FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Mark One
{X} Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1996.
{ } 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 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
---- ----
Common stock outstanding on July 31, 1996, 5,748,119 shares
1
<PAGE>
SURETY CAPITAL CORPORATION
<TABLE>
<CAPTION>
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ---------------------------- --------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1996 and December 31, 1995
unaudited)
3
Consolidated Statements of Income for the Six Months Ended
June 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Income for the Three Months Ended
June 30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the Six
Months Ended June 30, 1996 and for the Year Ended December
31, 1995 (unaudited)
6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
PART II. - OTHER INFORMATION
- -------- -------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
- -------
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
- -------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(unaudited)
<S> <C> <C>
ASSETS
June 30, December 31,
1996 1995
--------------- ----------------
Assets:
Cash and due from banks $7,519,519 $4,727,018
Federal funds sold 18,435,000 18,490,000
Interest bearing deposits in financial institutions 381,805 1,046,297
Investment securities:
Available-for-sale 17,628,242 10,128,157
Held-to-maturity 23,799,657 13,780,538
--------------- ----------------
Total investment securities 41,427,899 23,908,695
Loans 92,862,728 68,991,700
Less: Unearned interest (2,408,274) (1,889,461)
Allowance for credit losses (1,295,165) (702,927)
--------------- ----------------
Net loans 89,159,289 66,399,312
Premises and equipment, net 4,139,877 2,775,688
Accrued interest receivable 1,198,313 781,031
Other real estate and repossessed assets 673,121 85,528
Other assets 841,746 467,147
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $490,009 and $359,572 at
June 30, 1996 and December 31, 1995, respectively 6,410,000 2,658,557
--------- ---------
Total assets $170,186,569 $121,339,273
=============== ================
Liabilities and shareholders' equity:
Demand deposits $22,207,699 $13,182,888
Savings, NOW and money markets 42,109,572 30,612,855
Time deposits, $100,000 and over 20,193,272 15,472,674
Other time deposits 66,147,217 50,330,085
--------------- ----------------
Total deposits 150,657,760 109,598,502
Note payable - 375,000
Accrued interest payable and other liabilities 1,352,397 1,071,299
---------------------------------------------- --------------- ---------------
Total liabilities 152,010,157 111,044,801
--------------- ----------------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued at June 30, 1996 and December 31, 1995 - -
Common stock, $.01 par value, 20,000,000 shares authorized,
5,758,429 and 3,516,595 shares issued at June 30, 1996 and
December 31, 1995, respectively, and 5,746,512 and 3,506,429
outstanding at June 30, 1996 and December 31, 1995, respectively 57,584 35,166
Additional paid-in capital 16,875,100 9,356,469
Retained earnings 1,502,218 811,784
Treasury stock, 11,917 shares at June 30, 1996 and 10,166 shares at
at December 31, 1995 carried at cost (56,959) (50,830)
Unrealized gain on available-for-sale securities, net of tax (201,531) 141,883
--------------- ----------------
Total shareholders' equity 18,176,412 10,294,472
---------------
================
Total liabilities and shareholders' equity $170,186,569 $121,339,273
=============== ================
3
<PAGE>
</TABLE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the six months ended June 30, 1996 and 1995
(unaudited)
Six Months Ended
June 30, 1996 June 30,1995
------------- ---------------
Interest income: $ 2,609,187 1,829,221
Commercial and real estate loas 708,204 556,328
Consumer loans 1,493,538 1,377,723
Insurance premium financing 663,631 240,724
Federal funds sold
Investment securities;
Taxable 1,040,610 330,900
Tax-exempt 161,051 143,594
Interest bearing deposits 30,711 98,842
------------- --------------
Total interest income 6,706,932 4,532,977
-------------- --------------
Interest expense:
Savings, NOW and money market 532,023 376,955
Time deposits, $100,000 and over 508,078 391,059
Other time deposits 1,561,301 773,556
Other interest expense 6,612 54,487
------------- --------------
Total interest expense 2,608,014 1,640,412
-------------- --------------
Net interest income before
provision for credit losses 4,098,918 2,892,565
-------------- --------------
Provision for credit losses 45,000 60,000
-------------- --------------
Net interest income 4,053,918 2,832,565
-------------- --------------
Noninterest income 880,112 717,946
--------------- --------------
Noninterest expense:
Salaries and employee benefits 2,021,022 1,427,033
Occupancy and equipment 597,265 440,536
General and administrative 1,266,602 1,098,866
------------ -----------
Total noninterest expense 3,884,889 2,966,435
----------- -----------
Income before income taxes expenses: 1,049,141 584,076
Current 358,707 186,904
------------- -----------
Net income $690,434 $397,172
================== ===========
Net income per share of common stock $0.14 $0.13
================== ============
Weighted average shares outstanding 5,033,116 3,135,247
================== ==================
4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended June 30, 1996 and 1995
(unaudited)
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
--------------- -----------------
Interest income:
Commercial and real estate loan $1,515,382 $925,373
Consumer loans 374,535 301,239
Insurance premium financing 812,637 729,545
Federal funds sold 321,125 87,366
Investment securities:
Taxable 636,355 230,342
Tax-exempt 84,543 22,932
Interest bearing deposits 11,707 25,847
-------------- -----------
Total interest income 3,756,284 2,322,644
-------------- -----------
Interest expense:
Savings, NOW and money market 284,365 187,124
Time deposits, $100,000 and 237,748 198,468
Other time deposits 865,265 424,902
Other interest expense - 48,787
------------ -----------
Total interest expense1, 387,378 859,281
-------------- -----------
Net interest income before
provision for credit losses 2,368,906 1,463,363
--------------- -----------
Provision for credit losses 15,000 15,000
--------------- -----------
Net interest income 2,353,906 1,448,363
-------------- -----------
Noninterest income 482,843 350,383
-------------- -----------
Noninterest expense:
Salaries and employee benefits 1,119,843 719,814
Occupancy and equipment 331,417 221,849
General and administrative 699,784 584,240
------------ -----------
Total noninterest expense 2,151,044 1,525,903
----------- -----------
Income before income taxes 685,705 272,843
Income tax expenses:
Current 239,181 86,035
-------------- -----------
Net income $446,524 $186,808
============== ===========
Net income per share of common stock $0.08 $0.06
============== ===========
Weighted average shares outstanding 5,746,512 3,156,771
=============== ===========
5
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the six months ended June 30, 1996 and
for the year ended December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Unrealized
Gain/
Accumulate (Loss) on
Common Stock Additional Retained Available-
---------------------
Par Paid-in Earnings/ Treasury for-Sale Total
Shares Value Capital (Deficit) Stock Securities Equity
----------- --------- ------------ ------------- -------------- -------------- ------------
Balance at December 31, 1994 3,040,829 $30,408 $8,113,214 $(75,102) - $(2,839) $8,065,681
Sale of Common Stock 459,500 4,595 1,192,587 1,197,182
Purchase of Treasury Stock $(50,830) (50,830)
Net Income 886,886 886,886
Exercise of stock options 16,266 163 50,668 50,831
Change in unrealized
gain/(losses)
on available-for-sale
securities,
net of income taxes 144,722 144,722
----------- --------- ------------ ------------- -------------- -------------- ------------
Balance at December 31, 1995 3,516,595 35,166 9,356,469 811,784 (50,830) 141,883 10,294,472
Sale of Common Stock 2,239,218 22,392 7,512,528 7,534,920
Purchase of Treasury Stock (6,129) (6,129)
Net Income 690,434 690,434
Exercise of stock options 2,616 26 6,103 6,129
Change in unrealized
gain/(losses)
on available-for-sale
securities,
net of income taxes (343,414) (343,414)
----------- --------- ------------ ------------- -------------- -------------- ------------
Balance at June 30, 1996 5,758,429 $57,584 $16,875,100 $1,502,218 $(56,959) $(201,531) $18,176,412
=========== ========= ============ ============= ============== ============== ============
</TABLE>
6
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30,
------------------------------------
1996 1995
---------------- ----------------
Cash flows from operating activities:
Net income $690,434 $397,172
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Provision for credit losses 45,000 60,000
Provision for depreciation 276,146 227,568
Amortization of intangible assets 130,438 62,997
Gain on sale or disposal of assets - 100
Net increase in unearned interest on loans 311,475 472,898
Net increase in other assets (376,529) (216,314)
Net increase (decrease) in accrued interest payable and other (214,715) 358,732
liabilities
---------------- ----------------
Net cash provided by operating activities 862,249 1,363,153
---------------- ----------------
Cash flows from investing activities:
Net increase in loans (8,428,499) (5,001,528)
Payments received on purchased medical claims receivables 10,429,762 8,691,206
Purchases of medical claims receivables (6,640,767) (9,842,623)
Purchases of available-for-sale securities (6,738,752) (1,631,556)
Proceeds from sales of available-for-sale securities - 4,736,538
Proceeds from maturities of available-for-sale securities 4,758,844 334,864
Purchases of held-to-maturity securities (2,977,925) (160,820)
Proceeds from maturities of held-to-maturity securities 8,150,935 1,559,780
Proceeds from maturities of interest bearing deposits in financial 938,734 90,435
institutions
Purchases of bank premises and equipment (369,934) (289,081)
Direct cost incurred for bank acquisition (106,113)
Net cash acquired through acquisition 3,876,901
---------------- ----------------
Net cash provided by (used in) investing activities 2,893,186 (1,512,785)
---------------- ----------------
Cash flows from financing activities:
Net (decrease) increase in deposits (8,177,854) 496,152
Principal payments on notes payable (375,000) (1,250,000)
Purchase of treasury stock (6,129)
Exercise of stock options 6,129
Proceeds from the sale of stock 7,534,920 1,173,600
---------------- ----------------
Net cash (used in) provided by financing activities (1,017,934) 419,752
---------------- ----------------
Net increase in cash and cash equivalents 2,737,501 270,120
Beginning cash and cash equivalents 23,217,018 11,194,360
---------------- ----------------
Ending cash and cash equivalents $25,954,519 $11,464,480
================ ================
</TABLE>
7
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30,
------------------------------------
1996 1995
---------------- ----------------
Supplemental disclosure:
Cash paid during the period for interest $2,430,284 $1,593,555
Cash paid during the period for federal income taxes $327,500 $10,358
Supplemental schedule of investing activities:
Net cash acquired through acquisitions:
Interest bearing deposits in financial institutions $274,242
Investment securities 21,214,629
Net loans 18,476,948
Premises and equipment, net 1,270,401
Other assets 896,832
Excess of cost over fair value of net assets acquired 3,881,881
Deposits (49,237,113)
Other liabilities (654,721)
---------------- ----------------
Net cash acquired through acquisitions $(3,876,901)
================ ================
</TABLE>
8
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. Basis of Presentation:
----------------------
The condensed financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K. In
the opinion of the Company, all adjustments consisting only of normal recurring
adjustments necessary to present fairly the financial position of the Company as
of June 30, 1996, 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, 1996.
2. Acquisitions:
-------------
BANK ONE, TEXAS, NATIONAL ASSOCIATION BRANCH IN WAXAHACHIE, TEXAS
On June 16, 1995, Surety Bank entered into an agreement with Bank One,
Texas, National Association ("Bank One") for the acquisition of certain assets
and the assumption of certain liabilities by Surety Bank relating to the branch
of Bank One located in Waxahachie, Texas (the "Waxahachie Branch").
The acquisition was consummated on September 28, 1995. Surety Bank financed
the acquisition through the use of internally-generated funds.
At the closing, Surety Bank assumed deposits and other liabilities totaling
approximately $16,642,000. In addition, Surety Bank acquired certain small
business and consumer loans totaling approximately $875,000, certain real
property, furniture and equipment related to the Waxahachie Branch totaling
approximately $271,000, and cash and other assets totaling approximately
$15,496,000. After paying a deposit premium of two percent (2%) on the deposits
assumed totaling approximately $331,000, Surety Bank received approximately
$15,419,000 in cash from Bank One as consideration for the net deposit
liabilities assumed. The Waxahachie Branch and deposits acquired in the
acquisition have been incorporated into Surety Bank's existing branch network.
FIRST NATIONAL BANK, MIDLOTHIAN, TEXAS
On February 28, 1996, the Company completed a primary and secondary
offering of its Common Stock. The offering was underwritten by Hoefer & Arnett,
Incorporated, a San Francisco investment banking firm. A total of 2,388,759
shares of Common Stock were sold in the offering at a price of $3.75 per share,
including 288,759 shares of Common Stock sold as an over-allotment and 174,939
shares of Common Stock held by a shareholder of the Company. The proceeds from
this offering were used by the Company to finance the acquisition of First
National Bank, Midlothian, Texas, to retire the Company's outstanding bank debt
and for general corporate purposes.
On February 29, 1996 the Company completed the acquisition of First
National Bank, Midlothian, Texas ("First National"), through the consolidation
of First National and Surety Bank. In connection with the transaction, Surety
Bank changed its main office to the former main office of First National in
Midlothian, Texas, and operates its own former main office in Lufkin, Texas as a
branch. Effective April 18, 1996, Surety Bank changed the location of its main
office to Hurst, Texas, and operates its former main office in Midlothian, Texas
as a branch.
9
<PAGE>
2. Acquisitions continued:
------------
With the completion of this acquisition, Surety Bank increased its asset
size by approximately 42%. As of December 31, 1995, First National had total
assets of $51,253,000, and Surety Bank had total assets of $121,262,000. In the
transaction, a subsidiary of Surety Bank was first merged with and into First
National's parent holding company, First Midlothian Corporation ("First
Midlothian"), pursuant to which merger the shareholders of First Midlothian
received cash in exchange for their shares of capital stock of First Midlothian
in an amount equal to approximately one hundred fifty percent (150%) of the book
value of First National. Immediately following the merger, First National and
Surety Bank consolidated under the charter of Surety Bank.
The acquisition has been accounted for as a purchase in the accompanying
consolidated financial statements. The assets and liabilities of First National
have been recorded at their fair values as of February 29, 1996.
Included in the accompanying consolidated financial statements are the
following amounts for First National as of June 30, 1996 and for the six months
ended June 30, 1996:
Balance sheet data:
Cash and due from banks $ 395,893
Federal funds sold 9,775,000
Investment securities 16,265,359
Net loans 15,803,811
Premises and equipment, net 1,423,581
Accrued interest receivable 118,562
Other assets 618,022
-------------
Total assets $ 44,400,228
=============
Income statement data:
Total interest income $ 982,968
Total interest expense 497,682
Other income 128,761
Noninterest expense 531,609
-------------
Net income $ 82,438
===========
The consolidated results of operations include the operations of First
National subsequent to March 1, 1996. The unaudited information for the six
months ended June 30, 1996 and the unaudited pro forma information for the six
months ended June 30, 1995, presented below, reflect the acquisition of First
National, as if it had been acquired as of January 1, 1995. Pro forma
adjustments consisting of a provision for income taxes and interest expense have
been made to properly reflect the unaudited pro forma information.
Six months ended Six months ended
June 30, 1996 June 30, 1995
Interest income $6,706,932 $5,546,977
Net income 266,760 522,172
Net income per share of common stock $0.05 $0.09
10
<PAGE>
2. Acquisitions continued:
------------
Providers Funding Corporation
On March 15, 1996, Surety Bank completed the acquisition of Providers
Funding Corporation ("PFC"), a Dallas-based medical claims servicing company.
The acquisition was accomplished through the purchase of certain assets and the
assumption of certain liabilities of PFC by Surety Bank. Surety Bank used cash
on hand to fund this purchase. Surety Bank operates PFC as a division titled
"Providers Funding a division of Surety Bank, N.A." PFC's former president,
Barry T. Carroll, has joined Surety Bank to head up the division.
3. Investment Securities:
----------------------
At June 30, 1996, the amortized cost and estimated market values of
investment securities are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held-to-Maturity:
U.S. Treasury $ 4,003,167 $749 $ 7,826 $ 3,996,090
Obligations of other U.S.
Government agencies and
corporations 14,452,145 248 166,321 14,286,072
State and county municipals 5,344,345 153,502 5,782 5,492,065
------------ --------- ---------- -------------
Total Held-to-Maturity $23,799,657 $154,499 $179,929 $23,774,227
============ ========= ========= ============
Available-for-Sale:
U.S. Treasury $ 6,303,364 $6,421 $12,298 $ 6,297,487
Obligations of other U.S.
Government agencies and
corporations 10,696,717 18,490 301,247 10,413,960
State and county municipals 410,456 16,715 393,741
Federal Reserve Bank Stock 446,250 446,250
Other investment securities 76,804 76,804
------------------------------- --------------- ---------------
Total Available-for-Sale $ 17,933,591 $ 24,911 $330,260 $17,628,242
============= ========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and estimated market value of investment securities at
June 30, 1996, 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.
11
<PAGE>
3. Investment Securities continued:
---------------------
<S> <C> <C>
Estimated
Amortized Fair
Cost Value
HELD-TO-MATURITY:
Due within one year $2,488,925 $2,488,402
Due after one year through five years 16,613,703 16,551,410
Due after five years through ten years 4,253,894
4,296,127
Mortgage-backed securities 443,135 438,288
-------------- ------------
Total Held-to-Maturity $23,799,657 $23,774,227
=========== ============
AVAILABLE-FOR-SALE:
Due within one year $ 4,216,194 $ 4,213,582
Due after one year through five years 6,693,614 6,627,491
Due after five years through ten years 6,314,225 6,074,789
Mortgage-backed securities 186,504 189,326
Other securities 523,054 523,054
-------------- --------------
Total Available-for-Sale $17,933,591 $17,628,242
============ =============
</TABLE>
Proceeds from sales of available-for-sale investment securities during the
six months ended June 30, 1996 and 1995 were $0 and $4,736,538 with gross
recognized gains of $0 and $100 and no losses, respectively.
At June 30, 1996 and 1995 the carrying values of the Federal Reserve Bank
stock were $446,250 and $280,850, respectively. The fair value of the Federal
Reserve Bank stock was estimated to be the same as its carrying value at both
dates.
4. Net Loans:
----------
At June 30, 1996 and December 31, 1995, the loan portfolio was composed of
the following:
June 30, December 31,
1996 1995
---- ----
Insurance premium financing $28,844,971 $22,409,356
Commercial loans 22,823,692 16,301,840
Installment loans 13,221,733 10,645,406
Real estate loans 24,601,510 16,281,558
Medical claims receivable 3,370,822 3,353,540
------------ ------------
Total gross loans 92,862,728 68,991,700
Unearned interest (2,408,274) (1,889,461)
Allowance for credit losses (1,295,165) (702,927)
--------------- -------------
Net loans $89,159,289 $66,399,312
----------- -----------
----------- -----------
12
<PAGE>
4. Net Loans continued:
---------
<TABLE>
<CAPTION>
Activity in the allowance for credit losses is as follows:
<S> <C> <C> <C> <C>
Six Months Three Months Six Months Three Months
Ended Ended Ended Ended
June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995
------------------ ----------------- --------------- ----------------
Beginning balance $702,927 $1,302,492 $697,948 $719,216
Provision for credit losses 45,000 15,000 45,000 15,000
Bank acquisition 614,700 - - -
Loan charged off, net of
recoveries (67,462) (22,327) (23,732) (15,588)
-------- -------- -------- --------
Ending balance
$1,295,165 $1,295,165 $719,216 $718,628
========== ========== ======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $29,000 and $31,000 at June 30, 1996 and December 31, 1995,
respectively.
5. Shareholders' Equity:
---------------------
During the six months ended June 30, 1996, the Company completed a primary
and secondary offering of its Common Stock. The offering was underwritten by
Hoefer & Arnett, Incorporated, a San Francisco investment banking firm. A total
of 2,388,759 shares of Common Stock were sold in the offering at a price of
$3.75 per share, including 288,759 shares of Common Stock sold as an
over-allotment. The proceeds from this offering were used by the Company to
finance the acquisition of First National Bank, Midlothian, Texas, to retire the
Company's outstanding bank debt and for general corporate purposes.
6. Stock Option Plans:
-------------------
The Company has two long-term incentive stock option plans for key senior
officers of the Company. The stock option plans provide these key employees with
options to purchase shares of the Company's Common Stock at an exercise price
equal to at least the fair market value of such Common Stock on the date of
grant.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ ------------------------------------------------------------------------
OF OPERATIONS:
--------------
GENERAL
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company changed the name of its subsidiary
bank to Surety Bank, National Association ("Surety Bank"), effective January 1,
1995, in order to establish name recognition for Surety Bank and to avoid
confusion with other similarly named banks.
The information presented below reflects the lending and related funding
business of the Company:
<TABLE>
Six months ended Six months ended
June 30, June 30,
1996 1995
--------------------- ---------------------
<S> <C> <C>
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 24,350,648 $ 23,401,618
Average yield 12.3% 11.8%
Interest incom $ 1,493,538 $ 1,377,723
CONSUMER, COMMERCIAL AND REAL
ESTATE FINANCING:
Average balance outstanding $ 55,688,400 $ 44,111,245
Average yield 11.9% 10.8%
Interest incom $ 3,317,391 $ 2,385,549
COST OF FUNDS:
Average balance outstanding <F1> $ 141,250,180 $ 92,943,762
Average interest rate 3.7% 3.5%
Interest expens $ 2,608,014 $ 1,640,412
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 1,117,822 $ 755,496
Total interest expense 434,669 $ 273,402
Provision for loan losses 7,500 $ 10,000
Noninterest income 146,685 $ 119,658
Noninterest expense 647,482 $ 494,406
<FN>
<F1> Includes $120,218 and $1,642,000 of short term borrowings and $6,612
and $98,842 of interest expense on short term borrowings for the six months
ended June 30, 1996 and 1995, respectively.
Note: Average balances are computed using daily balances throughout each
period.
</FN>
</TABLE>
NOTE: AVERAGE BALANCES ARE COMPUTED USING DAILY BALANCES TROUGHOUT EACH PERIOD.
14
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET
Six months ended June 30, 1996
------------------------------
Average Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities and
due from time $36,124,846 $ 1,232,372<F1> 6.8%
Federal funds sold 24,274,608 663,631 5.5%
Loans<F2> 80,039,050 4,810,929<F3> 12.0%
Allowance for credit losses (1,208,008) N/A N/A
-------------- ------------- ----------
Total interest earning assets 139,230,496 6,706,932 9.6%
------------- ---------- ----------
Cash and due from banks 5,178,226
Premises and equipment 3,569,661
Accrued interest receivable 1,008,706
Other assets 7,982,179
--------------
Total assets $156,969,268
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $34,962,900 $ 425,855 2.4%
Savings deposits 8,318,316 106,168 2.6%
Time deposits 77,980,832 2,069,379 5.3%
Notes payable 120,218 6,612 11.0%
---------------- ------------- ---------
Total interest bearing liabilities 121,382,266 2,608,014 4.3%
------------- ---------- ---------
Net interest income $4,098,918
Net interest spread 5.3%
Net interest income to average earning assets 5.9%
========
Noninterest bearing deposits 19,074,627
Accrued interest payable and other liabilities 729,774
-------
Total liabilities 141,186,667
Shareholders' equity 15,782,601
----------
Total liabilities and shareholders' equity $156,969,268
============
<FN>
<F1> Interest income on the tax exempt securities does not reflect the tax
equivalent yield.
<F2> Loans on nonaccrual status have been included in the computation of average
balances.
<F3> The interest income on loans does not include loan fees. Loan fees are
immaterial and are included in noninterest income.
</FN>
</TABLE>
15
<PAGE>
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995.
- ---------------------------------------------------------------------
Surety Capital Corporation ("Surety") and its wholly owned subsidiary,
Surety Bank, National Association (the "Bank"), reported an increase of 73.8% in
net earnings of $690,434 as compared to $397,172 during the six months ended
June 30, 1996 and 1995, respectively. Earnings per share were $0.14 and $0.13
for the six months ended June 30, 1996 and 1995, respectively. The increase in
earnings per share is principally attributed to Surety's loan-to-deposit ratio
as well as Surety's liquidity. The loan-to-deposit ratio indicates the
percentage of the Bank's interest earning assets which are invested in the loan
portfolio relative to deposits. The yields earned by Surety on its loan
portfolio during the six months ended June 30, 1996 and 1995 were 12.0% and
11.1%, respectively, while the average cost of funds for Surety for the same
periods was 4.3% and 4.1%, respectively. The loan-to-deposit ratio as of June
30, 1996 and 1995 was 60.0% and 70.3%, respectively, and the drop is attributed
to the consolidation of First National Bank, Midlothian, Texas, with and into
the Bank (the "Midlothian Consolidation"). It is the goal of Surety to increase
its loan production in order to improve the Bank's loan-to-deposit ratio, which
will result in a transfer from the Bank's overnight federal funds sold (with a
5.5% yield for the first half of 1996) to the higher yielding loan portfolio.
Total interest income increased 48.0% to $6,706,932 from $4,532,977, while
total interest expense increased 59.0% to $2,608,014 from $1,640,412, resulting
in a 41.7% increase in net interest income before provision for credit losses to
$4,098,918 from $2,892,565. Surety's loan growth between these two periods was
concentrated within the real estate lending, commercial loans, consumer loans
and the insurance premium financing. Real estate lending increased by 49.8% to
$24,601,510 from $16,419,348, commercial lending increased by 43.5% to
$22,823,692 from $15,903,653, consumer lending increased by 28.0% to $13,221,733
from $10,330,594 and insurance premium financing increased by 10.5% to
$28,844,971 from $26,106,808. This growth is attributed to the Midlothian
Consolidation and management's marketing efforts. The average volume of
consumer, commercial, and real estate lending increased 26.3%, with an increase
in the average yields on those loans from 10.8% to 11.9%. The 4.1% increase in
the average volume of insurance premium loans was accompanied by a yield of
12.3% and 11.8% on those loans for the six months ended June 30, 1996 and 1995,
respectively. The average balance of interest bearing deposits increased 52.0%,
while the average rate paid increased from 3.5% to 3.7%.
Surety recorded a $45,000 provision for loan losses during the six months
ended June 30, 1996 compared to $60,000 provision for loan losses during the six
months ended June 30, 1995. As Surety's ratio of net charge-offs to average
loans remained unchanged for these periods, Surety provided amounts, through
charges to earnings, to maintain the allowance for loan losses at an adequate
level. Management believes that all known losses in the portfolio have been
recognized.
Surety's noninterest income increased 22.6% to $880,112 from $717,946 for
the six months ended June 30, 1996 and 1995, respectively. This increase
compares to a corresponding increase in average noninterest bearing deposits of
53.5% to $19,074,627 from $12,426,651 for these same periods. Noninterest income
is generated primarily from fees associated with noninterest and interest
bearing accounts.
Noninterest expense increased 31.0%, primarily the result of a 41.6%
increase in salaries and employee benefits, a 35.6% increase in occupancy and
equipment expenses, and a 15.3% increase in general and administrative expenses.
The increase in salaries and benefits was due primarily to additional staffing
required by the Midlothian Consolidation and the Providers Funding Corporation
acquisition. Increases in general and administrative expenses relate primarily
to legal and professional fees.
Three Months Ended June 30, 1996 Versus Three Months Ended June 30, 1995.
- -------------------------------------------------------------------------
The Company earned $446,524 as compared to $186,808 during the three months
ended June 30, 1996 and 1995, respectively. Earnings per share were $0.08 and
$0.06 for the three months ended June 30, 1996 and 1995, respectively. Total
interest income increased 61.7% to $3,756,284 from $2,322,644, while total
interest expense increased 61.5% to $1,387,378 from $859,281, resulting in a
61.9% increase in net interest income before provision for loan losses to
$2,368,906 from $1,463,363.
Surety recorded $15,000 provision for loan losses during the three months
ended June 30, 1996 compared to $15,000 provision for credit losses during the
three months ended June 30, 1995. As Surety's ratio of net charge-offs to
average loans remained unchanged for these periods, Surety provided amounts,
through charges to earnings, to maintain the allowance for loan losses at an
adequate level. Management believes that all known losses in the portfolio have
been recognized.
16
<PAGE>
Surety's noninterest income increased 37.8% to $482,843 from $350,383 for
the three months ended June 30, 1996 and 1995, respectively. Noninterest expense
increased 41.0%, primarily the result of a 55.6% increase in salaries and
employee benefits, a 49.4% increase in occupancy and equipment expenses, and a
19.8% increase in general and administrative expenses. The increase in salaries
and benefits was due primarily to additional staffing required by the Midlothian
Consolidation and the Providers Funding Corporation acquisition. Increases in
general and administrative expenses relate primarily to legal and professional
fees.
Parent Company Only Results of Operations.
- ------------------------------------------
Surety did not own the Bank prior to December 30, 1989. Since that time,
Surety has served as a parent company to The Bank and has wound down Surety's
own separate business activities. For the six months ended June 30, 1996, Surety
had only nominal income, other than equity in net income of the Bank of
approximately $7,900, and approximately $56,000 in noninterest expenses. The
noninterest expenses, which decreased 63.4% from the same period in the prior
year, consisted primarily of legal and professional fees incurred in the
operation of Surety and in the maintenance of Surety's public company status
under applicable securities laws and regulations.
ALLOWANCE FOR CREDIT LOSSES
Surety recorded a $45,000 provision for credit losses during the six months
ended June 30, 1996 compared to a $60,000 provision during the six months ended
June 30, 1995. Surety's provision for credit 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. Credit losses different from the allowance provided by Surety are
likely, and credit 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
Surety.
The ratio of charge-offs, net of recoveries, to average loans during the
six months ended June 30, 1996 was 0.08%. The ratio of the allowance for credit
losses to total loans was 1.4% on June 30, 1996 as compared to 1.0% on June 30,
1995. The allowance for credit losses was $1,295,165 and $718,628 on June 30,
1996 and 1995, respectively.
CURRENT TRENDS AND UNCERTAINTIES
Economic trends and other developments could adversely affect Surety's
operations. Regulatory changes may increase Surety's cost of doing business or
otherwise impact it adversely.
LIQUIDITY
Surety's investment securities portfolio, including federal funds sold, and
its cash and due from bank deposit balances serve as the primary sources of
liquidity. At June 30, 1996, 15.7% 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.
Over the long term, the ability of Surety to meet its cash obligations will
depend substantially on its receipt of dividends from the Bank, which are
limited by banking statutes and regulations.
CAPITAL RESOURCES
Shareholders' equity at June 30, 1996 was $18,176,412 as compared to
$10,294,472 at December 31, 1995. Surety had consolidated net income of $690,434
for the six months ended June 30, 1996.
17
<PAGE>
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 10.76% and 11.72%, respectively, at December 31, 1995 and 10.31% and 11.56%,
respectively, at June 30, 1996. 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 Surety believes it has sufficient financing for its working capital
needs until the end of its 1996 fiscal year, there can be no assurance that
Surety's present capital and financing will be sufficient to finance future
operations thereafter. If Surety 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, Surety could be
required to restrict its operations.
The Board of Governors of the Federal Reserve System (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
Surety, 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 Surety, make its assets and
resources available to a failing subsidiary bank could have an adverse effect
upon Surety and its shareholders.
On December 8, 1994, Surety obtained a $1,750,000, 90-day note payable to a
local financial institution to finance the acquisition of First National Bank,
Whitesboro, Texas. After the note matured on June 7, 1995, Surety reduced the
balance of the note to $500,000, and a new note was obtained for the remaining
balance of $500,000 with a maturity of January 23, 1996. On February 28, 1996,
Surety repaid this debt.
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, Surety's operations are not
affected by inflation in a material way. Other factors, such as interest rates
and liquidity, exert greater influence on a bank's performance than does
inflation. The effects of inflation, however, can magnify the growth of assets
in the banking industry. If significant, this would require that equity capital
increase at a faster rate than would otherwise be necessary.
OTHER
Deposits held by the Bank are insured by the FDIC's Bank Insurance Fund
("BIF"). On August 8, 1995, the FDIC Board of Directors voted to significantly
reduce the deposit insurance premiums paid by most banks but to keep existing
assessment rates intact for savings associations. Under the new rate structure,
which went into effect in October 1995, the best-rated institutions insured by
the BIF, including the Bank, paid $0.04 cents per $100 of domestic deposits. On
November 14, 1995, the FDIC announced that commencing in 1996 it would eliminate
insurance deposit premiums for all but the banks in the highest level of
supervisory concern. Based on the risk category applicable to the Bank, the
premium paid by the Bank is presently $0.00 per $100 of domestic deposits.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Bank is a defendant in two related cases: Tennessee Ex Rel. Douglas
Sizemore, Commissioner of Commerce and Insurance for the State of Tennessee, et
al. vs. Surety Bank, N.A., filed in June 1995 in the Federal District Court for
the Northern District of Texas, Dallas Division (the "Anchorage Case"), and
United Shortline Inc. Assurance Services, N.A. et al. vs. MacGregor General
Insurance Company, Ltd., et al., now pending in the 141st Judicial District
Court of Tarrant County, Texas (the "MacGregor Case").
The claimant in the Anchorage Case is a liquidator (the "Liquidator"), the
Tennessee Commissioner of Commerce and Insurance, appointed by the Chancery
Court for the State of Tennessee, Twentieth Judicial District, Davidson County,
to liquidate Anchorage Fire and Casualty Insurance Company ("Anchorage"). The
Liquidator seeks to recover compensatory and punitive damages on various alleged
causes of action, including violation of orders issued by a Tennessee court,
fraudulent and preferential transfers, common law conversion, fraud, negligence,
and bad faith, all of which are based on the same underlying facts and course of
conduct.
The plaintiff in the MacGregor Case, United Shortline Inc. Assurance
Services, N.A. ("United Shortline"), is the holder of a Florida judgment against
MacGregor General Insurance Company, Ltd. ("MacGregor") and seeks to recover
funds allegedly belonging to MacGregor which were held by the Bank.
Both cases arise out of the Bank's alleged exercise of control over funds
held in accounts at the Bank under agreements with Anchorage and MacGregor. The
exercise of control included the setoff of approximately $570,000, and the
interpleader, in the MacGregor Case, of approximately $600,000. The Bank asserts
that it had a right to exercise control over the funds, in the first instance
under contractual agreements between the Bank and the respective insurance
companies or the Bank and the policy holders, and in the second instance in
order to protect the Bank against the possibility of inconsistent orders
regarding the same funds. The Liquidator also seeks to recover funds allegedly
transferred from Anchorage/MacGregor accounts at the Bank during an approximate
four month period in 1993, which exceed $2.6 million in the aggregate. The Bank
believes that the claims lack merit and intends to defend the cases vigorously.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on June 19,
1996. The stockholders voted (1) to elect eight directors of the Company;
and (2) to approve the appointment of Coopers & Lybrand, L.L.P. as the
independent public accountants of the Company for the fiscal year ending
December 31, 1996.
19
<PAGE>
The results of the voting for the election of Directors was as follows:
Broker
Name For Against Withheld Non-votes
C. Jack Bean 4,016,106 0 11,500 78,823
William B. Byrd 4,025,506 0 2,100 78,823
Bobby W. Hackler 4,025,606 0 2,000 78,823
Joseph S. Hardin 4,004,606 0 23,000 78,823
G.M. Heinzlmann, III 4,025,516 0 2,090 78,823
Michael Milam 4,014,006 0 13,600 78,823
Garrett Morris 3,986,666 0 40,940 78,823
Cullen W. Turner 4,020,356 0 7,250 78,823
The results of the other votes were as follows:
BROKER
DESCRIPTION FOR AGAINST ABSTAIN NON-VOTES
Approval of Coopers & Lybrand, 4,016,861 83,543 6,025 0
L.L.P. as the Company's independent
accountants for the fiscal year ending
December 31, 1996
All proposals were approved by the vote of the stockholders.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(A) EXHIBITS
27 Financial Data Schedule*
- ------------------------------------------------------------
* FILED HEREWITH.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended June 30, 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 20, 1996 Surety Capital Corporation
By: /s/ C. Jack Bean
---------------------------------
C. Jack Bean
Chairman
By /s/ B.J. Curley
---------------------------------
B.J. Curley
Vice President, Chief Accounting
Officer & Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 7,519,519
<INT-BEARING-DEPOSITS> 381,805
<FED-FUNDS-SOLD> 18,435,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,628,242
<INVESTMENTS-CARRYING> 23,799,657
<INVESTMENTS-MARKET> 23,774,227
<LOANS> 90,454,454
<ALLOWANCE> (1,295,165)
<TOTAL-ASSETS> 170,186,569
<DEPOSITS> 150,657,760
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,352,397
<LONG-TERM> 0
0
0
<COMMON> 57,584
<OTHER-SE> 18,118,828
<TOTAL-LIABILITIES-AND-EQUITY> 170,186,569
<INTEREST-LOAN> 4,810,929
<INTEREST-INVEST> 1896,003
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,706,932
<INTEREST-DEPOSIT> 2601,402
<INTEREST-EXPENSE> 2,608,014
<INTEREST-INCOME-NET> 4,098,918
<LOAN-LOSSES> 45,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,884,889
<INCOME-PRETAX> 1049,141
<INCOME-PRE-EXTRAORDINARY> 1049,141
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690,434
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> .10
<LOANS-NON> 29,000
<LOANS-PAST> 87,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 702,927
<CHARGE-OFFS> 84,252
<RECOVERIES> 16,790
<ALLOWANCE-CLOSE> 1,295,165
<ALLOWANCE-DOMESTIC> 1,295,165
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
