FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Mark One
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 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 May 7, 1996, 5,746,512 shares
<PAGE>
SURETY CAPITAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
- - ------------------------------ --------
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1996
and December 31, 1995 (unaudited) 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1995 (unaudited) 4
Consolidated Statements of Shareholders' Equity of the Three
Months Ended March 31, 1996 and for the Year Ended December
31, 1995 (unaudited) 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
2
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
-------------- -------------
<S> <C> <C>
Assets:
Cash and due from banks $7,197,345 $4,727,018
Federal funds sold 28,741,000 18,490,000
Interest bearing deposits
in financial institutions 756,718 1,046,297
Investment securities:
Available-for-sale 19,929,179 10,128,157
Held-to-maturity 21,846,756 13,780,538
--------------- -------------
Total investment securities 41,775,935 23,908,695
Loans 88,431,577 68,991,700
Less: Unearned interest (2,250,953) (1,889,461)
Allowance for credit losses (1,302,492) (702,927)
--------------- --------------
Net loans 84,878,132 66,399,312
Premises and equipment, net 3,962,229 2,775,688
Accrued interest receivable 1,186,177 781,031
Other real estate and repossessed assets 685,935 85,528
Other assets 1,206,417 467,147
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$408,312 and $359,572 at March 31, 1996 and
December 31, 1995, respectively 6,142,549 2,658,557
------------- ------------
Total assets $176,532,437 $121,339,273
============== =============
Liabilities and shareholders equity:
Demand deposits $22,604,592 $13,182,888
Savings, NOW and money markets 39,509,684 30,612,855
Time deposits, $100,000 and over 20,390,377 15,472,674
Other time deposits 74,176,797 50,330,085
--------------- -------------
Total deposits 156,681,450 109,598,502
Note payable - 375,000
Accrued interest payable and other liabilities 1,652,376 1,071,299
--------------- -------------
Total liabilities 158,333,826 111,044,801
--------------- --------------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, none issued at
March 31, 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 March 31, 1996 and December 31, 1995,
respectively, and 5,746,512 and 3,506,429
outstanding at March 31, 1996 and December 31,
1995, respectively 57,584 35,166
Additional paid-in capital 17,132,871 9,356,469
Retained earnings 1,055,694 811,784
Treasury stock, 11,917 shares at March 31, 1996
and 10,166 shares at December 31, 1995
carried at cost (56,959) (50,830)
Unrealized gain on available-for-sale securities,
net of tax 9,421 141,883
--------------- ------------
Total shareholders' equity 18,198,611 10,294,472
-------------- --------------
Total liabilities and shareholders' equity $176,532,437 $121,339,273
=============== ==============
</TABLE>
3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
----------- ----------
<S> <C> <C>
Interest income:
Commercial and real estate loans $1,093,805 $903,848
Consumer loans 333,669 255,089
Insurance premium financing 680,901 648,178
Federal funds sold 342,506 153,358
Investment securities:
Taxable 404,255 100,558
Tax-exempt 76,508 120,662
Interest bearing deposits 19,004 28,640
----------- ----------
Total interest inco 2,950,648 2,210,333
----------- ----------
Interest expense:
Savings, NOW and money market 244,542 189,831
Time deposits, $100,000 and over 270,330 192,591
Other time deposits 699,152 348,654
Other interest expense 6,612 50,055
----------- ----------
Total interest expense 1,220,636 781,131
----------- ----------
Net interest income before
provision for credit loss 1,730,012 1,429,202
----------- ----------
Provision for credit losses 30,000 45,000
----------- ----------
Net interest income 1,700,012 1,384,202
----------- ----------
Noninterest income 397,269 368,292
----------- ----------
Noninterest expense:
Salaries and employee benefits 901,179 707,219
Occupancy and equipment 265,848 218,687
General and administrative 566,818 515,355
----------- ----------
Total noninterest expense 1,733,845 1,441,261
----------- ----------
Income before income taxes 363,436 311,233
Income tax expenses:
Current 119,526 100,869
Deferred
----------- -----------
Net income $243,910 $210,364
=========== ===========
Net income per share of common stock $0.06 $0.07
=========== ===========
Weighted average shares outstanding 4,319,721 3,113,483
=========== ===========
</TABLE>
4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the three months ended March 31, 1996 and
for the year ended December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
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
----------- --------- ------------ ------------- -------------- -------------- ------------
<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 7,770,299 7,792,691
Purchase of Treasury Stock (6,129) (6,129)
Net Income 243,910 243,910
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 (132,462) (132,462)
----------- --------- ------------ ------------- -------------- -------------- ------------
Balance at March 31, 1996 5,758,429 $57,584 $17,132,871 $1,055,694 $(56,959) $9,421 $18,198,611
=========== ========= ============ ============= ============== ============== ============
</TABLE>
5
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
March 31,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $243,910 $210,364
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Provision for credit losses 30,000 45,000
Provision for depreciation 132,125 116,698
Amortization of intangible assets 48,741 27,262
Gain on sale or disposal of assets 100
Net increase in unearned interest on loans 154,154 204,473
Net (increase) decrease in other assets (584,397) 81,879
Net increase (decrease) in accrued interest payable and other (131,861) 23,289
liabilities
---------------- ----------------
Net cash (used in) provided by operating activities (107,328) 709,065
---------------- ----------------
Cash flows from investing activities:
Net increase in loans (633,284) (1,973,727)
Payments received on purchased medical claims receivables 4,086,207 3,169,910
Purchases of medical claims receivables (3,593,814) (4,940,209)
Purchases of available-for-sale securities (4,702,650)
Proceeds from sales of available-for-sale securities 4,736,538
Proceeds from maturities of available-for-sale securities 3,850,040 204,832
Purchases of held-to-maturity securities (1,992,500) (982,073)
Proceeds from maturities of held-to-maturity securities 6,015,000 1,114,252
Proceeds from maturities of interest bearing deposits in financial 563,821 95,833
institutions
Purchases of bank premises and equipment (48,265) (64,627)
Direct cost incurred for bank acquisition (96,542)
Net cash acquired through acquisition 4,117,116
---------------- ----------------
Net cash provided by investing activities 7,565,129 1,360,729
---------------- ----------------
Cash flows from financing activities:
Net decrease in deposits (2,154,165) (1,909,611)
Principal payments on notes payable (375,000)
Purchase of treasury stock (6,129)
Exercise of stock options 6,129
Proceeds from the sale of stock 7,792,691
---------------- ----------------
Net cash provided by (used in) financing activities 5,263,526 (1,909,611)
---------------- ----------------
Net increase in cash and cash equivalents 12,721,327 160,183
Beginning cash and cash equivalents 23,217,018 11,194,360
---------------- ----------------
Ending cash and cash equivalents $35,938,345 $11,354,543
================ ================
</TABLE>
6
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1996 and 1995
(unaudited)
<TABLE>
<CAPTION>
March 31,
------------------------------------
1996 1995
---------------- ----------------
<S> <C> <C>
Supplemental disclosure:
Cash paid during the period for interest $1,244,174 $761,871
Cash paid during the period for federal income taxes $255,000 $6,233
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 3,641,666
Deposits (49,237,113)
Other liabilities (654,721)
---------------- ----------------
Net cash acquired through acquisitions $ (4,117,116)
================ ================
</TABLE>
7
<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 March 31, 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.
8
<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's total
assets as of the same date were $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 March 31, 1996 and for the
three months ended March 31, 1996:
Balance sheet data:
Cash and due from banks $ 1,414,857
Federal funds sold 9,155,000
Investment securities 21,241,467
Net loans 17,672,424
Premises and equipment, net 1,249,918
Accrued interest receivable 480,405
Other assets 560,384
-------------
Total assets $ 51,774,455
=============
Income statement data:
Total interest income $ 313,798
Total interest expense 139,060
Other income 37,387
Noninterest expense 143,326
-------------
Net income $ 68,799
=============
The consolidated results of operations include the operations of First
National subsequent to March 1, 1996. The unaudited information for
the three months ended March 31, 1996 and the unaudited pro forma
information for the three months ended March 31, 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.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Interest income $2,950,648 $2,698,333
Net income (179,764) 317,364
Net (loss) income per share of common stock ($0.04) $0.10
</TABLE>
9
<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 will operate 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 March 31, 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 $ 13,065,843 $5,829 $ 36,359 $ 13,035,313
Obligations of other U.S.
Government agencies and
corporations 4,037,915 8,253 42,074 4,004,094
State and county municipals 4,742,998 196,070 4,939,068
------------ --------- -------- -------------
21,846,756 210,152 78,433 21,978,475
------------ --------- -------- ------------
Available-for-Sale:
U.S. Treasury 288,389 7,876 296,265
Obligations of other U.S.
Government agencies and
corporations 19,301,041 73,400 67,002 19,307,439
Federal Reserve Bank Stock 305,550 305,550
Other investment securities 19,925 19,925
---------------------------------------------------------------
19,914,905 81,276 67,002 19,929,179
------------ ----------- ---------- -------------
$41,761,661 $ 291,428 $ 145,435 $41,907,654
============ ========== ========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities
at March 31, 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.
10
<PAGE>
3. Investment Securities continued:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Held-to-Maturity:
Due within one year $6,474,988 $6,471,212
Due after one year through five years 11,427,615 11,473,030
Due after five years through ten years 3,476,432 3,574,095
Mortgage-backed securities 467,721 460,138
----------- ------------
Total $21,846,756 $21,978,475
------------ ------------
Available-for-Sale:
Due within one year $ 7,318,452 $ 7,218,805
Due after one year through five years 4,935,237 4,927,024
Due after five years through ten years 7,141,647 7,256,725
Mortgage-backed securities 194,094 201,150
Other securities 325,475 325,475
------------ ------------
19,914,905 19,929,179
------------ ------------
Total $ 41,761,661 $41,907,654
============ ===========
</TABLE>
Proceeds from sales of available-for-sale investment securities during
the three months ended March 31, 1996 and 1995 were $0 and $4,736,538
with gross recognized gains of $0 and $100 and no losses,
respectively.
At March 31, 1996 and 1995 the carrying values of the Federal Reserve
Bank stock were $305,550 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 March 31, 1996 and December 31, 1995, the loan portfolio was
composed of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Insurance premium financing $25,044,108 $22,409,356
Commercial loans 20,614,367 16,301,840
Installment loans 12,958,709 10,645,406
Real estate loans 27,172,579 16,281,558
Medical claims receivable 2,641,814 3,353,540
----------- ------------
Total gross loans 88,431,577 68,991,700
Unearned interest (2,250,953) (1,889,461)
Allowance for credit losses (1,302,492) (702,927)
----------- ------------
Net loans $84,878,132 $66,399,312
=========== ===========
</TABLE>
11
<PAGE>
4. Net Loans continued:
Activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
Beginning balance $702,927 $697,948
Provision for loan losses 30,000 45,000
Bank acquisition 614,700
Loans charged off, net of recoveries (45,135) (23,732)
------- -------
Ending balance $1,302,492 $719,216
========== ========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted
to approximately $55,000 and $31,000 at March 31, 1996 and December
31, 1995, respectively.
5. Shareholders' Equity:
During the three months ended March 31, 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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
General
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended. The Company changed the name of its subsidiary bank to
Surety Bank, National Association (the "Surety Bank"), effective January 1,
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>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 22,577,950 $ 22,168,189
Average yield 12.1% 11.7%
Interest income $ 680,901 $ 648,178
CONSUMER, COMMERCIAL AND REAL
ESTATE FINANCING:
Average balance outstanding $ 50,866,149 $ 43,522,673
Average yield 11.2% 10.7%
Interest income $ 1,427,474 $ 1,158,937
COST OF FUNDS:
Average balance outstanding<F1> $ 129,814,967 $ 93,110,851
Average interest rate 3.8% 3.4%
Interest expense $ 1,220,636 $ 781,131
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 983,549 $ 736,778
Total interest expense $ 406,879 $ 260,377
Provision for loan losses $ 10,000 $ 15,000
Noninterest income $ 132,423 $ 122,764
Noninterest expense $ 577,948 $ 480,420
<FN>
<F1>Includes $240,436 and $1,750,000 of short term borrowings and $6,612 and
$50,055 of interest expense on short term borrowings for the three months
ended March 31, 1996 and 1995, respectively.
</FN>
</TABLE>
Note: Average balances are computed using daily balances throughout each period.
13
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
Average Average
Balance Interest Rate
------- -------- ----
<S> <C> <C> <C>
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities and
due from time $30,297,849 $ 499,767<F1> 6.6%
Federal funds sold 25,738,624 342,506 5.3%
Loans<F2> 73,444,099 2,108,375<F3> 11.5%
Allowance for loan losses (850,869) N/A N/A
-------------- ------------- ----------
Total interest earning assets 128,629,703 2,950,648 9.2%
------------- ---------- ----------
Cash and due from banks 5,526,542
Premises and equipment 3,007,564
Accrued interest receivable 875,557
Other assets 4,552,797
--------------
Total assets $142,592,163
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $26,959,905 $ 189,616 2.8%
Savings deposits 8,222,422 54,926 2.7%
Time deposits 77,482,589 969,482 5.0%
Notes payable 240,436 6,612 11.0%
-------------- ---------- ---------
Total interest bearing liabilities 112,905,352 1,220,636 4.3%
-------------- ---------- ---------
Net interest income $1,730,012
Net interest spread 4.9%
Net interest income to average earning assets 5.4%
========
Noninterest bearing deposits 16,349,451
Other liabilities 408,175
----------
Total liabilities 129,662,978
Shareholders' equity 12,929,185
Total liabilities and shareholders' equity $142,592,163
<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>
14
<PAGE>
Three Months Ended March 31, 1996 Versus Three Months Ended March 31, 1995.
Surety Capital Corporation ("Surety") and its wholly owned subsidiary, Surety
Bank, National Association (the "Bank"), reported an increase of 16.1% in net
earnings of $243,910 as compared to $210,364 during the three months ended March
31, 1996 and 1995, respectively. Earnings per share were $0.06 and $0.07 for the
three months ended March 31, 1996 and 1995, respectively. The decline 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 three months ended March 31, 1996 and 1995 were 12% and
11%, respectively, while the average cost of funds for Surety for the same
periods was 4% and 3%, respectively. The loan-to-deposit ratio as of March 31,
1996 and 1995 was 50% and 70%, 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%
yield for the first quarter of 1996) to the higher yielding loan portfolio.
Total interest income increased 34% to $2,950,648 from $2,210,333, while total
interest expense increased 56% to $1,220,636 from $781,131, resulting in a 56%
increase in net interest income before provision for loan losses to $1,730,012
from $1,429,202. 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 69% to $27,172,579
from $16,041,646, commercial lending increased by 30% to $20,614,367 from
$15,857,674, consumer lending increased by 37% to $12,958,709 from $9,446,658
and insurance premium financing increased by 3% to $25,044,108 from $24,438,592.
This growth is attributed to the Midlothian Consolidation and management's
marketing efforts. The average volume of consumer, commercial, and real estate
lending increased 17%, with a no change in the average yields on those loans at
12%. The 2% increase in the average volume of insurance premium loans was
accompanied by a yield of 12% on those loans for the three months ended March
31, 1996 and 1995, respectively. The average balance of interest bearing
deposits increased 40%, while the average rate paid increased from 3% to 4%.
Surety recorded a $30,000 provision for loan losses during the three months
ended March 31, 1996 compared to $45,000 provision for loan losses during the
three months ended March 31, 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 8% to $397,269 from $368,292 for the three
months ended March 31, 1996 and 1995, respectively. This increase compares to a
corresponding increase in average noninterest bearing deposits of 34% to
$16,349,451 from $12,197,290 for these same periods. Noninterest income is
generated primarily from fees associated with noninterest and interest bearing
accounts.
Noninterest expense increased 20%, primarily the result of a 27% increase in
salaries and employee benefits, a 22% increase in occupancy and equipment
expenses, and a 10% 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 three months ended March 31, 1996, Surety
had only nominal income, other than equity in net income of the Bank of
approximately $18,500, and approximately $28,000 in noninterest expenses. The
noninterest expenses, which decreased 54% 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.
15
<PAGE>
Allowance for Credit Losses
Surety recorded a $30,000 provision for credit losses during the three months
ended March 31, 1996 compared to a $45,000 provision during the three months
ended March 31, 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 three
months ended March 31, 1996 was 0.06%. The ratio of the allowance for loan
losses to total loans was 1.5% on March 31, 1996. The allowance for loan losses
was $1,302,492 on March 31, 1996.
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 March 31, 1996, 13% 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 March 31, 1996 was $18,198,611 as compared to
$10,294,472 at December 31, 1995. Surety had consolidated net income of $243,910
for the nine months ended March 31, 1996.
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 10.58% and 12.08%,
respectively, at March 31, 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.
16
<PAGE>
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. On February 28, 1996,
Surety repaid its 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.
17
<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.
Not applicable.
Item 5. Other Information.
Not applicable.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.01 Amendment Number One to Reorganization Agreement by and between
First Midlothian Corporation; First National Bank; certain
individual shareholders and directors of First Midlothian
Corporation and First National Bank; Surety Bank, National
Association; and Surety Capital Corporation, dated January 16,
1996 (1)
2.02 Amendment Number Two to Reorganization Agreement by and between
First Midlothian Corporation; First National Bank; certain
individual shareholders and directors of First Midlothian
Corporation and First National Bank; Surety Bank, National
Association; and Surety Capital Corporation, dated February 29,
1996 (1)
2.03 Amendment Number One to Agreement to merge SCC Acquisition, Inc.
with and into First Midlothian Corporation Under the Charter of
First Midlothian Corporation and Under the Title of First
Midlothian Corporation, dated February 29, 1996 (1)
27 Financial Data Schedule*
99 Financial statements relating to the acquisition of First
Midlothian Corporation and its wholly-owned subsidiary, First
National Bank*
------------------------------------------------------------
* Filed herewith.
(1) Filed with the Company's current report on Form 8-K dated February 29,
1996 and incorporated by reference herein.
(b) Reports on Form 8-K
On March 15, 1996 the Company filed a Current Report on Form 8-K to
report that as of the close of business on February 29, 1996, the Company
acquired First Midlothian Corporation, a Texas bank holding company
located in Midlothian, Texas, and its wholly-owned subsidiary, First
National Bank, a national banking association located in Midlothian,
Texas.
19
<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: May 14, 1996 Surety Capital Corporation
By: /s/ C. Jack Bean
C. Jack Bean
Chairman
By: /s/ B.J. Curley
B.J. Curley
Vice President, Chief
Financial Officer
Chief Accounting Officer
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS'
Board of Directors and Shareholders
First Midlothian Corporation
Midlothian, Texas
We have audited the accompanying consolidated balance sheets of First Midlothian
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Midlothian Corporation as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, First Midlothian Corporation
changed its method of accounting for investment securities and income taxes.
/s/ Samson, Robbins & Associates, P.L.L.C.
SAMSON, ROBBINS & ASSOCIATES, P.L.L.C.
Dallas, Texas
February 1. 1996
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1995 1994
---- ----
<S> <C> <C>
ASSETS
- - ------
Cash and due from banks $ 2,443,940 $ 2,150,392
Federal funds sold 8,170,000 2,640,000
------------ ------------
Cash and cash equivalents 10,613,940 4,790,392
Investment securities 19,365,924 20,512,375
Loans, net 19,354,727 20,396,952
Premises and equipment, net 843,532 854,488
Accrued interest receivable 411,469 460,611
Other real estate and repossessed assets 648,535 1,046,724
Deferred income tax asset 35 205,101
Other assets 59,428 48,423
------------ ------------
Total assets $ 51,297,590 $ 48,315,066
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- - ------------------------------------
Liabilities:
Demand deposits $ 10,141,218 $ 9,191,492
Savings, NOW and money markets 16,673,946 16,766,651
Time deposits, $100,000 and over 1,964,821 1,546,147
Other time deposits 17,660,893 16,096,716
------------ ------------
Total deposits 46,440,878 43,601,006
Subordinated debentures 619,707 674,707
Accrued interest payable and other liabilities 339,328 468,933
------------ ------------
Total liabilities 47,399,913 44,744,646
Commitments and contingent liabilities -- --
Shareholders' equity:
Common stock, $10 par value, 48,000 shares
authorized, issued and outstanding 480,000 480,000
Additional paid-in capital 679,493 679,493
Retained earnings 2,707,093 2,417,344
Unrealized gain (loss) on available-for
sale securities 31,091 (6,417)
------------ ------------
Total shareholders' equity 3,897,677 3,570,420
Total liabilities and shareholders' equity $ 51,297,590 $ 48,315,066
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Commercial and real estate loans $ 1,652,287 $ 1,466,820 $ 1,555,773
Consumer loans 398,445 351,874 299,759
Federal funds sold 454,151 185,581 341,754
Investment securities and
interest bearing deposits 1,137,894 963,043 659,231
Other interest income 1,761 32,621 35,923
----- ------ ------
Total interest income 3,644,538 2,999,939 2,892,440
--------- --------- ---------
Interest expense:
Savings, NOW and money markets 491,164 327,632 363,056
Time deposits, $100,000 and over 241,286 134,369 121,505
Other time deposits 809,653 627,142 641,687
Other interest expense 90,566 81,777 88,846
------ ------ ------
Total interest expense 1,632,669 1,170,920 1,215,094
--------- --------- ---------
Net interest income before
provision for loan losses 2,011,869 1,829,019 1,677,346
Provision for loan losses 58,000 0 0
------ - -
Net interest income 1,953,869 1,829,019 1,677,346
--------- --------- ---------
Noninterest income 610,807 627,846 645.961
------- ------- -------
Noninterest expense:
Salaries and employee benefits 980,459 941,462 881,923
Occupancy and equipment 203,187 194,860 181,048
General and administrative 783,244 936,371 1,035,401
------- ------- ---------
Total noninterest expense 1,966,890 2,072,693 2,098,372
--------- --------- ---------
Income before income taxes 597,786 384,172 224,935
Income tax expense:
Current 8,500 0 0
Deferred 179,537 109,229 57,632
------- ------- ------
Total income tax expense 188,037 109,229 57,632
------- ------- ------
Net income $ 409,749 $ 274,943 $ 167,303
=========== =========== ===========
Net income per share of common stock $ 8.54 $ 5.73 $ 3.49
=========== =========== ===========
Weighted average shares outstanding 48,000 48,000 48,000
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
Common Stock Additional on Available Total
Par Paid-In Retained For Sale Shareholders'
Shares Value Capital Earnings Securities Equity
------ ----- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 as
previously reported 48,000 $480,000 $ 679,493 $ 1,605,971 $ 0 $2,765,464
Cumulative effect on prior years
of change in accounting principle 369,127 369,127
------ -------- --------- ----------- -------- ----------
Balance at December 31, 1992
as restated 48,000 480,000 679,493 1,975,098 0 3,134,591
Net income 167,303 167,303
Balance at December 31, 1993 48,000 480,000 679,493 2,142,401 0 3,301,894
Net income 274,943 274,943
------ -------- --------- ----------- -------- ----------
Unrealized (loss) on
available-for-sale
securities, net of
income taxes (6,417) (6,417)
------ -------- --------- ----------- -------- ----------
Balance at December 31, 1994 48,000 480,000 679,493 2,417,344 (6,417) 3,570,420
Net income 409,749 409,749
Dividends paid (120,000) (120,000)
Unrealized gain on
available-for-sale
securities, net of
income taxes 37,508 37,508
------ -------- --------- ----------- ------- ----------
Balance at December 31, 1995 48,000 $480,000 $ 679,493 $ 2,707,093 $31,091 $3,897,677
====== ======== ========= =========== ======= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
---- ---- ----
<S> <C>
Cash flows from operating activities:
Net income $ 409,749 $ 274,943 $ 167,303
Adjustment to reconcile net income
to net cash provided by operating
activities:
Provision for loan loss 58,000 0 0
Depreciation 73,200 72,300 63,600
(Discount accretion) / premium amortization (102,230) (19,895) 155,671
Loss on sale or disposal of other real estate 57,334 76,061 189,967
Loss on sale of investment securities 0 15,548 0
Net change in accrued interest receivable 49,142 (9,236) 4,123
Net change in other assets (11,005) 24,696 15,224
Net change in deferred tax asset 179,537 109,227 57,632
Net change in accrued interest
payable and other liabilities (129,605) (13,800) (88,163)
-------- ------- -------
Net cash provided by operating activities 584,122 529,844 565,357
------- ------- -------
Cash flows from investing activities:
Proceeds from the maturity of held-to-maturity
securities and interest bearing deposits 15,320,000 18,365,125 20,822,000
Proceeds from maturity of available-for
sale securities 4,000,000 0 0
Purchase of premises and equipment (62,245) (87,408) (62,953)
Net decrease in loans 984,225 307,459 59,028
Proceeds from sale of other real estate 340,854 377,819 598,850
Purchase of held-to-maturity securities (12,000,703) (15,906,164) (20,186,250)
Purchase of available-for-sale securities (6,007,578) (3,927,657) 0
---------- ---------- -
Net cash provided by (used in)
investing activities 2,574,553 (870,826) 1,230,675
--------- -------- ---------
Cash flows from financing activities:
Net change in deposits 2,839,873 (2,097,951) (4,622,469)
Payments on debentures (55,000) (99,040) (62,203)
Dividends paid (120,000) 0 0
-------- - -
Net cash provided by (used in)
financing activities 2,664,873 (2,196,991) (4,684,672)
--------- ---------- ----------
Net increase (decrease) in cash 5,823,548 (2,537,973) (2,888,640)
Beginning cash and cash equivalents 4,790,392 7,328,365 10,217,005
--------- --------- ----------
Ending cash and cash equivalents $10,613,940 $ 4,790,392 $ 7,328,365
=========== =========== ===========
Supplemental disclosure:
Cash paid during the period for interest $ 1,544,006 $ 1,182,505 $ 1,267,670
=========== =========== ===========
Cash paid during the period for income taxes $ 0 $ 0 $ 0
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
1. Basis of Presentation:
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiary, First National Bank in Midlothian ("Bank"), which is
100% owned. All significant intercompany transactions and balances have been
eliminated in consolidation.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents
- - -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are sold for one days Periods.
Use of Estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties and an annual independent loan review.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is possible that the allowances for losses on loans
and foreclosed real estate may change.
Fair Value of Financial Instruments
- - -----------------------------------
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
- - ---------------------------------------------
About Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition, where it is practical to estimate values and
without incurring excessive costs. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used. including the discount rate and estimates of future cash
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of the Bank.
Management has determined that the disclosures required by SFAS 107 are not
considered practical or cost effective. Accordingly, this information is not
included in the accompanying consolidated financial statements or related notes
to the consolidated financial statements.
Investment Securities
- - ---------------------
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
---------------------------------
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
- - ---------
Securities" (SFAS 115). This statement addresses the accounting and reporting
for investments in equity and debt securities.
Management determines the appropriate classification of securities at time of
purchase. If the securities are purchased with the positive intent and the
ability to hold the securities until maturity, they are classified as
Held-To-Maturity and carried at historical cost, adjusted for amortization of
premiums and accretion of fees and discounts using the effective interest
method. Securities to be held for indefinite periods of time are classified as
Available-For-Sale and carried at fair value. Securities purchased and held
principally for the purpose of selling them in the near term are classified as
trading. The Company has no securities classified as trading as of December 31,
1995. The cost of securities sold is based on the specific identification
method.
During December, 1995, the Company reclassified approximately $6,000,000 of U.S.
Treasury obligations from the Held-to-Maturity classification to
Available-for-Sale. This was accomplished by utilizing an opportunity made
available by the Financial Accounting Standards Board that allowed all financial
institutions a one time chance to reclassify their security portfolio without
jeopardizing their present accounting treatment.
Loans and Allowance for Loan Losses
- - -----------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned interest
and an allowance for loan losses. The allowance for loan losses is established
through a provision for loan losses charged against current earnings. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance for loan losses is an
amount that management believes will be adequate to absorb possible losses on
existing loans that may become uncollectible, based upon evaluation of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrowers' ability to pay.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans and Allowance for Loan Losses, continued
- - -----------------------------------
Interest income on installment loans is recognized by a method which
approximates the interest method. Interest income on commercial and real estate
loans is accrued daily on the amount of outstanding principal. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that a borrower's
financial condition is such that collection of interest and principal is
doubtful. Management evaluates the book value (including accrued interest) and
collateral value on loans placed on nonaccrual status and provides specific
allowance for loan losses as deemed appropriate.
Certain fees and costs associated with the origination of loans are recognized
when received. Management has determined that fees collected offset actual
expenses incurred to process the subject loans.
Premises and Equipment
- - ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method at rates sufficient to
amortize the cost over the estimated lives of the assets. Expenditures for
repairs and maintenance are expensed as incurred, and renewals and betterments
that extend the lives of assets are capitalized. Cost and accumulated
depreciation are eliminated from the accounts when assets are sold or retired
and any resulting gain or loss is reflected in operations in the year of
disposition.
Other Real Estate and Repossessed Assets
- - ----------------------------------------
Foreclosed real estate and other assets are recorded at the lower of the unpaid
balance of the related loan or the fair market value of the property, net of
related selling and carrying costs. Any write down to fair market value at the
date of acquisition is charged against the allowance for loan losses. Any
subsequent write downs are reflected in operations.
Income Per Share
- - ----------------
Net income per share of common stock is computed based upon the weighted average
number of shares of common stock outstanding during the years ended December 31.
1995, 1994 and 1993.
Income Taxes
- - ------------
During 1993, the Company adopted Statement of Financial Accounting Standards No.
109 (SFAS 109) whereby the method of accounting for income taxes utilized an
asset and liability approach for financial statement purposes. Under SFAS 109,
the types of differences between the tax bases of assets and liabilities and
their financial reporting amounts that give rise to significant portions
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of deferred income tax liabilities or assets include: allowances for possible
loan losses, property and equipment, investment securities and net operating
loss carryforwards. The change in accounting did not have an effect on the
Company's consolidated financial position or results of operations for the years
ended 1994 or 1995. First Midlothian Corporation and its subsidiary file a
consolidated tax return. The Company has a tax sharing arrangement with its
subsidiary.
3. Investment Securities:
At December 31, 1995 the amortized cost and estimated market values of
investment securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury $ 9,002,032 $ 34,509 $ 0 $ 9,036,541
Obligations of other U.S.
Government agencies and
corporations 4,000,000 3,750 2,820 4,000,930
State and county municipals 264,022 2,880 0 266,902
Federal Reserve Bank stock 44,400 0 0 44,400
----------- -------- ---------- -----------
$13,310,454 $ 41,139 $ 2,820 $13,348,773
=========== ======== ========== ===========
Available-for-Sale:
U.S. Treasury $ 6,002,155 $ 53,315 $ 0 $ 6,055,470
Obligations of other U.S.
Government agencies and
corporations 0 O 0 O
----------- -------- ---------- -----------
$ 6,002,155 $ 53,315 $ 0 $ 6,055,470
=========== ======== ========== ===========
</TABLE>
At December 31, 1994 the amortized cost and estimated market values of
investment securities are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Treasury $ 16,258.839 $ 0 $ 170,257 $ 16,088,582
Obligations of other U.S.
Government agencies and
corporations 0 0 0 0
State and county municipals 283,736 1,623 0 285,359
Federal Reserve Bank stock 44,400 0 0 44,400
------------ ---------- ----------- ------------
$ 16,586,975 $ 1,623 $ 170,257 $ 16,418,341
============ ========== =========== ============
</TABLE>
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-Sale:
U.S. Treasury $ 3,935,122 $ 0 $ 9,722 $ 3,925,400
Obligations of other U.S.
Government agencies and
corporations 0 0 0 0
----------- ------- ----------- -----------
$ 3,935,122 $ 0 $ 9,722 $ 3,925,400
=========== ======= =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
---- -----
Held-to-Maturity:
Due within one year $ 6,249,771 $ 6,273,293
Due after one year through five years 12,993,755 13,061,550
Due after five years through ten years 24,683 25,000
Other Securities Total 44,400 44,400
$ 19,312,609 $19,404,243
============ ===========
Proceeds from maturities of investment securities during the twelve months ended
December 31, 1995 were $19,320,000 with no gross recognized gains or losses.
Proceeds from maturities of investment securities during the twelve months ended
December 31, 1994 were $18,365,125 with gross recognized losses of $15,548.
These securities were sold within ninety (90) days of the maturity dates and did
not impact the classification of other Held-To-Maturity securities.
At December 31, 1995, and December 31, 1994, the carrying value of Federal
Reserve Bank stock was $44,400. The Federal Reserve Bank stock's market value
was estimated to be the same as its carrying value at both December 31, 1995 and
December 31, 1994.
At December 31, 1995 and December 31, 1994, securities with a carrying amount of
approximately $6,565,000 and $7,537,000, respectively, were pledged as
collateral for public deposits, as required or permitted by law.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Loans and Allowance for Loan Losses:
The loan portfolio was composed of the following at December 31, 1995 and 1994:
1995 1994
---- ----
Commercial loans $ 4,063,532 $ 5,505,238
Real estate loans 12,014,874 11,550,776
Installment loans 3,715,915 3,659,907
Overdrafts 10,318 122,934
------ -------
Total loans 19,804,639 20,838,855
Deduct:
Unearned interest (217,257) (232,655)
Allowance for loan losses (185,320) (256,583)
-------- --------
Net loans $ 19,354,727 $ 20,396,952
============ ============
A summary of the changes in the allowance for loan losses for the years ended
December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993
---- ---- ----
Beginning balance $ 256,583 $ 317,372 $ 346,582
Provision for loan losses 58,000 0 0
Loans charged off (112,511) (84,079) (45,416)
Recoveries 30,583 23,290 16,206
$ 232,655 $ 256,583 $ 317,372
========== ========== ==========
No provision for loan losses was recorded during the year ended December 31,
1994 and 1993. During 1991, the Company was required by its bank regulator to
increase the allowance for loan loss significantly based upon actual experience
levels at that time. Subsequent to 1991, the Company's experience relative to
loan loss has improved such that no material provision was required until 1995.
Loans on which the accrual of interest has been discontinued amounted to
approximately $146,759 and $52,663 at December 31, 1995 and 1994, respectively.
Included in commercial and installment loans at December 31, 1995 and 1994, are
approximately $998,714 and $1,414,804, respectively, of loans to employees,
officers, and/or directors, or their interests.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Premises and Equipment
Premises and equipment at December 31, 1995 and 1994 are summarized as follows:
1995 1994
---- ----
Land 64,277 $ 64,277
Building 989,222 971,697
Furniture, fixtures and computers 399,200 646,761
Automobiles 53,289 53,289
1,505,988 1,736,024
Less accumulated depreciation (662,456) (881,536)
Net premises and equipment $ 843,532 $ 854,488
========== =========
During 1995, the Company adjusted premises and equipment to reflect obsolete,
nonutilized items that were fully depreciated in prior years. The effect was to
reduce the asset cost and accumulated depreciation by approximately $291,000.
Depreciation expense was $73,200, $72,300 and $63,600 for the years ended
December 31. 1995. 1994 and 1993, respectively.
6. Other Real Estate and Repossessed Assets:
Other real estate and repossessed assets consisted of the following at December
31, 1995 and] 1994:
1995 1994
---- ----
Other real estate $ 708,268 $ 1,173,812
Allowance for possible loss:
Beginning balance (127,088) (140,151)
Charge offs 69,941 13,063
Provision charged to expense (2,586) -
---------- ------------
Ending balance (59,733) (127,088)
---------- ------------
Net other real estate $ 648,535 $ 1,046,724
========== ============
The allowance for possible loss on real estate includes both a provision for
adjustment to market value and an amount for anticipated closing and selling
costs.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Subordinated Debentures:
Subordinated Debentures at December 31, 1995 and 1994 are summarized as follows:
1995 1994
---- ----
1982 Subordinated Debentures 12.00% $ 339,707 $ 339,707
91 Subordinated Debentures:
Series D 9.75% -- 55,000
Series E 9.75% 70,000 70,000
Series F 10.00% 70,000 70,000
Series G 10.00% 70,000 70,000
Series H 10.00% 70,000 70,000
--------- ---------
$ 619,707 $ 674,707
========= =========
Interest is payable semiannually with the principle due at maturity.
The following is a summary of maturities of Subordinated Debentures at December
31, 1995
Due within one year $ 70,000
Due after one year through five years 549,707
---------
$ 619,707
=========
The 1982 Subordinated Debentures are held by several shareholders of the
Company. The 1991 Subordinated Debentures are held by shareholders with the
exception of $100,000 which is held by two (2) significant customers of the
Bank.
8. Federal Income Tax:
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". In accordance with the
provisions of this statement, the Company elected to restate prior years by
recording the cumulative effect of this restatement as an increase to retained
earnings of approximately $ 370,000 at January 1, 1993.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred asset recognized for the years ended December
31, are as follows:
1995 1994
---- ----
Deferred tax liability:
Allowance for loan losses $ 12,659 $ 32,379
Securities 14,030 0
-------- --------
26,689 32,379
-------- --------
Deferred tax asset:
Contribution carryforward 4,820 203,006
Depreciation 3,240 1,115
Securities 0 12,250
Allowance for real estate losses 18,664 21,109
-------- --------
26,724 237,480
-------- --------
Valuation allowance 0 0
Net deferred tax asset $ 35 $205,101
======== ========
The Company's effective tax rate on income before income taxes differs from the
U.S. statutory tax rate as follows:
December 31,
1995 1994
---- ----
U.S. statutory rate 34.0 % 34.0 %
Tax-exempt interest (2.6) (5.6)
------ ------
Effective tax rate 31.4 % 28.4 %
====== ======
9. Financial Instruments With Off-Balance Sheet Risk:
The Company's subsidiary Bank is party to financial instruments with off-balance
sheet risk, entered into in the normal course of business to meet the financing
needs of its customers. These financial instruments include loan commitments and
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
The Bank's exposure to credit loss in the event of nonperformance by
counterparties to loan commitments and letters of credit is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as are used in underwriting
on-balance sheet instruments.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total amounts of financial instruments with off-balance sheet risk at
December 31, 1995 and 1994 are as follows:
1995 1994
---- ----
Unfunded loan commitments $ 827,991 $ 761,132
Letters of credit 15,450 80,602
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
Loans are made in accordance with formal written loan policies. The Bank
evaluates each customer's credit worthiness on a case by case basis. The amount
of collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's evaluation of the counterparty. Collateral held
varies, but may include cash. accounts receivable, inventory, property,
equipment and real estate.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The Bank sold $8,170,000 and $2,640,000 in federal funds at December 31, 1995
and 1994, respectively. These funds represent uncollateralized loans made by the
Bank, in varying amounts, to commercial banks with whom the subsidiary Bank has
correspondent relationships. The Bank maintains deposits with other financial
institutions in amounts which exceed FDIC insurance coverage. At December 31,
1995 and 1994, approximately $613,184 and $0 respectively, of such balances were
uninsured.
10. Commitments and Contingencies:
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. Management does not anticipate any material
adverse effect on the financial condition of the Company as a result of these
commitments.
The Company is party to various operating leases and contracts. The Company has
a contract with Electronic Data Systems (EDS) to provide data processing
services for the Bank. This contract, which expires February 28, 1997, is based
on usage and items processed. The average cost of this contract over the past
three years is approximately $10,000 - $12,000 per month. This agreement can be
canceled with a six month notice but requires the Bank to pay for the remaining
term of the contract at 80% of the normal usage.
In addition, the Company has a maintenance agreement for the drive-in turbo
lanes and leases offsite storage facilities. The maintenance agreement is for a
term of seven years and expires in March, 1996. The storage lease is for a term
of two years and expires in March, 1997. These agreements cost $1,800 per year
and $550 per month, respectively.
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule of future estimated minimum payments required under
these operating leases:
1996 $ 112,650
1997 19,250
---------
Total minimum payment $ 131,900
=========
In the normal course of business, the Bank may become involved in routine claims
and lawsuits. While the results of litigation cannot be predicted with
certainty, management, in consultation with legal counsel, believes that the
final outcome of any of these matters, or of any unasserted claims, will not
have a material adverse effect on the Company's consolidated financial condition
or results of operations.
11. Shareholders' Equity:
In 1982, the Company acquired all of the common stock of the subsidiary Bank.
Shareholders of the Bank stock were issued the same number of shares of common
stock of the Company as they had held in the Bank. The Company does not have any
warrants or options issued or outstanding.
The Company is not subject to any regulatory restrictions on the amount of
dividends that it may declare, however, dividends must be paid out of retained
earnings. On June 30, 1995, the Company declared and paid a $2.50 per share
dividend for the shareholders of record as of that date.
12. Restrictions on Retained Earnings:
The primary source of funds for cash distributions by the Company to its
shareholders is dividends received from its subsidiary Bank. The amount of
dividends that the subsidiary Bank may declare in a calendar year without
approval by the OCC is the Bank's net profits for that year combined with its
net retained profits, as defined, for the two preceding years. At December 31,
1995, approximately $ 616,200 of the Bank's retained earnings were available for
dividend distribution to the Company without prior regulatory approval.
13. Regulatory Matters:
The Company's Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements car. initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. The regulations require the
Bank to meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under the regulatory accounting practices. The Bank's capital
classification is also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. The Bank must maintain a minimum
of qualifying total capital and core
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capital to risk-weighted assets of 8% and 4%, respectively. Management believes,
as of December 31, 1995, that the Bank meets all capital requirements to which
it is subject. The following is a summary of the Bank's capital ratios at
December 31. 1995 and 1994:
1995 1994
---- ----
Total capital to risk-weighted assets 20.42 % 19.30 %
Core capital to risk-weighted assets 19.40 % 18.15 %
Capital to total assets (leverage) 8.74 % 8.56 %
14. Net Income Per Common Share:
Net income per common share for the three years ended December 31, 1995 was
based upon the weighted average shares of common stock outstanding of 48.000
shares. respectively
15. Other Noninterest Income and Expense:
Other noninterest income and expense for the three years ended December 31, 1995
were composed of the following:
1995 1994 1993
---- ---- ----
Noninterest income:
Service charges $ 519,161 $ 513,834 $ 517,836
Other fees 51,560 50,559 51,940
Other 40,086 63,453 76,185
Total $ 610,807 $ 627,846 $ 645,961
========= ========= =========
General and administrative expense:
Data processing $ 209,047 $ 207,875 195,821
FDIC and exam assessments 36,078 134,600 154,201
ORE expense 91,198 122,097 288,128
Office expense 111,877 119,314 121,804
Directors' fees 77,400 64,095 67,820
Advertising 54,017 53,939 58,645
Professional fees 112,341 49,895 27,941
Loss on maturity of securities - 15,548 -
Other 91,286 169,008 121,041
Total $ 783,244 $ 936,371 $ 1,035,401
========= ========= ===========
<PAGE>
FIRST MIDLOTHIAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Subsequent Event:
The Company has entered into a contract to be acquired by Surety Capital, a bank
holding company located in Hurst, Texas. Surety Capital intends to merge the
sole subsidiary of the Company, First National Bank of Midlothian, with and into
Surety Capital's subsidiary, Surety Bank, National Association. It is
anticipated that First Midlothian Corporation will be dissolved upon completion
of the merger of the two banks. The current shareholders of the Company will
receive cash in exchange for the stock held in the Company as a result of this
transaction.
The Board of Directors of the Company has approved this transaction. However,
the completion of the purchase is subject to a number of contingencies,
including approval by the applicable banking authorities, due diligence review
of the Company's business operations, the raising of sufficient funds by Surety
Capital to facilitate the acquisition, shareholder approval by the Company's
shareholders and Surety Bank shareholders, and other matters. Assuming all
activities are satisfactorily completed, the transaction is expected to close
during the first quarter of 1996.
<PAGE>
PRO FORMA BALANCE SHEET
as of March 31, 1996
<TABLE>
<CAPTION>
Surety First
Capital Midlothian Adjustments Pro Forma
Corporation Corporation Debits Credits Combined
--------------------------------------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,364,249 $1,414,857 $ 6,013,946<F2> $ 6,595,707 $ 7,197,345
Federal funds sold 19,586,000 9,155,000 28,741,000
-------------- ------------- ---------------
Cash and cash equivalents 25,950,249 10,569,857 6,013,946 6,595,707 35,938,345
Interest bearing deposits in
financial institutions 756,718 - 756,718
Investment securities 20,534,468 21,201,131 40,336<F3> 41,775,935
Net loans 67,205,708 17,672,424 84,878,132
Premises and equipment, net 2,712,311 930,450 319,468<F4> 3,962,229
Accrued interest receivable 705,722 480,405 1,186,177
Other real estate and
repossessed assets 106,378 579,557 685,935
Other assets 1,206,417 1,206,417
Excess of cost over fair value
of net assets acquired, net 4,038,064 - 2,104,485<F1> 6,142,549
-------------- ------------- ------------ ------------ ---------------
Total assets $ 123,216,085 $ 51,433,824 $ 8,478,235 $ 6,595,707 $ 176,532,437
============== ============= ============ ============ ===============
Liabilities:
Demand deposits $ 13,856,784 8,747,808 $ - $ - $ 22,604,592
Savings, NOW and money
markets 22,727,484 16,782,200 39,509,684
Time deposits, $100,000 and
over 18,656,220 1,734,157 20,390,377
Other time deposits 54,628,831 19,547,966 74,176,797
-------------- ------------- ---------------
Total deposits 109,869,319 46,812,131 156,681,450
Note payable 375,000 619,707 994,707<F1><F2> -
Accrued interest payable and
other 1,178,639 473,737 1,652,376
-------------- ------------- ------------ ------------ ---------------
Total liabilities 111,422,958 47,905,575 994,707 158,333,826
-------------- ------------- ------------ ------------ ---------------
Shareholders' equity:
Common stock 38,333 480,000 480,000<F1> 19,251<F2> 54,584
Additional paid in capital 10,763,176 679,493 679,493<F1> 6,369,695<F2> 17,132,871
Retained earnings 1,055,694 2,352,218 2,352,218<F1> 1,155,694
Treasury stock (56,959) (56,959)
Unrealized gain/(loss) on
available-for-sale
securities (7,117) 16,538 9,421
-------------- ------------- ------------ ------------ ---------------
Total equity 11,793,127 3,528,248 4,506,418 6,388,946 18,198,611
-------------- ------------- ------------ ------------ ---------------
Total liabilities
and equity $ 123,216,085 $ 51,433,824 $ 4,506,418 $ 6,388,946 $ 176,532,437
============== ============= ============ ============ ===============
<FN>
<F1> To record purchase of First National Bank, Midlothian, Texas. The purchase
price for First National Bank was based on the book value of First National
Bank, subject to adjustments. The note payable for Surety Capital was paid
off with the proceeds from the offering and First Midlothian Corporation
paid off its debt. The difference of $2,104,485 is recorded as goodwill and
is amortized over a 15 year period.
<F2> To record $6,500,000 net capital raised through offering.
<F3> In order to adjust investment securities to estimated market value an
increase of $40,336 is recorded.
<F4> In order to adjust property and equipment to estimated market value an
increase of $319,468 is recorded.
</FN>
</TABLE>
<PAGE>
PRO FORMA INCOME STATEMENT
for the three months ended March 31, 1996
<TABLE>
<CAPTION>
Surety First Pro Forma
Capital Midlothian Adjustments Pro Forma
-------------------------------
Corporation Corporation Debits Credits Combined
--------------------------------------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Commercial loans and real estate
loans $ 949,351 $ 413,351 $ - $ - $ 1,362,702
Consumer loans 315,016 87,902 - - 402,918
Insurance premium financing 680,901 - - - 680,901
Federal funds sold 296,778 129,904 - - 426,682
Investment securities
Interest bearing deposits 375,799 309,727 - - 685,526
-------------- ------------- ------------- -------------- -------------
Total interest income 2,636,849 940,884 - - 3,577,733
-------------- ------------- -------------
Interest expense:
Savings, NOW and money market 203,775 131,249 335,024
Time deposits, $100,000 and over 243,686 172,572 416,258
Other time deposits 627,933 107,923 735,856
Other interest expense 6,182 1,463 - 7,645
-------------- ------------- ------------- -------------- -------------
Total interest expense 1,081,576 413,207 1,494,783
-------------- ------------- -------------
Net interest income before
provision for loan losses 1,555,273 527,677 - - 2,082,950
Provision for loan losses 30,000 - - - 30,000
-------------- ------------- ------------- -------------- -------------
Net interest income 1,525,273 527,677 - - 2,052,950
-------------- ------------- ------------- -------------- -------------
Non interest income 359,882 55,848 - - 415,730
-------------- ------------- ------------- -------------- -------------
Non interest expense:
Salaries and employee benefits 846,943 211,256 - - 1,058,199
Occupancy & equipment 246,209 53,463 10,416 -<F3> 310,000
General & administrative 532,808 308,478 98,185 204,825<F2> 734,646<F1>
-------------- ------------- ------------- -------------- -------------
Total noninterest expense 1,625,960 573,197 108,601 204,825 2,102,933
-------------- ------------- ------------- -------------- -------------
Income before income taxes 259,195 10,328 108,601 204,825 365,747
Income tax expense: 84,084 3,512 69,641 36,924 120,312
-------------- ------------- ------------- -------------- -------------
Net income $ 175,111 $ 6,816 $ 178,242 $ 241,749<F4> $ 245,435<F4>
============== ============= ============= ============== =============
Net income per share of common stock $ 0.05 $ 0.05
============== =============
Weighted average shares outstanding 3,279,448 5,204,509<F6>
============== =============
<FN>
<F1> To record savings to be realized by merger. These adjustments are a direct
result of the elimination of director fees, committee fees and professional
fees which will not continue after the merger. In addition to the
elimination of these fees, a reduction in computer processing fees is also
recorded.
<F2> To record amortization of the goodwill added through the acquisition of the
First Midlothian Corporation and to record payment of fees by First
Midlothian Corporation
<F3>To record the additional depreciation to premises and equipment as a result
of the write up to estimated market value for First Midlothian Corporation
<F4> This pro forma income statement does not reflect all adjustments to, or
projected changes in, income Surety expects to realize
<F5> To record tax effect of adjustments.
<F6> Additional shares offered in Surety Capital Corporation's Registration
Statement on Form S-1 (1,925,061 shares) increase total outstanding shares.
</FN>
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<INT-BEARING-DEPOSITS> 756,718
<FED-FUNDS-SOLD> 28,741,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,929,179
<INVESTMENTS-CARRYING> 21,846,756
<INVESTMENTS-MARKET> 21,978,475
<LOANS> 86,180,624
<ALLOWANCE> (1,302,492)
<TOTAL-ASSETS> 176,532,437
<DEPOSITS> 156,681,450
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,652,376
<LONG-TERM> 0
0
0
<COMMON> 57,584
<OTHER-SE> 18,141,027
<TOTAL-LIABILITIES-AND-EQUITY> 176,532,437
<INTEREST-LOAN> 2,108,375
<INTEREST-INVEST> 842,273
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,950,648
<INTEREST-DEPOSIT> 1,214,024
<INTEREST-EXPENSE> 1,220,636
<INTEREST-INCOME-NET> 1,730,012
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,733,845
<INCOME-PRETAX> 363,436
<INCOME-PRE-EXTRAORDINARY> 243,910
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 243,910
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> 0.09
<LOANS-NON> 55,000
<LOANS-PAST> 66,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 702,927
<CHARGE-OFFS> 52,628
<RECOVERIES> 7,493
<ALLOWANCE-CLOSE> 1,302,492
<ALLOWANCE-DOMESTIC> 1,162,652
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 139,840
</TABLE>
