<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Mark One
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1997.
[ ] 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 5, 1997, 5,751,882 shares
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
- -------
Consolidated Balance Sheets at September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income for the Nine Months
Ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Income for the Three Months
Ended September 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the
Nine Months Ended September 30, 1997 (unaudited) and for
the Years Ended December 31, 1996 and 1995 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations 12
PART II. - OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings 19
- -------
Item 2. Changes in Securities 20
- -------
Item 3. Defaults Upon Senior Securities 20
- -------
Item 4. Submission of Matters to a Vote of Security Holders 20
- -------
Item 5. Other Information 20
- -------
Item 6. Exhibits and Reports on Form 8-K 20
- -------
2
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1997 (unaudited)
and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 6,671,815 $ 6,094,457
Federal funds sold 11,485,000 16,772,000
Interest bearing deposits in financial
institutions 190,000 285,842
Investment securities:
Available-for-sale 14,369,508 16,221,273
Held-to-maturity 18,376,112 22,561,270
------------ ------------
Total investment securities 32,745,620 38,782,543
Loans 117,183,231 105,696,491
Less: Unearned interest (2,508,953) (2,544,803)
Allowance for credit losses (1,366,662) (1,284,774)
------------ ------------
Net loans 113,307,616 101,866,914
Premises and equipment, net 3,777,650 3,970,193
Accrued interest receivable 855,707 1,083,336
Other real estate and repossessed assets 130,992 738,198
Other assets 1,738,969 607,214
Excess of cost over fair value of net
assets acquired, net of accumulated
amortization of $1,109,716 and $719,288
at September 30, 1997 and December 31,
1996, respectively 5,990,140 6,238,613
------------ ------------
Total assets $176,893,509 $176,439,310
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 22,607,969 $ 23,878,744
Savings, NOW and money markets 45,076,627 48,372,642
Time deposits, $100,000 and over 21,631,301 20,276,235
Other time deposits 65,683,422 63,162,720
------------ ------------
Total deposits 154,999,319 155,690,341
Accrued interest payable and other liabilities 1,087,832 1,518,417
------------ ------------
Total liabilities 156,087,151 157,208,758
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued at
September 30, 1997 and December 31, 1996 - -
Common stock, $.01 par value, 20,000,000
shares authorized, 5,786,171 and
5,763,737 shares issued at September 30,
1997 and December 31, 1996, respectively,
and 5,751,882 and 5,748,119 outstanding
at September 30, 1997 and December 31,
1996, respectively 57,862 57,637
Additional paid-in capital 16,850,067 16,752,003
Retained earnings 3,982,998 2,509,771
Stock rights issuable 57,862
Treasury stock, 34,289 shares at September
30, 1997 and 15,618 shares at December
31, 1996 carried at cost (172,828) (74,539)
Unrealized gain (loss) on available-for
-sale securities, net of tax 30,397 (14,320)
------------ ------------
Total shareholders' equity 20,806,358 19,230,552
------------ ------------
Total liabilities and shareholders'
equity $176,893,509 $176,439,310
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Interest income:
Insurance premium financing $ 3,717,187 $ 2,509,161
Commercial and real estate loans 3,472,758 3,245,672
Medical receivables factoring 1,713,678 843,071
Consumer loans 968,832 1,084,355
Federal funds sold 323,455 875,221
Investment securities:
Taxable 1,561,055 1,637,835
Tax-exempt 237,685 243,673
Interest bearing deposits 12,763 36,771
------------ ------------
Total interest income 12,007,413 10,475,759
------------ ------------
Interest expense:
Savings, NOW and money market 937,393 760,635
Time deposits, $100,000 and over 839,902 754,507
Other time deposits 2,512,759 2,439,884
Other interest expense - 6,612
------------ ------------
Total interest expense 4,290,054 3,961,638
------------ ------------
Net interest income before
provision for credit losses 7,717,359 6,514,121
------------ ------------
Provision for credit losses 295,000 90,000
------------ ------------
Net interest income 7,422,359 6,424,121
------------ ------------
Noninterest income 1,764,705 1,354,776
------------ ------------
Noninterest expense:
Salaries and employee benefits 3,392,296 3,153,119
Occupancy and equipment 1,123,513 933,008
General and administrative 2,265,249 1,965,581
------------ ------------
Total non interest expense 6,781,058 6,051,708
------------ ------------
Income before income taxes 2,406,006 1,727,189
Income tax expense:
Current 874,917 593,972
------------ ------------
Net income $ 1,531,089 $ 1,133,217
============ ============
Net income per share of common stock $0.27 $0.22
============ ============
Weighted average shares outstanding 5,751,212 5,262,716
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the Three Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Interest income:
Insurance premium financing $1,257,910 $1,015,623
Commercial and real estate loans 1,167,596 975,364
Medical receivables factoring 514,403 504,193
Consumer loans 312,418 376,151
Federal funds sold 63,481 211,590
Investment securities:
Taxable 430,965 597,225
Tax-exempt 79,180 82,622
Interest bearing deposits 1,544 6,060
---------- ----------
Total interest income 3,827,497 3,768,828
---------- ----------
Interest expense:
Savings, NOW and money market 282,380 242,743
Time deposits, $100,000 and over 300,645 275,101
Other time deposits 856,708 835,780
Other interest expense
---------- ----------
Total interest expense 1,439,733 1,353,624
---------- ----------
Net interest income before
provision for credit losses 2,387,764 2,415,204
---------- ----------
Provision for credit losses 145,000 45,000
---------- ----------
Net interest income 2,242,764 2,370,204
---------- ----------
Noninterest income 642,930 474,663
---------- ----------
Noninterest expense:
Salaries and employee benefits 974,048 1,132,097
Occupancy and equipment 389,769 335,743
General and administrative 724,199 698,978
---------- ----------
Total non interest expense 2,088,016 2,166,818
---------- ----------
Income before income taxes 797,678 678,049
Income tax expense:
Current 277,304 235,266
---------- ----------
Net income $ 520,374 $ 442,783
========== ==========
Net income per share of common stock $0.09 $0.08
========== ==========
Weighted average shares outstanding 5,751,882 5,746,512
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the Nine Months Ended September 30, 1997 (unaudited)
and for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
Common Stock on
------------------- Additional Retained Stock Available-
Par Paid-In Earnings/ Rights Treasury for-Sale Total
Shares Value Capital (Deficit) Issuable Stock Securities Equity
--------- ------- ---------- ---------- -------- -------- ----------- -----------
<S> <C> <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
(10,166 shares) $(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 tax, $74,544 144,722 144,722
--------- ------- ---------- ---------- -------- -------- ----------- -----------
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 7,371,901 7,394,293
Purchase of Treasury Stock
(5,452 shares) (23,709) (23,709)
Net Income 1,697,987 1,697,987
Exercise of stock options 7,924 79 23,633 23,712
Change in unrealized gain/
(losses)on available-
for-sale securities,
net of tax, $(81,147) (156,203) (156,203)
--------- ------- ---------- ---------- -------- -------- ----------- -----------
Balance at December 31, 1996 5,763,737 57,637 16,752,003 2,509,771 (74,539) (14,320) 19,230,552
--------- ------- ---------- ---------- -------- -------- ----------- -----------
Stock Rights Issuable (57,862) $57,862
Purchase of Treasury Stock
(18,671 shares) (98,289) (98,289)
Net Income 1,531,089 1,531,089
Exercise of stock options 22,434 225 98,064 98,289
Change in unrealized gain/
(losses) on available-
for-sale securities,
net of tax, $19,800 44,717 44,717
--------- ------- ----------- ---------- -------- ---------- ----------- ------------
Balance at September 30, 1997 5,786,171 $57,862 $16,850,067 $3,982,998 $57,862 $(172,828) $30,397 $20,806,358
--------- ------- ----------- ---------- -------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
September 30,
-------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,531,089 $ 1,133,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 295,000 90,000
Provision for depreciation 510,022 457,502
Amortization of intangible assets 390,428 182,849
Gain on sale of available-for-sale securities (10,379)
Gain on sale or disposal of assets (110,888)
Net (decrease) increase in unearned interest
on loans (35,850) 451,427
Net increase(decrease) in other assets 239,399 (103,009)
Net decrease in accrued interest payable and
other liabilities (450,385) (243,238)
----------- -----------
Net cash provided by operating activities 2,358,436 1,968,748
----------- -----------
Cash flows from investing activities:
Net increase in loans (9,101,888) (14,059,111)
Payments received on purchased medical claims
receivables 14,899,958 13,278,557
Purchases of medical claims receivables (18,753,754) (10,404,482)
Purchases of available-for-sale securities (5,973,016) (7,239,958)
Proceeds from sales of available-for-sale
securities 2,948,507
Proceeds from maturities of available-for-sale
securities 4,951,170 4,883,718
Purchases of held-to-maturity securities (2,977,925)
Proceeds from maturities of held-to-maturity
securities 4,185,158 8,495,145
Proceeds from maturities of interest bearing
deposits in financial institutions 95,842 1,034,216
Purchases of bank premises and equipment (362,352) (429,747)
Proceeds from sale of bank premises and equipment 119,780
Proceeds from sale of other real estate and
repossessed assets 613,539
Direct cost incurred for bank acquisition (106,113)
Net cash acquired through acquisition 3,876,901
----------- -----------
Net cash used in investing activities (6,377,056) (3,648,799)
----------- -----------
Cash flows from financing activities:
Net decrease in deposits (691,022) (6,555,012)
Principal payments on notes payable (375,000)
Purchase of treasury stock (98,289) (23,709)
Exercise of stock options 98,289 23,712
Proceeds from the sale of stock 7,452,098
----------- -----------
Net cash (used in) provided by financing
activities (691,022) 522,089
----------- -----------
Net decrease in cash and cash equivalents (4,709,642) (1,157,962)
Beginning cash and cash equivalents 22,866,457 23,217,018
----------- -----------
Ending cash and cash equivalents $18,156,815 $22,059,056
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
7
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
September 30,
-----------------------
1997 1996
-------- -----------
<S> <C> <C>
Supplemental schedule of noncash investing and
financing activities:
Transfers of repossessed collateral to other
assets $750,739
Transfer from loans to other assets $850,000
Additions to loans to facilitate the sale of
other real estate and other assets $344,907
Adjustments to other assets subsequent to
acquisition $141,955
Declaration of Stock Dividend $ 57,862
Net cash acquired through acquisitions:
Interest bearing deposits in financial
institutions $ 274,242
Investment securities 21,214,629
Net loans 18,476,948
Premises and equipment, net 1,270,401
Other assets 896,832
Excess of cost over fair value of net
assets acquired 3,881,881
Deposits (49,237,113)
Other liabilities (654,721)
------------
Net cash acquired through acquisitions $(3,876,901)
============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
8
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
The 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, 1997, 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, 1997.
2. Loans, net:
-----------
At September 30, 1997 and December 31, 1996, the loan portfolio was
composed of the following:
September 30, December 31,
1997 1996
------------- ------------
Insurance premium financing $ 46,395,314 $ 39,168,604
Installment loans 10,316,265 12,631,520
Commercial loans 22,715,798 22,745,139
Real estate loans 27,255,527 24,774,167
Medical claims receivable 10,500,327 6,377,061
------------ ------------
Total gross loans 117,183,231 105,696,491
Unearned interest (2,508,953) (2,544,803)
Allowance for credit losses (1,366,662) (1,284,774)
------------ ------------
Loans, net $113,307,616 $101,866,914
============ ============
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,
1997 1997 1996 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning balance $1,284,774 $1,300,567 $ 702,927 $1,295,165
Provision for credit losses 295,000 145,000 90,000 45,000
Bank acquisition - 614,700 -
Loans charged off, net of
recoveries (213,112) (78,905) (115,438) (47,976)
---------- ---------- ---------- ----------
Ending balance $1,366,662 $1,366,662 $1,292,189 $1,292,189
========== ========== ========== ==========
</TABLE>
Loans on which the accrual of interest has been discontinued amounted
to approximately $126,000 and $144,000 at September 30, 1997 and
December 31, 1996, respectively.
9
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
At September 30, 1997 and December 31, 1996, the Company's recorded
investment in loans for which impairment has been recognized in
accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," ("SFAS 114")
consists primarily of commercial loans and installment loans as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Impaired loans $ 10,356,686 $ 4,837,271
Impaired loans with related allowance
calculated under SFAS 114 9,165,643 3,209,403
Allowance on impaired loans calculated
under SFAS 114 853,522 387,386
Impaired loans with no allowance
calculated under SFAS 114 1,191,043 1,627,868
</TABLE>
<TABLE>
<CAPTION>
For the nine For the twelve
months ended months ended
September 30, December 31,
1997 1996
------------- --------------
<S> <C> <C>
Average impaired loans $ 7,651,462 $ 3,436,870
Interest income recognized on
impaired loans 694,370 415,861
</TABLE>
As of September 30, 1997 and December 31, 1996, there were no
commitments to lend additional funds for loans considered impaired.
3. 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. The Company has also adopted a
stock option plan for directors of the Company who are not employees
of the Company.
4. Stockholders' Rights Agreement:
-------------------------------
Pursuant to the Rights Agreement dated June 17, 1997 between the
Company and Securities Transfer Corporation, as rights agent, the
Company declared a dividend of one common stock purchase right (a
"Right") for each outstanding share of common stock, $0.01 par value,
of the Company (the "Common Stock Purchase Plan") to stockholders of
record at the close of business on June 6, 1997.
Each Right initially entitles stockholders to buy one share of Common
Stock at an exercise price of $50.00 (the "Purchase Price"). The
Rights will be exercisable only if a person or group acquires 15% or
more of the Common Stock or announces a tender offer the consummation
of which would result in ownership by such person or group of 15% or
more of the Common Stock. The Company will be entitled to redeem the
Rights at $0.0001 per Right at any time prior to the tenth day after
a person or group acquires 15% or more of the Common Stock, other
than pursuant to a transaction approved by the Company's Board of
Directors. The Rights are redeemable even after a 15% or more
acquisition, if the Board so determines, in connection with a merger
of the Company with a "white knight" and under other circumstances.
In the event of a 15% or more acquisition, each Right will entitle
its holder to purchase that number of shares of Common Stock equal to
the result obtained by dividing the Purchase Price by 50% of the then
current market price of the Common Stock.
If the Company, or any subsidiary of the Company, is acquired in a
merger or other business combination transaction in which the Common
Stock is exchanged or changed, or 50% or more of the Company's assets
or earning power are sold, each Right will entitle its holder to
purchase that number of shares of common stock of the surviving or
acquiring entity equal to the result obtained by dividing the Purchase
Price by 50% of the then current market price of the common stock of
the surviving or acquiring entity.
5. Other Receivables:
------------------
The Company's subsidiary, Surety Bank, National Association (the
"Bank"), has learned that a number of insurance premium finance
agreements on which it has made loans may be fictitious or forged.
The matter is under continuing investigation by state and federal
authorities. All of the loans were originated through one insurance
agency. The total unpaid balance of all of the loans in question is
approximately $1,100,000. This amount has been reclassified from
loans to other receivables and will remain in a non-accrual account
until collected. The Bank has commenced legal action against the
parties believed to be responsible. Management believes it has
meritorious avenues of collection and no material losses are expected.
10
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Subsequent Events:
------------------
On October 10, 1997 the Company and Surety Bank entered into an
agreement to acquire TexStar National Bank ("TexStar"), located in
Universal City, Texas. The purchase price for TexStar is projected to
be approximately $19.59 per share of TexStar common stock outstanding
(total cash consideration: approximately $9,500,000), which will be
paid to the shareholders of TexStar in connection with the merger of
TexStar with and into Surety Bank.
As of September 30, 1997, TexStar had total assets of $73,635,427,
total deposits of $65,681,173, total loans of $32,551,203, total equity
of $5,647,545 and year to date net income of $394,682. TexStar has
five full service banking facilities located primarily in suburban
areas northeast of San Antonio, Texas.
The completion of the merger will result in Surety Bank increasing its
asset size to approximately $250,000,000. This will represent an
approximate 43% increase in asset size. The completion of the merger is
subject to a number of contingencies, including regulatory approvals by
applicable banking authorities, due diligence review by Surety Bank of
TexStar's business operations, the raising of sufficient funds by Surety
Capital to facilitate the transaction, approval by TexStar's
shareholders, and other matters. If consummated, the transaction is
expected to close on or before March 31, 1998.
11
PAGE
<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 has one wholly owned subsidiary,
Surety Bank, National Association, a national banking association
("Surety Bank").
The information presented below reflects the lending and related funding
business of the Company:
Nine Months Ended Nine Months Ended
September 30, September 30,
1997 1996
----------------- -----------------
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 45,009,669 $ 26,849,509
Average yield 11.0% 12.5%
Interest income $ 3,717,187 $ 2,509,161
MEDICAL FACTORING, CONSUMER,
COMMERCIAL AND REAL ESTATE
FINANCING:
Average balance outstanding $ 67,559,030 $ 54,775,163
Average yield 12.2% 12.6%
Interest income $ 6,155,268 $ 5,173,098
COST OF FUNDS:
Average balance outstanding (1) $ 154,999,987 $ 144,184,834
Average interest rate 3.7% 3.7%
Interest expense $ 4,290,054 $ 3,961,638
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 1,334,157 $ 1,163,973
Total interest expense $ 476,673 $ 440,182
Provision for credit losses $ 32,778 $ 10,000
Noninterest income $ 196,078 $ 150,531
Noninterest expense $ 753,451 $ 672,412
(1) Includes $0 and $80,144 of short-term borrowings and $0 and
$6,612 of interest expense on short-term borrowings for the
nine months ended September 30, 1997 and 1996, respectively.
Note: Average balances are computed using daily balances throughout each
period.
12
PAGE
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
---------------------------------------
Average Average
Balance Interest Rate
--------- ---------- ---------
<S> <C> <C> <C>
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities
and due from time $ 37,585,012 $1,811,503(1) 6.4%
Federal funds sold 8,613,801 323,455 5.0%
Loans(2) 112,568,699 9,872,455(3) 11.7%
Allowance for credit losses (1,319,124) N/A N/A
------------ ---------- -----
Total interest earning assets 157,448,388 12,007,413 10.2%
------------ ---------- -----
Cash and due from banks 5,668,715
Premises and equipment 3,882,628
Accrued interest receivable 972,556
Other assets 7,456,061
------------
Total assets $175,428,348
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $ 39,227,467 $ 797,744 2.7%
Savings deposits 7,737,747 139,649 2.4%
Time deposits 85,717,079 3,352,661 5.2%
------------ ---------- -----
Total interest bearing liabilities 132,682,293 4,290,054 4.3%
------------ ---------- -----
Net interest income $7,717,359
==========
Net interest spread 5.9%
-----
Net interest income to average earning assets 6.5%
=====
Noninterest bearing deposits 22,317,694
Accrued interest payable and other liabilities 1,504,300
------------
Total liabilities 156,504,287
Shareholders' equity 18,924,061
------------
Total liabilities and
shareholders' equity $175,428,348
============
</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.
13
PAGE
<PAGE>
Nine Months Ended September 30, 1997 Versus Nine Months Ended
September 30, 1996.
The Company reported an increase of 35.1% in net earnings of $1,531,089 as
compared to $1,133,217 during the nine months ended September 30, 1997 and
1996, respectively. Earnings per share were $0.27 and $0.22 for the nine
months ended September 30, 1997 and 1996, respectively. The increase in net
earnings is principally attributed to 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, 1997 and 1996 were 11.7% and 12.0%,
respectively, while the average cost of funds for the Company for the same
periods was unchanged at 3.7%. The average balance of loans outstanding was
$112,568,699 and $85,351,415 for the nine months ended September 30, 1997 and
1996, respectively. The loan-to-deposit ratio as of September 30, 1997 and 1996
was 73.1% and 62.7%, respectively. With the completion of the acquisition of
First National Bank in Midlothian, Texas in early 1996, Surety's loan-to-
deposit ratio fell to approximately 50.0%. At that time management determined
that until Surety's loan-to-deposit ratio returned to its desired level of 75%,
Surety would suspend its merger and acquisition activity, and concentrate on
asset utilization and profit maximization. Surety's average loan-to-deposit
ratio for the third quarter of 1997 was 75.6%, and Surety resumed its growth
and acquisition strategy.
Total interest income increased 14.6% to $12,007,413 from $10,475,759, for the
nine months ended September 30, 1997 and 1996, respectively, while total
interest expense increased 8.3% to $4,290,054 from $3,961,638, for the nine
months ended September 30, 1997 and 1996, respectively, resulting in a 18.5%
increase in net interest income before provision for credit losses to
$7,717,359 from $6,514,121 for these same periods. The Company's loan growth
for the nine months ended September 30, 1997 was concentrated within medical
claims factoring and insurance premium financing. For the nine months ended
September 30, 1997, real estate loans increased by 10.0% to $27,255,527 from
$22,745,139, commercial lending decreased by 0.1% to $22,715,798 from
$22,774,167, consumer loans decreased by 18.3% to $10,316,266 from $12,631,520,
medical claims factoring increased by 64.7% to $10,500,327 from $6,377,061, and
insurance premium financing increased by 18.4% to $46,395,314 from $39,168,604.
The overall net growth in the loan portfolio is attributed to management's
marketing efforts. The average volume of medical claims factoring, consumer,
commercial, and real estate lending increased 23.3%, with a decrease in the
average yields on those loans from 12.6% to 12.2%, over the last twelve months.
The 67.6% increase in the average volume of insurance premium financing loans
was accompanied by a yield of 11.0% and 12.4% on those loans for the nine
months ended September 30, 1997 and 1996, respectively. The average balance of
interest bearing deposits increased 7.5%, while the average rate paid remained
unchanged at 3.7%.
The Company recorded a $295,000 provision for credit losses during the nine
months ended September 30, 1997 compared to a $90,000 provision for credit
losses during the nine months ended September 30, 1996. The increased
provision taken during 1997 can be attributed to the loan growth in insurance
premium finance and medical claims factoring. 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
credit losses at an adequate level. Management believes that all known losses
in the portfolio have been recognized.
The Company's noninterest income increased 30.3% to $1,764,705 from $1,354,776
for the nine months ended September 30, 1997 and 1996, respectively. This
increase compares to a corresponding increase in average noninterest bearing
deposits of 11.3% to $22,317,694 from $20,061,217 for these same periods along
with a growth in average volume of insurance premium finance loans of 67.6%
(over the prior twelve months). Noninterest income is generated primarily from
fees associated with noninterest and interest bearing accounts.
Noninterest expense increased 12.1%, primarily the result of a 7.6% increase in
salaries and employee benefits, a 20.4% increase in occupancy and equipment
expenses, and a 15.2% increase in general and administrative expenses. The
increase in salaries and benefits was due primarily to additional staffing
required by the acquisitions of First National Bank in Midlothian, Texas, and
Providers Funding Corporation in the first quarter of 1996. Increases in
general and administrative expenses relate primarily to the operation of the
Midlothian branch and the medical claims factoring division, and legal and
professional fees.
14
PAGE
<PAGE>
Three Months Ended September 30, 1997 Versus Three Months Ended
September 30, 1996
The Company earned $520,374 as compared to $442,783 during the three months
ended September 30, 1997 and 1996, respectively. Earnings per share were
$0.09 and $0.08 for the three months ended September 30, 1997 and 1996,
respectively. Total interest income increased 1.6% to $3,827,497 from
$3,768,828, while total interest expense increased 6.4% to $1,439,733 from
$1,353,624, resulting in a 1.1% decrease in net interest income before
provision for credit losses to $2,387,764 from $2,415,204.
The Company recorded a $145,000 provision for credit losses during the three
months ended September 30, 1997 compared to $45,000 provision for credit losses
during the three months ended September 30, 1996. The increased provision
taken during the three months ended September 30, 1997 can be attributed to
the loan growth in insurance premium finance and medical claims factoring.
As the three month's ended September 30, 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 credit losses at an adequate level. Management believes that
all known losses in the portfolio have been recognized.
The Company's noninterest income increased 35.4% to $642,930 from $474,663
for the three months ended September 30, 1997 and 1996, respectively, while
noninterest expense decreased 3.6%.
Parent Company Only Results of Operations.
- ------------------------------------------
The Company serves as a parent company to Surety Bank and has minimal separate
business activities. For the nine months ended September 30, 1997, the Company
had only nominal interest income of approximately $16,000, and approximately
$118,000 in noninterest expenses. The noninterest expenses, which increased
19.7% 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 $295,000 provision for credit losses during the nine
months ended September 30, 1997 compared to a $90,000 provision during the nine
months ended September 30, 1996. The increased provision taken during 1997 can
be attributed to the loan growth in insurance premium finance and medical
claims factoring. 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 credit losses are possible. Credit 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 at September 30,
1997 was 0.19%, as compared to 0.18% at September 30, 1996. The ratio of the
allowance for credit losses to total loans was 1.2% at September 30, 1997 as
compared to 1.3% at September 30, 1996. The allowance for credit losses was
$1,366,662 and $1,292,189 at September 30, 1997 and 1996, respectively.
15
PAGE
<PAGE>
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, 1997, 16.3% 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.
CAPITAL RESOURCES
Shareholders' equity at September 30, 1997 was $20,806,358 as compared to
$19,230,552 at December 31, 1996. The Company had consolidated net income of
$1,531,089 for the nine months ended September 30, 1997.
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 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 11.10% and
12.29%, respectively, at December 31, 1996 and 11.90% and 13.07%, respectively,
at September 30, 1997. 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 1997 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 established 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 its subsidiary banks during periods of financial stress or adversity.
The Federal Reserve has stated that it would generally view a failure to assist
a troubled or failing subsidiary bank in these circumstances as an unsound or
unsafe banking practice, a violation of Regulation Y, or both, justifying a
cease and desist order or other enforcement action, particularly if appropriate
resources are available to the bank holding company on a reasonable basis. The
requirement that a bank holding company, such as the Company, make its assets
and resources available to a failing subsidiary bank could have an adverse
effect upon the Company and its shareholders.
16
PAGE
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing earnings per share ("EPS") previously found in APB Opinion No. 15,
"Earnings per Share" ("Opinion 15"), and makes them comparable to international
EPS standards. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to Opinion 15. SFAS 128 also
requires dual presentation of basic and diluted EPS on the face of the income
statement for entities with complex capital structures and a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for financial
statements issued for periods ending after December 31, 1997, including interim
periods; earlier application is not permitted. Basic EPS under SFAS 128 was
$0.27 and $0.22 for the nine months ended September 30, 1997 and 1996,
respectively, and fully diluted EPS was $0.26 and $0.22 for the nine months
ended September 30, 1997 and 1996, respectively. SFAS 128 requires restatement
of all prior-period EPS data presented.
In February 1997, FASB issued Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS
129 establishes standards for disclosing information about an entity's capital
structure, including the pertinent rights and privileges of various securities
outstanding. SFAS 129 is effective for financial statements issued for periods
after December 15, 1997.
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 does not require a specific format for the
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Management believes that the adoption of these pronouncements will not have a
material impact on the financial statements of the Company.
IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES
The financial statements and related financial data concerning the Company in
this report have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, changes in interest rates have a more significant effect on the
performance of a financial institution than do the effects of changes in the
general rate of inflation and changes in prices. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices
of goods and services. Interest rates are highly sensitive to many factors
which are beyond the control of Surety Bank, including the influence of
domestic and foreign economic conditions and the monetary and fiscal policies
of the United States government and federal agencies, particularly the Federal
Reserve Bank. The Federal Reserve Bank implements national monetary policy
such as seeking to curb inflation and combat recession by its open market
operations in United States government securities, control of the discount rate
applicable to borrowing by banks and establishment of reserve requirements
against bank deposits. The actions of the Federal Reserve Bank in these areas
influence the growth of bank loans,
17
PAGE
<PAGE>
investments and deposits, and affect the interest rates charged on loans and
paid on deposits. The nature, timing and impact of any future changes in
federal monetary and fiscal policies on Surety Bank and its results of
operations are not predictable.
18
PAGE
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Surety Bank (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 the Tennessee Commissioner of
Commerce and Insurance ("Tennessee"), appointed by the Chancery Court
for the State of Tennessee, Twentieth Judicial District, Davidson
County, to liquidate Anchorage Fire and Casualty Insurance Company
("Anchorage"), including Anchorage deposits at the Bank. Tennessee
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. ("Shortline"), is
the holder of a Florida judgment against MacGregor General Insurance
Company, Ltd. ("MacGregor") who 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, representing the Bank's collateral, held in accounts at the Bank
under agreements with Anchorage and MacGregor. The Bank asserts that
it had a right to exercise control over its collateral under
contractual agreements between the Bank and the respective insurance
companies or the Bank and the policy holders, and also in order to
protect the Bank against the possibility of inconsistent orders
regarding the same funds. Tennessee also seeks to recover funds
allegedly transferred in and out of the Anchorage/MacGregor accounts
at the Bank during an approximate four month period in 1993.
When the MacGregor case was initially filed, Shortline sought a
restraining order against the Bank concerning the MacGregor funds.
When the Bank received notice of competing claims to some or all of
these funds by Tennessee, the Bank intervened and interpled approx
imately $600,000 into the court's registry. Shortline now seeks, inter
alia, damages against the Bank from an alleged wrongful offset wherein
the Bank allegedly exercised control over the MacGregor funds at the
Bank pursuant to agreements with MacGregor. The Bank moved for and
obtained a summary judgment that its intervention and interpleader of
funds was proper. Shortline also sought and obtained a summary
judgment from the trial court that the funds interpled by the Bank into
the court's registry belonged to Shortline. Tennessee appealed the
summary judgment to the Fort Worth Court of Appeals. The Fort Worth
Court of Appeals affirmed the trial court's ruling that the Bank's
intervention and interpleader was proper but reversed the trial court's
ruling that the funds in the court belonged to Shortline. Currently,
Shortline and Tennessee have made application to the Texas Supreme
Court to allow an appeal of the ruling from the Fort Worth Court of
Appeals. Shortline and Tennessee have appealed that decision to the
Texas Supreme Court which has yet to rule on that appeal.
In the Anchorage case, Tennessee claims that the Bank allegedly
transferred funds in and out of the Anchorage accounts after allegedly
receiving notice of court orders prohibiting such transfers. Discovery
in this case is in the initial stages and the damages sought by
Tennessee are not yet certain. Discovery in this case is ongoing and
the damages sought by Tennessee are not yet certain.
19
PAGE
<PAGE>
The Bank believes both of these cases lack merit and intends to defend
them vigorously. The outcome of both of these cases is uncertain at
this time.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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, 1997.
20
PAGE
<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 17, 1997 SURETY CAPITAL CORPORATION
By: /s/ C. Jack Bean
----------------
C. Jack Bean
Chairman of the Board and
Chief Executive Officer
By: /s/ B.J. Curley
---------------
B.J. Curley
Vice President, Chief Financial
Officer and Secretary
21
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,671,815
<INT-BEARING-DEPOSITS> 190,000
<FED-FUNDS-SOLD> 11,485,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,369,508
<INVESTMENTS-CARRYING> 18,376,112
<INVESTMENTS-MARKET> 18,647,261
<LOANS> 114,674,278
<ALLOWANCE> (1,366,662)
<TOTAL-ASSETS> 176,893,509
<DEPOSITS> 154,999,319
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,087,832
<LONG-TERM> 0
0
0
<COMMON> 57,862
<OTHER-SE> 20,748,496
<TOTAL-LIABILITIES-AND-EQUITY> 176,893,509
<INTEREST-LOAN> 9,872,455
<INTEREST-INVEST> 2,134,958
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,007,413
<INTEREST-DEPOSIT> 4,290,054
<INTEREST-EXPENSE> 4,290,054
<INTEREST-INCOME-NET> 7,717,359
<LOAN-LOSSES> 295,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,781,058
<INCOME-PRETAX> 2,406,006
<INCOME-PRE-EXTRAORDINARY> 1,531,089
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,531,089
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 10.29
<LOANS-NON> 126,000
<LOANS-PAST> 110,444
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,284,774
<CHARGE-OFFS> 324,921
<RECOVERIES> 111,809
<ALLOWANCE-CLOSE> 1,366,662
<ALLOWANCE-DOMESTIC> 1,366,662
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
