Document:

<PAGE>

                                                                     EXHIBIT 4.7

                TRUST PREFERRED SECURITIES GUARANTEE AGREEMENT

                                by and between

                         PARADIGM BANCORPORATION, INC.

                                      and

                FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION

                       Dated as of ______________, 2000
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                             Page
                                                                                             ----
<S>                                                                                          <C>
ARTICLE I

     DEFINITIONS AND INTERPRETATION..........................................................   1
     Section 1.1.   Definitions and Interpretation...........................................   1

ARTICLE II

     TRUST INDENTURE ACT.....................................................................   5
     Section 2.1.   Trust Indenture Act; Application.........................................   5
     Section 2.2.   Lists of Holders of Securities...........................................   5
     Section 2.3.   Reports by the Trust Preferred Guarantee Trustee.........................   5
     Section 2.4.   Periodic Reports to Trust Preferred Guarantee Trustee....................   5
     Section 2.5.   Evidence of Compliance with Conditions Precedent.........................   6
     Section 2.6.   Events of Default; Waiver................................................   6
     Section 2.7.   Event of Default; Notice.................................................   6
     Section 2.8.   Conflicting Interests....................................................   6

ARTICLE III

     POWERS, DUTIES AND RIGHTS OF TRUST PREFERRED GUARANTEE
     TRUSTEE.................................................................................   7
     Section 3.1.   Powers and Duties of the Trust Preferred Guarantee Trustee...............   7
     Section 3.2.   Certain Rights of Trust Preferred Guarantee Trustee......................   8
     Section 3.3.   Not Responsible for Recitals or Issuance of Guarantee....................  10

ARTICLE IV

     TRUST PREFERRED GUARANTEE TRUSTEE.......................................................  11
     Section 4.1.   Trust Preferred Guarantee Trustee; Eligibility...........................  11
     Section 4.2.   Appointment, Removal and Resignation of Trust Preferred
                    Guarantee Trustees.......................................................  11

ARTICLE V

     GUARANTEE...............................................................................  12
     Section 5.1.   Guarantee................................................................  12
     Section 5.2.   Waiver of Notice and Demand..............................................  12
     Section 5.3.   Obligations not Affected.................................................  13
     Section 5.4.   Rights of Holders........................................................  14
     Section 5.5.   Guarantee of Payment.....................................................  14
</TABLE>

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<TABLE>
<S>                                                                                          <C>
     Section 5.6.   Subrogation..............................................................  14
     Section 5.7.   Independent Obligations..................................................  14

ARTICLE VI

     LIMITATION OF TRANSACTIONS; SUBORDINATION...............................................  15
     Section 6.1.   Limitation of Transactions...............................................  15
     Section 6.2.   Ranking..................................................................  15

ARTICLE VII

     TERMINATION.............................................................................  15
     Section 7.1.   Termination..............................................................  15

ARTICLE VIII

     INDEMNIFICATION.........................................................................  16
     Section 8.1.   Exculpation..............................................................  16
     Section 8.2.   Indemnification..........................................................  16

ARTICLE IX

     MISCELLANEOUS...........................................................................  17
     Section 9.1.   Successors and Assigns...................................................  17
     Section 9.2.   Amendments...............................................................  17
     Section 9.3.   Notices..................................................................  17
     Section 9.4.   Benefit..................................................................  18
     Section 9.5.   Governing Law............................................................  18
</TABLE>

                                      -ii-
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                             CROSS REFERENCE TABLE
<TABLE>
<CAPTION>
Section of Trust                                                  Section of
Indenture Act of                                                  Guarantee
1939, as amended                                                  Agreement
------------------                                          --------------------
<S>                                                            <C>
310(a)....................................................     1(a)
310(b)....................................................     1(c), 2.8
310(c)....................................................     Not Applicable
311(a)....................................................     2.2(b)
311(b)....................................................     2.2(b)
311(c)....................................................     Not Applicable
312(a)....................................................     2.2(a)
312(b)....................................................     2.2(b)
313.......................................................     2.3
314(a)....................................................     2.4
314(b)....................................................     Not Applicable
314(c)....................................................     2.5
314(d)....................................................     Not Applicable
314(e)....................................................     1.1, 2.5, 3.2
314(f)....................................................     2.1, 3.2
315(a)....................................................     3.1(d)
315(b)....................................................     2.7
315(c)....................................................     3.1
315(d)....................................................     3.1(d)
316(a)....................................................     1.1, 2.6, 5.4
316(b)....................................................     5.3
317(a)....................................................     3.1
317(b)....................................................     Not Applicable
318(a)....................................................     1(a)
318(b)....................................................     1
318(c)....................................................     2.1(b)
</TABLE>

     Note: This Cross-Reference Table does not constitute part of this Agreement
and shall not affect the interpretation of any of its terms or provisions.

                                     -iii-
<PAGE>

                TRUST PREFERRED SECURITIES GUARANTEE AGREEMENT

     THIS TRUST PREFERRED SECURITIES GUARANTEE AGREEMENT (this "Trust Preferred
Securities Guarantee"), dated as of ____________, 2000, is executed and
delivered by PARADIGM BANCORPORATION, INC., a Texas corporation (the
"Guarantor"), and FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, a national
banking association, as trustee (the "Trust Preferred Guarantee Trustee"), for
the benefit of the Holders (as defined herein) from time to time of the Trust
Preferred Securities (as defined herein) of Paradigm Capital Trust II, a
Delaware statutory business trust (the "Trust").

                                   RECITALS

     WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust
Agreement"), dated as of ____________, 2000, among the trustees of the Trust
named therein, the Guarantor, as depositor, and the holders from time to time of
undivided beneficial interests in the assets of the Trust, the Trust is issuing
on the date hereof up to _____________ preferred securities, having an aggregate
liquidation amount of $____________, designated the Floating Rate Cumulative
Trust Preferred Securities (the "Trust Preferred Securities");

     WHEREAS, as incentive for the Holders to purchase the Trust Preferred
Securities, the Guarantor desires irrevocably and unconditionally to agree, to
the extent set forth in this Trust Preferred Securities Guarantee, to pay to the
Holders of the Trust Preferred Securities the Guarantee Payments (as defined
herein) and to make certain other payments on the terms and conditions set forth
herein.

     NOW, THEREFORE, in consideration of the purchase by each Holder of Trust
Preferred Securities, which purchase the Guarantor hereby agrees shall benefit
the Guarantor, the Guarantor executes and delivers this Trust Preferred
Securities Guarantee for the benefit of the Holders.

                                   ARTICLE I

                        DEFINITIONS AND INTERPRETATION

Section 1.1    Definitions and Interpretation.

     In this Trust Preferred Securities Guarantee, unless the context otherwise
requires:

     (a)  capitalized terms used in this Trust Preferred Securities Guarantee
but not defined in the preamble above have the respective meanings assigned to
them in this Section 1.1;

                                      -1-
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     (b)  terms defined in the Trust Agreement as at the date of execution of
this Trust Preferred Securities Guarantee have the same meaning when used in
this Trust Preferred Securities Guarantee, unless otherwise defined in this
Trust Preferred Securities Guarantee;

     (c)  a term defined anywhere in this Trust Preferred Securities Guarantee
has the same meaning throughout;

     (d)  all references to "the Trust Preferred Securities Guarantee" or "this
Trust Preferred Securities Guarantee" are to this Trust Preferred Securities
Guarantee as modified, supplemented or amended from time to time;

     (e)  all references in this Trust Preferred Securities Guarantee to
Articles and Sections are to Articles and Sections of this Trust Preferred
Securities Guarantee, unless otherwise specified;

     (f)  a term defined in the Trust Indenture Act has the same meaning when
used in this Trust Preferred Securities Guarantee, unless otherwise defined in
this Trust Preferred Securities Guarantee or unless the context otherwise
requires; and

     (g)  a reference to the singular includes the plural and vice versa.

     "Affiliate" has the same meaning as given to that term in Rule 405 of the
Securities Act of 1933, as amended, or any successor rule thereunder.

     "Business Day" means any day other than a Saturday, Sunday, a day on which
federal or state banking institutions in New York, New York or Wilmington,
Delaware are authorized or required by law, executive order or regulation to
close or a day on which the Corporate Trust Office of the Trust Preferred
Guarantee Trustee is closed for business.

     "Trust Preferred Guarantee Trustee" means First Union Trust Company,
National Association, until a Successor Trust Preferred Guarantee Trustee has
been appointed and has accepted such appointment pursuant to the terms of this
Trust Preferred Securities Guarantee and thereafter means each such Successor
Trust Preferred Guarantee Trustee.

     "Corporate Trust Office" means the office of the Trust Preferred Guarantee
Trustee at which the corporate trust business of the Trust Preferred Guarantee
Trustee shall, at any particular time, be principally administered, which office
at the date of execution of this Agreement is located at One Rodney Square, 920
King Street, 1/st/ Floor, Wilmington, Delaware 19801, Attention: Corporate Trust
Administration.

     "Covered Person" means any Holder or beneficial owner of Trust Preferred
Securities.

     "Debentures" means the Floating Rate Subordinated Debentures due
____________, 2030, of the Debenture Issuer held by the Property Trustee of the
Trust.

                                      -2-
<PAGE>

     "Debenture Issuer" means Paradigm Bancorporation, Inc., issuer of the
Debentures under the Indenture.

     "Event of Default" means a default by the Guarantor on any of its payment
or other obligations under this Trust Preferred Securities Guarantee.

     "Guarantor" means Paradigm Bancorporation, Inc., a Texas corporation.

     "Guarantee Payments" means the following payments or distributions, without
duplication, with respect to the Trust Preferred Securities, to the extent not
paid or made by the Trust: (i) any accumulated and unpaid Distributions (as
defined in the Trust Agreement) that are required to be paid on such Trust
Preferred Securities, to the extent the Trust shall have funds available
therefor, (ii) the redemption price, including all accumulated and unpaid
Distributions to the date of redemption (the "Redemption Price"), to the extent
the Trust has funds available therefor, with respect to any Trust Preferred
Securities called for redemption by the Trust, and (iii) upon a voluntary or
involuntary dissolution, winding-up or termination of the Trust (other than in
connection with the distribution of Debentures to the Holders in exchange for
Trust Preferred Securities as provided in the Trust Agreement), the lesser of
(a) the aggregate of the liquidation amount and all accumulated and unpaid
Distributions on the Trust Preferred Securities to the date of payment, to the
extent the Trust shall have funds available therefor (the "Liquidation
Distribution"), and (b) the amount of assets of the Trust remaining available
for distribution to Holders in liquidation of the Trust.

     "Holder" shall mean any holder, as registered on the books and records of
the Trust, of any Trust Preferred Securities; provided, however, that, in
determining whether the holders of the requisite percentage of Trust Preferred
Securities have given any request, notice, consent or waiver hereunder, "Holder"
shall not include the Guarantor, the Trust Preferred Guarantee Trustee or any of
their respective Affiliates.

     "Indemnified Person" means the Trust Preferred Guarantee Trustee, any
Affiliate of the Trust Preferred Guarantee Trustee, or any officers, directors,
shareholders, members, partners, employees, representatives, nominees,
custodians or agents of the Trust Preferred Guarantee Trustee.

     "Indenture" means the Indenture dated as of _____________, 2000, among the
Debenture Issuer and First Union Trust Company, National Association, as
trustee, and any indenture supplemental thereto pursuant to which certain
subordinated debt securities of the Debenture Issuer are to be issued to the
Property Trustee of the Trust.

     "Liquidation Amount" means the stated value of $10 per Trust Preferred
Security.

     "Liquidation Distribution" has the meaning provided therefor in the
definition of Guarantee Payments.

     "List of Holders" has the meaning provided therefor in Section 2.2(a)
hereof.

                                      -3-
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     "Majority in liquidation amount of the Trust Preferred Securities" means
the Holders of more than 50% of the Liquidation Amount of all of the Trust
Preferred Securities.

     "Officers' Certificate" means, with respect to any Person, a certificate
signed by two authorized officers of such Person, at least one of whom shall be
the principal executive officer, principal financial officer, principal
accounting officer, treasurer or any vice president of such Person. Any
Officers' Certificate delivered with respect to compliance with a condition or
covenant provided for in this Trust Preferred Securities Guarantee shall
include:

     (a)  a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definition relating thereto;

     (b)  a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;

     (c)  a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and

     (d)  a statement as to whether, in the opinion of each such officer, such
condition or covenant has been complied with.

     "Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.

     "Redemption Price" has the meaning provided therefor in the definition of
Guarantee Payments.

     "Responsible Officer" means, with respect to the Trust Preferred Guarantee
Trustee, any officer within the Corporate Trust Office of the Trust Preferred
Guarantee Trustee with direct responsibility for the administration of this
Trust Preferred Securities Guarantee, including any vice-president, any
assistant vice-president, any assistant secretary or other officer or assistant
officer of the Trust Preferred Guarantee Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of that officer's knowledge of
and familiarity with the particular subject.

     "Successor Trust Preferred Guarantee Trustee" means a successor Trust
Preferred Guarantee Trustee possessing the qualifications to act as Trust
Preferred Guarantee Trustee under Section 4.1.

     "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.

                                      -4-
<PAGE>

                                  ARTICLE II

                              TRUST INDENTURE ACT

Section 2.1    Trust Indenture Act; Application .

     (a)  This Trust Preferred Securities Guarantee is subject to the provisions
of the Trust Indenture Act that are required to be part of this Trust Preferred
Securities Guarantee and shall, to the extent applicable, be governed by such
provisions.

     (b)  If and to the extent that any provision of this Trust Preferred
Securities Guarantee limits, qualifies or conflicts with the duties imposed by
Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties
shall control.

Section 2.2    Lists of Holders of Securities.

     (a)  In the event the Trust Preferred Guarantee Trustee is not also acting
in the capacity of the Property Trustee under the Trust Agreement, the Guarantor
shall cause to be provided to the Trust Preferred Guarantee Trustee with a list,
in such form as the Trust Preferred Guarantee Trustee may reasonably require, of
the names and addresses of the Holders of the Trust Preferred Securities ("List
of Holders") as of the date (i) within five (5) Business Days after the last day
of March, June, September and December, and (ii) at any other time within 30
days of receipt by the Guarantor of a written request for a List of Holders as
of a date no more than 15 days before such List of Holders is given to the Trust
Preferred Guarantee Trustee; provided, that the Guarantor shall not be obligated
to provide such List of Holders at any time the List of Holders does not differ
from the most recent List of Holders caused to have been given to the Trust
Preferred Guarantee Trustee by the Guarantor. The Trust Preferred Guarantee
Trustee may destroy any List of Holders previously given to it on receipt of a
new List of Holders.

     (b)  The Trust Preferred Guarantee Trustee shall comply with its
obligations under Sections 311(a), 311(b) and Section 312(b) of the Trust
Indenture Act.

Section 2.3    Reports by the Trust Preferred Guarantee Trustee.

     On or before July 15 of each year, the Trust Preferred Guarantee Trustee
shall provide to the Holders of the Trust Preferred Securities such reports as
are required by Section 313 of the Trust Indenture Act, if any, in the form and
in the manner provided by Section 313 of the Trust Indenture Act. The Trust
Preferred Guarantee Trustee shall also comply with the requirements of Section
313(d) of the Trust Indenture Act.

Section 2.4    Periodic Reports to Trust Preferred Guarantee Trustee.

     The Guarantor shall provide to the Trust Preferred Guarantee Trustee such
documents, reports and information as required

                                      -5-
<PAGE>

by Section 314 (if any) and the compliance certificate required by Section 314
of the Trust Indenture Act in the form, in the manner and at the times required
by Section 314 of the Trust Indenture Act.

Section 2.5    Evidence of Compliance with Conditions Precedent.

     The Guarantor shall provide to the Trust Preferred Guarantee Trustee such
evidence of compliance with any conditions precedent, if any, provided for in
this Trust Preferred Securities Guarantee that relate to any of the matters set
forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion
required to be given by an officer pursuant to Section 314(c)(1) may be given in
the form of an Officers' Certificate.

Section 2.6    Events of Default; Waiver.

     The Holders of a Majority in liquidation amount of Trust Preferred
Securities may, by vote, on behalf of the Holders of all of the Trust Preferred
Securities, waive any past Event of Default and its consequences. Upon such
waiver, any such Event of Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured, for every purpose of this
Trust Preferred Securities Guarantee, but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.

Section 2.7    Event of Default; Notice.

     (a)  The Trust Preferred Guarantee Trustee shall, within five (5) Business
Days after the occurrence of an Event of Default, transmit by mail, first class
postage prepaid, to the Holders of the Trust Preferred Securities, notices of
all Events of Default actually known to a Responsible Officer of the Trust
Preferred Guarantee Trustee, unless such defaults have been cured before the
giving of such notice; provided, that, except in the case of a default by
Guarantor on any of its payment obligations, the Trust Preferred Guarantee
Trustee shall be protected in withholding such notice if and so long as a
Responsible Officer of the Trust Preferred Guarantee Trustee in good faith
determines that the withholding of such notice is in the interests of the
Holders of the Trust Preferred Securities.

     (b)  The Trust Preferred Guarantee Trustee shall not be deemed to have
knowledge of any Event of Default unless the Trust Preferred Guarantee Trustee
shall have received written notice, or of which a Responsible Officer of the
Trust Preferred Guarantee Trustee charged with the administration of the Trust
Agreement shall have obtained actual knowledge.

Section 2.8    Conflicting Interests.

     The Trust Agreement shall be deemed to be specifically described in this
Trust Preferred Securities Guarantee for the purposes of clause (i) of the first
proviso contained in Section 310(b) of the Trust Indenture Act.

                                      -6-
<PAGE>

                                  ARTICLE III

        POWERS, DUTIES AND RIGHTS OF TRUST PREFERRED GUARANTEE TRUSTEE

Section 3.1    Powers and Duties of the Trust Preferred Guarantee Trustee.

     (a)  This Trust Preferred Securities Guarantee shall be held by the Trust
Preferred Guarantee Trustee for the benefit of the Holders of the Trust
Preferred Securities, and the Trust Preferred Guarantee Trustee shall not
transfer this Trust Preferred Securities Guarantee to any Person except a Holder
of Trust Preferred Securities exercising his or her rights pursuant to Section
5.4(b) or to a Successor Trust Preferred Guarantee Trustee on acceptance by such
Successor Trust Preferred Guarantee Trustee of its appointment to act as
Successor Trust Preferred Guarantee Trustee. The right, title and interest of
the Trust Preferred Guarantee Trustee shall automatically vest in any Successor
Trust Preferred Guarantee Trustee, and such vesting and cessation of title shall
be effective whether or not conveyancing documents have been executed and
delivered pursuant to the appointment of such Successor Trust Preferred
Guarantee Trustee.

     (b)  If an Event of Default actually known to a Responsible Officer of the
Trust Preferred Guarantee Trustee has occurred and is continuing, the Trust
Preferred Guarantee Trustee shall enforce this Trust Preferred Securities
Guarantee for the benefit of the Holders of the Trust Preferred Securities.

     (c)  The Trust Preferred Guarantee Trustee, before the occurrence of any
Event of Default and after the curing of all Events of Default that may have
occurred, shall undertake to perform only such duties as are specifically set
forth in this Trust Preferred Securities Guarantee, and no implied covenants
shall be read into this Trust Preferred Securities Guarantee against the Trust
Preferred Guarantee Trustee. In case an Event of Default has occurred (that has
not been cured or waived pursuant to Section 2.6) and is actually known to a
Responsible Officer of the Trust Preferred Guarantee Trustee, the Trust
Preferred Guarantee Trustee shall exercise such of the rights and powers vested
in it by this Trust Preferred Securities Guarantee, and use the same degree of
care and skill in its exercise thereof, as a prudent person would exercise or
use under the circumstances in the conduct of his or her own affairs.

     (d)  No provision of this Trust Preferred Securities Guarantee shall be
construed to relieve the Trust Preferred Guarantee Trustee from liability for
its own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:

          (i)  prior to the occurrence of any Event of Default and after the
     curing or waiving of all such Events of Default that may have occurred:

               (A)  the duties and obligations of the Trust Preferred Guarantee
          Trustee shall be determined solely by the express provisions of this
          Trust Preferred Securities Guarantee, and the Trust Preferred
          Guarantee Trustee shall not be liable except for the performance of
          such duties and obligations as are specifically set forth in this

                                      -7-
<PAGE>

          Trust Preferred Securities Guarantee, and no implied covenants or
          obligations shall be read into this Trust Preferred Securities
          Guarantee against the Trust Preferred Guarantee Trustee; and

                 (B)  in the absence of bad faith on the part of the Trust
          Preferred Guarantee Trustee, the Trust Preferred Guarantee Trustee may
          conclusively rely, as to the truth of the statements and the
          correctness of the opinions expressed therein, upon any certificates
          or opinions furnished to the Trust Preferred Guarantee Trustee and
          conforming to the requirements of this Trust Preferred Securities
          Guarantee; but in the case of any such certificates or opinions that
          by any provision hereof are specifically required to be furnished to
          the Trust Preferred Guarantee Trustee, the Trust Preferred Guarantee
          Trustee shall be under a duty to examine the same to determine whether
          or not they conform to the requirements of this Trust Preferred
          Securities Guarantee;

          (ii)   the Trust Preferred Guarantee Trustee shall not be liable for
     any error of judgment made in good faith by a Responsible Officer of the
     Trust Preferred Guarantee Trustee, unless it shall be proved that the Trust
     Preferred Guarantee Trustee was negligent in ascertaining the pertinent
     facts upon which such judgment was made;

          (iii)  the Trust Preferred Guarantee Trustee shall not be liable with
     respect to any action taken or omitted to be taken by it in good faith in
     accordance with the direction of the Holders of not less than a Majority in
     liquidation amount of the Trust Preferred Securities relating to the time,
     method and place of conducting any proceeding for any remedy available to
     the Trust Preferred Guarantee Trustee, or exercising any trust or power
     conferred upon the Trust Preferred Guarantee Trustee under this Trust
     Preferred Securities Guarantee; and

          (iv)   no provision of this Trust Preferred Securities Guarantee shall
     require the Trust Preferred Guarantee Trustee to expend or risk its own
     funds or otherwise incur personal financial liability in the performance of
     any of its duties or in the exercise of any of its rights or powers, if the
     Trust Preferred Guarantee Trustee shall have reasonable grounds for
     believing that the repayment of such funds or liability is not reasonably
     assured to it under the terms of this Trust Preferred Securities Guarantee
     or indemnity, reasonably satisfactory to the Trust Preferred Guarantee
     Trustee, against such risk or liability is not reasonably assured to it.

Section 3.2    Certain Rights of Trust Preferred Guarantee Trustee.

     (a)  Subject to the provisions of Section 3.1:

          (i)  the Trust Preferred Guarantee Trustee may conclusively rely, and
     shall be fully protected in acting or refraining from acting upon, any
     resolution, certificate, statement, instrument, opinion, report, notice,
     request, direction, consent, order, bond, debenture, note,

                                      -8-
<PAGE>

     other evidence of indebtedness or other paper or document believed by it to
     be genuine and to have been signed, sent or presented by the proper party
     or parties;

          (ii)  any direction or act of the Guarantor contemplated by this Trust
     Preferred Securities Guarantee shall be sufficiently evidenced by an
     Officers' Certificate;

          (iii)  whenever, in the administration of this Trust Preferred
     Securities Guarantee, the Trust Preferred Guarantee Trustee shall deem it
     desirable that a matter be proved or established before taking, suffering
     or omitting any action hereunder, the Trust Preferred Guarantee Trustee
     (unless other evidence is herein specifically prescribed) may, in the
     absence of bad faith on its part, request and conclusively rely upon an
     Officers' Certificate which, upon receipt of such request, shall be
     promptly delivered by the Guarantor;

          (iv)   the Trust Preferred Guarantee Trustee shall have no duty to see
     to any recording, filing or registration of any instrument (or any
     rerecording, refiling or registration thereof);

          (v)    the Trust Preferred Guarantee Trustee may consult with counsel,
     and the written advice or opinion of such counsel with respect to legal
     matters shall be full and complete authorization and protection in respect
     of any action taken, suffered or omitted by it hereunder in good faith and
     in accordance with such advice or opinion. Such counsel may be counsel to
     the Guarantor or any of its Affiliates and may include any of its
     employees. The Trust Preferred Guarantee Trustee shall have the right at
     any time to seek instructions concerning the administration of this Trust
     Preferred Securities Guarantee from any court of competent jurisdiction;

          (vi)   the Trust Preferred Guarantee Trustee shall be under no
     obligation to exercise any of the rights or powers vested in it by this
     Trust Preferred Securities Guarantee at the request or direction of any
     Holder, unless such Holder shall have provided to the Trust Preferred
     Guarantee Trustee such security and indemnity, reasonably satisfactory to
     the Trust Preferred Guarantee Trustee, against the costs, expenses
     (including attorneys' fees and expenses and the expenses of the Trust
     Preferred Guarantee Trustee's agents, nominees or custodians) and
     liabilities that might be incurred by it in complying with such request or
     direction, including such reasonable advances as may be requested by the
     Trust Preferred Guarantee Trustee; provided that, nothing contained in this
     Section 3.2(a)(vi) shall be taken to relieve the Trust Preferred Guarantee
     Trustee, upon the occurrence of an Event of Default, of its obligation to
     exercise the rights and powers vested in it by this Trust Preferred
     Securities Guarantee;

          (vii)  the Trust Preferred Guarantee Trustee shall not be bound to
     make any investigation into the facts or matters stated in any resolution,
     certificate, statement, instrument, opinion, report, notice, request,
     direction, consent, order, bond, debenture, note, other evidence of
     indebtedness or other paper or document, but the Trust Preferred Guarantee

                                      -9-
<PAGE>

     Trustee, in its discretion, may make such further inquiry or investigation
     into such facts or matters as it may see fit;

          (viii)  the Trust Preferred Guarantee Trustee may execute any of the
     trusts or powers hereunder or perform any duties hereunder either directly
     or by or through agents, nominees, custodians or attorneys, and the Trust
     Preferred Guarantee Trustee shall not be responsible for any misconduct or
     negligence on the part of any agent or attorney appointed with due care by
     it hereunder;

          (ix)    any action taken by the Trust Preferred Guarantee Trustee or
     its agents hereunder shall bind the Holders of the Trust Preferred
     Securities, and the signature of the Trust Preferred Guarantee Trustee or
     its agents alone shall be sufficient and effective to perform any such
     action. No third party shall be required to inquire as to the authority of
     the Trust Preferred Guarantee Trustee to so act or as to its compliance
     with any of the terms and provisions of this Trust Preferred Securities
     Guarantee, both of which shall be conclusively evidenced by the Trust
     Preferred Guarantee Trustee's or its agent's taking such action;

          (x)     whenever in the administration of this Trust Preferred
     Securities Guarantee the Trust Preferred Guarantee Trustee shall deem it
     desirable to receive instructions with respect to enforcing any remedy or
     right or taking any other action hereunder, the Trust Preferred Guarantee
     Trustee (i) may request instructions from the Holders of a Majority in
     liquidation amount of the Trust Preferred Securities, (ii) may refrain from
     enforcing such remedy or right or taking such other action until such
     instructions are received, and (iii) shall be protected in conclusively
     relying on or acting in accordance with such instructions.

     (b)  No provision of this Trust Preferred Securities Guarantee shall be
deemed to impose any duty or obligation on the Trust Preferred Guarantee Trustee
to perform any act or acts or exercise any right, power, duty or obligation
conferred or imposed on it in any jurisdiction in which it shall be illegal, or
in which the Trust Preferred Guarantee Trustee shall be unqualified or
incompetent in accordance with applicable law, to perform any such act or acts
or to exercise any such right, power, duty or obligation. No permissive power or
authority available to the Trust Preferred Guarantee Trustee shall be construed
to be a duty.

Section 3.3    Not Responsible for Recitals or Issuance of Guarantee.

     The Recitals contained in this Guarantee shall be taken as the statements
of the Guarantor, and the Trust Preferred Guarantee Trustee does not assume any
responsibility for their correctness. The Trust Preferred Guarantee Trustee
makes no representation as to the validity or sufficiency of this Trust
Preferred Securities Guarantee.

                                      -10-
<PAGE>

                                  ARTICLE IV

                       TRUST PREFERRED GUARANTEE TRUSTEE

Section 4.1    Trust Preferred Guarantee Trustee; Eligibility.

     (a)  There shall at all times be a Trust Preferred Guarantee Trustee which
shall:

          (i)   not be an Affiliate of the Guarantor; and

          (ii)  be a corporation organized and doing business under the laws of
     the United States of America or any State or Territory thereof or of the
     District of Columbia, or a corporation or Person permitted by the
     Securities and Exchange Commission to act as an institutional trustee under
     the Trust Indenture Act, authorized under such laws to exercise corporate
     trust powers, having a combined capital and surplus of at least
     $50,000,000, and subject to supervision or examination by Federal, State,
     Territorial or District of Columbia authority. If such corporation
     publishes reports of condition at least annually, pursuant to law or to the
     requirements of the supervising or examining authority referred to above,
     then, for the purposes of this Section 4.1(a)(ii), the combined capital and
     surplus of such corporation shall be deemed to be its combined capital and
     surplus as set forth in its most recent report of condition so published.

     (b)  If at any time the Trust Preferred Guarantee Trustee shall cease to be
eligible to so act under Section 4.1(a), the Trust Preferred Guarantee Trustee
shall immediately resign in the manner and with the effect set out in Section
4.2(c).

     (c)  If the Trust Preferred Guarantee Trustee has or shall acquire any
"conflicting interest" within the meaning of Section 310(b) of the Trust
Indenture Act, the Trust Preferred Guarantee Trustee and Guarantor shall in all
respects comply with the provisions of Section 310(b) of the Trust Indenture
Act.

Section 4.2    Appointment, Removal and Resignation of Trust Preferred Guarantee
               Trustees.

     (a)  Subject to Section 4.2(b), the Trust Preferred Guarantee Trustee may
be appointed or removed without cause at any time by the Guarantor.

     (b)  The Trust Preferred Guarantee Trustee shall not be removed in
accordance with Section 4.2(a) until a Successor Trust Preferred Guarantee
Trustee has been appointed and has accepted such appointment by written
instrument executed by such Successor Trust Preferred Guarantee Trustee and
delivered to the Guarantor.

     (c)  The Trust Preferred Guarantee Trustee appointed to office shall hold
office until a Successor Trust Preferred Guarantee Trustee shall have been
appointed or until its removal or resignation. The Trust Preferred Guarantee
Trustee may resign from office (without need for prior

                                      -11-
<PAGE>

or subsequent accounting) by an instrument in writing executed by the Trust
Preferred Guarantee Trustee and delivered to the Guarantor, which resignation
shall not take effect until a Successor Trust Preferred Guarantee Trustee has
been appointed and has accepted such appointment by instrument in writing
executed by such Successor Trust Preferred Guarantee Trustee and delivered to
the Guarantor and the resigning Trust Preferred Guarantee Trustee.

     (d)  If no Successor Trust Preferred Guarantee Trustee shall have been
appointed and accepted appointment as provided in this Section 4.2 within 60
days after delivery to the Guarantor of an instrument of resignation, the
resigning Trust Preferred Guarantee Trustee may petition any court of competent
jurisdiction for appointment of a Successor Trust Preferred Guarantee Trustee.
Such court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Trust Preferred Guarantee Trustee.

     (e)  No Trust Preferred Guarantee Trustee shall be liable for the acts or
omissions to act of any Successor Trust Preferred Guarantee Trustee.

     (f)  Upon termination of this Trust Preferred Securities Guarantee or
removal or resignation of the Trust Preferred Guarantee Trustee pursuant to this
Section 4.2, the Guarantor shall pay to the Trust Preferred Guarantee Trustee
all amounts accrued to the date of such termination, removal or resignation.

                                   ARTICLE V

                                   GUARANTEE

Section 5.1   Guarantee.

     The Guarantor irrevocably and unconditionally agrees to pay in full to the
Holders the Guarantee Payments (without duplication of amounts theretofore paid
by the Trust), as and when due, regardless of any defense, right of set-off or
counterclaim that the Trust may have or assert. The Guarantor's obligation to
make a Guarantee Payment may be satisfied by direct payment of the required
amounts by the Guarantor to the Holders or by causing the Trust to pay such
amounts to the Holders.

Section 5.2   Waiver of Notice and Demand.

     The Guarantor hereby waives notice of acceptance of this Trust Preferred
Securities Guarantee and of any liability to which it applies or may apply,
presentment, demand for payment, any right to require a proceeding first against
the Trust or any other Person before proceeding against the Guarantor, protest,
notice of nonpayment, notice of dishonor, notice of redemption and all other
notices and demands.

                                      -12-
<PAGE>

Section 5.3    Obligations not Affected.

          The obligations, covenants, agreements and duties of the Guarantor
under this Trust Preferred Securities Guarantee shall in no way be affected or
impaired by reason of the happening from time to time of any of the following:

     (a)  the release or waiver, by operation of law or otherwise, of the
performance or observance by the Trust of any express or implied agreement,
covenant, term or condition relating to the Trust Preferred Securities to be
performed or observed by the Trust;

     (b)  the extension of time for the payment by the Trust of all or any
portion of the Distributions, Redemption Price, Liquidation Distribution or any
other sums payable under the terms of the Trust Preferred Securities or the
extension of time for the performance of any other obligation under, arising out
of, or in connection with, the Trust Preferred Securities (other than an
extension of time for payment of Distributions, Redemption Price, Liquidation
Distribution or other sum payable that results from the extension of any
interest payment period on the Debentures or any extension of the maturity date
of the Debentures permitted by the Indenture);

     (c)  any failure, omission, delay or lack of diligence on the part of the
Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Trust Preferred
Securities, or any action on the part of the Trust granting indulgence or
extension of any kind;

     (d)  the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of debt of,
or other similar proceedings affecting, the Trust or any of the assets of the
Trust;

     (e)  any invalidity of, or defect or deficiency in, the Trust Preferred
Securities;

     (f)  any failure or omission to receive any regulatory approval or consent
required in connection with the Trust Preferred Securities (or the common equity
securities issued by the Trust), including the failure to receive any approval
of the Board of Governors of the Federal Reserve System required for the
redemption of the Trust Preferred Securities;

     (g)  the settlement or compromise of any obligation guaranteed hereby or
hereby incurred; or

     (h)  any other circumstance whatsoever that might otherwise constitute a
legal or equitable discharge or defense of a guarantor, it being the intent of
this Section 5.3 that the obligations of the Guarantor hereunder shall be
absolute and unconditional under any and all circumstances.

     There shall be no obligation of the Holders to give notice to, or obtain
consent of, the Guarantor with respect to the happening of any of the foregoing.

                                      -13-
<PAGE>

Section 5.4    Rights of Holders.

     (a)  Subject to Section 5.4(b), the Holders of a Majority in liquidation
amount of the Trust Preferred Securities have the right to direct the time,
method and place of conducting of any proceeding for any remedy available to the
Trust Preferred Guarantee Trustee in respect of this Trust Preferred Securities
Guarantee or exercising any trust or power conferred upon the Trust Preferred
Guarantee Trustee under this Trust Preferred Securities Guarantee.

     (b)  Any Holder of Trust Preferred Securities may institute and prosecute a
legal proceeding directly against the Guarantor to enforce its rights under this
Trust Preferred Securities Guarantee without first instituting a legal
proceeding against the Trust, the Trust Preferred Guarantee Trustee or any other
Person.

Section 5.5    Guarantee of Payment.

     This Trust Preferred Securities Guarantee creates a guarantee of payment
and not of collection.

Section 5.6    Subrogation.

     The Guarantor shall be subrogated to all (if any) rights of the Holders of
Trust Preferred Securities against the Trust in respect of any amounts paid to
such Holders by the Guarantor under this Trust Preferred Securities Guarantee;
provided, however, that the Guarantor shall not (except to the extent required
by mandatory provisions of law) be entitled to enforce or exercise any right
that it may acquire by way of subrogation or any indemnity, reimbursement or
other agreement, in all cases as a result of payment under this Trust Preferred
Securities Guarantee, if, at the time of any such payment, any amounts are due
and unpaid under this Trust Preferred Securities Guarantee. If any amount shall
be paid to the Guarantor in violation of the preceding sentence, the Guarantor
agrees to hold such amount in trust for the Holders and to pay over such amount
to the Holders.

Section 5.7    Independent Obligations.

     The Guarantor acknowledges that its obligations hereunder are independent
of the obligations of the Trust with respect to the Trust Preferred Securities,
and that the Guarantor shall be liable as principal and as debtor hereunder to
make Guarantee Payments pursuant to the terms of this Trust Preferred Securities
Guarantee notwithstanding the occurrence of any event referred to in subsections
(a) through (h), inclusive, of Section 5.3 hereof.

                                      -14-
<PAGE>

                                  ARTICLE VI

                   LIMITATION OF TRANSACTIONS; SUBORDINATION

Section 6.1    Limitation of Transactions.

     So long as any Trust Preferred Securities remain outstanding, if there
shall have occurred an Event of Default under this Trust Preferred Securities
Guarantee, an event of default under the Indenture, an event of default under
the Trust Agreement or during an Extended Interest Payment Period (as defined in
the Indenture), then (a) the Guarantor shall not, and will not permit any
Subsidiary to, declare or pay any dividend on, make any distributions with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its capital stock (other than (i) as a result of a
reclassification of its capital stock for another class of its capital stock or
(ii) declarations of payments of dividends or distributions of capital stock by
a Subsidiary of the Guarantor to the Guarantor); (b) the Guarantor shall not,
and will not permit any Subsidiary to, make any payment of interest or principal
on or repay, repurchase or redeem any debt securities issued by the Guarantor
which rank pari passu with or junior to the Debentures; (c) the Guarantor shall
not make any guarantee payments with respect to any guarantee by the Guarantor
of the debt securities of any Subsidiary of the Guarantor if such guarantee
ranks pari passu with or junior in interest to the Debentures; and (d) the
Guarantor shall not redeem, purchase or acquire less than all of the outstanding
Debentures or any of the Trust Preferred Securities.

Section 6.2    Ranking.

     This Trust Preferred Securities Guarantee will constitute an unsecured
obligation of the Guarantor and will rank subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations,
as defined in the Indenture, of the Guarantor, to the extent and in the manner
set forth in the Indenture, and the applicable provisions of the Indenture will
apply, in all relevant respects, to the obligations of the Guarantor hereunder.

                                  ARTICLE VII

                                  TERMINATION

Section 7.1    Termination.

     This Trust Preferred Securities Guarantee shall terminate (a) upon full
payment of the Redemption Price of all Trust Preferred Securities, (b) upon full
payment of the amounts payable in accordance with the Trust Agreement upon
liquidation of the Trust, or (c) upon distribution of the Debentures to the
Holders of the Trust Preferred Securities. Notwithstanding the foregoing, this
Trust Preferred Securities Guarantee shall continue to be effective or shall be
reinstated, as the case may be, if at any time any Holder of Trust Preferred
Securities must restore payment of any sums paid under the Trust Preferred
Securities or under this Trust Preferred Securities Guarantee.

                                      -15-
<PAGE>

                                 ARTICLE VIII

                                INDEMNIFICATION

Section 8.1    Exculpation.

     (a)  No Indemnified Person shall be liable, responsible or accountable in
damages or otherwise to the Guarantor or any Covered Person for any loss, damage
or claim incurred by reason of any act or omission performed or omitted by such
Indemnified Person in good faith in accordance with this Trust Preferred
Securities Guarantee and in a manner that such Indemnified Person reasonably
believed to be within the scope of the authority conferred on such Indemnified
Person by this Trust Preferred Securities Guarantee or by law, except that an
Indemnified Person shall be liable for any such loss, damage or claim incurred
by reason of such Indemnified Person's negligence or willful misconduct with
respect to such acts or omissions.

     (b)  An Indemnified Person shall be fully protected in relying in good
faith upon the records of the Guarantor and upon such information, opinions,
reports or statements presented to the Guarantor by any Person as to matters the
Indemnified Person reasonably believes are within such other Person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Guarantor, including information, opinions, reports or
statements as to the value and amount of the assets, liabilities, profits,
losses, or any other facts pertinent to the existence and amount of assets from
which Distributions to Holders of Trust Preferred Securities might properly be
paid.

Section 8.2    Indemnification.

     The Guarantor agrees to indemnify each Indemnified Person for, and to hold
each Indemnified Person harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the trust or trusts
hereunder, including the costs and expenses (including reasonable legal fees and
expenses) of defending itself against, or investigating, any claim or liability
in connection with the exercise or performance of any of its powers or duties
hereunder. The obligation to indemnify as set forth in this Section 8.2 shall
survive the termination of this Trust Preferred Securities Guarantee.

                                      -16-
<PAGE>

                                  ARTICLE IX

                                 MISCELLANEOUS

Section 9.1    Successors and Assigns.

     All guarantees and agreements contained in this Trust Preferred Securities
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Guarantor and shall inure to the benefit of the Holders
of the Trust Preferred Securities then outstanding.

Section 9.2    Amendments.

     Except with respect to any changes that do not materially adversely affect
the rights of Holders (in which case no consent of Holders will be required),
this Trust Preferred Securities Guarantee may only be amended with the prior
approval of the Holders of at least a Majority in Liquidation Amount of the
Trust Preferred Securities. The provisions of Article VI of the Trust Agreement
with respect to meetings of Holders of the Trust Preferred Securities apply to
the giving of such approval.

Section 9.3    Notices.

     All notices provided for in this Trust Preferred Securities Guarantee shall
be in writing, duly signed by the party giving such notice, and shall be
delivered, telecopied or mailed by registered or certified mail, as follows:

     (a)  If given to the Trust Preferred Guarantee Trustee, at the Trust
Preferred Guarantee Trustee's mailing address set forth below (or such other
address as the Trust Preferred Guarantee Trustee may give notice of to the
Holders of the Trust Preferred Securities):

               First Union Trust Company, National Association
               One Rodney Square
               920 King Street, 1st Floor
               Wilmington, Delaware 19801
               Attention: Corporate Trust Administration

     (b)  If given to the Guarantor, at the Guarantor's mailing address set
forth below (or such other address as the Guarantor may give notice of to the
Holders of the Trust Preferred Securities):

               Paradigm Bancorporation, Inc.
               2828 FM 1960
               Houston, Texas 77273
               Attention: Peter E. Fisher, President

                                      -17-
<PAGE>

     (c)  If given to any Holder of Trust Preferred Securities, at the address
set forth on the books and records of the Trust. All such notices shall be
deemed to have been given when received in person, telecopied with receipt
confirmed, or mailed by first class mail, postage prepaid except that if a
notice or other document is refused delivery or cannot be delivered because of a
changed address of which no notice was given, such notice or other document
shall be deemed to have been delivered on the date of such refusal or inability
to deliver.

Section 9.4    Benefit.

     This Trust Preferred Securities Guarantee is solely for the benefit of the
Holders of the Trust Preferred Securities and, subject to Section 3.1(a), is not
separately transferable from the Trust Preferred Securities.

Section 9.5    Governing Law.

     THIS TRUST PREFERRED SEcURITIES GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

                           [SIGNATURE PAGE FOLLOWS]

                                      -18-
<PAGE>

     This Trust Preferred Securities Guarantee is executed as of the day and
year first above written.

                              PARADIGM BANCORPORATION, INC.,
                              as Guarantor

                              By:___________________________________
                              Name: Peter E. Fisher
                              Its: President

                              FIRST UNION TRUST COMPANY,
                              NATIONAL ASSOCIATION, as
                              Trust Preferred Guarantee Trustee

                              By:___________________________________
                              Name: Edward L. Truitt, Jr.
                              Its: Vice President

                                      -19-<PAGE>

                                                                    EXHIBIT 10.1

               ------------------------------------------------

                     AGREEMENT AND PLAN OF REORGANIZATION

                                by and between

                         PARADIGM BANCORPORATION, INC.

                                      and

                               DAYTON STATE BANK

                            Dated as of May 3, 1999

               ------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                            Page
<S>                                                                                         <C>
INTRODUCTION...............................................................................   1

I.  THE MERGER.............................................................................   1
       Section 1.1.   Merger...............................................................   1
       Section 1.2.   Articles of Association, Bylaws and Facilities of Surviving Bank.....   2
       Section 1.3.   Effect of Merger.....................................................   2
       Section 1.4.   Liabilities of the Surviving Bank....................................   2
       Section 1.5.   Merger Consideration.................................................   2
       Section 1.6.   Dissenting Shares....................................................   3
       Section 1.7.   Exchange of Shares...................................................   3
       Section 1.8.   Ratification by Shareholders.........................................   4

II.  REPRESENTATIONS AND WARRANTIES OF DSB.................................................   5
       Section 2.1.   Organization.........................................................   5
       Section 2.2.   Capitalization.......................................................   5
       Section 2.3.   Approvals; Authority.................................................   5
       Section 2.4.   Investments..........................................................   6
       Section 2.5.   Financial Statements.................................................   6
       Section 2.6.   Title................................................................   6
       Section 2.7.   Environmental Laws...................................................   6
       Section 2.8.   Litigation and Other Proceedings.....................................   7
       Section 2.9.   Taxes................................................................   8
       Section 2.10.  Contracts............................................................   8
       Section 2.11.  Insurance............................................................   8
       Section 2.12.  No Conflict With Other Instruments...................................   9
       Section 2.13.  Laws.................................................................   9
       Section 2.14.  Conduct..............................................................   9
       Section 2.15.  Allowance for Credit Losses..........................................  10
       Section 2.16.  Employment Relations.................................................  10
       Section 2.17.  ERISA................................................................  10
       Section 2.18.  Deferred Compensation Arrangements...................................  10
       Section 2.19.  List of Loans........................................................  10
       Section 2.20.  Absence of Changes...................................................  11
       Section 2.21.  Brokers and Finders..................................................  11
       Section 2.22.  Absence of Property Taxes and Liens..................................  11
       Section 2.23.  Community Reinvestment Act...........................................  11
       Section 2.24.  Fair Housing Act, Home Mortgage Disclosure Act
                      and Equal Credit Opportunity Act.....................................  11
       Section 2.25.  Usury Laws and Other Consumer Compliance Laws........................  12
</TABLE>

                                      -i-
<PAGE>

<TABLE>
<S>                                                                                              <C>
         Section 2.26.  Bank Secrecy Act.......................................................  12
         Section 2.27.  Zoning and Related Laws................................................  12
         Section 2.28.  Year 2000 Compliance...................................................  12
         Section 2.29.  Securities Laws........................................................  13
         Section 2.30.  Regulatory Approvals...................................................  13
         Section 2.31.  Shareholders' List.....................................................  13

III.   REPRESENTATIONS AND WARRANTIES OF PARADIGM..............................................  13
         Section 3.1.   Organization...........................................................  13
         Section 3.2.   Approvals; Authority...................................................  13
         Section 3.3.   No Conflict With Other Instruments.....................................  14
         Section 3.4.   Litigation and Other Proceedings.......................................  14
         Section 3.5.   Regulatory  Approvals..................................................  14

IV.    COVENANTS OF DSB........................................................................  14
         Section 4.1.   Shareholder Approval and Best Efforts..................................  14
         Section 4.2.   Operations.............................................................  15
         Section 4.3.   Access to Properties and Records.......................................  16
         Section 4.4.   Information for Regulatory Applications................................  16
         Section 4.5.   Attendance at Certain DSB Meetings.....................................  17
         Section 4.6.   Standstill Provision...................................................  17
         Section 4.7.   Environmental Investigation; Rights to Terminate Agreement.............  17
         Section 4.8.   Purchase and Assumption of Dayton Branch of Woodcreek Bank.............  19
         Section 4.9.   List of Loans..........................................................  19

V.     COVENANTS OF PARADIGM...................................................................  19
         Section 5.1.   Best Efforts...........................................................  19
         Section 5.2.   Information for Applications and Proxy Solicitation....................  19
         Section 5.3.   Confidentiality........................................................  20
         Section 5.4.   Applications...........................................................  20

VI.    CLOSING.................................................................................  20
         Section 6.1.   Closing................................................................  20
         Section 6.2.   Effective Time.........................................................  21

VII.   TERMINATION.............................................................................  21
         Section 7.1.   Termination............................................................  21
         Section 7.2.   Effect of Termination..................................................  22

VIII.  CONDITIONS TO OBLIGATIONS OF PARADIGM...................................................  23
         Section 8.1.   Compliance with Representations and Covenants..........................  23
         Section 8.2.   Material Adverse Change................................................  23
         Section 8.3.   Legal Opinion..........................................................  23
         Section 8.4.   Releases and Resignations..............................................  23
</TABLE>

                                     -ii-
<PAGE>

<TABLE>
<S>                                                                                             <C>
        Section 8.5.   Dissenters' Rights.....................................................  24
        Section 8.6.   Employment Agreements..................................................  24
        Section 8.7.   Receipt of Third Party Financing/Capital Raising.......................  24
        Section 8.8.   Execution of Escrow Agreement..........................................  24
        Section 8.9.   Result of Regulatory Examinations......................................  24

IX.  CONDITIONS TO OBLIGATIONS OF DSB.........................................................  24
        Section 9.1.   Compliance with Representations and Covenants..........................  24
        Section 9.2.   Legal Opinion..........................................................  24
        Section 9.3.   Release................................................................  24

X.   CONDITIONS TO RESPECTIVE OBLIGATIONS OF PARADIGM AND DSB.................................  25
        Section 10.1.  Government Approvals...................................................  25
        Section 10.2.  Shareholder Approval...................................................  25

XI.  MISCELLANEOUS............................................................................  25
        Section 11.1.  Non-Survival of Representations and Warranties.........................  25
        Section 11.2.  Amendments.............................................................  25
        Section 11.3.  Expenses...............................................................  25
        Section 11.4.  Notices................................................................  26
        Section 11.5.  Controlling Law........................................................  27
        Section 11.6.  Headings...............................................................  27
        Section 11.7.  Modifications or Waiver................................................  27
        Section 11.8.  Severability...........................................................  27
        Section 11.9.  Assignment.............................................................  27
        Section 11.10. Consolidation of Agreements............................................  27
        Section 11.11. Counterparts...........................................................  27
        Section 11.12. Binding on Successors..................................................  28
        Section 11.13. Gender.................................................................  28
        Section 11.14. Disclosures............................................................  28
        Section 11.15. Publicity..............................................................  28
        Section 11.16. Entire Agreement.......................................................  28

        SCHEDULE 2.1 TO THE AGREEMENT:
           Organization - DSB.................................................................  29

        SCHEDULE 2.2 TO THE AGREEMENT:
           Capitalization - DSB...............................................................  30

        SCHEDULE 2.4 TO THE AGREEMENT:
           Investments - DSB..................................................................  31
</TABLE>

                                     -iii-
<PAGE>

<TABLE>
     <S>                                                                                     <C>
     SCHEDULE 2.5 TO THE AGREEMENT:
          Financial Statements - DSB.......................................................  32

     SCHEDULE 2.6 TO THE AGREEMENT:
          Title - DSB......................................................................  33

     SCHEDULE 2.7 TO THE AGREEMENT:
          Environmental Laws - DSB.........................................................  34

     SCHEDULE 2.8 TO THE AGREEMENT:
          Litigation and Other Proceedings - DSB...........................................  35

     SCHEDULE 2.9 TO THE AGREEMENT:
          Taxes - DSB......................................................................  36

     SCHEDULE 2.10 TO THE AGREEMENT:
          Contracts - DSB..................................................................  37

     SCHEDULE 2.11 TO THE AGREEMENT:
          Insurance Policies - DSB.........................................................  38

     SCHEDULE 2.13 TO THE AGREEMENT:
          Compliance with Laws - DSB.......................................................  39

     SCHEDULE 2.14 TO THE AGREEMENT:
          Conduct - DSB....................................................................  40

     SCHEDULE 2.16 TO THE AGREEMENT:
          Employment Relations - DSB.......................................................  41

     SCHEDULE 2.17 TO THE AGREEMENT:
          ERISA - DSB......................................................................  42

     SCHEDULE 2.18 TO THE AGREEMENT:
          Deferred Compensation Arrangements - DSB.........................................  43

     SCHEDULE 2.19 TO THE AGREEMENT:
          List of Loans - DSB..............................................................  44

     SCHEDULE 2.20 TO THE AGREEMENT:
          Absence of Changes - DSB.........................................................  45

     SCHEDULE 2.21 TO THE AGREEMENT:
          Brokers' and Finders' Fees - DSB.................................................  46
</TABLE>

                                     -iv-

<PAGE>

<TABLE>
     <S>                                                                                               <C>
     SCHEDULE 2.22 TO THE AGREEMENT:
          Absence of Property Taxes and Liens - DSB...................................................  47

     SCHEDULE 2.28 TO THE AGREEMENT
          Year 2000 Compliance - DSB..................................................................  48

     SCHEDULE 3.4 TO THE AGREEMENT:
          Litigation - Paradigm.......................................................................  49

     SCHEDULE 8.3 TO THE AGREEMENT:
          Legal Opinion to be Delivered by DSB........................................................  50

     SCHEDULE 9.2 TO THE AGREEMENT:
          Legal Opinion to be Delivered by Paradigm...................................................  52
</TABLE>

                                      -v-
<PAGE>

                     AGREEMENT AND PLAN OF REORGANIZATION

     This Agreement and Plan of Reorganization ("Agreement") dated as of May 3,
1999, is by and between Paradigm Bancorporation, Inc., a Texas corporation
("Paradigm"), and Dayton State Bank, a Texas banking association ("DSB").

     WHEREAS, DSB desires to affiliate with Paradigm, and Paradigm desires to
affiliate with DSB in the manner provided in this Agreement; and

     WHEREAS, Paradigm and DSB believe that the acquisition of DSB by Paradigm
in the manner provided by, and subject to the terms and conditions set forth in,
this Agreement and all exhibits, schedules and supplements hereto is desirable
and in the best interests of both Paradigm and DSB and their respective
shareholders; and

     WHEREAS, the respective Boards of Directors of Paradigm and DSB have
approved this Agreement and the transactions proposed herein substantially on
the terms and conditions set forth in this Agreement;

     NOW, THEREFORE, in consideration of such premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties agree as set forth below.

                                 INTRODUCTION

Following the execution of this Agreement by Paradigm and DSB, Paradigm will
organize as a wholly-owned subsidiary a Texas banking association ("New Bank")
solely for the purpose of consummating the merger transaction described herein.
This Agreement provides for the merger of New Bank with and into DSB with DSB as
the survivor (the "Merger"), all pursuant to this Agreement and a Plan of Merger
by and between New Bank and DSB, a copy of which is attached hereto as Exhibit
"A" and all  of the terms of which are incorporated by reference for all
purposes.  In connection with the Merger, Paradigm will acquire all of the
issued and outstanding shares of common stock, $2.50 par value, of DSB ("DSB
Common Stock") for consideration as set forth in this Agreement.

                                I.  THE MERGER

     Section 1.1.  Merger.  New Bank shall be merged into DSB (the resulting
                   ------
banking association being herein referred to as the "Surviving Bank") as of the
Effective Time of the Merger (as defined in Section 6.2 of this Agreement) under
the charter and Articles of Association of DSB, as determined by the Texas
Department of Banking, and each of the outstanding shares of common stock of New
Bank shall and without any action on the part of Paradigm be canceled and be
converted into shares of common stock of the Surviving Bank.  The shares of
common stock of the Surviving Bank into which such New Bank common stock is
converted shall represent ownership of 100% of the issued and outstanding
capital stock of the Surviving Bank, all of which shall be owned by Paradigm.
The Merger shall be pursuant to Section 32.301 of the Texas Finance Code and the
provisions of Part Five of the Texas Business Corporation Act (the "TBCA") with
the effect provided in Article 5.06 of the TBCA.
<PAGE>

     Section 1.2.  Articles of Association, Bylaws and Facilities of Surviving
                   -----------------------------------------------------------
Bank.  At the Effective Time and until thereafter amended in accordance with
----
applicable law, the Articles of Association of the Surviving Bank shall be the
Articles of Association of DSB as in effect at the Effective Time.  Until
altered, amended or repealed as provided therein and in the Articles of
Association of the Surviving Bank, the Bylaws of the Surviving Bank shall be the
Bylaws of DSB as in effect at the Effective Time.  The main office of the
Surviving Bank shall be the main office of DSB as of the Effective Time, and all
corporate acts, plans, policies, contracts, approvals and authorizations of DSB
and New Bank and their respective shareholders, boards of directors, committees
elected or appointed thereby, officers and agents, which were valid and
effective immediately prior to the Effective Time, shall be taken for all
purposes as the acts, plans, policies, contracts, approvals and authorization of
the Surviving Bank and shall be as effective and binding thereon as the same
were with respect to DSB and New Bank respectively, as of the Effective Time.

     Section 1.3.  Effect of Merger.  At the Effective Time, the corporate
                   ----------------
existence of DSB and New Bank shall be merged and continued in the Surviving
Bank, and the Surviving Bank shall be deemed to be a continuation in entity and
identity of DSB and New Bank.  All rights, franchises and interests of DSB and
New Bank, respectively, in and to any type of property and choses in action
shall be transferred to and vested in the Surviving Bank by virtue of the Merger
without any deed or other transfer.  Surviving Bank, without any order or other
action on the part of any court or otherwise, shall hold and enjoy all rights of
property, franchises and interest, including appointments, designations and
nominations, and all other rights and interests as trustee, executor,
administrator, transfer agent or registrar of stocks and bonds, guardian of
estates, assignee, receiver and committee of estates and lunatics, and in every
other fiduciary capacity, in the same manner and to the same extent as such
rights, franchises and interests were held or enjoyed by DSB and New Bank,
respectively, as of the Effective Time.  As of the Effective Time, the directors
and officers of New Bank shall become the directors and officers of Surviving
Bank.

     Section 1.4.  Liabilities of the Surviving Bank.  At the Effective Time,
                   ---------------------------------
the Surviving Bank shall be liable for all liabilities of DSB and New Bank.  All
debts, deposits, liabilities and obligations of DSB and of New Bank,
respectively, accrued, absolute, contingent or otherwise, and whether or not
reflected or reserved against on balance sheets, books of account or records of
DSB or New Bank, as the case may be, shall be those of the Surviving Bank and
shall not be released or impaired by the Merger.  All rights of creditors and
other obligees and all liens on property of either DSB or New Bank shall be
preserved unimpaired.

     Section 1.5.  Merger Consideration.
                   --------------------

     (a)  Each of the shares of DSB Common Stock issued and outstanding
immediately prior to the Effective Time, other than Dissenting Shares (as
defined in Section 1.6 of this Agreement), shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and
represent the right to receive cash equal to $92.00, or an aggregate of
$17,257,912 ("Merger Consideration"), payable to the holders of record of shares
of DSB Common Stock, without interest thereon, upon the proper surrender of the
Certificate representing such shares.

                                      -2-
<PAGE>

     (b)  Of the Merger Consideration, Paradigm shall deposit or cause to be
deposited, at the Closing (as defined herein), $523,720.60 into an interest
bearing escrow account at Woodcreek Bank (the "Escrow Account"), with the
remainder of the Merger Consideration to be paid in cash pursuant to Section
1.7.  The Escrow Account shall be subject to and governed by the terms of an
escrow agreement substantially in the form attached hereto as Exhibit "B" (the
"Escrow Agreement"), and the funds held in such account shall be distributed in
accordance with the terms of the Escrow Agreement.  The rights of the holders of
DSB Common Stock in the Escrow Account will not be assignable or transferable
except by operation of law or by intestacy and will not be evidenced by any
certificate or other interest.  The amount withheld from the Merger
Consideration to be delivered at Closing and to be placed in the Escrow Account
shall be increased by an amount equal to the specific loss reserve for loans
identified in any examination conducted by banking regulators prior to the
Closing; provided, however, that the amount to be placed in the Escrow Account
shall be increased only to the extent the specific loss for a loan identified by
regulators exceeds the amount attributed to such loan in the Escrow Agreement.

     Section 1.6.  Dissenting Shares.  Each share of DSB Common Stock issued
                   -----------------
and outstanding immediately prior to the Effective Time, the holder of which has
not voted in favor of the Merger and who has delivered a written demand for
payment of the fair value of such shares within the time and in the manner
provided in Article 5.12 of the TBCA, is referred to herein as a "Dissenting
Share."  Dissenting Shares shall not be converted into or represent the right to
receive the Merger Consideration pursuant to Section 1.5 of this Agreement
unless and until such holder shall have failed to perfect or shall have
effectively withdrawn or lost his right to appraisal and payment under the TBCA.
If any such holder shall have so failed to perfect or shall have effectively
withdrawn or lost such right, such holder's Dissenting Shares shall thereupon be
deemed to have been converted into and to have become exchangeable for, at the
Effective Time, the right to receive the Merger Consideration without any
interest thereon.  As set forth in Section 8.5 of this Agreement, if the holders
of more than 5% of the DSB Common Stock shall have exercised their dissenters'
rights, Paradigm shall have no obligation to consummate the Merger.

     Section 1.7.  Exchange of Shares.
                   ------------------

          (a)  Paradigm shall deposit or cause to be deposited in trust with
Woodcreek Bank (the "Exchange Agent") prior to the Effective Time cash in an
aggregate amount sufficient to make the cash payments pursuant to Section 1.5
hereof and to make the appropriate cash payments, if any, to holders of
Dissenting Shares pursuant to Section 1.6 hereof (such amounts being hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall promptly make the
payments of the Merger Consideration out of the Exchange Fund upon surrender of
such shares. Payments to holders of Dissenting Shares shall be made as required
by the TBCA. The Exchange Fund shall not be used for any other purpose, except
as provided in this Agreement.

          (b)  At least 10 days prior to the Effective Time or on such other
date as the parties may agree, the Exchange Agent shall mail to each record
holder of an outstanding certificate or certificates which represent shares of
DSB Common Stock (the "Certificates"), a form letter of transmittal which will
specify that delivery shall be effected, and risk of loss and title to the

                                      -3-
<PAGE>

Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent and contain instructions for use in effecting the surrender of
the Certificates for payment therefor. At and after the Closing and upon
surrender to the Exchange Agent of a Certificate, together with such letter of
transmittal duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor the amount of cash provided in Section 1.5 hereof
in the manner described herein, and such Certificate shall forthwith be
canceled. Payment will be made at Closing by check sent by U.S. mail for shares
of DSB Common Stock if Certificates and a properly completed letter of
transmittal with respect to such shares are received by the Exchange Agent at
least five business days prior to Closing. Payment will be made for all other
shares of DSB Common Stock by check sent by U.S. mail within five business days
after the Exchange Agent's receipt of the Certificates and a properly completed
letter of transmittal. No interest will be paid or accrued on the cash payable
upon surrender of the Certificates. If payment of cash is to be made to a person
other than the person in whose name the Certificate surrendered is registered,
it shall be a condition of payment that the Certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the Certificate
surrendered or established to the satisfaction of Paradigm that such tax has
been paid or is not applicable. Until surrendered in accordance with the
provisions of this Section 1.7, each Certificate (other than Certificates
representing Dissenting Shares) shall represent for all purposes the right to
receive the Merger Consideration without any interest thereon. Each shareholder
of DSB shall be entitled to receive payment for his shares only upon surrender
of the certificates representing his shares of DSB Common Stock or after
providing an appropriate Affidavit of Lost Certificate and Indemnity Agreement
and/or a bond as may be required in each case by Paradigm; provided, however,
that such indemnity or bond will not be in excess of the payment related to the
missing certificate.

          (c)  After the Effective Time, the stock transfer ledger of DSB shall
be closed and there shall be no transfers on the stock transfer books of DSB of
the shares of DSB Common Stock which were outstanding immediately prior to such
time of filing.  If, after the Effective Time, Certificates are presented to
Paradigm, they shall be promptly presented to the Exchange Agent and exchanged
as provided in this Section 1.7.

          (d)  Any portion of the Exchange Fund (including the proceeds of any
investments thereof) that remains unclaimed by the shareholders of DSB for six
months after the Effective Time shall be paid to Paradigm, and the holders of
shares of DSB Common Stock not theretofore presented to the Exchange Agent shall
look to Paradigm only, and not the Exchange Agent, for the payment of any Merger
Consideration in respect of such shares.  The unpaid portion of the Exchange
Fund will escheat to the State of Texas as required by law.

     Section 1.8.  Ratification by Shareholders.  This Agreement shall be
                   ----------------------------
submitted to the shareholders of DSB in accordance with applicable provisions of
law and the respective Articles of Association and Bylaws of DSB. DSB and
Paradigm shall proceed expeditiously and cooperate fully in the procurement of
any other consents and approvals and the taking of any other actions in
satisfaction of all other requirements prescribed by law or otherwise necessary
for consummation of the Merger on the terms herein provided, including, without
limitation, the preparation and

                                      -4-
<PAGE>

submission of all necessary filings, requests for waivers and certificates with
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
the Federal Deposit Insurance Corporation ("FDIC") and the Texas Department of
Banking ("Banking Department").

                  II.  REPRESENTATIONS AND WARRANTIES OF DSB

     DSB represents and warrants to Paradigm that each of the statements made in
this Article II are true and correct in all material respects.  DSB agrees that,
at the Closing, it shall provide Paradigm with supplemental Schedules reflecting
any changes in the information contained in the Schedules which have occurred in
the period from the date of delivery of such Schedules to the date of Closing.

     Section 2.1.  Organization.  DSB is a Texas banking association duly
                   ------------
organized, validly existing and in good standing under the laws of the State of
Texas.  DSB has full power and authority (including all licenses, franchises,
permits and other governmental authorizations which are legally required) to
own, lease and operate its properties, to engage in the business and activities
now conducted by it and to enter into this Agreement.  DSB (i) is duly
authorized to conduct a general banking business, embracing all usual deposit
functions of commercial banks as well as commercial, industrial and real estate
loans, installment credits, collections and safe deposit facilities subject to
the supervision of the Federal Reserve Board, FDIC and the Banking Department;
and (ii) is an insured bank as defined in the Federal Deposit Insurance Act.
DSB does not conduct trust activities.  True and complete copies of the Articles
of Association and Bylaws of DSB, as amended to date (collectively, "DSB
Constituent Documents"), have been delivered or made available to Paradigm.
Except as otherwise disclosed in Schedule 2.1 to this Agreement DSB (a) does not
have any subsidiaries or affiliates, (b) is not a general partner or material
owner in any joint venture, general partnership, limited partnership, trust or
other non-corporate entity, and (c) does not know of any arrangement pursuant to
which the stock of any corporation is or has been held in trust (whether
express, constructive, resulting or otherwise) for the benefit of all
shareholders of DSB.

     Section 2.2.  Capitalization.  The authorized capital stock of DSB consists
                   --------------
of 198,899 shares of DSB Common Stock, 187,586 of which are issued and
outstanding. All of the issued and outstanding shares of DSB Common Stock are
validly issued, fully paid and nonassessable, and have not been issued in
violation of the preemptive rights of any person or in violation of any
applicable federal or state laws. Except as disclosed in Schedule 2.2, there are
no existing options, warrants, calls, convertible securities or commitments of
any kind obligating DSB to issue any authorized and unissued DSB Common Stock
nor does DSB have any outstanding commitment or obligation to repurchase,
reacquire or redeem any of its outstanding capital stock. Except as disclosed in
Schedule 2.2 to this Agreement, there are no voting trusts, voting agreements,
buy-sell agreements or other similar arrangements affecting the DSB Common
Stock.

     Section 2.3.  Approvals; Authority.  The Board of Directors of DSB has
                   --------------------
approved this Agreement and the transactions contemplated herein subject to the
approval thereof by the shareholders of DSB as required by law, and, other than
shareholder approval, no further corporate proceedings of DSB are needed to
execute and deliver this Agreement and consummate the Merger.

                                      -5-
<PAGE>

This Agreement has been duly executed and delivered by DSB and, is a duly
authorized, valid, legally binding agreement of DSB enforceable against DSB in
accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to creditors' rights
generally and general equitable principles.

     Section 2.4.  Investments.  DSB has furnished to Paradigm a complete list,
                   -----------
as of March 31, 1999, of all securities, including municipal bonds, owned by DSB
(the "Securities Portfolio"). Except as set forth on Schedule 2.4 all such
securities are owned by DSB (i) of record, except those held in bearer form,
(ii) beneficially, free and clear of all mortgages, liens, pledges and
encumbrances, and (iii) are qualified to be owned by commercial banks. Schedule
2.4 also discloses any entities in which the ownership interest of DSB equals 5%
or more of the issued and outstanding voting securities of the issuer thereof.
There are no voting trusts or other agreements or understandings with respect to
the voting of any of the securities.

     Section 2.5.  Financial Statements.  DSB has furnished or made available to
                   --------------------
Paradigm true and complete copies of DSB's audited balance sheets as of December
31, 1998, 1997 and 1996, and the related statements of income and statements of
cash flow for the years then ended, together with the notes thereto. DSB has
also delivered to Paradigm a true and correct copy of the Reports of Condition
and Income ("Call Reports") filed by DSB as of and for the year ended December
31, 1998 and as of and for the three months ended March 31, 1999. The audited
financial information and Call Reports referred to in this Section 2.5 are
collectively referred to as the "DSB Financial Statements." The DSB Financial
Statements fairly present the financial position of DSB and the results of its
operations at the dates and for the periods indicated in conformity with GAAP
applied on a consistent basis, except for the Call Reports which are in
compliance with regulatory accounting principles. Except as set forth on
Schedule 2.5 to this Agreement, as of the dates of the DSB Financial Statements
referred to above, DSB did not have any liabilities, fixed or contingent, which
are not fully shown or provided for in such DSB Financial Statements. Except as
set forth in Schedule 2.20 to this Agreement, since March 31, 1999, there have
been no material changes in the financial condition, assets, liabilities or
business of DSB, which individually or in the aggregate have adversely affected
the financial condition, results of operations or business of DSB.

     Section 2.6.  Title.  True and complete copies of all deeds and leases and
                   -----
title insurance policies, if any, for all real property owned or leased by DSB
and all mortgages, deeds of trust and security agreements to which such property
is subject have been furnished or made available to Paradigm. Except as set
forth in Schedule 2.6, DSB has good and indefeasible title to all of their
assets and properties including, without limitation, land and improvements
thereon, and all personal and intangible properties reflected in the DSB
Financial Statements or acquired subsequent thereto, subject to no liens,
mortgages, security interests, encumbrances or charges of any kind. Except as
set forth in Schedule 2.6, DSB does not own securities of or other interest in
any other commercial bank.

     Section 2.7.  Environmental Laws.  DSB is in compliance with all terms and
                   ------------------
conditions of all applicable federal and state Environmental Laws (as defined
below) and permits thereunder. Except as set forth on Schedule 2.7 of this
Agreement, (a) DSB has not received notice of any

                                      -6-
<PAGE>

violation of any Environmental Laws or generated, stored, or disposed of any
materials designated as Hazardous Materials (as defined below) under the
Environmental Laws, and it is not subject to any claim or lien under any
Environmental Laws; (b) during the term of ownership by DSB no real estate
currently owned, operated, or leased (including any property acquired by
foreclosure or deeded in lieu thereof) by DSB, or owned, operated or leased by
DSB within the ten years preceding the date of this Agreement, has been
designated as requiring any environmental cleanup or response action to comply
with Environmental Laws, or has been the site of release of any Hazardous
Materials; (c) to the knowledge of DSB, no asbestos was used in the construction
of any portion of DSB's facilities; and (d) to the knowledge of DSB, no real
property currently owned by DSB is, or has been, an industrial site or landfill.

     "Environmental Laws," for purposes of this Section 2.7, includes, but is
not limited to, any federal, state or local statute, law, rule, regulation,
ordinance, code, policy or rule of common law now in effect and in each case as
amended to date and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree, or judgment,
relating to the environment, human health or safety, or Hazardous Materials,
including without limitation the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. (S)(S) 9601, et
seq.; The Hazardous Materials Transaction Act, as amended, 49 U.S.C. (S)(S)
1801, et seq.; the Resource Conservation and Recovery Act of 1976, as amended,
42 U.S.C. (S)(S) 6901, et seq.; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. (S)(S) 1201, et seq.; the Toxic Substances Control Act, 15
U.S.C. (S)(S) 2601, et seq.; the Clean Air Act, 42 U.S.C. (S)(S) 7401, et seq.;
and the Safe Drinking Water Act, 42 U.S.C. (S)(S) 3808, et seq.

     "Hazardous Materials," for purposes of this Section 2.7, includes, but is
not limited to, (a) any petroleum or petroleum products, natural gas, or natural
gas products, radioactive materials, asbestos, urea formaldehyde foam
insulation, transformers or other equipment that contains dielectric fluid
containing levels of polychlorinated biphenyls (PCBs), and radon gas; (b) any
chemicals, materials, waste or substances defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous materials,"
"extremely hazardous wastes," "restricted hazardous wastes," toxic substances,"
"toxic pollutants," "contaminants," or "pollutants," or words of similar import,
under any Environmental Laws; and (c) any other chemical, material, waste or
substance which is in any way regulated by any federal, state or local
government authority, agency or instrumentality, including mixtures thereof with
other materials, and including any regulated building materials such as asbestos
and lead.

     Section 2.8.  Litigation and Other Proceedings.  Except as otherwise noted
                   --------------------------------
on Schedule 2.8 hereto, there are no legal, quasi-judicial, regulatory or
administrative proceedings of any kind or nature now pending or, to the
knowledge of DSB, threatened before any court or administrative body in any
manner against DSB, or any of its properties or capital stock. DSB does not know
of any basis on which any litigation or proceeding could be brought which could
have a material adverse effect on the financial condition of DSB or which could
question the validity of any action taken or to be taken in connection with this
Agreement and the transactions contemplated hereby. DSB is not in default with
respect to any judgment, order, writ, injunction, decree, award, rule or
regulation of any court, arbitrator or governmental agency or instrumentality.

                                      -7-
<PAGE>

     Section 2.9.  Taxes.  Except as otherwise noted in Schedule 2.9 hereto, DSB
                   -----
has filed with the appropriate federal, state and local governmental agencies
all tax returns and reports required to be filed, and has paid all taxes and
assessments shown or claimed to be due. DSB has not executed or filed with the
Internal Revenue Service any agreement extending the period for assessment and
collection of any federal tax, nor is DSB a party to any action or proceeding by
any governmental authority for assessment or collection of taxes, nor has any
claim for assessment or collection of taxes been asserted against DSB. DSB has
not waived any statute of limitations with respect to any tax or other
assessment or levy, and all such taxes and other assessments and levies which
DSB is required by law to withhold or to collect have been duly withheld and
collected and have been paid over to the proper governmental agency, domestic
and foreign, or segregated and set aside for such payment and, if so segregated
and set aside will be so paid by DSB, as required by law.

     True and complete copies of the federal income tax returns of DSB as filed
with the Internal Revenue Service for the years ended December 31, 1997,
December 31, 1996, and December 31, 1995, will be delivered to Paradigm within
ten (10) days after the execution of this Agreement, and a copy of the federal
income tax return of DSB to be filed with the Internal Revenue Service for the
year ended December 31, 1998 will promptly be forwarded to Paradigm.

     Section 2.10.  Contracts.  Except as otherwise noted on Schedule 2.10
                    ---------
hereto, DSB is not a party to or bound by any (a) employment contract or
severance arrangement (including without limitation any collective bargaining
contract or union agreement or agreement with an independent consultant); (b)
bonus, stock option, deferred compensation or profit-sharing, pension or
retirement plan or other employee benefit arrangement; (c) lease or license with
respect to any property, real or personal, whether as landlord, tenant, licensor
or licensee; (d) contract or commitment for capital expenditures; (e) material
contract or commitment made in the ordinary course of business for the purchase
of materials or supplies or for the performance of services; (f) contract or
option to purchase or sell any real or personal property; (g) contract,
agreement or letter with respect to the management or operations of DSB imposed
by any bank regulatory authority having supervisory jurisdiction over DSB; (h)
agreement, contract or indenture related to the borrowing by DSB of money; (i)
guaranty of any obligation for the borrowing of money; (j) agreement with or
extension of credit to any executive officer or director of DSB or holder of
more than ten percent (10%) of the issued and outstanding DSB Common Stock, or
any affiliate of such person; or (k) contracts not otherwise disclosed in any
schedule attached hereto. DSB has in all respects performed all obligations
required to be performed by it to date and is not in default under, and no event
has occurred which, with the lapse of time or action by a third party could
result in default under, any indenture, mortgage, contract, lease or other
agreement to which DSB is a party or by which DSB is bound or under any
provision of the DSB Constituent Documents.

     Section 2.11.  Insurance.  A true and complete list of all insurance
                    ---------
policies owned or held by or on behalf of DSB (other than credit-life policies),
including policy numbers, retention levels, insurance carriers, and effective
and termination dates, is set forth in Schedule 2.11 to this Agreement.  In the
judgment of the Board of Directors of DSB, such insurance policies are adequate
for the business conducted by DSB in respect of amounts, types and risks
insured.

                                      -8-
<PAGE>

     Section 2.12.  No Conflict With Other Instruments.  Neither the execution
                    ----------------------------------
and delivery of this Agreement nor the consummation of the Merger
contemplated hereby, subject to obtaining all required shareholder consents,
will conflict with or result in a breach of any provision of the DSB Constituent
Documents.  The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby, subject to obtaining all required
shareholder and regulatory approvals, will not violate any provision of, or
constitute a default under, any law, or any order, writ, injunction or decree of
any court or other governmental agency, or any contract, agreement or instrument
to which DSB is a party or by which it is bound or constitute an event which,
with the lapse of time or action by a third party, could result in any default
under any of the foregoing or result in the creation of any lien, charge or
encumbrance upon the assets or properties of DSB.

     Section 2.13.  Laws.  Except as otherwise noted in Schedule 2.13 hereto,
                    ----
DSB is in compliance with all applicable federal, state and local laws, rules,
regulations and orders applicable to it. Except for approvals by regulatory
authorities having jurisdiction over DSB, no prior consent, approval or
authorization of, or declaration, filing or registrations with, any person or
regulatory authority is required of DSB in connection with the execution,
delivery and performance by DSB of this Agreement and the transactions
contemplated hereby or the resulting change of control of DSB. DSB has filed all
reports, registrations and statements, together with any amendments required to
be made thereto, that are required to be filed with the Federal Reserve Board,
FDIC, Banking Department or any other regulatory authority having jurisdiction
over DSB, and such reports, registrations and statements are, to the best
knowledge of DSB, true and correct.

     Section 2.14.  Conduct.  Except as otherwise noted in Schedule 2.14 hereto,
                    -------
since March 31, 1999, DSB has not (a) issued or sold any of its capital stock or
corporate debt obligations; (b) declared or set aside or paid any dividend or
made any other distribution in respect of or, directly or indirectly, purchased,
redeemed or otherwise acquired any shares of DSB Common Stock; (c) incurred any
obligations or liabilities (fixed or contingent), except deposits incurred in
the ordinary course of business, or mortgaged, pledged or subjected any of its
assets to a lien or encumbrance; (d) discharged or satisfied any lien or
encumbrance or paid any obligation or liability (fixed or contingent); (e) sold,
exchanged or otherwise disposed of any of its capital assets; (f) made any
general or individual wage or salary increase (including increases in directors'
or consultants' fees), paid any bonus, granted or paid any perquisites such as
automobile allowance, club membership or dues or other similar benefits, or
instituted any employee welfare, retirement or similar plan or arrangement; (g)
suffered any physical damage, destruction or casualty loss, whether or not
covered by insurance, affecting its business, property or assets; (h) made any
or acquiesced with any change in accounting methods, principles and practices
except as may be required by GAAP; (i) excluding certificates of deposit issued,
entered into any contract, agreement or commitment which obligates DSB for an
amount in excess of $10,000 over the term of any such contract, agreement or
commitment; (j) entered or agreed to enter into any agreement or arrangement
granting any preferential rights to purchase any of their assets, properties or
rights or requiring the consent of any party to the transfer and assignment of
any such assets, properties or rights; (k) purchased, leased or otherwise
acquired capital assets for an aggregate amount in excess of $10,000.

                                      -9-
<PAGE>

     Section 2.15.  Allowance for Credit Losses.  The allowance for credit
                    ---------------------------
losses of DSB has been calculated in accordance with generally accepted
accounting principles as applied to banking institutions and in accordance with
all applicable rules and regulations. At the Effective Time, no facts relevant
to the adequacy of the allowance for credit losses as of that date shall have
been withheld from Paradigm. Except as disclosed in writing to Paradigm by DSB
on or before the date of the Agreement, there are no loans of DSB that have been
classified by bank examiners on DSB' most recent examination report as "Other
Assets Especially Mentioned," "Substandard," "Doubtful" or "Loss."

     Section 2.16.  Employment Relations.  The relations of DSB with its
                    --------------------
employees are satisfactory, and DSB has not received any notice of any
controversies with, or organizational efforts or other pending actions by,
representatives of its employees. DSB has complied with all laws relating to the
employment of labor with respect to their employees, including any provisions
thereof relating to wages, hours, collective bargaining and the payment of
workman's compensation insurance and social security and similar taxes, and,
except as disclosed in Schedule 2.16 hereto, no person has asserted that DSB is
liable for any arrearages of wages, workman's compensation insurance premiums or
any taxes or penalties for failure to comply with any of the foregoing.

     Section 2.17.  ERISA.  Except as set forth in Schedule 2.17, the employee
                    -----
pension benefits plans and welfare benefit plans (referred to collectively
herein as the "Plans") in effect at DSB (all of which are included in Schedule
2.10 hereto) have all been operated in all respects in compliance with ERISA
since ERISA became applicable with respect thereto. None of the Plans nor any of
their respective related trusts have been terminated, and there has been no
"reportable event," as that term is defined in Section 4043 of ERISA, required
to be reported since the effective date of ERISA which has not been reported,
and none of such Plans nor their respective related trusts have incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA (whether or not waived), since the effective date of ERISA. The Plans are
the only employee pension benefit plans covering employees of DSB. DSB will not
have any liabilities with respect to employee pension benefits, whether vested
or unvested as of the Closing, for any of their employees other than under the
Plans, and as of the date hereof the actuarial present value of Plan assets of
each Plan is not less (and as of the Closing of the Merger such present value
will not be less) than the present value of all benefits payable or to be
payable thereunder.

     Section 2.18.  Deferred Compensation Arrangements.  The schedule attached
                    ----------------------------------
as Schedule 2.18 contains a full description of all deferred compensation
arrangements of DSB, if any, including the terms under which the cash value of
any life insurance purchased in connection with any such arrangement can be
realized.

     Section 2.19.  List of Loans.  A true and complete list, as of March 31,
                    -------------
1999 of all loans (individually, a "Loan" and collectively, the "Loans") of DSB,
showing for each such Loan the outstanding principal balance due, before
reduction for any discount has been furnished or made available to Paradigm.
Except as set forth in Schedule 2.19, all currently outstanding Loans, including
any current extensions of any Loan, were solicited, originated and currently
exist in  compliance with all applicable requirements of federal and state law
and regulations promulgated

                                      -10-
<PAGE>

thereunder. To the best knowledge of DSB, the Loans are adequately documented
and each note evidencing a Loan or credit agreement or security instrument
related to a Loan constitutes a valid and binding obligation of the obligor
thereunder, enforceable in accordance with the terms thereof. There are no oral
modifications or amendments or additional agreements related to the Loans that
are not reflected in DSB's records, and no claim of defense as to the
enforcement of any Loan has been asserted, and DSB is not aware of any acts or
omissions that would give rise to any claim or right of rescission, set off,
counterclaim or defense.

     Section 2.20.  Absence of Changes.  Since March 31, 1999, except as
                    ------------------
disclosed in Schedule 2.20 to this Agreement, there has not been any material
adverse change in the financial condition, business or operations of DSB. Since
March 31, 1999, the business of DSB has been conducted only in the ordinary
course consistent with prior practices.

     Section 2.21.  Brokers and Finders.  Other than as set forth on Schedule
                    -------------------
2.21 of this Agreement, neither DSB nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the Merger
contemplated herein.

     Section 2.22.  Absence of Property Taxes and Liens.  All property taxes
                    -----------------------------------
due under the applicable provisions of the Texas Tax Code have been paid by
either DSB or the shareholders of DSB, and no liens imposed or authorized by the
Texas Tax Code exist on the shares of DSB Common Stock, except as otherwise
disclosed in Schedule 2.22 to this Agreement.

     Section 2.23.  Community Reinvestment Act.  To the best of its
                    --------------------------
knowledge, information and belief, DSB is in compliance with the Community
Reinvestment Act (12 U.S.C. (S) 2901 et seq.) and all regulations promulgated
                                     -- ----
thereunder, and DSB has supplied Paradigm with copies of DSB's current CRA
Statement, all support papers therefor, all letters and written comments
received by DSB since January 1, 1996 pertaining thereto and any responses by
DSB to such comments.  DSB has a rating of "satisfactory" as of its most recent
CRA compliance examination and knows of no reason why it would not receive a
rating of "satisfactory" or better pursuant to its next CRA compliance
examination or why the Federal Reserve Board or any other governmental entity
may seek to restrain, delay or prohibit the transactions contemplated hereby as
a result of any act or omission of DSB under the CRA.

     Section 2.24.  Fair Housing Act, Home Mortgage Disclosure Act and Equal
                    --------------------------------------------------------
Credit Opportunity Act.  To the best of its knowledge, information and belief,
----------------------
DSB is in compliance with the Fair Housing Act (42 U.S.C. (S) 3601 et seq.), the
                                                                   -- ----
Home Mortgage Disclosure Act (12 U.S.C. (S) 2801 et seq. and the Equal Credit
                                                 -- ----
Opportunity Act (15 U.S.C. (S) 1691 et seq.) and all regulations promulgated
                                    -- ----
thereunder.  DSB has not received any notices of any violation of said acts or
any of the regulations promulgated thereunder, and DSB does not have any notice
of, or knowledge of, any threatened administrative inquiry, proceeding or
investigation with respect to DSB's compliance with said acts.

                                      -11-
<PAGE>

     Section 2.25.  Usury Laws and Other Consumer Compliance Laws.  To the best
                    ---------------------------------------------
of its knowledge, information and belief, all loans of DSB have been made in
accordance with all applicable statutes and regulatory requirements at the time
of such loan or any renewal thereof, including without limitation, the Texas
usury statutes as they are currently interpreted, Regulation Z (12 C.F.R. (S)
226 et seq.) issued by the Board of Governors of the Federal Reserve System,
    -- ----
the Federal Consumer Credit Protection Act (15 U.S.C. (S) 1601 et seq.), the
                                                               -- ----
Texas Consumer Credit Code (Tex. Rev. Civ. Stat. Ann. art. 5069-2.01, et seq.)
                                                                      -- ----
and all statutes governing the operation of State member banks located in Texas.
Each loan on the books of DSB was made in the ordinary course of business of
DSB.

     Section 2.26.  Bank Secrecy Act.  To the best of its knowledge, information
                    ----------------
and belief, DSB is in compliance with the Bank Secrecy Act (12 U.S.C. (S)(S)
1730(d) and 1829(b)) and all regulations promulgated thereunder, and DSB has
properly certified all foreign deposit accounts and has made all necessary tax
withholdings on all of its deposit accounts; furthermore, DSB has timely and
properly filed and maintained all requisite Currency Transaction Reports and
other related forms, including, but not limited to, any requisite Custom Reports
required by any agency of the United States Treasury Department, including but
not limited to the Internal Revenue Service.

     Section 2.27.  Zoning and Related Laws.  All real property owned by DSB
                    -----------------------
and the use thereof complies with all applicable laws, ordinances, regulations,
orders or requirements, including without limitation, building, zoning and other
laws.

     Section 2.28.  Year 2000 Compliance.  Except as set forth on Schedule
                    --------------------
2.28, each item of software, hardware, firmware, third-party software, goods
with computer chips and services (i) provided by DSB during the past four (4)
years to any customer of DSB or any other party or (ii) used by DSB in its
business, is and shall remain Year 2000 Compliant, as that term is hereinafter
defined, through the year 2000.  For purposes of this Agreement, "Year 2000
Compliant" means that the item:

          (a)  Functions without interruption or human intervention with four-
     digit year processing on all data, input, or output which includes an
     indication of date (collectively, "Date Data"), including errors or
     interruptions from functions that may involve Date Data from more than one
     century, leap years, or the date September 9, 1999, regardless of the date
     of processing or date of Date Data;

          (b)  Provides results from any operation accurately reflecting any
     Date Data used in the operation performed, with output in any form, except
     graphics, having four digit years;

          (c)  Accepts two digit year Date Data in a manner that resolves any
     ambiguities as to century in a defined manner; and

          (d)  Provides data interchange in the ISO8601:1988 standard of
     CCYYMMDD.

                                      -12-
<PAGE>

Except as set forth on Schedule 2.28, to the best knowledge of DSB, each of
DSB's vendors has ensured that each item of software, hardware, firmware, third-
party software, goods with computer chips, and services (a) provided by such
vendor during the past four (4) years to DSB or (b) used by such vendor in its
business related to DSB, is and shall remain Year 2000 Compliant through the
Year 2000. DSB has followed the procedures set forth in, and has taken and will
continue to take all actions required by FFIEC Interagency Guidelines
Establishing Year 2000 Standards for Safety and Soundness Guidelines Concerning
the Year 2000 Business Risk and all previously applicable regulatory standards
and guidance papers regarding Year 2000 readiness (collectively, the "Year 2000
Guidelines") to ensure that all computer software owned by or licensed to DSB is
fully compliant with the Year 2000 Guidelines. DSB has not received a regulatory
rating of less than satisfactory from any regulatory authority with respect to
any review of its compliance with the Year 2000 Guidelines or the adequacy of
its Year 2000 planning efforts.

     Section 2.29.  Securities Laws. DSB and its officers, employees and agents
                    ---------------
are now, and at all times in the past have been, in full compliance with all
applicable federal and state securities laws and any regulations promulgated
thereunder. DSB and its officers, employees and agents have complied with, and
currently hold, all necessary licenses and permits required under any federal or
state securities law or regulation to conduct any securities activities in which
DSB or its officers, employees, or agents are now engaged or have been engaged
in the past.

     Section 2.30.  Regulatory Approvals. DSB has no reason to believe that it
                    --------------------
will not be able to obtain all requisite regulatory approvals on the part of DSB
necessary to consummate the Merger as set forth in this Agreement.

     Section 2.31.  Shareholders' List. DSB has provided or made available to
                    ------------------
Paradigm as of a date within ten (10) days of the date of this Agreement a list
of the holders of shares of DSB Common Stock containing for DSB's shareholders
the names, addresses and number of shares held of record, which shareholders'
list is in all respects accurate as of such date and will be updated prior to
Closing.

                III. REPRESENTATIONS AND WARRANTIES OF PARADIGM

     Paradigm represents and warrants to DSB that the statements contained in
this Article III are true and correct in all material respects as follows:

     Section 3.1.   Organization. Paradigm, a Texas corporation and a bank
                    ------------
holding company registered under the Bank Holding Company Act of 1956, as
amended, is duly organized, validly existing and in good standing under the laws
of the State of Texas. Paradigm has full power and authority (including all
licenses, franchises, permits and other governmental authorizations which are
legally required) to own its properties, to engage in the business and
activities now conducted by it and to enter into this Agreement.

     Section 3.2.   Approvals; Authority. The Board of Directors of Paradigm has
                    --------------------
approved this Agreement and the transactions contemplated herein and no further
corporate proceedings of

                                      -13-
<PAGE>

Paradigm are needed to execute and deliver this Agreement and consummate the
Merger. This Agreement has been duly executed and delivered by Paradigm and is a
duly authorized, valid, legally binding agreement of Paradigm enforceable
against Paradigm in accordance with its terms, subject to the effect of
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights generally and general equitable principles.

     Section 3.3.   No Conflict With Other Instruments. Neither the execution
                    ----------------------------------
and delivery of this Agreement nor the consummation of the Merger contemplated
thereby will conflict with or result in a breach of any provision of any
Articles of Incorporation of Paradigm or its Bylaws. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby,
subject to obtaining all required shareholder and regulatory approvals, will not
violate any provision of, or constitute a default under, any law, or any order,
writ, injunction or decree of any court or other governmental agency, or any
contract, agreement or instrument to which Paradigm is a party or by which it is
bound or constitute an event which, with the lapse of time or action by a third
party, could result in any default under any of the foregoing or result in the
creation of any lien, charge or encumbrance upon the assets or properties of
Paradigm, or upon the stock of Paradigm.

     Section 3.4.   Litigation and Other Proceedings. Except as otherwise noted
                    --------------------------------
on Schedule 3.4 hereto, there are no legal, quasi-judicial or administrative
proceedings of any kind or nature now pending or, to the knowledge of Paradigm,
threatened before any court or administrative body in any manner against
Paradigm, or any of its properties or capital stock, which might have a material
adverse effect on Paradigm, its financial condition, assets, operations or
earnings or the transactions proposed by this Agreement. Paradigm knows of no
basis on which any litigation or proceeding could be brought which could have a
materially adverse effect on the financial condition of Paradigm or which could
question the validity of any action taken or to be taken in connection with this
Agreement and the transactions contemplated hereby. Paradigm is not in default
with respect to any judgment, order, writ, injunction, decree, award, rule or
regulation of any court, arbitrator or governmental agency or instrumentality.

     Section 3.5.   Regulatory Approvals. Paradigm has no reason to believe that
                    --------------------
it will not be able to obtain all requisite regulatory approvals on the part of
Paradigm necessary to consummate the transactions set forth in this Agreement.

                             IV. COVENANTS OF DSB

     DSB covenants and agrees with Paradigm as follows:

     Section 4.1.   Shareholder Approval and Best Efforts. DSB and the Board of
                    -------------------------------------
Directors of DSB ("DSB Board") will, as soon as practicable but not later than
60 days following acceptance of Paradigm's regulatory applications for
processing and receipt of third party financing and capital from offering
activities for the payment of the Merger Consideration, present at a meeting for
the approval of its shareholders this Agreement and the transactions
contemplated hereby. DSB and the DSB Board will take all reasonable action to
arrange for a meeting of its shareholders for the purpose

                                      -14-
<PAGE>

of considering the Agreement and, if the transaction is approved by such
shareholders, to aid and assist in the consummation of the Merger, and will use
its best efforts to take or cause to be taken all other actions necessary,
proper or advisable to consummate the transactions contemplated by this
Agreement, including such actions as are reasonably necessary, proper or
advisable in connection with filing applications and registration statements
with, or obtaining approvals from, all regulatory authorities having
jurisdiction over the transactions contemplated by this Agreement.

     Section 4.2.   Operations. From and after the date of this Agreement to the
                    ----------
Effective Time, DSB shall (a) conduct its business in substantially the same
manner as it has been conducted since March 31, 1999 and in accordance with
prudent business and banking practices, (b) maintain and keep its properties in
as good repair and condition as at present, except for deterioration due to
ordinary wear and tear and damage due to casualty, (c) maintain in full force
and effect insurance comparable in amount and scope of coverage to that
currently maintained for DSB, (d) make no alteration in the manner of
maintaining its books, accounts or records, or in the accounting practices
relating to its business, properties or assets except as required by GAAP, (e)
perform all of its obligations under contracts, leases and documents relating to
or affecting its assets, properties and business, except such obligations as DSB
may in good faith reasonably dispute, (f) maintain and preserve its corporate
existence, business organization, assets, licenses, permits, authorizations and
business opportunities intact, use its best efforts to retain its present
employees and maintain all relationships with depositors and customers of DSB,
(g) comply with and perform all obligations and duties imposed upon DSB by all
federal, state and local laws, and all rules, regulations and orders imposed by
federal, state or local governmental authorities, (h) notify Paradigm promptly
upon commencement of any compliance, safety and soundness or other type of
examination conducted by the Federal Reserve Board, FDIC, Banking Department or
any other agency having supervisory authority over DSB or in the event of any
actual or threatened litigation, (i) promptly give written notice to Paradigm
upon obtaining knowledge of any event or fact that would cause any of the
representations or warranties of DSB contained in this Agreement to be untrue or
misleading in any respect, and (j) use DSB's best efforts to continue to solicit
deposits, maintain deposits and operate DSB's deposit gathering procedures
consistent with existing practices.

     DSB will not, without the prior consent of Paradigm, (i) permit any
amendment or change to be made in the DSB Constituent Documents except as
directed by Paradigm, (ii) take any action described or do any of the things
listed in Section 2.14 hereof except with respect to Section 2.14(g), (iii)
enter into or amend any contract, agreement or other instrument of any of the
types listed in Section 2.10 hereof, (iv) excluding deposits and certificates of
deposit, undertake any additional borrowings, (v) sell any investment
securities, (vi) purchase any investment securities, (vii) modify any
outstanding loan, make any new loan, or acquire any loan participation, unless
such modification, new loan or participation is made in the ordinary course of
business, consistent with existing practice, (viii) commit to or make any
extension of credit to any borrower or his or its related interests in an amount
which, when combined with all other loans to such borrower and his or its
related interests, would exceed an aggregate of $90,000; provided, however, that
DSB may make such loans to the extent that they are fully secured by funds on
deposit at DSB, or (ix) agree to settle all or part of any litigation matters,
provided that with respect to sections (iv), (v), (vi), (vii),

                                      -15-
<PAGE>

(viii) and (ix) consent of Paradigm shall not be unreasonably withheld and shall
be provided within 24 hours of submission.

     Section 4.3.   Access to Properties and Records. To the extent permitted by
                    --------------------------------
applicable law and at a reasonable time without interfering with the operation
of DBS, DSB will afford the executive officers and authorized representatives
(including legal counsel, accountants and consultants) of Paradigm full access
to the properties, books and records of DSB in order that Paradigm may have full
opportunity to make such reasonable investigation as it shall desire to make of
the affairs of DSB, and the officers of DSB will furnish Paradigm with such
additional financial and operating data and other information as to the business
and properties of DSB as Paradigm shall, from time to time, reasonably request.
As soon as practicable after they become available, DSB will deliver or make
available to Paradigm (i) all unaudited quarterly financial statements prepared
for the internal use of management of DSB, (ii) all Call Reports filed by DSB
with the appropriate federal regulatory authority after the date of this
Agreement and (iii) all reports of examination of DSB from regulatory
authorities and all responses thereto. All such financial statements shall be
prepared in accordance with generally accepted accounting principles applied on
a consistent basis with previous accounting periods. In the event of the
termination of this Agreement, Paradigm will return to DSB all documents and
other information obtained pursuant hereto and will keep confidential any
information obtained pursuant to this Agreement.

     Section 4.4.   Information for Regulatory Applications. To the extent
                    ---------------------------------------
permitted by law, DSB will furnish Paradigm with all information concerning DSB
required for inclusion in any application, filing, statement, offering material
or document to be made, filed or delivered by Paradigm or DSB in connection with
or in furtherance of the transactions contemplated by this Agreement, during the
pendency of this Agreement. DSB represents and warrants that all information so
furnished for such applications, filings, offering materials and documents
shall, to the best of its knowledge, be true and correct without omission of any
fact required to be stated to make the information not misleading. DSB will
indemnify and hold harmless Paradigm from and against any and all losses,
claims, damages, expenses or liabilities to which Paradigm may become subject
under applicable laws, rules and regulations and will reimburse Paradigm for any
legal or other expenses reasonably incurred by Paradigm in connection with
investigating or defending any actions whether or not resulting in liability,
insofar as such losses, claims, damages, expenses, liabilities or actions arise
out of or are based on any untrue statement or alleged untrue statement of a
fact contained in any such application, proxy materials, offering materials or
documents or arise out of or are based upon the omission or alleged omission to
state therein a fact required to be stated therein, or necessary in order to
make the statements therein not misleading, but only insofar as such statement
or omission was made in reliance upon and in conformity with information
expressly furnished by DSB expressly for use therein. DSB agrees at any time,
upon the request of Paradigm, to furnish to Paradigm a written letter or
statement confirming the accuracy of the information with respect to DSB
contained in any report, offering document or other application or statement
referred to in Sections 4.1 or 4.4 of this Agreement, and confirming that the
information with respect to DSB contained in such document or draft was
furnished by DSB expressly for use therein or, if such is not the case,
indicating the inaccuracies contained in such document or indicating the
information not furnished by DSB expressly for use therein.

                                      -16-
<PAGE>

     Section 4.5.   Attendance at Certain DSB Meetings. In order to facilitate
                    ----------------------------------
the continuing interaction of Paradigm with DSB, and in order to keep Paradigm
fully advised of all ongoing activities of DSB, DSB agrees to allow Paradigm to
designate two representatives, each of whom will be allowed to attend as an
invited guest and fully monitor all regular and called meetings of the board of
directors and committees thereof and meetings of the officers' loan committee of
DSB; provided, however, that the Paradigm representatives may be excluded from
portions of meetings directly related to the discussion of this Agreement. DSB
shall promptly give Paradigm prior notice by telephone of all called meetings.
Such representative shall have no right to vote. The Paradigm representatives
shall also be permitted, to the extent allowed by regulators, to attend the exit
meeting of each regulatory examination of DSB. No attendance by representatives
of Paradigm at board or committee meetings under this Section 4.5 or knowledge
gained or deemed to have been gained by virtue of such attendance will affect
any of the representations and warranties of DSB made in this Agreement.
Paradigm agrees that, until the Closing, it and its representatives will hold in
strict confidence all information so obtained from DSB and, if the transactions
provided for herein are not consummated, Paradigm will, upon request of DSB,
return or cause to be returned to DSB all written information and documents
obtained from DSB concerning DSB then in its possession. Furthermore, if the
transactions contemplated by this Agreement are disapproved by any regulatory
authority whose approval is required, then Paradigm's designees will no longer
be entitled to notice of and permission to attend such meetings.

     Section 4.6.   Standstill Provision. So long as this Agreement is in
                    --------------------
effect, neither DSB nor any of its directors or officers shall solicit or
encourage any inquiries, or provide any information to or negotiate with any
other party any proposal which could reasonably be expected to lead to the
merger, consolidation, acquisition, or sale of all or substantially all of the
assets or any shares of capital stock of DSB. DSB agrees to notify Paradigm
immediately of any such unsolicited acquisition proposals and provide reasonable
detail as to the identity of the proposed acquiror and the nature of the
proposed transaction.

     Section 4.7.   Environmental Investigation; Rights to Terminate Agreement
                    ----------------------------------------------------------

     (a)  DSB shall cause to be performed at its own expense the following: (i)
a Phase II environmental assessment ("Phase II") on the property of DSB located
at 106 N. Main, Dayton, Texas ("Main Building"); (ii) a Phase I environmental
assessment ("Phase I") on all other property owned, controlled, leased or
managed by DSB ("Other Property") or any property acquired, leased, foreclosed,
managed or controlled by DSB between the date of this Agreement and the Closing
Date ("Acquired Property"); (iii) a Phase II on any Other Property or Acquired
Property as requested by Paradigm and (iv) a certification as to the absence or
encapsulation of asbestos on the Main Property, Other Property and Acquired
Property. All of the Phase I and Phase II assessments and asbestos
certifications shall be performed by an environmental consulting firm acceptable
to Paradigm. The written Phase II report and the asbestos certification on the
Main Building and the Phase I reports and the asbestos certifications on the
Other Property shall be delivered to Paradigm at any time prior to thirty (30)
days after the date of this Agreement. The written Phase I reports and the
asbestos certifications on the Acquired Property shall be delivered to Paradigm
at any time within thirty (30)

                                      -17-
<PAGE>

days after DSB acquired, leased, foreclosed, managed or controlled the Acquired
Property. The written Phase II reports on the Other Property or Acquired
Property shall be delivered to Paradigm at any time within thirty (30) days
after Paradigm has requested such Phase II.

     (b)  In addition to the foregoing, Paradigm and its consultants, agents and
representatives shall have the right at the expense of Paradigm to the same
extent that DSB has such right, but not the obligation or responsibility, to
inspect any property, including, without limitation, conducting asbestos surveys
and sampling, environmental assessments and investigation, and other
environmental surveys and analyses including soil and ground sampling (along
with the Phase I and Phase II assessments and asbestos certifications required
in Section 4.7(a), "Environmental Inspections"). If, as a result of any such
Environmental Inspection, further investigation ("secondary investigation")
including, without limitation, test borings, soil, water, asbestos or other
sampling, is deemed desirable by Paradigm, Paradigm shall (i) notify DSB of any
property for which it intends to conduct such a secondary investigation and the
reasons for such secondary investigation, and (ii) Paradigm shall give
reasonable notice to DSB of such secondary investigations, and DSB may place
reasonable time and place restrictions on such secondary investigations.

     (c)  DSB agrees to indemnify and hold harmless Paradigm for any claims for
damage to property, or injury or death to persons, made as a result of any
Environmental Inspection or secondary investigation conducted by Paradigm or its
agents, which damage or injury is attributable to the negligent actions or
negligent omissions of DSB of their respective agents. Paradigm agrees to
indemnify and hold harmless DSB for any claims for damage to property, or injury
or death to persons, attributable to the negligent actions or omissions of
Paradigm or its agents in performing any Environmental Inspection or secondary
investigation except to the extent caused in whole or in part by the negligence
of DSB. Paradigm shall not have any liability or responsibility of any nature
whatsoever for the results, conclusions or other findings related to any
Environmental Inspection, secondary investigation or other environmental survey.
If this Agreement is terminated, then except as otherwise required by law,
reports to any governmental authority of the results of any Environmental
Inspection, secondary investigation or other environmental survey shall be made
by DSB and not by Paradigm. Paradigm shall make no such report prior to Closing
unless required to do so by law, and in such case will give DSB reasonable
notice of Paradigm's intentions.

     (d)  Paradigm shall have the right to terminate this Agreement if (i) the
factual substance of any warranty or representation set forth in Section 2.7 is
not true and accurate; (ii) the results of such Environmental Inspection,
secondary investigation or other environmental survey are disapproved by
Paradigm because the Environmental Inspection, secondary investigation or other
environmental survey identifies violations or potential violations of
Environmental Laws; (iii) DSB has failed to timely obtain and deliver the
reports required by Section 4.7(a) or has refused to allow Paradigm to conduct
an Environmental Inspection or secondary investigation in a manner that Paradigm
reasonably considers necessary; (iv) the Environmental Inspection, secondary
investigation or other environmental survey identifies any past or present
event, condition or circumstance that potentially would require remedial or
cleanup action or result in a Material Adverse Change; (v) the Environmental
Inspection, secondary investigation or other environmental survey identifies the
presence of any underground or above ground storage tank in, on or under any

                                      -18-
<PAGE>

property that is not shown to be in compliance with all Environmental Laws
applicable to the tank either now or at a future time certain, or that has had a
release of petroleum or some other Hazardous Material that has not been cleaned
up to the satisfaction of the relevant governmental authority or any other party
with a legal right to compel cleanup; or (vi) the Environmental Inspection,
secondary investigation or other environmental survey identifies the presence of
any non-encapsulated asbestos-containing material in, on or under any property,
the removal of which would result in a Material Adverse Change.

     (e)  DSB agrees to make available to Paradigm and its consultants, agents
and representatives all documents and other material relating to environmental
conditions of any property including, without limitation, the results of other
environmental inspections and surveys. DSB also agrees that all engineers and
consultants who prepared or furnished such reports may discuss such reports and
information with Paradigm and shall be entitled to certify the same in favor of
Paradigm and its consultants, agents and representatives and make all other data
available to Paradigm and its consultants, agents and representatives.

     Section 4.8.   Purchase and Assumption of Dayton Branch of Woodcreek Bank.
                    ----------------------------------------------------------
DSB will enter into a purchase and assumption agreement to acquire all of the
assets and liabilities of the branch of Woodcreek Bank located in Dayton, Texas
("P&A"); provided that the consummation of the P&A shall be conditioned upon the
prior consummation of the Merger. DSB will cooperate in the filing of all
necessary applications for the P&A.

     Section 4.9.   List of Loans. From March 31, 1999 through the Closing Date,
                    -------------
DSB shall on a monthly basis provide Paradigm with a list of all loans made
during such period.

                           V. COVENANTS OF PARADIGM

     Paradigm covenants and agrees with DSB as follows:

     Section 5.1.   Best Efforts. Paradigm will take all reasonable action to
                    ------------
aid and assist in the consummation of the Merger and the transactions
contemplated hereby, and will use its best efforts to take or cause to be taken
all other actions necessary, proper or advisable to consummate the transactions
contemplated by this Agreement, including such actions which are necessary,
proper or advisable in connection with filing applications with, or obtaining
approvals from, all regulatory authorities having jurisdiction over the
transactions contemplated by this Agreement.

     Section 5.2.   Information for Applications and Proxy Solicitation. To the
                    ---------------------------------------------------
extent permitted by law, Paradigm will furnish DSB with all information
concerning Paradigm required for inclusion in (a) any application, statement or
document to be made or filed by DSB with any federal or state regulatory or
supervisory authority in connection with the transactions contemplated by this
Agreement during the pendency of this Agreement and (b) any proxy materials to
be furnished to the shareholders of DSB in connection with their consideration
of the Merger. Paradigm represents and warrants that all information so
furnished for such statements and applications shall, to the best of its
knowledge, be true and correct in all material respects without omission of any
material fact

                                      -19-
<PAGE>

required to be stated to make the information not misleading. Paradigm will
indemnify and hold harmless DSB from and against any and all losses, claims,
damages, expenses or liabilities to which DSB may become subject under
applicable laws, rules and regulations and will reimburse DSB for any legal or
other expenses reasonably incurred by DSB in connection with investigating or
defending any actions whether or not resulting in liability, insofar as such
losses, claims, damages, expenses, liabilities or actions arise out of or are
based on any untrue statement or alleged untrue statement of a material fact
contained in any such application or proxy materials or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary in order to make the statements
therein not misleading, but only insofar as such statement or omission was made
in reliance upon and in conformity with information expressly furnished by
Paradigm expressly for use therein. Paradigm agrees, upon the request of DSB, to
furnish to DSB a written letter or statement confirming to the best of its
knowledge the accuracy of the information with respect to Paradigm contained in
any report or other application or statement referred to in Sections 5.1 or 5.2
of this Agreement, and confirming that the information with respect to Paradigm
contained in such document or draft was furnished expressly for use therein or,
if such is not the case, indicating the inaccuracies contained in such document
or indicating the information not furnished by Paradigm expressly for use
therein.

     Section 5.3.   Confidentiality.  Paradigm shall not, before or after the
                    ---------------
consummation or termination of this Agreement, directly or indirectly disclose
any confidential information ("Subject Information") acquired from DSB to any
person, firm, corporation, association or other entity for any reason or purpose
whatsoever, other than in connection with the regulatory notice and application
process or, after termination of this Agreement pursuant to Section 7.1 hereof,
use such Subject Information for its own purposes or for the benefit of any
person, firm, corporation, association, or other entity under any circumstances.
The term "Subject Information" does not include any information that (i) at the
time of disclosure or thereafter is generally available to and known to the
public, (ii) was available on a nonconfidential basis from a source other than
DSB or (iii) was independently acquired or developed without violating any
obligations of this Agreement.

     Section 5.4.   Applications. Paradigm will, at its own expense, prepare and
                    ------------
file all necessary regulatory notices and applications not later than the 60th
day after the execution of this Agreement and will provide DSB with a copy of
the non-confidential portions of notices, applications, statements or
correspondence submitted to or received from regulatory authorities in
connection with the Merger.

                                  VI. CLOSING

     Section 6.1.   Closing. Subject to the other provisions of this Article VI,
                    -------
on a mutually acceptable date ("Closing Date") as soon as practicable within a
thirty-day period commencing with the latest of the following dates:

          (a)       the receipt of shareholder approval and the last approval
from any requisite regulatory or supervisory authority and the expiration of any
statutory or regulatory waiting period which is necessary to effect the Merger;
or

                                      -20-
<PAGE>

          (b)       if the transactions contemplated by this Agreement are being
contested in any legal proceeding and Paradigm or DSB, pursuant to Section 10.1
herein, have elected to contest the same, then the date that such proceeding has
been brought to a conclusion favorable, in the judgment of each of Paradigm and
DSB, to the consummation of the transactions contemplated herein, or such prior
date as each of Paradigm and DSB shall elect whether or not such proceeding has
been brought to a conclusion.

     A meeting ("Closing") will take place at which the parties to this
Agreement will exchange certificates, opinions, letters and other documents in
order to determine whether any condition exists which would permit the parties
hereto to terminate this Agreement. If no such condition then exists or if no
party elects to exercise any right it may have to terminate this Agreement, then
and thereupon the appropriate parties shall execute such documents and
instruments as may be necessary or appropriate to effect the transactions
contemplated by this Agreement.

     The Closing shall take place at the offices of Bracewell & Patterson,
L.L.P. in Houston, Texas, or at such other place to which the parties hereto may
mutually agree.

     Section 6.2.   Effective Time. Subject to the terms and upon satisfaction
                    --------------
of all requirements of law and the conditions specified in this Agreement
including, among other conditions, the receipt of any requisite approvals of the
shareholders of DSB and the regulatory approvals of the Federal Reserve Board,
Banking Department and any other federal or state regulatory agency whose
approval must be received in order to consummate the Merger, the Merger shall
become effective, and the effective time of the Merger shall occur, at the date
and time specified in the certificate approving the Final Merger to be issued by
the Banking Department ("Effective Time"). It is anticipated by Paradigm and DSB
that the Closing and the Effective Time will occur on the same day.

                               VII. TERMINATION

     Section 7.1.   Termination.
                    -----------

          (a)       This Agreement may be terminated by action of the Board of
Directors of Paradigm or DSB at any time prior to the Effective Time if:

                    (i)  any court of competent jurisdiction in the United
          States or other United States (federal or state) governmental body
          shall have issued an order, decree or ruling or taken any other action
          restraining, enjoining or otherwise prohibiting the Merger and such
          order, decree, ruling or other action shall have been final and non-
          appealable;

                    (ii) any of the transactions contemplated by this Agreement
          are disapproved by any regulatory authority or other person whose
          approval is required to consummate any of such transactions; or

                                      -21-
<PAGE>

                    (iii)  the Merger shall not have become effective on or
          before December 31, 1999, or such later date as shall have been
          approved in writing by the Boards of Directors of Paradigm and DSB;
          provided, however, that the right to terminate under this Section
          7.1(a)(iii) shall not be available to any party whose failure to
          fulfill any material obligation under this Agreement has been the
          cause of, or has resulted in, the failure of the Merger to become
          effective on or before such date.

          (b)       This Agreement may be terminated at any time prior to the
Effective Time by the Board of Directors of DSB if Paradigm shall fail to comply
in any material respect with any of its covenants or agreements contained in
this Agreement, or if any of the representations or warranties of Paradigm
contained herein shall be inaccurate in any material respect. In the event the
Board of Directors of DSB desires to terminate this Agreement as provided above,
such Board of Directors must notify Paradigm in writing of its intent to
terminate stating the reason therefor. Paradigm shall have fifteen days from the
receipt of such notice to cure the alleged breach or inaccuracy, subject to the
approval of DSB (which approval shall not be unreasonably delayed or withheld).

          (c)       This Agreement may be terminated any time prior to the
Effective Time by action of the Board of Directors of Paradigm if (i) DSB shall
fail to comply in any material respect with any of its covenants or agreements
contained in this Agreement, or if any of the representations or warranties of
DSB contained herein shall be inaccurate in any material respect, (ii) there
shall have been any change after March 31, 1999, in the assets, properties,
business or financial condition of DSB which individually or in the aggregate
have materially and adversely affected the financial condition, results of
operation or business of DSB, or (iii) the Board of Directors of Paradigm
reasonably concludes, after consulting with counsel, that Paradigm will be
unable to obtain any regulatory approval required in order to consummate the
Merger or any such approval is accompanied by terms or conditions unacceptable
to Paradigm. In the event the Board of Directors of Paradigm desires to
terminate this Agreement because of an alleged breach, inaccuracy or change as
provided in (i) or (ii) above, the Board of Directors must notify DSB in writing
of its intent to terminate stating the cause therefor. DSB shall have fifteen
days from the receipt of such notice to cure the alleged breach, inaccuracy or
change, subject to the approval of Paradigm (which approval shall not be
unreasonably delayed or withheld).

          (d)       This Agreement may be terminated at any time prior to the
Effective Time with the mutual written consent of Paradigm and DSB and the
approval of such action by their respective Boards of Directors.

     Section 7.2.   Effect of Termination. In the event of termination of this
                    ---------------------
Agreement and the abandonment of the Merger without breach by any party hereto,
this Agreement (other than Sections 5.3, 5.4, 11.3 and 11.5) shall become void
and have no effect, without any liability on the part of any party or its
directors, officers or shareholders. Nothing contained in this Section 7.2 shall
relieve any party hereto of any liability for a breach of this Agreement.

                                      -22-
<PAGE>

                  VIII. CONDITIONS TO OBLIGATIONS OF PARADIGM

     The obligations of Paradigm under this Agreement are subject to the
satisfaction, at or prior to the Closing Date of the following conditions, which
may be waived by Paradigm in its sole discretion:

     Section 8.1.   Compliance with Representations and Covenants. The
                    ---------------------------------------------
representations and warranties made by DSB in this Agreement must have been true
in all material respects when made and shall be true in all material respects as
of the Closing Date with the same force and effect as if such representations
and warranties were made at and as of the Closing Date, and DSB shall have
performed or complied with all covenants and conditions required by this
Agreement to be performed and complied with prior to or at the Closing. Paradigm
shall have been furnished with a certificate, executed by an appropriate
representative of DSB and dated as of the Closing Date, to the foregoing effect.

     Section 8.2.   Material Adverse Change. Prior to the Closing Date, there
                    -----------------------
shall not have occurred any material adverse change in the financial condition,
business or operations of DSB, nor shall any event have occurred which, with the
lapse of time, will cause or create any material adverse change in the financial
condition, business or operations of DSB in the reasonable judgment of the Board
of Directors of Paradigm; provided, however, that a material adverse change will
not include a change with respect to, or effect on, DSB resulting from a change
in law, rule, regulation or GAAP or from any other matter affecting federally-
insured depository institutions generally (including without limitation, their
holding companies), including, without limitation, changes in general economic
conditions and changes in prevailing interest or deposit rates; provided, any
such change does not impact DSB more adversely than other similarly situated
financial institutions. Paradigm shall have received a certificate to the
foregoing effect executed by an appropriate representative of DSB and dated as
of the Closing Date.

     Section 8.3.   Legal Opinion. Paradigm shall have received an opinion of
                    -------------
counsel to DSB, dated as of the Closing Date, in form and substance satisfactory
to counsel for Paradigm, to the effect set forth in Schedule 8.3 hereof. As to
questions of fact material to their opinion, such counsel may rely upon
certificates of officers of DSB. Such opinion may contain such qualifications,
exceptions and explanations as are satisfactory in form and substance to
Paradigm.

     Section 8.4.   Releases and Resignations. The directors and officers of DSB
                    -------------------------
deliver to Paradigm an instrument in the form of Exhibit "C" attached hereto
dated the Effective Time releasing DSB from any and all claims of such directors
and officers (except as provided therein). Those directors of DSB requested to
do so by Paradigm shall have delivered to Paradigm their respective resignations
from the Board of Directors.

     Section 8.5.   Dissenters' Rights. The holders of no more than 5% of the
                    ------------------
issued and outstanding DSB Common Stock shall have demanded or shall be entitled
to demand payment of the fair value of their shares as dissenting shareholders.

                                      -23-
<PAGE>

     Section 8.6.   Employment Agreements. J.R. Jamison, James A. Woodall,
                    ---------------------
Donald Preston and Jerry Sparks shall have entered into an employment agreement
satisfactory to Paradigm.

     Section 8.7.   Receipt of Third Party Financing/Capital Raising. Paradigm
                    ------------------------------------------------
shall have received third party financing and capital from offering activities
all on terms reasonably acceptable to Paradigm which, together with Paradigm's
internal funds, is sufficient to satisfy the Merger Consideration. When this
condition has been satisfied, Paradigm will so certify to DSB.

     Section 8.8.   Execution of Escrow Agreement. At the Closing, each of
                    -----------------------------
Paradigm, Woodcreek Bank, DSB and J. Robert Jamison, as agent for all of the
shareholders of DSB, shall execute and acknowledge (where appropriate) and
deliver to the other the Escrow Agreement substantially in the form of Exhibit
"B."

     Section 8.9.   Result of Regulatory Examinations. The results of all
                    ---------------------------------
regulatory examinations of DSB shall be satisfactory to Paradigm.

                     IX. CONDITIONS TO OBLIGATIONS OF DSB

     The obligations of DSB under this Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions,
which may be waived by DSB in its sole discretion:

     Section 9.1.   Compliance with Representations and Covenants. The
                    ---------------------------------------------
representations and warranties made by Paradigm in this Agreement must have been
true in all materials respects when made and shall be true in all material
respects as of the Closing Date with the same force and effect as if such
representations and warranties were made at and as of the Closing Date, and
Paradigm shall have performed and complied in all material respects with all
covenants and conditions required by this Agreement to be performed or complied
with by Paradigm prior to or at the Closing. DSB shall be furnished with a
certificate, executed by appropriate representatives of Paradigm and dated as of
the Closing Date, to the foregoing effect.

     Section 9.2.   Legal Opinion. DSB shall have received an opinion of counsel
                    -------------
to Paradigm, dated as of the Closing Date and in form and substance satisfactory
to counsel for DSB, to the effect set forth in Schedule 9.2 hereof. As to
questions of fact material to their opinion, such counsel may rely upon
certificates of officers of Paradigm. Such opinion may contain such
qualifications, exceptions and explanations as are satisfactory in form and
substance to DSB.

     Section 9.3.   Release. The officers and directors of DSB who have
                    -------
delivered releases pursuant to Section 8.4 shall have received an instrument in
the form of Exhibit "D" attached hereto dated the Effective Time releasing such
persons from any and all claims of DSB (except as provided therein).

                                      -24-
<PAGE>

                  X. CONDITIONS TO RESPECTIVE OBLIGATIONS OF
                               PARADIGM AND DSB

     The respective obligations of Paradigm and DSB under this Agreement are
subject to the satisfaction of the following conditions which may be waived by
Paradigm and DSB, respectively, in their sole discretion:

     Section 10.1.  Government Approvals.  Paradigm and DSB shall have received
                    --------------------
the approval, or waiver of approval, of the transactions contemplated by this
Agreement from all necessary governmental agencies and authorities, including
the Federal Reserve Board, FDIC, Banking Department and any other regulatory
agency whose approval must be received in order to consummate the Merger, which
approvals shall not impose any restrictions on the operations of Paradigm or the
Surviving Bank which are unacceptable to Paradigm, and such approvals and the
transactions contemplated hereby shall not have been contested by any federal or
state governmental authority or any third party (except shareholders asserting
dissenters' rights) by formal proceeding.  It is understood that, if any such
contest is brought by formal proceeding, Paradigm or DSB may, but shall not be
obligated to, answer and defend such contest or otherwise pursue the Merger over
such objection.

     Section 10.2.  Shareholder Approval.  The shareholders of DSB shall have
                    --------------------
approved this Agreement and the transactions contemplated by this Agreement.

                               XI. MISCELLANEOUS

     Section 11.1.  Non-Survival of Representations and Warranties.  The
                    ----------------------------------------------
representations and warranties of Paradigm and DSB contained in this Agreement
shall terminate at the Closing Date.

     Section 11.2.  Amendments. This Agreement may be amended only by a writing
                    ----------
signed by Paradigm and DSB at any time prior to the Closing Date with respect to
any of the terms contained herein; provided, however, that the Merger
Consideration to be received by the shareholders of DSB pursuant to this
Agreement shall not be decreased subsequent to the approval of the transactions
contemplated by the Agreement without the further approval by such shareholders.

     Section 11.3.  Expenses. Whether or not the transactions provided for
                    --------
herein are consummated, each party to this Agreement will pay its respective
expenses incurred in connection with the preparation and performance of its
obligations under this Agreement. Similarly, each party agrees to indemnify the
other parties against any cost, expense or liability (including reasonable
attorneys' fees) in respect of any claim made by any party for a broker's or
finder's fee in connection with this transaction. Paradigm and DSB represent and
warrant to each other that neither of them, nor any of their agents, employees
or representatives, has incurred any liability for any commissions or brokerage
fees in connection with this transaction.

     Section 11.4.  Notices.  Except as explicitly provided herein, any notice
                    -------
given hereunder shall be in writing and shall be delivered in person or mailed
by first class mail, postage prepaid or

                                      -25-
<PAGE>

sent by facsimile, courier or personal delivery to the parties at the following
addresses unless by such notice a different address shall have been designated:

     If to Paradigm:

     Paradigm Bancorporation, Inc.
     2828 FM 1960 East
     Houston, Texas 77073
     Fax No.: (281) 443-0668

     Attention:  Mr. Peter E. Fisher

     With a copy to:

     Bracewell & Patterson, L.L.P.
     South Tower Pennzoil Place
     711 Louisiana Street, Suite 2900
     Houston, Texas 77002-2781
     Fax No.: (713) 221-1212

     Attention:  Mr. William T. Luedke IV

     If to Dayton State Bank:

     Dayton State Bank
     106 N. Main, P.O. Box 1987
     Dayton, Texas 77535
     Fax No.:

     Attention:  Mr. J. Robert Jamison

     With a copy to:

     Temple & Temple
     400 West 15/th/ Street, Suite 1510
     Austin, Texas 78701

     Attention:  Mr. Larry Temple

All notices sent by mail as provided above shall be deemed delivered five (5)
days after deposit in the mail. All notices sent by facsimile or courier as
provided above shall be deemed delivered one day after being sent. All other
notices shall be deemed delivered when actually received. Any party to this
Agreement may change its address for the giving of notice specified above by
giving notice as herein provided.

                                      -26-
<PAGE>

     Section 11.5.  Controlling Law.  All questions concerning the validity,
                    ---------------
operation and interpretation of this Agreement and the performance of the
obligations imposed upon the parties hereunder shall be governed by the laws of
the State of Texas and, to the extent applicable, by the laws of the United
States of America.

     Section 11.6.  Headings.  The headings and titles to the sections of this
                    --------
Agreement are inserted for convenience only and shall not be deemed a part
hereof or affect the construction or interpretation of any provision hereof.

     Section 11.7.  Modifications or Waiver.  No termination, cancellation,
                    -----------------------
modification, amendment, deletion, addition or other change in this Agreement,
or any provision hereof, or waiver of any right or remedy herein provided, shall
be effective for any purpose unless specifically set forth in a writing signed
by the party or parties to be bound thereby.  The waiver of any right or remedy
in respect to any occurrence or event on one occasion shall not be deemed a
waiver of such right or remedy in respect to such occurrence or event on any
other occasion.

     Section 11.8.  Severability. Any provision hereof prohibited by or unlawful
                    ------------
or unenforceable under any applicable law or any jurisdiction shall as to such
jurisdiction be ineffective, without affecting any other provision of this
Agreement, or shall be deemed to be severed or modified to conform with such
law, and the remaining provisions of this Agreement shall remain in force,
provided that the purpose of the Agreement can be effected. To the fullest
extent, however, that the provisions of such applicable law may be waived, they
are hereby waived, to the end that this Agreement be deemed to be a valid and
binding agreement enforceable in accordance with its terms.

     Section 11.9.  Assignment. This Agreement shall be binding upon and inure
                    ----------
to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assigned by any party without the prior written
consent of the other parties.

     Section 11.10. Consolidation of Agreements. All understandings and
                    ---------------------------
agreements heretofore made between the parties hereto are merged in this
Agreement which (together with any agreements executed by the parties hereto
contemporaneously with or subsequent to the execution of this Agreement) shall
be the sole expression of the agreement of the parties respecting the Merger.

     Section 11.11. Counterparts.  This Agreement may be executed in multiple
                    ------------
counterparts, each of which shall be deemed an original and all of which shall
be deemed to constitute one and the same instrument.

     Section 11.12. Binding on Successors. Except as otherwise provided herein,
                    ---------------------
this Agreement shall be binding upon, and shall inure to the benefit of, the
parties and their respective heirs, executors, trustees, administrators,
guardians, successors and assigns.

     Section 11.13. Gender. Any pronoun used herein shall refer to any gender,
                    ------
either masculine, feminine or neuter, as the context requires.

                                      -27-
<PAGE>

     Section 11.14. Disclosures. Any disclosure made in any document delivered
                    -----------
pursuant to this Agreement or referred to or described in writing in any section
of this Agreement or any schedule attached hereto shall be deemed to be
disclosure for purposes of any section herein or schedule hereto.

     Section 11.15. Publicity. Subject to written advice of counsel with respect
                    ---------
to legal requirements relating to public disclosure of matters related to the
transactions contemplated by this Agreement, the timing and content of any
announcements, press releases or other public statements (whether written or
oral) concerning this Agreement or the Merger will occur upon, and be determined
by, the mutual consent of Paradigm and DSB; provided, however, that this shall
not include notices required to be published pursuant to the regulatory
application process.

     Section 11.16. Entire Agreement. This Agreement contains the entire
                    ----------------
agreement among Paradigm and DSB with respect to the Merger.

     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.

                         PARADIGM BANCSHARES, INC.

                         By:___________________________________________________

                         DAYTON STATE BANK

                         By:___________________________________________________

                                      -28-

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