<PAGE> 1
As filed with the Securities and Exchange Commission on May __, 1995
Registration No. 33-89264
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
AMENDMENT NO. 1
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SURETY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2065607
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
C. Jack Bean
1845 Precinct Line Road, 1845 Precinct Line Road,
Suite 100 Suite 100
Hurst, Texas 76054 Hurst, Texas 76054
(817) 498-8154 (817) 498-8154
(Address, including zip code and telephone (Name, address, including zip code
number, including area code, and telephone number, including area code,
of Registrant's principal executive offices) of agent for service)
</TABLE>
_____________________________________
Copy to:
DAN R. WALLER, P.C.
SECORE & WALLER, L.L.P.
ONE GALLERIA TOWER, SUITE 2290
13355 NOEL ROAD, LB 75
DALLAS, TEXAS 75240
_____________________________________
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following: [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following: [x]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================
Title of Each Amount Proposed Proposed Amount of
Class of Securities to be Maximum Maximum Registration
to be Registered Registered(1) Offering Price Aggregate Fee(1)
Per Share(1) Offering Price(1)
<S> <C> <C> <C> <C>
Common Stock, 1,287,400 __________ $5,905,948 $2,037
$0.01 per
Share Par Value
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this calculation, the amount of shares to be
registered is presumed to be 667,400 shares offered by Selling
Shareholders and 620,000 shares offered by Registrant. The
Registration fee is estimated based upon the average of the high and
low market prices reported for the Common Stock of the Registrant
carried on the Primary List of the American Stock Exchange during the
week ended April 28, 1995, which was $4.5875 per share.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or on such earlier date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE> 2
SURETY CAPITAL CORPORATION
FORM S-2
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Prospectus
No. Item Caption or Page
- ---- ---- ---------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Facing Page of Registration
Facing Page of Registration Front Cover Page of Prospectus . . . . . . . . . . Statement, ii, and 1.
2. Inside Front and Outside
Back Cover Pages of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 and 14
3. Summary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Ratios of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . Not Applicable
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Determination of Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . Not applicable
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not applicable
7. Selling Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
9. Description of Registrant's Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. Interests of Named Experts and Counsel . . . . . . . . . . . . . . . . . . . . . . . Not applicable
11. Information with Respect to the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12. Incorporation of Certain Information by Reference . . . . . . . . . . . . . . . . . . . . . . . . 2
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
ii
<PAGE> 3
PROSPECTUS
SURETY CAPITAL CORPORATION
1,217,400 SHARES
COMMON STOCK
COMPANY SHARES. This Prospectus relates to the offer and sale of
620,000 shares of common stock, $0.01 par value, of Surety Capital Corporation
(the "Company") by the Company ("Company Shares"). The offer and sale of
Company Shares will terminate on October 31, 1995, unless extended for up to 60
days by the Company. The proceeds from the offer and sale of Company Shares
will be used to retire outstanding indebtedness of the Company of $1,750,000,
plus interest, and will represent approximately 17% of the total outstanding
common stock of the Company if all of the Company Shares are sold. Company
Shares will be sold by selected securities broker-dealers that are members of
the National Association of Securities Dealers, Inc., with whom the Company will
contract. Company Shares will not be sold in blocks of less than 1,000 shares.
The Company must receive subscriptions for a minimum of $1,750,000 in order to
consummate the offering.
SHAREHOLDERS' SHARES. This Prospectus also relates to the offer and
sale from time to time of 667,400 shares of common stock of the Company by
certain shareholders ("Selling Shareholders"). The shares of the Selling
Shareholders are to be registered on a continuing basis and will be priced at
the market price on the day of sale. The shares offered by the Selling
Shareholders represent approximately 22% of the current total outstanding
shares of common stock of the Company. The Selling Shareholders may sell their
stock, directly or through agents, dealers or underwriters, on terms to be
determined at the time of sale. To the extent required, the respective
purchase prices and public offering prices, the name of any agent, dealer or
underwriter and applicable discounts or commissions with respect to a particu-
lar offer by Selling Shareholders will be set forth in an accompanying
prospectus supplement. See "Selling Shareholders".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE. THESE SECURITIES INVOLVE A SIGNIFICANT DEGREE OF RISK.
SEE "RISK FACTORS."
NO PERSON, OR PERSONS ACTING TOGETHER, MAY ACQUIRE IN THE AGGREGATE
10% OR MORE OF THE COMPANY'S SHARES WITHOUT COMPLYING WITH THE PRIOR NOTICE
REQUIREMENTS OF THE BANK CHANGE OF CONTROL ACT.
PRELIMINARY PROSPECTUS - SUBJECT TO COMPLETION
DATED MAY 5, 1995
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Company's common stock is traded on the Primary List of the
American Stock Exchange ("AMEX") under the symbol "SRY". As of the close of
the market on May __, 1995, the price of the common stock was listed at
$_______ per share.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Proceeds to Issuer
Price to Public Brokers Commissions or Selling Shareholders(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share _____ _____ _____
Shares Offered
by Company _____ _____ _____
Shares Offered by
Selling Shareholders(1) At the Market _____ _____
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Selling Shareholders' shares will be offered on a continuous basis
under Rule 415 of Regulation C promulgated by the SEC under the
Securities Act of 1933, as amended. The shares of the Selling
Shareholders may be sold at the market price as quoted on the Primary
List of the American Stock Exchange at the time of sale or as
negotiated between the buyer and seller and any dealer or underwriter
involved. As of the close of business on May __, 1995, the price of
the common stock was listed on the AMEX at $_______ per share. The
Company's Share's will be offered at a price as close as possible to
the market price on the date the Registration statement becomes
effective.
(2) Additional expenses related to this offering will total approximately
$159,146.75. The Company will pay these expenses from proceeds from
the sale of the Company Shares offered herein, or out of general
corporate funds.
The date of this Prospectus is May __, 1995.
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed a Form S-2 Registration Statement under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
("Commission") with respect to the common stock offered pursuant to this
Prospectus. This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits thereto. However, all material information is contained in
the Registration Statement and this Prospectus or in documents incorporated by
reference therein. In addition, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934 (the "1934 Act") and in
accordance therewith files reports and other information with the Commission.
The Registration Statement filed with respect to this Prospectus, and all other
reports, proxy statements and other information can be inspected free of charge
at the offices of the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549; and at 411 W. Seventh Street, Eighth
Floor, Fort Worth, Texas 76102. Copies of such material may be obtained upon
the payment of prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Company's common stock is traded on the American Stock Exchange
and copies of the Company's periodic reports, proxy statements, and other
information is also available for inspection at the American Stock Exchange at
86 Trinity Place, Fifth Floor Library, New York, NY 10006. The telephone
number at the American Stock Exchange is (212) 306-1290.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File
No. 33-1983) are incorporated herein by reference:
1. Annual Report on Form 10-K for the year ended December 31,
1994 (the "1994 Form 10-K");
2. Definitive Proxy Statement dated April 5, 1995, in connection
with the Company's annual meeting of stockholders held on
April 28, 1995;
3. Report on Form 8-K, dated January 17, 1995;
4. Quarterly Report on Form 10-Q/A for the quarter ended June 30,
1994, as amended on February 6, 1995;
5. Report on Form 8-K/A, dated February 6, 1995; and
6. Quarterly Report on Form 10-Q for the quarter ended March 31,
1995.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, upon written or oral request of such person, a
copy of any or all of the documents that have been incorporated by reference in
this Prospectus, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Any such
requests should be directed to Mr. C. Jack Bean, Chairman of the Board, Surety
Capital Corporation, 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054,
(817) 498-2749.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus.
THE SHARES Common stock of the Company, $.01 par value. The
Company is authorized to issue 20,000,000 shares and
presently has 3,040,829 issued and outstanding. The
common stock of the Company is traded on the American
Stock Exchange under the symbol "SRY". As of the
close of the market on May __, 1995, the stock was
priced at $_________ per Share.
THE COMPANY The Company is a bank holding company incorporated in
Delaware with main offices in Hurst, Texas. The
Company's principal asset is approximately 99% of the
outstanding common stock of Surety Bank, N.A. (the
"Bank"), a national banking association. The Bank,
with offices located in Hurst, Whitesboro, Wells,
Kennard, Chester, and Lufkin, Texas, engages in
general commercial and consumer banking and
concentrates its lending activities in the area of
insurance premium financing. As of April 30, 1995,
there were 416 stockholders of record. For
additional information, please contact the Company at
its principal executive offices, 1845 Precinct Line
Road, Suite 100, Hurst, Texas 76054 and its phone
number is (817) 498-8154.
THE OFFERING OF Common Stock 620,000 shares
COMPANY SHARES
Purchase Price per Share $__________
Maximum Proceeds to Company from $ _________
Sales of Company Shares (Estimated)
USE OF PROCEEDS Proceeds from offer and sale of Company Shares will
first be used to repay outstanding indebtedness of
the Company of $1,750,000, plus interest. The
balance of the proceeds, if any, will be used either
to pay expenses associated with this offering or for
working capital of the Company. See "Use of
Proceeds". The Company will receive no proceeds from
the sale of shares of the Selling Shareholders. See
"Selling Shareholders".
MINIMUM PURCHASE Each purchaser of Company Shares must purchase a
minimum of 1,000 shares.
THE OFFERING BY Common Stock 667,400 shares
SELLING SHAREHOLDERS
Purchase Price per Share
At Market
Maximum Proceeds to Selling Shareholders $__________
from Sales of common stock (Estimated)
SELLING SHAREHOLDERS Each of the Selling Shareholders acquired their
shares in a private placement of the Company's common
stock in December 1994 at a price of $3.25 per share.
The Selling Shareholders are not, and never have
been, affiliates of the Company. Pursuant to an
agreement between the Company and each Selling
Shareholder, the Company is obligated to use its best
efforts to register the shares issued in the private
placement. See "Selling Shareholders."
3
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors which individually or
cumulatively could result in the decline or loss in the value of the shares
offered:
THE OVERTON BANK & TRUST LOAN. On December 9, 1994, the Company
borrowed $1,750,000 from Overton Bank & Trust, N.A. ("Overton") bearing
interest at two percent above Overton's prime rate with principal and interest
due at maturity. This loan is due on June 7, 1995. The loan is secured by all
of the Shares of the Bank owned by the Company and by a personal guarantee of
C. Jack Bean, Chairman of the Board of the Company. The loan was obtained to
assist the Bank in acquiring the First National Bank, Whitesboro, Texas. The
Company intends to repay this loan with the proceeds from the offer and sale of
the Company Shares. If sufficient proceeds are not raised from this offering
by the maturity date of the indebtedness to retire the indebtedness in full,
the Company may have to use other means to repay the loan or may have to extend
all or a portion of the loan, which in turn, could materially affect earnings
of the Company and thus the market price of the common stock. See "Use of
Proceeds".
INSURANCE PREMIUM FINANCING CONCENTRATION MAY INCREASE RISK OF LOSSES.
As of December 31, 1994, insurance premium financing loans represented
approximately 32% of the total loans of the Bank. Such a high concentration of
insurance premium financing loans may expose the Bank to greater risk of loss
than would a more diversified loan portfolio, although no more than 10% of the
Bank's premium finance loans are made regarding policies issued by any one
insurance company.
ALLOWANCE FOR LOAN LOSSES. Based on management's analysis of current
historical data, the Bank endeavors to establish an adequate allowance for
possible loan losses. Loan losses different from the allowance provided by the
Bank could occur, and loan losses in excess 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
Bank and therefore the Company. At December 31, 1994, the Bank's allowance for
loan losses was 1.1% of total loans (net of unearned interest) and 574.8% of
total nonperforming loans. Management feels that all known losses in the
portfolio have been provided for.
EQUITY CAPITAL COMPLIANCE REQUIREMENTS FOR BANK AND COMPANY. Pursuant
to regulatory requirements, the Bank and the Company are required to maintain
certain levels of regulatory capital. Failure to meet these capital
requirements could expose the Company and/or the Bank to possible regulatory
administrative action or agreements, including, as to the Bank, limitations on
asset growth, restrictions on operations, restrictions on payment of dividends
or mandated disposition of assets. For bank holding companies with less than
$150 million in consolidated assets, the capital requirements are applied on a
bank-only basis. Generally, a national bank is required to maintain a minimum
ratio of 8% qualifying capital to risk-weighted assets. Qualifying capital
includes common stockholders' equity and, subject to certain limitations,
preferred stock, the allowance for loan losses, mandatory convertible debt and
subordinated debt. For purposes of calculating the ratio, assets are assigned
different risk weights ranging from 0% for risk-free assets such as cash to
100% for assets such as commercial loans. At December 31, 1994, the Bank had a
qualifying capital to risk-weighted assets ratio of 11.17%. In addition, the
Bank is required to maintain a minimum level of 3% core (generally equity)
capital to assets. At December 31, 1994, the Bank had a 10.13% ratio of core
capital to assets. There can be no assurance that the Company will be
successful in maintaining or raising capital for the Bank sufficient to meet
its needs.
4
<PAGE> 7
DILUTION; ADDITIONAL FINANCING NEEDED. The price at which the Company
Shares are being offered is greater than the Company's book value per share as
of the effective date of the Registration Statement. While the capital raised
in this offering will increase the Company's book value per share, the price
paid by purchasers of the common stock will exceed the Company's book value per
share at the close of the offering. There can be no assurance that the
Company's present capital and financing will be sufficient to finance future
operations. If the Company sells additional shares of common and/or preferred
stock to raise funds in the future, the terms and conditions of the issuances
may have a dilutive effect or otherwise adversely impact 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.
SHARES OWNED BY TENNESSEE RECEIVER'S OFFICE. Approximately 6% of the
total outstanding shares of the Company is currently held by the Tennessee
Receiver's Office (the "Liquidator") as a result of a Liquidation Order with
respect to Anchorage Fire & Casualty Insurance Company, a former stockholder of
the Company. Pursuant to the Liquidation Order, all assets of Anchorage
(including the shares of common stock of the Company owned by Anchorage) are
vested in the Liquidator. The Company is currently attempting to assist the
Liquidator in selling its shares. However, should the Liquidator attempt to
sell shares over a short period of time, such a transaction or transactions
could have a significant adverse effect on the market price for the common
stock.
RELIANCE ON KEY PERSONNEL. The Company and the Bank are highly
dependent upon their executive officers and key employees. Specifically, the
Company considers the services of C. Jack Bean, G. M. Heinzelmann, III, and Bob
Hackler to be of vital importance to the success of the Company. The
unexpected loss of the services of any of these individuals, particularly Mr.
Bean, Chairman of the Board of the Company, could have a detrimental effect on
the Company and the Bank. The Bank is the beneficiary of a $500,000 key man
insurance policy on the life of Mr. Bean.
"SOURCE OF STRENGTH DOCTRINE." 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 policy to
require that a bank holding company, such as the Company, stand ready to use
available resources to provide adequate capital funds to its 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
or a violation of Regulation Y or both, justifying a cease and desist order or
other enforcement 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 on the Company and
its stockholders.
RESTRICTION ON BANK DIVIDENDS. The Company does not intend to pay
dividends in the near future. However, the payment of cash dividends by the
Company in the future will depend to a large extent on the receipt of dividends
from the Bank. The ability of the Bank to pay dividends is dependent upon the
Bank's earnings and financial condition. The payment of cash dividends by the
Bank to the Company and by the Company to its stockholders is subject to
statutory and regulatory restrictions. See "Description of Company's Common
Stock."
COMPETITION. There is significant competition among banks and bank
holding companies in the areas in which the Bank and the Company operate. The
Company believes that such competition among such banks and bank holding
companies, many of which have far greater assets and financial resources than
the Company, will continue to increase in the future. The Bank also encounters
intense competition in its commercial banking business from savings and loan
associations, credit unions, factors, insurance companies, commercial and
captive finance companies, and certain other types of financial institutions
located in other major metropolitan areas in the United States, many of which
are larger in terms of capital, resources and personnel. The casualty
5
<PAGE> 8
insurance premium financing business of the Bank is also very competitive.
Large insurance companies offer their own financing plans, and other
independent premium finance companies and other financial institutions offer
insurance premium financing.
GOVERNMENT REGULATION AND RECENT LEGISLATION. The Company and the
Bank are subject to extensive federal and state legislation, regulation and
supervision regarding banking and insurance premium financing. Recently
enacted or proposed legislation and regulations have had, will continue to have
or may have significant impact on the banking industry. Some of the
legislative and regulatory changes may benefit the Company and the Bank, while
others may increase the Company's costs of doing business and assist
competitors of the Company and the Bank. For example, under the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Interstate Banking Act"),
banks may acquire branches through interstate mergers beginning in June 1997,
unless a state "opts out." The Texas Legislature has passed legislation to opt
out until 1999. The Governor is not expected to veto the bill. It is not
possible to predict whether this legislation will enhance or decrease the value
of stock of existing Texas based financial institutions. In addition, persons,
alone or acting in concert with others, seeking to acquire more than 10% of any
class of voting securities must comply with the Change in Bank Control Act.
Entities seeking to acquire more than 5% of any class of voting securities must
comply with the Bank Holding Company Act.
GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income
and net income of the Bank depend to a substantial extent on "rate
differentials," i.e., the differences between the income the Bank receives from
loans, securities and other earning assets, and the interest expense it pays to
obtain deposits and other liabilities. These rates are highly sensitive to
many factors which are beyond the control of the Bank, including general
economic conditions and the policies of various governmental and regulatory
authorities. For example, in an expanding economy, loan demand usually
increases and the interest rates charged on loans increase. Increases in the
discount rate by the Federal Reserve System usually lead to rising interest
rates, which affect the Bank's interest income, interest expense and investment
portfolio. Also, governmental policies such as the creation of a tax
deduction for individual retirement accounts can increase savings and affect
the cost of funds.
STOCK PRICE VOLATILITY. The market price of the Company's common
stock has been highly volatile in the past. There can be no assurance that the
market price of the Company's common stock will not be volatile in the future,
and no assurance that the market price will not decrease below the price at
which shares are offered herein.
USE OF PROCEEDS
SALES OF COMMON STOCK BY THE COMPANY. The Company intends to use the
proceeds from the sale of Company Shares to retire an indebtedness of
$1,750,000, plus interest, currently owed to Overton Bank & Trust, N.A.
("Overton"). The Overton loan is due on June 7, 1995. The interest rate on
the outstanding principal is two percent (2%) above Overton's prime rate. The
Company borrowed the funds in order to assist the Bank in the acquisition of
the First National Bank, N.A., Whitesboro, Texas. The loan is secured by all
of the stock of the Bank owned by the Company and by a personal guarantee of C.
Jack Bean, Chairman of the Board of the Company. Any proceeds remaining after
the discharge of the Overton loan will be used for the payment of expenses
associated with the offering and for working capital.
SALES OF COMMON STOCK BY THE SELLING SHAREHOLDERS. The 667,400 shares
of common stock offered herein by certain Selling Shareholders may be sold from
time to time for their own account (see "Selling Shareholders"). The Company
will not receive any proceeds from the sale of such shares. The Company has
agreed with the Selling Shareholders to include their shares in this
Registration Statement. All costs, expenses and fees incurred in connection
with the registration of the shares of the Selling Shareholders will be borne
by the Company. The Selling Shareholders will bear all selling costs
associated with the offer or sale of their shares.
6
<PAGE> 9
CAPITALIZATION
The following table sets forth the unaudited actual capitalization of
the Company at March 31, 1995, and the pro forma capitalization reflecting the
sale by the Company of the common stock pursuant to this offering. The
pro forma minimum assumes that 437,500 shares were sold for $4 per share,
raising a total of $1,750,000. The pro forma maximum assumes that 620,000
shares were sold for $4 per share, raising a total of $2,480,000. Both
pro formas assume that the entire Overton loan is repaid. See "Use of
Proceeds".
<TABLE>
<CAPTION>
March 31, 1995
------------------------------------------------------
Pro forma
----------------------------------
Actual Minimum Maximum
----------- ----------- ------------
<S> <C> <C> <C>
Note payable:
Short term note due July 7, 1995 $1,750,000 $ -0- $ -0-
Stockholders' equity:
Common stock, $.01 par value;
Authorized - 20,000,000 shares;
Issued - 3,040,829 shares,
(3,478,329 as adjusted minimum,
3,660,829 as adjusted maximum) 30,408 34,783 36,608
Additional paid-in capital 8,113,214 9,676,994 10,370,494
Surplus 135,262 135,262 135,262
Unrealized gain on available-for-sale securities 45,208 45,208 45,208
------------ ------------ ------------
Total stockholders' equity 8,324,092 9,892,247 10,587,572
------------ ------------ ------------
Total capitalization $10,074,092 $9,892,247 $10,587,572
============ ============ ============
</TABLE>
The following table sets forth the unaudited actual results of
operations for the first three months of 1995 and an unaudited pro forma
schedule showing the results of operations as adjusted for minimum proceeds of
$1,750,000 and maximum proceeds of $2,480,000 as if this offering were
completed on January 1, 1995. This table is intended to reflect the
elimination of the interest expense associated with the Overton loan, the
provision for income taxes and the impact on earnings per share as a result of
this offering.
<TABLE>
<CAPTION>
Income Statement
for the three months ended March 31, 1995
------------------------------------------------
Actual Pro forma
---------- ------------------------------
Minimum Maximum
<S> <C> <C> <C>
Total interest income $2,210,333 $2,208,390 $2,218,793
Total interest expense 781,131 731,076 731,076
---------- ---------- ----------
Net interest income before provision for loan 1,429,202 1,477,314 1,487,717
losses
Provision for loan losses 45,000 45,000 45,000
---------- ----------- -----------
Net interest income 1,384,202 1,432,314 1,442,717
---------- ---------
Total noninterest income 368,292 368,292 368,292
Total noninterest expense 1,542,130 1,554,890 1,556,174
---------- --------- ---------
Net income $210,364 $245,716 $254,835
========= ========= =========
Net income per share $0.07 $0.07 $0.07
===== ===== =====
Weighted average shares outstanding 3,040,829 3,478,329 3,660,829
</TABLE>
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 concentrated within the real estate
lending, commercial loans and the medical claims receivable financing. Real
estate lending increased by 797% to $16,041,646 from $1,788,802, commercial
lending increased by 198% to $15,857,674 from $5,327,177, and medical claims
receivable financing increased by 103% to $4,141,435 from $2,043,890. This
growth is attributed to management's marketing efforts and the acquisition of
the First National Bank, Whitesboro and the Farmers Guarantee State Bank of
Kennard. 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 secured 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 50% 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.
[THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]
8
<PAGE> 11
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Assets:
Cash and cash equivalents 11,354,543 11,194,360
Investment securities and interest bearing deposits in 15,858,960 21,028,442
financial institutions
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 assets 3,070,799 3,088,769
------------ ------------
Total assets $100,662,153 $102,294,311
============ ============
Liabilities:
Total deposits 90,117,511 92,027,122
Other liabilities 2,220,550 2,201,508
------------ ------------
Total liabilities 92,338,061 94,228,630
------------ ------------
Shareholders' equity 8,324,092 8,065,681
------------ ------------
Total liabilities and shareholders' equity $100,662,153 $102,294,311
============ ============
</TABLE>
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 2,210,333 1,144,315
---------- -----------
Total interest expense 781,131 272,980
---------- -----------
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 100,869 2,500
---------- -----------
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>
9
<PAGE> 12
SELLING SHAREHOLDERS
The Selling Shareholders acquired their shares from the Company in December
1994 at a price of $3.25 per share through a private placement of securities
conducted under Regulation D of the Securities Act of 1933. The purchase
price was determined by arm's length negotiations. In the private placement,
pursuant to a Contingent Stock Rights Agreement with the Selling Shareholders,
the Company agreed to issue additional common stock or other securities to the
Selling Shareholders in the event (1) their shares were not registered by
December 25, 1995 or (2) other shares of common stock of the Company are sold
at a price less than $3.25 per share. The rights of the Selling Shareholders
under such agreement terminate 10 days after the earlier of July 1, 1995 or the
receipt by the Company of gross proceeds of $1,750,000 or more from sales of
common stock or other securities.
The following table sets forth certain information as of December 31, 1994
regarding the common stock beneficially owned by the Selling Shareholders.
None has occupied any position or office or had any other material relationship
with the Company.
<TABLE>
<CAPTION>
Number of Shares of Percentage of Shares
Number of Shares of Common Stock of common stock
Number of Shares of Percentage of Shares Common Stock Owned After Sale of Owned After Sale of
Common Stock of Common Offered by Shares Offered by Shared Offered
Name Beneficially Owned(1) Stock Outstanding(2) This Prospectus This Prospectus(3) By this Prospectus
- ---- --------------------- -------------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Robert M. Adams 50,000 1.64% 50,000 0 0%
The Advantage Special 124,000 4.08% 124,000 0 0%
Fund
Evergreen Limited 151,500 4.98% 151,500 0 0%
Market Fund
Investors Capital Fund 16,200 0.53% 16,200 0 0%
John Hancock Bank & 303,700 9.99% 303,700 0 0%
Thrift Opportunity
Fund
James H. Levi 16,000 0.53% 16,000 0 0%
Edward G. Shufro 6,000 0.20% 6,000 0 0%
TOTAL 667,400 21.95% 667,400 0 0%
</TABLE>
(1) Each of the parties named has sole voting and dispositive power with
respect to the shares reported.
(2) Based on 3,040,829 shares of common stock outstanding at December 31,
1994.
(3) This assumes the sale by all of the Selling Shareholders of the shares
offered in this Prospectus. At this time the Company has not been
advised by any of the Selling Shareholders of any plans, if any, to
sell the shares owned by each.
The Selling Shareholders and any underwriter, dealer or agent that
participates with the Selling Shareholders in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "1933 Act"), and any discounts or commissions received by
them and any profit on the resale of the shares purchased by them may be deemed
to be underwriting discounts and commissions under the 1933 Act. The Company
will not receive any proceeds from the offer and sale of shares of the Selling
Shareholders, but will pay certain offering expenses regarding the preparation
of this Registration Statement and related matters. Offering expenses incurred
by the Selling Shareholders may consist of underwriting discounts, selling
commissions and fees of their own attorneys, none of which is currently
estimable.
10
<PAGE> 13
PLAN OF DISTRIBUTION
SALES OF THE COMPANY SHARES. The Company Shares will be sold by
participating soliciting broker/dealers that are qualified to offer and sell
the shares in a particular state as hereafter engaged by the Company and that
are members of the National Association of Securities Dealers, Inc. ("Selling
Broker/Dealers"). Selling Broker/Dealers will be paid a sales comission of __%
and an unallocated due diligence and marketing fee of __% for a total of __%.
The Company estimates that the total compensation to be paid to Selling
Broker/Dealers plus professional fees associated with the registration of all
shares offered hereunder will be approximately $186,000 if the minimum number
of shares are sold and $233,000 if the maximum number of shares are sold. The
Company will not sell shares in blocks of less than 1,000 shares. The Company
must receive subscriptions for a minimum of $1,750,000 before it closes the
offering. The offering will terminate on October 31, 1995 unless extended by
the Company, in its sole discretion, for up to 60 days.
SALES OF SHARES OF THE SELLING SHAREHOLDERS. Shares owned by a
Selling Shareholder may be sold from time to time directly by such Selling
Shareholder. Alternatively, the Selling Shareholders may from time to time
offer their respective shares in one or more transactions (which may involve
block transactions) (i) through underwriters; (ii) through dealers; (iii) "at
the market" to or through a market maker or into an existing trading market, in
the over-the- counter market or otherwise, or in other ways not involving
market makers or established trading markets; (iv) in privately negotiated
transactions; or (v) in a combination of any such transactions. Such
transactions may be effected by any Selling Shareholder at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices. At the time a particular
offer of shares is made, a prospectus supplement, if required, will be
distributed that will set forth the aggregate amount of shares being offered
and the terms of the offering, including the name or names of any underwriters,
dealers or agents, any discounts, commissions and other items constituting
compensation from the Selling Shareholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers.
If an underwriter or underwriters are utilized in a firm commitment
public offering, the Selling Shareholders will execute a firm commitment
underwriting agreement with such underwriters. If a dealer is utilized in the
sale of its shares, the Selling Shareholder will sell such shares to the
dealer, as principal. The dealer may then resell such shares to the public at
varying prices to be determined by such dealer at the time of resale. Sales of
Shares by Selling Shareholders may be "at the market" and not at a fixed price
and may be made to or through one or more underwriters, acting as principal or
as agent, as shall be specified in an accompanying prospectus supplement.
Other sales may be made, directly or through agents, to purchasers outside
existing trading markets. The place and time of delivery for a particular
offer of the shares will be set forth in an accompanying prospectus supplement,
if required.
DESCRIPTION OF COMPANY'S COMMON STOCK
COMMON STOCK. The Company is authorized to issue twenty million
(20,000,000) shares of common stock, par value $0.01 per share, 3,040,829 of
which shares were issued and outstanding as of April 30, 1995 (not including
106,980 shares issuable upon the exercise of outstanding stock options and
warrants). In 1994, the Company's common stock was traded in the Emerging
Companies section of the AMEX for approximately ten (10) months, from February
23 through December 31. During that period 829,900 shares were traded against
an average number of shares outstanding of 2,393,841.
Holders of shares are entitled to one vote per share, without
cumulative voting, on all matters to be voted on by shareholders. Therefore,
the holders of more than 50% of the shares voting for the election of directors
can elect all the directors and the remaining holders of shares will not be
able to elect any directors. Subject to preferences that may be applicable to
any outstanding preferred stock, shareholders are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds
legally available. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, shareholders are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any
11
<PAGE> 14
outstanding preferred stock. Shares have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares.
PREFERRED STOCK. The Company is authorized to issue one million
(1,000,000) shares of preferred stock, par value $0.01 per share, none of which
are issued and outstanding as of the date of this Prospectus. The Board of
Directors of the Company may establish series of preferred stock with such
rights and preferences as may be fixed and determined by the Board of
Directors.
DIVIDEND POLICY. The Company does not currently intend to pay
dividends in the foreseeable future, but intends to retain any future earnings
for use in the business of the Company and the Bank. Payment of any dividends
in the future will be made at the discretion of the Board of Directors of the
Company and will depend upon the operating results and financial condition of
the Company and the Bank, their capital requirements, general business
conditions and other factors. Additionally, the Federal Reserve has announced
a policy sometimes known as the "source of strength doctrine" which requires
that "a bank holding company shall serve as a source of financial and
managerial strength to its subsidiary banks and shall not conduct its
operations in an unsafe and unsound manner." The Federal Reserve has
interpreted this policy to require that a bank holding company, such as the
Company, make its resources available to a subsidiary bank that is threatened
with failure. The source of strength doctrine could operate to prevent a bank
holding company such as the Company from making dividend payments to its
shareholders even though otherwise permitted to do so by other applicable law.
The payment of cash dividends by the Company in the future will depend to a
large extent on the receipt of dividends from the Bank. The ability of the
Bank to pay dividends is dependent upon the Bank's earnings and financial
condition. In addition, the payment of cash dividends by the Bank to the
Company and by the Company to its shareholders is subject to statutory and
regulatory restrictions.
ANTI-TAKEOVER MEASURES. The Company has adopted certain measures that
it believes to be in the best interest of the Company in order to prevent, to
the extent reasonably possible, a hostile takeover by a third party or the loss
of certain key employees of the Corporation. Specifically, the Company has
entered into agreements with C. Jack Bean, Chairman of the Board, G.M.
Heinzelmann, III, President, and Bobby W. Hackler, Vice President, providing
that, in the event of a change in control of the Company and any or all of them
are terminated as employees of the Company or are materially relieved of their
duties, the Company will pay to such employee three times his base annual
salary at the time of termination or relief from duties as a lump sum severance
payment or the equivalent value in common stock of the Company based upon the
prevailing market price for the common stock at the time of termination or
relief from duties.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar of the
common stock is Securities Transfer Corporation, 16910 Dallas Parkway, Suite
100, Dallas, Texas 75248.
STOCK OPTIONS. The Company has adopted a Stock Option Plan for key
and executive employees, under which options to purchase 71,480 shares of
common stock are outstanding exercisable at prices which range from $2.343 to
$7.2188. Options covering up to 100,000 shares may be issued under the 1995
Stock Option Plan.
WARRANTS. There is presently one outstanding warrant issued by the
Company in June 1994. The warrant entitles the holders to purchase 35,500
shares of the Company's common stock at an exercise price of $4.50 per share.
The warrant will expire on June 17, 1995.
INFORMATION WITH RESPECT TO THE COMPANY
INFORMATION ACCOMPANYING THIS PROSPECTUS. Certain financial and other
information with regard to the Company is set forth in the Company's Annual
Report on Form 10-K for the period ending December 31, 1994 and the Quarterly
Report on Form 10-Q for the period ended March 31, 1995, both of which
accompany this Prospectus.
MATERIAL EVENTS AND CHANGES. The following information supplements or
modifies information previously included in the Company's 1994 Annual Report on
Form 10-K.
12
<PAGE> 15
LITIGATION. The Company is not a party to any material legal
proceedings.
LEGAL OPINION
Certain matters with respect to the validity of the shares have been
passed upon by Secore & Waller, L.L.P., Dallas, Texas.
EXPERTS
The consolidated Financial Sheets of the Company as of December 31,
1994 and 1993 and the related consolidated Statements of Operations,
Shareholders Equity, and Cash Flows for each of the three years in the period
ended December 31, 1994 have been incorporated by reference herein in reliance
on the report of Coopers & Lybrand, L.L.P. independent accountants, given on
the authority of that firm as experts in accounting and auditing. The
financial statements of the First National Bank, N.A., Whitesboro, Texas and
the Farmers State Bank of Kennard, Kennard, Texas as of December 31, 1993 and
for each of the three years in the period ended December 31, 1993, have been
incorporated by reference herein also in reliance on the report of Coopers &
Lybrand, L.L.P. and given on the authority of that firm as experts in
accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
(the "Act") empowers a corporation to indemnify its directors and officers and
to purchase insurance with respect to liability arising out of their capacity
as directors and officers. The Act further provides that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's bylaws, any
agreement, vote of the shareholders, or otherwise.
Section 6.04 of the Company's Bylaws provides that the Company shall
indemnify all persons to the full extent allowable by law who, by reason of the
fact that they are or were a director of the Company, become a party or are
threatened to be made a party to any indemnifiable action, suit or proceeding.
The Company shall pay, in advance of the final disposition of any indemnifiable
action, suit or proceeding under this bylaw, all reasonable expenses incurred
by the director, upon receipt of an undertaking by or on behalf of the director
to repay such amount if it is ultimately determined that he is not entitled to
be indemnified by the Company under the law. The Company may indemnify persons
other than directors, such as officers and employees, as permitted by law. The
Company may purchase and maintain insurance on behalf of directors, officers
and other persons against any liability asserted against him, whether or not
the Company would have the power to indemnify such person against such
liability, as permitted by law.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the Company,
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
13
<PAGE> 16
PROSPECTUS
SURETY CAPITAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Use of Proceeds 6
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Plan Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Description of Company's Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Information with Respect to the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Indemnification of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such an offer or solicitation in such
jurisdiction. No person has been authorized to give any information or to make
any representations other than those contained in this Prospectus or the
documents incorporated by reference herein in connection with the offering made
hereby, and, if given or made, such information or representations must not be
relied upon as having been authorized by the Company or the Selling
Shareholders. Neither the delivery of this Prospectus or any prospectus
supplement nor any sale made hereunder or thereunder shall, under any
circumstances, create any implication that the information herein or therein is
correct as of any time subsequent to the date of such information.
14
<PAGE> 17
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered. All of the
amounts shown are estimates, except the Securities and Exchange Commission
registration fee. All expenses will be borne by the Company.
<TABLE>
<S> <C>
Sales Commissions $ 119,220.00
Registration Fee $ 2,067.00
Printing Expenses $ 3,000.00
Legal Fees and Expenses $ 55,000.00
Accounting Fees and Expenses $ 20,000.00
Miscellaneous $ -0-
-------------
Total $ 199,287.00
</TABLE>
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
(the "Act") empowers a corporation to indemnify its directors and officers and
to purchase insurance with respect to liability arising out of their capacity
as directors and officers. The Act further provides that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's bylaws, any
agreement, vote of the shareholders, or otherwise.
Section 6.04 of the Company's Bylaws provides that the Company shall
indemnify all persons to the full extent allowable by law who, by reason of the
fact that they are or were a director of the Company, become a party or are
threatened to be made a party to any indemnifiable action, suit or proceeding.
The Company shall pay, in advance of the final disposition of any indemnifiable
action, suit or proceeding under this bylaw, all reasonable expenses incurred
by a director, upon receipt of an undertaking by or on behalf of a director to
repay such amount if it is ultimately determined that he is not entitled to be
indemnified by the Company under the law. The Company may indemnify persons
other than directors, such as officers and employees, as permitted by law. The
Company may purchase and maintain insurance on behalf of directors, officers
and other persons against any liability asserted against him, whether or not
the Company would have the power to indemnify such person against such
liability, as permitted by law.
Item 16. Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed as
part of this Registration Statement and such Exhibit Index is hereby
incorporated by reference.
Item 17. Undertakings.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
II-1
<PAGE> 18
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration State- ment.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post- effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) To deliver or cause to be delivered with the Prospectus, to
each person to whom the Prospectus is sent or given, the latest annual report
to security holders that is incorporated by reference in the Prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not set
forth in the Prospectus, to deliver, or cause to be delivered to each person to
whom the Prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the Prospectus to provide such
interim financial information.
(6) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(7) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(8) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this Amendment No
1 to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Hurst, Texas on the 2nd of February,
1995.
SURETY CAPITAL CORPORATION
By:/s/ C. Jack Bean
------------------------------------
C. Jack Bean, Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ C. Jack Bean Chairman of the Board and Director May 4, 1995
- ------------------------------- (Principal Executive Officer)
C. Jack Bean
/s/ Bob Hackler Chief Financial Officer, Vice President, May 4, 1995
- ------------------------------- Secretary and Director
Bob Hackler (Principal Financial and Accounting Officer)
/s/ Cullen W. Turner Director May 4, 1995
- -------------------------------
Cullen W. Turner
/s/ G. M. Heinzelmann Director May 4, 1995
- -------------------------------
G. M. Heinzelmann
/s/ Garrett Morris Director May 4, 1995
- -------------------------------
Garrett Morris
</TABLE>
II-3
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
- ------ -----------
<S> <C>
2.01 Reorganization agreement by and between First National Bank, N.A.; Lloyd W. Butts; D.C. Deegan; Norman
Denton; Murriel Gilbreath; Robert S. Light; Joe B. Turner, Jr.; Surety Bank N.A.; and Surety Capital
Corporation; dated May 24, 1994. (10)
2.02 Reorganization agreement by and between the Farmers Guarantee State Bank of Kennard; Dr. Frank A. Smith
III; Surety Bank N.A.; and Surety Capital Corporation, dated February 4, 1994; and agreement to merge
the Farmers Guarantee State Bank of Canard with and into Surety Bank, N.A. under the charter of Surety
Bank, N.A. and under the title of Surety Bank, N.A., dated February 4, 1994 (8)
4.01 Certificate of Incorporation of the Company. (1)
4.02 Amendment to the Certificate of Incorporation, dated April 8, 1987. (2)
4.03 Restated Bylaws of the Company. (2)
4.04 Certificate of Amendment to the Company's Certificate of Incorporation, as filed with the Delaware
Secretary of State on April 4, 1988. (4)
4.05 Form of Common Stock certificate (specimen). (3)
4.06 Certification of Elimination of Series of Shares of Preferred Stock of the Company as filed with the
Delaware Secretary of State on January 31, 1992. (7)
4.07 Certificate of Amendment to Company's Certificate of Incorporation as filed with Delaware Secretary of
State on June 14, 1993. (11)
5.01 Opinion of Secore & Waller, L.L.P with respect to the validity of the shares to be registered and
issued.*
10.01 Letter Loan Agreement between Overton Bank and Trust, N.A. and the Surety Capital Corporation, dated
December 9, 1994 with respect to a loan in the amount of $1,750,000.00.**
10.02 Pledge Agreement by and between Surety Capital Corporation and Overton Bank and Trust, N.A., dated
December 9, 1994.**
10.03 Promissory Note made by Surety Capital Corporation to Overton Bank and Trust N.A. in the amount of
$1,750,000.00, dated December 9, 1994.**
10.04 Guaranty Agreement entered into by C. Jack Bean with Overton Bank and Trust, N.A. with respect to the
repayment by Surety Capital Corporation of loan from Overton Bank and Trust, N.A., dated December 9,
1994.**
</TABLE>
II-4
<PAGE> 21
<TABLE>
<S> <C>
10.05 Uniform Commercial Code Financing Statement UCC-1 completed with respect to Overton Bank & Trust,
N.A.'s security interest in the Shares of Stock of Surety Bank, N.A., owned by Surety Capital
Corporation.**
10.06 A form of Contingent Stock Right granted by the Company to Robert M. Adams, with respect to the right
to receive additional shares of Common Stock in the event the Company fails to register with the
Securities and Exchange Commission those shares purchased in the December 1994 private placement with
schedule identifying omitted agreements with substantially identical terms.**
10.07 A form of Contingent Stock Right offered to Robert M. Adams, with respect to the right to purchase
additional shares of Common Stock in the event the Company subsequently offers Company securities on
terms more favorable than those offered to the purchasers in the private placement with identifying
schedule setting forth omitted Contingent Stock Right agreements with substantially identical terms.**
10.08 Surety Capital Corporation 1988 Incentive Stock Option Plan of Surety. (7)
10.09 Form of Change in Control Agreement dated August 16, 1994, as entered into between the Company and C.
Jack Bean with schedule identifying parties to substantially similar agreements.**
10.10 Lease agreement between Precinct Office Park Joint Venture, as landlord, and the Company, as tenant,
regarding offices located in Hurst, Texas, dated December 1, 1989. (6)
10.11 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. (8)
10.12 Surety Capital Corporation 1995 Incentive Stock Option Plan. (8)
13.01 Annual Report to shareholders for the fiscal year ended December 31, 1994. (8)
13.02 Quarterly report on form 10-Q for the three months ended March 31, 1995. ***
13.03 Annual Report on Form 10-K for the year ended December 31, 1994. ***
23.01 Consent of Coopers & Lybrand, L.L.P. with respect to the Financial Statements prepared for the
Company.**
23.02 Consent of Coopers & Lybrand, L.L.P. with respect to the Financial Statements prepared for the First
National Bank, N.A.***
23.03 Consent of Coopers & Lybrand, L.L.P. with respect to the Financial Statements prepared for the Farmers
Guarantee State Bank of Kennard.**
23.04 Consent of Secore & Waller, L.L.P.*
27 Financial Data Schedule ***
99.01 Form of Subscription Agreement Regarding Offering of Company's Common Stock.***
</TABLE>
II-5
<PAGE> 22
NOTES TO EXHIBIT INDEX
(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.
(3) Filed with the Company's Form 8-K dated May 17, 1988 and
incorporated by reference herein.
(4) Filed with the Company's Form 10-Q for the quarter ended April
30, 1988 and incorporated by reference herein.
(6) Filed with the Company's Form 10-K dated December 31, 1990 and
incorporated by reference herein.
(7) Filed with the Company's Form 10-K dated December 31, 1991 and
incorporated by reference herein.
(8) Filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated by
reference herein.
(9) Filed with the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 1995 and incorporated by
reference herein.
(10) Filed with the Company's Form 8-K dated December 8, 1994 and
incorporated by reference herein.
(11) Filed with the Company's Form 10-K dated December 31, 1993 and
incorporated by reference herein.
* To be filed by amendment.
** Filed previously.
*** Filed herein.
II-6
<PAGE> 1
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> 2
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1995 and December 31, 1994
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
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
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
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> 3
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> 4
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> 5
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> 6
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, 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 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> 7
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 Banks 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>
<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> 8
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 December 1, 1994. 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> 9
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 pennalties.
<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> 10
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> 11
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> 12
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 Ended Three Months 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
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
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
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> 13
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> 14
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 concentrated within the real estate
lending, commercial loans and the medical claims receivable financing. Real
estate lending increased by 797% to $16,041,646 from $1,788,802, commerical
lending increased by 198% to $15,857,674 from $5,327,177, and medical claims
receivable financing increased by 103% to $4,141,435 from $2,043,890. This
growth is attributed to the merger of the acquired banks, as discussed in note
2 above, and management s marketing efforts. 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
secured 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 income
is generated primarily from fees associated with noninterest and interest
bearing accounts.
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.
14
<PAGE> 15
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.
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.
15
<PAGE> 16
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.
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.
16
<PAGE> 17
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.
17
<PAGE> 18
(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."
18
<PAGE> 19
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
Chief Accounting Officer
19
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
Mark One
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31,
1994 --- Commission File Number 33-1983; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Transition Period From
___________________ to _________________.
--------------------
SURETY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 75-2065607
- --------------------------------------------------------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1845 Precinct Line Road, Suite 100, Hurst, Texas 76054
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(817) 498-8154
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- -------------------
<S> <C>
Common Stock, $0.01 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $0.01 par value
Indicate by check mark whether the Registrant (1) has filed 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
The aggregate market value of Common Stock held by nonaffiliates of
the Registrant, based on the quoted price of the Common Stock as reported on
the American Stock Exchange on March 15, 1995, was $6,795,542.81. For
purposes of this computation, all officers, directors and 5% beneficial owners
of the Registrant are deemed to be affiliates. Such determination should not
be deemed an admission that such officers, directors or 5% beneficial owners
are, in fact, affiliates of the Registrant. As of March 15, 1995, 3,040,829
shares of Common Stock were outstanding.
Documents Incorporated by Reference: Portions of the Company's Proxy
Statement dated not later than 120 days after the end of the Company's most
recent fiscal year, filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934 for the 1995 Annual Meeting of Stockholders of Surety Capital
Corporation, are incorporated by reference into Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
GENERAL
Surety Capital Corporation (the "Company"), a corporation incorporated
under the laws of the state of Delaware in 1985, is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The Company owns over ninety-nine percent (99%) of the issued and
outstanding shares of capital stock of Surety Bank, National Association,
formerly Texas Bank, National Association and formerly Texas National Bank,
Lufkin, Texas (the "Bank"), with full service offices in Hurst, Lufkin,
Chester, Wells, Kennard and Whitesboro, Texas.
The Company's principal executive offices are located at 1845 Precinct
Line Road, Suite 100, Hurst, Texas 76054, and its telephone number is
817-498-8154. The Bank's principal offices are located at 600 South First
Street, Lufkin, Texas 75901, and its telephone number is 409-632-5541.
THE COMPANY
At December 31, 1994 the Company had consolidated total assets of
$102,294,311, total net loans of $63,965,402, consolidated total deposits of
$92,027,122, and consolidated total shareholders' equity of $8,065,681.
The Company was originally organized in 1985 as a sole proprietorship
owned by C. Jack Bean and Lorene Sims Bean, and operated under the name "Surety
Finance Company." In March 1987 Surety Finance Company transferred its assets
to a publicly-held corporation, which was renamed "Surety Capital Corporation."
On December 30, 1989 the Company acquired approximately 98% of the
common stock of the Bank and subsequently increased its ownership to in excess
of 99%. Prior to acquisition of the Bank, the Company operated as a casualty
insurance premium finance company licensed by the state of Texas. Upon its
acquisition by the Company, the Bank began operating as an insurance premium
finance company, and the Company ceased writing new insurance premium financing
business to allow the Bank to succeed to the existing business of the Company
at that time.
The Company acts as a registered bank holding company under the BHC
Act. The Company does not have any independent material business activities.
The Company anticipates that its future activities will be limited to acting as
a source of support for the Bank.
The Company's business is neither seasonal in nature nor in any manner
related to or dependent upon patents, licenses, franchises or concessions, and
the Company has not spent material amounts on research activities.
<PAGE> 3
The following table sets forth in summary form the revenues, expenses
and income for the Company and the Bank as of, and for the year ended, December
31, 1994.
<TABLE>
<CAPTION>
Balance Sheet Data Company Only Bank Only Consolidated
- ------------------ ------------ --------- ------------
<S> <C> <C> <C>
Cash and Cash Equivalents $ 324,658 $ 11,194,360 $ 11,194,360
Total Net Loans 72,557 63,965,402 63,965,402
Total Assets 9,829,595 102,189,924 102,294,311
Deposits - 92,351,785 92,027,122
Total Liabilities 1,763,914 92,819,520 94,228,630
Shareholders' Equity 8,065,681 9,370,401 8,065,681
Income Statement Data
- ---------------------
Interest Income 24,685 5,387,009 5,387,009
Interest Expense 11,075 1,476,656 1,487,731
Non-Interest Expense 207,473 4,254,465 4,461,938
Net Income 472,760 390,797 472,760
</TABLE>
THE SUBSIDIARY BANK
The Bank was chartered as a national banking association in 1963 and
has been operating since that date in Lufkin, Texas. The Bank also operates
five (5) branches in Hurst, Chester, Wells, Kennard and Whitesboro, Texas.
The services offered by the Bank and its branches are generally those
offered by commercial banks of comparable size in their respective areas,
except that a large portion of the Bank's loan portfolio represents insurance
premium financing loans. Some of the major services are described below.
COMMERCIAL BANKING. The Bank provides general commercial banking
services for corporate and other business clients located in Angelina County,
Texas, and through its branches located in Tarrant County, Tyler County,
Cherokee County, Houston County, and Grayson County, Texas as a part of the
Bank's efforts to serve the local communities in which it operates. These
loans are generally made to provide working capital, to finance the purchase of
equipment, and for the expansion of existing businesses. Most loans are
secured by the assets of the businesses, including real estate, inventories,
receivables, equipment and cash. Virtually all of these loans are also
guaranteed by the owners of the businesses. The commercial loan portfolio also
includes a significant amount of agricultural loans to farmers and ranchers.
These loans are normally secured by equipment, crops, livestock, real estate
and cash.
The average yield during 1994 for the Bank's commercial lending
activities was 12%. The Bank's commercial loans have maturities of twelve
months or less. The Bank also offers programs for medical claims factoring.
-2-
<PAGE> 4
CONSUMER BANKING. The Bank provides a full range of consumer banking
services, including checking accounts, secured credit cards, "NOW" and "money
market" accounts, savings programs, installment and real estate loans, money
transfers and safe deposit facilities.
INSURANCE PREMIUM FINANCING. As described in greater detail below,
the Bank makes insurance premium financing loans in Texas and in other states.
See "Item 1. Business - Insurance Premium Financing."
At December 31, 1994 approximately 24%, 44% and 32% of the Bank's loan
portfolio represented corporate banking loans, consumer banking loans and
insurance premium financing loans, respectively.
ACQUISITIONS
On July 23, 1992 the Bank entered into an agreement for the merger of
the Bank of East Texas, a Texas banking association located in Chester, Texas,
with and into the Bank. The merger was consummated on March 23, 1993,
effective as of the close of business on March 22, 1993. Pursuant to the
merger, the Bank paid $645,676 to Bancwell Financial Corp., the sole
shareholder of the Bank of East Texas. The purchase price was based on the
book value of the Bank of East Texas as of February 28, 1993, subject to
certain agreed upon adjustments. The Company financed the acquisition with
internally-generated cash reserves.
Additionally, on July 23, 1992 the Bank entered into an agreement for
the merger of First State Bank, a Texas banking association located in Wells,
Texas, with and into the Bank. The merger was consummated on March 23, 1993,
effective as of the close of business on March 22, 1993. Pursuant to the
merger, the Bank paid $1,090,203 to Newell Bancshares, Inc., the sole
shareholder of First State Bank. The purchase price was based on the book
value of First State Bank as of February 28, 1993, subject to certain agreed
upon adjustments. The Company financed the acquisition with
internally-generated cash reserves.
On February 4, 1994 the 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 the Bank. The merger was consummated
on June 1, 1994, effective as of the close of business on May 31, 1994.
Pursuant to the merger, the Bank paid the stockholders of The Farmers Guaranty
State Bank of Kennard $1,200,000 for all of its issued and outstanding stock.
The purchase price was based on a multiple of the book value of the bank as of
May 31, 1994, subject to certain agreed upon adjustments. The Company financed
the acquisition with internally-generated cash reserves.
On May 24, 1994 the Bank entered into an agreement for the merger of
First National Bank, a national banking association
-3-
<PAGE> 5
located in Whitesboro, Texas, with and into the Bank. The merger was
consummated on December 9, 1994, effective as of the close of business on
December 8, 1994. The purchase price was Twenty Nine and 50/100 Dollars
($29.50) per share for each of the 200,000 shares of First National Bank common
stock issued and outstanding as of the effective date, subject to certain
agreed upon adjustments. The Company financed the acquisition in part
through a private placement of its common stock, pursuant to which the Company
raised $2,169,050, and in part through a $1,750,000 loan from a financial
institution.
INSURANCE PREMIUM FINANCING
Prior to acquisition of the Bank, the Company operated as a casualty
insurance premium finance company licensed by the state of Texas. Upon its
acquisition by the Company, the Bank obtained a license from the state of Texas
to operate as an insurance premium finance company, and the Company ceased
writing new insurance premium financing business to allow the Bank to succeed
to the insurance premium financing business of the Company at that time.
During 1994, the Company, exclusive of the Bank, had no insurance premium
financing loans.
The Bank engages in the business of lending a portion of the premium
of casualty insurance policies to the purchasers of casualty insurance policies
("insured-borrower"). The making of casualty insurance premium financing loans
is a relatively new industry. Large insurance companies (such as State Farm
and Allstate), which have exclusive agents, offer their own premium financing
plans for the insurance they write. Such major insurance casualty companies
account for most of the total casualty insurance policies written in the state
of Texas. The Bank markets to independent agents for companies which do not
internally offer financing.
A description of the mechanics of a typical insurance premium
financing loan is as follows. The Bank enters into a loan agreement at the
time the insured-borrower purchases insurance from an independent agent or
managing general agent. The term of the Bank's casualty insurance premium
loans is generally for eight months on a twelve month insurance policy. The
insured-borrower is generally required to pay the insurance company 25% to 30%
of the aggregate premium as a down payment at inception of the policy so that
the Bank's loan will not exceed 70% of the total premium. The loan is
generally repayable in eight monthly installments, including finance charges,
beginning thirty (30) days after inception of the policy. The finance
agreement between the Bank and the insured-borrower gives the Bank a power of
attorney to cancel the policy in the event the insured-borrower defaults on the
loan. The down payment and monthly installment amounts are calculated so that
at all times the unearned premium for the policy (which is pledged to the Bank
as security for the loan) exceeds the balance due on the loan.
-4-
<PAGE> 6
If an insured-borrower defaults on his premium loan, the Bank cancels
the policy and is entitled under Texas insurance law to receive from the
insurance company a refund of the unearned premium amount on the cancelled
policy, which is applied to pay all earned interest, late charges and
outstanding principal due on the loan. Any remaining amount in excess of $1.00
is then refunded to the insured-borrower. The Bank, therefore, relies on the
insurance company, as well as the insured-borrower, for repayment of an
insurance premium financing loan. The interest rates on casualty insurance
premium loans are set by regulation of the Texas State Board of Insurance and
presently range up to 31%, depending upon the size of the loan. The Bank
earned an average annual yield of approximately 11.2% and 13.2% on insurance
premium financing loans for the years ended December 31, 1994 and 1993,
respectively.
Effective March 1, 1993, and as amended on February 21, 1995, the Bank
adopted a policy which sets forth certain guidelines relating to its insurance
premium finance program (the "Policy"). The guidelines set forth in the Policy
are as follows:
The Bank will only finance insurance policies written by insurance
companies who meet one of the following criteria: (i) have a "B" or better
A.M. Best & Company, Inc. ("Best's") rating, or (ii) conform with published
National Association of Insurance Commissioners ("NAIC") standards regarding
certain insurance industry ratios, including liquidity, capital, loss,
reinsurance, premium, growth and other standards.
The Bank's insurance premium finance loan portfolio may not exceed
500% of equity capital.
A maximum concentration for each approved insurance company may not
exceed the following percentages of equity capital of the Bank:
<TABLE>
<S> <C> <C>
1. Carriers rated A (A-, A, A+) by Best's 25%
2. Carriers rated B (B-, B, B+) by Best's 20%
3. Non-rated carriers who, based upon a combination of several factors, including 20%
financial strength, reputation, longevity and diversity of risk, are considered by
management to warrant confidence
4. Carriers rated C (C-, C, C+) by Best's 10%
5. Non-rated, admitted carriers 10%
6. Non-rated, non-admitted carriers 6%
</TABLE>
At least 50% of the total insurance premium finance portfolio must be
collateralized by policies written by insurance companies rated B or better by
Best's.
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The insurance premium finance portfolio of the Bank is currently in
compliance in all material respects with the Policy.
The Bank markets its insurance premium financing business through
independent agents and managing general agents. These agents refer their
clients to the Bank to finance the purchase of insurance. The Bank provides a
computer software program for processing its premium financing agreements and
payment booklets in the offices of the agents at the time of the sale of the
casualty insurance policies by the agents.
The Bank's casualty insurance premium loan business is regulated by
the Premium Finance Department of the Texas State Board of Insurance. The
maximum allowable finance charge (or interest) for stratified loan amounts is
set in accordance with Texas state law under the Texas Insurance Code, and
ranges from up to 100% APR for a $100 loan to 18% APR for a loan equal to or
greater than $3,840. This regulatory agency establishes permissible interest
rates which may be charged on these loans as well as the loan terms. These
rates are reviewed and established annually. The Bank may incur losses in its
insurance premium financing business for a number of reasons, including fraud,
refusal of an insurance company to refund a premium, insurance company
insolvency, failure of the Company to properly notify an insurance company of
its interest in unearned premiums under applicable law and other reasons. The
Bank endeavors to establish procedures to minimize losses, but some losses
invariably occur.
MEDICAL CLAIMS FACTORING. The Bank has been engaged in medical claims
factoring since 1990. Medical claims factoring involves the purchase by the
Bank of accounts receivable from doctors, hospitals, and other health care
providers at approximately 50% of their face amount. These accounts receivable
are due principally from major insurance companies and governmental agencies.
The collection of these accounts receivable is performed by a third party
processor. When the receivable is collected, the Bank retains the amount paid
for the receivable plus a discount factor and a servicing fee. The remaining
balance of the payment is paid to the party from whom the receivable was
purchased. If payment with respect to an account receivable is denied (the
"denied receivable"), the Bank generally has no recourse against the seller of
the denied receivable to require the repurchase thereof unless there has been a
breach of warranty. The Bank generally obtains and perfects a security
interest in all accounts receivable of the health care provider purchased by
the Bank in order to secure the obligations of the health care provider to the
Bank. Therefore, payments received on any other accounts receivable of a
health care provider may, under certain circumstances, be applied by the Bank
against a denied receivable. The Bank has experienced no losses in its medical
claims factoring business since its inception. Medical claims factoring is a
specialty type of financing which provides high yields and requires specialized
expertise and systems.
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On September 20, 1994 the Bank expanded its insured medical claims
factoring program to include Medicare accounts receivable. The factoring of
Medicare accounts receivable is handled in a similar manner by the Bank. The
Bank buys batches of Medicare accounts receivable at a discount, advances funds
to the health care provider at a predetermined rate, pays the health care
provider for the accounts receivable out of future Medicare payments by the
United States Department of Health and Human Services (the "USDHHS"), which
administers the Medicare program, after deducting funds advanced and the
applicable discount, and obtains a security interest in the accounts receivable
to secure all obligations of the health care provider to the Bank. The
collection of the Medicare accounts receivable is performed by a third party
processor. As is the case with non-government accounts receivable, if a
Medicare receivable is not paid, the Bank generally has no recourse against the
seller of the denied receivable unless there has been a breach of warranty;
payments received by the Bank on any other Medicare receivables of a health
care provider may, under certain circumstances, be applied by the Bank against
a denied receivable.
However, extensive federal regulation over health care accounts
receivable requires the Bank to take certain additional precautions. The
Medicare statute generally prohibits payments, pursuant to an assignment, to
any person other than the health care provider. Therefore, the provider is
prohibited, except under very limited circumstances, from transferring the
Medicare payments directly to the Bank. Although a lender, such as the Bank,
may obtain and perfect a security interest in Medicare accounts receivable,
such a security interest may not be enforceable by a lender as against the
USDHHS to compel Medicare payments directly to the lender. Due to this
uncertainty, payments in respect of Medicare accounts receivable are directed
to a lock-box account established at the Bank which is under the exclusive
dominion and control of the health care provider. Funds in the lock-box
account are transferred, or "swept," daily by the Bank and applied against the
funds advanced to the health care provider. Any excess amounts are
periodically paid to the health care provider, after deduction of the
applicable discount rate and other amounts owed by the health care provider.
The Bank can incur losses for a number of reasons in its medical
factoring program, including losses as a result of fraud, submission of
unsubstantiated claims, refusal of the insurance company to pay claims,
insurance company failure, failure to properly process claims and other
reasons. As discussed above, the Bank's lending risk is increased with respect
to Medicare accounts receivable because it cannot enforce its security interest
in the Medicare accounts receivable as against the USDHHS directly.
Additionally, the USDHHS has a broad statutory right to adjust a provider's
Medicare payments for prior overpayments or underpayments. These express
reimbursement adjustment rights granted by statute, together with well-settled
principles of recoupment and offset under common law, further serve to increase
the Bank's lending risk with respect to Medicare accounts receivable.
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As of December 31, 1994, the Bank had outstanding $2,705,974 for the
purchase of health care accounts receivable, of which $641,799 represented
Medicare accounts receivable and $2,064,175 represented commercial insurer
accounts receivable.
SECURED CREDIT CARD PROGRAM. In September 1991 the Bank began issuing
secured credit cards to customers. The Bank currently offers VISA credit cards
through Equity Bank for Savings, F.A. of Oklahoma City, Oklahoma ("Equity").
Equity provides the issuance of VISA credit cards, credit card billing services
and the acceptance of deposits from the resulting transactions to the Bank and
its customers. Credit card loans are initially made by Equity and in turn are
purchased by the Bank under the terms of an agreement between the Bank and
Equity, at an amount equal to the amount advanced to the borrowers.
In the Bank's secured credit card program, the borrower provides a
cash time deposit to the Bank as security for repayment to the Bank for
transactions if the cardholder defaults in payment. If the borrower does not
make payments on the secured card, the savings account is used to pay off the
card balance. If the borrower makes timely payments, the borrower can charge
up to 90% (in some cases up to 100%) of the credit limit. Even though styled a
"secured card," the Bank can still incur losses through fraud, in a period
before termination of a card is reported to merchants, from repeated charges by
a borrower over the borrower's authorized credit limit, and for other reasons.
While merchants are usually required to pre-approve authorization before
allowing a charge, some merchants are not required to do so and the Bank may,
therefore, have liability for some unauthorized charging.
COMPETITION
There is significant competition among banks and bank holding
companies in Angelina County, Tarrant County, Tyler County, Cherokee County,
Houston County, and Grayson County, Texas, and the Company believes that such
competition among such banks and bank holding companies, many of which have far
greater assets and financial resources than the Company, will continue to
increase in the future. The Bank also encounters intense competition in its
commercial and consumer banking business from savings and loan associations,
credit unions, factors, insurance companies, commercial and captive finance
companies, and certain other types of financial institutions located in other
major metropolitan areas in the United States, many of which are larger in
terms of capital, resources and personnel. The casualty insurance premium
financing business of the Bank is also very competitive. Large insurance
companies offer their own financing plans, and other independent premium
finance companies and other financial institutions offer insurance premium
financing.
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<PAGE> 10
EMPLOYEES
As of January 31, 1995 the Company and the Bank collectively had
eighty-seven (87) full-time employees and two (2) part-time employees. None
of the Company's or the Bank's employees are subject to a collective bargaining
agreement, and the Company and the Bank believe that their respective employee
relations are good.
SUPERVISION AND REGULATION
GENERAL. The Company and the Bank are extensively regulated under
federal and state law. These laws and regulations are generally intended to
protect depositors, not stockholders.
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws
or regulations may have a material effect on the business and prospects of the
Company and the Bank. The operations of the Company and the Bank may be
affected by legislative changes and by the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future.
FEDERAL BANK HOLDING COMPANY REGULATION. The Company is a bank
holding company within the meaning of the BHC Act and as such is subject to
regulation, supervision and examination by the Board of Governors of the
Federal Reserve System (the "FRB"). A bank holding company is required to file
with the FRB an annual report and to provide such additional information
regarding its business operations and those of its subsidiaries as the FRB may
require.
With certain limited exceptions, the BHC Act requires every bank
holding company to obtain the prior approval of the FRB before: (i) acquiring
direct or indirect ownership or control of any voting shares of another bank or
bank holding company if, after such acquisition, it would own or control more
than 5% of such shares (unless it already owns or controls the majority of such
shares); (ii) acquiring all or substantially all of the assets of another bank
or bank holding company; or (iii) merging or consolidating with another bank
holding company. The FRB will not approve any acquisition, merger or
consolidation that would have a substantially anti-competitive result, unless
the anti-competitive effects of the proposed transaction are clearly outweighed
by a greater public interest in meeting the convenience and needs of the
community to be served. The FRB also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers.
With certain exceptions, the BHC Act also prohibits a bank holding
company from acquiring or retaining direct or indirect ownership or control of
more than 5% of the voting shares of any
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<PAGE> 11
company which is not a bank or bank holding company, or from engaging directly
or indirectly in activities other than those of banking, managing or
controlling banks, or providing services for its subsidiaries. The principal
exceptions to these prohibitions involve certain non-bank activities which, by
statute or by FRB regulation or order, have been identified as activities
closely related to the business of banking or of managing or controlling banks.
In making this determination, the FRB considers whether the performance of such
activities by a bank holding company can be expected to produce benefits to the
public such as greater convenience, increased competition or gains in
efficiency of resources, which can be expected to outweigh the risks of
possible adverse effects such as decreased or unfair competition, conflicts of
interest or unsound banking practices.
At the present time, the BHC Act generally prohibits bank holding
companies located in Texas from acquiring or establishing banks located outside
of the state in which the operations of such bank holding company's
subsidiaries are principally conducted unless the laws of such state expressly
authorize out-of-state bank holding companies to acquire or establish banks in
such state. Texas law permits the acquisition of banks domiciled in Texas by
out-of-state bank holding companies. However, an out-of-state bank holding
company cannot own or control (i) a newly formed bank, (ii) both a bank and a
savings and loan association located in Texas, or (iii) both a bank and a
non-bank located in Texas. Texas banks acquired by an out-of-state bank
holding company must be adequately capitalized and the board of directors of
any such bank must have a Texas resident majority (which majority does not
include insiders of the bank or the bank holding company). Unlike similar laws
which have been adopted in other states, Texas law does not limit the
geographic region of out-of-state bank holding companies that may acquire a
Texas bank, nor does it require a reciprocal law in the out-of-state bank
holding company's home state. The lack of such requirements significantly
increases the number of bank holding companies eligible to invest in Texas. An
out-of-state bank holding company seeking to acquire ownership or control of a
Texas state bank, national bank located in Texas or any bank holding company
owning or controlling a state bank or a national bank located in Texas must
obtain the prior approval of both the FRB and the Banking Commissioner of
Texas.
The Riegle-Neal Interstate Banking and Branching Act of 1994 (the
"Interstate Banking Act") was signed into law by President Clinton on September
29, 1994. The Interstate Banking Act will allow adequately capitalized and
managed bank holding companies to acquire banks in any state commencing
September 29, 1995, regardless of whether the acquisition would be prohibited
by applicable state law. As discussed above, Texas law permits the acquisition
of banks domiciled in Texas by out-of-state bank holding companies. Under the
Interstate Banking Act a bank holding company and its insured depository
institution affiliates may not complete an acquisition which would cause it to
control more than 10% of total deposits in insured depository institutions
nationwide or to
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<PAGE> 12
control 30% or more of total deposits in insured depository institutions in the
home state of the target bank. However, state deposit concentration caps
adopted by various states, such as the state of Texas, which limit control of
in-state insured deposits to a greater extent than the Interstate Banking Act
will be given effect. The state of Texas has adopted a deposit concentration
cap of 25% of in-state insured deposits; therefore, the Texas state deposit
concentration cap will preempt the federal deposit concentration cap.
Additionally, state minimum age provisions will be honored; provided, however,
acquisitions may be approved when the target bank has been in existence for at
least five years, notwithstanding state provisions to the contrary. The
minimum age provision adopted by the state of Texas is five years and therefore
this provision will not be preempted by the federal provision.
The Interstate Banking Act will also allow out-of-state branches
through interstate mergers commencing June 1, 1997, provided each bank involved
in the merger is adequately capitalized and managed. States are permitted,
however, to pass legislation providing for either earlier approval of mergers
with out-of-state banks or "opting-out" of interstate mergers entirely,
provided such legislation applies equally to all out-of-state banks. The
Interstate Banking Act also provides for interstate mergers involving an
out-of-state bank's acquisition of a branch of an insured bank without the
acquisition of the entire bank, if permitted under the laws of the state where
the branch is located. The deposit concentration caps and the minimum age
provisions applicable to interstate bank acquisitions also apply to interstate
bank mergers. It is impossible to predict at this time what legislation will
be adopted by the Texas State Legislature in response to the Interstate Banking
Act.
The Interstate Banking Act also provides for de novo branches in a
state if that state expressly elects to permit de novo branching on a
non-discriminatory basis. A "de novo branch" is defined as a branch office of
a national or state bank that is originally established as a branch and does
not become a branch as a result of an acquisition, conversion, merger or
consolidation. De novo interstate branching is subject to the same conditions
applicable to interstate mergers under the Interstate Banking Act, other than
deposit concentration limits.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
the bank holding company or its subsidiaries, on investments in their
securities and on the use of their securities as collateral for loans to any
borrower. These regulations and restrictions may limit the Company's ability
to obtain funds from the Bank for its cash needs, including funds for payment
of dividends, interest and operating expenses.
Under the BHC Act and certain regulations of the FRB, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of
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<PAGE> 13
credit or lease or sale of property or furnishing of services. For example,
the Bank may not generally require a customer to obtain other services from the
Bank or the Company, and may not require that customer to promise not to obtain
other services from a competitor, as a condition to an extension of credit to
the customer.
CAPITAL ADEQUACY GUIDELINES
-RISK-BASED CAPITAL ADEQUACY GUIDELINES. The FRB has adopted
risk-based capital adequacy guidelines applicable to bank holding companies.
For bank holding companies with less than $150 million in consolidated assets,
such as the Company, the guidelines are generally applied on a bank-only basis.
The FRB's risk-based capital guidelines require the Company to
maintain a level of capital based on the risk of assets and off-balance sheet
items. Under the guidelines, different categories of assets are assigned
different risk weights ranging from 0% for risk-free assets (e.g., cash), to
20% (e.g., cash items in process of collection), to 50% for certain other types
of assets (e.g., mortgages on one-to-four family dwellings), to 100% for
relatively high-risk assets (e.g., commercial loans). These risk weights are
multiplied by corresponding asset balances to determine a "risk-adjusted" asset
base. Certain off-balance sheet items (e.g., letters of credit), not
previously considered in capital adequacy computations, are added to the
risk-adjusted asset base.
The Company's risk-based capital is calculated by dividing its
qualifying total capital base by its risk-weighted assets. Qualifying capital
is divided into two tiers, as follows:
(i) Tier 1 (core) capital, which is common
stockholders' equity, minority interest in the equity accounts
of consolidated subsidiaries and cumulative and noncumulative
perpetual preferred stock (exclusive of auction-rate preferred
and provided the preferred stock counted within Tier 1 is
limited to 25% of all core capital elements); and
(ii) Tier 2 (supplementary) capital, which
consists, subject to certain limitations, of other preferred
stock, the allowance for loan losses, certain hybrid capital
instruments and mandatory convertible debt securities and
subordinated debt. Tier 2 (supplementary) capital will
qualify as a part of a bank holding company's total capital up
to a maximum of 100% of the bank holding company's Tier 1
(core) capital. Amounts in excess of these limits may be
issued but are not included in the calculation of the
risk-based capital ratio.
The Company is required to meet a minimum risk-based capital
to risk-weighted assets ratio of 8%, of which at least one-half
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<PAGE> 14
(or 4%) has to be in the form of Tier 1 (core) capital. The remaining one-half
(or 4%) has to be either in the form of Tier 1 (core) or Tier 2 (supplementary)
capital. The amount of loan loss allowance that can be included in capital 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
Company was 10.13% and 11.17% respectively, at December 31, 1994. The Company
is currently, and expects to continue to be, in compliance with these
guidelines.
-LEVERAGE-BASED ADEQUACY GUIDELINES. The FRB has also adopted
a minimum 3% Tier 1 (core) capital to adjusted total assets ratio, or leverage
ratio, for bank holding companies. The 3% leverage ratio is the absolute
minimum and most banking organizations are expected to maintain more than the
statutory minimum, commensurate with the level and nature of all the risks,
including the volume and severity of problem loans, to which such organizations
are exposed. Additionally, banking institutions experiencing growth are
expected to maintain strong levels of capital well above the minimum
supervisory level. The amount of Tier 1 (core) capital required to be held by
a banking institution above the minimum statutory level may be set on a
case-by-case basis as determined by the FRB as part of the examination process.
The Company is currently, and expects to continue to be, in compliance with the
minimum leverage ratio.
-CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires
federal banking regulators to take "prompt corrective action" with respect to
capital-deficient institutions.
Regulations setting forth a five-tier scheme for measuring the
capital adequacy of depository institutions have been issued in final form.
Under these regulations (commonly referred to as the "prompt corrective action"
rules), an institution would be placed in one of the following capital
categories: (i) well capitalized (an institution that has a total risk-based
capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%
and a Tier 1 leverage ratio of at least 5%); (ii) adequately capitalized (an
institution that has a total risk-based capital ratio of at least 8%, a Tier 1
risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least
4%); (iii) undercapitalized (an institution that has a total risk-based capital
ratio of under 8% or a Tier 1 risk-based capital ratio under 4% or a Tier 1
leverage ratio under 4%); (iv) significantly undercapitalized (an institution
that has a total risk-based capital ratio of under 6% or a Tier 1 risk-based
capital ratio under 3% or a Tier 1 leverage ratio under 3%); and (v) critically
undercapitalized (an institution that has a ratio of tangible equity to total
assets of 2% or less). Under these regulations, the Bank would be considered
to be well capitalized as of December 31, 1994.
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<PAGE> 15
FDICIA generally prohibits a depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. In addition, for a capital restoration plan to be acceptable, the
depository institution's parent holding company must guaranty that the
institution will comply with such capital restoration plan. The aggregate
liability of the parent holding company under the guaranty is limited to the
lesser of (i) an amount equal to 5% of the depository institution's total
assets at the time it became undercapitalized, and (ii) the amount that is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
significantly undercapitalized.
Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cessation of receipt of deposits from correspondent
banks. Critically undercapitalized institutions are subject to the appointment
of a receiver or conservator.
Under FDICIA, the FDIC is permitted to provide financial
assistance to an insured bank before appointment of a conservator or receiver
only if (i) such assistance would be the least costly method of meeting the
FDIC's insurance obligations, (ii) grounds for appointment of a conservator or
a receiver exist or are likely to exist, (iii) it is unlikely that the bank can
meet all capital standards without assistance, and (iv) the bank's management
has been competent, has complied with applicable laws, regulations, rules and
supervisory directives, and has not engaged in any insider dealing, speculative
practice or other abusive activity.
NATIONAL BANK REGULATION. The Bank is a national banking association
organized under the laws of the United States pursuant to the provisions of the
National Bank Act.
The Bank is subject to regulation and supervision, of which regular
bank examinations are a part, by the Office of the Comptroller of the Currency
(the "OCC"), which may prohibit the Bank from engaging in what the OCC believes
constitutes unsafe or unsound banking practices.
The interest and usury laws of the state of Texas, which laws are
preempted to a certain extent by federal law, generally limit the amount of
interest which lenders, including the Bank, may
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<PAGE> 16
charge on loans. This limit may vary depending upon, among other things, the
identity, nature and location of the lender and the particular state or federal
law applicable thereto, and the type of loan.
National banks domiciled in Texas are permitted to engage in unlimited
branch banking. A national bank seeking to establish such a branch must obtain
the prior approval of the OCC.
While the Bank currently does not pay dividends, the Company
anticipates that future cash flow eventually will be derived primarily from
dividends paid by the Bank. The Bank is subject to various restrictions
imposed by the National Bank Act relating to the declaration and payment of
dividends. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters - Dividends."
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the FRB or
the OCC evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered by the FRB and the OCC in evaluating mergers,
acquisitions and applications to open a branch or facility.
The Bank is also subject to certain restrictions imposed by the
Federal Reserve Act on extensions of credit to executive officers, directors,
principal stockholders or any related interest of such persons. Extensions of
credit (i) must be made on substantially the same terms, including interest
rates and collateral as, and following credit underwriting procedures that are
not less stringent than, those prevailing at the time for comparable
transactions with persons not covered above and who are not employees, and (ii)
must not involve more than the normal risk of repayment or present other
unfavorable features. The Bank is also subject to certain lending limits and
restrictions on overdrafts to such persons. A violation of these restrictions
may result in the assessment of substantial civil monetary penalties on the
Bank or any officer, director, employee, agent or other person participating in
the conduct of the affairs of the Bank, the imposition of a cease and desist
order, and other regulatory sanctions.
DEPOSIT INSURANCE. As a Federal Deposit Insurance Corporation
("FDIC") member institution, the deposits of the Bank are currently insured to
a maximum of $100,000 per depositor through the Bank Insurance Fund ("BIF")
administered by the FDIC, and the Bank is required to pay semi-annual deposit
insurance premium assessments to the FDIC.
FDICIA included provisions to reform the federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums,
and permits the FDIC to make special assessments on insured depository
institutions, in amounts determined
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by the FDIC to be necessary to give it adequate assessment income to repay
amounts borrowed from the U.S. Treasury and other sources or for any other
purpose the FDIC deems necessary. Pursuant to FDICIA, the FDIC implemented a
transitional risk-based insurance premium system on January 1, 1993 which
became the permanent risk-based premium system on January 1, 1994. Generally,
under this system banks are assessed insurance premiums according to how much
risk they are deemed to present the BIF. Such premiums currently range from
0.23% of insured deposits to 0.31% of insured deposits. Banks with higher
levels of capital and involving a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or involving a
higher degree of supervisory concern. The Bank is currently being assessed at
the rate of $0.23 per $100 of deposits.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with (i) the default of a commonly controlled FDIC-insured
depository institution, or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default
(the "Cross Guarantee"). "Default" is defined generally as the appointment of
a conservator or receiver and "in danger of default" is defined generally as
the existence of certain conditions indicating either that there is no
reasonable prospect that the institution will be able to meet the demands of
its depositors or pay its obligations in the absence of regulatory assistance,
or that its capital has been depleted and there is no reasonable prospect that
it will be replenished in the absence of regulatory assistance. The Cross
Guarantee thus enables the FDIC to assess a bank holding company's healthy BIF
members for the losses of any of such bank holding company's failed BIF
members. Cross Guarantee liabilities are generally superior in priority to
obligations of the depository institution to its stockholders due solely to
their status as stockholders and obligations to other affiliates.
As an institution's capital decreases, the powers of the federal
regulators become greater. A significantly undercapitalized institution is
subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management, and other
restrictions. The regulators have very limited discretion in dealing with a
critically undercapitalized institution and are required to appoint a receiver
or conservator if the capital deficiency is not corrected promptly.
INTERNAL OPERATING REQUIREMENTS. Under FDICIA, each federal banking
agency is required to prescribe, by regulation, non-capital safety and
soundness standards for institutions under its authority. The federal banking
agencies, including the OCC and FRB, have recently proposed standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, and standards for asset quality and earnings
-16-
<PAGE> 18
sufficiency. An institution which fails to meet those standards would be
required to develop a plan acceptable to the agency, specifying the steps the
institution will take to meet the standards. Failure to submit or implement
such a plan may subject the institution to regulatory sanctions. Under the
proposed regulations of the FRB, a bank holding company would be required to
ensure that its subsidiary bank returns to compliance with the safety and
soundness standards if a deficiency is detected. The Company believes the Bank
already meets substantially all the standards which have been proposed, and
therefore does not believe the implementation of these regulatory standards
will materially affect the Company's business operations.
MONETARY POLICY. The earnings of a bank holding company are affected
by the policies of regulatory authorities, including the FRB, in connection
with the FRB's regulation of the money supply. Various methods employed by the
FRB are open market operations in United States government securities, changes
in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. These methods are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans or paid on deposits. The monetary policies of the FRB have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future.
EXECUTIVE OFFICERS
The executive officers of the Company as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Name Age Company Office
---- --- --------------
<S> <C> <C>
C. Jack Bean 67 Chairman of the Board
and Director
G. M. Heinzelmann, III 32 President and Director
Bobby W. Hackler 49 Vice President, Secretary and Chief Financial Officer
</TABLE>
C. JACK BEAN has been Chairman of the Board and a director of the
Company since March 1987, and served as President of the Company from March
1987 to July 1992. Mr. Bean was the owner and founder of Surety Finance
Company, the predecessor company to the Company's business, from 1985 until
March 1987. Mr. Bean has been Chairman of the Board and a director of the
Company's subsidiary, Surety Bank, National Association, since December 1989.
G. M. HEINZELMANN, III has been President of the Company since July
1992 and a director of the Company since July 1993. He previously served as
Vice President of the Company from May 1987 to July 1992. Mr. Heinzelmann has
been Senior Vice President and a director of the Company's subsidiary, Surety
Bank, National Association,
-17-
<PAGE> 19
since December 1989 and Manager of the Insurance Premium Finance Division of
the Company, and subsequently the Bank, since May 1987. Mr. Heinzelmann has
been Secretary, Treasurer and a director of Brian Capital, Inc., a nonoperating
publicly-held corporation, since November 1, 1988. Mr. Heinzelmann is the
son-in-law of C. Jack Bean, Chairman of the Board of the Company.
BOBBY W. HACKLER has served as the Company's Chief Financial Officer,
Vice President and Secretary since January 1992. Since February 1994 he has
served as President of the Company's subsidiary, Surety Bank, National
Association, and since July 1992 has served as its Chief Executive Officer.
Mr. Hackler previously served as the Bank's Chief Operating Officer from
January 1992 to July 1992, as its Senior Vice President and Controller from
March 1991 to December 1991, and as its Vice President and Controller from
January 1990 to March 1991.
ITEM 2. PROPERTIES.
The Bank has six banking facilities. The Bank's main office is
located in Lufkin, Texas, and the Bank's five branches are located in Hurst,
Chester, Wells, Kennard and Whitesboro, Texas.
The Lufkin facility is a two-story building located at 600 South First
Street, Lufkin, Texas 75901. This building and the underlying tract of land
are owned by the Bank. The building includes approximately 10,000 square feet
of office space. A detached motor bank facility is also located on the land.
The Hurst banking facility is located at 1845 Precinct Line Road,
Suite 100, Hurst, Texas 76054. The Bank occupies approximately 11,181 square
feet of leased space in a two-story building under a lease dated February 14,
1994 for a term of five years and ten months beginning March 1, 1994 and ending
on December 31, 1999. The Bank is on a graduated lease payment schedule as
follows:
<TABLE>
<CAPTION>
Period Monthly Rent
------ ------------
<S> <C>
03-01-94 to 12-31-94 $7,406.48
01-01-95 to 12-31-96 $7,892.75
01-01-97 to 12-31-98 $8,303.46
01-01-99 to 12-31-99 $8,714.17
</TABLE>
The Company also occupies a portion of the office space leased by the Bank
under these leases.
The Chester facility is located in a two-story building located on
U.S. Highway 287 in Chester, Texas. This building, and the underlying tract of
land consisting of approximately 15,000 square feet, are owned by the Bank.
The building includes approximately 5,600 square feet of office space. The
Bank also owns an improved tract of land (containing approximately 3,000 square
feet) located adjacent to the Chester facility.
-18-
<PAGE> 20
The Wells facility is located in a one-story building located on U.S.
Highway 69 in Wells, Texas. This building, and the underlying tract of land
consisting of approximately 9,000 square feet, are owned by the Bank. The
building includes approximately 4,500 square feet of office space. The Bank
also owns two unimproved tracts of land (one containing approximately 2.31
acres and the other approximately 1,800 square feet) located adjacent to the
Wells facility.
The Kennard facility is located in a one-story building located at
Broadway and Main Streets, in Kennard, Texas. This building, and the
underlying tract of land consisting of approximately 14,000 square feet, are
owned by the Bank. The building includes approximately 2,790 square feet of
office space. The Bank also owns two storage buildings located on the same
tract of land.
The Whitesboro facility is located in a one-story building located at
2500 Highway 82 East, in Whitesboro, Texas. This building, and the underlying
tract of land consisting of approximately 132,000 square feet, are owned by the
Bank. The building includes approximately 6,400 square feet of office space.
Management of the Company believes the existing facilities are
adequate for the Company's and the Bank's present needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the stockholders of the Company
during the fourth quarter of 1994.
-19-
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Since January 10, 1995 the Company's Common Stock has been traded on
the American Stock Exchange, Inc.'s ("AMEX") primary list under the symbol
"SRY." From February 23, 1994 through January 9, 1995 the Company's Common
Stock was traded on the AMEX Emerging Company Marketplace under the symbol
"SRY.EC." Prior to that date, the Company's Common Stock was traded in the
over-the-counter market on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ").
The following table sets forth, for the periods indicated, the high
and low sale price per share of the Company's Common Stock as reported on the
AMEX Emerging Company Marketplace since February 23, 1994, and the high and low
bid price per share as reported by NASDAQ for prior periods. All prices have
been adjusted to reflect the one-for-ten reverse stock split effected on June
14, 1993. The NASDAQ quotations reflect prices quoted by market makers of the
Company's Common Stock, without retail markup, markdown or commissions, and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
---------------------------
<S> <C> <C>
1993 Fiscal Year:
----------------
Quarter ended March 31, 1993 $10.00 $ 4.375
Quarter ended June 30, 1993 $ 5.9375 $ 3.125
Quarter ended September 30, 1993 $ 5.50 $ 3.25
Quarter ended December 31, 1993 $ 5.25 $ 4.375
1994 Fiscal Year:
----------------
Quarter ended March 31, 1994 $ 6.375 $ 3.00
Quarter ended June 30, 1994 $ 5.25 $ 3.875
Quarter ended September 30, 1994 $ 5.00 $ 4.00
Quarter ended December 31, 1994 $ 4.50 $ 3.00
</TABLE>
STOCKHOLDERS
As of March 15, 1995 there were 416 record holders of the Company's
Common Stock.
DIVIDENDS
THE COMPANY. The Company currently intends not to pay dividends on
its Common Stock for the foreseeable future, but to
-20-
<PAGE> 22
retain any future earnings for use in the business of the Company and the Bank.
Payment of any dividends in the future will be made at the discretion of the
Board of Directors of the Company and will depend upon the operating results
and financial condition of the Company and the Bank, their capital
requirements, general business conditions and other factors. Additionally, the
FRB has promulgated a regulation sometimes known as the "source of strength
doctrine" which requires that "a bank holding company shall serve as a source
of financial and managerial strength to its subsidiary banks and shall not
conduct its operations in an unsafe and unsound manner." The FRB has
interpreted this requirement to require that a bank holding company, such as
the Company, make its resources available to a subsidiary bank that is
threatened with failure. The source of strength doctrine could operate to
prevent a bank holding company such as the Company from making dividend
payments to its stockholders even though otherwise permitted to do so by other
applicable law. The payment of cash dividends by the Company in the future
will depend to a large extent on the receipt of dividends from the Bank.
Under its loan agreement with Overton Bank and Trust, N.A., pursuant
to which the Company obtained a $1,750,000 loan for the purpose of financing
the acquisition of First National Bank, the Company may not, without the prior
written consent of Overton Bank and Trust, N.A., declare or pay any dividends
or make any other payment or distribution on account of its capital stock. See
"Item 1. Business - Acquisitions."
THE BANK. The Bank is subject to various restrictions imposed by the
National Bank Act relating to the declaration and payment of dividends. The
board of directors of a national banking association may, subject to the
following limitations, declare a quarterly, semiannual or annual dividend of as
much of its net profits as it may judge expedient. The payment of dividends is
subject to the provisions of 12 U.S.C. 60, which provides that no dividends may
be declared quarterly, semiannually or annually until the surplus fund of the
national banking association shall equal its common capital unless, in the case
of quarterly and semiannual dividends, not less than one-tenth (1/10th) of the
national banking association's net profits of the preceding two consecutive
half-year periods has been carried to the surplus fund. In addition, the
approval of the OCC is required if the total of all dividends, including a
proposed dividend declared by a national banking association, in any calendar
year exceeds the total of the national banking association's net profits of
that year combined with its retained net profits of the preceding two years.
Under the provisions of 12 U.S.C. 56, no dividend may be declared which would
withdraw any portion of a national banking association's capital (the amount of
unimpaired common stock plus the amount of preferred stock outstanding and
unimpaired). Additionally, if losses have at any time been sustained by the
national banking association equal to or exceeding its undivided profits then
on hand, no dividends may be paid, and no dividends may ever be paid in an
amount greater than its net profits then on hand, deducting therefrom its
losses and bad debts.
-21-
<PAGE> 23
The OCC also has authority under the Financial Institution Supervisory Act of
1966 to prohibit a national bank from engaging in what in its opinion
constitutes an unsafe or unsound practice in conducting business, including the
payment of a dividend.
-22-
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Company as
of December 31, 1994, 1993, 1992, 1991 and 1990, and for the periods then
ended.
<TABLE>
<CAPTION>
1-1-94- 1-1-93- 1-1-92- 1-1-91- 1-1-90-
12-31-94(1) 12-31-93(2) 12-31-92 12-31-91 12-31-90
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $5,387,009 $3,995,061 $3,343,968 $2,953,093 $2,175,322
Interest expense 1,487,731 1,123,584 977,715 1,380,040 1,071,095
Net interest income 3,899,278 2,871,477 2,366,253 1,573,053 1,104,227
Provision for loan 106,899 90,584 299,555 466,500 221,000
losses
Noninterest income 1,160,007 1,181,808 784,066 488,458 454,709
Noninterest expense 4,461,938 3,591,978 2,834,340 2,185,323 1,932,702
Income (loss) before 490,488 370,723 16,424 (590,312) (594,766)
income tax and
extraordinary item
Provision for income 17,688 0 0 0 0
taxes
Income (loss) before 472,760 370,723 16,424 (590,312) (594,766)
extraordinary item
Extraordinary item 0 0 0 0 516,513
Net income (loss) 472,760 370,723 16,424 (590,312) (78,253)
PER SHARE DATA:
Net income (loss) 0.20 0.19 0.00 (0.45) (0.08)
Weighted average 2,393,841 2,001,689 1,951,873 1,310,242 963,052
shares outstanding
BALANCE SHEET DATA:
Total assets 102,294,311 49,036,258 30,963,843 26,876,851 22,088,204
Net loans 63,965,402 31,225,035 19,168,892 18,914,350 14,912,536
Investment 19,504,254 8,218,029 94,000 50,500 521,390
securities
Interest bearing 1,524,188 648,000 500,000 0 0
deposits in
financial
institutions
Total deposits 92,027,122 43,595,919 26,840,275 23,334,905 20,012,054
Notes payable 1,750,000 0 0 0 500,000
Shareholders' equity 8,065,681 5,280,988 4,058,362 3,262,795 1,409,406
</TABLE>
_______________
(1) On May 31, 1994 the Bank acquired 100% of the outstanding common
stock of The Farmers Guaranty State Bank of Kennard, Kennard, Texas, and on
December 8, 1994 the Bank acquired 100% of the outstanding common stock of
First National Bank, Whitesboro, Texas. Operations of these two banks have
been included in consolidated operations subsequent to May 31, 1994 and
December 8, 1994, respectively.
-23-
<PAGE> 25
(2) On March 23, 1993 the Bank acquired 100% of the outstanding
common stock of the Bank of East Texas, Chester, Texas and First State Bank,
Wells, Texas. Operations of these two banks have been included in consolidated
operations subsequent to February 28, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The information presented below reflects the lending and related
funding business of the Company.
<TABLE>
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
12/31/94 12/31/93 12/31/92 12/31/91
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE PREMIUM FINANCING:
Average Balance Outstanding $19,370,887 $ 9,855,620 $ 8,240,727 $ 6,892,795
Average Yield 11.2% 13.2% 17.9% 17.6%
Interest Income $ 2,172,038 $ 1,302,854 $ 1,471,226 $ 1,211,490
CONSUMER, COMMERCIAL AND REAL ESTATE
FINANCING:
Average Balance Outstanding Average $20,766,039 $16,153,213 $12,255,653 $10,603,733
Yield 12.0% 12.4% 13.3% 13.5%
Interest Income $ 2,482,099 $ 2,001,251 $ 1,632,746 $ 1,428,326
COST OF FUNDS:
Average Balance of Deposits $54,458,467 $41,175,656 $26,469,157 $23,418,163
Average Interest Rate 2.7% 2.7% 3.7% 5.9%
Interest Expense $ 1,476,656 $ 1,123,584 $ 977,715 $ 1,380,040
COST OF SHORT TERM DEBT:
Average Balance of Debt $ 146,756
Average Interest Rate 9.5%
Interest Expense $ 13,914
</TABLE>
Note: Average balances are computed using daily balances throughout
each period.
CONSOLIDATED RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993. The
Company had income of $472,760 during 1994 compared to income of $370,723
during 1993, and the Bank had income of $390,797 during 1994 compared to income
of $549,493 during 1993. The decrease in earnings for the Bank is attributable
to a tax sharing agreement between the Bank and the Company implemented in
1994. The record earnings growth achieved during 1994 can be attributed to the
Company's emphasis on niche banking. The Company has compiled a portfolio of
high yielding asset products, such as insurance premium financing loans (See
"Item 1. Business - Insurance Premium Financing") and medical claims factoring
loans (See "Item 1. Business - Medical Claims Factoring"). Total assets grew
108.6% during 1994, from $49,036,258 at the end of 1993 to $102,294,311 at
-24-
<PAGE> 26
the end of 1994, while net income grew 27.5% to $472,760 for 1994 from $370,723
for 1993. The asset growth is a direct result of the addition of a bank in
east Texas and another bank in northeast Texas. The Company targets banks for
acquisition which have low loan-to-deposit ratios which provides the Company
with the opportunity to increase lending in its niche markets. Another factor
contributing to the Company's improved performance is related to the increase
in the net interest spread. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Average Balance Sheet and
Analysis of Net Interest Income."
Total interest income increased 34.8%, to $5,387,009 from $3,995,061,
while total interest expense increased 32.4%, to $1,487,731 from $1,123,584,
resulting in a 35.8% increase in net interest income before provision for loan
losses, to $3,899,278 from $2,871,477. The Company's average loan growth
between these two periods was spread throughout the loan portfolio. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - General." This diversification in loan growth was directly
related to management's marketing efforts and the acquisition of the two Texas
banks in 1994. The average volume of consumer, commercial and real estate
lending increased 28.6%, with a modest decrease in average yields on those
loans from 12.4% to 12.0% due to decreasing loan rates. The 96.6% growth in
the average volume of insurance premium loans showed a decrease in the average
yield on those loans from 13.2% to 11.2%. The decline in the average yields on
insurance premium financing loans can be attributed to competitive forces
within the industry to lower rates as the average cost of funding declines.
The average balance of interest bearing deposits increased 32.3%, while the
average rate paid on such deposits remained unchanged at 2.7%. Management has
also made efforts to increase the overall quality of the insurance premium
financing portfolio. A reduction in rates has been offered in order to further
attract higher quality insurance carriers. While these efforts have increased
the overall quality of the portfolio, the yield realized has been directly
affected by the reduced rates.
The solid growth in the loan portfolio, while generating a 35.8%
increase in net interest income before provision for loan losses, has not
necessitated a corresponding increase in the provision for loan losses. The
Company recorded a $106,899 provision for loan losses during 1994 compared to a
$90,584 provision during 1993. This increase of 18.0% over the 1993 provision
is a result of the 54.3% growth in average loans outstanding. As of December
31, 1993, the Company's allowance was based on specific allowances for loans
identified as potential problems, and a general allowance based on a 0.5%
historical loss factor on insurance premium finance loans and on a 1.7%
historical loss factor on the general loan portfolio.
The Company's December 31, 1994 allowance was based on the same
method, with specific allowances for identified problem loans
-25-
<PAGE> 27
and a general allowance based upon historical loss data. The historical loss
factors used were approximately 0.5% for insurance premium finance loans and
approximately 1.7% for the general loan portfolio.
The Company's noninterest income decreased 1.9%, to $1,160,007 for
1994 from $1,181,808 for 1993. This decrease compares to a corresponding
increase in average noninterest bearing deposits of 25.4%, to $7,996,860 from
$6,375,876 for these same periods. Noninterest bearing deposits normally
generate the majority of noninterest income through service charges.
Noninterest results are below the 1993 level due to a decision by management to
discontinue servicing outside loan portfolios and the realization of gains on
the sale of investment securities. The servicing of outside loan portfolios
generated noninterest income for the Bank of $0 and $161,310 for 1994 and 1993,
respectively. Proceeds from the sale of investment securities during the
twelve months ended December 31, 1994 were $500,000 with no gross recognized
gains and losses. During the twelve months ended December 31, 1993, proceeds
from the sales of investment securities were $6,084,844 with gross recognized
gains and losses of $93,859 and $3,096, respectively.
Noninterest expense increased 24.2%, primarily as a result of a 28.3%
increase in salaries and employee benefits and a 15.2% increase in general and
administrative expenses. The increase in salaries and benefits was due
primarily to additional staffing required by the acquisition of the two Texas
banks, the Bank's loan and deposit growth and the establishment of the secured
credit card program. Increases in general and administrative expenses relate
primarily to legal and professional fees and FDIC assessments.
On December 9, 1994 the Company secured a short term note in the
amount of $1,750,000 at 11.0% 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.
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 1994, the Company had only nominal income, other than
equity in net income of the Bank of approximately $391,000, and approximately
$207,000 in noninterest expenses.
The noninterest expenses, which decreased 19.0% from the same period
in the prior year due to decreased regulatory and legal activity, consisted
primarily of legal and professional fees incurred in the operation of the
Company, in the maintenance of the Company's public company status under
applicable securities laws and regulations, and promotional fees.
YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1992. The
Company had income of $370,723 during 1993 compared to
-26-
<PAGE> 28
income of $16,424 during 1992, and the Bank had income of $549,493 during 1993
compared to income of $293,324 during 1992. The record earnings growth
achieved during 1993 can be attributed to the Company's emphasis on niche
banking. The Company has compiled a portfolio of high yielding asset products,
such as insurance premium financing and medical claims factoring loans. Total
assets grew 58% during 1993, from $30,963,843 at the end of 1992 to $49,036,258
at the end of 1993, while income grew 2,157%, to $370,723 for 1993 from $16,424
for 1992. The asset growth is a direct result of the addition of two banks in
east Texas. The Company targets banks for acquisition which have low
loan-to-deposit ratios which provides the Company with the opportunity to
increase lending in its niche markets. Another factor contributing to the
Company's improved performance is related to significant declines in the
average rates paid for the cost of funding the Bank's growing loan portfolio.
Total interest income increased 19.5%, to $3,995,061 from $3,343,968,
while total interest expense increased 14.9%, to $1,123,584 from $977,715,
resulting in a 21.4% increase in net interest income before provision for loan
losses, to $2,871,477 from $2,366,253. The Company's average loan growth
between these two periods was spread throughout the loan portfolio. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations - General." This diversification in loan growth was directly
related to management's marketing efforts and the acquisition of the two east
Texas banks. The average volume of consumer, commercial and real estate
lending increased 31.8%, with a modest decrease in average yields on those
loans from 13.3% to 12.4% due to decreasing loan rates. The 19.6% growth in
the average volume of insurance premium loans showed a decrease in the average
yield on those loans from 17.9% to 13.2%. The decline in the average yields on
insurance premium financing loans can be attributed to competitive forces
within the industry to lower rates as the average cost of funding declines.
The average balance of interest bearing deposits increased 55.6%, while the
average rate paid on such deposits fell from 3.7% to 2.7%, reflecting an
overall decline in interest rates in the market. Management has also made
efforts to increase the overall quality of the insurance premium financing
portfolio. A reduction in rates has been offered in order to further attract
higher quality insurance carriers. While these efforts have increased the
overall quality of the portfolio, the yield realized has been directly affected
by the reduced rates.
The solid growth in the loan portfolio, while generating a 21.4%
increase in net interest income before provision for loan losses, has not
necessitated a corresponding increase in the provision for loan losses. The
Company recorded a $90,584 provision for loan losses during 1993 compared to a
$299,555 provision during 1992. This decrease resulted primarily from positive
collection efforts in both the insurance premium finance portfolio and the
general loan portfolio. As of December 31, 1992 the Company's allowance was
based on specific allowances for loans identified as potential problems, and a
general allowance based on a 0.5%
-27-
<PAGE> 29
historical loss factor on insurance premium finance loans and on a 2.0%
historical loss factor on the general loan portfolio.
The Company's December 31, 1993 allowance was based on the same
method, with specific allowances for identified problem loans and a general
allowance based upon historical loss data. The historical loss factors used
were approximately 0.5% for insurance premium finance loans and approximately
1.7% for the general loan portfolio.
The Company's noninterest income increased 50.7%, to $1,181,808 for
1993 from $784,066 for 1992. This increase compares to a corresponding
increase in average noninterest bearing deposits of 73.5%, to $6,375,876 from
$3,675,287 for these same periods. Noninterest bearing deposits normally
generate the majority of noninterest income through service charges.
Noninterest expense increased 26.7%, primarily as a result of a 43.7%
increase in salaries and employee benefits and a 12.4% increase in general and
administrative expenses. The increase in salaries and benefits was due
primarily to additional staffing required by the acquisition of the two east
Texas banks, the Bank's loan and deposit growth and the establishment of the
secured credit card program. 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 1993, the Company had only nominal income, other than
equity in net income of the Bank of approximately $549,000, and approximately
$256,000 in noninterest expenses.
The noninterest expenses, which decreased 28.1% from the same period
in the prior year due to decreased regulatory and legal activity, consisted
primarily of legal and professional fees incurred in the operation of the
Company, in the maintenance of the Company's public company status under
applicable securities laws and regulations, and promotional fees.
-28-
<PAGE> 30
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Year Ended December 31, 1993
---------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets
Interest bearing deposits $ 981,184 $ 68,173 6.9% $ 636,420 $ 20,853 3.3%
in financial institutions
U.S. Treasury and agency 7,648,411 362,078 4.7% 9,567,829 507,273 5.3%
securities
Federal funds sold 6,456,165 302,621 4.7% 5,343,461 162,830 3.0%
Loans 40,136,926 4,654,137 11.6% 26,008,833 3,304,105 12.7%
Allowance for loan losses ( 444,805) N/A N/A ( 388,255) N/A N/A
---------- --------- ---- ---------- --------- -----
Total interest earning 54,777,881 5,387,009 9.8% 41,168,288 3,995,061 9.7%
assets ---------- ---------- ----- ---------- -----
Cash and due from banks 3,249,783 2,705,248
Premises and equipment 1,520,404 1,094,260
Accrued interest receivable 205,770 185,109
Other real estate owned 51,043 31,715
Other assets 1,357,765 417,878
---------- ----------
Total assets $61,162,646 $45,602,498
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Liabilities:
Interest bearing demand
deposits $ 14,680,300 $ 259,113 1.8% 12,538,376 209,937 1.7%
Savings deposits 3,104,155 94,010 3.0% 3,165,466 96,962 3.1%
Time Deposits 28,530,396 1,123,533 4.0% 19,095,938 816,685 4.3%
Notes Payable 146,756 11,075 7.5% 0 0 0.0%
---------- ------ ---------- ---------
Total interest bearing
liabilities 46,461,607 1,487,731 3.2% 34,799,780 1,123,584 3.2%
---------- ---------
Net interest income $3,899,278 $2,871,477
========= =========
Net interest spread 6.6% 6.5%
==== ====
Net interest income to
average earning assets 7.1% 7.0%
==== ====
Noninterest bearing
deposits 7,996,860 6,375,876
Other liabilities 281,660 151,681
---------- ----------
Total liabilities 54,740,127 41,327,337
Shareholders' equity 6,422,519 4,275,161
---------- ----------
Total liabilities and
shareholders' equity $61,162,646 $45,602,498
========== ==========
</TABLE>
The following table presents the changes in net interest income for
the years ended December 31, 1994 and 1993:
-29-
<PAGE> 31
1994 VERSUS 1993
INCREASE (DECREASE) DUE TO CHANGES IN
<TABLE>
<CAPTION>
Average Volume Average Rate Total
-------------- ------------ -----
<S> <C> <C> <C>
Interest Income
Interest bearing deposits in
financial institutions $ (551) $ 47,871 $ 47,320
U.S. Treasury and agency
securities (94,659) (50,536) (145,195)
Federal funds sold 38,998 100,793 139,791
Loans 1,659,906 (309,874) 1,350,032
---------- ------- ---------
Total interest income 1,603,694 (211,746) 1,391,948
---------- ------- ---------
Interest expense
Interest bearing demand deposits 38,707 10,469 49,176
Savings deposits (1,827) (1,125) (2,952)
Time deposits 375,946 (69,098) 306,848
Federal funds purchased and other
borrowed funds 11,075 11,075
---------- ------- ---------
Total interest expense 423,901 (59,754) 364,147
---------- ------ ---------
Net interest margin $ 1,179,793 $ (151,992) $1,027,801
========== ======= =========
</TABLE>
1993 VERSUS 1992
INCREASE (DECREASE) DUE TO CHANGES IN
<TABLE>
<CAPTION>
Average Volume Average Rate Total
-------------- ------------ -----
<S> <C> <C> <C>
Interest Income
Interest bearing deposits in
financial institutions $ 5,133 $ ( 1,735) $ 3,398
U.S. Treasury and agency
securities 507,273 507,273
Federal funds sold (36,164) ( 23,152) (59,316)
Loans 750,748 (551,010) 199,738
--------- ------- -------
Total interest income 1,226,990 (575,897) 651,093
--------- ------- -------
Interest expense
Interest bearing demand deposits 114,730 ( 98,866) 15,864
Savings deposits 57,705 ( 6,727) 50,978
Time deposits 206,265 (127,238) 79,027
--------- ------- -------
Total interest expense 378,700 (232,831) 145,869
--------- ------- -------
Net interest margin $ 848,290 $ ( 343,066) $ 505,224
========= ======== =======
</TABLE>
Changes which are attributed in part to volume and in part to rate are
allocated in proportion to their relationship to the amounts of changes
attributed directly to volume and rate.
-30-
<PAGE> 32
CURRENT TRENDS AND UNCERTAINTIES
The main office of the Bank is located in Angelina County, Texas.
During 1994 Angelina County experienced growth in the construction,
manufacturing, retail and service sectors of the local economy. The prior ten
years have shown growth trends in these sectors, ranging from 1.4% per year in
the construction sector up to 11.6% per year in the service sector. The only
sector which experienced negative growth in the last ten years in Angelina
County is the wholesale sector, at (3.8%) per year.
The Wells, Chester and Kennard branches of the Bank are located in
counties adjacent to Angelina County. These economies have also been
positively impacted by the growth experienced in the Lufkin area, in part
because a number of local residents commute to work in the Lufkin area. Per
capita income for the Lufkin area has grown by 30.0% from 1987 to 1992. The
local economy in which the Hurst branch of the Bank is located, in the Fort
Worth-Dallas area, has experienced per capita income growth at a rate of 31.2%,
while the local economy in which the Whitesboro branch is located has
experienced per capita income growth of 25.8% in the same period.
Economic trends and other developments could adversely affect the
Company's operations. Only the Hurst branch has experienced recent lay-offs in
its local area. Carswell Air Force Base has closed; however, it has reopened
as Carswell Naval Air Station. 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 Bank'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 December 31, 1994, 8.6% of the Bank's interest
bearing liabilities were in the form of time deposits of $100,000 and over.
Substantially all of such large deposits were obtained from the Bank's market
area, and none were obtained through brokers. Management believes these
deposits to be a stable source of funds. However, 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, with 38.5% maturing
in the first quarter of 1995, 19.7% maturing in the second quarter of 1995,
39.3% maturing in the second half of 1995, and the remaining 2.5% maturing
thereafter, and the Bank monitors those maturities in an effort to minimize any
adverse effect on liquidity. The Bank is
-31-
<PAGE> 33
limited through regulatory commitments from using brokered funds without prior
approval.
The Company raised approximately $2,314,772 during 1994, $852,000
during 1993, and $779,000 during 1992 through the sale, in private offerings
and incentive stock option exercises, of the Company's Common Stock.
Management anticipates that future registered and private offerings of the
Company's Common Stock may be used to raise additional capital, especially if
and when the regulatory capital requirements with which the Bank must comply
necessitate the injection of additional capital by the Company into the Bank.
Failure to raise such additional capital could adversely impact the growth of
the Bank or result in its failure to comply with applicable regulatory capital
requirements, which could necessitate a reduction in the volume of assets and
deposits of the Bank. Such reductions could adversely affect the Bank's
earnings and liquidity.
In the longer term, the liquidity of the Company and its ability to
meet its cash obligations will depend substantially on its receipt of dividends
from the Bank, which are limited by banking statutes and regulations. See
"Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- - Dividends." At December 31, 1994 the Bank had retained earnings of
approximately $838,000 which is included in the consolidated accumulated
deficit.
CAPITAL RESOURCES
The Company's shareholders' equity at December 31, 1994 was
$8,065,681, compared to $5,280,988 at December 31, 1993. The growth in equity
has been the result of the sale of Common Stock by the Company. The Company
had consolidated income of $472,760 for the year ended December 31, 1994.
There can be no assurance that the Company can continue to operate profitably
in the future and failure to operate profitably would have a material adverse
effect on the Company.
As of December 31, 1994 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 loan loss allowances that may be
included in capital 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 were 10.13% and
11.17%, respectively, at December 31, 1994, and 11.37% and 12.57%,
respectively, at December 31, 1993. The Bank is currently, and expects to
continue to be, in compliance with these guidelines. See "Item 1. Business -
Supervision and Regulation: Capital Adequacy Guidelines."
-32-
<PAGE> 34
While the Company believes it has sufficient financing for its working
capital needs until the end of its 1995 fiscal year, the Company is considering
acquiring banks in addition to the four banks acquired in 1993 and 1994. 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 Stock to raise funds, the terms and conditions of
the issuances and any dilutive effect may have an adverse impact on the
existing stockholders. If additional financing becomes necessary, there can be
no assurance that such financing can be obtained on satisfactory terms. In
this event, the Company could be required to restrict its operations.
The FRB 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 FRB 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 its subsidiary banks during periods of financial stress or adversity.
The FRB 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 or a violation of Regulation Y or both, justifying a cease and
desist order or other enforcement 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 stockholders.
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.
ASSET/LIABILITY MANAGEMENT
The objective of asset/liability management is to manage
interest-sensitive assets and liabilities to maintain positive net interest
margins, regardless of changes in market interest rates. Interest sensitive
assets and liabilities, including both variable or adjustable rate instruments
or fixed rate instruments approaching maturity, are subject to repricing
immediately or in the near term. An interest rate sensitivity gap arises when
interest rates on assets change in a different time period from that of
interest rates on liabilities. The interest rate sensitivity gap is the
-33-
<PAGE> 35
difference between total interest-sensitive assets and total interest-sensitive
liabilities. If the interest rate sensitivity gap is positive during a period
of rising interest rates or negative during a period of declining interest
rates, net interest income will tend to increase. Conversely, if the interest
rate sensitivity gap is negative during a period of rising interest rates or
positive during a period of declining interest rates, net interest income will
tend to decrease. The greater the gap, the greater the effect declining or
rising interest rates will have on net interest income. If the gap is closed
or matched, the effect on net interest income due to interest rate movements is
reduced.
The following table presents the repricing opportunities for the
Company's interest earning assets and interest bearing liabilities at December
31, 1994:
<TABLE>
<CAPTION>
3 months 6 months 1 year
3 months to to to Over
or less 6 months 1 year 5 years 5 years Total
------- -------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing
deposits in financial
institutions $ 99,000 $ 95,000 $ 290,000 $ 1,040,188 $1,524,188
Investment securities 1,477,456 1,788,772 3,231,038 7,082,145 $5,924,843 19,504,254
Federal funds sold 7,265,000 7,265,000
Loans 22,567,462 16,414,413 15,482,544 7,519,177 2,679,754 64,663,350
---------- ---------- ---------- --------- --------- -----------
Interest earning assets 31,408,918 18,298,185 19,003,582 15,641,510 8,604,597 92,956,792
---------- ---------- ---------- ---------- --------- ----------
Interest bearing
liabilities:
Interest bearing demand
deposits 24,961,830 24,961,830
Savings deposits 4,913,651 4,913,651
Time deposits 17,731,144 10,897,343 19,022,104 2,309,867 49,960,458
Notes payable 1,750,000 1,750,000
---------- ---------- ---------- ---------- --------- -----------
Interest bearing
liabilities 47,606,625 12,647,343 19,022,104 2,309,867 81,585,939
---------- ---------- ---------- ---------- --------- -----------
Period interest sensitive
gap $(16,197,707) $ 5,650,842 $( 18,522) $13,331,643 $8,604,597 11,370,853
========== ========= ========= ========== ========== ==========
Cumulative interest
sensitive gap (16,197,707) $(10,546,865) $(10,565,387) $ 2,766,256 11,370,853 11,370,853
========== ========== ========== ========= ========== ==========
Cumulative gap as a
percent of total assets (15.8%) (10.3%) (10.3%) 2.7% 11.1% 11.1%
Cumulative interest-
sensitive assets as
percent of cumulative
interest-sensitive
liabilities 66.0% 82.5% 86.7% 103.4% 113.9% 113.9%
</TABLE>
The preceding table does not necessarily indicate the impact of
general interest rate movements on the Company's net interest income because
the repricing of various assets and liabilities is discretionary and is subject
to competitive and other pressures. Currently, the Bank is holding
approximately $2,987,000 in mortgage backed securities. Although the mortgage
backed securities have a stated maturity greater than five years, it is not
uncommon for mortgage backed securities to fully pay down well ahead of stated
maturities. As a result, assets and liabilities indicated as
-34-
<PAGE> 36
repricing within the same period may, in fact, reprice at different times and
at different rate levels.
The operating income and net income of the Bank depend, to a
substantial extent, on "rate differentials," i.e., the differences between the
income the Bank receives from loans, securities and other earning assets, and
the interest expense it pays to obtain deposits and other liabilities. These
rates are highly sensitive to many factors which are beyond the control of the
Bank, including general economic conditions and the policies of various
governmental and regulatory authorities.
RATIOS
The following are various ratios for the Company for the years ended
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Return on average assets 0.8% 0.8%
Return on average equity 7.4% 8.7%
Dividend payout ratio on Common Stock N/A N/A
Average equity to average assets 10.5% 9.4%
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), requires that impaired loans
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate, or as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. SFAS 114 becomes effective for fiscal years beginning
after December 15, 1994. The Company expects no material effect from the
adoption of SFAS 114.
LOAN PORTFOLIO
The following table describes the composition of loans by major
categories outstanding at December 31, 1994 and 1993:
-35-
<PAGE> 37
<TABLE>
<CAPTION>
1994 1993
---------------------------------- --------------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
<S> <C> <C> <C> <C>
Loans, net of unearned interest:
Insurance premium
financing $ 20,496,562 31.7% $ 14,209,177 44.9%
Commercial loans 13,205,698 20.4% 5,198,223 16.5%
Installment loans 10,968,948 17.0% 7,961,350 25.2%
Real estate loans 17,297,636 26.8% 1,878,030 5.9%
Medical claims
receivable 2,694,506 4.1% 2,379,482 7.5%
----------- ----- ---------- ------
Total loans 64,663,350 100.0% 31,626,262 100.0%
===== ======
Less: Allowance for
loan losses ( 697,948) ( 401,227)
----------- ----------
Total net loans $ 63,965,402 $ 31,225,035
========== ==========
</TABLE>
The concentration of insurance premium financing loans may expose the
Bank to greater risk of loss than would a more diversified loan portfolio.
These requirements may also limit the growth of the Bank and, therefore, could
have a material adverse effect on the Bank.
As of December 31, 1994 and 1993 commitments of the Bank under standby
letters of credit and unused lines of credit totaled approximately $2,425,000
and $1,453,000, respectively.
Final loan maturities (including floating rate loans reset to market
interest rates) of the total loan portfolio, before unearned income, as of
December 31, 1994 were:
<TABLE>
<CAPTION>
One
Within Year to After
One Five Five
Year Years Years Total
---- ----- ----- -----
<S> <C> <C> <C> <C>
Final Loan Maturities/Floating Rates
Reset:
Insurance premium financing $20,496,562 $20,496,562
Commercial loans 13,205,698 13,205,698
Installment loans 4,567,348 $ 6,401,600 10,968,948
Real estate loans 13,520,841 3,776,795 17,297,636
Medical claims receivable 2,694,506 2,694,506
---------- ---------- ---------- ----------
Total $54,484,955 $10,178,395 $ $64,663,350
========== ========== ========== ==========
</TABLE>
Rate sensitivities of the total loan portfolio as of December 31, 1994
are as follows:
-36-
<PAGE> 38
<TABLE>
<CAPTION>
One Year After
Within to Five Five
One Year Years Years Total
-------- ----- ----- -----
<S> <C> <C> <C> <C>
Fixed rate $36,590,720 $10,053,943 $46,644,663
Variable rate 17,811,235 124,452 17,935,687
Nonaccrual 83,000 83,000
---------- --------- --------- ----------
Total $54,484,955 $10,178,395 $ $64,663,350
========== ========== ========= ==========
</TABLE>
NONPERFORMING ASSETS
It is the policy of the Bank not to renegotiate the terms of a loan
simply because of a delinquent status. Rather, a loan is generally transferred
to a nonaccrual status if it is not in the process of collection and is
delinquent in payment of either principal or interest beyond ninety (90) days.
Interest income which would have been recorded on nonaccrual loans in
1994 and 1993, had they been on an accrual status, was approximately $8,000 and
$4,000, respectively.
The following table summarizes nonperforming assets by category as of
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Nonaccrual loans $83,000 $48,113
Loans 90 days past due and still
accruing interest 38,432 46,124
------- -------
Total nonperforming loans 121,432 94,237
Other real estate owned and other assets 121,359 34,676
------- -------
Total nonperforming assets $242,791 $128,913
======= =======
</TABLE>
The classification of a loan on nonaccrual status does not necessarily
indicate that the principal is uncollectible, in whole or in part. A
determination as to collectibility is made by management of the Bank on a
case-by-case basis. The Bank considers both the adequacy of the collateral and
the other resources of the borrower in determining the steps to be taken to
collect non-accrual loans. The final determination as to these steps is made
on a case-by-case basis. Alternatives that are considered are foreclosure,
collecting on guarantees, restructuring the loan or collection lawsuits.
-37-
<PAGE> 39
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The amount of the provision for loan losses is based on periodic (not
less than quarterly) evaluations of the loan portfolio, with particular
attention directed toward nonperforming and other potential problem loans.
During these evaluations, consideration is given to such factors as:
management's evaluation of specific loans; the level and composition of
nonperforming loans; historical loss experience; results of examinations by
regulatory agencies; an asset review process; the market value of collateral;
the strength and availability of guaranties; concentrations of credits; and
other judgmental factors. The Company determines separate general allowances
for insurance premium financing and non-insurance premium financing loans. The
Company's loss experience on insurance premium finance lending was adversely
affected during the second half of 1991 by the failure of a non-Best's rated
insurance company and certain charge-offs directed by regulatory authorities.
The Company has implemented certain changes in its lending policies and
procedures with respect to insurance premium finance lending which have reduced
the maximum concentration by insurance carrier except as approved by the
Company and also reduced the amount of loans secured by unearned premiums of
insurance policies written by non-rated carriers. See "Item 1. Business -
Insurance Premium Financing." As a result of these changes in loan policy and
recoveries of previously charged-off insurance premium financing loans, the
Company's historical loss factor on insurance premium financing loans has
improved from 0.15% in 1993 to 0% in 1994. Management believes that all known
losses in the portfolio have been provided for; however, loan losses different
from the allowance provided by the Company are likely, and loan losses in
excess 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 provision taken in 1994, 1993 and 1992 was $106,899, $90,584 and
$299,555, respectively, as compared to annual gross charge-offs for 1994, 1993
and 1992 of $212,266, $247,774 and $672,313, respectively. The recoveries for
these same periods were $61,256, $161,713 and $354,280, respectively. The
positive trend in charge-offs and the overall quality improvements seen within
the loan portfolio (i.e. insurance premium finance loans have been increasing
the volume of loans on A rated insurance companies) have necessitated lower
provisions than in the past. Recoveries have been reducing in response to
lower charge-offs. The recoveries are a direct result of management's
collection efforts. Insurance premium financing had charge-offs of $1,710 and
recoveries of $2,488 in 1994, and charge-offs of $19,380 and recoveries of
$71,790 in 1993. The recoveries associated with insurance premium financing
are the result of management's collection efforts as well as the underlying
unearned premiums securing the charged-off loans. Collections have surpassed
charge-offs in recent years as a result of collections on loans charged-off in
1992.
-38-
<PAGE> 40
The following table sets forth an analysis of the allowance for loan
losses for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Beginning Balance $ 401,227 $ 324,728
---------- ----------
Charge-Offs:
Commercial loans (41,537) ( 48,681)
Installment loans (163,669) (179,713)
Real estate loans (5,350) 0
Insurance premium finance ( 1,710) ( 19,380)
---------- -------
Total Charge-offs ( 212,266) (247,774)
---------- -------
Recoveries:
Commercial loans 15,698 1,412
Installment loans 43,070 88,511
Real estate loans 0 0
Insurance premium finance 2,488 71,790
---------- ----------
Total recoveries 61,256 161,713
---------- ----------
Net Charge-offs (151,010) ( 86,061)
Bank Acquisition 340,832 71,976
Provision for loan losses 106,899 90,584
---------- ----------
Ending Balance $ 697,948 $ 401,227
========== ==========
Period end total loans, net of unearned interest $64,663,350 $31,626,262
========== ==========
Average loans $40,136,926 $26,008,833
========== ==========
Ratio of net charge-offs to average loans 0.4% 0.3%
===== =====
Ratio of provision for loan losses to average loans
0.3% 0.4%
===== =====
Ratio of allowance for loan losses to ending
total loans 1.1% 1.3%
===== =====
Ratio of allowance for loan losses to total
nonperforming loans 574.8% 425.8%
===== =====
Ratio of allowance for loan losses to total
nonperforming assets 287.5% 311.2%
===== =====
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table sets forth an allocation of the allowance for loan
losses among categories as of December 31, 1994 and 1993. Management believes
that any allocation of the allowance for loan losses into categories lends an
appearance of precision which does not exist. The allowance is utilized as a
single unallocated allowance available for all loans. The following allocation
table should not be interpreted as an indication of the specific amounts or the
relative proportion of future charges to the allowance. Such a table is merely
a convenient device for assessing the adequacy of the allowance as a whole.
The following allocation table has been derived by applying a general allowance
to the portfolio as a whole, in addition to specific allowance amounts for
internally classified loans. In retrospect, the specific allocation
-39-
<PAGE> 41
in any particular category may prove excessive or inadequate and consequently
may be reallocated in the future to reflect the then current condition.
Accordingly, the entire allowance is available to absorb losses in any
category.
<TABLE>
<CAPTION>
1994 1993
--------------------------- ---------------------------
Percent of Loans Percent of Loans
by Category to by Category to
Loans, Net of Loans, Net of
Amount Unearned Income Amount Unearned Income
------ --------------- ------ ---------------
<S> <C> <C> <C> <C>
Insurance premium
financing loans $136,326 19.5% $176,540 44.0%
Commercial loans 181,669 26.0% 92,282 23.0%
Installment loans 224,697 32.2% 109,535 27.3%
Real estate loans 155,256 22.3% 22,870 5.7%
------- ----- ------- -----
Total $697,948 100.0% $401,227 100.0%
======= ===== ======= =====
</TABLE>
The allowance allocated to real estate loans did increase
significantly during 1994. The level of real estate loans out-standing on
December 31, 1993 was $1,878,030 as compared to the level outstanding on
December 31, 1994 of $17,297,636 which translates into an increase in real
estate loans of 821.5%. The volume increase in real estate loans has
necessitated an increase in the allocation both in amount and percentage of the
allocation. This increase in volume of real estate loans and the performance
of the insurance premium finance loans has reduced the amount necessary and
percentage of the allowance allocated to the insurance premium finance loans.
INVESTMENT PORTFOLIO
Management determines the appropriate classification of securities at
the time of purchase. If the securities are purchased with the positive
intent and ability to hold the securities to maturity, they are classified as
held-to-maturity and carried at amortized historical cost. Securities to be
held for indefinite periods of time are classified as available-for-sale and
are carried at fair value. The adjusted carrying value of a specific security
sold is used to compute the gain or loss on its sale.
Prior to the acquisition of the bank in Whitesboro, Texas, all
investment securities were classified as held-to-maturity with the exception of
the Federal Reserve Bank stock which was classified as available-for-sale.
During 1994, the Bank's investment portfolio increased by $14,575,690 as a
result of the acquisition of the bank in Whitesboro. At the time of
acquisition, $4,744,575 was classified as held-to-maturity and $9,831,115 was
classified as available-for-sale. As of December 31, 1994, the net unrealized
loss on the available-for-sale securities was $4,301. Proceeds from sales of
held-to-maturity investment securities during the twelve months ended December
31, 1994 were $500,000. These securities were sold
-40-
<PAGE> 42
within ninety (90) days of the call date and were expected to be called.
The amortized cost of the held-to-maturity securities was $9,541,045
as compared to their estimated market value of $9,351,075 on December 31, 1994.
The unrealized loss on the held-to-maturity securities was $189,970 and will
not be realized since management has the intent and the ability to hold these
securities to maturity. The securities within the available-for-sale
classification had an amortized cost of $9,967,510 and an estimated market
value of $9,963,209 on December 31, 1994. The unrealized loss in the
available-for-sale securities was $4,301 as of December 31, 1994. These
unrealized losses are the result of interest rate movements during 1994 and
other market forces, and would be realized in part or in whole if some or all
of the available-for-sale securities were sold and no changes in the
respective market values occurred.
The mortgage backed securities held by the Bank include $1,108,583
fixed rate and $559,883 variable rate as held-to-maturity. The
held-to-maturity mortgage backed securities are stated at cost, adjusted for
amortization of premiums and accretion of fees and discounts using a method
that approximates a level yield. The available-for-sale mortgage backed
securities includes $252,796 fixed rate mortgage backed securities and $65,308
variable rate mortgage backed securities. The available-for-sale securities
are carried at fair value.
The following tables describe the composition of investments by major
category and maturity at December 31, 1994:
<TABLE>
<CAPTION>
Held-to- Available-
Maturity for-Sale
-------- --------
<S> <C> <C>
U.S. Treasury Notes $2,123,659 $1,959,773
U.S. Government Agencies 2,668,466 7,702,661
State and County Municipal Securities 4,748,920
Federal Reserve Bank Stock 280,850
Other Investments 19,925
---------- ----------
Total $9,541,045 $9,963,209
========== ==========
</TABLE>
-41-
<PAGE> 43
<TABLE>
<CAPTION>
Maturing or Repricing
--------------------------------------------------------------------------
After 1 Year After 5 Years but
to 5 Years Within 10 Years After 10 Years
------------------ ---------------- -----------------
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
- ----------------
U.S. Treasury Notes 2,123,659 4.05%
U.S. Government Agencies 1,021,103 4.35% 2,606,346 5.76% 2,121,471 6.09%
Mortgage Backed
Securities 127,972 4.11% 533,540 5.85% 1,006,954 6.25%
--------- --------- ---------
Total 3,272,734 3,139,886 3,128,425
========= ========= =========
Available-for-Sale
- ------------------
U.S. Treasury Notes 1,861,960 5.95% 97,813 7.35%
U.S. Government Agencies 1,490,544 6.24% 4,377,986 7.51% 1,520,328 7.60%
Mortgage Backed Securities 318,104 6.25%
Federal Reserve Bank Stock 280,850
Other Investments 19,925
--------- --------- ---------
Total 3,352,504 4,475,799 2,139,207
----- ========= ========= =========
</TABLE>
DEPOSITS
The following table sets forth certain information regarding the
Bank's average deposits for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
--------------------------------- --------------------------------
Average Percent Average Average Percent Average
Amount of Total Rate Paid Amount of Total Rate Paid
------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
deposits $ 7,996,860 14.7% N/A $ 6,375,876 15.5% N/A
Interest bearing demand
deposits 14,680,300 27.0% 1.8% 12,538,376 30.5% 1.9%
Savings deposits 3,104,155 5.7% 2.5% 3,165,466 7.7% 3.0%
Time deposits 28,530,396 52.6% 4.0% 19,095,938 46.3% 4.1%
---------- ----- --- ----------- ----- ---
Total average deposits $54,311,711 100.0% 3.2% $41,175,656 100.0% 2.7%
========== ===== === ========== ===== ===
</TABLE>
The following table sets forth the remaining maturities for time
deposits of $100,000 or more at December 31, 1994 and 1993:
-42-
<PAGE> 44
<TABLE>
<CAPTION>
Maturity Range 1994 1993
-------------- ---- ----
<S> <C> <C>
Three months or less $3,054,111 $1,819,520
Three through six months 1,562,924 1,811,957
Six through twelve months 3,125,847 1,703,158
Over twelve months 200,000 305,099
--------- ---------
Total $7,942,882 $5,639,734
========= =========
</TABLE>
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has loans, deposits and
other transactions with its executive officers and directors and businesses
with which such persons are associated. It is the Company's policy that all
such transactions are entered into on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated third
parties. During 1994, the Bank extended loans of $105,000 to director-related
companies.
SUBSEQUENT EVENTS
On January 11, 1995 the Company's Common Stock began trading on the
American Stock Exchange, Inc.'s primary list. Trading under the ticker symbol
"SRY," the Common Stock opened trading at $6.25 per share.
On March 9, 1995, the Company signed an agreement with a local
financial institution extending the maturity of the short term note to June 7,
1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required to be
included in this Item 8 are set forth in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has had no changes in accountants or disagreements with
its accountants on accounting and disclosure to report under this Item 9.
-43-
<PAGE> 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is incorporated by reference from the Company's
definitive Proxy Statement for the Company's 1995 annual meeting for the fiscal
year ended December 31, 1994, to be filed no later than April 30, 1995.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference from the Company's
definitive Proxy Statement for the Company's 1995 annual meeting for the fiscal
year ended December 31, 1994, to be filed no later than April 30, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
This information is incorporated by reference from the Company's
definitive Proxy Statement for the Company's 1995 annual meeting for the fiscal
year ended December 31, 1994, to be filed no later than April 30, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference from the Company's
definitive Proxy Statement for the Company's 1995 annual meeting for the fiscal
year ended December 31, 1994, to be filed no later than April 30, 1995.
-44-
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(A) DOCUMENTS FILED AS PART OF REPORT.
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
The following financial statements of the Company required to
be included in Item 8 are filed under Item 14 at the page
indicated:
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 1994 and 1993 F-2
Consolidated Statements of Income for the years ended December
31, 1994, 1993 and 1992 F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
No schedules are required because they are inapplicable or the
information is otherwise shown in the financial statements or
notes thereto.
3. EXHIBITS
2.01 Reorganization Agreement by and between Bancwell Financial
Corp.; Dan W. Brent, Jody Pearson and Joe M. Pearson;
Texas Bank, N.A.; and Surety Capital Corporation dated
July 23, 1992; and Agreement to Merge Bank of East Texas
with and into Texas Bank, N.A. under the Charter of Texas
Bank, N.A. and under the Title of Texas Bank, N.A., dated
July 23, 1992. (5)
2.02 Reorganization Agreement by and between Newell Bancshares,
Inc.; Dan W. Brent, Jody Pearson and Joe M. Pearson; Texas
Bank, N.A.; and Surety Capital Corporation dated July 23,
1992; and Agreement to Merge First State Bank with and
into Texas Bank, N.A. under the Charter of Texas Bank,
N.A. and under the Title of Texas Bank, N.A., dated July
23, 1992. (5)
-45-
<PAGE> 47
2.03 Reorganization Agreement by and between The Farmers
Guaranty State Bank of Kennard; Dr. Frank A. Smith, III;
Surety Bank, National Association; and Surety Capital
Corporation dated February 4, 1994; and Agreement to Merge
The Farmers Guaranty State Bank of Kennard with and into
Surety Bank, National Association under the Charter of
Surety Bank, National Association and under the Title of
Surety Bank, National Association, dated February 4, 1994.
(8)
2.04 Reorganization Agreement between First National Bank;
Lloyd W. Butts, D. C. Degan, Norman Denton, Murriel
Gilbreath, Robert S. Light, and Joe B. Turner, Jr.; Surety
Bank, National Association; and Surety Capital
Corporation, dated May 24, 1994; and Agreement to Merge
between Surety Bank, National Association, First National
Bank and joined in by the Shareholders and Surety
Corporation, dated May 24, 1994. (9)
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. (8)
3.05 Restated Bylaws of the Company.*
4.01 Form of Common Stock Certificate (Specimen). (8)
4.02 Certificate of Elimination of Series of Shares of
Preferred Stock of the Company, as filed with the Delaware
Secretary of State on January 31, 1992. (6) (4.04)
10.01 Letter from Federal Reserve Bank to the Company, dated
November 30, 1989, regarding commitments of the Company
concerning acquisition of Texas National Bank, Lufkin,
Texas. (4) (10.12); as amended by Letter from the Federal
Reserve Bank to the Company, dated March 19, 1993. (7)
10.02 Agreement between Equity Bank for Savings, F.A. and Texas
Bank, N.A. regarding credit cards services, dated August
5, 1991; and letter from Equity Bank for Savings, F.A.
waiving requirement for ratification by its board of
directors, dated August 12, 1991. (5)
-46-
<PAGE> 48
10.03 Agreement by and between Texas Bank, N.A. and Providers
Funding Corporation regarding medical services factoring
arrangements, dated March 13, 1990. (5)
10.04 Form of Providers Funding Corporation factoring agreement.
(5)
10.05 Surety Capital Corporation 1988 Incentive Stock Option
Plan. (6)
10.06 Lease Agreement between Precinct Campus, Inc., as
landlord, and Surety Capital Corporation, as tenant,
regarding offices located in Hurst, Texas, dated February
14, 1994. (8)
10.07 Form of Change in Control Agreements entered into between
Surety Capital Corporation and C. Jack Bean, Bobby W.
Hackler and G. M. Heinzelmann, III, dated August 16,
1994.*
10.08 Letter Loan Agreement by and between Surety Capital
Corporation, as borrower, and Overton Bank and Trust,
N.A., as lender, dated December 9, 1994; Promissory Note
in the original principal amount of $1,750,000; Pledge
Agreement; Guaranty Agreement executed by C. Jack Bean;
and renewal promissory note dated March 9, 1995.*
10.09 Subscription Agreement between Surety Capital Corporation
and John Hancock Bank & Thrift Opportunity Fund, dated
December 8, 1994.*
10.10 Form of Contingent Stock Right for Shares of Common Stock
of Surety Capital Corporation issued in connection with
the December 1994 private placement of shares of common
stock of Surety Capital Corporation.*
10.11 Form of Contingent Stock Right for Shares of Common Stock
or Other Securities of Surety Capital Corporation issued
in connection with the December 1994 private placement of
shares of common stock of Surety Capital Corporation.*
10.12 Surety Capital Corporation 1995 Incentive Stock Option
Plan.*
10.13 401(k) Plan for Employees of Surety Bank, National
Association, effective October 1, 1993; and Amendment No.
1 dated February 14, 1994.*
21 Subsidiaries of the Company.*
23 Consent of Coopers & Lybrand, L.L.P.*
-47-
<PAGE> 49
24 Power of Attorney.*
_______________
(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.
(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, 1989 and
incorporated by reference herein.
(5) Filed with Registration Statement No. 33-44893 on Form S-3 and
incorporated by reference herein.
(6) Filed with the Company's Form 10-K dated December 31, 1991 and
incorporated by reference herein.
(7) Filed with the Company's Form 10-K dated December 31, 1992 and
incorporated by reference herein.
(8) Filed with the Company's Form 10-K dated December 31, 1993 and
incorporated by reference herein.
(9) Filed with the Company's Current Report on Form 8-K dated
December 8, 1994 and incorporated by reference herein.
* Filed herewith.
(B) REPORTS ON FORM 8-K.
On June 15, 1994 the Company filed a current report on Form 8-K with
the Securities and Exchange Commission to report that as of the close of
business on May 31, 1994 the Company and its subsidiary, Surety Bank, National
Association, had consummated the merger of The Farmers Guaranty State Bank of
Kennard, a Texas banking association located in Kennard, Texas, with and into
Surety Bank, National Association.
On December 20, 1994 the Company filed a current report on Form 8-K
with the Securities and Exchange Commission to report that as of the close of
business on December 8, 1994 the Company and its subsidiary, Surety Bank,
National Association, had consummated the merger of First National Bank, a
national banking association located in Whitesboro, Texas, with and into Surety
Bank, National Association. This filing was amended on February 6, 1995.
On January 17, 1995 the Company filed a current report on Form 8-K
with the Securities and Exchange Commission to report that as of the open of
trading on January 11, 1995, the Company's common
-48-
<PAGE> 50
stock began trading on the American Stock Exchange, Inc.'s primary list under
the symbol "SRY."
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
The exhibits listed in Part IV, Item 14(a)(3) of this report, and not
incorporated by reference to a separate file, are included after "Signatures,"
below.
(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X. (INCLUDED
UNDER PART IV, ITEM 14(A)(2)).
All schedules are omitted because they are not required, inapplicable
or the information is otherwise shown in the financial statements or notes
thereto.
-49-
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SURETY CAPITAL CORPORATION
Date: March 28, 1995 By: /s/ C. Jack Bean
--------------------------------
C. Jack Bean, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant in the capacities indicated on this 28th day of March, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ C. Jack Bean Chairman of the Board
---------------------------------------------------- and Director (Principal
C. Jack Bean Executive Officer)
* President and Director
----------------------------------------------------
G. M. Heinzelmann, III
/s/ Bobby W. Hackler Vice President, Secretary and Chief
---------------------------------------------------- Financial Officer (Principal Accounting
Bobby W. Hackler Officer)
* Director
----------------------------------------------------
William B. Byrd
* Director
----------------------------------------------------
Joseph S. Hardin
* Director
----------------------------------------------------
Michael L.Milam
</TABLE>
-50-
<PAGE> 52
<TABLE>
<S> <C>
* Director
----------------------------------------------------
Garrett Morris
* Director
----------------------------------------------------
Cullen W. Turner
*By: /s/ C. Jack Bean
------------------------------------------------
C. Jack Bean, as Attorney-
in-Fact for each of the
persons indicated
</TABLE>
-51-
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Surety Capital Corporation
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Surety Capital
Corporation as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Surety Capital
Corporation as of December 31, 1994 and 1993, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, Surety Capital Corporation
changed its method of accounting for investment securities and income taxes in
1994 and 1993, respectively.
/s/ COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
January 27, 1995, except as to the information
presented in Note 7, for which
the date is March 8, 1995
F-1
<PAGE> 54
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
ASSETS
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C>
Assets:
Cash and due from banks $ 3,929,360 $ 2,436,487
Federal funds sold 7,265,000 4,450,000
------------ -----------
Cash and cash equivalents 11,194,360 6,886,487
Interest bearing deposits in financial institutions 1,524,188 648,000
Investment securities 19,504,254 8,218,029
Net loans 63,965,402 31,225,035
Premises and equipment, net 2,393,601 1,304,845
Accrued interest receivable 623,737 161,470
Other real estate and repossessed assets 121,359 34,676
Net deferred tax asset 135,774
Other assets 316,117 115,128
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $175,240 and
$124,039 at December 31, 1994 and 1993, respectively 2,515,519 442,588
------------ -----------
Total assets $102,294,311 $49,036,258
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits $ 12,191,183 $ 7,311,674
Savings, NOW and money markets 29,875,481 17,040,843
Time deposits, $100,000 and over 7,942,882 5,639,734
Other time deposits 42,017,576 13,603,668
------------ -----------
Total deposits 92,027,122 43,595,919
Note payable 1,750,000
Accrued interest payable and other liabilities 451,508 159,351
------------ ------------
Total liabilities 94,228,630 43,755,270
------------ -----------
Commitments and contingent liabilities (Notes 8 and 15)
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
3,040,829 and 2,273,487 shares issued and outstanding
at December 31, 1994 and 1993, respectively 30,408 22,734
Additional paid-in capital 8,113,214 5,806,116
Deficit (75,102) (547,862)
Unrealized loss on available-for-sale securities (2,839)
-------------- ---------------
Total shareholders' equity 8,065,681 5,280,988
------------- -----------
Total liabilities and shareholders' equity $102,294,311 $49,036,258
============ ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
<PAGE> 55
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income:
Commercial and real estate loans $1,422,911 $1,034,793 $ 774,203
Consumer loans 1,059,188 966,458 858,543
Insurance premium financing 2,172,038 1,302,854 1,471,226
Federal funds sold 302,621 162,830 222,146
Investment securities and interest bearing deposits 430,251 528,126 17,455
Other interest income 395
------------- -------------- ------------
Total interest income 5,387,009 3,995,061 3,343,968
------------- -------------- ------------
Interest expense:
Savings, NOW and money markets 353,123 306,899 240,057
Time deposits, $100,000 and over 362,700 198,151 207,547
Other time deposits 760,833 618,534 530,111
Other interest expense 11,075
------------- -------------- ------------
Total interest expense 1,487,731 1,123,584 977,715
------------- -------------- ------------
Net interest income before provision for loan losses 3,899,278 2,871,477 2,366,253
Provision for loan losses 106,899 90,584 299,555
------------- -------------- ------------
Net interest income 3,792,379 2,780,893 2,066,698
------------- -------------- ------------
Noninterest income 1,160,007 1,181,808 784,066
------------- -------------- ------------
Noninterest expense:
Salaries and employee benefits 2,201,188 1,715,952 1,194,179
Occupancy and equipment 669,936 495,055 411,587
General and administrative 1,590,814 1,380,971 1,228,574
------------- -------------- ------------
Total noninterest expense 4,461,938 3,591,978 2,834,340
------------- -------------- ------------
Income before income taxes 490,448 370,723 16,424
Income tax expense:
Current 36,697
Deferred (19,009)
------------- -------------- ------------
Net income $ 472,760 $ 370,723 $ 16,424
============= ============== ============
Net income per share of common stock $.20 $.19 $.00
==== ==== ====
Weighted average shares outstanding 2,393,841 2,001,689 1,951,873
============= ============== ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE> 56
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Unrealized
Common Stock Loss on
------------------- Additional Available-
Par Paid-in for-Sale Total
Shares Value Capital Deficit Securities Equity
------ ----- ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at 12/31/91 1,767,062 $ 17,670 $4,180,134 $(935,009) $3,262,795
Sale of common stock 214,385 2,144 776,999 779,143
Net income 16,424 16,424
--------- -------- ---------- --------- ----------- -----------
Balance at 12/31/92 1,981,447 19,814 4,957,133 (918,585) 4,058,362
Sale of common stock 292,040 2,920 848,983 851,903
Net income 370,723 370,723
--------- -------- ---------- --------- ----------- -----------
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
========= ======== ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE> 57
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 472,760 $ 370,723 $ 16,424
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan loss 106,899 90,584 299,555
Depreciation 330,644 211,934 201,144
Amortization 51,201 35,567 29,388
Gain on sale or disposal of assets (15,508) (8,286) (5,587)
Gain on sale of investment securities (90,763)
Net change in other assets (82,094) 216,152 (41,185)
Net change in deferred tax asset (135,774)
Net increase in accrued interest
payable and other liabilities (125,277) (2,424) (213,945)
----------- ----------- -----------
Net cash provided by operating activities 602,851 823,487 285,794
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of held-to-maturity securities 500,000 6,084,844
Proceeds from the maturity of held-to-maturity
securities and interest bearing deposits 5,269,724 2,799,980
Proceeds from maturity of available-for-sale securities 169,971
Purchase of premises and equipment (420,487) (560,529) (156,906)
Net increase in loans (7,624,058) (8,448,392) (401,553)
Proceeds from sale of assets 16,308 72,526
Purchase of held-to-maturity securities (316,276)
Purchase of investment securities (3,532,926) (543,500)
Payments received on purchased medical claims
receivable 12,290,141 11,585,316 11,120,480
Purchases of medical claims receivable (11,229,044) (12,564,026) (11,299,682)
Direct cost incurred for bank acquisitions (115,039) (71,935)
Net cash acquired through purchase of banks 2,624,200 1,441,254
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,165,440 (3,194,479) (1,280,570)
----------- ----------- -----------
Cash flows from financing activities:
Net change in deposits (1,525,190) (1,298,634) 3,505,370
Proceeds from the sale of common stock 2,314,772 851,903 779,143
Proceeds from borrowings on note payable 1,750,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,539,582 (446,731) 4,284,513
----------- ----------- -----------
Net increase (decrease) in cash 4,307,873 (2,817,723) 3,289,737
Beginning cash and cash equivalents 6,886,487 9,704,210 6,414,473
----------- ----------- -----------
Ending cash and cash equivalents $11,194,360 $ 6,886,487 $ 9,704,210
=========== =========== ===========
Supplemental disclosure:
Cash paid during the period for interest $ 1,339,223 $ 1,074,507 $ 1,021,014
=========== =========== ===========
Cash paid during the period for income taxes $ 12,000
=========== =========== ===========
</TABLE>
(Continued)
F-5
<PAGE> 58
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
for the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest bearing deposits in financial institutions $ 1,588,931 $ 198,000
Investment securities 16,196,901 13,335,164
Net loans 26,363,109 2,869,616
Premises and equipment, net 999,713 92,972
Other assets 474,002 152,533
Excess cost over fair value of net assets acquired 2,124,132 61,308
Deposits (49,956,393) (18,054,279)
Other liabilities (414,595) (96,568)
------------ ------------
Net cash acquired through purchase of banks $(2,624,200) $(1,441,254)
=========== ===========
Supplemental schedule of noncash investing and
financing activities:
Additions to other real estate and
repossessed assets $241,189 $ 149,991 $ 26,658
Additions to loans to facilitate the sale of
other real estate and repossessed assets 162,385
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE> 59
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary, Surety Bank, National Association,
("Bank"), which is 99% owned and was acquired on December 30, 1989. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold. Generally,
federal funds are sold for one day periods.
Investment Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"). This statement addresses the
accounting and reporting for investments in equity securities that have
readily determined fair values for all investments in debt securities.
Management determines the appropriate classification of securities at the
time of purchase. If the securities are purchased with the positive
intent and the ability to hold the securities until maturity, they are
classified as held-to-maturity and carried at historical cost, adjusted
for amortization of premiums and accretion of fees and discounts using a
method that approximates the interest method. Securities to be held for
indefinite periods of time are classified as available-for-sale and
carried at fair value. Securities purchased and held principally for the
purpose of selling them in the near term are classified as trading. The
Company has no securities classified as trading as of December 31, 1994.
The cost of securities sold is based on the specific identification
method.
The effect at December 31, 1994 of SFAS 115 was a decrease in
stockholders' equity of $2,839 (net of $1,462 of deferred income tax) to
reflect the net unrealized holding loss on available-for-sale securities.
The available-for-sale classification includes securities which were
acquired through the acquisition of the First National Bank of Whitesboro,
which were marked to market as of the acquisition date at December 8,
1994.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
interest and an allowance for loan losses. The allowance for loan losses
is established through a provision for loan losses charged against current
earnings. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
The allowance for loan losses is an amount that management believes will
be adequate to absorb possible losses on existing loans that may become
uncollectible, based upon evaluation of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
F-7
<PAGE> 60
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Loans and Allowance for Loan Losses, continued
Interest income on insurance premium financing loans and installment loans
is recognized by a method which approximates the interest method.
Interest income on commercial and real estate loans is accrued daily on
the amount of outstanding principal. Accrual of interest is discontinued
on a loan when management believes, after considering economic and
business conditions and collection efforts, that a borrower's financial
condition is such that collection of interest and principal is doubtful.
Management evaluates the book value (including accrued interest) and
collateral value on loans placed on nonaccrual status and provides
specific allowance for loan losses as deemed appropriate.
Certain fees and costs associated with the origination of loans are
deferred and recognized over the estimated lives of the related loans as
an adjustment to yield.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method at rates
sufficient to amortize the cost over the estimated lives of the assets.
Expenditures for repairs and maintenance are expensed as incurred, and
renewals and betterments that extend the lives of assets are capitalized.
Cost and accumulated depreciation are eliminated from the accounts when
assets are sold or retired and any resulting gain or loss is reflected in
operations in the year of disposition.
Other Real Estate and Repossessed Assets
Foreclosed real estate and other assets are recorded at the lower of the
unpaid balance of the related loan or the fair market value of the
property. Any write down to fair market value at the date of acquisition
is charged against the allowance for loan losses. Any subsequent write
downs are reflected in operations.
Income Per Share
Net income per share of common stock is computed based upon the weighted
average number of shares of common stock outstanding during the years
ended December 31, 1994, 1993 and 1992.
Income Taxes
During 1993, the Company adopted Statement of Accounting Standards (SAS)
No. 109 whereby the method of accounting for income taxes utilized 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 include:
allowances for possible loan losses, property and equipment, investment
securities and net operating loss carryforwards. 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. The Company has a tax sharing
arrangement with its subsidiary.
Purchase Method of Accounting
Net assets of companies acquired in purchase transactions are recorded at
their fair value at the date of acquisition. The excess of purchase price
over fair value of net assets acquired is amortized on a straight-line
basis generally over a 15-year period. The Company continually
re-evaluates the propriety of the carrying amount of such intangible
assets, as well as their amortization period, to determine
F-8
<PAGE> 61
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Purchase Method of Accounting, continued
whether current events and circumstances warrant adjustments to the
carrying value and/or revised estimates of the period of benefit. At this
time, the Company believes that no significant impairment of such
intangible assets has occurred and that no reduction of amortization
period is warranted.
Reclassifications
Certain balances for the year ended December 31, 1993 have been
reclassified to conform to the presentation adopted for the year ended
December 31, 1994. These reclassifications had no effect on net income,
total assets, total liabilities, or shareholders' equity as previously
reported.
3. Acquisitions:
THE FARMERS GUARANTY STATE BANK OF KENNARD
On February 4, 1994, the 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, the 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, subject to certain agreed upon adjustments.
Pursuant to the merger agreement, the Bank purchased all of the assets and
assumed all of the obligations of The Farmers Guaranty State Bank of
Kennard. The merger was financed through a $1,000,000 capital
contribution from the Company and internally generated funds.
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 pro forma
information for the twelve months ended December 31, 1994 and 1993,
presented below, reflects the acquisition of the bank, as if it had been
acquired as of January 1, 1993. Pro forma adjustments consisting of
provision for income taxes have been made to properly reflect the
unaudited pro forma information.
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Interest income $5,744,113 $4,976,794
Net income 352,425 437,237
Net income per share of common stock $0.15 $0.22
</TABLE>
F-9
<PAGE> 62
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. 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. The Company also obtained a 90-day loan in the
amount of $1,750,000 (see Note 7).
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.
The consolidated results of operations include the operations of the
acquired bank subsequent to December 1, 1994. The unaudited pro forma
information for the twelve months ended December 31, 1994 and 1993,
presented below, reflects the acquisition of the bank, as if it had been
acquired as of January 1, 1993. 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, 1993 and was converted to a five-year note in July of 1993.
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Interest income $8,070,348 $6,627,062
Net income 922,300 789,232
Net income per share of common stock $0.39 $0.39
</TABLE>
F-10
<PAGE> 63
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investment Securities:
At December 31, 1994, 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 $ 2,123,659 $ 19,105 $ 2,104,554
Obligations of other U.S.
Government agencies and
corporations 2,668,466 170,865 2,497,601
State and county municipals 4,748,920 4,748,920
----------- ----------- ---------- -----------
9,541,045 189,970 9,351,075
----------- ----------- ---------- -----------
AVAILABLE-FOR-SALE:
U.S. Treasury 1,964,627 4,854 1,959,773
Obligations of other U.S.
Government agencies and
corporations 7,702,108 $ 553 7,702,661
Federal Reserve Bank stock 280,850 280,850
Other investment securities 19,925 19,925
----------- ----------- ---------- -----------
9,967,510 553 4,854 9,963,209
----------- ----------- ---------- -----------
$19,508,555 $ 553 $ 194,824 $19,314,284
=========== =========== ========== ===========
</TABLE>
At December 31, 1993, 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>
U.S. Treasury $2,085,555 $ 10,345 $2,095,900
Obligations of other U.S.
Government agencies
and corporations 6,023,774 21,537 $ 23,196 6,022,115
Federal Reserve Bank stock 108,700 108,700
---------- -------- -------- ----------
$8,218,029 $ 31,882 $ 23,196 $8,226,715
========== ======== ======== ==========
</TABLE>
F-11
<PAGE> 64
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Investment Securities, continued:
The amortized cost and estimated market value of investment securities at
December 31, 1994, 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 $ 3,144,762 $ 3,039,407
Due after one year through five years 2,606,346 2,606,346
Due after five years through ten years 2,121,471 2,121,471
Mortgage-backed securities 1,668,466 1,583,851
----------- -----------
9,541,045 9,351,075
----------- -----------
AVAILABLE-FOR-SALE:
Due within one year 3,352,504 3,344,039
Due after one year through five years 4,475,799 4,482,206
Due after five years through ten years 1,520,328 1,522,789
Mortgage-backed securities 318,104 313,400
Other securities 300,775 300,775
----------- ------------
9,967,510 9,963,209
----------- -----------
Total $19,508,555 $19,314,284
=========== ===========
</TABLE>
Proceeds from sales of held-to-maturity investment securities during the
twelve months ended December 31, 1994 were $500,000 with no gross
recognized gains or losses. These securities were sold within 90 days of
the call date and were expected to be called.
Proceeds from sales of investment securities during the twelve months
ended December 31, 1993 were $6,084,844 with gross recognized gains and
losses of $93,859 and $3,096, respectively. During the year ended
December 31, 1992, there were no sales of investment securities.
At December 31, 1994 and 1993, 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 December 31, 1994 and 1993.
At December 31, 1994 and 1993, securities with a carrying amount of
$14,319,159 and $1,450,000, respectively, were pledged as collateral for
public deposits, as required or permitted by law.
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 the available-for-sale securities for 1994 was $4,301.
F-12
<PAGE> 65
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Net Loans:
The loan portfolio was composed of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Premium financing $20,931,642 $14,518,680
Commercial loans 13,205,698 5,204,120
Real estate loans 17,297,636 1,878,030
Installment loans 12,029,243 9,016,179
Medical claims receivable 2,705,974 2,379,482
----------- -----------
Total loans 66,170,193 32,996,491
Deduct:
Unearned interest (1,506,843) (1,370,229)
Allowance for loan losses (697,948) (401,227)
----------- ------------
Net loans $63,965,402 $31,225,035
=========== ===========
</TABLE>
A summary of the changes in the allowance for loan losses for the years
ended December 31, 1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Beginning balance $401,227 $324,728 $343,206
Provision for loan losses 106,899 90,584 299,555
Bank acquisition 340,832 71,976
Loans charged off (212,266) (247,774) (672,313)
Recoveries 61,256 161,713 354,280
-------- -------- --------
$697,948 $401,227 $324,728
======== ======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $83,000 and $48,000 at December 31, 1994 and 1993,
respectively. Included in commercial and installment loans at December
31, 1994 and 1993, are approximately $387,797 and $310,000, respectively,
of loans to employees, officers, and/or directors, or their interests.
F-13
<PAGE> 66
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Premises and Equipment:
Premises and equipment at December 31, 1994 and 1993 are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Land $ 145,116 $ 88,616
Building 1,183,960 495,040
Furniture, fixtures and computers 1,666,434 1,189,832
Automobiles 225,282 142,851
Leasehold improvements 92,118
---------- ----------
3,312,910 1,916,339
Less accumulated depreciation (919,309) (611,494)
---------- ----------
Net premises and equipment $2,393,601 $1,304,845
========== ==========
</TABLE>
7. Note Payable:
The Company obtained a $1,750,000, 90-day note payable to Overton Bank
and Trust, N.A. ("Overton Bank"). The proceeds from this note were used
to purchase The First National Bank of Whitesboro. The note bears
interest at two percent (2%) above Overton Bank's prime rate of interest
(9% at December 31, 1994), with principal and interest due at maturity.
The note is secured by all of the stock of the Bank owned by the Company
and by the personal guarantee of C. Jack Bean, Chairman of the Board of
the Company. On March 8, 1994, the loan was renewed with the same terms
for an additional 90 days.
8. Financial Instruments With Off-Balance-Sheet Risk and Concentration of
Credit Risk:
The Company's subsidiary Bank is party to financial instruments with
off-balance-sheet risk, entered into in the normal course of business to
meet the financing needs of its customers. These financial instruments
include loan commitments and letters of credit. The instruments involve,
to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the financial statements.
The subsidiary Bank's exposure to credit loss in the event of
nonperformance by counterparties to loan commitments and letters of
credit is represented by the contractual amount of those instruments.
The subsidiary Bank uses the same credit policies in making commitments
and conditional obligations as are used in underwriting on-balance sheet
instruments.
The total amounts of financial instruments with off-balance sheet risk at
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Unfunded loan commitments $1,832,576 $944,000
Letters of credit 181,900 105,000
Credit card lines 338,570 404,000
</TABLE>
F-14
<PAGE> 67
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Financial Instruments With Off-Balance-Sheet Risk and Concentration of
Credit Risk, continued:
Since many of the loan commitments may expire without being drawn upon,
the total commitment amount does not necessarily represent future cash
requirements. Loans are made in accordance with formal written loan
policies. The subsidiary Bank evaluates each customer's credit
worthiness on a case by case basis. The amount of collateral obtained,
if deemed necessary by the subsidiary Bank, upon extension of credit is
based on management's evaluation of the counterparty. Collateral held
varies, but may include cash, accounts receivable, inventory, property,
equipment and real estate.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The
subsidiary Bank had certificates of deposit, or other deposit accounts,
in the amount of $254,400 and $90,000 at December 31, 1994 and 1993,
respectively, as collateral supporting those letter of credit commitments
for which collateral is deemed necessary. There were no deposit accounts
held as collateral for letters of credit at December 31, 1992. Credit
card lines available at December 31, 1994 and 1993 are fully secured by
deposits held at the Company's subsidiary Bank.
The subsidiary Bank sold $7,265,000 and $4,450,000 in federal funds at
December 31, 1994 and 1993, respectively. These funds represent
uncollateralized loans made by the Bank, in varying amounts, to
commercial banks with whom the subsidiary Bank has correspondent
relationships. The subsidiary Bank maintains deposits with other
financial institutions in amounts which exceed FDIC insurance coverage.
At December 31, 1994 and 1993, approximately $1,819,121 and $1,201,000,
respectively, of such balances were uninsured.
The subsidiary Bank has geographic concentrations of credit in its three
principal trade areas, Grayson County, Angelina County and Tarrant
County, Texas. Additionally, the subsidiary Bank has a significant
concentration of credit, based upon like collateral, in its insurance
premium finance portfolio. Insurance premium finance comprises
approximately $20,500,000 or 32% and $14,200,000 or 45% of consolidated
total loans net of unearned interest as of December 31, 1994 and 1993,
respectively. As of December 31, 1994, no group of borrowers financing
insurance policies through any one insurance company represents greater
than 10% of the Bank's premium finance loans.
9. 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 year 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.
Subsequent to December 31, 1993, 100,000 shares of the Company's common
stock were sold in private placements for total gross consideration of
$450,000. During the year ended December 31, 1992, 214,385 shares of the
Company's common stock were sold in private placements for total
consideration, net of expenses, of $779,143.
F-15
<PAGE> 68
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. Stock Options and Warrants:
The Company has an incentive stock option plan for key employees, under
which 100,000 shares of the Company's common stock have been reserved for
issuance. The plan stipulates that the options may be exercised at any
time after grant date, but expire upon the termination of the employee or
after five years from the grant date.
<TABLE>
<CAPTION>
Shares Price
Under Per
Option Share
------ -----
<S> <C> <C>
Outstanding at December 31, 1991 25,895 $2.743 to $6.531
Granted 9,096 $6.5625 to $7.2188
Exercised (16,438) $2.343 to $6.5315
Cancelled -
------
Outstanding at December 31, 1992 18,553 $2.743 to $6.531
Granted 10,000 $5.00 to $5.50
Exercised -
Cancelled (1,492)
------
Outstanding at December 31, 1993 27,061 $2.743 to $6.531
Granted 10,000 $4.50 to $4.95
Exercised
Cancelled (2,500)
------
Outstanding at December 31, 1994 34,561
=======
</TABLE>
On April 1, 1994, the Company issued 4 warrants for the purchase of
355,000 shares of Surety Capital Corporation common stock at an exercise
price of $4.50 per share. These warrants expire on March 31, 1995.
On June 17, 1994, the Company issued 1 warrant for the purchase of 35,500
shares of Surety Capital Corporation common stock with an exercise price
of $4.50 per share. This warrants expires on June 16, 1995.
As of December 31, 1994, there are 5 warrants outstanding for the
purchase of 390,500 shares of Surety Capital Corporation common stock
with an exercise price of $4.50 per share. These warrants were issued in
connection with the private placement completed in 1993.
11. Net Income Per Common Share:
Net income per common share for the years ended December 31, 1994, 1993
and 1992 was based upon 2,393,841, 2,001,689, and 1,951,873 shares of
common stock outstanding, respectively.
F-16
<PAGE> 69
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Income Per Common Share, continued:
The effects of the exercise of stock options and warrants are not
material and have not been considered in the calculation of income per
common share.
12. Employee Benefit Plan:
Effective October 1, 1993, the Company adopted the Surety Bank 401(k)
Plan ("Plan"). All full-time employees are eligible for participation.
Under the terms of the Plan, eligible employees are allowed to contribute
up to 10% of their base pay. The Company contributes amounts equal to 5%
of the employee's contribution to a maximum of 5% of the employee's pay,
subject to statutory limits. The expense for the Plan in 1994 and 1993
was $13,650 and $2,889, respectively. Contributions to the plan during
1994 and 1993 were $30,000 and $25,000, respectively.
13. Federal Income Tax:
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". In
accordance with the provisions of this statement, the Company elected not
to restate prior years and has determined that the cumulative effect of
implementation was not significant.
The components of the net deferred asset recognized at December 31, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Deferred tax liability:
Depreciation and amortization $350,066 $135,696
Securities 34,286 34,286
Deferred loans costs 18,700
Other 58,604
-------- -----------
461,656 169,982
-------- -----------
Deferred tax asset:
Tax net operating losses 163,366 270,558
Depreciation 55,988 47,973
Allowance for loan losses 128,080 26,307
Securities 224,238
Other 25,758 9,429
-------- -----------
597,430 354,267
Valuation allowance -0- (184,285)
-------- -----------
Deferred tax asset 135,774 169,982
-------- -----------
Net deferred tax asset $135,774 $ -0-
======== ===========
</TABLE>
Gross net operating losses and the related valuation allowance disclosed
in 1993 were adjusted to exclude net operating losses which the Company
would not be able to utilize. This adjustment had no impact on the net
deferred tax asset.
F-17
<PAGE> 70
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Federal Income Tax, continued:
The Company's effective tax rate on income before income taxes differs
from the U.S. statutory tax rate as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate (benefit) 34.0% 34.0% 34.0%
Other (2.9)
Valuation allowance (33.0) (31.1)
Utilization of net operating losses (34.0)
Tax-exempt interest (1.1)
----- ----- -----
Effective tax rate (.1)% -0- -0-
===== ===== =====
</TABLE>
As of December 31, 1994, the Company has a net operating loss
carryforward of approximately $480,473 for income tax reporting purposes
which expires, if not used, in 2002 through 2008. The utilization of
approximately $353,652 of the net operating loss carryforward is limited
by Section 382 of the Internal Revenue Code to approximately $59,000
annually until its expiration in 1999 and $15,000 thereafter through
2004.
14. Other Noninterest Income and Expense:
Other noninterest income and expense for the years ended December 31,
1994, 1993 and 1992 was composed of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Noninterest income:
Nonsufficient fund charges $ 263,315 $ 248,890 $145,365
Late fee charges 426,476 304,354 278,520
Service charges 163,336 120,143 47,717
Collection fees 96,162 71,760 44,351
Credit life insurance 44,402 49,777 46,346
Premium finance servicing 161,310 101,853
Secured credit card annual fee 15,905 36,968 52,837
Other 150,411 97,843 67,077
Gain on sale of investment 90,763
---------- ---------- --------
Total $1,160,007 $1,181,808 $784,066
========== ========== ========
</TABLE>
F-18
<PAGE> 71
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. Other Noninterest Income and Expense, continued:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
General and administrative expense:
Professional fees $ 315,434 $ 362,571 $ 351,593
Office supplies 201,028 165,416 126,880
Travel and entertainment 60,162 62,184 42,593
Telephone 128,407 103,921 78,384
Advertising 54,683 60,302 88,589
Postage 133,887 125,092 105,229
Amortization of intangibles 51,201 35,567 29,388
Dues and subscriptions 54,609 26,707 20,935
Insurance 97,473 59,882 25,519
Credit cards 59,573 63,298 83,941
Bank service charge 25,808 29,018 17,922
FDIC assessment 133,112 71,003 56,594
Credit reports 17,714 48,495 27,256
Operational losses 62,044
Other 257,723 167,515 111,707
----------- ----------- ----------
Total $1,590,814 $1,380,971 $1,228,574
========== ========== ==========
</TABLE>
15. Commitments and Contingencies:
As of December 31, 1994, the Company leased its office space in Hurst,
Texas under a noncancellable operating lease. The lease expires December
31, 1999. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1995 $ 94,713
1996 94,713
1997 99,642
1998 99,642
1999 104,570
--------
Total $493,280
========
</TABLE>
Rent expense was $83,062 for the year ended December 31, 1994, $56,982
for the year ended December 31, 1993, and $55,310 for the year ended
December 31, 1992.
The Company adopted an agreement which compensates certain executive
officers at a rate of three times their annual salary for a change in
control of approximately 20%.
F-19
<PAGE> 72
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Parent Company Financial Information:
Condensed Parent Company Only
Statements of Condition
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1993
---- ----
<S> <C> <C>
Assets:
Cash $ 324,658 $1,010,573
Interest bearing deposits in financial institutions 450,000
Receivable from subsidiary 242,493
Investment in Subsidiary, at equity 9,211,212 3,820,415
Net deferred tax asset 30,232
Other assets 21,000
---------- ----------
Total assets $9,829,595 $5,280,988
========== ==========
Liabilities:
Note payable $1,750,000 $ -0-
Accrued liabilities 13,914 -0-
---------- ----------
Total liabilities 1,763,914 -0-
---------- ----------
Shareholders' equity:
Common stock 30,408 22,734
Additional paid-in capital 8,113,214 5,806,116
Deficit (75,102) (547,862)
Unrealized loss on available-for-sale securities (2,839)
---------- ----------
Total shareholders' equity 8,065,681 5,280,988
---------- ----------
Total liabilities and shareholders' equity $9,829,595 $5,280,988
========== ==========
</TABLE>
F-20
<PAGE> 73
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Parent Company Financial Information, continued:
Condensed Parent Company Only
Statements of Income
for the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income $ 24,685 $ 12,813 $ 13,517
Interest expense (11,075) 0 0
-------- -------- --------
Net interest income before
provision for loan loss 13,610 12,813 13,517
Recovery on loan loss 3,101 64,416 65,445
-------- -------- --------
Net interest income 16,711 77,229 78,962
Noninterest income 0 0 0
Noninterest expense (207,473) (255,999) (355,862)
Equity in net income of subsidiary 390,797 549,493 293,324
-------- -------- --------
Net income before income taxes 200,035 370,723 16,424
Income tax expense (benefit):
Current (242,493)
Deferred (30,232)
-------- -------- --------
Net income $472,760 $370,723 $ 16,424
======== ======== ========
</TABLE>
F-21
<PAGE> 74
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. Parent Company Financial Information, continued:
Condensed Parent Company Only
Statements of Cash Flows
for the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 472,760 $ 370,723 $ 16,424
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of subsidiary (390,797) (549,493) (293,324)
Recovery on loan losses (64,416) (65,445)
Depreciation and amortization 35,015
Net increase (decrease) in accrued liabilities 11,075 (155,648)
Net increase in other assets (21,000)
Net increase in deferred asset (30,232)
---------- ---------- --------
Net cash provided (used) in operating activities 41,806 (243,186) (462,978)
---------- ---------- --------
Cash flows from investing activities:
Proceeds from the maturity of interest
bearing deposits 450,000 50,000
Purchase of interest bearing deposits
in financial institutions (500,000)
Net increase in receivable from subsidiary (242,493)
Net (increase) decrease in loans 207,582 185,480
Direct cost incurred for probable
bank acquisitions 71,935 (71,935)
Investment in subsidiary (5,000,000)
---------- ---------- --------
Net cash (used) provided in investing
activities (4,792,493) 329,517 (386,455)
---------- ---------- --------
Cash flows from financing activities:
Sale of common stock 2,314,772 851,903 779,143
Short-term debt 1,750,000
---------- ---------- --------
Net cash provided in financing activities 4,064,772 851,903 779,143
---------- ---------- --------
Net (decrease) increase in cash (685,915) 938,234 (70,290)
Beginning cash and cash equivalents 1,010,573 72,339 142,629
---------- ---------- --------
Ending cash and cash equivalents $ 324,658 $1,010,573 $ 72,339
========== ========== ========
</TABLE>
F-22
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Surety Capital Corporation on Form S-2 (File No. 33-89264) and Form S-3 (File
No. 33-44893) of our report dated January 27, 1995, except as to the
information presented in Note 7, for which the date is March 8, 1995 on our
audits of the consolidated financial statements of Surety Capital Corporation
as of December 31, 1994 and 1993, and for each of the three years in the period
ended December 31, 1994, which report is included in the Annual Report on Form
10-K for the year ended December 31, 1994. We also consent to the reference to
our firm under the caption "Experts."
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P.
Fort Worth, Texas
March 27, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 3,929,360
<INT-BEARING-DEPOSITS> 1,524,188
<FED-FUNDS-SOLD> 7,265,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,963,209
<INVESTMENTS-CARRYING> 9,541,045
<INVESTMENTS-MARKET> 9,351,075
<LOANS> 64,663,350
<ALLOWANCE> 697,948
<TOTAL-ASSETS> 102,294,311
<DEPOSITS> 92,027,122
<SHORT-TERM> 1,750,000
<LIABILITIES-OTHER> 451,508
<LONG-TERM> 0
<COMMON> 30,408
0
0
<OTHER-SE> 8,035,273
<TOTAL-LIABILITIES-AND-EQUITY> 94,228,630
<INTEREST-LOAN> 4,654,137
<INTEREST-INVEST> 732,872
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,387,009
<INTEREST-DEPOSIT> 1,476,656
<INTEREST-EXPENSE> 11,075
<INTEREST-INCOME-NET> 3,899,278
<LOAN-LOSSES> 106,899
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,461,938
<INCOME-PRETAX> 490,448
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 472,760
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 3,899,278
<LOANS-NON> 83,000
<LOANS-PAST> 119,442
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,051,656
<ALLOWANCE-OPEN> 401,227
<CHARGE-OFFS> 212,266
<RECOVERIES> 61,256
<ALLOWANCE-CLOSE> 697,948
<ALLOWANCE-DOMESTIC> 639,020
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 58,926
</TABLE>
<PAGE> 1
SURETY CAPITAL CORPORATION
SUBSCRIPTION AGREEMENT
REGARDING OFFERING OF COMMON STOCK
________________________________________________________________________________
To: Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, TX 76054
Attention: C. Jack Bean, President
The undersigned purchaser understands that Surety Capital Corporation
(the "Company") is offering for sale up to 620,000 shares of common stock,
$0.01 par value (the "Company Shares").
1. SUBSCRIPTION FOR THE SHARES. Subject to the terms and conditions
of this Subscription Agreement ("Agreement"), the undersigned hereby
irrevocably subscribes for _______________ Shares for an aggregate purchase
price of $__________________________________(at a purchase price of $________
per Share). The purchase price shall be paid in cash upon execution of this
Agreement. Upon payment of the purchase price above, the shares shall be
deemed to be fully paid, validly issued and nonassessable shares of common
stock.
2. PROSPECTUS AND ACCOMPANYING INFORMATION. Purchaser acknowledges
that purchaser has received the following documents from the Company: (i) the
prospectus under which the Company is offering 620,000 shares; (ii) the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1994; and (iii) the quarterly report of the Company on Form 10-Q for the
quarter ended March 31, l995.
3. DELIVERY OF SHARES. All shares subscribed for hereunder shall be
delivered to the purchaser, registered in the name or names set out below, as
soon as practical after the close of the offering. Certificates evidencing
such shares shall not contain any restrictive legend.
4. ENTIRE AGREEMENT. This Agreement constitutes the whole
agreement of the parties and supersedes any commitment, agreement, memorandum
or understanding previously made by the parties, or any of them, with respect
to the subject matter of this Agreement.
Dated____________________________,1995.
By:____________________________________
Authorized Signature
______________________________________
(Print Name)
_______________________________________
(Title)
SUBSCRIPTION AGREEMENT PAGE 1
