<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 June 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 August 11, 3,500,329 shares
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1995 and December 31, 1994
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
-------------- ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 4,574,480 $ 3,929,360
Federal funds sold 6,890,000 7,265,000
-------------- ------------
Cash and cash equivalents 11,464,480 11,194,360
Interest bearing deposits in financial institutions 1,433,753 1,524,188
Investment securities 14,850,145 19,504,254
Net loans 69,585,449 63,965,402
Premises and equipment, net 2,455,114 2,393,601
Accrued interest receivable 664,450 623,737
Other real estate and repossessed assets 92,845 121,359
Other assets 658,745 451,891
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $238,237 and $175,240 at June 30, 1995
and December 31, 1994, respectively 2,452,522 2,515,519
------------- -------------
Total assets $103,657,503 $102,294,311
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits $ 13,499,425 $ 12,191,183
Savings, NOW and money markets 26,899,822 29,875,481
Time deposits, $100,000 and over 15,540,333 7,942,882
Other time deposits 36,583,694 42,017,576
------------ ------------
Total deposits 92,523,274 92,027,122
Note payable 500,000 1,750,000
Accrued interest payable and other liabilities 868,366 451,508
------------ ------------
Total liabilities 93,891,640 94,228,630
------------ ------------
Commitments and contingent liabilities (Note 1)
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
3,461,329 and 3,040,829 shares issued and outstanding at
June 30, 1995 and December 31, 1994, respectively 34,613 30,408
Additional paid-in capital 9,282,609 8,113,214
Retained earnings/(Deficit) 322,070 (75,102)
Unrealized gain on available-for-sale securities 126,571 (2,839)
------------ ------------
Total shareholders' equity 9,765,863 8,065,681
------------ ------------
Total liabilities and shareholders' equity $103,657,503 $102,294,311
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
2
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the six months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1995 1994
------------ -----------
<S> <C> <C>
Interest income:
Commercial and real estate loans $ 1,829,221 $ 576,267
Consumer loans 556,328 501,248
Insurance premium financing 1,377,723 1,026,441
Federal funds sold 240,724 73,707
Investment securities 528,981 171,458
Other interest income 35,193
---------- ----------
Total interest income 4,532,977 2,384,314
---------- ----------
Interest expense:
Savings, NOW and money markets 376,955 190,679
Time deposits, $100,000 and over 391,059 121,691
Other time deposits 773,556 273,377
Other interest expense 98,842
---------- ----------
Total interest expense 1,640,412 585,747
---------- ----------
Net interest income before provision
for loan losses 2,892,565 1,798,567
Provision for loan losses 60,000 56,898
---------- ----------
Net interest income 2,832,565 1,741,669
---------- ----------
Noninterest income 717,946 512,430
---------- ----------
Noninterest expense:
Salaries and employee benefits 1,427,033 1,023,179
Occupancy and equipment 440,536 297,412
General and administrative 1,098,866 750,908
---------- ----------
Total noninterest expense 2,966,435 2,071,499
---------- ----------
Income before income taxes 584,076 182,600
Income tax expense 186,904 5,000
---------- ----------
Net income $ 397,172 $ 177,600
========== ==========
Net income per share of common stock $0.13 $0.08
========== ==========
Weighted average shares outstanding 3,135,247 2,329,783
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, June 30,
1995 1994
----------- ----------
<S> <C> <C>
Interest income:
Commercial and real estate loans $ 925,373 $ 302,295
Consumer loans 301,239 251,194
Insurance premium financing 729,545 548,831
Federal funds sold 87,366 49,125
Investment securities 279,121 65,373
Other interest income 23,181
----------- ----------
Total interest income 2,322,644 1,239,999
----------- ----------
Interest expense:
Savings, NOW and money markets 187,124 97,426
Time deposits, $100,000 and over 198,468 68,818
Other time deposits 424,902 146,523
Other interest expense 48,787 -
----------- ----------
Total interest expense 859,281 312,767
----------- ----------
Net interest income before provision
for loan losses 1,463,363 927,232
Provision for loan losses 15,000 28,346
----------- ----------
Net interest income 1,448,363 898,886
----------- ----------
Noninterest income 350,383 262,013
----------- ----------
Noninterest expense:
Salaries and employee benefits 719,814 529,933
Occupancy and equipment 221,849 156,259
General and administrative 584,240 407,439
----------- ----------
Total noninterest expense 1,525,903 1,093,631
----------- ----------
Income before income taxes 272,843 67,268
Income tax expense 86,035 2,500
----------- ----------
Net income $ 186,808 $ 64,768
=========== ==========
Net income per share of common stock $ 0.06 $ 0.03
=========== ==========
Weighted average shares outstanding 3,156,771 2,329,783
=========== ==========
</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 six months ended June 30, 1995 and
the year ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Common Stock Gain/(Loss) on
-------------- Additional Accumulated Available-
Par Paid-in Retained for-Sale Total
Shares Value Capital Earnings 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
--------- ------- ---------- ---------- ------- ----------
Sale of common stock 420,500 4,205 1,169,395 1,173,600
Net income 397,172 397,172
Net of tax:
Unrealized gain
on Available-For-Sale, net
of income taxes 129,410 129,410
--------- ------- ---------- -------- -------- ----------
Balance at 6/30/95 3,461,329 $34,613 $9,282,609 $322,070 $126,571 $9,765,863
--------- ------- ---------- -------- -------- ----------
</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 six months ended June 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1995 1994
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 397,172 $ 177,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60,000 56,898
Depreciation and amortization 290,565 184,338
Gain on sale of investment securities 100
Net change in other assets 692 (97,221)
Net increase/(decrease) in accrued interest
payable and other liabilities 416,858 (4,991)
----------- -----------
Net cash provided by operating activities 1,165,387 316,624
----------- -----------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 4,736,538 500,000
Proceeds from the maturity of held-to-maturity
securities and interest bearing deposits 1,559,780 4,261,238
Proceeds from the maturity of available-for-sale securities 334,864
Purchase of premises and equipment (289,081) (237,011)
Net increase in loans (4,528,630) (8,867,949)
Purchase of available-for-sale securities (1,977,073)
Payments received on purchased medical claims receivable 8,691,206 6,221,194
Purchases of medical claims receivable (9,842,623) (4,308,001)
Net cash acquired through purchase of bank 7,485,325
----------- -----------
Net cash provided by (used in) investing activities (1,315,019) 5,054,796
----------- -----------
Cash flows from financing activities:
Net change in deposits 496,152 (371,788)
Payments on borrowings of note payable (1,250,000)
Proceeds from the sale of common stock 1,173,600 394,713
----------- -----------
Net cash provided by financing activities 419,752 22,925
----------- -----------
Net increase in cash 270,120 5,394,345
Beginning cash and cash equivalents 11,194,360 6,886,487
----------- -----------
Ending cash and cash equivalents $11,464,480 $12,280,832
=========== ===========
Supplemental disclosure:
Cash paid during the period for interest $ 1,593,555 $ 576,124
============== ===========
</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
June 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
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
(11.25%) at June 30, 1995, with principal and interest due at maturity.
After the note matured on June 7, 1995, the Company reduced the balance of
the note to $500,000. A new monthly installment note was obtained for the
remaining balance of $500,000 with a maturity of June 7, 2000.
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.
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 the acquired bank as of June 30, 1995 and for the six
months ended June 30, 1995:
<TABLE>
<CAPTION>
<S> <C>
Balance sheet data:
Cash and due from banks $ 279,345
Federal funds sold 3,400,000
Interest bearing deposits in financial institutions 98,355
Investment securities 6,099,646
Net loans 22,756,686
Premises and equipment, net 844,218
Accrued interest receivable 276,714
Other assets 243,923
-------------
Total assets $ 33,998,887
=============
Income statement data:
Total interest income $ 1,091,238
Total interest expense 625,367
Other income 160,733
Noninterest expense 363,103
-----------
Net income $ 263,501
-----------
</TABLE>
The consolidated results of operations include the operations of the
acquired Bank subsequent to December 1, 1994. The unaudited information for
the six months ended June 30, 1995 and the unaudited pro forma information
for the six months ended June 30, 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 $4,532,977 $3,808,562
Net income 397,172 482,798
Net income per share of common stock $0.13 $0.21
</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 1995.
8
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
3. Investment Securities:
---------------------
At June 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 $1,102,986 $ 1,205 $1,101,781
Obligations of other U.S.
Government agencies and
corporations 2,290,098 27,590 2,262,508
State and county municipals 4,749,002 $ 213,492 4,962,494
----------- ---------- ---------- ----------
8,142,086 213,492 28,795 8,326,783
AVAILABLE FOR SALE: ----------- ---------- ---------- ----------
U.S. Treasury 1,479,267 12,294 1,491,561
Obligations of other U.S.
Government agencies and
corporations 4,763,482 152,731 490 4,915,723
Federal Reserve Bank Stock 280,850 280,850
Other investment securities 19,925 19,925
----------- ---------- ---------- ----------
6,543,524 165,025 490 6,708,059
----------- ---------- ----------- -----------
$14,685,610 $ 378,517 $ 29,285 $15,034,842
============ =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities at June
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 $1,834,681 $1,858,272
Due after one year through five years 2,989,274 3,073,922
Due after five years through ten years 1,766,842 1,864,821
Mortgage-backed securities 1,551,289 1,529,768
Total 8,142,086 $8,326,783
---------- ----------
AVAILABLE-FOR-SALE:
Due within one year $1,295,589 $1,297,685
Due after one year through five years 4,560,856 4,703,484
Due after five years through ten years 308,657 326,812
Mortgage-backed securities 77,647 79,303
Other securities 300,775 300,775
---------- ----------
6,543,524 6,708,059
---------- ----------
Total $14,685,610 $15,034,842
----------- -----------
</TABLE>
9
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Investment Securities continued:
---------------------
Proceeds from sales of Available-for-Sale investment securities during the
six months ended June 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 June 30, 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 June 30, 1995 and December 31, 1994, the loan portfolio was composed of
the following:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Insurance premium financing $26,106,808 $20,931,642
Commercial loans 15,903,653 13,205,698
Installment loans 10,330,594 12,029,243
Real estate loans 16,419,348 17,297,636
Medical claims receivable 3,523,412 2,705,974
Total gross loans 72,283,815 66,170,193
Unearned interest (1,979,738) (1,506,843)
Allowance for loan losses (718,628) (697,948)
----------- ------------
Net loans $69,585,449 $63,965,402
----------- ------------
</TABLE>
10
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED STATEMENTS, continued
4. Net Loans, continued:
---------
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Six Months Three Months Six Months Three Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1995 1995 1994 1994
--------------- ----------------- --------------- ------------
<S> <C> <C> <C> <C>
Beginning balance $697,948 $719,216 $401,227 $430,31
Provision for loan losses 60,000 15,000 56,898 28,346
Bank acquisition 40,511 40,511
Loans charged off, net of
recoveries (39,320) (15,588) (26,911) (27,446)
--------- --------- -------- ---------
$718,628 $718,628 $471,725 $471,725
Ending balance ======== ======== ======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $66,000 and $83,000 at June 30, 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 loans
comprise approximately $25,449,000 or 36% and $20,496,000 or 32% of
consolidated total loans net of unearned interest as of June 30, 1995 and
December 31, 1994, respectively. As of June 30, 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:
--------------------
During the six months ended June 30, 1995, 420,500 shares of the Company's
common stock were sold in an offering for a total consideration, net of
expenses, of $1,173,600. 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.
7. Subsequent Events:
-----------------
On July 3, 1995, 39,000 shares of the Company's common stock were sold in
an offering for a total consideration, net of expenses, of $89,428. The
offering was closed on July 6, 1995.
Surety Bank filed an application with the Office of the Comptroller of the
Currency on July 10, 1995, for the acquisition of a Bank One, Texas,
National Association ("Bank One"), branch located in Waxahachie, Texas. The
purchase price for the Waxahachie branch will be equal to a percentage of
the deposit base of the branch. As of May 31, 1995, the Waxahachie branch
had deposits of approximately $18,600,000, loans of $1,600,000 and fixed
assets with a current book value of approximately $160,000.
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 two quarters of 1995 and
1994 are depicted below:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, June 30,
1995 1994
---------------------- ------------------------
<S> <C> <C>
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 23,401,618 $ 18,279,944
Average 11.8% 11.2%
Interest income $ 1,377,723 $ 1,026,441
CONSUMER, COMMERCIAL AND REAL ESTATE FINANCING:
Average Average balance outstanding $ 44,111,245 $ 17,349,839
Average yield 10.8% 12.4%
Interest income $ 2,385,549 1,077,515
COST OF FUNDS:
Average balance outstanding (1) $ 92,943,762 $ 46,972,212
Average interest rate 3.5% 2.5%
Interest expense $ 1,640,412 $ 585,747
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 755,496 $ 397,386
Total interest expense $ 273,402 $ 97,625
Provision for loan losses $ 10,000 $ 9,483
Noninterest income $ 119,658 $ 85,405
Noninterest expense $ 494,406 $ 345,250
</TABLE>
(1) Includes $1,642,000 of short term borrowings and $98,842 interest
expense on short term borrowings.
Note: Average balances are computed using daily balances throughout each
period.
12
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995
----------------------------------
Average Average
Balance Interest Rate
------- -------- -------
ASSETS:
<S> <C> <C> <C>
Interest earnings assets:
U.S. Treasury and agency securities and
due from time $16,611,728 $ 528,981(1) 6.4%
Federal funds sold 8,049,688 240,724 6.0%
Loans(2) 67,512,863 3,763,272(3) 11.1%
Allowance for loan losses (708,868) N/A N/A
----------- ---------- -------
Total interest earning assets 91,465,411 4,532,977 9.9%
----------- ---------- -------
Cash and due from banks 4,244,789
Premises and equipment 2,382,608
Accrued interest receivable 629,105
Other assets 2,828,296
-----------
Total assets $101,550,209
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $23,163,089 $ 313,593 2.7%
Savings deposits 4,403,987 63,362 2.9%
Time deposits 51,308,035 1,164,615 4.5%
Notes payable 1,642,000 98,842 12.0%
------------ ----------- ---------
Total interest bearing liabilities 80,517,111 1,640,412 4.1%
------------ ----------- ---------
Net interest income 2,892,565
===========
Net interest spread 5.8%
------
Net interest income to average earning assets 6.3%
------
Noninterest bearing deposits 12,426,651
Other liabilities 102,084
------------
Total liabilities 93,045,846
Shareholders' equity 8,504,363
------------
Total liabilities and shareholders' equity $101,550,209
============
</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>
Six Months Ended June 30, 1995 Versus Six Months Ended June 30, 1994.
---------------------------------------------------------------------
The Company earned $397,172 and $177,600 during the six months ended June 30,
1995 and 1994, respectively. Total interest income increased 90% to $4,532,977
from $2,384,314, while total interest expense increased 180% to $1,640,412 from
$585,747, resulting in a 61% increase in net interest income before provision
for loan losses to $2,892,565 from $1,798,567. 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 767% to $16,419,348 from $1,894,214, commercial lending increased by 103% to
$15,903,653 from $7,819,919, and medical claims receivable financing increased
by 90% to $3,523,412 from $1,853,529. This growth is attributed to the merger of
the acquired banks, and management's marketing efforts. The average volume of
consumer, commercial, and real estate lending increased 155%, with a decrease in
average yields on those loans from 12% to 11%. The 28% 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 98%, while the average rate paid increased from 3.0% to 4.1%.
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 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 six months
ended June 30, 1995 compared to $56,898 provision for loan losses during the six
months ended June 30, 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 40% to $717,946 from $512,430 for the
six months ended June 30, 1995 and 1994, respectively. This increase compares
to a corresponding increase in average noninterest bearing deposits of 73% to
$12,426,651 from $7,205,520 for these same periods. Noninterest income is
generated primarily from fees associated with noninterest and interest bearing
accounts.
Noninterest expense increased 43%, primarily the result of a 40% increase in
salaries and employee benefits, a 48% increase in occupancy and equipment
expenses, and a 46% 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.
Three Months Ended June 30, 1995 Versus Three Months Ended June 30, 1994.
-------------------------------------------------------------------------
The Company earned $186,808 and $64,768 during the three months ended June 30,
1995 and 1994, respectively. Total interest income increased 87% to $2,322,644
from $1,239,999, while total interest expense increased 175% to $859,281 from
$312,767, resulting in a 58% increase in net interest income before provision
for loan losses to $1,463,363 from $927,232.
The Company recorded a $15,000 provision for loan losses during the three months
ended June 30, 1995 compared to $28,346 provision for loan losses during the
three months ended June 30, 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 34% to $350,383 from $262,013 for the
three months ended June 30, 1995 and 1994, respectively. Noninterest expense
increased 40%, primarily the result of a 36% increase in salaries and employee
benefits, a 42% increase in occupancy and equipment expenses, and a 44% 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.
14
<PAGE>
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 June 30,
1995, the Company had only nominal income, other than equity in net income of
the subsidiary bank of approximately $4,900, and approximately $153,000 in
noninterest expenses. The noninterest expenses, which increased 28% 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 six months
ended June 30, 1995 compared to a $56,898 provision during the six months ended
June 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 six
months ended June 30, 1995 was 0.06%. The ratio of the allowance for loan
losses to total loans was 1.0% on June 30, 1995. The allowance for loan losses
was $718,628 on June 30, 1995.
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 June 30, 1995, 17% 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 June 30, 1995 was $9,765,863 as compared to $8,065,681
at December 31, 1994. The Company had consolidated earnings of $397,172 for the
six months ended June 30, 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
15
<PAGE>
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 10.17% and 11.17%, respectively, at June 30, 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 obtained 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 was extended
to June 7, 1995. After the note matured on June 7, 1995, the Company reduced
the balance of the note to $500,000. A new monthly installment note was
obtained for the remaining balance of $500,000 with a maturity of June 7, 2000.
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.
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 soonest the recapitalization of the BIF can be
confirmed is in early September. This change is expected to significantly
reduce the cost of deposit insurance for the 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.
16
<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.
The Annual Meeting of Stockholders of the Company was held on April 28,
1995. The stockholders voted (1) to approve certain amendments to the
Company's Certificate of Incorporation (the "Amendments"); (2) to elect eight
directors of the Company; (3) to ratify the adoption of the 1995 Incentive Stock
Option Plan of the Company; and (4) to approve the appointment of Coopers &
Lybrand, L.L.P. as the independent public accountants of the Company for the
fiscal year ending December 31, 1995.
The results of the voting for the election of Directors was as follows:
<TABLE>
<CAPTION>
BROKER
NAME FOR WITHHELD NON-VOTES
<S> <C> <C> <C>
C. Jack Bean 2,470,455 0 1,350
William B.Byrd 2,470,455 0 1,350
Bobby W. Hackler 2,470,455 0 1,350
Joseph S. Hardin 2,470,275 180 1,350
G. M. Heinzelmann, III 2,470,275 180 1,350
Michael L. Milam 2,470,455 0 1,350
Garrett Morris 2,470,455 0 1,350
Cullen W. Turner 2,470,455 0 1,350
</TABLE>
The results of the other votes were as follows:
<TABLE>
<CAPTION>
BROKER
DESCRIPTION FOR AGAINST ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
Approval of the Amendments 824,887 629,952 12,528 1,089,454
Ratification of the adoption of the 1995 2,218,595 265,632 5,876 66,718
Incentive Stock Option Plan of the
Company
Approval of Coopers & Lybrand, 2,536,905 17,823 743 1,350
L.L.P. as the Company's independent
accountants for the fiscal year ending
December 31, 1995
</TABLE>
All proposals except the Amendments were approved by the vote of the
stockholders.
17
<PAGE>
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits to this Form 10-Q.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended June
30, 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: August 18, 1995 Surety Capital Corporation
By: /s/ C. Jack Bean
-------------------------------
C. Jack Bean
Chairman
By: /s/ Bobby W. Hackler
-------------------------------
Bobby W. Hackler
Vice President, Chief Financial Officer
Chief Accounting Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 4,574,480
<INT-BEARING-DEPOSITS> 1,433,753
<FED-FUNDS-SOLD> 6,890,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,142,086
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 6,708,059
<LOANS> 70,304,077
<ALLOWANCE> 718,628
<TOTAL-ASSETS> 103,657,503
<DEPOSITS> 92,523,274
<SHORT-TERM> 868,366
<LIABILITIES-OTHER> 0
<LONG-TERM> 500,000
<COMMON> 34,613
0
0
<OTHER-SE> 9,731,250
<TOTAL-LIABILITIES-AND-EQUITY> 103,657,503
<INTEREST-LOAN> 3,763,272
<INTEREST-INVEST> 528,981
<INTEREST-OTHER> 240,724
<INTEREST-TOTAL> 4,532,977
<INTEREST-DEPOSIT> 1,541,570
<INTEREST-EXPENSE> 98,842
<INTEREST-INCOME-NET> 2,892,565
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 100
<EXPENSE-OTHER> 2,966,435
<INCOME-PRETAX> 584,076
<INCOME-PRE-EXTRAORDINARY> 584,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 397,172
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 6.3
<LOANS-NON> 66,000
<LOANS-PAST> 49,891
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 697,948
<CHARGE-OFFS> 39,320
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 718,628
<ALLOWANCE-DOMESTIC> 718,628
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 15,842
</TABLE>
