0. 7.5 Ratio of Net Premium to Statutory Capital and Surplus. HFS shall cause AH to maintain its ratio of Net Premium to Statutory Capital and Surplus at or below 3.0 to 1.0. 7.6 Combined Ratio. HFS shall cause AH to maintain the average of AH's Combined Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations at 115% or below. 7.7 Loss Ratio. HFS shall cause AH to maintain the average of AH's Loss Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations at 87% or below. 7.8 Change in Ownership or Business. (i) Neither HFS nor ACO shall permit AH, Borrower or AHGA to change the nature of its business or materially change its ownership.

(ii) HFS shall not permit AH to write directly or indirectly the following lines of business, or its equivalent: mortgage guaranty, ocean marine, financial guaranty, medical malpractice, earthquake (as a separate coverage), group accident and health, credit accident and health (group and individual), other accident and health, workers' compensation, products liability, aircraft (all perils), fidelity, surety, boiler and machinery, credit, and international. 7.9 Dividends. HFS shall not pay or declare any cash or other dividends or distributions on its corporate stock. ACO shall not, and HFS shall not permit AH to, pay or declare any cash or other dividends or distributions on its corporate stock if such payment or declaration would result in an Event of Default hereunder or under the Dorinco Loan Documents. 7.10 Intercompany Service Agreements. HFS shall not nor permit AH to amend or adjust the commission structure of its intercompany service agreements in place at the date of execution of this Agreement, to the extent

(ii) HFS shall not permit AH to write directly or indirectly the following lines of business, or its equivalent: mortgage guaranty, ocean marine, financial guaranty, medical malpractice, earthquake (as a separate coverage), group accident and health, credit accident and health (group and individual), other accident and health, workers' compensation, products liability, aircraft (all perils), fidelity, surety, boiler and machinery, credit, and international. 7.9 Dividends. HFS shall not pay or declare any cash or other dividends or distributions on its corporate stock. ACO shall not, and HFS shall not permit AH to, pay or declare any cash or other dividends or distributions on its corporate stock if such payment or declaration would result in an Event of Default hereunder or under the Dorinco Loan Documents. 7.10 Intercompany Service Agreements. HFS shall not nor permit AH to amend or adjust the commission structure of its intercompany service agreements in place at the date of execution of this Agreement, to the extent that it materially adversely affects AH financially. 7.11 Disposition of Assets, Security Interests and other Encumbrances. Neither HFS nor ACO shall, nor permit AH, Borrower or AHGA to, sell, assign, transfer or otherwise dispose of any of their respective assets or properties or any interest therein, or create, incur or suffer to exist any mortgage, security interest, lien, license or other encumbrance upon any of their respective properties or assets, whether now owned or hereafter acquired, except (a) security interests created or arising pursuant to the Dorinco Loan Documents, (b) purchase money security interests in equipment used in the normal course of their respective businesses, (c) operating or capital equipment leases for use in the ordinary course of business, (d) existing encumbrances disclosed in HFS's consolidated and consolidating financial statements, and (e) liens granted by Borrower to Bank under this Agreement and the other Loan Documents. 7.12 Capital Stock. Neither HFS nor ACO shall, nor permit Borrower to, purchase or retire any of its capital stock or issue or sell any capital stock or otherwise change its capital structure or change the relative rights, preferences or limitations relating to its capital stock. 7.13 Investments and Advances. Neither HFS nor ACO shall, nor permit AH to make any investment in or advance to any person, firm or corporation, other than advances (i) to or investments in any Affiliate(s), however, any advance or investment by AH to any Affiliate(s) or HFS requires Bank's prior written consent and (ii) to employees in the ordinary course of business, not to exceed $50,000.00. 7.14 Guaranties. Neither HFS nor ACO shall, nor permit AH or any other Affiliate(s) to become a guarantor, surety or otherwise liable for the debts or other obligations of any other person, firm or corporation, except for (i) Obligations to Bank, (ii) pledges of assets to secure Indebtedness of HFS under the Dorinco Loan Documents, (iii) obligations under the Reinsurance Agreements, and (iv) obligations of Affiliate(s), provided the aggregate obligation of either HFS or AH on the obligations of all other Affiliate(s) shall not exceed $500,000.00, further provided, no single transaction shall exceed $200,000.00.

7.15 Affiliate(s) Stock. Neither HFS nor ACO shall permit any Affiliate(s) (other than HFS) to consent to or approve or permit the issuance of any additional shares of any class of capital stock of any such Affiliate(s), or any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or nonoccurrence of any event or condition into, or exchangeable for, any such shares, or any warrants, options, rights or other commitments entitling any person to purchase or otherwise acquire any such shares other than to the present owner of the capital stock of such Affiliate. 7.16 Other Miscellaneous Covenants. Neither HFS nor ACO shall, and HFS shall not permit AH to: (i) Create, incur or permit to exist or otherwise become liable for, directly or indirectly, any indebtedness for borrowed money or for the deferred purchase price of real or personal property in excess of, in the aggregate, $500,000.00, or in any individual transaction, $200,000.00, except (A) trade indebtedness incurred in the ordinary course of business, (B) the Obligations and (C) the Indebtedness owing under the Dorinco Loan Documents; (ii) Merge or consolidate with any other company or companies; enter into any joint venture or partnership with

7.15 Affiliate(s) Stock. Neither HFS nor ACO shall permit any Affiliate(s) (other than HFS) to consent to or approve or permit the issuance of any additional shares of any class of capital stock of any such Affiliate(s), or any securities convertible voluntarily by the holder thereof or automatically upon the occurrence or nonoccurrence of any event or condition into, or exchangeable for, any such shares, or any warrants, options, rights or other commitments entitling any person to purchase or otherwise acquire any such shares other than to the present owner of the capital stock of such Affiliate. 7.16 Other Miscellaneous Covenants. Neither HFS nor ACO shall, and HFS shall not permit AH to: (i) Create, incur or permit to exist or otherwise become liable for, directly or indirectly, any indebtedness for borrowed money or for the deferred purchase price of real or personal property in excess of, in the aggregate, $500,000.00, or in any individual transaction, $200,000.00, except (A) trade indebtedness incurred in the ordinary course of business, (B) the Obligations and (C) the Indebtedness owing under the Dorinco Loan Documents; (ii) Merge or consolidate with any other company or companies; enter into any joint venture or partnership with any person, firm or corporation other than an Affiliate; or convey, lease or sell all or any material portion of its property or assets or business to any other person, firm or corporation, other than the purchase or sale of assets in the ordinary course of business; (iii) Consent to or approve or permit any material amendment, restatement or substitution of the articles of incorporation and/or bylaws of AH, it being hereby acknowledged by HFS that any such amendment, restatement or substitution shall not be effective unless so consented to by Bank and that Bank may give or withhold such consent in each instance in Bank's sole and absolute discretion. For purposes of this Section 7, and without limiting the scope of this Section 7, any change in capital structure or in the relative rights, preferences or limitations relating to capital stock shall be deemed a material change. 8.0 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: 8.1 Good Standing. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which Borrower does business. ACO is a corporation duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business. HFS is a corporation duly organized, validly existing and in good standing under the laws of Nevada and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business. AHGA is a corporation duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business. American Hallmark Agencies, Inc. is a corporation duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does

business. HCS is a corporation duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business. 8.2 Authority and Compliance. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. Each Guarantor has full power and authority to execute and deliver the guaranty agreements to which each is a party and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of the Guarantors. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower and all Guarantors are in compliance with all laws and regulatory requirements to which they are subject. 8.3 Binding Agreement. This Agreement and the other Loan Documents executed by Borrower constitute valid

business. HCS is a corporation duly organized, validly existing and in good standing under the laws of Texas and has the power and authority to own its property and to carry on its business in each jurisdiction in which it does business. 8.2 Authority and Compliance. Borrower has full power and authority to execute and deliver the Loan Documents and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of Borrower. Each Guarantor has full power and authority to execute and deliver the guaranty agreements to which each is a party and to incur and perform the obligations provided for therein, all of which have been duly authorized by all proper and necessary action of the appropriate governing body of the Guarantors. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower and all Guarantors are in compliance with all laws and regulatory requirements to which they are subject. 8.3 Binding Agreement. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. Each Guaranty Agreement executed by a Guarantor constitutes a valid and legally binding obligation of such Guarantor, enforceable in accordance with its terms. 8.4 Concerning the Reinsurance Agreements. Each Reinsurance Agreement is in full force and effect and is the valid and legally binding obligation of the parties thereto enforceable in accordance with its respective terms. 8.5 Litigation. There is no proceeding involving Borrower pending or, to the knowledge of Borrower, threatened before any court or Governmental Authority, agency or arbitration authority, except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. 8.6 No Conflicting Agreements. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the organization, power or authority of Borrower or any Guarantor and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or any Guarantor or affecting their property, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of the Loan Documents to which they are parties, including without limitation, the Dorinco Loan Documents. 8.7 Ownership of Assets. Borrower has good title to its assets, and its assets are free and clear of liens, except those granted to Bank and as disclosed to Bank in writing prior to the date of this Agreement. 8.8 Contingent Liabilities. There are no suretyship agreements,guaranties or other contingent liabilities of Borrower, ACO or HFS that have not been disclosed in writing to Bank. 8.9 Taxes. All taxes and assessments due and payable by Borrower have been paid or are being Contested in Good Faith, and Borrower has filed all tax returns which it is required to file.

8.10 Financial Statements. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since September 30, 1996. To the best of Borrower's knowledge, all factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. 8.11 Environmental Matters. The conduct of Borrower's business operations and the condition of Borrower's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency, any applicable local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. 8.12 Licenses and Permits. Borrower has obtained all licenses, permits and approvals required to engage in the business of insurance premium financing which are required by the laws, rules and regulations of every state in which Borrower engages in such business.

8.10 Financial Statements. The financial statements of Borrower heretofore delivered to Bank have been prepared in accordance with GAAP applied on a consistent basis throughout the period involved and fairly present Borrower's financial condition as of the date or dates thereof, and there has been no material adverse change in Borrower's financial condition or operations since September 30, 1996. To the best of Borrower's knowledge, all factual information furnished by Borrower to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. 8.11 Environmental Matters. The conduct of Borrower's business operations and the condition of Borrower's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency, any applicable local or state law, rule, regulation or rule of common law or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. 8.12 Licenses and Permits. Borrower has obtained all licenses, permits and approvals required to engage in the business of insurance premium financing which are required by the laws, rules and regulations of every state in which Borrower engages in such business. 8.13 Use of Approved Premium Finance Agreement. The form of Premium Finance Agreement used by Borrower in its insurance premium finance business complies in all material respects with all applicable laws, including, without limitation, Chapter 24 of the Insurance Code, Chapters 3 and 4 of the Texas Credit Code (Tex. Rev. Civ. Stat.Ann. art. 5069-3.01, et seq. and art 5069-4.01, et seq.) and shall be approved by the Department of Insurance of Texas and by all other Governmental Authorities required in order for Borrower to use such agreement in its insurance premium finance business prior to the date of the initial funding of the Loan hereunder. 8.14 Compliance with Applicable Laws. Borrower has complied with all applicable laws (including without limitation Chapter 24 of the Insurance Code, Title 28 of the Administrative Code, and the Truth in Lending Act (the "Act") and all other statutes referenced in Chapter 24 of the Insurance Code), rules, regulations (including without limitation Regulation Z promulgated under the Act) and orders of all Governmental Authorities (including without limitation, the Department of Insurance) having jurisdiction over any aspect of the business conducted by Borrower. 8.15 Solvency. Borrower, each of the Guarantors and AH are Solvent both before and after giving effect to the transactions contemplated by this Agreement and the other Loan Documents. 8.16 Additional Information. No information, exhibit or report furnished by Borrower to Bank in connection with any of the Loan Documents contains any material misstatement of a fact or omits to state a material fact or any fact necessary to make the statements contained therein not materially misleading.

8.17 Continuation of Representation and Warranties. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any future advance under any Loan. 9.0 DEFAULT. Any of the following shall constitute Events of Default: 9.1 Nonpayment. Borrower shall default in the due and punctual payment of any principal or interest of the Note when due and payable, whether at maturity or otherwise. 9.2 Representations and Warranties. Any representation, warranty or statement made by Borrower or any Guarantor herein or otherwise in writing in connection herewith or in connection with any of the other Loan Documents and the agreements referred to herein or therein or in any financial statement, certificate or statement signed by any officer or employee of Borrower or any Guarantor and furnished pursuant to any provision of the Loan Documents shall be breached, or shall be materially false, incorrect or incomplete when made. 9.3 Covenants Contained in Agreement. (a) Borrower shall default in the due performance or observance of any

8.17 Continuation of Representation and Warranties. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any future advance under any Loan. 9.0 DEFAULT. Any of the following shall constitute Events of Default: 9.1 Nonpayment. Borrower shall default in the due and punctual payment of any principal or interest of the Note when due and payable, whether at maturity or otherwise. 9.2 Representations and Warranties. Any representation, warranty or statement made by Borrower or any Guarantor herein or otherwise in writing in connection herewith or in connection with any of the other Loan Documents and the agreements referred to herein or therein or in any financial statement, certificate or statement signed by any officer or employee of Borrower or any Guarantor and furnished pursuant to any provision of the Loan Documents shall be breached, or shall be materially false, incorrect or incomplete when made. 9.3 Covenants Contained in Agreement. (a) Borrower shall default in the due performance or observance of any term, covenant or agreement (other than Sections 5.5, 5.10, 6.1, 6.2, 6.4, 6.6, 6.8, 6.9, 6.11 and 6.12 hereof) on its part to be performed or observed hereunder and the default shall continue unremedied for a period of thirty (30) days following notice thereof from Bank to Borrower; or (b) Borrower shall default in the due performance or observance of any term, covenant or agreement of Sections 5.5, 5.10, 6.1, 6.2, 6.4, 6.6, 6.8, 6.9, 6.11 and 6.12 hereof. 9.4 Default in Other Loan Documents. Borrower or any Guarantor shall default in the due performance of or observance by it of any term, covenant or agreement on its part to be performed pursuant to the terms of any of the other Loan Documents and the default shall continue unremedied beyond any grace or cure period therein provided. 9.5 Default under the Dorinco Loan Documents. An event of default shall occur under the provisions of any Dorinco Loan Document the effect of which is to permit the holder or holders of such instrument to cause the indebtedness evidenced by such instrument to become due prior to its stated maturity. 9.6 Default in Other Debt. An event of default shall occur under the provisions of any instrument (other than the Loan Documents and the indebtedness described in Schedule 9.6 attached hereto and made a part hereof by this reference) evidencing indebtedness of Borrower or any Guarantor for the payment of borrowed money or of any agreement relating thereto the effect of which is to permit the holder or holders of such instrument to cause the indebtedness evidenced by such instrument to become due prior to its stated maturity. 9.7 Validity of Loan Documents. Any of the Loan Documents shall cease to be a legal, valid and binding agreement enforceable against any party executing the same in accordance with the respective terms thereof, or shall in any way be terminated, or become or be declared ineffective or inoperative, or shall in any way whatsoever cease to give or provide the respective rights, remedies, powers and privileges intended to be created thereby.

9.8 Bankruptcy. Borrower or any Guarantor shall suspend or discontinue its business operations, or shall generally fail to pay its debts as they mature, or shall file a petition commencing a voluntary case concerning Borrower or any Guarantor under any chapter of the United States Bankruptcy Code; or any involuntary case shall be commenced against Borrower or any Guarantor under the United States Bankruptcy Code; or Borrower or any Guarantor shall become insolvent (howsoever such insolvency may be evidenced). 9.9 Judgments and Decrees. Borrower or any Guarantor shall suffer a final judgment for the payment of money and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced, or, if commenced, has been effectively stayed. Any order, judgment or decree shall be entered in any proceeding against Borrower or any Guarantor decreeing the dissolution or split up of Borrower or any Guarantor and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days unless, pending further proceedings, dissolution or split up has not commenced, or, if commenced, has been effectively stayed.

9.8 Bankruptcy. Borrower or any Guarantor shall suspend or discontinue its business operations, or shall generally fail to pay its debts as they mature, or shall file a petition commencing a voluntary case concerning Borrower or any Guarantor under any chapter of the United States Bankruptcy Code; or any involuntary case shall be commenced against Borrower or any Guarantor under the United States Bankruptcy Code; or Borrower or any Guarantor shall become insolvent (howsoever such insolvency may be evidenced). 9.9 Judgments and Decrees. Borrower or any Guarantor shall suffer a final judgment for the payment of money and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced, or, if commenced, has been effectively stayed. Any order, judgment or decree shall be entered in any proceeding against Borrower or any Guarantor decreeing the dissolution or split up of Borrower or any Guarantor and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days unless, pending further proceedings, dissolution or split up has not commenced, or, if commenced, has been effectively stayed. 9.10 Drop in Rating of Reinsurance Companies Responsible for Repayment of Unearned Premiums. The A.M. Best Company shall lower below "A-" the rating of any reinsurance company responsible for the repayment of unearned premiums to Borrower and, within ninety (90) days of the date the rating of such reinsurance company falls below "A-," the Borrower has not replaced the reinsurance agreement of such reinsurance company with a reinsurance agreement with another reinsurance company having an A.M. Best Company rating of "A-" or better covering the same reinsured business. 9.11 Ms. Linda Sleeper and Mr. Ramon Phillips to be Involved in Senior Management. Neither Linda H. Sleeper nor Ramon D. Phillips is devoting her/his full time and effort to the management and operation of Borrower. 9.12 Concerning the Reinsurance Agreements. At any time there is not in force and effect (i) a Reinsurance Agreement reinsuring all new and renewal business produced and underwritten through AHGA for and on behalf of State and County Mutual Fire Insurance Company, Fort Worth, Texas, ceded to AH and classified by AH as Private Passenger Automobile business, including Physical Damage, Liability, Personal Injury Protection and Uninsured/Underinsured Motorist, covering seventy-five percent (75%) quota share; and (ii) a Reinsurance Agreement reinsuring all new and renewal business produced and underwritten through AHGA for and on behalf of State and County Mutual Fire Insurance Company, Fort Worth, Texas, ceded to AH and classified by AH as Private Passenger Automobile Physical Damage business, covering ninety-five percent (95%) of $150,000 in excess of $100,000 of each loss occurrence. 9.13 Regulatory Action or Directive. At any time any Governmental Authority delivers to Borrower, HFS, ACO, AHGA or AH, a cease and desist order, letter of unsafe practices or conditions, an order of correction, or similar directive under applicable law or commences any action which could result in taking possession, reorganization or liquidation of Borrower, HFS, ACO, AH, or AHGA, and such letter, action, order or other directive is permitted to remain uncured or undismissed for more than forty-five (45) days.

10.0 REMEDIES. Upon the occurrence of an event of default described in Section 9.8 hereof, the entire principal of and accrued interest on the Note shall forthwith be due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. In the event that any event of default described in Sections 9.1 through 9.7 hereof or Section 9.9 through 9.13 hereof shall occur and be continuing, Bank may, without demand or notice of its election declare the entire unpaid balance of the Note and all other indebtedness of Borrower to Bank, or any part thereof, immediately due and payable, whereupon the principal of and accrued interest on such Note and other indebtedness shall be forthwith due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. Upon the occurrence and during the continuance of any such event of default, Bank may (a) exercise any and all rights under or pursuant to any of the Loan Documents, and (b) exercise any and all rights afforded to Bank by the laws of the State of Texas or any other applicable jurisdiction or in equity or otherwise, as Bank may deem appropriate.

10.0 REMEDIES. Upon the occurrence of an event of default described in Section 9.8 hereof, the entire principal of and accrued interest on the Note shall forthwith be due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. In the event that any event of default described in Sections 9.1 through 9.7 hereof or Section 9.9 through 9.13 hereof shall occur and be continuing, Bank may, without demand or notice of its election declare the entire unpaid balance of the Note and all other indebtedness of Borrower to Bank, or any part thereof, immediately due and payable, whereupon the principal of and accrued interest on such Note and other indebtedness shall be forthwith due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. Upon the occurrence and during the continuance of any such event of default, Bank may (a) exercise any and all rights under or pursuant to any of the Loan Documents, and (b) exercise any and all rights afforded to Bank by the laws of the State of Texas or any other applicable jurisdiction or in equity or otherwise, as Bank may deem appropriate. 11.0 NOTICES. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to the other party at the addresses set forth on the first page of this Agreement or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made (a) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. Mail, first class postage prepaid, and (b) if sent by any other means, upon delivery. 12.0 COSTS, EXPENSES AND ATTORNEY'S FEES. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees, incurred by Bank in connection with (a) negotiation and preparation of this Agreement and each of the Loan Documents, and (b) Bank's continued administration thereof, and (c) any modifications of or consents or waivers under or amendments to or interpretations of or enforcement of this Agreement, the Note, the other Loan Documents and the agreements described therein. Borrower further agrees to indemnify Bank from and hold it harmless against any and all losses, liabilities, claims, damages or expenses which Bank suffers or incurs as a result of its entering into this Agreement, or the consummation of the transactions contemplated by this Agreement and the Loan Documents, or the use or contemplated use of the proceeds of the Loan, including, without limitation, the fees and disbursements of counsel incurred in connection with any litigation, arbitration or other proceeding arising out of or by reason of any of the aftersaid. 13.0 MISCELLANEOUS. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: 13.1 Cumulative Rights and No Waiver. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise

of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. 13.2 Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Texas and applicable United States federal law and shall be performable in Dallas County, Texas. 13.3 Amendment. No modification, consent, amendment or waiver of any provision of this Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which

of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. 13.2 Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the laws of Texas and applicable United States federal law and shall be performable in Dallas County, Texas. 13.3 Amendment. No modification, consent, amendment or waiver of any provision of this Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by an officer of Bank, and then shall be effective only in the specified instance and for the purpose for which given. This Agreement is binding upon Borrower, its successors and assigns, and inures to the benefit of Bank, its successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Agreement. 13.4 Documents. All documents, certificates and other items required under this Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. 13.5 Partial Invalidity. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. 13.6 Indemnification. Notwithstanding anything to the contrary contained in Section 13.7 hereof, Borrower shall indemnify, defend and hold Bank and its successors and assigns harmless from and against any and all claims, demands, suits, losses, damages, assessments, fines, penalties, costs or other expenses (including reasonable attorneys' fees and court costs) arising from or in any way related to any of the transactions contemplated hereby, including but not limited to actual or threatened damage to the environment, agency costs of investigation, personal injury or death, or property damage, due to a release or alleged release of Hazardous Materials, arising from Borrower's business operations, any other property owned by Borrower or in the surface or ground water arising from Borrower's business operations, or gaseous emissions arising from Borrower's business operations or any other condition existing or arising from Borrower's business operations resulting from the use or existence of Hazardous Materials, whether such claim proves to be true or false. Borrower further agrees that its indemnity obligations shall include, but are not limited to, liability for damages resulting from the personal injury or death of an employee of Borrower, regardless of whether Borrower has paid the employee under the workmen's compensation laws of any state or other similar federal or state legislation for the protection of employees. The term "property damage" as used in this paragraph includes, but is not limited to, damage to any real or personal property of Borrower, Bank, and of any third parties. Borrower's obligations under this paragraph shall survive the

repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any deed of trust, security agreement or other Loan Document securing the Loan. 13.7 Survivability. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of Bank to make any advances under the Loan shall not have expired. 13.8 Accounting Terms. All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under GAAP, as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 7.9 hereof. 14.0 ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS,

repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any deed of trust, security agreement or other Loan Document securing the Loan. 13.7 Survivability. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the Loan and shall continue in full force and effect so long as the Loan is outstanding or the obligation of Bank to make any advances under the Loan shall not have expired. 13.8 Accounting Terms. All accounting terms not specifically defined or specified herein shall have the meanings generally attributed to such terms under GAAP, as in effect from time to time, consistently applied, with respect to the financial statements referenced in Section 7.9 hereof. 14.0 ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. 14.1 Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. 14.2 Reservation of Rights. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL

CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.

CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 15.0 AGREEMENT CONTROLLING. In the event of a conflict between the terms and provisions of this Agreement and the terms and provisions of any of the other Loan Documents, the terms and provisions of this Agreement shall control. 16.0 NOTICE OF FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [THIS SPACE IS INTENTIONALLY LEFT BLANK.] HALLMARK FINANCE CORPORATION By Linda H. Sleeper, Executive Vice President HALLMARK FINANCIAL SERVICES, INC. By Linda H. Sleeper, Executive Vice President ACO HOLDINGS, INC. By Linda H. Sleeper, Executive Vice President NATIONSBANK OF TEXAS, N.A. By Susan M. Raher, Vice President

EXHIBIT A FORM OF NOTICE OF BORROWING TO: NATIONSBANK OF TEXAS, N.A. under the Loan Agreement dated March 17, 1997, by and between HALLMARK FINANCE CORPORATION, and NATIONSBANK OF TEXAS, N.A. ("Agreement") Terms used herein which are defined in the Agreement have the same meanings unless otherwise specified. Pursuant to Section 2.5 and Section 2.6 of the Agreement, this Notice of Borrowing represents the election of Borrower to select the following Interest Rate Options: (I) Date of proposed Loan:\ (ii)Principal amount of requested Loan (Minimum Principal amount $250,000). (If no Interest Rate Option is

EXHIBIT A FORM OF NOTICE OF BORROWING TO: NATIONSBANK OF TEXAS, N.A. under the Loan Agreement dated March 17, 1997, by and between HALLMARK FINANCE CORPORATION, and NATIONSBANK OF TEXAS, N.A. ("Agreement") Terms used herein which are defined in the Agreement have the same meanings unless otherwise specified. Pursuant to Section 2.5 and Section 2.6 of the Agreement, this Notice of Borrowing represents the election of Borrower to select the following Interest Rate Options: (I) Date of proposed Loan:\ (ii)Principal amount of requested Loan (Minimum Principal amount $250,000). (If no Interest Rate Option is elected by Borrower, the applicable Interest Rate Option shall be the Adjusted Prime Rate.): Amount of requested Loan which will be a Prime Rate Tranche: Amount of requested Loan which will be a LIBO Rate Tranche: (iii) If the Interest Rate Option for any Tranche is the Adjusted LIBO Rate, the Interest Period for such Tranche (options: three (3), six (6) or twelve (12) calendar months): (iv)Designate whether Loan is a new advance, or a conversion or renewal of any existing LIBO Rate Tranche or a Prime Rate Tranche: Borrower certifies that as of the date of the requested advance(s) all of the conditions precedent contained in the Agreement have been satisfied (or waived pursuant to the Agreement) and that all representations and warranties of Borrower and each Guarantor set forth in the Agreement are true and correct in all material respects on the date of such advance(s) (other than representations and warranties which expressly speak as of the closing date), and the Borrowing Base Certificate most recently delivered pursuant to the Agreement may be relied upon for this borrowing and is true and correct as of the date thereof. DATED this _____ day of ____________, 199__. HALLMARK FINANCE CORPORATION By Title

EXHIBIT B BORROWING BASE CERTIFICATE Status as of , 199__ In accordance with the terms of the Loan Agreement dated March 17, 1997, by and between HALLMARK FINANCE CORPORATION, and NATIONSBANK OF TEXAS, N.A., we hereby represent and warrant as follows: Prior Period Balance of Premium Finance Agreements $

EXHIBIT B BORROWING BASE CERTIFICATE Status as of , 199__ In accordance with the terms of the Loan Agreement dated March 17, 1997, by and between HALLMARK FINANCE CORPORATION, and NATIONSBANK OF TEXAS, N.A., we hereby represent and warrant as follows: Prior Period Balance of Premium Finance Agreements $ PLUS: PREMIUM FINANCE AGREEMENTS ISSUED DURING THE PERIOD ENDING ___________, 19__ $ PLUS/LESS THE FOLLOWING ADJUSTMENTS: (+/-) Premium Finance Agreement Amendments $ (+/-) Miscellaneous Premium Finance Agreement Corrections $ (+/-) Cash Receipts $ (+/-) Cancellations $ (+/-) Earned Late Charges $ (+/-) Earned Setup Fees $ (+/-) Returned Checks (Uncollected) $ (+/-) Returned Check Charges $ (+/-) Interest and Write-offs $ (-) Change in Unearned Interest $ (+) Return Premiums in Course of Collections $ Total Adjusted Eligible Premium Finance Agreements $ LESS THE FOLLOWING NON-ELIGIBLE PREMIUM FINANCE AGREEMENTS: Premium Finance Agreements disputed or denied by insurer or reinsurer $ Premium Finance Agreements subject to a right of insurer or reinsurer to setoff, defense or discount $

Premium Finance Agreements with less than ten% equity in the premium $ Premium Finance Agreements in default which have balances due from makers after realization of all collateral $ Premium Finance Agreements resulting from TAIP $ Premium Finance Agreements funding policies outside Texas $ Premium Finance Agreements where AH is not the issuer on behalf of State and County Mutual $

Premium Finance Agreements with less than ten% equity in the premium $ Premium Finance Agreements in default which have balances due from makers after realization of all collateral $ Premium Finance Agreements resulting from TAIP $ Premium Finance Agreements funding policies outside Texas $ Premium Finance Agreements where AH is not the issuer on behalf of State and County Mutual $ Premium Finance Agreements which do not have 75% or more premium balances reinsured with third party reinsurer with A. M. Best Rating of A- or higher $ Premium Finance Agreements where AHGA is not the Managing Agent $ Return premiums in course of collection greater than 5 days past due from the original due date as required by applicable Governmental Authorities $ Total Adjusted Eligible Premium Finance Agreements $ LESS: Bank Reserve $ CALCULATION OF BORROWING BASE: [(Total Adjusted Eligible Premium Finance Agreements - Bank Reserve) x 60%] = Maximum amount of borrowings (not to exceed $8,000,000) $ LESS: Outstandings $ Available Amount/Overadvance Due Bank (Amount of Borrowing Base - Outstandings) $ BORROWER: HALLMARK FINANCE CORPORATION By: Title

EXHIBIT C COMPLIANCE CERTIFICATE This Compliance Certificate is delivered pursuant to Section 5.1(i) of the Loan Agreement dated as of March 17, 1997 (together with all amendments and modifications, if any, from time to time made thereto, the "Loan Agreement"), between HALLMARK FINANCE CORPORATION (the "Borrower") and NATIONSBANK OF TEXAS, N.A. Unless otherwise defined, terms used herein have the meanings provided in the Loan Agreement. The undersigned, being the duly elected, qualified and acting of Borrower, on behalf of Borrower and solely in his or her capacity as an officer of Borrower, hereby certifies and warrants that: 1. He or she is the of Borrower and that, as such, he or she is authorized to execute this certificate on behalf of Borrower.

EXHIBIT C COMPLIANCE CERTIFICATE This Compliance Certificate is delivered pursuant to Section 5.1(i) of the Loan Agreement dated as of March 17, 1997 (together with all amendments and modifications, if any, from time to time made thereto, the "Loan Agreement"), between HALLMARK FINANCE CORPORATION (the "Borrower") and NATIONSBANK OF TEXAS, N.A. Unless otherwise defined, terms used herein have the meanings provided in the Loan Agreement. The undersigned, being the duly elected, qualified and acting of Borrower, on behalf of Borrower and solely in his or her capacity as an officer of Borrower, hereby certifies and warrants that: 1. He or she is the of Borrower and that, as such, he or she is authorized to execute this certificate on behalf of Borrower. 2. As of , 199 , Borrower was not in default of any of the provisions of the Loan Agreement during the period as to which this compliance certificate relates as represented below: (a) Interest Coverage Ratio: net income before taxes, dividends, distribution, + Interest Expense management and marketing fees = Maximum 1.50 : 1.0 Interest Expense Calculate here: (b) Capital Expenditures: Maximum $100,000 per fiscal year Fiscal Year 199 = $ (cumulative YTD) (c) Minimum Tangible Net Worth: Minimum Tangible Net Worth Minimum 1997 - $7,700,000 1998 $8,000,000 Fiscal Year 199 = $ (d) Dividends, Distributions, Management Fees & Marketing Fees YTD calculation of Net Operating Income for Distribution (see page 6 of Loan Agreement for definition) = $ Actual Amount Distributed = $

3. As of , 199 , HFS was not in default of any of the provisions of the Loan Agreement during the period as to which this compliance certificate relates as represented below: (a) Minimum Statutory Capital and Surplus: AH's Minimum Statutory Capital and Surplus - $2,650,000 Fiscal Year 199 = $ (b) Ratio of Gross Premium to Statutory Capital and Surplus: AH is required to maintain its ratio of Gross Premium to Statutory Capital and Surplus at or below 10.0 to 1.0. Calculate here: (c) Ratio of Net Premium to Statutory Capital and Surplus: AH is required to maintain its ratio of Net Premium to Statutory Capital and Surplus at or below 3.0 to 1.0.

3. As of , 199 , HFS was not in default of any of the provisions of the Loan Agreement during the period as to which this compliance certificate relates as represented below: (a) Minimum Statutory Capital and Surplus: AH's Minimum Statutory Capital and Surplus - $2,650,000 Fiscal Year 199 = $ (b) Ratio of Gross Premium to Statutory Capital and Surplus: AH is required to maintain its ratio of Gross Premium to Statutory Capital and Surplus at or below 10.0 to 1.0. Calculate here: (c) Ratio of Net Premium to Statutory Capital and Surplus: AH is required to maintain its ratio of Net Premium to Statutory Capital and Surplus at or below 3.0 to 1.0. Calculate here: (d) Combined Ratio: AH is required to maintain the average of AH's Combined Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations at 115% or below.
Calculate here: Loss Ratio + Expense Ratio = % + % = % %

(e) Loss Ratio: AH is required to maintain the average of AH's Loss Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations not to exceed 87% or below. Calculate here: 4. As of , 199 , no Trigger Event (as defined in the Loan Agreement) has occurred during the period as to which this compliance certificate relates as represented below: Trigger Events:

(a) AH's Combined Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations is greater than 107%. Calculate here: (b) AH's Loss Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations is greater than 83%. Calculate here: (c) Borrower's Interest Coverage Ratio as of the end of any fiscal quarter is less than 1.80 to 1.0. Calculate here: (d) As of the date of any reporting period required by law or the Texas Department of Insurance the Tangible Net Worth of Borrower (determined in accordance with GAAP) is less than the amount set forth below for the calendar year indicated: 1997 - $7,890,000 1998 - $8,200,000

(a) AH's Combined Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations is greater than 107%. Calculate here: (b) AH's Loss Ratio as of the end of any four (4) immediately preceding fiscal quarters of AH's operations is greater than 83%. Calculate here: (c) Borrower's Interest Coverage Ratio as of the end of any fiscal quarter is less than 1.80 to 1.0. Calculate here: (d) As of the date of any reporting period required by law or the Texas Department of Insurance the Tangible Net Worth of Borrower (determined in accordance with GAAP) is less than the amount set forth below for the calendar year indicated: 1997 - $7,890,000 1998 - $8,200,000 Calculate here: 199 : $ (e) As of the date of any reporting period required by law or the Texas Department of Insurance, the Minimum Statutory Capital and Surplus is less than $4,200,000 or shall have decreased more than 15% from the comparable reporting period of the preceding calendar year. Calculate here: IN WITNESS WHEREOF, the undersigned has executed and delivered this certificate this day of , 199 . BORROWER: HALLMARK FINANCE CORPORATION By: Title GUARANTOR:

HALLMARK FINANCIAL SERVICES, INC. By: Title Period Ending:

EXHIBIT D AGED STATUS ON PREMIUM FINANCE AGREEMENTS

HALLMARK FINANCIAL SERVICES, INC. By: Title Period Ending:

EXHIBIT D AGED STATUS ON PREMIUM FINANCE AGREEMENTS Total 1-30 31-60 61-90 91+ January 31, 1997 New Current Late Cancel without Returns Cancel with Dun Refunds Due

SCHEDULE 1.0 BANK RESERVE APPLICABLE PERIOD AMOUNT OF BANK RESERVE
March, 1997 April, 1997 May, 1997 June, 1997 July, 1997 August, 1997 September, 1997 October, 1997 November, 1997 December, 1997 January, 1998 February, 1998 March, 1998 and thereafter $20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00 140,000.00 160,000.00 180,000.00 200,000.00 220,000.00 240,000.00 250,000.00

SCHEDULE 9.6 DEFAULT UNDER OTHER INDEBTEDNESS In connection with the acquisition of the assets of Acadine Capital Corporation ("ACC") in 1990, American Hallmark General Agency, Inc. ("AHGA") assumed the unpaid balance of a promissory note dated January 1,

EXHIBIT D AGED STATUS ON PREMIUM FINANCE AGREEMENTS Total 1-30 31-60 61-90 91+ January 31, 1997 New Current Late Cancel without Returns Cancel with Dun Refunds Due

SCHEDULE 1.0 BANK RESERVE APPLICABLE PERIOD AMOUNT OF BANK RESERVE
March, 1997 April, 1997 May, 1997 June, 1997 July, 1997 August, 1997 September, 1997 October, 1997 November, 1997 December, 1997 January, 1998 February, 1998 March, 1998 and thereafter $20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00 140,000.00 160,000.00 180,000.00 200,000.00 220,000.00 240,000.00 250,000.00

SCHEDULE 9.6 DEFAULT UNDER OTHER INDEBTEDNESS In connection with the acquisition of the assets of Acadine Capital Corporation ("ACC") in 1990, American Hallmark General Agency, Inc. ("AHGA") assumed the unpaid balance of a promissory note dated January 1, 1989, in the original principal amount of $982,000 payable by ACC to White Enterprises, Inc. ("White"). By its terms, the note bears interest at prime plus one percent until maturity and at the maximum lawful rate thereafter. AHGA discontinued payment on the note in November, 1992, at which time the unpaid principal balance was alleged to be approximately $380,000. Pursuant to the terms of the note, all unpaid principal and accrued unpaid interest became due on March 1, 1993. AHGA disputes the validity of the obligations evidenced by such note. Further, AHGA believes that it has a right of offset with respect to $240,000 which is on deposit with a subsidiary of White. Both White and such subsidiary are currently in bankruptcy proceedings. AHGA also believes that collection of the obligation is barred by the statute of limitations.

SCHEDULE 1.0 BANK RESERVE APPLICABLE PERIOD AMOUNT OF BANK RESERVE
March, 1997 April, 1997 May, 1997 June, 1997 July, 1997 August, 1997 September, 1997 October, 1997 November, 1997 December, 1997 January, 1998 February, 1998 March, 1998 and thereafter $20,000.00 40,000.00 60,000.00 80,000.00 100,000.00 120,000.00 140,000.00 160,000.00 180,000.00 200,000.00 220,000.00 240,000.00 250,000.00

SCHEDULE 9.6 DEFAULT UNDER OTHER INDEBTEDNESS In connection with the acquisition of the assets of Acadine Capital Corporation ("ACC") in 1990, American Hallmark General Agency, Inc. ("AHGA") assumed the unpaid balance of a promissory note dated January 1, 1989, in the original principal amount of $982,000 payable by ACC to White Enterprises, Inc. ("White"). By its terms, the note bears interest at prime plus one percent until maturity and at the maximum lawful rate thereafter. AHGA discontinued payment on the note in November, 1992, at which time the unpaid principal balance was alleged to be approximately $380,000. Pursuant to the terms of the note, all unpaid principal and accrued unpaid interest became due on March 1, 1993. AHGA disputes the validity of the obligations evidenced by such note. Further, AHGA believes that it has a right of offset with respect to $240,000 which is on deposit with a subsidiary of White. Both White and such subsidiary are currently in bankruptcy proceedings. AHGA also believes that collection of the obligation is barred by the statute of limitations.

Promissory Note Effective $8,000,000 Dallas, Texas March 17, 1997 Bank: NATIONSBANK OF TEXAS, N.A. 901 Main Street Dallas, Texas 75202 Borrower: HALLMARK FINANCE CORPORATION 14651 Dallas Parkway, Suite 900 Dallas, Texas 75240 FOR VALUE RECEIVED, the undersigned Borrower unconditionally promises to pay to the order of Bank, its successors and assigns, without setoff, at its offices indicated at the beginning of this Note, or at such other place as may be designated by Bank, the principal amount of Eight Million and No/100 Dollars ($8,000,000), or so

SCHEDULE 9.6 DEFAULT UNDER OTHER INDEBTEDNESS In connection with the acquisition of the assets of Acadine Capital Corporation ("ACC") in 1990, American Hallmark General Agency, Inc. ("AHGA") assumed the unpaid balance of a promissory note dated January 1, 1989, in the original principal amount of $982,000 payable by ACC to White Enterprises, Inc. ("White"). By its terms, the note bears interest at prime plus one percent until maturity and at the maximum lawful rate thereafter. AHGA discontinued payment on the note in November, 1992, at which time the unpaid principal balance was alleged to be approximately $380,000. Pursuant to the terms of the note, all unpaid principal and accrued unpaid interest became due on March 1, 1993. AHGA disputes the validity of the obligations evidenced by such note. Further, AHGA believes that it has a right of offset with respect to $240,000 which is on deposit with a subsidiary of White. Both White and such subsidiary are currently in bankruptcy proceedings. AHGA also believes that collection of the obligation is barred by the statute of limitations.

Promissory Note Effective $8,000,000 Dallas, Texas March 17, 1997 Bank: NATIONSBANK OF TEXAS, N.A. 901 Main Street Dallas, Texas 75202 Borrower: HALLMARK FINANCE CORPORATION 14651 Dallas Parkway, Suite 900 Dallas, Texas 75240 FOR VALUE RECEIVED, the undersigned Borrower unconditionally promises to pay to the order of Bank, its successors and assigns, without setoff, at its offices indicated at the beginning of this Note, or at such other place as may be designated by Bank, the principal amount of Eight Million and No/100 Dollars ($8,000,000), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereunder, at an annual interest rate, and in accordance with the payment schedule, indicated below. 1. CERTAIN DEFINITIONS. Unless the context hereof otherwise requires or provides, the terms used herein and defined in that certain Loan Agreement between Borrower and Bank, of even date herewith, as the same has been or may be amended or supplemented from time to time (the "Agreement") have the same meanings. Certain of these definitions have been included herein for convenience of reference and have the following meaning set forth with respect thereto: "Adjusted Eligible Premium Finance Agreements" at any time, means the Eligible Premium Finance Agreements adjusted to reflect the addition or subtraction, as appropriate of: (a) amendments to any Eligible Premium Finance Agreement; (b) miscellaneous corrections to Eligible Premium Finance Agreements; (c) cash receipts (not otherwise included in the definition of Eligible Premium Finance Agreements); (d) any Eligible Premium Finance Agreement which has been canceled; (e) earned late charges; (f) earned set up fees; (g) returned checks (uncollected net of returned check charges); (h) interest and write-offs; (i) change in unearned interest; and (j) return premiums in course of collections. "Adjusted LIBO Rate" means, for any Interest Period, a rate of interest per annum equal to the sum of two and eight-tenths of one percent (2.80%) plus the LIBO Rate for the applicable Interest Period.

Promissory Note Effective $8,000,000 Dallas, Texas March 17, 1997 Bank: NATIONSBANK OF TEXAS, N.A. 901 Main Street Dallas, Texas 75202 Borrower: HALLMARK FINANCE CORPORATION 14651 Dallas Parkway, Suite 900 Dallas, Texas 75240 FOR VALUE RECEIVED, the undersigned Borrower unconditionally promises to pay to the order of Bank, its successors and assigns, without setoff, at its offices indicated at the beginning of this Note, or at such other place as may be designated by Bank, the principal amount of Eight Million and No/100 Dollars ($8,000,000), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereunder, at an annual interest rate, and in accordance with the payment schedule, indicated below. 1. CERTAIN DEFINITIONS. Unless the context hereof otherwise requires or provides, the terms used herein and defined in that certain Loan Agreement between Borrower and Bank, of even date herewith, as the same has been or may be amended or supplemented from time to time (the "Agreement") have the same meanings. Certain of these definitions have been included herein for convenience of reference and have the following meaning set forth with respect thereto: "Adjusted Eligible Premium Finance Agreements" at any time, means the Eligible Premium Finance Agreements adjusted to reflect the addition or subtraction, as appropriate of: (a) amendments to any Eligible Premium Finance Agreement; (b) miscellaneous corrections to Eligible Premium Finance Agreements; (c) cash receipts (not otherwise included in the definition of Eligible Premium Finance Agreements); (d) any Eligible Premium Finance Agreement which has been canceled; (e) earned late charges; (f) earned set up fees; (g) returned checks (uncollected net of returned check charges); (h) interest and write-offs; (i) change in unearned interest; and (j) return premiums in course of collections. "Adjusted LIBO Rate" means, for any Interest Period, a rate of interest per annum equal to the sum of two and eight-tenths of one percent (2.80%) plus the LIBO Rate for the applicable Interest Period. "Adjusted Prime Rate" means, for any Interest Period, a rate of interest per annum equal to the Prime Rate plus three-eighths of one percent (0.375%).

"Board" means the Board of Governors of the Federal Reserve System of the United States of America or any successor governmental body. "Borrowing Base" at any time, shall be equal to the remainder of (i) the sum of (A) 60% of Adjusted Eligible Premium Finance Agreements plus (B) 60% of Eligible Return Premiums as determined in accordance with this Agreement, minus (ii) the Bank Reserve. "Business Day" means (i) a day other than Saturday, Sunday or a day on which Bank is authorized to be closed in the State of Texas, and (ii) if the applicable Business Day relates to an Adjusted LIBO Rate Tranche, a day on which dealings in Dollar deposits are also carried on in the London interbank market and banks are open for business in London.

"Board" means the Board of Governors of the Federal Reserve System of the United States of America or any successor governmental body. "Borrowing Base" at any time, shall be equal to the remainder of (i) the sum of (A) 60% of Adjusted Eligible Premium Finance Agreements plus (B) 60% of Eligible Return Premiums as determined in accordance with this Agreement, minus (ii) the Bank Reserve. "Business Day" means (i) a day other than Saturday, Sunday or a day on which Bank is authorized to be closed in the State of Texas, and (ii) if the applicable Business Day relates to an Adjusted LIBO Rate Tranche, a day on which dealings in Dollar deposits are also carried on in the London interbank market and banks are open for business in London. "Expiration Date" means 2 p.m. on September 17, 1998 or any other date on which the Loans become due and payable pursuant to the terms of the Agreement. "Interest Payment Date" means (i) the last Business Day of each calendar month, or if earlier occurring in any calendar month with respect to any LIBO Rate Tranche, the last day of the Interest Period applicable to such LIBO Rate Tranche, and (ii) the Expiration Date. "Interest Period" means for each LIBO Rate Tranche, the period commencing on the date such LIBO Rate Tranche is made or, in the case of a rollover to a successive Interest Period, the last day of the immediately preceding Interest Period and, except as provided below, ending three (3), six (6) or twelve (12) calendar months thereafter, as Borrower may select in accordance with the terms of this Agreement; provided that all Interest Periods are subject to the following terms and conditions: (A) all Interest Periods which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day unless such next succeeding Business Day falls in the next succeeding calendar month, in which case such Interest Period shall end on the next preceding Business Day; (B) no Interest Period may be selected that ends later than the Expiration Date; (C) an Interest Period once selected by Borrower shall be binding upon Borrower and irrevocable; and (D) each Interest Period shall terminate on the numerical day of the last calendar month of such Interest Period which corresponds to the day such Interest Period began unless there is no such corresponding day in such month, in which case such Interest Period shall terminate on the last Business Day of such calendar month. "Interest Rate Option" means the Adjusted LIBO Rate or the Adjusted Prime Rate. "LIBO Rate" means, for each Interest Period, a rate per annum (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent) determined by Bank to be equal to the quotient obtained by dividing (a) the London Interbank Offered Rate for the relevant Interest Period by (b) the remainder of one (1) minus the applicable Reserve Requirement on

the first day of the relevant Interest Period (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent). "LIBO Rate Tranche" means each Tranche the interest on which is calculated with reference to an Adjusted LIBO Rate. "London Interbank Offered Rate" means, for the relevant Interest Period, the rate of interest per annum (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent) equal to the rate at which Dollar deposits would be offered by Bank (or its affiliate) at its in London, England (or if Bank, at the time any determination is made, does not maintain an office in London, England, the principal office of any affiliate of Bank in London, England) to major banks in the London interbank market at 11:00 a. m. London, England two (2) Business Days prior to the commencement of the relevant Interest Period for a period of time equal or comparable to and commencing on such Interest Period and in an amount equal or comparable to the principal balance of the Loan to be disbursed or outstanding during such Interest Period. "Maximum Amount" means the lesser of $8,000,000 or the Borrowing Base.

the first day of the relevant Interest Period (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent). "LIBO Rate Tranche" means each Tranche the interest on which is calculated with reference to an Adjusted LIBO Rate. "London Interbank Offered Rate" means, for the relevant Interest Period, the rate of interest per annum (rounded upwards, if not already a whole multiple of 1/16 of one percent, to the next higher 1/16 of one percent) equal to the rate at which Dollar deposits would be offered by Bank (or its affiliate) at its in London, England (or if Bank, at the time any determination is made, does not maintain an office in London, England, the principal office of any affiliate of Bank in London, England) to major banks in the London interbank market at 11:00 a. m. London, England two (2) Business Days prior to the commencement of the relevant Interest Period for a period of time equal or comparable to and commencing on such Interest Period and in an amount equal or comparable to the principal balance of the Loan to be disbursed or outstanding during such Interest Period. "Maximum Amount" means the lesser of $8,000,000 or the Borrowing Base. "Maximum Rate" means the higher of the maximum interest rate allowed by applicable United States or Texas law as amended from time to time and in effect on the date for which a determination of interest is made. "Premium Finance Agreement" means an agreement by which an insured or prospective insured promises to pay Borrower the amount advanced under the agreement to American Hallmark Insurance Company of Texas on behalf of State and County Mutual Fire Insurance Company or to American Hallmark General Agency, Inc. in payment of premium on an insurance contract. "Prime Rate" means the fluctuating rate of interest established by Bank from time to time, at its discretion, whether or not such rate shall be otherwise published. The Prime Rate is established by Bank as an index and may or may not at any time be the best or lowest rate charged by Bank on any loan. "Prime Rate Tranche" means a Tranche the interest on which is calculated with reference to an Adjusted Prime Rate. "Regulation D" means Regulation D (12 C.F.R. 204) and all amendments and supplements thereof and any successors or replacements therefor as promulgated from time to time by the Board. "Reserve Requirement" with respect to each Interest Period means the daily average of the stated maximum rate (expressed as a decimal) at which reserves (including all basic, supplemental, marginal, emergency, special, and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements during such Interest Period) are required by the Board (including those under Regulation D) to be maintained

during such Interest Period with respect to the LIBO Rate, for Eurocurrency liabilities (as such term is defined in Regulation D) but without benefit or credit for prorations, exemptions or offsets that might otherwise be available from time to time under Regulation D. The Reserve Requirement shall reflect any other reserves required to be maintained against with respect to LIBO Rate Tranches (1) any category of liabilities that includes deposits by reference to which the LIBO Rate is to be determined or (2) any category of extension of credit or other assets that includes LIBO Rate Tranches. "Tranche" means either a LIBO Rate Tranche or a Prime Rate Tranche. 2. Amortization. Interest only under this Note shall be due and payable monthly as it accrues commencing March 31, 1997, and continuing on each Interest Payment Date thereafter through and including the Expiration Date. The unpaid principal balance of this Note, and all accrued, unpaid interest thereon, shall be due and payable on the Expiration Date.

during such Interest Period with respect to the LIBO Rate, for Eurocurrency liabilities (as such term is defined in Regulation D) but without benefit or credit for prorations, exemptions or offsets that might otherwise be available from time to time under Regulation D. The Reserve Requirement shall reflect any other reserves required to be maintained against with respect to LIBO Rate Tranches (1) any category of liabilities that includes deposits by reference to which the LIBO Rate is to be determined or (2) any category of extension of credit or other assets that includes LIBO Rate Tranches. "Tranche" means either a LIBO Rate Tranche or a Prime Rate Tranche. 2. Amortization. Interest only under this Note shall be due and payable monthly as it accrues commencing March 31, 1997, and continuing on each Interest Payment Date thereafter through and including the Expiration Date. The unpaid principal balance of this Note, and all accrued, unpaid interest thereon, shall be due and payable on the Expiration Date. 3. Interest. (a) Except as otherwise provided in subsections (b) and (c), the outstanding principal balance of the Loan shall bear interest from the date funded until paid, at a rate per annum equal to the lesser of (x) the Maximum Rate or (y) the rate for each Tranche determined according to the following: (A) for the Prime Rate Tranche, a fluctuating rate per annum equal to the Adjusted Prime Rate; or (B) for each LIBO Rate Tranche, a rate equal to the Adjusted LIBO Rate. (b) If, at any time with respect to the Prime Rate Tranche or during the Interest Periods of LIBO Rate Tranche, the interest rate then in effect with respect to such Tranche or Tranches would exceed the Maximum Rate Bank could charge, then, notwithstanding the other provisions hereof and Borrower's election, the interest rate chargeable with respect to such affected Tranche or Tranches shall immediately become the Maximum Rate, provided that such affected Tranche or Tranches shall thereafter accrue interest at the Maximum Rate until such time as Bank has received a sum equal to the amount of interest which would have accrued on such affected Tranche or Tranches had such Tranche or Tranches accrued interest at the interest rate otherwise applicable thereto. So long as interest is calculated pursuant to this provision, Borrower is not entitled to elect that any Tranche be, or to convert the interest rate to the rate applicable to, a LIBO Rate Tranche and the interest rate for the Prime Rate Tranche shall not be reinstated. (c) All past due payments of principal and, past due interest to the extent permitted by law, shall bear interest until paid at a default rate equal to the Maximum Rate, or if there is no such Maximum Rate, then at a rate equal to 6.0% above the interest rate then in effect.

(d) With respect to any LIBO Rate Tranche, in the event no selection of an Interest Period is made by Borrower, the relevant Interest Period shall be for three calendar months. (e) The amount of the monthly payment of interest shall be determined by Bank, and Bank's determination thereof shall be conclusive and binding, absent manifest error. (f) Notwithstanding any provision of this Note, Bank does not intend to charge and Borrower shall not be required to pay any amount of interest or other charges in excess of the maximum permitted by applicable law. Borrower agrees that during the full term hereof, the maximum lawful interest rate for this Note as determined under Texas law shall be the indicated rate ceiling as specified in Article 5069-1.04 of VATS. Further, to the extent that any other lawful rate ceiling exceeds the rate ceiling so determined then the higher rate ceiling shall apply. Any payment in excess of such maximum shall be refunded to Borrower or credited against principal, at the option of Bank. 4. Prepayments. Borrower may from time to time upon five (5) Business Days' prior written notice to Bank and subject to any other limitations in this Agreement prepay the Loan in whole or in part without penalty or premium, except as may be incurred in connection with a prepayment of a LIBO Rate Tranche prior to the end of the applicable Interest Period, provided any partial prepayment shall be not less than One Hundred Thousand And No/100 DOLLARS ($100,000) or an integral multiple thereof. Any such prepayment shall be made subject to

(d) With respect to any LIBO Rate Tranche, in the event no selection of an Interest Period is made by Borrower, the relevant Interest Period shall be for three calendar months. (e) The amount of the monthly payment of interest shall be determined by Bank, and Bank's determination thereof shall be conclusive and binding, absent manifest error. (f) Notwithstanding any provision of this Note, Bank does not intend to charge and Borrower shall not be required to pay any amount of interest or other charges in excess of the maximum permitted by applicable law. Borrower agrees that during the full term hereof, the maximum lawful interest rate for this Note as determined under Texas law shall be the indicated rate ceiling as specified in Article 5069-1.04 of VATS. Further, to the extent that any other lawful rate ceiling exceeds the rate ceiling so determined then the higher rate ceiling shall apply. Any payment in excess of such maximum shall be refunded to Borrower or credited against principal, at the option of Bank. 4. Prepayments. Borrower may from time to time upon five (5) Business Days' prior written notice to Bank and subject to any other limitations in this Agreement prepay the Loan in whole or in part without penalty or premium, except as may be incurred in connection with a prepayment of a LIBO Rate Tranche prior to the end of the applicable Interest Period, provided any partial prepayment shall be not less than One Hundred Thousand And No/100 DOLLARS ($100,000) or an integral multiple thereof. Any such prepayment shall be made subject to the requirements of Section 2.8, 2.12, 2.13 and 2.14 of the Agreement. 5. Accrual Method. Interest at the Rate set forth above will be calculated by the 365/360 day method (a daily amount of interest is computed for a hypothetical year of 360 days; that amount is multiplied by the actual number of days for which any principal is outstanding hereunder). 6. Adjusted Prime Rate Change Date. The Adjusted Prime Rate of this Note shall change automatically, without notice to Borrower, as of the opening of business on the effective date of each change in the Prime Rate charged by Bank. 7. Payment Schedule. All payments received hereunder shall be applied first to the payment of any expense or charges payable hereunder or under any other loan documents executed in connection with this Note, then to interest due and payable, with the balance applied to principal, or in such other order as Bank shall determine at its option. 8. Revolving Feature. Borrower may borrow, repay and reborrow hereunder at any time, up to a maximum aggregate amount outstanding at any one time equal to the Maximum Amount, provided that Borrower is not in default under any provision of this Note, any other documents executed in connection with this Note, or any other note or other loan documents now or hereafter executed in connection with any other obligation of Borrower to Bank, and provided that the borrowings hereunder do not exceed any other limitation on borrowings by Borrower. Bank shall incur no liability for its refusal to advance funds based upon its determination that any conditions of such further advances have not been met. Bank records of the amounts borrowed from time to time shall be conclusive proof thereof.

9. Waivers, Consents and Covenants. Borrower, any indorser or guarantor hereof, or any other party hereto (individually an "Obligor" and collectively "Obligors") and each of them jointly and severally: (a) waive presentment, demand, protest, notice of demand, notice of intent to accelerate, notice of acceleration of maturity, notice of protest, notice of nonpayment, notice of dishonor, and any other notice required to be given under the law to any Obligor in connection with the delivery, acceptance, performance, default or enforcement of this Note, any indorsement or guaranty of this Note, or any other documents executed in connection with this Note or any other note or other loan documents now or hereafter executed in connection with any obligation of Borrower to Bank (the "Loan Documents"); (b) consent to all delays, extensions, renewals or other modifications of this Note or the Loan Documents, or waivers of any term hereof or of the Loan Documents, or release or discharge by Bank of any of Obligors, or release, substitution or exchange of any security for the payment hereof, or the failure to act on the part of Bank, or any indulgence shown by Bank (without notice to or further assent from any of Obligors), and agree that no such action, failure to act or failure to exercise any right or remedy by Bank shall in any way affect or impair the obligations of any Obligors or be construed as a waiver by Bank of, or otherwise affect, any of Bank's rights under this Note, under any indorsement or guaranty of this Note or under any of the

9. Waivers, Consents and Covenants. Borrower, any indorser or guarantor hereof, or any other party hereto (individually an "Obligor" and collectively "Obligors") and each of them jointly and severally: (a) waive presentment, demand, protest, notice of demand, notice of intent to accelerate, notice of acceleration of maturity, notice of protest, notice of nonpayment, notice of dishonor, and any other notice required to be given under the law to any Obligor in connection with the delivery, acceptance, performance, default or enforcement of this Note, any indorsement or guaranty of this Note, or any other documents executed in connection with this Note or any other note or other loan documents now or hereafter executed in connection with any obligation of Borrower to Bank (the "Loan Documents"); (b) consent to all delays, extensions, renewals or other modifications of this Note or the Loan Documents, or waivers of any term hereof or of the Loan Documents, or release or discharge by Bank of any of Obligors, or release, substitution or exchange of any security for the payment hereof, or the failure to act on the part of Bank, or any indulgence shown by Bank (without notice to or further assent from any of Obligors), and agree that no such action, failure to act or failure to exercise any right or remedy by Bank shall in any way affect or impair the obligations of any Obligors or be construed as a waiver by Bank of, or otherwise affect, any of Bank's rights under this Note, under any indorsement or guaranty of this Note or under any of the Loan Documents; and (c) agree to pay, on demand, all costs and expenses of collection or defense of this Note or of any indorsement or guaranty hereof and/or the enforcement or defense of Bank's rights with respect to, or the administration, supervision, preservation, or protection of, or realization upon, any property securing payment hereof, including, without limitation, reasonable attorney's fees, including fees related to any suit, mediation or arbitration proceeding, out of court payment agreement, trial, appeal, bankruptcy proceedings or other proceeding, in such amount as may be determined reasonable by any arbitrator or court, whichever is applicable. 10. Events of Default. Upon the occurrence of an Event of Default described in Section 9.8 of the Agreement, the entire principal balance and accrued interest of this Note shall be due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. Should any other Event of Default under the Agreement or any other Loan Document occur and be continuing, Bank may, without demand or notice of its election declare the entire unpaid balance of this Note, or any part thereof, immediately due and payable, whereupon the principal of and accrued interest on this Note shall be forthwith due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. 11. Remedies upon Default. Whenever there is a default under this Note (a) the entire balance outstanding hereunder and all other obligations of any Obligor to Bank (however acquired or evidenced) shall, at the option of Bank, become immediately due and payable and any obligation of Bank to permit further borrowing under this Note shall immediately cease and terminate, and/or (b) to the extent permitted by law, the rate of interest on the unpaid principal shall be increased at

Bank's discretion up to the Maximum Rate allowed by law, or if none, 15% per annum (the "Default Rate"). The provisions herein for a Default Rate shall not be deemed to extend the time for any payment hereunder or to constitute a "grace period" giving Obligors a right to cure any default. At Bank's option, any accrued and unpaid interest, fees or charges may, for purposes of computing and accruing interest on a daily basis after the due date of this Note or any installment thereof, be deemed to be a part of the principal balance, and interest shall accrue on a daily compounded basis after such date at the Default Rate provided in this Note until the entire outstanding balance of principal and interest is paid in full. Upon a default under this Note, Bank is hereby authorized at any time, at its option and without notice or demand, to set off and charge against any deposit accounts of any Obligor (as well as any money, instruments, securities, documents, chattel paper, credits, claims, demands, income and any other property, rights and interests of any Obligor), which at any time shall come into the possession or custody or under the control of Bank or any of its agents, affiliates or correspondents, any and all obligations due hereunder. Additionally, Bank shall have all rights and remedies available under each of the Loan Documents, as well as all rights and remedies available at law or in equity. 12. Non-Waiver. The failure at any time of Bank to exercise any of its options or any other rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of its options or rights at a later date. All rights and remedies of Bank shall be cumulative and may be pursued singly, successively or together, at the option of Bank. The acceptance by Bank of any partial payment shall not constitute a waiver of any default or of

Bank's discretion up to the Maximum Rate allowed by law, or if none, 15% per annum (the "Default Rate"). The provisions herein for a Default Rate shall not be deemed to extend the time for any payment hereunder or to constitute a "grace period" giving Obligors a right to cure any default. At Bank's option, any accrued and unpaid interest, fees or charges may, for purposes of computing and accruing interest on a daily basis after the due date of this Note or any installment thereof, be deemed to be a part of the principal balance, and interest shall accrue on a daily compounded basis after such date at the Default Rate provided in this Note until the entire outstanding balance of principal and interest is paid in full. Upon a default under this Note, Bank is hereby authorized at any time, at its option and without notice or demand, to set off and charge against any deposit accounts of any Obligor (as well as any money, instruments, securities, documents, chattel paper, credits, claims, demands, income and any other property, rights and interests of any Obligor), which at any time shall come into the possession or custody or under the control of Bank or any of its agents, affiliates or correspondents, any and all obligations due hereunder. Additionally, Bank shall have all rights and remedies available under each of the Loan Documents, as well as all rights and remedies available at law or in equity. 12. Non-Waiver. The failure at any time of Bank to exercise any of its options or any other rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of its options or rights at a later date. All rights and remedies of Bank shall be cumulative and may be pursued singly, successively or together, at the option of Bank. The acceptance by Bank of any partial payment shall not constitute a waiver of any default or of any of Bank's rights under this Note. No waiver of any of its rights hereunder, and no modification or amendment of this Note, shall be deemed to be made by Bank unless the same shall be in writing, duly signed on behalf of Bank; each such waiver shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Bank or the obligations of Obligors to Bank in any other respect at any other time. 13. Applicable Law, Venue and Jurisdiction. Borrower agrees that this Note shall be deemed to have been made in the State of Texas at Bank's address indicated at the beginning of this Note and shall be governed by, and construed in accordance with, the laws of the State of Texas and is performable in the City and County of Texas indicated at the beginning of this Note. In any litigation in connection with or to enforce this Note or any indorsement or guaranty of this Note or any Loan Documents, Obligors, and each of them, irrevocably consent to and confer personal jurisdiction on the courts of the State of Texas or the United States courts located within the State of Texas. Nothing contained herein shall, however, prevent Bank from bringing any action or exercising any rights within any other state or jurisdiction or from obtaining personal jurisdiction by any other means available under applicable law. 14. Partial Invalidity. The unenforceability or invalidity of any provision of this Note shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of this Note or of the Loan Documents to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances.

15. Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower, Obligors and Bank and their respective successors, assigns, heirs and personal representatives, provided, however, that no obligations of Borrower or Obligors hereunder can be assigned without prior written consent of Bank. 16. Controlling Document. To the extent that this Note conflicts with or is in any way incompatible with any other document related specifically to the loan evidenced by this Note, this Note shall control over any other such document, and if this Note does not address an issue, then each other such document shall control to the extent that it deals most specifically with an issue. 17. Arbitration. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL

15. Binding Effect. This Note shall be binding upon and inure to the benefit of Borrower, Obligors and Bank and their respective successors, assigns, heirs and personal representatives, provided, however, that no obligations of Borrower or Obligors hereunder can be assigned without prior written consent of Bank. 16. Controlling Document. To the extent that this Note conflicts with or is in any way incompatible with any other document related specifically to the loan evidenced by this Note, this Note shall control over any other such document, and if this Note does not address an issue, then each other such document shall control to the extent that it deals most specifically with an issue. 17. Arbitration. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. A. Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY BORROWER S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. B. Reservation of Rights. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY

PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 18. Representation Concerning Use of Proceeds. Borrower represents to Bank that the proceeds of this loan are

PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 18. Representation Concerning Use of Proceeds. Borrower represents to Bank that the proceeds of this loan are to be used primarily for business, commercial or agricultural purposes. Borrower acknowledges having read and understood, and agrees to be bound by, all terms and conditions of this Note. HALLMARK FINANCE CORPORATION By Name: Linda H. Sleeper Its: Executive Vice President

March 17, 1997 SECURITY AGREEMENT Bank/Secured Party: NATIONSBANK OF TEXAS, N.A. 901 Main Street Dallas, Texas 75202 Debtor: HALLMARK FINANCE CORPORATION 14651 Dallas Parkway Suite 900 Dallas, Texas 75240 Debtor is a corporation. The collateral is located at Debtor's address shown above. Terms used herein which are defined in that certain Loan Agreement of even date herewith between Debtor and Bank (the "Loan Agreement"), unless otherwise defined herein, shall have the same meanings set forth in the Loan Agreement. 1. Security Interest. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor (hereinafter referred to as "Debtor") assigns and grants to Bank (also known as "Secured Party"), a security interest and lien in the Collateral (hereinafter defined) to secure the payment and the performance of the Obligation (hereinafter defined). 2. Collateral. A security interest is granted in the following collateral described in this Item 2 (the Collateral"): A. Types of Collateral. [X] Premium Finance Agreements: [X] Blanket Lien: All Premium Finance Agreements and all rights and privileges related thereto, including, without limitation, all collateral therefor and guaranties thereof, now owned or hereafter acquired by Debtor; all notes receivable of Debtor (notes made payable to the order of Debtor) now existing or hereafter arising, together with all renewals, extensions, modifications or rearrangements of such notes, payments thereon, and all other proceeds, monies, income and benefits arising from or by virtue of all sums payable or distributable with respect to such notes; all accounts as that term is defined in Chapter 9 of the Texas Business and Commerce Code, general intangibles, executory contract rights, chattel paper, documents, instruments, notes, drafts, acceptances, tax refunds, insurance proceeds, rights to refund and indemnification, and all other debts, obligations and liabilities in whatever form owing to Debtor from any person, firm or corporation now existing or at any time hereafter

March 17, 1997 SECURITY AGREEMENT Bank/Secured Party: NATIONSBANK OF TEXAS, N.A. 901 Main Street Dallas, Texas 75202 Debtor: HALLMARK FINANCE CORPORATION 14651 Dallas Parkway Suite 900 Dallas, Texas 75240 Debtor is a corporation. The collateral is located at Debtor's address shown above. Terms used herein which are defined in that certain Loan Agreement of even date herewith between Debtor and Bank (the "Loan Agreement"), unless otherwise defined herein, shall have the same meanings set forth in the Loan Agreement. 1. Security Interest. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor (hereinafter referred to as "Debtor") assigns and grants to Bank (also known as "Secured Party"), a security interest and lien in the Collateral (hereinafter defined) to secure the payment and the performance of the Obligation (hereinafter defined). 2. Collateral. A security interest is granted in the following collateral described in this Item 2 (the Collateral"): A. Types of Collateral. [X] Premium Finance Agreements: [X] Blanket Lien: All Premium Finance Agreements and all rights and privileges related thereto, including, without limitation, all collateral therefor and guaranties thereof, now owned or hereafter acquired by Debtor; all notes receivable of Debtor (notes made payable to the order of Debtor) now existing or hereafter arising, together with all renewals, extensions, modifications or rearrangements of such notes, payments thereon, and all other proceeds, monies, income and benefits arising from or by virtue of all sums payable or distributable with respect to such notes; all accounts as that term is defined in Chapter 9 of the Texas Business and Commerce Code, general intangibles, executory contract rights, chattel paper, documents, instruments, notes, drafts, acceptances, tax refunds, insurance proceeds, rights to refund and indemnification, and all other debts, obligations and liabilities in whatever form owing to Debtor from any person, firm or corporation now existing or at any time hereafter arising including all securities, guaranties, warranties, indemnity agreements, insurance policies and all other agreements pertaining to the same; all collateral which secures any of the foregoing; and all proceeds of the foregoing. The Collateral includes all of Debtor's rights to receive payment from any party or

parties arising under any reinsurance or similar types of agreements related to any Premium Finance Agreements of Debtor, including rights arising under the Reinsurance Agreements as defined in the Loan Agreement, as well as all of Debtor's rights to any unearned insurance premiums. Notwithstanding the foregoing, the Collateral does not include any Premium Finance Agreement sold to Peregrine Premium Finance L.C. prior to the date hereof.

[X] Accounts:

parties arising under any reinsurance or similar types of agreements related to any Premium Finance Agreements of Debtor, including rights arising under the Reinsurance Agreements as defined in the Loan Agreement, as well as all of Debtor's rights to any unearned insurance premiums. Notwithstanding the foregoing, the Collateral does not include any Premium Finance Agreement sold to Peregrine Premium Finance L.C. prior to the date hereof.

[X] Accounts: [X] Blanket Lien: Any and all accounts and other rights of Debtor to the payment for goods sold or leased or for services rendered whether or not earned by performance, including, without limitation, contract rights, book debts, checks, notes, drafts, instruments, chattel paper, acceptances, and any and all amounts due to Debtor from a factor or other forms of obligations and receivables, now existing or hereafter arising. [X] Inventory:

[X] Accounts: [X] Blanket Lien: Any and all accounts and other rights of Debtor to the payment for goods sold or leased or for services rendered whether or not earned by performance, including, without limitation, contract rights, book debts, checks, notes, drafts, instruments, chattel paper, acceptances, and any and all amounts due to Debtor from a factor or other forms of obligations and receivables, now existing or hereafter arising. [X] Inventory: [X] Blanket Lien: Any and all of Debtor's goods held as inventory, whether now owned or hereafter acquired, including without limitation, any and all such goods held for sale or lease or being processed for sale or lease in Debtor's business, as now or hereafter conducted, including all materials, goods and work in process, finished goods and other tangible property held for sale or lease or furnished or to be furnished under contracts of service or used or consumed in Debtor's business, along with all documents (including documents of title) covering such inventory. [X] Equipment: [X] Blanket Lien: Any and all of Debtor's goods held as equipment, including, without limitation, all machinery, tools, dies, furnishings, or fixtures, wherever located, whether now owned or hereafter acquired, together with all increases, parts, fittings, accessories, equipment, and special tools now or hereafter affixed to any part thereof or used in connection therewith. [X] Instruments and/or Investment Documents: [X] Blanket Lien: Any and all of Debtor's instruments, documents, and other writings of any type, which evidence a right to the payment of money and which are of a type that is transferred in the ordinary course of business by delivery with any necessary indorsement or assignment, whether now owned or hereafter acquired, including, without limitation, negotiable instruments, promissory notes, and documents of title owned or to be owned by Debtor, certificates of deposit, and all liens, security agreements, leases and other contracts securing or otherwise relating to any of said instruments or documents. [X] General Intangibles: [X] Blanket Lien: Any and all of Debtor's general intangible property, whether now owned or hereafter acquired by Debtor or used in Debtor's business currently or hereafter, including, without limitation, all patents, trademarks, service marks, trade secrets, copyrights and exclusive licenses (whether issued or pending) literary rights, contract rights and all documents, applications, materials and other matters related thereto, all inventions, all manufacturing, engineering and

production plans, drawings, specifications, processes and systems, all trade names, goodwill and all chattel paper, documents and instruments relating to such general intangibles. [X] Other: [X] Computer Collateral: [X] Blanket Lien: All of the following property now owned or hereafter acquired (whether as owner, lessee, licensee, or otherwise) by Debtor: (i) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (ii) all software programs (including source code and object code and all related applications and data files) designed for use on the computers and electronic data processing hardware described in clause (i) above; (iii) all firmware associated therewith; (iv) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) for such hardware, software and firmware described in the preceding clauses (i), (ii), and

production plans, drawings, specifications, processes and systems, all trade names, goodwill and all chattel paper, documents and instruments relating to such general intangibles. [X] Other: [X] Computer Collateral: [X] Blanket Lien: All of the following property now owned or hereafter acquired (whether as owner, lessee, licensee, or otherwise) by Debtor: (i) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (ii) all software programs (including source code and object code and all related applications and data files) designed for use on the computers and electronic data processing hardware described in clause (i) above; (iii) all firmware associated therewith; (iv) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) for such hardware, software and firmware described in the preceding clauses (i), (ii), and (iii); and (v) all rights with respect to all of the foregoing, including, without limitation, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing. B. Substitutions, Proceeds and Related Items. Any and all substitutes and replacements for, accessions, attachments and other additions to, tools, parts and equipment now or hereafter added to or used in connection with, and all cash or non-cash proceeds and products of, the Collateral (including, without limitation, all income, benefits and property receivable, received or distributed which results from any of the Collateral, such as dividends payable or distributable in cash, property or stock; insurance distributions of any kind related to the Collateral, including, without limitation, returned premiums, interest, premium and principal payments; redemption proceeds and subscription rights; and shares or other proceeds of conversions or splits of any securities in the Collateral); any and all choses in action and causes of action of Debtor, whether now existing or hereafter arising, relating directly or indirectly to the Collateral (whether arising in contract, tort or otherwise and whether or not currently in litigation); all documents, accounts and chattel paper, whether now existing or hereafter arising directly or indirectly from or related to the Collateral; all warranties related to the Collateral; all of Debtor's books, records, data, plans, manuals, computer software, computer tapes, computer systems, computer disks, computer programs, source codes and object codes containing any information, pertaining directly or indirectly to the Collateral and all rights of Debtor to retrieve data and other information pertaining directly or indirectly to the Collateral from third parties, whether now existing or hereafter arising; and all returned, refused, stopped in transit, or repossessed Collateral, any of which, if received by Debtor, upon request shall be delivered immediately to Bank.

C. Balances and Other Property. The balance of every deposit account of Debtor maintained with Bank and any other claim of Debtor against Bank, now or hereafter existing, liquidated or unliquidated, and all money, instruments, securities, documents, chattel paper, credits, claims, demands, income, and any other property, rights and interests of Debtor which at any time shall come into the possession or custody or under the control of Bank or any of Bank's agents or affiliates for any purpose, and the proceeds of any thereof. Bank shall be deemed to have possession of any of the Collateral in transit to or set apart for Bank or any of its agents or affiliates. 3. Description of Obligation(s). The following obligations ("Obligation" or Obligations ) are secured by this Agreement: (a) All debts, obligations, liabilities and agreements of Debtor to Bank, now or hereafter existing, arising directly or indirectly between Debtor and Bank whether absolute or contingent, joint or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, and all renewals, extensions or rearrangement of any of the above; (b) All costs incurred by Bank to obtain, preserve, perfect and enforce this Agreement and maintain, preserve, collect and realize upon the Collateral; (c) All other costs and attorney's fees incurred by Bank, for which Debtor is obligated to reimburse Bank in accordance with the terms of the Loan Agreement and all other Loan Documents (hereinafter defined), together with interest at the maximum rate allowed by law, or if there is no maximum rate, 15% per annum; and

C. Balances and Other Property. The balance of every deposit account of Debtor maintained with Bank and any other claim of Debtor against Bank, now or hereafter existing, liquidated or unliquidated, and all money, instruments, securities, documents, chattel paper, credits, claims, demands, income, and any other property, rights and interests of Debtor which at any time shall come into the possession or custody or under the control of Bank or any of Bank's agents or affiliates for any purpose, and the proceeds of any thereof. Bank shall be deemed to have possession of any of the Collateral in transit to or set apart for Bank or any of its agents or affiliates. 3. Description of Obligation(s). The following obligations ("Obligation" or Obligations ) are secured by this Agreement: (a) All debts, obligations, liabilities and agreements of Debtor to Bank, now or hereafter existing, arising directly or indirectly between Debtor and Bank whether absolute or contingent, joint or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, and all renewals, extensions or rearrangement of any of the above; (b) All costs incurred by Bank to obtain, preserve, perfect and enforce this Agreement and maintain, preserve, collect and realize upon the Collateral; (c) All other costs and attorney's fees incurred by Bank, for which Debtor is obligated to reimburse Bank in accordance with the terms of the Loan Agreement and all other Loan Documents (hereinafter defined), together with interest at the maximum rate allowed by law, or if there is no maximum rate, 15% per annum; and (d) All amounts which may be owed to Bank pursuant to the Loan Agreement and all other Loan Documents executed between Bank and any other Debtor. If Debtor is not the obligor of the Obligation, and in the event any amount paid to Bank on any Obligation is subsequently recovered from Bank in or as a result of any bankruptcy, insolvency or fraudulent conveyance proceeding, Debtor shall be liable to Bank for the amounts so recovered up to the fair market value of the Collateral whether or not the Collateral has been released or the security interest terminated. In the event the Collateral has been released or the security interest terminated, the fair market value of the Collateral shall be determined, at Bank's option, as of the date the Collateral was released, the security interest terminated, or said amounts were recovered. 4. Debtor's Warranties. Debtor hereby represents and warrants to Bank as follows: A. Financing Statements. Except as may be noted by schedule attached hereto and incorporated herein by reference, no financing statement covering the Collateral is or will be on file in any public office, except the financing statements relating to this security interest, and no security interest, other than the one herein created, has attached or been perfected in the Collateral or any part thereof. B. Ownership. Debtor owns, or will use the proceeds of any loans by Bank to become the owner of, the Collateral free from any setoff, claim, restriction, lien, security interest or encumbrance except (a) liens in favor of Bank, (b) liens for taxes, assessments or similar charges, incurred in the ordinary course of business that are not yet due and payable, (c) liens of mechanics, materialmen, warehousemen, carriers, operators and other like liens securing obligations incurred in the ordinary course of business that are not yet due and payable; (d) landlord's liens for rentals not yet due and payable; and (e) liens

securing any purchase money Indebtedness permitted hereunder (if any) if such liens do not encumber any property other than the property for which such Indebtedness was incurred and do not secure payment of any amount other than the amount from time to time owing on the property for which such Indebtedness was incurred and the Indebtedness initially secured by such lien does not exceed $100,000. C. Fixtures and Accessions. None of the Collateral is affixed to real estate or is an accession to any goods, or will become a fixture or accession, except as expressly set out herein. D. Claims of Debtors on the Collateral. All account debtors and other obligors whose debts or obligations are part of the Collateral have no right to setoffs, counterclaims or adjustments, and no defenses in connection therewith. E. Environmental Compliance. The conduct of Debtor's business operations and the condition of Debtor's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency and any applicable local or state law, rule, regulation or rule

securing any purchase money Indebtedness permitted hereunder (if any) if such liens do not encumber any property other than the property for which such Indebtedness was incurred and do not secure payment of any amount other than the amount from time to time owing on the property for which such Indebtedness was incurred and the Indebtedness initially secured by such lien does not exceed $100,000. C. Fixtures and Accessions. None of the Collateral is affixed to real estate or is an accession to any goods, or will become a fixture or accession, except as expressly set out herein. D. Claims of Debtors on the Collateral. All account debtors and other obligors whose debts or obligations are part of the Collateral have no right to setoffs, counterclaims or adjustments, and no defenses in connection therewith. E. Environmental Compliance. The conduct of Debtor's business operations and the condition of Debtor's property does not and will not violate any federal laws, rules or ordinances for environmental protection, regulations of the Environmental Protection Agency and any applicable local or state law, rule, regulation or rule of common law and any judicial interpretation thereof relating primarily to the environment or any materials defined as hazardous materials or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos ("Hazardous Materials"). F. Power and Authority. Debtor has full power and authority to make this Agreement, and all necessary consents and approvals of any persons, entities, governmental or regulatory authorities and securities exchanges have been obtained to effectuate the validity of this Agreement. G. Licenses and Permits. Debtor has obtained all licenses, permits, and approvals required by applicable law for it to engage in the business of insurance premium financing in each state in which Debtor engages in such business. To the best knowledge of Debtor, Debtor owns, is licensed, or is entitled to use by license or otherwise, or has all permits and other governmental approvals for all licenses, technology, know-how, processes and rights with respect to any of the foregoing used in or necessary for the conduct of Debtor's business as currently conducted except where failure to do so does not and is not reasonably expected to have a material adverse effect upon the Borrower's financial condition or operation or the Collateral. H. Form of Agreements. The form of each premium finance agreement used by Debtor in its insurance premium financing business has been approved by the State Board of Insurance of the State of Texas or other governmental regulatory authority with jurisdiction to approve same. I. Compliance with Law. Debtor has complied with all applicable laws, including, without limitation, Chapter 24 of the Texas Insurance Code, Title 28 of the Texas Administrative Code, the Truth-in-Lending Act (the "Act"), and Regulation Z ("Reg Z") promulgated pursuant thereto, and all other statutes applicable to Debtor's business.

J. Reinsurance Agreements. Each Reinsurance Agreement is in full force and effect and constitutes the legal, valid, and binding obligation of each party thereto. 5. Debtor's Covenants. Until full payment and performance of all of the Obligation and termination or expiration of any obligation or commitment of Bank to make advances or loans to Debtor, unless Bank otherwise consents in writing: A. Obligation and This Agreement. Debtor shall perform all of its agreements herein and in any other agreements between it and Bank. B. Ownership and Maintenance of the Collateral. Debtor shall keep all tangible Collateral in good condition. Debtor shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein adverse to Bank. Debtor shall keep the Collateral free from all liens and security interests except those liens described in paragraph 4.B of this Agreement. Debtor shall furnish to Bank proof of payment of ad valorem taxes payable on the Collateral as and when requested by Bank. C. Insurance. Debtor shall insure the Collateral which is of an insurable nature (the parties agree that Premium

J. Reinsurance Agreements. Each Reinsurance Agreement is in full force and effect and constitutes the legal, valid, and binding obligation of each party thereto. 5. Debtor's Covenants. Until full payment and performance of all of the Obligation and termination or expiration of any obligation or commitment of Bank to make advances or loans to Debtor, unless Bank otherwise consents in writing: A. Obligation and This Agreement. Debtor shall perform all of its agreements herein and in any other agreements between it and Bank. B. Ownership and Maintenance of the Collateral. Debtor shall keep all tangible Collateral in good condition. Debtor shall defend the Collateral against all claims and demands of all persons at any time claiming any interest therein adverse to Bank. Debtor shall keep the Collateral free from all liens and security interests except those liens described in paragraph 4.B of this Agreement. Debtor shall furnish to Bank proof of payment of ad valorem taxes payable on the Collateral as and when requested by Bank. C. Insurance. Debtor shall insure the Collateral which is of an insurable nature (the parties agree that Premium Finance Agreements shall not be insured) with companies acceptable to Bank. Such insurance shall be in an amount not less than the fair market value of the Collateral and shall be against such casualties, with such deductible amounts as Bank shall approve. All insurance policies shall be written for the benefit of Debtor and Bank as their interests may appear, payable to Bank as loss payee, or in other form satisfactory to Bank, and such policies or certificates evidencing the same shall be furnished to Bank. All policies of insurance shall provide for written notice to Bank at least thirty (30) days prior to cancellation. Risk of loss or damage is Debtor's to the extent of any deficiency in any effective insurance coverage. D. Bank's Costs. Debtor shall pay all costs necessary to obtain, preserve, perfect, defend and enforce the security interest created by this Agreement, collect the Obligation, and preserve, defend, enforce and collect the Collateral, including but not limited to taxes, assessments, insurance premiums, repairs, rent, storage costs and expenses of sales, legal expenses, reasonable attorney's fees and other fees or expenses for which Debtor is obligated to reimburse Bank in accordance with the terms of the Loan Documents. Whether the Collateral is or is not in Bank's possession, and without any obligation to do so and without waiving Debtor's default for failure to make any such payment, Bank at its option may pay any such costs and expenses, discharge encumbrances on the Collateral, and pay for insurance of the Collateral, and such payments shall be a part of the Obligation and bear interest at the rate set out in the Obligation for amounts past due. Debtor agrees to reimburse Bank on demand for any costs so incurred. E. Information and Inspection. Debtor shall (i) promptly furnish Bank any information with respect to the Collateral requested by Bank; (ii) allow Bank or its representatives to inspect the Collateral, at any time and wherever located, and to inspect and copy, or furnish Bank or

its representatives with copies of, all records relating to the Collateral and the Obligation; and (iii) promptly furnish Bank or its representatives such information as Bank may request to identify the Collateral, at the time and in the form requested by Bank. F. Additional Documents. Debtor shall sign and deliver any papers deemed necessary or desirable in the judgment of Bank to obtain, maintain, and perfect the security interest hereunder and to enable Bank to comply with any federal or state law in order to obtain or perfect Bank's interest in the Collateral or to obtain proceeds of the Collateral. G. Parties Liable on the Collateral. Debtor shall preserve the liability of all obligors on any Collateral and shall preserve the priority of all security therefor. Bank shall have no duty to preserve such liability or security, but may do so at the expense of Debtor, without waiving Debtor's default. H. Records of the Collateral. Debtor at all times shall maintain accurate books and records covering the Collateral. Debtor immediately will mark all books and records with an entry showing the absolute assignment of

its representatives with copies of, all records relating to the Collateral and the Obligation; and (iii) promptly furnish Bank or its representatives such information as Bank may request to identify the Collateral, at the time and in the form requested by Bank. F. Additional Documents. Debtor shall sign and deliver any papers deemed necessary or desirable in the judgment of Bank to obtain, maintain, and perfect the security interest hereunder and to enable Bank to comply with any federal or state law in order to obtain or perfect Bank's interest in the Collateral or to obtain proceeds of the Collateral. G. Parties Liable on the Collateral. Debtor shall preserve the liability of all obligors on any Collateral and shall preserve the priority of all security therefor. Bank shall have no duty to preserve such liability or security, but may do so at the expense of Debtor, without waiving Debtor's default. H. Records of the Collateral. Debtor at all times shall maintain accurate books and records covering the Collateral. Debtor immediately will mark all books and records with an entry showing the absolute assignment of all Collateral to Bank, and Bank is hereby given the right to audit the books and records of Debtor relating to the Collateral at any time and from time to time. The amounts shown as owed to Debtor on Debtor's books and on any assignment schedule will be the undisputed amounts owing and unpaid. I. Disposition of the Collateral. If disposition of any Collateral gives rise to an account, chattel paper or instrument, Debtor immediately shall notify Bank, and upon request of Bank shall assign or indorse the same to Bank. No Collateral may be sold, leased, manufactured, processed or otherwise disposed of by Debtor in any manner without the prior written consent of Bank, except the Collateral sold, leased, manufactured, processed or consumed in the ordinary course of business. J. Accounts. Each account held as Collateral will represent the valid and legally enforceable obligation of third parties. K. Notice/Location of the Collateral. Debtor shall give Bank written notice of each office of Debtor in which records of Debtor pertaining to accounts held as Collateral are kept, and each location at which the Collateral is or will be kept, and of any change of any such location. If no such notice is given, all records of Debtor pertaining to the Collateral and all Collateral of Debtor are and shall be kept at the address marked by Debtor above. L. Change of Name/Status and Notice of Changes. Without the written consent of Bank, Debtor shall not change its name, change its corporate status, use any trade name or engage in any business not reasonably related to its business as presently conducted. Debtor shall notify Bank immediately of (i) any material change in the Collateral, (ii) a change in Debtor's residence or location, (iii) a change in any matter warranted or represented by Debtor in this Agreement, or in any of the Loan Documents or furnished to Bank pursuant to this Agreement, and (iv) the occurrence of an Event of Default (hereinafter defined).

M. Use and Removal of the Collateral. Debtor shall not use the Collateral illegally. Debtor shall not, unless previously indicated as a fixture, permit the Collateral to be affixed to real or personal property without the prior written consent of Bank. Debtor shall not permit any of the Collateral to be removed from the locations specified herein without the prior written consent of Bank, except for the sale of inventory in the ordinary course of business. N. Possession of the Collateral. Upon the occurrence of any Trigger Event, within one (1) Business Day, Borrower shall immediately notify Bank of the occurrence of such Trigger Event and deliver to Bank all Premium Finance Agreements of Borrower (excluding those Premium Finance Agreements sold to Peregrine Premium Finance L.C. prior to the date hereof), appropriately endorsed, with full recourse and warranty and execute, acknowledge, and deliver to Bank and file or cause to be filed any and all other documents, agreements and instruments and do all other acts or things as Bank may reasonably request in order more fully to effect the assignment of the Premium Finance Agreements to Bank. O. Consumer Credit. If any Collateral or proceeds includes obligations of third parties to Debtor, the transactions

M. Use and Removal of the Collateral. Debtor shall not use the Collateral illegally. Debtor shall not, unless previously indicated as a fixture, permit the Collateral to be affixed to real or personal property without the prior written consent of Bank. Debtor shall not permit any of the Collateral to be removed from the locations specified herein without the prior written consent of Bank, except for the sale of inventory in the ordinary course of business. N. Possession of the Collateral. Upon the occurrence of any Trigger Event, within one (1) Business Day, Borrower shall immediately notify Bank of the occurrence of such Trigger Event and deliver to Bank all Premium Finance Agreements of Borrower (excluding those Premium Finance Agreements sold to Peregrine Premium Finance L.C. prior to the date hereof), appropriately endorsed, with full recourse and warranty and execute, acknowledge, and deliver to Bank and file or cause to be filed any and all other documents, agreements and instruments and do all other acts or things as Bank may reasonably request in order more fully to effect the assignment of the Premium Finance Agreements to Bank. O. Consumer Credit. If any Collateral or proceeds includes obligations of third parties to Debtor, the transactions giving rise to the Collateral shall conform in all respects to the applicable state or federal law including but not limited to consumer credit law. Debtor shall hold harmless and indemnify Bank against any cost, loss or expense arising from Debtor's breach of this covenant. P. Power of Attorney. Debtor appoints Bank and any officer thereof as Debtor's attorney-in-fact with full power in Debtor's name and behalf to do every act which Debtor is obligated to do or may be required to do hereunder; however, nothing in this paragraph shall be construed to obligate Bank to take any action hereunder nor shall Bank be liable to Debtor for failure to take any action hereunder. This appointment shall be deemed a power coupled with an interest and shall not be terminable as long as the Obligation is outstanding and shall not terminate on the disability or incompetence of Debtor. Q. Waivers by Debtor. Debtor waives notice of the creation, advance, increase, existence, extension or renewal of, and of any indulgence with respect to, the Obligation; waives presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligation outstanding at any time, notice of any change in financial condition of any person liable for the Obligation or any part thereof, notice of any Event of Default, and all other notices respecting the Obligation; and agrees that maturity of the Obligation and any part thereof may be extended or renewed, and after an Event of Default has occurred and is continuing, accelerated, one or more times by Bank in its discretion, without notice to Debtor. Debtor waives any right to require that any action be brought against any other person or to require that resort be had to any other security or to any balance of any deposit account. Debtor further waives any right of subrogation or to enforce any right of action against any other Debtor until the Obligation is paid in full. R. Other Parties and Other Collateral. No renewal or extension of or any other indulgence with respect to the Obligation or any part thereof, no release of any security, no release of any person (including any maker, indorser, guarantor or surety) liable on the Obligation, no delay in enforcement of payment, and no delay or omission or lack of

diligence or care in exercising any right or power with respect to the Obligation or any security therefor or guaranty thereof or under this Agreement shall in any manner impair or affect the rights of Bank under the law, hereunder, or under any other agreement pertaining to the Collateral. Bank need not file suit or assert a claim for personal judgment against any person for any part of the Obligation or seek to realize upon any other security for the Obligation, before foreclosing or otherwise realizing upon the Collateral. Debtor waives any right to the benefit of or to require or control application of any other security or proceeds thereof, and agrees that Bank shall have no duty or obligation to Debtor to apply to the Obligation any such other security or proceeds thereof. S. Collection and Segregation of Accounts and Right to Notify. Bank hereby authorizes Debtor to collect the Collateral, subject to the direction and control of Bank, but Bank may, after an Event of Default has occurred and without further notice, curtail or terminate said authority at any time. Upon notice by Bank, whether oral or in writing, to Debtor, Debtor shall forthwith upon receipt of all checks, drafts, cash, and other remittances in payment of or on account of the Collateral, deposit the same in one or more special accounts maintained with Bank over which Bank alone shall have the power of withdrawal. The remittance of the proceeds of such

diligence or care in exercising any right or power with respect to the Obligation or any security therefor or guaranty thereof or under this Agreement shall in any manner impair or affect the rights of Bank under the law, hereunder, or under any other agreement pertaining to the Collateral. Bank need not file suit or assert a claim for personal judgment against any person for any part of the Obligation or seek to realize upon any other security for the Obligation, before foreclosing or otherwise realizing upon the Collateral. Debtor waives any right to the benefit of or to require or control application of any other security or proceeds thereof, and agrees that Bank shall have no duty or obligation to Debtor to apply to the Obligation any such other security or proceeds thereof. S. Collection and Segregation of Accounts and Right to Notify. Bank hereby authorizes Debtor to collect the Collateral, subject to the direction and control of Bank, but Bank may, after an Event of Default has occurred and without further notice, curtail or terminate said authority at any time. Upon notice by Bank, whether oral or in writing, to Debtor, Debtor shall forthwith upon receipt of all checks, drafts, cash, and other remittances in payment of or on account of the Collateral, deposit the same in one or more special accounts maintained with Bank over which Bank alone shall have the power of withdrawal. The remittance of the proceeds of such Collateral shall not, however, constitute payment or liquidation of such Collateral until Bank shall receive good funds for such proceeds. Funds placed in such special accounts shall be held by Bank as security for all Obligations secured hereunder. These proceeds shall be deposited in precisely the form received, except for the indorsement of Debtor where necessary to permit collection of items, which indorsement Debtor agrees to make, and which indorsement Bank is also hereby authorized, as attorney-in-fact, to make on behalf of Debtor. In the event Bank has notified Debtor to make deposits to a special account, pending such deposit, Debtor agrees that it will not commingle any such checks, drafts, cash or other remittances with any funds or other property of Debtor, but will hold them separate and apart therefrom, and upon an express trust for Bank until deposit thereof is made in the special account. Bank will, from time to time, apply the whole or any part of the Collateral funds on deposit in this special account against such Obligations as are secured hereby as Bank may in its sole discretion elect. At the sole election of Bank, any portion of said funds on deposit in the special account which Bank shall elect not to apply to the Obligations, may be paid over by Bank to Debtor. If an Event of Default has occurred and is continuing, Bank may notify persons obligated on any Collateral to make payments directly to Bank and Bank may take control of all proceeds of any Collateral. Until Bank elects to exercise such rights, Debtor, as agent of Bank, shall collect and enforce all payments owed on the Collateral. T. Compliance with State and Federal Laws. Debtor will maintain its existence, good standing and qualification to do business, where required, and comply with all laws, regulations and governmental requirements, including without limitation, environmental laws applicable to it or any of its property, business operations and transactions. U. Environmental Covenants. Debtor shall immediately advise Bank in writing of (i) any and all enforcement, cleanup, remedial, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state, or local laws,

ordinances or regulations relating to any Hazardous Materials affecting Debtor's business operations; and (ii) all claims made or threatened by any third party against Debtor relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Debtor shall immediately notify Bank of any remedial action taken by Debtor with respect to Debtor's business operations. Debtor will not use or permit any other party to use any Hazardous Materials at any of Debtor's places of business or at any other property owned by Debtor except such materials as are incidental to Debtor's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Debtor agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Debtor's places of business or any other property of Debtor at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Debtor is complying with this covenant and Debtor shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Debtor shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Debtor's business operations within five (5) days of the request therefor. V. Endorsement. At such times as Borrower is required by the terms of Section 5.10 of the Loan Agreement and paragraph 5.N hereof, Debtor will endorse each Premium Finance Agreement to Bank as follows:

ordinances or regulations relating to any Hazardous Materials affecting Debtor's business operations; and (ii) all claims made or threatened by any third party against Debtor relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials. Debtor shall immediately notify Bank of any remedial action taken by Debtor with respect to Debtor's business operations. Debtor will not use or permit any other party to use any Hazardous Materials at any of Debtor's places of business or at any other property owned by Debtor except such materials as are incidental to Debtor's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Debtor agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Debtor's places of business or any other property of Debtor at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Debtor is complying with this covenant and Debtor shall reimburse Bank on demand for the costs of any such environmental investigation and audit. Debtor shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Debtor's business operations within five (5) days of the request therefor. V. Endorsement. At such times as Borrower is required by the terms of Section 5.10 of the Loan Agreement and paragraph 5.N hereof, Debtor will endorse each Premium Finance Agreement to Bank as follows: "Pay to the order of NationsBank of Texas, N.A. with full recourse and warranty" W. Status of Reinsurance Agreements. Debtor will notify Bank of any default by any party to any Reinsurance Agreement and will not enter into any material alteration of the terms of any Reinsurance Agreement without the prior written consent of Bank. Debtor will comply fully and completely with all of Debtor's obligations under each Reinsurance Agreement. X. Compliance with Certain Laws. In addition to the other provisions hereof, Debtor will comply with Chapter 24 of the Texas Insurance Code, Title 28 of the Texas Administrative Code, the Act, and Reg Z. Y. Renewals of Licenses. Debtor will on a timely basis procure all necessary renewals and extensions of all licenses, approvals, and permits required for it to engage in the business of insurance premium financing which are required by the laws of each state in which Debtor engages in such business. Z. Notification to Insurers. Debtor will notify each insurer whose premiums are being financed with Premium Finance Agreements constituting part of the Collateral, or its managing general agent, of the existence of each Premium Finance Agreement in a timely manner and take all such other action as may be necessary or required in order that Debtor will be entitled to receive all unearned premiums from such

insurer if an insurance contract is canceled, and Debtor will furnish a list of same to Bank upon Bank's request. Notice of the creation of each Premium Finance Agreement shall be given to the insurer within thirty (30) days of Debtor's acceptance of such agreement. 6. Grant of License to Use Intangibles. To the extent permitted by applicable law and the terms of any agreements relating to Debtor's General Intangibles, Debtor hereby grants to the Bank an irrevocable, nonexclusive license (exercisable upon the occurrence of an Event of Default) to use, assign, license or sublicense any of Debtor's General Intangibles, and wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. No agreements hereafter acquired or agreed to or entered into by Debtor shall prohibit, restrict, or impair the rights granted hereunder. 7. Rights and Powers of Bank. A. General. Bank, after an Event of Default has occurred and is continuing, without liability to Debtor may: obtain from any person

insurer if an insurance contract is canceled, and Debtor will furnish a list of same to Bank upon Bank's request. Notice of the creation of each Premium Finance Agreement shall be given to the insurer within thirty (30) days of Debtor's acceptance of such agreement. 6. Grant of License to Use Intangibles. To the extent permitted by applicable law and the terms of any agreements relating to Debtor's General Intangibles, Debtor hereby grants to the Bank an irrevocable, nonexclusive license (exercisable upon the occurrence of an Event of Default) to use, assign, license or sublicense any of Debtor's General Intangibles, and wherever the same may be located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof. No agreements hereafter acquired or agreed to or entered into by Debtor shall prohibit, restrict, or impair the rights granted hereunder. 7. Rights and Powers of Bank. A. General. Bank, after an Event of Default has occurred and is continuing, without liability to Debtor may: obtain from any person

information regarding Debtor or Debtor's business or the Collateral, which information any such person also may furnish without liability to Debtor; require Debtor to give possession or control of any Collateral to Bank; indorse as Debtor's agent any instruments, documents or chattel paper in the Collateral or representing proceeds of the Collateral; contact account debtors directly to verify information furnished by Debtor; take control of proceeds, including stock received as dividends or by reason of stock splits; release the Collateral in its possession to any Debtor, temporarily or otherwise; reject as unsatisfactory any property hereafter offered by Debtor as Collateral; set standards from time to time to govern what may be used as after acquired Collateral; take control of funds generated by the Collateral, such as cash dividends, interest and proceeds or refunds from insurance, and use same to reduce any part of the Obligation and exercise all other rights which an owner of such Collateral may exercise, except the right to vote or dispose of the Collateral; at any time transfer any of the Collateral or evidence thereof into its own name or that of its nominee; and demand, collect, convert, redeem, receipt for, settle, compromise, adjust, sue for, foreclose or realize upon the Collateral, in its own name or in the name of Debtor, as Bank may determine. Bank shall not be liable for failure to collect any account or instruments, or for any act or omission on the part of Bank, its officers, agents or employees, except for its or their own willful misconduct or gross negligence. The foregoing rights and powers of Bank will be in addition to, and not a limitation upon, any rights and powers of Bank given by law, elsewhere in this Agreement, or otherwise. If Debtor fails to maintain any required insurance, to the extent permitted by applicable law Bank may (but is not obligated to) purchase single interest insurance coverage for the Collateral which insurance may at Bank's option (i) protect only Bank and not provide any remuneration or protection for Debtor directly and (ii) provide coverage only after the Obligation has been declared due as herein provided. The premiums for any such insurance purchased by Bank shall be a part of the Obligation and shall bear interest as provided in 3(d) hereof.

B. Convertible Collateral. Bank may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Bank shall not have any duty to present for conversion any Collateral unless it shall have received from Debtor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. 8. Default. A. Event of Default. An event of default ("Event of Default") shall occur if: (i) Debtor or any other obligor on all or part of the Obligation shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in this Agreement or in any other agreement between Debtor and Bank or between Bank and any other obligor on the Obligation (beyond any applicable grace period contained therein), including, but not limited to, any other note or instrument, loan agreement, security agreement, deed of trust, mortgage, promissory note, guaranty, certificate, assignment, instrument, document or other agreement concerning or related to the Obligation (collectively, the "Loan Documents") beyond any applicable grace period contained therein; or (ii) Debtor or such other obligor shall fail to timely and properly pay or observe, keep or perform any term,

information regarding Debtor or Debtor's business or the Collateral, which information any such person also may furnish without liability to Debtor; require Debtor to give possession or control of any Collateral to Bank; indorse as Debtor's agent any instruments, documents or chattel paper in the Collateral or representing proceeds of the Collateral; contact account debtors directly to verify information furnished by Debtor; take control of proceeds, including stock received as dividends or by reason of stock splits; release the Collateral in its possession to any Debtor, temporarily or otherwise; reject as unsatisfactory any property hereafter offered by Debtor as Collateral; set standards from time to time to govern what may be used as after acquired Collateral; take control of funds generated by the Collateral, such as cash dividends, interest and proceeds or refunds from insurance, and use same to reduce any part of the Obligation and exercise all other rights which an owner of such Collateral may exercise, except the right to vote or dispose of the Collateral; at any time transfer any of the Collateral or evidence thereof into its own name or that of its nominee; and demand, collect, convert, redeem, receipt for, settle, compromise, adjust, sue for, foreclose or realize upon the Collateral, in its own name or in the name of Debtor, as Bank may determine. Bank shall not be liable for failure to collect any account or instruments, or for any act or omission on the part of Bank, its officers, agents or employees, except for its or their own willful misconduct or gross negligence. The foregoing rights and powers of Bank will be in addition to, and not a limitation upon, any rights and powers of Bank given by law, elsewhere in this Agreement, or otherwise. If Debtor fails to maintain any required insurance, to the extent permitted by applicable law Bank may (but is not obligated to) purchase single interest insurance coverage for the Collateral which insurance may at Bank's option (i) protect only Bank and not provide any remuneration or protection for Debtor directly and (ii) provide coverage only after the Obligation has been declared due as herein provided. The premiums for any such insurance purchased by Bank shall be a part of the Obligation and shall bear interest as provided in 3(d) hereof.

B. Convertible Collateral. Bank may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Bank shall not have any duty to present for conversion any Collateral unless it shall have received from Debtor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. 8. Default. A. Event of Default. An event of default ("Event of Default") shall occur if: (i) Debtor or any other obligor on all or part of the Obligation shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in this Agreement or in any other agreement between Debtor and Bank or between Bank and any other obligor on the Obligation (beyond any applicable grace period contained therein), including, but not limited to, any other note or instrument, loan agreement, security agreement, deed of trust, mortgage, promissory note, guaranty, certificate, assignment, instrument, document or other agreement concerning or related to the Obligation (collectively, the "Loan Documents") beyond any applicable grace period contained therein; or (ii) Debtor or such other obligor shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in any agreement between such party and any affiliate or subsidiary of NationsBank Corporation beyond any applicable grace period contained therein. B. Rights and Remedies. If any Event of Default shall occur, then, in each and every such case, Bank may, without presentment, demand, or protest; notice of default, dishonor, demand, non-payment, or protest; notice of intent to accelerate all or any part of the Obligation; notice of acceleration of all or any part of the Obligation; or notice of any other kind, all of which Debtor hereby expressly waives, (except for any notice required under this Agreement, any other Loan Document or applicable law); at any time thereafter exercise and/or enforce any of the following rights and remedies at Bank's option: (i) Acceleration. The Obligation shall, at Bank's option, become immediately due and payable, and the obligation, if any, of Bank to permit further borrowings under the Obligation shall at Bank's option immediately cease and terminate. (ii) Possession and Collection of the Collateral. At its option: (a) if Bank has not already done so, (i) take possession or control of, store, lease, operate, manage, sell, or instruct any agent or broker to sell or otherwise dispose of, all or any part of the Collateral, (ii) notify all parties under any account or contract right forming all or any part of the Collateral to make any payments otherwise due to Debtor directly to Bank, (iii) in Bank's own name, or in the name of Debtor, demand, collect, receive, sue for,

B. Convertible Collateral. Bank may present for conversion any Collateral which is convertible into any other instrument or investment security or a combination thereof with cash, but Bank shall not have any duty to present for conversion any Collateral unless it shall have received from Debtor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible. 8. Default. A. Event of Default. An event of default ("Event of Default") shall occur if: (i) Debtor or any other obligor on all or part of the Obligation shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in this Agreement or in any other agreement between Debtor and Bank or between Bank and any other obligor on the Obligation (beyond any applicable grace period contained therein), including, but not limited to, any other note or instrument, loan agreement, security agreement, deed of trust, mortgage, promissory note, guaranty, certificate, assignment, instrument, document or other agreement concerning or related to the Obligation (collectively, the "Loan Documents") beyond any applicable grace period contained therein; or (ii) Debtor or such other obligor shall fail to timely and properly pay or observe, keep or perform any term, covenant, agreement or condition in any agreement between such party and any affiliate or subsidiary of NationsBank Corporation beyond any applicable grace period contained therein. B. Rights and Remedies. If any Event of Default shall occur, then, in each and every such case, Bank may, without presentment, demand, or protest; notice of default, dishonor, demand, non-payment, or protest; notice of intent to accelerate all or any part of the Obligation; notice of acceleration of all or any part of the Obligation; or notice of any other kind, all of which Debtor hereby expressly waives, (except for any notice required under this Agreement, any other Loan Document or applicable law); at any time thereafter exercise and/or enforce any of the following rights and remedies at Bank's option: (i) Acceleration. The Obligation shall, at Bank's option, become immediately due and payable, and the obligation, if any, of Bank to permit further borrowings under the Obligation shall at Bank's option immediately cease and terminate. (ii) Possession and Collection of the Collateral. At its option: (a) if Bank has not already done so, (i) take possession or control of, store, lease, operate, manage, sell, or instruct any agent or broker to sell or otherwise dispose of, all or any part of the Collateral, (ii) notify all parties under any account or contract right forming all or any part of the Collateral to make any payments otherwise due to Debtor directly to Bank, (iii) in Bank's own name, or in the name of Debtor, demand, collect, receive, sue for, and give receipts and releases for, any and all amounts due under such accounts and contract rights, or (iv) indorse as the agent of Debtor any check, note, chattel paper, documents, or instruments forming all or any part of the Collateral; (b) make formal application for transfer to Bank (or to any assignee of Bank or to any purchaser of any of the Collateral) of all of Debtor's permits, licenses, approvals, agreements, and the like relating to the Collateral or to Debtor's business; (c) take any other action which Bank deems necessary or desirable to protect and realize upon its security

interest in the Collateral; and (d) in addition to the foregoing, and not in substitution therefor, exercise any one or more of the rights and remedies exercisable by Bank under any other provision of this Agreement, under any of the other Loan Documents, or as provided by applicable law (including, without limitation, the Uniform Commercial Code as in effect in Texas (hereinafter referred to as the "UCC")). In taking possession of the Collateral Bank may enter Debtor's premises and otherwise proceed without legal process, if this can be done without breach of the peace. Debtor shall, upon Bank's demand, promptly make the Collateral or other security available to Bank at a place designated by Bank, which place shall be reasonably convenient to both parties. Bank shall not be liable for, nor be prejudiced by, any loss, depreciation or other damages to the Collateral, unless caused by Bank's willful and malicious act. Bank shall have no duty to take any action to preserve or collect the Collateral. (iii) Receiver. Obtain the appointment of a receiver for all or any of the Collateral, Debtor hereby consenting to the appointment of such a receiver and agreeing not to oppose any such appointment.

interest in the Collateral; and (d) in addition to the foregoing, and not in substitution therefor, exercise any one or more of the rights and remedies exercisable by Bank under any other provision of this Agreement, under any of the other Loan Documents, or as provided by applicable law (including, without limitation, the Uniform Commercial Code as in effect in Texas (hereinafter referred to as the "UCC")). In taking possession of the Collateral Bank may enter Debtor's premises and otherwise proceed without legal process, if this can be done without breach of the peace. Debtor shall, upon Bank's demand, promptly make the Collateral or other security available to Bank at a place designated by Bank, which place shall be reasonably convenient to both parties. Bank shall not be liable for, nor be prejudiced by, any loss, depreciation or other damages to the Collateral, unless caused by Bank's willful and malicious act. Bank shall have no duty to take any action to preserve or collect the Collateral. (iii) Receiver. Obtain the appointment of a receiver for all or any of the Collateral, Debtor hereby consenting to the appointment of such a receiver and agreeing not to oppose any such appointment. (iv) Right of Set Off. Without notice or demand to Debtor, set off and apply against any and all of the Obligation any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness, at any time held or owing by Bank or any of Bank's agents or affiliates to or for the credit of the account of Debtor or any guarantor or indorser of Debtor's Obligation. Bank shall be entitled to immediate possession of all books and records evidencing any Collateral or pertaining to chattel paper covered by this Agreement and it or its representatives shall have the authority to enter upon any premises upon which any of the same, or any Collateral, may be situated and remove the same therefrom without liability. Bank may surrender any insurance policies in the Collateral and receive the unearned premium thereon. Debtor shall be entitled to any surplus and shall be liable to Bank for any deficiency. The proceeds of any disposition after default available to satisfy the Obligation shall be applied to the Obligation in such order and in such manner as Bank in its discretion shall decide. Debtor specifically understands and agrees that any sale by Bank of all or part of the Collateral pursuant to the terms of this Agreement may be effected by Bank at times and in manners which could result in the proceeds of such sale as being significantly and materially less than might have been received if such sale had occurred at different times or in different manners, and Debtor hereby releases Bank and its officers and representatives from and against any and all obligations and liabilities arising out of or related to the timing or manner of any such sale. If, in the opinion of Bank, there is any question that a public sale or distribution of any Collateral will violate any state or federal securities law, Bank may offer and sell such Collateral in a transaction exempt from registration under federal securities law, and any such sale made in good faith by Bank shall be deemed "commercially reasonable".

(v) If any Event of Default exists, upon the written demand of Bank, Debtor shall execute and deliver to Bank to the extent permitted by applicable law and any contracts relating to the Computer Collateral, an assignment or assignments of the Computer Collateral and licenses in favor of, or otherwise of value to Debtor, and such other documents as are necessary or appropriate to carry out the intent and purposes of this Security Agreement. Such an assignment shall reduce the Obligations then due only to the extent that Bank receives cash proceeds in respect of the sale of, or other realization upon, the Computer Collateral or licenses; such cash proceeds to be applied by Bank as provided in the Loan Agreement. 9. General. A. Parties Bound. Bank's rights hereunder shall inure to the benefit of its successors and assigns. In the event of any assignment or transfer by Bank of any of the Obligation or the Collateral, Bank thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Bank shall retain all rights and powers hereby given with respect to any of the Obligation or the Collateral not so assigned or transferred. All representations, warranties and agreements of Debtor if more than one are joint and several and all shall be binding upon the personal representatives, heirs, successors and assigns of Debtor.

(v) If any Event of Default exists, upon the written demand of Bank, Debtor shall execute and deliver to Bank to the extent permitted by applicable law and any contracts relating to the Computer Collateral, an assignment or assignments of the Computer Collateral and licenses in favor of, or otherwise of value to Debtor, and such other documents as are necessary or appropriate to carry out the intent and purposes of this Security Agreement. Such an assignment shall reduce the Obligations then due only to the extent that Bank receives cash proceeds in respect of the sale of, or other realization upon, the Computer Collateral or licenses; such cash proceeds to be applied by Bank as provided in the Loan Agreement. 9. General. A. Parties Bound. Bank's rights hereunder shall inure to the benefit of its successors and assigns. In the event of any assignment or transfer by Bank of any of the Obligation or the Collateral, Bank thereafter shall be fully discharged from any responsibility with respect to the Collateral so assigned or transferred, but Bank shall retain all rights and powers hereby given with respect to any of the Obligation or the Collateral not so assigned or transferred. All representations, warranties and agreements of Debtor if more than one are joint and several and all shall be binding upon the personal representatives, heirs, successors and assigns of Debtor. B. Waiver. No delay of Bank in exercising any power or right shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude other or further exercise thereof or the exercise of any other power or right. No waiver by Bank of any right hereunder or of any default by Debtor shall be binding upon Bank unless in writing, and no failure by Bank to exercise any power or right hereunder or waiver of any default by Debtor shall operate as a waiver of any other or further exercise of such right or power or of any further default. Each right, power and remedy of Bank as provided for herein or in any of the Loan Documents, or which shall now or hereafter exist at law or in equity or by statute or otherwise, shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by Bank of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Bank of any or all other such rights, powers or remedies. C. Waiver. Without limiting the generality of the appointment of Bank as Debtor's attorney-in-fact pursuant to the Loan Agreement and the other Loan Documents, Debtor agrees that Bank shall have the right and authority to the extent permitted by applicable law and any contracts relating to the Computer Collateral (i) while any Event of Default exists to license or sublicense the Computer Collateral, any other General Intangible or any thereof, including, without limitation, assignments, recordings, registrations and applications therefor in the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency of the United States, any State thereof or any other country or political subdivision thereof, and for the purpose of the recording, registering and filing of, or accomplishing any other formality with respect to, the foregoing, to execute and deliver any and all agreements, documents, instruments of assignment or other papers necessary or advisable to

effect such purpose; and (ii) to make claim for, and receive and give acquittances for payment on account of, loss under any insurance policy covering the Collateral, or any part thereof, and to receive, endorse and collect all checks, drafts and other orders for the payment of money representing the proceeds of such insurance. D. Agreement Continuing. This Agreement shall constitute a continuing agreement, applying to all future as well as existing transactions, whether or not of the character contemplated at the date of this Agreement, and if all transactions between Bank and Debtor shall be closed at any time, shall be equally applicable to any new transactions thereafter. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. Time is of the essence of this Agreement. E. Definitions. Unless the context indicates otherwise, definitions in the UCC apply to words and phrases in this Agreement; if UCC definitions conflict, Article 9 definitions apply. F. Notices. Notice shall be deemed reasonable if mailed postage prepaid at least five (5) days before the related action (or if the UCC elsewhere specifies a longer period, such longer period) to the address of Debtor given above, or to such other address as any party may designate by written notice to the other party. Each notice, request and demand shall be deemed given or made, if sent by mail, upon the earlier of the date of receipt or five

effect such purpose; and (ii) to make claim for, and receive and give acquittances for payment on account of, loss under any insurance policy covering the Collateral, or any part thereof, and to receive, endorse and collect all checks, drafts and other orders for the payment of money representing the proceeds of such insurance. D. Agreement Continuing. This Agreement shall constitute a continuing agreement, applying to all future as well as existing transactions, whether or not of the character contemplated at the date of this Agreement, and if all transactions between Bank and Debtor shall be closed at any time, shall be equally applicable to any new transactions thereafter. Provisions of this Agreement, unless by their terms exclusive, shall be in addition to other agreements between the parties. Time is of the essence of this Agreement. E. Definitions. Unless the context indicates otherwise, definitions in the UCC apply to words and phrases in this Agreement; if UCC definitions conflict, Article 9 definitions apply. F. Notices. Notice shall be deemed reasonable if mailed postage prepaid at least five (5) days before the related action (or if the UCC elsewhere specifies a longer period, such longer period) to the address of Debtor given above, or to such other address as any party may designate by written notice to the other party. Each notice, request and demand shall be deemed given or made, if sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid, or if sent by any other means, upon delivery. G. Modifications. No provision hereof shall be modified or limited except by a written agreement expressly referring hereto and to the provisions so modified or limited and signed by Debtor and Bank. The provisions of the Agreement shall not be modified or limited by course of conduct or usage of trade. H. Applicable Law and Partial Invalidity. This Agreement has been delivered in the State of Texas and shall be construed in accordance with the laws of that State. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement. The invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. I. Financing Statement. To the extent permitted by applicable law, a carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral shall be sufficient as a financing statement. J. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION

IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (i) Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY DEBTOR'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION,

IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (i) Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY DEBTOR'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. (ii) Reservation of Rights. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. K. Controlling Document. To the extent that this Security Agreement conflicts with or is in any way incompatible with any other Loan Document concerning the Obligation, any promissory note shall control over any other document, and if such note does not address an issue, then each other document shall control to the extent that it deals most specifically with an issue. L. Notice of Final Agreement. THIS WRITTEN SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed by their duly authorized representatives as of the date first above written.

HALLMARK FINANCE CORPORATION By: Linda H. Sleeper

HALLMARK FINANCE CORPORATION By: Linda H. Sleeper Executive Vice President NATIONSBANK OF TEXAS, N.A. By: Susan M. Raher Vice President

ARTICLE 7 Due to format constraints of this Financial Data Schedule (FDS) certain Balance Sheet items where omitted: i.e. Prepaid reinsurance premiums, Premium notes receivable, Installment premiums receivable, Excess of cost over net assets acquired & Other assets. Refer to actual 10KSB submission. MULTIPLIER: 1 CURRENCY: $

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE DEBT HELD FOR SALE DEBT CARRYING VALUE DEBT MARKET VALUE EQUITIES MORTGAGE REAL ESTATE TOTAL INVEST CASH RECOVER REINSURE DEFERRED ACQUISITION TOTAL ASSETS POLICY LOSSES UNEARNED PREMIUMS POLICY OTHER POLICY HOLDER FUNDS NOTES PAYABLE PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY PREMIUMS INVESTMENT INCOME INVESTMENT GAINS OTHER INCOME BENEFITS UNDERWRITING AMORTIZATION UNDERWRITING OTHER INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED RESERVE OPEN PROVISION CURRENT PROVISION PRIOR PAYMENTS CURRENT PAYMENTS PRIOR RESERVE CLOSE

12 MOS DEC 31 1996 JAN 01 1996 DEC 31 1996 1 0 8,540,196 8,564,569 152,246 0 0 8,692,442 4,749,388 20,058,062 168,300 53,763,761 0 11,310,250 2,946,034 4,429,604 590,853 0 0 328,868 11,092,496 53,763,761 42,502,556 863,863 1,890 2,005,106 7,220,561 (686,986) 7,292,643 1,609,244 559,477 1,049,767 0 0 0 1,049,767 0.09 0.09 22,323,090 31,380,460 (3,919,957) 17,999,353 11,086,847 20,697,393

ARTICLE 7 Due to format constraints of this Financial Data Schedule (FDS) certain Balance Sheet items where omitted: i.e. Prepaid reinsurance premiums, Premium notes receivable, Installment premiums receivable, Excess of cost over net assets acquired & Other assets. Refer to actual 10KSB submission. MULTIPLIER: 1 CURRENCY: $

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END EXCHANGE RATE DEBT HELD FOR SALE DEBT CARRYING VALUE DEBT MARKET VALUE EQUITIES MORTGAGE REAL ESTATE TOTAL INVEST CASH RECOVER REINSURE DEFERRED ACQUISITION TOTAL ASSETS POLICY LOSSES UNEARNED PREMIUMS POLICY OTHER POLICY HOLDER FUNDS NOTES PAYABLE PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY PREMIUMS INVESTMENT INCOME INVESTMENT GAINS OTHER INCOME BENEFITS UNDERWRITING AMORTIZATION UNDERWRITING OTHER INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED RESERVE OPEN PROVISION CURRENT PROVISION PRIOR PAYMENTS CURRENT PAYMENTS PRIOR RESERVE CLOSE CUMULATIVE DEFICIENCY

12 MOS DEC 31 1996 JAN 01 1996 DEC 31 1996 1 0 8,540,196 8,564,569 152,246 0 0 8,692,442 4,749,388 20,058,062 168,300 53,763,761 0 11,310,250 2,946,034 4,429,604 590,853 0 0 328,868 11,092,496 53,763,761 42,502,556 863,863 1,890 2,005,106 7,220,561 (686,986) 7,292,643 1,609,244 559,477 1,049,767 0 0 0 1,049,767 0.09 0.09 22,323,090 31,380,460 (3,919,957) 17,999,353 11,086,847 20,697,393 0