<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 September 30, 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 October 23, 1995, 3,506,429 shares
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 4,997,517 $ 3,929,360
Federal funds sold 21,660,000 7,265,000
------------ ------------
Cash and cash equivalents 26,657,517 11,194,360
Interest bearing deposits in financial
institutions 1,334,860 1,524,188
Investment securities 17,017,258 19,504,254
Net loans 67,923,543 63,965,402
Premises and equipment, net 2,776,443 2,393,601
Accrued interest receivable 622,518 623,737
Other real estate and repossessed assets 92,830 121,359
Other assets 594,762 451,891
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $312,411 and $175,240 at September 30, 1995
and December 31, 1994, respectively 2,534,050 2,515,519
------------ ------------
Total assets $119,553,781 $102,294,311
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits $13,914,468 $12,191,183
Savings, NOW and money markets 31,421,332 29,875,481
Time deposits, $100,000 and over 13,885,925 7,942,882
Other time deposits 48,986,950 42,017,576
------------ ------------
Total deposits 108,208,675 92,027,122
Note payable 375,000 1,750,000
Federal income tax payable 254,386 -
Accrued interest payable and other liabilities 679,019 451,508
------------ ------------
Total liabilities 109,517,080 94,228,630
------------ ------------
Commitments and contingent liabilities (Note 1)
Shareholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized, 3,516,595 and 3,040,829
shares issued and outstanding at September
30, 1995 and December 31, 1994, respectively 35,166 30,408
Additional paid-in capital 9,364,515 8,113,214
Retained Earnings/(Deficit) 573,311 (75,102)
Treasury Stock (50,830) -
Unrealized gain/(loss) on available-for-sale
securities 114,539 (2,839)
------------ ------------
Total shareholders' equity 10,036,701 8,065,681
------------ ------------
Total liabilities and shareholders' equity $119,553,781 $102,294,311
------------ ------------
------------ ------------
</TABLE>
SURETY CAPITAL CORPORATION
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
for the nine months ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
September 30, September 30,
1995 1994
---------- ----------
<S> <C> <C>
Interest income:
Commercial and real estate loans $ 2,759,887 $ 898,537
Consumer loans 861,646 768,043
Insurance premium financing 2,080,915 1,597,634
Federal funds sold 358,600 188,197
Investment securities 810,719 225,424
Other interest income 65,196
---------- ----------
Total interest income 6,871,767 3,743,031
---------- ----------
Interest expense:
Savings, NOW and money markets 569,783 305,732
Time deposits, $100,000 and over 579,022 206,173
Other time deposits 1,276,222 459,659
Other interest expense 111,915 -
---------- ----------
Total interest expense 2,536,942 971,564
---------- ----------
Net interest income before provision
for loan losses 4,334,825 2,771,467
Provision for loan losses 60,000 66,898
---------- ----------
Net interest income 4,274,825 2,704,569
---------- ----------
Noninterest income 1,056,095 800,805
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,143,694 1,577,591
Occupancy and equipment 668,483 473,588
General and administrative 1,569,753 1,152,961
---------- ----------
Total noninterest expense 4,381,930 3,204,140
---------- ----------
Income before income taxes 948,990 301,234
Income tax expense 300,577 7,500
---------- ----------
Net income $ 648,413 $ 293,734
---------- ----------
---------- ----------
Net income per share of common stock $ 0.20 $ 0.13
---------- ----------
---------- ----------
Weighted average shares outstanding 3,208,319 2,344,491
---------- ----------
---------- ----------
</TABLE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
for the three months ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
September 30, September 30,
1995 1994
---------- ----------
<S> <C> <C>
Interest income:
Commercial and real estate loans $ 930,666 $ 322,270
Consumer loans 305,318 266,795
Insurance premium financing 703,192 571,193
Federal funds sold 117,876 114,490
Investment securities 281,738 53,966
Other interest income 30,003
---------- ----------
Total interest income 2,338,790 1,358,717
---------- ----------
Interest expense:
Savings, NOW and money markets 192,828 115,053
Time deposits, $100,000 and over 187,963 84,482
Other time deposits 502,666 186,282
Other interest expense 13,073 -
---------- ----------
Total interest expense 896,530 385,817
---------- ----------
Net interest income before provision
for loan losses 1,442,260 972,900
Provision for loan losses - 10,000
---------- ----------
Net interest income 1,442,260 962,900
---------- ----------
Noninterest income 338,149 288,375
---------- ----------
Noninterest expense:
Salaries and employee benefits 716,661 554,412
Occupancy and equipment 227,947 176,176
General and administrative 470,887 402,053
---------- ----------
Total noninterest expense 1,415,495 1,132,641
---------- ----------
Income before income taxes 364,914 118,634
Income tax expense 113,673 2,500
---------- ----------
Net income $ 251,241 $ 116,134
---------- ----------
Net income per share of common stock $ 0.07 $ 0.05
---------- ----------
Weighted average shares outstanding 3,500,871 2,373,429
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the nine months ended September 30, 1995 and
the year ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain/
Accumulated (Loss) on
Common Stock Additional Retained Available-
Par Paid-in Treasury Earnings/ for-Sale Total
Shares Value Capital Stock (Deficit) Securities Equity
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <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
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Sale of Common Stock 475,766 4,758 1,251,301 1,256,059
Purchase of Treasury Stock (50,830) (50,830)
Net Income 648,413 648,413
Unrealized gain on available-
for-sale securities, net of
income taxes 117,378 117,378
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at 9-30-95 3,516,595 $35,166 $9,364,515 $(50,830) $573,311 $114,539 $10,036,701
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
Ended Ended
September 30, September 30,
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 648,413 $ 293,734
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60,000 66,898
Depreciation and amortization 433,373 286,398
Gain on sale of investment securities 100
Net change in other assets (639,798) (293,047)
Net increase/(decrease) in accrued interest
payable and other liabilities 996,211 (38,312)
---------- ----------
Net cash provided by operating activities 1,498,299 315,671
---------- ----------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 4,736,538
Proceeds from sale of held-to-maturity securities 500,000
Proceeds from the maturity of held-to-maturity
securities and interest bearing deposits 2,716,665 4,885,510
Proceeds from the maturity of available-for-sale
securities 2,664,997
Purchase of premises and equipment (460,784) (351,371)
Net increase in loans (2,534,748) (7,506,927)
Purchase of available-for-sale securities (3,954,573)
Purchase of held-to-maturity securities (3,487,203) (94,429)
Payments received on purchased medical
claims receivable 12,961,663 9,195,279
Purchases of medical claims receivable (13,569,897) (7,249,097)
Net cash acquired through purchase of bank 15,418,983 7,485,325
----------- ----------
Net cash provided by investing activities 14,491,641 6,864,290
---------- ----------
Cash flows from financing activities:
Net change in deposits (357,012) (1,602,783)
Payments on borrowings of note payable (1,375,000)
Purchase of treasury stock (50,830)
Proceeds from the sale of common stock 1,256,059 394,713
---------- ----------
Net cash used by financing activities (526,783) (1,208,070)
---------- ----------
Net increase in cash 15,463,157 5,971,891
Beginning cash and cash equivalents 11,194,360 6,886,487
---------- ----------
Ending cash and cash equivalents $26,657,517 $12,858,378
---------- ----------
---------- ----------
Supplemental disclosure:
Cash paid during the period for interest $ 2,433,146 $ 951,084
Cash paid during the period for federal
income taxes $ 18,608 $ 7,500
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<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
September 30, 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:
FIRST NATIONAL BANK, WHITESBORO, TEXAS
On May 24, 1994, Surety Bank entered into an agreement for the acquisition
of First National Bank, a national banking association located in
Whitesboro, Texas. The acquisition was effected through the merger of
First National Bank with and into Surety Bank effective as of the close of
business on December 8, 1994. Pursuant to the merger, Surety Bank paid
$6,000,000 to the shareholders of First National Bank in exchange for all
of the issued and outstanding shares of common stock of First National
Bank. The purchase price of $30.00 per share was based on approximately
150% of the book value of First National Bank as of December 31, 1993. As
a result of the earnings of First National Bank during the fiscal year
1994, the purchase price of $30.00 per share represented approximately 130%
of the book value of First National Bank as of the date of consummation of
the merger.
In connection with the merger, Surety Bank purchased all of the assets
and assumed all of the obligations of First National Bank. To finance
the merger, Surety 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. After the note matured on June 7, 1995, the Company reduced the
balance of the note to $500,000 and a new note was obtained for the
remaining balance with a maturity of January 23, 1996. As of September
30, 1995, the note bore an interest at eleven and one-half percent
(11.50%), had a balance of $375,000, and provided for quarterly
interest payments and one principal payment at maturity.
The acquisition has been accounted for as a purchase in the accompanying
consolidated financial statements. The assets and liabilities of First
National Bank have been recorded at their fair values as of November 30,
1994.
7
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ACQUISITIONS continued:
Included in the accompanying consolidated financial statements are
the following amounts for First National Bank as of September 30, 1995
and for the nine months ended September 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Balance sheet data:
Cash and due from banks $ 509,620
Federal funds sold 4,310,000
Investment securities 4,764,782
Net loans 22,225,087
Premises and equipment, net 836,314
Accrued interest receivable 290,723
Other assets 241,827
-----------
Total assets $ 33,178,353
-----------
-----------
Income statement data:
Total interest income $ 1,826,948
Total interest expense 947,017
Other income 231,661
Noninterest expense 756,667
-----------
Net income $ 354,925
-----------
-----------
</TABLE>
The consolidated results of operations include the operations of First
National Bank subsequent to December 1, 1994. The unaudited information
for the nine months ended September 30, 1995 and the unaudited pro forma
information for the nine months ended September 30, 1994, presented below,
reflect the acquisition of First National Bank, as if it had been acquired
as of January 1, 1994. Pro forma adjustments consisting of a 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 the short-term debt had been incurred on
January 1, 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest income $6,871,767 $5,931,128
Net income 648,413 516,241
Net income per share of common stock $0.20 $0.17
</TABLE>
BANK ONE, TEXAS, NATIONAL ASSOCIATION BRANCH IN WAXAHACHIE, TEXAS
On June 16, 1995, Surety Bank entered into an agreement with Bank One,
Texas, National Association ("Bank One") for the acquisition of certain
assets and the assumption of certain liabilities by Surety Bank relating to
the branch of Bank One located in Waxahachie, Texas (the "Waxahachie
Branch").
The acquisition was consummated on September 28, 1995. Surety Bank
financed the acquisition through the use of internally-generated funds.
At the closing, Surety Bank assumed deposits and other liabilities totaling
approximately $16,642,000. In addition, Surety Bank acquired certain small
business and consumer loans totaling approximately $875,000, certain real
property, furniture and equipment related to the Waxahachie Branch totaling
approximately
8
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ACQUISITIONS continued:
$271,000, and cash and other assets totaling approximately $15,496,000.
After paying a deposit premium of two percent (2%) on the deposits assumed
totaling approximately $331,000, Surety Bank received approximately
$15,419,000 in cash from Bank One as consideration for the net deposit
liabilities assumed. The Waxahachie Branch and deposits acquired in the
acquisition have been incorporated into Surety Bank's existing branch
network.
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. The Company and Surety Bank will file a consolidated tax
return for 1995.
3. INVESTMENT SECURITIES:
At September 30, 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 $ 99,205 $ 77 $ 99,128
Obligations of other U.S.
Government agencies and
corporations 5,476,904 256 5,987 5,471,173
State and county municipals 4,735,574 $ 263,040 4,998,614
----------- ---------- --------- -----------
10,311,683 263,296 6,064 10,568,915
----------- ---------- --------- -----------
AVAILABLE FOR SALE:
U.S. Treasury 483,490 11,510 495,000
Obligations of other U.S.
Government agencies and
corporations 5,753,408 173,577 17,185 5,909,800
Federal Reserve Bank Stock 280,850 280,850
Other investment securities 19,925 19,925
----------- ---------- --------- -----------
6,537,673 185,087 17,185 6,705,575
----------- ---------- --------- -----------
$16,849,356 $ 448,383 $ 23,249 $17,274,490
----------- ---------- --------- -----------
----------- ---------- --------- -----------
</TABLE>
9
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. INVESTMENT SECURITIES continued:
The amortized cost and estimated market value of investment securities at
September 30, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
HELD-TO-MATURITY:
Due within one year $1,232,093 $1,235,728
Due after one year through five years 5,085,377 5,163,506
Due after five years through ten years 3,482,659 3,664,114
Mortgage-backed securities 511,554 505,567
----------- -----------
Total 10,311,683 $10,568,915
----------- -----------
AVAILABLE-FOR-SALE:
Due within one year $ 398,835 $ 401,703
Due after one year through five years 2,530,544 2,636,540
Due after five years through ten years 3,166,230 3,218,581
Mortgage-backed securities 141,289 147,976
Other securities 300,775 300,775
----------- -----------
6,537,673 6,705,575
----------- -----------
Total $16,849,356 $17,274,490
----------- -----------
----------- -----------
</TABLE>
Proceeds from sales of available-for-sale investment securities during the
nine months ended September 30, 1995 were $4,736,538 with gross recognized
gains of $100 and no losses.
Proceeds from sales of held-to-maturity investment securities during the
twelve months ended December 31, 1994 were $500,000 with no recognized
gains or losses. These securities were sold within 90 days of the call
date and were expected to be called.
At September 30, 1995 and 1994 the carrying values of Federal Reserve Bank
stock were $280,850 and $151,050 respectively. The Federal Reserve Bank
stock's market value was estimated to be the same as its carrying value at
both dates.
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 First National Bank, $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.
10
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. NET LOANS:
At September 30, 1995 and December 31, 1994, the loan portfolio was
composed of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Insurance premium financing $24,283,325 $20,931,642
Commercial loans 15,590,320 13,205,698
Installment loans 11,519,839 12,029,243
Real estate loans 16,224,602 17,297,636
Medical claims receivable 2,992,867 2,705,974
---------- ----------
Total gross loans 70,610,953 66,170,193
Unearned interest (1,962,866) (1,506,843)
Allowance for loan losses (724,544) (697,948)
---------- ----------
Net loans $67,923,543 $63,965,402
---------- ----------
---------- ----------
</TABLE>
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months Three Months Nine Months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1995 1995 1994 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Beginning balance $697,948 $718,628 $401,227 $471,725
Provision for loan losses 60,000 66,898 10,000
Bank acquisition 10,181 10,181 40,511
Loans charged off, net of
recoveries (43,585) (4,265) (102,023) (75,112)
-------- ------- ------- -------
Ending balance $724,544 $724,544 $406,613 $406,613
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $27,000 and $83,000 at September 30, 1995 and December 31,
1994, respectively.
5. CONCENTRATION OF CREDIT RISK:
Surety Bank has a significant concentration of credit in its insurance
premium finance portfolio. Insurance premium finance loans comprise
approximately $23,724,000 or 35% and $20,496,000 or 32% of consolidated
total loans net of unearned interest as of September 30, 1995 and December
31, 1994, respectively. As of September 30, 1995, no group of borrowers
writing insurance through any one insurance company represents 10% or more
of Surety Bank's premium finance loans.
11
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO COMSOLIDATED FINANCIAL STATEMENTS, Continued
6. SHAREHOLDERS' EQUITY:
During the nine months ended September 30, 1995, 459,500 shares of the
Company's common stock were sold in an offering for a total consideration,
net of expenses, of $1,251,301. During the twelve months ended December
31, 1994, 767,342 shares of the Company's common stock were sold in private
placements for a total consideration, net of expenses, of $2,314,772.
7. STOCK OPTION PLANS:
The Company has two long-term incentive stock option plans for key senior
officers of the Company. The stock option plans provide these key
employees with options to purchase shares of the Company's common stock at
an exercise price equal to at least the fair market value of such common
stock on the date of grant.
8. SUBSEQUENT EVENTS:
On October 17, 1995 the Company and Surety Bank entered into an agreement
to acquire First National Bank, a national banking association located in
Midlothian, Texas. Under the proposed structure of the transaction, a
subsidiary of Surety Bank (to be organized by Surety Bank under the name of
"Surety Acquisition, Inc.") will first merge with and into First National
Bank's parent holding company, First Midlothian Corporation ("First
Midlothian"), pursuant to which merger (the "Merger") the shareholders of
First Midlothian will receive cash in exchange for their shares of capital
stock of First Midlothian in an amount equal to one hundred and fifty
percent (150%) of the book value of First National Bank. Surety
Acquisition, Inc. will be a Texas corporation, and its proposed activities
will be limited to facilitating Surety Bank's acquisition of First
Midlothian and, indirectly, First National Bank.
Immediately following the Merger, First National Bank and Surety Bank will
consolidate under the charter of Surety Bank (the "Consolidation"). Upon
consummation of the Consolidation, First Midlothian will be dissolved.
The Company is in the process of preparing the various regulatory
applications necessary to consummate the proposed acquisition.
As of September 30, 1995 First National Bank had total assets of
$51,984,000, total deposits of $47,160,000, total net loans of $20,094,000,
total equity of $4,286,000 and income for the nine months ended September
30, 1995 of $354,000.
The completion of the acquisition is subject to a number of contingencies,
including regulatory approval by applicable banking authorities, the
raising of sufficient funds by the Company to facilitate the acquisition,
shareholder approval, and other matters. If consummated, the transactions
are expected to occur during the first quarter of 1996.
12
<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 "Surety Bank"), effective January 1,
1994, in order to establish name recognition for Surety Bank and to avoid
confusion with other similarly named banks.
The results of the Company's operations for the first three quarters of 1995 and
1994 are depicted below:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1995 1994
----------------- -----------------
<S> <C> <C>
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 23,776,528 $ 18,957,989
Average yield 11.7% 11.2%
Interest income $ 2,080,915 $ 1,597,634
CONSUMER, COMMERCIAL AND REAL
ESTATE FINANCING:
Average balance outstanding $ 44,215,791 $ 17,925,706
Average yield 10.9% 12.4%
Interest income $ 3,621,533 $ 1,666,580
COST OF FUNDS:
Average balance outstanding (1) $ 92,715,823 $ 50,622,739
Average interest rate 3.6% 2.6%
Interest expense $ 2,536,942 $ 971,564
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 763,530 $ 415,408
Total interest expense $ 281,882 $ 107,823
Provision for loan losses $ 6,667 $ 7,778
Noninterest income $ 117,344 $ 88,978
Noninterest expense $ 486,881 $ 339,723
</TABLE>
(1) Includes $1,297,565 of short term borrowings and $111,915
interest expense on short term borrowings.
Note: AVERAGE BALANCES ARE COMPUTED USING DAILY BALANCES THROUGHOUT EACH
PERIOD.
13
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1995
------------------------------------
Average Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities and
due from time $16,507,128 $ 810,719(1) 6.6%
Federal funds sold 7,995,800 358,600 6.0%
Loans(2) 67,992,319 5,702,448(3) 11.2%
Allowance for loan losses (711,919) N/A N/A
---------- --------- -----
Total interest earning assets 91,783,328 6,871,767 10.0%
---------- --------- -----
Cash and due from banks 4,403,273
Premises and equipment 2,402,578
Accrued interest receivable 639,556
Other assets 3,060,726
----------
Total assets $102,289,461
-----------
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $22,422,644 $ 476,084 2.8%
Savings deposits 4,697,675 93,699 2.7%
Time deposits 52,078,213 1,855,244 4.8%
Notes payable 1,297,565 111,915 11.5%
---------- --------- -----
Total interest bearing liabilities 80,418,199 2,536,942 4.2%
---------- --------- -----
Net interest income 4,334,825
---------
---------
Net interest spread 5.8%
----
Net interest income to average earning assets 6.3%
----
Noninterest bearing deposits 12,297,624
Other liabilities 489,746
----------
Total liabilities 93,283,467
Shareholders' equity 9,005,994
---------
Total liabilities and shareholders' equity $102,289,461
-----------
-----------
</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
immaterial and are included in noninterest income.
14
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1994.
The Company earned $648,413 and $293,734 during the nine months ended September
30, 1995 and 1994, respectively. Total interest income increased 84% to
$6,871,767 from $3,743,031, while total interest expense increased 161% to
$2,536,942 from $971,564, resulting in a 56% increase in net interest income
before provision for loan losses to $4,334,825 from $2,771,467. The Company's
loan growth between these two periods was concentrated within the real estate
lending, commercial loans and the medical claims receivable financing. Real
estate lending increased by 466% to $16,224,602 from $2,867,976, commercial
lending increased by 141% to $15,590,320 from $6,466,966, and medical claims
receivable financing increased by 65% to $2,992,867 from $1,815,702. This
growth is attributed to the merger of First National Bank, located in
Whitesboro, Texas, with and into Surety Bank (the "Whitesboro Merger"), the
acquisition by Surety Bank of all of the assets of the Bank One, Texas, National
Association branch located in Waxahachie, Texas (the "Waxahachie Acquisition")
and management's marketing efforts. The average volume of consumer, commercial,
and real estate lending increased 147%, with a decrease in average yields on
those loans from 12% to 11%. The 25% increase in the average volume of
insurance premium loans was accompanied by an increase in the average yield on
those loans from 11% to 12%. The average balance of interest bearing deposits
increased 88%, while the average rate paid increased from 3.0% to 4.2%. 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, Surety Bank
sold its secured credit card program to Bank IV, Oklahoma City, Oklahoma, for a
gain of approximately $30,000.
The Company recorded a $60,000 provision for loan losses during the nine months
ended September 30, 1995 compared to $66,898 provision for loan losses during
the nine months ended September 30, 1994. As the Company's ratio of net charge-
offs to average loans remained unchanged 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 32% to $1,056,095 from $800,805 for
the nine months ended September 30, 1995 and 1994, respectively. This increase
compares to a corresponding increase in average noninterest bearing deposits of
78% to $12,297,624 from $6,912,272 for these same periods. Noninterest income
is generated primarily from fees associated with noninterest and interest
bearing accounts.
Noninterest expense increased 37%, primarily the result of a 36% increase in
salaries and employee benefits, a 41% increase in occupancy and equipment
expenses, and a 36% increase in general and administrative expenses. The
increase in salaries and benefits was due primarily to additional staffing
required by the Whitesboro Merger and the Waxahachie Acquisition and Surety
Bank's loan and deposit growth. Increases in general and administrative
expenses relate primarily to legal and professional fees.
THREE MONTHS ENDED SEPTEMBER 30, 1995 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1994.
The Company earned $251,241 and $116,134 during the three months ended September
30, 1995 and 1994, respectively. Total interest income increased 72% to
$2,338,790 from $1,358,717, while total interest expense increased 132% to
$896,530 from $385,817, resulting in a 48% increase in net interest income
before provision for loan losses to $1,442,260 from $972,900.
The Company did not record a provision for loan losses during the three months
ended September 30, 1995 while the Company recorded a $10,000 provision for loan
losses during the three months ended September 30, 1994. As the Company's ratio
of net charge-offs to average loans remained unchanged 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 17% to $338,149 from $288,375 for the
three months ended September 30, 1995 and 1994, respectively. Noninterest
expense increased 25%, primarily the result of a 29% increase in salaries and
employee benefits, a 29% increase in occupancy and equipment expenses, and a 17%
increase in general and administrative expenses. The increase in salaries and
benefits was due primarily to additional staffing required by the Whitesboro
Merger and the Waxahachie Acquisition and Surety Bank's loan and deposit growth.
Increases in general and administrative expenses relate primarily to legal and
professional fees.
15
<PAGE>
PARENT COMPANY ONLY RESULTS OF OPERATIONS.
The Company did not own Surety Bank prior to December 30, 1989. Since that
time, the Company has served as a parent company to Surety Bank and has wound
down the Company's own separate business activities. For the three months ended
September 30, 1995, the Company had only nominal income, other than equity in
net income of Surety Bank of approximately $1,600, and approximately $32,000 in
noninterest expenses. The noninterest expenses, which decreased 81% 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 $60,000 provision for loan losses during the nine months
ended September 30, 1995 compared to a $66,898 provision during the nine months
ended September 30, 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.
The ratio of charge-offs, net of recoveries, to average loans during the nine
months ended September 30, 1995 was 0.06%. The ratio of the allowance for loan
losses to total loans was 1.0% on September 30, 1995. The allowance for loan
losses was $724,544 on September 30, 1995.
CURRENT TRENDS AND UNCERTAINTIES
Economic trends and other developments could adversely affect the Company's
operations. 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 September 30, 1995, 14% of Surety 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, Surety Bank's liquidity could be adversely
affected. Currently, the maturities of Surety Bank's large time deposits are
spread throughout the year, and Surety Bank monitors those maturities in an
effort to minimize any adverse effect on liquidity.
Over the long term, the ability of the Company to meet its cash obligations will
depend substantially on its receipt of dividends from Surety Bank, which are
limited by banking statutes and regulations.
CAPITAL RESOURCES
Shareholders' equity at September 30, 1995 was $10,036,701 as compared to
$8,065,681 at December 31, 1994. The Company had consolidated earnings of
$648,413 for the nine months ended September 30, 1995.
Under the regulatory risk-based capital framework, Surety 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 Surety
Bank was 10.13% and 11.17%, respectively, at December 31, 1994 and 10.17% and
11.14%, respectively, at September 30, 1995. In addition, Surety Bank is
expected to maintain a Tier 1 capital to total assets ratio (Tier 1 leverage
ratio) of at least 3%. Surety Bank is currently, and expects to continue to be,
in compliance with these capital requirements.
16
<PAGE>
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 obtained a $1,750,000, 90-day note payable to a
local financial institution to finance the Whitesboro Merger. After the note
matured on June 7, 1995, the Company reduced the balance of the note to
$500,000, and a new note was obtained for the remaining balance of $500,000 with
a maturity of January 23, 1996. Interest payments are due quarterly and
principal is due at maturity. As of September 30, 1995 the note bore interest
at the rate of eleven and one-half percent (11.5%) and had a balance of
$375,000.
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.
OTHER
Deposits held by Surety Bank are insured by the FDIC's Bank Insurance Fund
("BIF"). On August 8, 1995, the FDIC Board of directors voted to significantly
reduce the deposit insurance premiums paid by most banks but to keep existing
assessment rates intact for savings associations. Under the new rate structure,
the best-rated institutions insured by the BIF will pay four cents per $100 of
domestic deposits, down from the current rate of twenty three cents per $100.
The new BIF assessment rates will apply from the first day of the month after
the BIF is recapitalized. The recapitalization of the BIF occurred in early
September. This change is expected to significantly reduce the cost of deposit
insurance for Surety Bank. In connection with the new rate schedule, the FDIC
Board established a process for quickly raising or lowering all rates for BIF-
insured institutions up to twice a year without seeking public comment.
The Company is party to a number of lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will
not have a material adverse effect on the Company's financial position.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any material legal proceedings.
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
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On October 13, 1995 the registrant filed a Current Report on Form 8-K
regarding the acquisition of certain assets and the assumption of
certain liabilities relating to the branch of Bank One, Texas National
Association located in Waxahachie, Texas by the registrant's subsidiary,
Surety Bank, National Association. This transaction was effective as of
September 29, 1995.
18
<PAGE>
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: November 10, 1995 Surety Capital Corporation
By: /s/ C. Jack Bean
----------------------------
C. Jack Bean
Chairman
By: /s/ B.J. Curley
----------------------------
B.J. Curley
Vice President, Chief Financial Officer
Chief Accounting Officer
19
<PAGE>
INDEX TO EXHIBITS
Exh. No. Description
- ---------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,997,517
<INT-BEARING-DEPOSITS> 1,334,860
<FED-FUNDS-SOLD> 21,660,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,705,575
<INVESTMENTS-CARRYING> 10,311,683
<INVESTMENTS-MARKET> 10,568,915
<LOANS> 68,648,087
<ALLOWANCE> (724,544)
<TOTAL-ASSETS> 119,553,781
<DEPOSITS> 108,208,675
<SHORT-TERM> 375,000
<LIABILITIES-OTHER> 933,405
<LONG-TERM> 0
<COMMON> 35,166
0
0
<OTHER-SE> 10,001,535
<TOTAL-LIABILITIES-AND-EQUITY> 119,553,781
<INTEREST-LOAN> 5,702,448
<INTEREST-INVEST> 810,719
<INTEREST-OTHER> 358,600
<INTEREST-TOTAL> 6,871,767
<INTEREST-DEPOSIT> 2,425,027
<INTEREST-EXPENSE> 111,915
<INTEREST-INCOME-NET> 4,334,825
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 100
<EXPENSE-OTHER> 4,381,930
<INCOME-PRETAX> 948,990
<INCOME-PRE-EXTRAORDINARY> 948,990
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 648,413
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> .063
<LOANS-NON> 27,000
<LOANS-PAST> 13,877
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 697,948
<CHARGE-OFFS> 82,750
<RECOVERIES> 39,165
<ALLOWANCE-CLOSE> 724,544
<ALLOWANCE-DOMESTIC> 682,343
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 42,201
</TABLE>
