FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Mark One
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 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 November 4, 1996, 5,748,119 shares
<PAGE>
SURETY CAPITAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
- -------
Consolidated Balance Sheets at September 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statements of Income for the Nine Months
Ended September 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Income for the Three Months
Ended September 30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the
Nine Months Ended September 30, 1996 and for the Year
Ended December 31, 1995 (unaudited) 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 19
- -------
Item 6. Exhibits and Reports on Form 8-K 20
- -------
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Assets:
Cash and due from banks $ 6,757,056 $ 4,727,018
Federal funds sold 15,302,000 18,490,000
Interest bearing deposits in financial institutions 286,323 1,046,297
Investment securities:
Available-for-sale 18,119,039 10,128,157
Held-to-maturity 23,466,973 13,780,538
---------- ----------
Total investment securities 41,586,012 23,908,695
Loans 99,360,283 68,991,700
Less: Unearned interest (2,548,226) (1,889,461)
Allowance for credit losses (1,292,189) (702,927)
---------- --------
Net loans 95,519,868 66,399,312
Premises and equipment, net 4,018,334 2,775,688
Accrued interest receivable 1,081,990 781,031
Other real estate and repossessed assets 721,209 85,528
Other assets 636,461 467,147
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $602,480 and
$359,572 at September 30, 1996 and December 31, 1995,
respectively 6,357,589 2,658,557
--------- ---------
Total assets $172,266,842 $121,339,273
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 23,089,431 $ 13,182,888
Savings, NOW and money markets 37,802,713 30,612,855
Time deposits, $100,000 and over 19,598,343 15,472,674
Other time deposits 71,790,115 50,330,085
---------- ----------
Total deposits 152,280,602 109,598,502
Note payable - 375,000
Accrued interest payable and other liabilities 1,383,165 1,071,299
--------- ---------
Total liabilities 153,663,767 111,044,801
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued at September 30, 1996 and
December 31, 1995 - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 5,763,737 and 3,516,595 shares issued at
September 30, 1996 and December 31, 1995,
respectively, and 5,748,119 and 3,506,429 outstanding
at September 30, 1996 and December 31, 1995,
respectively 57,637 35,166
Additional paid-in capital 16,809,808 9,356,469
Retained earnings 1,945,001 811,784
Treasury stock, 15,618 shares at September 30, 1996
and 10,166 shares at December 31, 1995 carried
at cost (74,539) (50,830)
Unrealized gain on available-for-sale securities,
net of tax (134,832) 141,883
-------- -------
Total shareholders' equity 18,603,075 10,294,472
---------- ----------
Total liabilities and shareholders' equity $172,266,842 $121,339,273
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the nine months ended September 30, 1996 and 1995
(unaudited)
Nine Months Ended
September 30, September 30,
1996 1995
------------- -------------
Interest income:
Commercial and real estate loans $ 4,088,743 $ 2,759,887
Consumer loans 1,084,355 861,646
Insurance premium financing 2,509,161 2,080,915
Federal funds sold 875,221 358,600
Investment securities:
Taxable 1,637,835 518,886
Tax-exempt 243,673 215,391
Interest bearing deposits 36,771 76,442
------ ------
Total interest income 10,475,759 6,871,767
---------- ---------
Interest expense:
Savings, NOW and money market 760,635 569,783
Time deposits, $100,000 and over 754,507 579,022
Other time deposits 2,439,884 1,276,222
Other interest expense 6,612 111,915
----- -------
Total interest expense 3,961,638 2,536,942
--------- ---------
Net interest income before
provision for credit losses 6,514,121 4,334,825
--------- ---------
Provision for credit losses 90,000 60,000
------ ------
Net interest income 6,424,121 4,274,825
--------- ---------
Noninterest income 1,354,776 1,056,095
--------- ---------
Noninterest expense:
Salaries and employee benefits 3,153,119 2,143,694
Occupancy and equipment 933,008 668,483
General and administrative 1,965,581 1,569,753
--------- ---------
Total noninterest expense 6,051,708 4,381,930
--------- ---------
Income before income taxes 1,727,189 948,990
Income tax expenses:
Current 593,972 300,577
------- -------
Net income $ 1,133,217 $ 648,413
============ ============
Net income per share of common stock $ 0.22 $ 0.20
============ ============
Weighted average shares outstanding 5,262,716 3,208,319
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended September 30, 1996 and 1995
(unaudited)
Three Months Ended
September 30, September 30,
1996 1995
------------ ------------
Interest income:
Commercial and real estate loans $ 1,479,557 $ 930,666
Consumer loans 376,151 305,318
Insurance premium financing 1,015,623 703,192
Federal funds sold 211,590 117,876
Investment securities:
Taxable 597,225 184,442
Tax-exempt 82,622 71,797
Interest bearing deposits 6,060 25,499
----- ------
Total interest income 3,768,828 2,338,790
--------- ---------
Interest expense:
Savings, NOW and money market 242,743 192,828
Time deposits, $100,000 and over 275,101 187,963
Other time deposits 835,780 502,666
Other interest expense - 13,073
--------- ------
Total interest expense 1,353,624 896,530
--------- -------
Net interest income before
provision for credit losses 2,415,204 1,442,260
--------- ---------
Provision for credit losses 45,000 -
------ ---------
Net interest income 2,370,204 1,442,260
--------- ---------
Noninterest income 474,663 338,149
------- -------
Noninterest expense:
Salaries and employee benefits 1,132,097 716,661
Occupancy and equipment 335,743 227,947
General and administrative 698,978 470,887
------- -------
Total noninterest expense 2,166,818 1,415,495
--------- ---------
Income before income taxes 678,049 364,914
Income tax expenses:
Current 235,266 113,673
Net income $ 442,783 $ 251,241
============ ============
Net income per share of common stock $ 0.08 $ 0.07
============ ============
Weighted average shares outstanding 5,746,512 3,500,871
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the nine months ended September 30, 1996 and
for the year ended December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain/
Common Stock Accumulate (Loss) on
--------------------- Additional Retained Available-
Par Paid-in Earnings/ Treasury for-Sale Total
Shares Value Capital (Deficit) Stock Securities Equity
----------- --------- ------------ ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 7,429,706 7,452,098
Purchase of Treasury Stock (23,709) (23,709)
Net Income 1,133,217 1,133,217
Exercise of stock options 7,924 79 23,633 23,712
Change in unrealized gain
(losses) on available-
for-sale securities,
net of income taxes (276,715) (276,715)
--------- ------- ----------- ---------- --------- ---------- ------------
Balance at September 30, 1996 5,763,737 $57,637 $16,809,808 $1,945,001 $(74,539) $(134,832) $18,603,075
========= ======= =========== ========== ========= ========== ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
September 30,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,133,217 $648,413
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 90,000 60,000
Provision for depreciation 457,502 349,397
Amortization of intangible assets 182,849 83,976
Gain on sale or disposal of assets - 100
Net increase in unearned interest on loans 451,427 456,023
Net increase in other assets (103,009) (106,654)
Net (decrease) increase in accrued interest payable and other (243,238) 378,789
liabilities ---------------- ----------------
Net cash provided by operating activities 1,968,748 1,870,044
---------------- ----------------
Cash flows from investing activities:
Net increase in loans (14,059,111) (2,990,771)
Payments received on purchased medical claims receivables 13,278,557 12,961,663
Purchases of medical claims receivables (10,404,482) (13,569,897)
Purchases of available-for-sale securities (7,239,958) (3,975,999)
Proceeds from sales of available-for-sale securities 0 4,736,538
Proceeds from maturities of available-for-sale securities 4,883,718 2,614,473
Purchases of held-to-maturity securities (2,977,925) (3,487,303)
Proceeds from maturities of held-to-maturity securities 8,495,145 2,716,665
Proceeds from maturities of interest bearing deposits in financial 1,034,216 189,328
institutions
Purchases of bank premises and equipment (429,747) (460,784)
Direct cost incurred for bank acquisition (106,113)
Net cash acquired through acquisition 3,876,901 15,385,983
---------------- ----------------
Net cash (used in) provided by investing activities (3,648,799) 14,119,896
---------------- ----------------
Cash flows from financing activities:
Net decrease in deposits (6,555,012) (357,012)
Principal payments on notes payable (375,000) (1,375,000)
Purchase of treasury stock (23,709) (50,830)
Exercise of stock options 23,712 0
Proceeds from the sale of stock 7,452,098 1,256,059
---------------- ----------------
Net cash provided by (used in) financing activities 522,089 (526,783)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (1,157,962) 15,463,157
Beginning cash and cash equivalents 23,217,018 11,194,360
---------------- ----------------
Ending cash and cash equivalents $22,059,056 $26,657,517
================ ================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
7
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
September 30,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Supplemental disclosure:
Cash paid during the period for interest $3,789,628 $2,433,146
Cash paid during the period for federal income taxes $400,000 $18,608
Supplemental schedule of investing activities:
Net cash acquired through acquisitions:
Interest bearing deposits in financial institutions $274,242 $0
Investment securities 21,214,629 0
Net loans 18,476,948 875,159
Premises and equipment, net 1,270,401 271,455
Other assets 896,832 6,569
Excess of cost over fair value of net assets acquired 3,881,881 102,507
Deposits (49,237,113) (16,538,565)
Other liabilities (654,721) (103,108)
---------------- ----------------
Net cash acquired through acquisitions $(3,876,901) $(15,385,983)
================ ================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
8
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
The condensed financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K. In the opinion of the
Company, all adjustments consisting only of normal recurring adjustments
necessary to present fairly the financial position of the Company as of
September 30, 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 September 30, 1996 and for the
nine months ended September 30, 1996:
Balance sheet data:
Cash and due from banks $ 360,209
Federal funds sold 9,400,000
Investment securities 16,259,433
Net loans 14,980,028
Premises and equipment, net 1,420,873
Accrued interest receivable 125,319
Other assets 659,900
-------------
Total assets $ 43,205,762
=============
Income statement data:
Total interest income $ 1,577,467
Total interest expense 832,598
Other income 215,001
Noninterest expense 804,587
-------------
Net income $ 155,283
=============
The consolidated results of operations include the operations of First
National subsequent to March 1, 1996. The unaudited information for the
nine months ended September 30, 1996 and the unaudited pro forma
information for the nine months ended September 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.
Nine months ended Nine months ended
September 30, 1996 September 30, 1995
------------------ ------------------
Interest income $10,475,759 $9,597,529
Net income 709,543 954,677
Net (loss) income per
share of common stock $ 0.12 $ 0.17
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 September 30, 1996, the amortized cost and estimated market values of
investment securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury $ 4,000,994 $ 927 $ 1,141 $ 4,000,780
Obligations of other U.S.
Government agencies and
corporations 14,440,735 271 104,326 14,336,680
State and county municipals 5,025,244 165,326 1,432 5,189,138
------------ --------- --------- ------------
Total Held-to-Maturity $23,466,973 $166,524 $106,899 $23,526,598
============ ========= ========= ============
Available-for-Sale:
U.S. Treasury $ 6,298,032 $ 8,187 $2,019 $ 6,304,200
Obligations of other U.S.
Government agencies and
corporations 10,597,442 10,731 215,513 10,392,660
State and county municipals 409,982 12,063 397,919
Federal Reserve Bank Stock 446,250 446,250
Other investment securities 578,010 578,010
------------ --------- --------- ------------
Total Available-for-Sale $ 18,329,716 $ 18,918 $229,595 $ 18,119,039
============= ========== ========= ============
</TABLE>
The amortized cost and estimated market value of investment securities at
September 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:
--------------------------------
Estimated
Amortized Fair
Cost Value
---- -----
Held-to-Maturity:
Due within one year $ 4,205,346 $ 4,205,894
Due after one year through five years 14,708,163 14,704,954
Due after five years through ten years 4,154,293 4,219,050
Mortgage-backed securities 399,171 396,700
------------ -----------
Total Held-to-Maturity $ 23,466,973 $23,526,598
============ ===========
Available-for-Sale:
Due within one year $ 6,239,504 $ 6,241,234
Due after one year through five years 5,584,357 5,534,442
Due after five years through ten years 5,346,010 5,181,499
Mortgage-backed securities 135,585 137,604
Other securities 1,024,260 1,024,260
------------ -----------
Total Available-for-Sale $ 18,329,716 $18,119,039
============ ===========
Proceeds from sales of available-for-sale investment securities during the
nine months ended September 30, 1996 and 1995 were $0 and $4,736,538 with
gross recognized gains of $0 and $100 and no losses, respectively.
At September 30, 1996 and 1995 the carrying values of the Federal Reserve
Bank stock were $446,250 and $151,050, 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 September 30, 1996 and December 31, 1995, the loan portfolio was
composed of the following:
September 30, December 31,
1996 1995
---- ----
Insurance premium financing $34,811,254 $22,409,356
Commercial loans 22,399,093 16,301,840
Installment loans 13,153,478 10,645,406
Real estate loans 24,716,828 16,281,558
Medical claims receivable 4,279,630 3,353,540
------------ ------------
Total gross loans 99,360,283 68,991,700
Unearned interest (2,548,226) (1,889,461)
Allowance for credit losses (1,292,189) (702,927)
------------ ------------
Net loans $95,519,868 $66,399,312
============ ============
12
<PAGE>
4. Net Loans continued:
--------------------
Activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Nine months Three Months Nine months Three Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1996 1996 1995 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning balance $ 702,927 $1,295,165 $697,948 $718,628
Provision for credit losses 90,000 45,000 60,000 0
Bank acquisition 614,700 0 10,181 10,181
Loans charged off,
net of recoveries (115,438) (47,976) (43,585) (4,265)
---------- ---------- -------- --------
Ending balance $1,292,189 $1,292,189 $724,544 $724,544
========== ========== ======== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $135,000 and $27,000 at September 30, 1996 and December 31,
1995, respectively.
5. Shareholders' Equity:
---------------------
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. 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 the fair market value of such Common Stock on the
date of grant. On July 16, 1996, the Company adopted a stock option plan
for directors of the Company who are not employees of the Company. This
plan is a formula plan pursuant to which annual options to purchase 2,000
shares of the Company's Common Stock at an exercise price equal to the fair
market value of such Common Stock on the date of the grant are
automatically granted to each non-employee director of the Company.
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:
Nine months ended
September 30, September 30,
1996 1995
---- ----
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 26,849,509 $ 23,776,526
Average yield 12.5% 11.7%
Interest income $ 2,509,161 $ 2,080,915
CONSUMER, COMMERCIAL AND REAL
ESTATE FINANCING:
Average balance outstanding $ 54,775,163 $ 44,215,791
Average yield 12.6% 10.9%
Interest income $ 5,173,098 $ 3,261,533
COST OF FUNDS:
Average balance outstanding (1) $ 144,184,834 $ 92,715,823
Average interest rate 3.7% 3.6%
Interest expense $ 3,961,638 $ 2,536,942
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 1,163,973 $ 763,530
Total interest expense $ 440,182 $ 281,882
Provision for loan losses $ 10,000 $ 6,667
Noninterest income $ 150,531 $ 117,344
Noninterest expense $ 672,412 $ 486,881
(1) Includes $80,144 and $1,297,565 of short term borrowings and $6,612
and $111,915 of interest expense on short term borrowings for the nine
months ended September 30, 1996 and 1995, respectively.
Note: Average balances are computed using daily balances throughout each period.
14
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Nine months ended September 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 $37,985,065 $ 1,918,279(1) 6.7%
Federal funds sold 21,114,785 875,221 5.5%
Loans(2) 85,351,415 7,682,259(3) 12.0%
Allowance for credit losses (1,119,472) N/A N/A
----------- ------------ -----
Total interest earning assets 143,331,793 10,475,759 9.8%
----------- ------------ -----
Cash and due from banks 6,181,557
Premises and equipment 3,742,163
Accrued interest receivable 1,012,359
Other assets 5,897,982
-----------
Total assets $160,165,854
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $34,995,294 $ 632,228 2.4%
Savings deposits 8,274,505 128,407 2.1%
Time deposits 79,248,375 3,194,391 5.4%
Notes payable 80,144 6,612 11.0%
----------- ------------ -----
Total interest bearing liabilities 122,598,318 3,961,638 4.3%
----------- ------------ -----
Net interest income $6,514,121
==========
Net interest spread 5.5%
-----
Net interest income to average earning assets 6.1%
=====
Noninterest bearing deposits 20,061,217
Accrued interest payable and other liabilities 802,798
-----------
Total liabilities 143,462,333
Shareholders' equity 16,703,521
-----------
Total liabilities and shareholders' equity $160,165,854
============
</TABLE>
(1) Interest income on the tax exempt securities does not reflect the tax
equivalent yield.
(2) Loans on nonaccrual status have been included in the computation of average
balances.
(3) The interest income on loans does not include loan fees. Loan fees are
immaterial and are included in noninterest income.
15
<PAGE>
Nine Months Ended September 30, 1996 Versus Nine Months Ended September 30, 1995
- --------------------------------------------------------------------------------
Surety Capital Corporation (the "Company") and its wholly owned subsidiary,
Surety Bank, National Association ("Surety Bank"), reported an increase of 74.8%
in net earnings of $1,133,217 as compared to $648,413 during the nine months
ended September 30, 1996 and 1995, respectively. Earnings per share were $0.22
and $0.20 for the nine months ended September 30, 1996 and 1995, respectively.
The increase in earnings per share is principally attributed to an increase in
yields realized on the loan portfolio along with an increase in the average
balance of loans outstanding. The yields earned by the Company on its loan
portfolio during the nine months ended September 30, 1996 and 1995 were 12.0%
and 10.0%, respectively, while the average cost of funds for the Company for the
same periods was 4.3% and 4.2%, respectively. The average balance of loans
outstanding were $85,351,415 and $67,992,319 for the nine months ended September
30, 1996 and 1995, respectively. The loan-to-deposit ratio as of September 30,
1996 and 1995 was 63.0% and 72.4%, respectively, and the drop is attributed to
the acquisition of First National Bank, Midlothian, Texas, by Surety Bank. It is
the goal of the Company to increase its loan production in order to improve
Surety Bank's loan-to-deposit ratio, which will result in a transfer from Surety
Bank's overnight federal funds sold (with a 5.5% yield for the first three
quarters of 1996) to the higher yielding loan portfolio (with a 12% yield for
the first three quarters of 1996).
Total interest income increased 52.4% to $10,475,759 from $6,871,767, while
total interest expense increased 56.2% to $3,961,638 from $2,536,942, resulting
in a 50.3% increase in net interest income before provision for credit losses to
$6,514,121 from $4,334,825. The Company'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
52.3% to $24,716,828 from $16,224,602, commercial lending increased by 43.7% to
$22,399,093 from $15,590,320, consumer lending increased by 14.2% to $13,153,478
from $11,519,839, medical claims factoring increased by 43.0% to $4,279,630 from
$2,992,867, and insurance premium financing increased by 43.4% to $34,811,254
from $24,283,325. This growth is attributed to the Midlothian acquisition and
management's marketing efforts. The average volume of consumer, commercial, and
real estate lending increased 23.9%, with an increase in the average yields on
those loans from 12.6% to 10.9%. The 12.9% increase in the average volume of
insurance premium loans was accompanied by a yield of 12.5% and 11.7% on those
loans for the nine months ended September 30, 1996 and 1995, respectively. The
average balance of interest bearing deposits increased 52.5%, while the average
rate paid increased from 4.2% to 4.3%.
The Company recorded a $90,000 provision for loan losses during the nine months
ended September 30, 1996 compared to $60,000 provision for loan losses during
the nine months ended September 30, 1995. As the Company's ratio of net
charge-offs to average loans remained unchanged for these periods, the Company
provided amounts, through charges to earnings, to maintain the allowance for
loan losses at an adequate level. Management believes that all known losses in
the portfolio have been recognized.
The Company's noninterest income increased 28.3% to $1,354,776 from $1,056,095
for the nine months ended September 30, 1996 and 1995, respectively. This
increase compares to a corresponding increase in average noninterest bearing
deposits of 63.1% to $20,061,217 from $12,297,624 for these same periods.
Noninterest income is generated primarily from fees associated with noninterest
and interest bearing accounts.
Noninterest expense increased 38.1%, primarily the result of a 47.1% increase in
salaries and employee benefits, a 39.6% increase in occupancy and equipment
expenses, and a 25.2% increase in general and administrative expenses. The
increase in salaries and benefits was due primarily to additional staffing
required by the Midlothian acquisition and the Providers Funding Corporation
acquisition. Increases in general and administrative expenses relate primarily
to legal and professional fees.
Three Months Ended September 30, 1996 Versus Three Months Ended September 30,
1995
- --------------------------------------------------------------------------------
The Company earned $442,783 as compared to $251,241 during the three months
ended September 30, 1996 and 1995, respectively. Earnings per share were $0.08
and $0.07 for the three months ended September 30, 1996 and 1995, respectively.
Total interest income increased 61.1% to $3,768,828 from $2,338,790, while total
interest expense increased 50.9% to $1,353,264 from $896,530, resulting in a
67.5% increase in net interest income before provision for loan losses to
$2,415,204 from $1,442,260.
16
<PAGE>
The Company recorded a $45,000 provision for loan losses during the three months
ended September 30, 1996 compared to no provision for credit losses during the
three months ended September 30, 1995. As the Company's ratio of net charge-offs
to average loans remained unchanged for these periods, the Company provided
amounts, through charges to earnings, to maintain the allowance for loan losses
at an adequate level. Management believes that all known losses in the portfolio
have been recognized.
The Company's noninterest income increased 40.4% to $474,664 from $338,149 for
the three months ended September 30, 1996 and 1995, respectively. Noninterest
expense increased 53.1%, primarily the result of a 58.0% increase in salaries
and employee benefits, a 47.3% increase in occupancy and equipment expenses, and
a 48.4% increase in general and administrative expenses. The increase in
salaries and benefits was due primarily to additional staffing required by the
Midlothian acquisition 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.
- ------------------------------------------
The Company did not own Surety Bank prior to December 30, 1989. Since that time,
the Company has served as a parent company to Surety Bank and has wound down the
Company's own separate business activities. For the nine months ended September
30, 1996, the Company had only nominal income, other than equity in net income
of Surety Bank of approximately $33,000, and approximately $98,600 in
noninterest expenses. The noninterest expenses, which decreased 25.5% 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 CREDIT LOSSES
The Company recorded a $90,000 provision for credit losses during the nine
months ended September 30, 1996 compared to a $60,000 provision during the nine
months ended September 30, 1995. The Company'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 the Company 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 the Company.
The ratio of charge-offs, net of recoveries, to average loans during the nine
months ended September 30, 1996 was 0.2%. The ratio of the allowance for credit
losses to total loans was 1.3% on September 30, 1996 as compared to 1.0% on
September 30, 1995. The allowance for credit losses was $1,292,189 and $724,544
on September 30, 1996 and 1995, respectively.
CURRENT TRENDS AND UNCERTAINTIES
Economic trends and other developments could adversely affect the Company's
operations. Regulatory changes may increase the Company's cost of doing business
or otherwise impact it adversely.
LIQUIDITY
The Company's investment securities portfolio, including federal funds sold, and
its cash and due from bank deposit balances serve as the primary sources of
liquidity. At September 30, 1996, 15.2% of Surety Bank's interest bearing
liabilities were in the form of time deposits of $100,000 and over. Although
unlikely, if a large number of these time deposits matured at approximately the
same time and were not renewed, Surety Bank's liquidity could be adversely
affected. Currently, the maturities of Surety Bank's large time deposits are
spread throughout the year, and Surety Bank monitors those maturities in an
effort to minimize any adverse effect on liquidity.
Over the long term, the ability of the Company to meet its cash obligations will
depend substantially on its receipt of dividends from Surety Bank, which are
limited by banking statutes and regulations.
17
<PAGE>
CAPITAL RESOURCES
Shareholders' equity at September 30, 1996 was $18,603,075 as compared to
$10,294,472 at December 31, 1995. The Company had consolidated net income of
$1,133,217 for the nine months ended September 30, 1996.
Under the regulatory risk-based capital framework, Surety Bank is expected to
meet a minimum risk-based capital ratio to risk-weighted assets ratio of 8%, of
which at least one-half, or 4%, must be in the form of Tier 1 (core) capital.
The remaining one-half, or 4%, may be either in the form of Tier 1 (core) or
Tier 2 (supplementary) capital. The amount of the loan loss allowances that may
be included in capital after the transition period is limited to 1.25% of
risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier
1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for Surety
Bank was 10.76% and 11.72%, respectively, at December 31, 1995 and 11.05% and
12.30%, respectively, at September 30, 1996. In addition, Surety Bank is
expected to maintain a Tier 1 capital to total assets ratio (Tier 1 leverage
ratio) of at least 3%. Surety Bank is currently, and expects to continue to be,
in compliance with these capital requirements.
While the Company believes it has sufficient financing for its working capital
needs until the end of its 1996 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 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 the Company, stand
ready to use available resources to provide adequate capital funds to their
subsidiary banks during periods of financial stress or adversity. The Federal
Reserve has stated that it would generally view a failure to assist a troubled
or failing subsidiary bank in these circumstances as an unsound or unsafe
banking practice, a violation of Regulation Y, or both, justifying a cease and
desist order or other endorsement action, particularly if appropriate resources
are available to the bank holding company on a reasonable basis. The requirement
that a bank holding company, such as the Company, make its assets and resources
available to a failing subsidiary bank could have an adverse effect upon the
Company and its shareholders.
On December 8, 1994, the Company 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, the Company reduced
the balance of the note to $500,000, and a new note was obtained for the
remaining balance of $500,000 with a maturity of January 23, 1996. On February
28, 1996, the Company 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, 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.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Surety 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 Surety Bank.
Both cases arise out of Surety Bank's alleged exercise of control over funds
held in accounts at Surety 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. Surety Bank
asserts that it had a right to exercise control over the funds, in the first
instance under contractual agreements between Surety Bank and the respective
insurance companies or Surety Bank and the policy holders, and in the second
instance in order to protect Surety 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 Surety Bank during an
approximate four month period in 1993, which exceed $2.6 million in the
aggregate. Surety 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.
Not applicable
Item 5. Other Information.
Not applicable.
19
<PAGE>
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
September 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: November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,757,086
<INT-BEARING-DEPOSITS> 286,323
<FED-FUNDS-SOLD> 15,302,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,119,039
<INVESTMENTS-CARRYING> 23,466,973
<INVESTMENTS-MARKET> 23,526,598
<LOANS> 96,812,057
<ALLOWANCE> (1,292,189)
<TOTAL-ASSETS> 172,266,842
<DEPOSITS> 152,280,602
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,383,165
<LONG-TERM> 0
0
0
<COMMON> 57,637
<OTHER-SE> 18,545,438
<TOTAL-LIABILITIES-AND-EQUITY> 172,266,842
<INTEREST-LOAN> 7,682,259
<INTEREST-INVEST> 1,918,279
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 10,475,759
<INTEREST-DEPOSIT> 3,955,026
<INTEREST-EXPENSE> 3,961,638
<INTEREST-INCOME-NET> 6,514,121
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,051,707
<INCOME-PRETAX> 1,727,189
<INCOME-PRE-EXTRAORDINARY> 1,133,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,133,217
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 9.800
<LOANS-NON> 135,000
<LOANS-PAST> 116,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 702,927
<CHARGE-OFFS> 152,043
<RECOVERIES> 36,605
<ALLOWANCE-CLOSE> 1,292,189
<ALLOWANCE-DOMESTIC> 1,292,189
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,292,189
</TABLE>
