Rule 424(b)(3)
Registration No. 33-35415
Prospectus Supplement Dated April 3, 1997
to
Reoffer Prospectus Dated October 26, 1995
Reoffers or Resales of Shares of Common Stock,
Par Value $0.01 Per Share, of Surety Capital Corporation
Acquired or to be Acquired Pursuant to the
1988 Incentive Stock Option Plan of Surety Capital Corporation
The information set forth in this Prospectus Supplement (the "Prospectus
Supplement") supplements certain of the information set forth in the Reoffer
Prospectus dated October 26, 1995 (the "Prospectus"). This Prospectus Supplement
is not complete without, and may not be delivered or utilized except in
connection with, the Prospectus. Capitalized terms used herein but not defined
have the meanings assigned to such terms in the Prospectus.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). These reports, proxy statements and other information can be
inspected and copied at the offices of the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at 801 Cherry Street,
19th Floor, Fort Worth, Texas 76102. Copies of such material may be obtained
upon the payment of prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
The Common Stock of the Company is traded on the American Stock Exchange,
Inc., and reports, proxy statements and other information concerning the Company
can be inspected at the American Stock Exchange, Inc. at 86 Trinity Place, Fifth
Floor Library, New York, New York 10006. The telephone number of the American
Stock Exchange, Inc. is 212-306-1290.
RISK FACTORS
In addition to the other information in this Prospectus Supplement,
prospective investors should carefully consider the following factors which
individually or cumulatively could result in the decline or loss in the value of
the Shares offered hereby:
INSURANCE PREMIUM FINANCING CONCENTRATION MAY INCREASE RISK OF LOSSES. The
Company owns all of the issued and outstanding shares of capital stock of Surety
Bank, National Association, formerly Texas Bank, National Association and
formerly Texas National Bank, Lufkin, Texas (the "Bank"), with full service
offices in Chester, Hurst, Kennard, Lufkin, Midlothian, Waxahachie, Wells and
Whitesboro, Texas.
As of December 31, 1996 insurance premium financing loans represented
approximately 37% of the total loans of the Bank. Such a high concentration of
insurance premium financing loans may expose the Bank to greater risk of loss
than would a more diversified loan portfolio. The Bank's current policy
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limits the aggregate loans related to any single insurance company or any
insurance syndicate to a maximum of 35% of the Bank's capital. The 35% limit
applies only to insurance companies rated "A" or better by A. M. Best & Company,
Inc. ("Best"), and to certain unrated insurance organizations which the Bank's
management has determined to be financially strong. Lower percentage limits
apply to insurance companies which have ratings of less than "A" from Best or
are not rated by Best. For example, the aggregate premium loans related to any
insurance entity that is not rated by Best and is not admitted in Texas may not
exceed 10% of the Bank's capital unless the Bank's board of directors authorizes
a higher limit based on a review of the insurer, principally concerning its
financial strength.
ALLOWANCE FOR LOAN LOSSES. The Bank attempts to establish an adequate
allowance for possible loan losses through management's analysis of current and
historical data. Loan losses different from the allowance provided by the Bank
could occur, and loan losses in excess 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
Bank and therefore the Company. At December 31, 1996 the Bank's allowance for
loan losses was 1.2% of total loans (net of unearned interest) and 502.5% of
total nonperforming loans. Management believes that all known losses in the
portfolio have been provided for.
EQUITY CAPITAL COMPLIANCE REQUIREMENTS FOR BANK AND COMPANY. Pursuant to
regulatory requirements, the Bank and the Company are required to maintain
certain levels of regulatory capital. Failure to meet these capital requirements
could expose the Company and/or the Bank to possible regulatory administrative
action or agreements, including, for the Bank, limitations on asset growth,
restrictions on operations, restrictions on payment of dividends or mandated
disposition of assets. Generally, a national bank is required to maintain a
minimum ratio of 8% qualifying capital to risk-weighted assets. Qualifying
capital includes common stockholders' equity and, subject to certain
limitations, preferred stock, the allowance for loan losses, mandatory
convertible debt and subordinated debt. For purposes of calculating the ratio,
assets are assigned different risk weights, ranging from 0% for risk-free assets
such as cash to 100% for assets such as commercial loans. At December 31, 1996
the Bank had a qualifying capital to risk-weighted assets ratio of 12.29%. In
addition, the Bank is required to maintain a minimum level of 3% core (generally
equity) capital to assets. At December 31, 1996 the Bank had a 11.10% ratio of
core capital to assets. There can be no assurance that the Company will be
successful in maintaining or raising capital for the Bank sufficient to meet its
needs.
RELIANCE ON KEY PERSONNEL. The Company and the Bank are highly dependent
upon their executive officers and key employees. Specifically, the Company
considers the services of C. Jack Bean, G. M. Heinzelmann, III, Bobby W. Hackler
and B. J. Curley to be of vital importance to the success of the Company. The
unexpected loss of the services of any of these individuals, particularly Mr.
Bean, Chairman of the Board of the Company, could have a detrimental effect on
the Company and the Bank. The Bank is the beneficiary of a $500,000 key man
insurance policy on the life of Mr. Bean. The Company has entered into Change in
Control Agreements with Messrs. Bean, Heinzelmann, Hackler and Curley under
which each will receive certain benefits if their employment is terminated other
than for cause, or constructively terminated, following a change in control of
the Company. Effective February 18, 1997, the Company adopted a Management
Succession Plan which provides for the orderly succession of executive officers
of the Company in the event of the resignation, retirement or other loss of
services of any such officer.
"SOURCE OF STRENGTH DOCTRINE." 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 policy to require that a bank holding
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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 or 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 on the Company and its shareholders.
RESTRICTION ON BANK DIVIDENDS. The Company does not intend to pay dividends
in the near future. However, the payment of cash dividends by the Company in the
future will depend to a large extent on the receipt of dividends from the Bank.
The ability of the Bank to pay dividends is dependent upon the Bank's earnings
and financial condition. The payment of cash dividends by the Bank to the
Company and by the Company to its shareholders is subject to statutory and
regulatory restrictions.
COMPETITION. There is significant competition among banks and bank holding
companies in the areas in which the Bank and the Company operate. The Company
believes that such competition among such banks and bank holding companies, many
of which have far greater assets and financial resources than the Company, will
continue to increase in the future. The Bank also encounters intense competition
in its commercial banking business from savings and loan associations, credit
unions, factors, insurance companies, commercial and captive finance companies,
and certain other types of financial institutions located in other major
metropolitan areas in the United States, many of which are larger in terms of
capital, resources and personnel. The casualty insurance premium financing
business of the Bank is also very competitive. Large insurance companies offer
their own financing plans, and other independent premium finance companies and
other financial institutions offer insurance premium financing.
GOVERNMENT REGULATION AND RECENT LEGISLATION. The Company and the Bank are
subject to extensive federal and state legislation, regulation and supervision
regarding banking and insurance premium financing. Recently enacted or proposed
legislation and regulations have had, will continue to have or may have
significant impact on the banking industry. Some of the legislative and
regulatory changes may benefit the Company and the Bank, while others may
increase the Company's costs of doing business and assist competitors of the
Company and the Bank. For example, under the Riegle-Neal Interstate Banking and
Branching Act of 1994, banks may acquire branches through interstate mergers
beginning June 1, 1997, unless a state "opts out." The Texas Legislature has
passed legislation to opt out until 1999. It is not possible to predict whether
this legislation will enhance or decrease the value of stock of existing
Texas-based financial institutions. In addition, persons, alone or acting in
concert with others, seeking to acquire more than 10% of any class of voting
securities must comply with the Change in Bank Control Act. Entities seeking to
acquire more than 5% of any class of voting securities must also comply with the
Bank Holding Company Act.
GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income and
net income of the Bank depend to a substantial extent on "rate differentials,"
i.e., the differences between the income the Bank receives from loans,
securities and other earning assets, and the interest expense it pays to obtain
deposits and other liabilities. These rates are highly sensitive to many factors
which are beyond the control of the Bank, including general economic conditions
and the policies of various governmental and regulatory authorities. For
example, in an expanding economy, loan demand usually increases and the interest
rates charged on loans increase. Increases in the discount rate by the Federal
Reserve System usually lead to rising interest rates, which affect the Bank's
interest income, interest expense and investment portfolio. Also, governmental
policies such as the creation of a tax deduction for individual retirement
accounts can increase savings and affect the cost of funds.
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TRADING MARKET FOR THE COMMON STOCK. Although the Common Stock is listed
for trading on the American Stock Exchange, the trading market in the Company's
Common Stock on such exchange historically has been less active than the average
trading market for companies listed on such exchange. As a result, the price of
the Company's Common Stock has ranged from $3.25 to $4.9375 during 1996. A
public trading market having the desired characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace of willing buyers and
sellers of Common Stock at any given time, which presence is dependent upon the
individual decisions of investors and general economic and market conditions
over which the Company has no control.
SELLING SHAREHOLDERS
The following table sets forth certain information as of March 20, 1997
regarding the Common Stock of the Company beneficially owned by the Selling
Shareholders, and any position, office or other material relationship which the
Selling Shareholders have had in the past three years with the Company.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Under
This Offering (3)
-----------------
Number Percentage
of Shares of of Shares of
Shares Subject Common Stock Common Stock
Position, Beneficially Acquired Under to Options Owned Owned
Office or Owned Plan & Held Outstanding After Sale After Sale
Material Prior to Subject to Under the Under this Under this
Name (1) Relationship Offering (2) This Offering Plan (4) Offering (5) Offering (6)
-------- ------------ ------------ ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
C. Jack Bean Chairman of the 194,665(7) 0 11,900 182,765 3.15%
Board and Chief
Executive Officer
Bobby W. Hackler Vice Chairman of 33,637(8) 0 21,354 12,283 less than 1%
the Board and Chief
Operating Officer
G. M. Heinzelmann, President 39,051(9) 0 19,344 19,707 less than 1%
======= -- ====== ======= ============
III
TOTAL 267,353 0 52,598 214,755 3.70%
</TABLE>
(1) Except as otherwise noted, each of the persons named has sole voting and
dispositive power with respect to the shares reported.
(2) Includes all shares which have been or may have been acquired under the
Plan subject to options, and includes all other shares for which beneficial
ownership is deemed pursuant to Rule 13d-3 under the Exchange Act.
(3) For each of the Selling Shareholders, the sum of these two columns is the
total number of Shares which may be offered for his account pursuant to the
Prospectus. The sum of the totals of these two columns equals the total
number of Shares registered under this Offering.
(4) Only includes Shares subject to options exercisable within sixty (60) days
that were granted pursuant to the Plan.
(5) Does not include any Shares that have been acquired or may be acquired
pursuant to the Plan, and assumes exercise of all options granted under the
1995 Incentive Stock Option Plan of the Company which are exercisable
within sixty (60) days.
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<PAGE>
(6) Based on 5,803,152 shares of Common Stock outstanding at March 20, 1997,
which assumes the exercise of all options underlying the Shares offered
hereby.
(7) Includes 182,765 shares of Common Stock owned of record; and 11,900 shares
of Common Stock which Mr. Bean has the right to acquire within sixty (60)
days from the date hereof pursuant to options granted to him under the
Plan.
(8) Includes 128 shares of Common Stock owned of record; 21,354 shares of
Common Stock which Mr. Hackler has the right to acquire within sixty (60)
days from the date hereof pursuant to options granted to him under the
Plan; and 12,155 shares of Common Stock which Mr. Hackler has the right to
acquire within sixty (60) days from the date hereof pursuant to options
granted to him under the 1995 Incentive Stock Option Plan of the Company.
(9) Includes 8,590 shares of Common Stock owned of record; 19,344 shares of
Common Stock which Mr. Heinzelmann has the right to acquire within sixty
(60) days from the date hereof pursuant to options granted to him under the
Plan; and 11,117 shares of Common Stock which Mr. Heinzelmann has the right
to acquire within sixty (60) days from the date hereof pursuant to options
granted to him under the 1995 Incentive Stock Option Plan of the Company.
There is no assurance that any of the Selling Shareholders will sell any or
all of the shares of the Common Stock offered by them under the Prospectus. The
Prospectus may be amended or further supplemented from time to time to add or
delete persons who have acquired or will acquire shares of Common Stock under
the Plan, or who have disposed of such shares of Common Stock, to or from the
list of Selling Shareholders.
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