<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C., 20549
Mark One
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1995.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from ________________ to
______________.
Commission file number 33-1983
SURETY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2065607
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1845 Precinct Line Road, Suite 100, Hurst, Texas 76054
(Address of principal executive offices)
(817) 498-2749
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
----- -----
Common stock outstanding on April 27, 1995, 3,040,829 shares
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 4,624,543 $ 3,929,360
Federal funds sold 6,730,000 7,265,000
------------ ------------
Cash and cash equivalents 11,354,543 11,194,360
Interest bearing deposits in financial institutions 1,428,355 1,524,188
Investment securities 14,430,605 19,504,254
Net loans 67,459,955 63,965,402
Premises and equipment, net 2,341,530 2,393,601
Accrued interest receivable 576,366 623,737
Other real estate and repossessed assets 73,836 121,359
Net deferred tax asset 112,485 135,774
Other assets 396,221 316,117
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $202,502 and $175,240 at March 31, 1995
and December 31, 1994, respectively 2,488,257 2,515,519
------------ ------------
Total assets $100,662,153 $102,294,311
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Demand deposits $ 12,040,515 $ 12,191,183
Savings, NOW and money markets 28,643,576 29,875,481
Time deposits, $100,000 and over 16,474,951 7,942,882
Other time deposits 32,958,469 42,017,576
------------ ------------
Total deposits 90,117,511 92,027,122
Note payable 1,750,000 1,750,000
Accrued interest payable and other liabilities 470,550 451,508
------------ ------------
Total liabilities 92,338,061 94,228,630
------------ ------------
Commitments and contingent liabilities (Note 1)
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized, 3,040,829 and 2,373,429 shares issued
and outstanding at March 31, 1995 and
December 31, 1994, respectively 30,408 30,408
Additional paid-in capital 8,113,214 8,113,214
Surplus/(Deficit) 135,262 (75,102)
Unrealized gain on available-for-sale securities 45,208 (2,839)
------------ ------------
Total shareholders' equity 8,324,092 8,065,681
------------ ------------
Total liabilities and shareholders' equity $100,662,153 $102,294,311
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
------------ ------------
<S> <C> <C>
Interest income:
Commercial and real estate loans $ 903,848 $ 273,972
Consumer loans 255,089 250,054
Insurance premium financing 648,178 477,610
Federal funds sold 153,358 24,582
Investment securities 249,860 106,085
Other interest income 12,012
------------ ------------
Total interest income 2,210,333 1,144,315
------------ ------------
Interest expense:
Savings, NOW and money markets 189,831 93,253
Time deposits, $100,000 and over 192,591 52,873
Other time deposits 348,654 126,854
Other interest expense 50,055
------------ ------------
Total interest expense 781,131 272,980
------------ ------------
Net interest income before provision 1,429,202 871,335
for loan losses
Provision for loan losses 45,000 28,552
------------ ------------
Net interest income 1,384,202 842,783
------------ ------------
Noninterest income 368,292 250,417
------------ ------------
Noninterest expense:
Salaries and employee benefits 707,219 493,246
Occupancy and equipment 218,687 141,153
General and administrative 515,355 343,469
------------ ------------
Total noninterest expense 1,441,261 977,868
------------ ------------
Income before income taxes 311,233 115,332
Income tax expense:
Current 100,869 2,500
Deferred ------------ ------------
Net income $ 210,364 $ 112,832
============ ============
Net income per share of common stock $ 0.07 $ 0.05
============ ============
Weighted average shares outstanding 3,113,483 2,373,429
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the three months ended March 31, 1995 and
the year ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Common Stock Loss on
------------ Additional Available-
Par Paid-in Accumulated for-Sale Total
Shares Value Capital Deficit Securities Equity
------ ----- ---------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at 12/31/93 2,273,487 $22,734 $5,806,116 $(547,862) $5,280,988
--------- ------- ---------- --------- ----------
Sale of common stock 767,342 7,674 2,307,098 2,314,772
Net income 472,760 472,760
Unrealized loss on available-
for-sale securities, net
of income taxes $(2,839) (2,839)
--------- ------- ---------- --------- ------- ----------
Balance at 12/31/94 3,040,829 30,408 8,113,214 (75,102) (2,839) 8,065,681
--------- ------- ---------- --------- ------- ----------
Net income 210,364 210,364
Net of tax:
Unrealized gain
on AFS, net of
income taxes 48,047 48,047
--------- ------- ---------- --------- ------- ----------
Balance at 3/31/95 3,040,829 $30,408 $8,113,214 $ 135,262 $45,208 $8,324,092
========= ======= ========== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 210,364 $ 112,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 45,000 28,552
Depreciation and amortization 143,960 80,495
Gain on sale or disposal of assets
Gain on sale of investment securities 100
Net change in other assets 62,837 (31,686)
Net change in deferred tax asset 19,042
Net increase/(decrease) in accrued interest
payable and other liabilities 23,289 (8,989)
----------- -----------
Net cash provided by operating activities 504,592 181,204
----------- -----------
Cash flows from investing activities:
Proceeds from sale of AFS securities 4,736,538
Proceeds from the maturity of held-to maturity
securities and interest bearing deposits 1,210,085 1,115,679
Proceeds from maturity of available-for-sale
securities 204,832
Purchase of premises and equipment (64,627) (100,947)
Net increase in loans (1,769,254) (5,349,023)
Purchase of held-to-maturity securities
Purchase of available-for-sale securities (982,073)
Payments received on purchased medical claims receivable 3,169,910 3,170,167
Purchases of medical claims receivable (4,940,209) (1,440,691)
----------- -----------
Net cash provided by (used in) investing activities 1,565,202 (2,604,815)
----------- -----------
Cash flows from financing activities:
Net change in deposit (1,909,611) 776,330
Proceeds from the sale of common stock 405,001
----------- -----------
Net cash provided by (used in) financing activities (1,909,611) 1,181,331
----------- -----------
Net increase (decrease) in cash 160,183 (1,242,280)
Beginning cash and cash equivalents 11,194,360 6,886,487
----------- -----------
Ending cash and cash equivalents $11,354,543 $ 5,644,207
=========== ===========
Supplemental disclosure:
Cash paid during the period for interest $ 761,871 $ 280,108
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
The condensed financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report on Form 10-K. In the opinion of the Company, all adjustments
consisting only of normal recurring adjustments necessary to present fairly
the financial position of the Company as of March 31, 1995, and the results
of its operations and its cash flows for the indicated periods have been
included. The results of operations for such interim period are not
necessarily indicative of the results to be expected for the fiscal year
ending December 31, 1995.
2. Acquisitions:
------------
The Farmers Guaranty State Bank of Kennard
On February 4, 1994, Surety Capital Corporation's subsidiary Surety Bank,
National Association ("Surety Bank") entered into an agreement for the merger
of The Farmers Guaranty State Bank of Kennard, a Texas banking association
located in Kennard, Texas, with and into Surety Bank. The merger was
consummated effective as of the close of business on May 31, 1994. Pursuant
to the merger, Surety Bank paid $1,200,000 to the shareholders of The Farmers
Guaranty State Bank of Kennard. The purchase price was based on the book
value of The Farmers Guaranty State Bank of Kennard as of May 31, 1994.
Pursuant to the merger agreement, Surety Bank purchased all of the assets and
assumed all of the obligations of The Farmers Guaranty State Bank of Kennard.
Surety Bank internally financed the acquisition through the use of working
capital, and did not borrow funds for any portion of the purchase price.
The acquisition has been accounted for as a purchase in the accompanying
consolidated financial statements. The assets and liabilities of the
acquired Bank have been recorded at their fair values as of May 31, 1994.
The consolidated results of operations include the operations of the acquired
Bank subsequent to June 1, 1994. The unaudited information for the three
months ended March 31, 1994 presented below, reflects the acquisition of the
Bank, as if it had been acquired as of January 1, 1994. Pro forma adjustments
consisting for income taxes have been made to properly reflect the unaudited
pro forma information.
<TABLE>
<CAPTION>
Balance Sheet Data: 1995 1994
----------- -----------
<S> <C> <C>
Interest income $2,210,333 $1,383,319
Net income 210,364 132,987
Net income per share of common stock $0.07 $0.06
</TABLE>
6
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Acquisitions continued:
------------
First National Bank
On May 24, 1994, the Bank entered into an agreement for the merger of the
First National Bank, a national banking association located in Whitesboro,
Texas, with and into Surety Bank. The merger was consummated effective as of
the close of business on December 8, 1994. Pursuant to the merger, the Bank
paid $6,000,000 to the shareholders of the First National Bank in exchange
for all of the issued and outstanding shares of common stock of the First
National Bank. The purchase price of $30.00 per share was based on
approximately 150% of the book value of the First National Bank as of
December 31, 1993. As a result of the earnings of the First National Bank
during the fiscal year 1994, the purchase price of $30.00 per share
represented approximately 130% of the book value of the First National Bank
as of the date of consummation of the merger.
In connection with the merger, the Bank purchased all of the assets and
assumed all of the obligations of the First National Bank. To finance the
merger, the Bank received a $4,000,000 capital contribution from the Company.
The Company raised $2,169,050 under a limited offering of its shares of
common stock, pursuant to which it sold 667,400 shares of common stock at
$3.25 per share and the Company obtained a $1,750,000, 90-day note payable to
Overton Bank and Trust, N.A. ("Overton Bank"). The note bears interest at
two percent (2%) above Overton Bank's prime rate of interest (9%) at March
31, 1995, with principal and interest due at maturity. The Company also
signed an agreement extending the maturity of the short term note to June 7,
1995.
The acquisition has been accounted for as a purchase in the accompanying
consolidated financial statements. The assets and liabilities of the
acquired bank have been recorded at their fair values as of November 30,
1994.
Included in the accompanying consolidated financial statements are the
following amounts for the acquired bank as of March 31, 1995 and for the
three months ended March 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Balance sheet data:
Cash and due from banks $ 279,327
Federal funds sold 5,130,000
Interest bearing deposits in financial institutions 98,355
Investment securities 6,099,646
Net loans 22,455,308
Premises and equipment, net 800,090
Accrued interest receivable 248,418
Other assets 264,345
-----------
Total assets $35,375,489
===========
Income statement data:
Total interest income $ 600,565
Total interest expense 304,688
Other income 81,583
Noninterest expense 248,733
-----------
Net income $ 128,727
===========
</TABLE>
7
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Acquisitions continued:
------------
The consolidated results of operations include the operations of the acquired
Bank subsequent to January 1, 1995. The unaudited information for the three
months ended March 31, 1995 and the unaudited pro forma information for the
three months ended March 31, 1994, presented below, reflects the acquisition
of the Bank, as if it had been acquired as of January 1, 1994. Pro forma
adjustments consisting of provision for income taxes and interest expense
have been made to properly reflect the unaudited pro forma information.
Interest expense on short-term debt of $1,750,000 is included as if it had
been secured on January 1, 1994.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Interest income $2,210,333 $1,836,214
Net income 210,364 164,846
Net income per share of common stock $0.07 $0.07
</TABLE>
Income Taxes
------------
During 1993, the Company adopted Statement of Financial Accounting Standards
-------------------------------------------
(SFAS) No. 109 whereby the method of accounting for income taxes utilizes an
asset and liability approach for financial statement purposes. Under SFAS
No. 109, the types of differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to
significant portions of deferred income tax liabilities or assets are: net
operating loss carryforwards, allowances for possible loan losses and
property and equipment. The change in accounting did not have an effect on
the Company's consolidated financial position or results of operations.
Surety Capital Corp. and its subsidiary will file a consolidated tax return
for 1994.
8
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investment Securities:
---------------------
At March 31, 1995, the amortized cost and estimated market values of
investment securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury $1,112,430 $ 7,193 $ 1,105,237
Obligations of other U.S.
Government agencies and
corporations 2,471,168 88,101 2,383,067
State and county municipals 4,747,362 $ 139,032 3,632 4,882,762
----------- ----------- ----------- -----------
8,330,960 139,032 98,926 8,371,066
----------- ----------- ----------- -----------
Available for sale:
U.S. Treasury 1,771,359 5,201 1,776,560
Obligations of other U.S.
Government agencies and
corporations 3,959,014 63,296 4,022,310
Federal Reserve Bank Stock 280,850 280,850
Other investment securities 19,925 19,925
----------- ----------- ----------- -----------
$14,362,108 $ 207,529 $ 98,926 $14,470,711
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities at
March 31, 1995, by contractural maturity, are shown below. Expected maturities
will differ from contractural maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- -----------
<S> <C> <C>
Held-to-Maturity:
Due within one year $2,024,686 $ 2,017,182
Due after one year through five years 2,605,406 2,628,288
Due after five years through ten years 2,083,683 2,164,181
Mortgage-backed securities 1,617,131 1,561,415
---------- -----------
Total $8,330,960 $ 8,371,066
========== ===========
Available-for-Sale:
Due within one year $1,589,212 $ 1,590,045
Due after one year through five years 2,909,896 2,939,149
Due after five years through ten years 1,153,245 1,190,897
Mortgage-backed securities 78,020 78,779
Other securities 300,775 300,775
---------- -----------
6,031,148 6,099,645
Total $14,362,108 $14,470,711
=========== ===========
</TABLE>
9
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Investment Securities continued:
---------------------
Proceeds from sales of Available-for-Sale investment securities during the
three months ended March 31, 1995 were $4,736,638 with gross recognized gains
of $100 and no losses.
Proceeds from sales of investment securities during the twelve months ended
December 31, 1994 were $500,000 with no recognized gains or losses.
At March 31, 1995 and 1994 the carrying values of Federal Reserve Bank stock
were $280,850 and $108,700 respectively. The Federal Reserve Bank stock's
market value was estimated to be the same as its carrying value at both.
Prior to December 8, 1994, all investment securities were classified as held-
to-maturity. Of the securities added to the investment portfolio on
December 8, 1994 through the acquisition of the First National Bank of
Whitesboro, $4,744,575 was added to the held-to-maturity classification and
$9,831,115 was classified as available-for-sale. The net unrealized loss on
available-for-sale investment securities on December 31, 1994 was $4,031.
4. Net Loans:
---------
At March 31, 1995 and December 31, 1994, the loan portfolio was composed of
the following:
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Premium financing $24,438,592 $20,931,642
Commercial loans 15,857,674 13,205,698
Installment loans 9,446,658 12,029,243
Real estate loans 16,041,646 17,297,636
Medical claims receivable 4,141,435 2,705,974
----------- -----------
Total gross loans 69,926,005 66,170,193
Unearned interest (1,746,834) (1,506,843)
Allowance for loan losses (719,216) (697,948)
----------- -----------
Net loans $67,459,955 $63,965,402
=========== ===========
</TABLE>
10
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Net Loans, continued:
---------
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
------------- ------------
<S> <C> <C>
Beginning balance $697,948 $401,227
Provision for loan losses 45,000 28,552
Bank acquisition
Loans charged off, net of
recoveries (23,732) 535
-------- --------
Ending balance $719,216 $430,314
======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $75,000 and $83,000 at March 31, 1995 and December 31, 1994,
respectively.
5. Concentration of Credit Risk:
----------------------------
The subsidiary bank has a significant concentration of credit in its
insurance premium finance portfolio. Insurance premium finance comprises
approximately $23,854,000 or 35% and $20,496,000 or 32% of consolidated total
loans net of unearned interest as of March 31, 1995 and December 31, 1994,
respectively. As of March 31, 1995, no group of borrowers writing insurance
through any one insurance company represents 10% or more of the Bank's
premium finance loans.
6. Shareholders' Equity:
--------------------
On April 22, 1993, the Company's Board of Directors approved a one-for-ten
reverse split of the Company's common stock. The reverse split was approved
by the shareholders of the Company on May 27, 1993. This action became
effective on June 14, 1993 for shareholders of record as of June 11, 1993. A
total of $178,331 was reclassified from par value of common stock to
additional paid-in capital in connection with the reverse stock split. The
par value of common stock remains unchanged. All per share amounts have been
adjusted to reflect the reverse stock split on a retroactive basis.
During the twelve months ended December 31, 1994, 767,342 shares of the
Company's common stock were sold in private placements for total
consideration, net of expenses, of $2,314,772. During the year ended
December 31, 1993, 292,040 shares of the Company's common stock were sold in
private placements for total consideration, net of expenses, of $851,903.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS:
-------------
General
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. The Company changed the name of its subsidiary bank to
Surety Bank, National Association (the "Bank"), effective January 1, 1994. The
name change was made in order to establish name recognition for the Bank and to
avoid confusion with other similarly named banks.
The results of the Company's operations for the first quarter of 1995 and 1994
are depicted below:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
-------------- ---------------
<S> <C> <C>
INSURANCE PREMIUM FINANCING:
Average balance outstanding $22,168,189 $16,549,393
Average yield 11.7% 11.5%
Interest income $ 648,178 $ 477,610
<CAPTION>
<S> <C> <C>
CONSUMER, COMMERCIAL AND REAL ESTATE FINANCING:
Average balance outstanding $43,522,673 $17,177,364
Average yield 10.7% 12.2%
Interest income $ 1,158,937 $ 524,026
<CAPTION>
<S> <C> <C>
COST OF FUNDS:
Average balance outstanding/(1)/ $93,110,851 $44,440,789
Average interest rate 3.4% 2.5%
Interest expense $ 781,131 $ 272,980
<CAPTION>
<S> <C> <C>
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 736,778 $ 381,438
Total interest expense $ 260,377 $ 90,993
Provision for loan losses $ 15,000 $ 9,517
Noninterest income $ 122,764 $ 83,472
Noninterest expense $ 480,420 $ 326,944
</TABLE>
/(1)/ Includes $1,750,000 of short term borrowings and $50,055 interest
expense on short term borrowings.
Note: Average balances are computed using daily balances throughout each period.
12
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995
-----------------------------------------
Average Average
Balance Interest Rate
------- -------- --------
<S> <C> <C> <C>
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities
and due from time $ 16,545,617 $ 249,860/(1)/ 6.0%
Federal funds sold 9,771,463 153,358 6.3%
Loans/(2)/ 65,690,862 1,807,115/(3)/ 11.0%
Allowance for loan losses (698,938) N/A N/A
------------ ---------- -------
Total interest earning assets 91,309,004 2,210,333 9.7%
------------ ---------- -------
Cash and due from banks 4,104,074
Premises and equipment 2,366,786
Accrued interest receivable 614,098
Other assets 2,914,191
------------
Total assets $101,308,153
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $ 24,408,341 $ 157,747 2.6%
Savings deposits 4,239,928 32,084 3.0%
Time deposits 50,515,292 541,245 4.3%
Notes payable 1,750,000 50,055 11.4%
------------ ---------- ----
Total interest bearing liabilities 80,913,561 781,131 3.9%
------------ ---------- ----
Net interest income 1,429,202
==========
Net interest spread 5.8%
----
Net interest income to average earning assets 6.3%
====
Noninterest bearing deposits 12,197,290
Other liabilities 37,721
----------
Total liabilities 93,148,572
Shareholders' equity 8,159,581
------------
Total liabilities and shareholders'
equity $101,308,153
------------
</TABLE>
/(1)/ Interest income on the tax exempt securities does not reflect the tax
equivalent yield.
/(2)/ Loans on nonaccrual status have been included in the computation of
average balances.
/(3)/ The interest income on loans does not include loan fees. Loan fees are
included in noninterest income.
13
<PAGE>
Three Months Ended March 31, 1995 Versus Three Months Ended March 31, 1994.
- ---------------------------------------------------------------------------
The Company earned $210,364 and $112,832 during the three months ended March
31,1995 and 1994, respectively. Total interest income increased 93% to
$2,210,333 from $1,144,315, while total interest expense increased 186% to
$781,131 from $272,980, resulting in a 64% increase in net interest income
before provision for loan losses to $1,429,202 from $871,335. The Company's loan
growth between these two periods was diversified in all aspects of the loan
portfolio, as reflected in Note 3 above. This diversification in loan growth was
directly related to management's marketing efforts and the merger of the
acquired banks, as discussed in Note 2 above. The average volume of consumer,
commercial, and real estate lending increased 153%, with a decrease in average
yields on those loans from 12% to 11%. The 34% increase in the average volume of
insurance premium loans was accompanied by no change in the average yield on
those loans of 12%. The average balance of interest bearing deposits increased
117%, while the average rate paid increased from 2.5% to 3.4%. The increase in
average rate paid for interest bearing liabilities moved higher as a result of
increased interest rates within the marketplace and the interest expense
associated with the short term note. On March 31, 1995, the Bank sold its second
credit card program to Bank IV, Oklahoma City, Oklahoma for a gain of
approximately $30,000.
The Company recorded a $45,000 provision for loan losses during the three months
ended March 31, 1995 compared to $28,552 provision for loan losses during the
three months ended March 31, 1994. As the Company's ratio of net charge-offs to
average loans remained unchanged at 0% for these periods, the Company provided
amounts, through charges to earnings, to maintain the allowance for loan losses
at an adequate level. Management feels that all known losses in the portfolio
have been recognized.
The Company's noninterest income increased 47% to $368,292 from $250,417 for the
three months ended March 31, 1995 and 1994, respectively. This increase
compares to a corresponding increase in average noninterest bearing deposits of
69% to $12,197,290 from $7,226,728 for these same periods.
Noninterest expense increased 47%, primarily the result of a 43% increase in
salaries and employee benefits and a 49% increase in general and administrative
expenses. The increase in salaries and benefits was due primarily to additional
staffing required by the merger of the acquired banks and the Bank's loan and
deposit growth. Increases in general and administrative expenses relate
primarily to legal and professional fees and FDIC assessments.
Parent Company Only Results of Operations.
- ------------------------------------------
The Company did not own the Bank prior to December 30, 1989. Since that time,
the Company has served as a parent company to the Bank and has wound down the
Company's own separate business activities. For the three months ended March
31, 1995, the Company had only nominal income, other than equity in net income
of the subsidiary bank of approximately $2,800, and approximately $61,800 in
noninterest expenses. The noninterest expenses, which increased 17% from the
same period in the prior year, consisted primarily of legal and professional
fees incurred in the operation of the Company and in the maintenance of the
Company's public company status under applicable securities laws and
regulations.
Allowance for Loan Losses
The Company recorded a $45,000 provision for loan losses during the three months
ended March 31, 1995 compared to a $28,552 provision during the three months
ended March 31, 1994. The Company's provision for loan losses is based upon
quarterly loan portfolio reviews by management. The purpose of the reviews is
to assess loan quality, analyze delinquencies, ascertain loan growth, evaluate
potential charge-offs and recoveries, and assess general economic conditions in
the market economy. Loan losses different from the allowance provided by the
Company are likely, and loan losses in excess or deficient of the allowance for
loan losses are possible. Loan losses in excess of the amount of the allowance
could and probably would have a material adverse effect on the financial
condition of the Company. See above for additional discussion.
The ratio of charge-offs, net of recoveries, to average loans during the three
months ended March 31, 1995 was 0.04%. The ratio of the allowance for loan
losses to total loans was 1.1% on March 31, 1995. The allowance for loan losses
was $719,216 on March 31, 1995.
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Current Trends and Uncertainties
Economic trends and other developments could adversely affect the Company's
operations. As the repercussions of area lay-offs, both directly on affected
workers and indirectly on area businesses, make themselves fully felt, the Bank
could experience increased loan delinquencies and losses, decreased loan demand,
decreased deposit growth and other symptoms of a depressed local economy.
The Company may be affected by other uncertainties. Regulatory changes may
increase the Company's cost of doing business or otherwise impact it adversely.
Liquidity
The Company's investment securities portfolio, including federal funds sold, and
its cash and due from bank deposit balances serve as the primary sources of
liquidity. At March 31, 1995, 18% of the Bank's interest bearing liabilities
were in the form of time deposits of $100,000 and over. Although unlikely, if a
large number of these time deposits matured at approximately the same time and
were not renewed, the Bank's liquidity could be adversely affected. Currently,
the maturities of the Bank's large time deposits are spread throughout the year,
and the Bank monitors those maturities in an effort to minimize any adverse
effect on liquidity.
In the longer term, the ability of the Company to meet its cash obligations will
depend substantially on its receipt of dividends from the Bank, which are
limited by banking statutes and regulations.
Capital Resources
Shareholders' equity at March 31, 1995 was $8,324,092 as compared to $8,065,681
at December 31, 1994. The Company had consolidated earnings of $210,364 for the
three months ended March 31, 1995.
Under the regulatory risk-based capital framework, the Bank is expected to meet
a minimum risk-based capital ratio to risk-weighted assets ratio of 8%, of which
at least one-half, or 4%, must be in the form of Tier 1 (core) capital. The
remaining one-half, or 4%, may be either in the form of Tier 1 (core) or Tier 2
(supplementary) capital. The amount of the loan loss allowances that may be
included in capital after the transition period is limited to 1.25% of risk-
weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier 1
(core) and Tier 2 (supplementary) capital to risk-weighted assets for the Bank
was 10.13% and 11.17%, respectively, at December 31, 1994 and 10.38% and 11.41%,
respectively, at March 31, 1995. In addition, the Bank is expected to maintain
a Tier 1 capital to total assets ratio (Tier 1 leverage ratio) of at least 3%.
The Bank is currently, and expects to continue to be, in compliance with these
capital requirements.
While the Company believes it has sufficient financing for its working capital
needs until the end of its 1995 fiscal year, there can be no assurance that the
Company's present capital and financing will be sufficient to finance future
operations thereafter. If the Company sells additional shares of common and/or
preferred stock to raise funds, the terms and conditions of the issuances and
any dilutive effect may have an adverse impact on the existing shareholders. If
additional financing becomes necessary, there can be no assurance that the
financing can be obtained on satisfactory terms. In this event, the Company
could be required to restrict its operations.
The Federal Reserve has announced a policy sometimes known as the "source of
strength doctrine" that requires a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. The Federal Reserve
has interpreted this requirement to require that a bank holding company, such as
the Company, stand ready to use available resources to provide adequate capital
funds to their subsidiary banks during periods of financial stress or adversity.
The Federal Reserve has stated that it would generally view a failure to assist
a troubled or failing subsidiary bank in these circumstances as an unsound or
unsafe banking practice, a violation of Regulation Y, or both, justifying a
cease and desist order or other endorsement action, particularly if appropriate
resources are available to the bank holding company on a reasonable basis. The
requirement that a bank holding company, such as the Company, make its assets
and resources available to a failing subsidiary bank could have an adverse
effect upon the Company and its shareholders.
On December 9, 1994, the Company secured a short term note in the amount of
$1,750,000 with a local financial institution to finance the acquisition of the
bank in Whitesboro, Texas. This note matured on March 7, 1995 and has been
extended to June 7, 1995.
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The Company intends to raise additional funds through private placements of its
equity securities. The Company is subject to the uncertainties of the private
placement market for small companies. Failure of the Company to obtain required
equity through private placements or other sources could have an adverse effect
on the Company.
Effects of Inflation
A financial institution's asset and liability structure is substantially
different from that of an industrial company, in that virtually all assets and
liabilities are monetary in nature and, therefore, the Company's operations are
not affected by inflation in a material way. Other factors, such as interest
rates and liquidity, exert greater influence on a bank's performance than does
inflation. The effects of inflation, however, can magnify the growth of assets
in the banking industry. If significant, this would require that equity capital
increase at a faster rate than would otherwise be necessary.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.01 Certificate of Incorporation of the Company. (1)
(3.01)
3.02 Amendment to the Certificate of Incorporation, dated
April 8, 1987. (2) (3.02)
3.03 Certificate of Amendment to the Company's
Certificate of Incorporation, as filed with the
Delaware Secretary of State on April 4, 1988. (3)
(3.04)
3.04 Amendment to the Certificate of Incorporation, dated
June 14, 1993. (4)
3.05 Restated Bylaws of the Company. (5)
10.01 Renewal of Promissory Note in the original principal
amount of $1,750,000, with Surety Capital
Corporation as borrower, and Overton Bank and Trust,
N.A. as lender, dated March 9, 1995. (5) (10.08)
10.02 Surety Capital Corporation 1995 Incentive Stock
Option Plan. (5) (10.12)
______________________________
(1) Filed with Registration Statement No. 33-1983 on Form S-1 and
incorporated by reference herein.
(2) Filed with the Company's Form 10-K dated October 31, 1987 and
incorporated by reference herein.
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(3) Filed with the Company's Form 10-Q for the quarter ended April
30, 1988 and incorporated by reference herein.
(4) Filed with the Company's Form 10-K dated December 31, 1993 and
incorporated by reference herein.
(5) Filed with the Company's Form 10-K dated December 31, 1994 and
incorporated by reference herein.
(b) Reports on Form 8-K
On January 17, 1995 the Company filed a Current Report on Form 8-K
to report that on December 29, 1994 the registrant filed an
application with the American Stock Exchange, Inc. (the"Exchange")
regarding the listing of the Registrant's common stock, $0.01 par
value per share, on the Exchange's primary list. The listing was
approved by the Exchange effective as of the open of trading on
January 11, 1995, under the trading symbol "SRY."
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 27, 1995 Surety Capital Corporation
By: /s/ G.M. Heinzelmann, III
----------------------------
G.M. Heinzelmann, III
President
By: /s/ Bobby W. Hackler
----------------------------
Bobby W. Hackler
Vice President,
Chief Financial Officer
and Chief Accounting Officer
19
