<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 June 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 August 9, 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 June 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income for the Six Months
Ended June 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Income for the Three Months
Ended June 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the
Six Months Ended June 30, 1997 (unaudited) and for the
Years Ended December 31, 1996 and 1995 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 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 11
PART II. - OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
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 18
2
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1997 (unaudited)
and December 31, 1996
June 30, December 31,
1997 1996
------------ ------------
Assets:
Cash and due from banks $ 7,151,677 $ 6,094,457
Federal funds sold 2,961,000 16,772,000
Interest bearing deposits in financial
institutions 190,144 285,842
Investment securities:
Available-for-sale 16,291,037 16,221,273
Held-to-maturity 20,396,763 22,561,270
------------ ------------
Total investment securities 36,687,800 38,782,543
Loans 118,621,301 105,696,491
Less: Unearned interest (2,479,093) (2,544,803)
Allowance for credit losses (1,300,567) (1,284,774)
------------ ------------
Net loans 114,841,641 101,866,914
Premises and equipment, net 3,872,568 3,970,193
Accrued interest receivable 1,139,290 1,083,336
Other real estate and repossessed
assets 300,003 738,198
Other assets 1,628,833 607,214
Excess of cost over fair value of
net assets acquired, net of
Accumulated amortization of
$952,905 and $719,288 at
June 30, 1997 and December 31,
1996, respectively 6,153,099 6,238,613
------------ ------------
Total assets $174,926,055 $176,439,310
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 23,690,352 $ 23,878,744
Savings, NOW and money markets 44,558,136 48,372,642
Time deposits, $100,000 and over 20,013,680 20,276,235
Other time deposits 65,572,760 63,162,720
------------ ------------
Total deposits 153,834,928 155,690,341
Accrued interest payable and
other liabilities 840,343 1,518,417
------------ ------------
Total liabilities 154,675,271 157,208,758
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized,
none issued at June 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 June 30, 1997 and
December 31, 1996, respectively,
and 5,751,882 and 5,748,119
outstanding at June 30, 1997 and
December 31, 1996, respectively 57,862 57,637
Additional paid-in capital 16,850,067 16,752,003
Retained earnings 3,462,624 2,509,771
Stock rights issueable 57,862
Treasury stock, 34,289 shares at
June 30, 1997 and 15,618 shares
at December 31, 1996 carried at cost (172,828) (74,539)
Unrealized loss on available-for-sale
securities, net of tax (4,803) (14,320)
------------ ------------
Total shareholders' equity 20,250,784 19,230,552
------------ ------------
Total liabilities and
shareholders' equity $174,926,055 $176,439,310
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
3
PAGE
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the Six Months Ended June 30, 1997 and 1996
(unaudited)
Six Months Ended
June 30, 1997 June 30, 1996
------------- -------------
Interest income:
Insurance premium financing $2,459,277 $1,493,538
Commercial and real estate loans 2,305,162 2,122,265
Medical receivables factoring 1,199,275 486,922
Consumer loans 656,414 708,204
Federal funds sold 259,974 663,631
Investment securities:
Taxable 1,130,090 1,040,610
Tax-exempt 158,505 161,051
Interest bearing deposits 11,219 30,711
---------- ----------
Total interest income 8,179,916 6,706,932
---------- ----------
Interest expense:
Savings, NOW and money market 655,013 532,023
Time deposits, $100,000 and over 539,257 508,078
Other time deposits 1,656,051 1,561,301
Other interest expense - 6,612
---------- ----------
Total interest expense 2,850,321 2,608,014
---------- ----------
Net interest income before
provision for credit losses 5,329,595 4,098,918
---------- ----------
Provision for credit losses 150,000 45,000
---------- ----------
Net interest income 5,179,595 4,053,918
---------- ----------
Noninterest income 1,121,775 880,112
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,418,248 2,021,022
Occupancy and equipment 733,744 597,265
General and administrative 1,541,050 1,266,602
---------- ----------
Total noninterest expense 4,693,042 3,884,889
---------- ----------
Income before income taxes 1,608,328 1,049,141
Income tax expenses:
Current 597,613 358,707
---------- ----------
Net income $1,010,715 $690,434
========== ==========
Net income per share of common stock $0.18 $0.14
========== ==========
Weighted average shares outstanding 5,750,870 5,033,116
========== ==========
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 June 30, 1997 and 1996
(unaudited)
Three Months Ended
June 30,1997 June 30, 1996
------------ -------------
Interest income:
Insurance premium financing $1,325,507 $ 812,637
Commercial and real estate loans 1,182,649 1,176,504
Medical receivables factoring 592,950 338,878
Consumer loans 321,688 374,535
Federal funds sold 65,304 321,125
Investment securities:
Taxable 588,040 636,355
Tax-exempt 78,704 84,543
Interest bearing deposits 5,608 11,707
---------- ----------
Total interest income 4,160,450 3,756,284
---------- ----------
Interest expense:
Savings, NOW and money market 352,453 284,365
Time deposits, $100,000 and over 268,430 237,748
Other time deposits 829,203 865,265
Other interest expense
---------- ----------
Total interest expense 1,450,086 1,387,378
---------- ----------
Net interest income before
provision for credit losses 2,710,364 2,368,906
---------- ----------
Provision for credit losses 75,000 15,000
---------- ----------
Net interest income 2,635,364 2,353,906
---------- ----------
Noninterest income 555,427 482,843
---------- ----------
Noninterest expense:
Salaries and employee benefits 1,225,415 1,119,843
Occupancy and equipment 375,789 331,417
General and administrative 776,381 699,784
---------- ----------
Total noninterest expense 2,377,585 2,151,044
---------- ----------
Income before income taxes 813,206 685,705
Income tax expenses:
Current 302,315 239,181
---------- ----------
Net income $510,891 $446,524
========== ==========
Net income per share of common stock $0.09 $0.08
========== ==========
Weighted average shares outstanding 5,751,882 5,746,512
========== ==========
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 Six Months Ended June 30, 1997 (unaudited)
and for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain/
(Loss) on
Common Stock Additional Retained Stock Available-
Par Paid-in Earnings/ Rights Treasury for-Sale Total
Shares Value Capital (Deficit) Issueable 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 $(50,830) (50,830)
(10,166 shares)
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 (23,709) (23,709)
(5,452 shares)
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 Issueable $57,862 57,862
Purchase of Treasury Stock (98,289) (98,289)
(18,671 shares)
Net Income 952,853 952,853
Exercise of stock options 22,434 225 98,064 98,289
Change in unrealized
gain/(losses) on
available-for-sale
securities, net of tax,
$(4,902) 9,517 9,517
--------- ------- ---------- --------- --------- -------- ----------- ----------
Balance at June 30, 1997 5,786,171 $57,862 $16,850,067 $3,462,624 $57,862 $(172,828) $(4,803) $20,250,784
========= ======= =========== ========== ========= ======== =========== ==========
</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 Six Months Ended June 30, 1997 and 1996
(unaudited)
June 30,
1997 1996
----------- ----------
Cash flows from operating activities:
Net income $1,010,715 $690,434
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 150,000 45,000
Provision for depreciation 360,149 276,146
Amortization of intangible assets 227,469 130,438
Gain on sale of available-for-sale securities (10,379)
Gain on sale or disposal of assets 20,209
Net (decrease) increase in unearned
interest on loans (65,710) 311,475
Net increase in other assets (260,908) (626,315)
Net decrease in accrued interest payable
and other liabilities (683,427) (214,715)
----------- ----------
Net cash provided by operating activities 748,118 612,463
----------- ----------
Cash flows from investing activities:
Net increase in loans (10,661,259) (8,428,499)
Payments received on purchased medical claims
receivables 9,606,343 10,429,762
Purchases of medical claims receivables (12,991,743) (6,640,767)
Purchases of available-for-sale securities (5,973,016) (6,738,752)
Proceeds from sales of available-for-sale
securities 2,948,507
Proceeds from maturities of available-for-sale
securities 2,959,236 4,758,844
Purchases of held-to-maturity securities (2,977,925)
Proceeds from maturities of held-to-maturity
securities 2,164,507 8,150,935
Proceeds from maturities of interest bearing
deposits in financial institutions 95,698 938,734
Purchases of bank premises and equipment (262,524) (369,934)
Proceeds from sale of other real estate and
repossessed assets 467,766
Net cash acquired through acquisition 4,020,574
----------- ----------
Net cash (used in) provided by
investing activities (11,646,485) 3,142,972
----------- ----------
Cash flows from financing activities:
Net decrease in deposits (1,855,413) (8,177,854)
Principal payments on notes payable (375,000)
Purchase of treasury stock (98,289) (6,129)
Exercise of stock options 98,289 6,129
Proceeds from the sale of stock 7,534,920
----------- ----------
Net cash used in financing activities (1,855,413) (1,017,934)
----------- ----------
Net (decrease) increase in cash and cash
equivalents (12,753,780) 2,737,501
Beginning cash and cash equivalents 22,866,457 23,217,018
----------- ----------
Ending cash and cash equivalents $10,112,677 $25,954,519
=========== ===========
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 Six Months Ended June 30, 1997 and 1996
(unaudited)
June 30,
1997 1996
-------- ----------
Supplemental schedule of noncash investing and
financing activities:
Transfers of repossessed collateral to other assets $226,562
Transfer from loans to other assets $850,000
Additions to loans to facilitate the sale of
other real estate and other assets $233,724
Adjustments to other assets subsequent to
acquisition $141,955
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 3,738,208
Deposits (49,237,113)
Other liabilities (654,721)
------------
Net cash acquired through acquisitions $(4,020,574)
============
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 June 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 June 30, 1997 and December 31, 1996, the loan portfolio was composed
of the following:
June 30, December 31,
1997 1996
----------- -----------
Insurance premium financing $48,197,899 $39,168,604
Installment loans 11,601,709 12,631,520
Commercial loans 23,069,300 22,745,139
Real estate loans 26,152,676 24,774,167
Medical claims receivable 9,599,717 6,377,061
----------- -----------
Total gross loans 118,621,301 105,696,491
Unearned interest (2,479,093) (2,544,803)
Allowance for credit losses (1,300,567) (1,284,774)
----------- -----------
Loans, net $114,841,641 $101,866,914
============ ============
Activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Six Months Three Months Six Months Three Months
Ended Ended Ended Ended
June 30, 1997 June 30, 1997 June 30, 1996 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Beginning balance $1,284,774 $1,309,983 $702,927 $1,302,492
Provision for credit losses 150,000 75,000 45,000 15,000
Bank acquisition - 614,700 -
Loans charged off, net of
recoveries (134,207) (84,416) (67,462) (22,327)
------------- ------------- ------------- -------------
Ending balance $1,300,567 $1,300,567 $1,295,165 $1,295,165
============= ============= ============= =============
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $115,000 and $144,000 at June 30, 1997 and December 31,
1996, respectively.
9
PAGE
<PAGE>
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. On July 16, 1996, the Company adopted a stock
option plan for directors of the Company who are not employees of the
Company. This plan is a formula plan pursuant to which annual options to
purchase 2,000 shares of the Company's Common Stock at an exercise price
equal to the fair market value of such Common Stock on the date of the
grant are automatically granted to each non-employee director of the
Company.
4. Stockholders' Rights Agreement:
Pursuant to the Surety Capital Corporation Rights Agreement dated as of
June 17, 1997 between the Company and Securities Transfer Corporation, as
Rights Agent, the Company declared a dividend of one right (a "Right") for
each outstanding share of common stock, $0.01 par value, of the Company
(the "Common Stock") 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 Board. 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
5. Other Receivables:
The Bank has learned that a number of insurance premium finance agreements
on which it made loans are believed to be fictitious or forged. The
matter is under continuing investigation by state and federal authorities.
All of the loans originated through one insurance agency. The total unpaid
balance of all the loans in question is approximately $850,000. This
amount has been reclassified from loans to other receivables. This amount
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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
General
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended. The Company changed the name of its
subsidiary bank to Surety Bank, National Association ("Surety Bank"),
effective January 1, 1995, in order to establish name recognition for Surety
Bank and to avoid confusion with other similarly named banks.
The information presented below reflects the lending and related funding
business of the Company:
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
----------- -----------
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 43,587,571 $ 24,350,648
Average yield 11.3% 12.3%
Interest income $ 2,459,277 $ 1,493,538
MEDICAL FACTORING, CONSUMER,
COMMERCIAL AND REAL ESTATE FINANCING:
Average balance outstanding $ 66,728,180 $ 55,688,400
Average yield 12.5% 11.9%
Interest income $ 4,160,851 $ 3,317,391
COST OF FUNDS:
Average balance outstanding (1) $155,179,729 $141,250,180
Average interest rate 3.7% 3.7%
Interest expense $ 2,850,321 $ 2,608,014
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 1,363,319 $ 1,117,822
Total interest expense $ 475,053 $ 434,669
Provision for loan losses $ 25,000 $ 7,500
Noninterest income $ 186,962 $ 146,685
Noninterest expense $ 782,174 $ 647,482
(1) Includes $0 and $120,218 of short-term borrowings and $0 and
$6,612 of interest expense on short-term borrowings for the six
months ended June 30, 1997 and 1996, respectively.
Note: Average balances are computed using daily balances throughout each
period.
11
PAGE
<PAGE>
AVERAGE BALANCE SHEET
Six Months Ended June 30, 1997
--------------------------------
Average Average
Balance Interest Rate
------- -------- -------
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities
and due from time $38,860,510 $1,299,814(1) 6.7%
Federal funds sold 10,308,106 259,974 5.0%
Loans(2) 110,315,750 6,620,128(3) 12.0%
Allowance for credit losses (1,320,100) N/A N/A
----------- ---------- -----
Total interest earning assets 158,164,266 8,179,916 10.3%
Cash and due from banks 5,230,309
Premises and equipment 3,903,794
Accrued interest receivable 966,682
Other assets 7,205,819
-----------
Total assets $175,470,870
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $39,086,675 $ 562,985 2.9%
Savings deposits 7,685,232 92,028 2.4%
Time deposits 85,683,221 2,195,308 5.1%
----------- ---------- -----
Total interest bearing
liabilities 132,455,128 2,850,321 4.3%
----------- ---------- -----
Net interest income $5,329,595
==========
Net interest spread 6.0%
-----
Net interest income to average
earning assets 6.7%
=====
Noninterest bearing deposits 22,399,587
Accrued interest payable and other
liabilities 1,123,098
------------
Total liabilities 155,977,813
Shareholders' equity 19,493,057
-------------
Total liabilities and
shareholders' equity $175,470,870
=============
(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.
12
PAGE
<PAGE>
Six Months Ended June 30, 1997 Versus Six Months Ended June 30, 1996.
- ---------------------------------------------------------------------
Surety Capital Corporation (the "Company") and its wholly owned subsidiary,
Surety Bank, National Association ("Surety Bank"), reported an increase of
46.4% in net earnings of $1,010,715 as compared to $690,434 during the six
months ended June 30, 1997 and 1996, respectively. Earnings per share were
$0.18 and $0.14 for the six months ended June 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 six months ended June 30, 1997 and 1996 were
unchanged at 12.0%, while the average cost of funds for the Company for the
same periods were unchanged at 3.7%. The average balance of loans outstanding
was $110,315,750 and $80,039,050 for the six months ended June 30, 1997 and
1996, respectively. The loan-to-deposit ratio as of June 30, 1997 and 1996 was
74.6% and 59.2%, 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. As of June 30, 1997, Surety's loan-
to-deposit ratio was 74.6%, and Surety resumed its growth and acquisition
strategy.
Total interest income increased 22.0% to $8,179,916 from $6,706,932, for the
six months ended June 30, 1997 and 1996, respectively, while total interest
expense increased 9.3% to $2,850,321 from $2,608,014, for the six months ended
June 30, 1997 and 1996, respectively, resulting in a 30.0% increase in net
interest income before provision for credit losses to $5,329,595 from
$4,098,918 for these same periods. The Company's loan growth for the six
months ended June 30, 1997, was concentrated within medical claims factoring
and insurance premium financing. Real estate lending increased by 6.3% to
$26,152,676 from $24,601,510, commercial lending increased by 10.8% to
$23,069,300 from $22,823,692, consumer lending decreased by 12.2% to
$11,601,709 from $13,221,733, medical claims factoring increased by 184.8% to
$9,599,717 from $3,370,822, and insurance premium financing increased by 70.1%
to $49,066,773 from $28,844,971. 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
19.8%, with an increase in the average yields on those loans from 11.9% to
12.5%. The 79.0% increase in the average volume of insurance premium financing
loans was accompanied by a yield of 11.3% and 12.3% on those loans for the six
months ended June 30, 1997 and 1996, respectively. The average balance of
interest bearing deposits increased 9.1%, while the average rate paid remained
unchanged at 4.3%.
The Company recorded a $150,000 provision for loan losses during the six months
ended June 30, 1997 compared to a $45,000 provision for loan losses during the
six months ended June 30, 1996. As the Company's ratio of net charge-offs to
average loans remained unchanged for these periods, the Company provided
amounts, through charges to earnings, to maintain the allowance for loan losses
at an adequate level. Management believes that all known losses in the
portfolio have been recognized.
The Company's noninterest income increased 27.4% to $1,121,775 from $880,112
for the six months ended June 30, 1997 and 1996, respectively. This increase
compares to a corresponding increase in average noninterest bearing deposits of
17.4% to $22,399,587 from $19,074,627 for these same periods. Noninterest
income is generated primarily from fees associated with noninterest and
interest bearing accounts.
Noninterest expense increased 20.8%, primarily the result of a 19.6% increase
in salaries and employee benefits, a 22.8% increase in occupancy and equipment
expenses, and a 21.7% 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, 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.
13
PAGE
<PAGE>
Three Months Ended June 30, 1997 Versus Three Months Ended June 30, 1996
- ------------------------------------------------------------------------
The Company earned $510,891 as compared to $446,524 during the three months
ended June 30, 1997 and 1996, respectively. Earnings per share were $0.09 and
$0.08 for the three months ended June 30, 1997 and 1996, respectively. Total
interest income increased 10.8% to $4,160,450 from $3,756,284, while total
interest expense increased 4.5% to $1,450,086 from $1,387,378, resulting in a
14.4% increase in net interest income before provision for loan losses to
$2,710,364 from $2,368,906.
The Company recorded $75,000 provision for loan losses during the three months
ended June 30, 1997 compared to $15,000 provision for credit losses during the
three months ended June 30, 1996. As the Company's ratio of net charge-offs to
average loans remained unchanged for these periods, the Company provided
amounts, through charges to earnings, to maintain the allowance for loan losses
at an adequate level. Management believes that all known losses in the
portfolio have been recognized.
The Company's noninterest income increased 15.0% to $555,427 from $482,843 for
the three months ended June 30, 1997 and 1996, respectively. Noninterest
expense increased 10.5%, primarily the result of a 9.4% increase in salaries
and employee benefits, a 13.4% increase in occupancy and equipment expenses,
and a 10.9% 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, Midlothian, Texas, and Providers Funding
Corporation in the first quarter of 1996. Increases in general and
administrative expenses relate primarily to legal and professional fees.
Parent Company Only Results of Operations.
- ------------------------------------------
The Company did not own Surety Bank prior to December 30, 1989. Since that
time, the Company has served as a parent company to Surety Bank and has
minimized its own separate business activities. For the six months ended
June 30, 1997, the Company had only nominal interest income of approximately
$11,000, and approximately $82,000 in noninterest expenses. The noninterest
expenses, which increased 46.4% 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 $150,000 provision for credit losses during the six
months ended June 30, 1997 compared to a $45,000 provision during the six
months ended June 30, 1996. The Company's provision for credit losses is based
upon quarterly loan portfolio reviews by management. The purpose of the
reviews is to assess loan quality, analyze delinquencies, ascertain loan
growth, evaluate potential charge-offs and recoveries, and assess general
economic conditions in the market economy. Credit losses different from the
allowance provided by the Company are likely, and credit losses in excess or
deficient of the allowance for loan losses are possible. Loan losses in excess
of the amount of the allowance could and probably would have a material adverse
effect on the financial condition of the Company.
The ratio of charge-offs, net of recoveries, to average loans on June 30, 1997
was 0.12%, as compared to 0.08% at June 30, 1996. The ratio of the allowance
for credit losses to total loans was 1.1% on June 30, 1997 as compared to 1.4%
on June 30, 1996. The allowance for credit losses was $1,300,567 and
$1,295,165 on June 30, 1997 and 1996, respectively.
CURRENT TRENDS AND UNCERTAINTIES
Economic trends and other developments could adversely affect the Company's
operations. Regulatory changes may increase the Company's cost of doing
business or otherwise impact it adversely.
14
PAGE
<PAGE>
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 June 30, 1997, 13.0% 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 June 30, 1997 was $20,250,784 as compared to
$19,230,552 at December 31, 1996. The Company had consolidated net income of
$1,010,715 for the six months ended June 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 11.32% and 12.43%, respectively,
at June 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 announced a policy sometimes known as the "source of strength doctrine"
that requires a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. The Federal Reserve has
interpreted this requirement to require that a bank holding company, such as
the Company, stand ready to use available resources to provide adequate capital
funds to 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125." This Statement deferred
the effective date of FASB Statement No. 125 for secured lending, repurchase
agreement, dollar-roll, securities lending, and similar transactions to
transactions occurring after December 31, 1997. Management believes that the
adoption of this pronouncement will not have a material impact on the financial
statements of the Company.
15
PAGE
<PAGE>
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
$0.18 and $0.14 for the six months ended June 30, 1997 and 1996, respectively,
and fully diluted EPS was $0.17 and $0.14 for the six months ended June 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, 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.
16
PAGE
<PAGE>
On March 25, 1997, the Federal Open Market Committee decided to tighten money
market conditions slightly, expecting the federal funds rate to rise one-
quarter percentage (1/4%) point to approximately five and one-half percent (5-
1/2%). This action was taken in light of persisting strength in demand, which
is progressively increasing the risk of inflationary imbalances developing in
the economy that may eventually undermine the long expansion. In these
circumstances, the slight firming of monetary conditions is viewed as a prudent
step that affords greater assurance of prolonging the current economic
expansion by sustaining the existing low inflation environment through the rest
of this year and next. The experience of the last several years has reinforced
the conviction that low inflation is essential to realizing the economy's
fullest growth potential. No change was made in the Federal Reserve discount
rate, which remains at five percent (5%).
17
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.
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.
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.
18
PAGE
<PAGE>
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of the Company was held on May 29, 1997.
The stockholders voted (1) to elect eight directors of the Company; and (2)
to approve the appointment of Coopers & Lybrand, L.L.P. as the independent
public accountants of the Company for the fiscal year ending December 31,
1997.
The results of the voting for the election of Directors was as follows:
Name For Against Withheld
---------------------- --------- ------- --------
C. Jack Bean 4,720,641 87 61,341
William B. Byrd 4,720,391 337 61,341
Bobby W. Hackler 4,720,541 187 61,341
Joseph S. Hardin 4,716,041 4,687 61,341
G. M. Heinzelmann, III 4,715,041 5,687 61,341
Michael L. Milam 4,720,656 87 61,341
Garrett Morris 4,720,391 337 61,341
Cullen W. Turner 4,720,641 87 61,341
The results of the other votes were as follows:
Description For Against Abstain
----------------------------- --------- ------- -------
Approval of Coopers &
Lybrand, L.L.P. as the
Company's independent
accountants for the fiscal
year ending December 31, 1997 4,766,708 6,666 8,695
All proposals were approved by the vote of the stockholders.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule*
* Filed herewith.
19
PAGE
<PAGE>
(b) Reports on Form 8-K
On June 23, 1997 the Company filed a current report on Form 8-K with
the Securities and Exchange Commission to report that on June 17, 1997
the Board of Directors of the Company, pursuant to the Surety Capital
Corporation Rights Agreement dated June 17, 1997 between the Company and
Securities Transfer Corporation, as rights agent, declared a dividend of
one right for each outstanding share of common stock, $0.01 par value, of
the Company 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 under certain circumstances.
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: August 9, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,151,677
<INT-BEARING-DEPOSITS> 190,144
<FED-FUNDS-SOLD> 2,961,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,291,037
<INVESTMENTS-CARRYING> 20,396,763
<INVESTMENTS-MARKET> 20,618,167
<LOANS> 116,142,208
<ALLOWANCE> (1,300,567)
<TOTAL-ASSETS> 174,926,055
<DEPOSITS> 153,834,928
<SHORT-TERM> 0
<LIABILITIES-OTHER> 840,343
<LONG-TERM> 0
0
0
<COMMON> 57,862
<OTHER-SE> 20,192,922
<TOTAL-LIABILITIES-AND-EQUITY> 174,926,055
<INTEREST-LOAN> 6,620,128
<INTEREST-INVEST> 1,288,595
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,179,916
<INTEREST-DEPOSIT> 2,850,321
<INTEREST-EXPENSE> 2,850,321
<INTEREST-INCOME-NET> 5,329,595
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,693,042
<INCOME-PRETAX> 1,608,328
<INCOME-PRE-EXTRAORDINARY> 1,010,715
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,010,715
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 10.3
<LOANS-NON> 115,000
<LOANS-PAST> 75,461
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,284,774
<CHARGE-OFFS> 214,124
<RECOVERIES> 79,917
<ALLOWANCE-CLOSE> 1,300,567
<ALLOWANCE-DOMESTIC> 1,300,567
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
