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, 1999, or
[ ] 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 12, 1999, 5,760,235 share
<PAGE>
SURETY CAPITAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
- -------------------------------- --------
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Six
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Operations for the Three
Months Ended June 30, 1999 and 1998 5
Statement of Comprehensive Income (Loss) for the Six
Months Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
- -----------------------------
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 22
2
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 7,849,265 $ 9,289,897
Federal funds sold 27,374,339 24,761,752
Interest bearing deposits in financial institutions - 94,939
Investment securities: Available-for-sale 18,688,649 24,366,866
Loans 77,444,834 100,852,107
Less: Unearned interest (698,698) (916,152)
Allowance for credit losses (1,813,608) (1,961,840)
------------ ------------
Net loans 74,932,528 97,974,115
Premises and equipment, net 4,890,126 6,762,223
Accrued interest receivable 614,052 759,833
Other real estate and repossessed assets 157,088 205,877
Other assets 1,743,821 2,451,172
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $984,223 and $2,581,074 at June 30, 1999
and December 31, 1998, respectively 5,683,005 8,395,121
------------ ------------
Total assets $141,932,873 $175,061,795
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 21,629,889 $ 31,732,996
Savings, NOW and money markets 23,854,117 43,282,766
Time deposits, $100,000 and over 13,386,088 24,224,817
Other time deposits 37,681,867 55,922,822
------------ ------------
Total deposits 96,551,961 155,163,401
Due to purchaser on branch sale 24,993,724 -
Accrued interest payable and other liabilities 1,858,926 1,554,144
Convertible subordinated debt 4,350,000 4,350,000
------------ ------------
Total liabilities 127,754,611 161,067,545
------------ ------------
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, none issued at June 30, 1999 and
December 31, 1998 -
Common stock, $0.01 par value, 20,000,000 shares
authorized, 5,840,071 shares issued at June 30,
1999 and December 31, 1998, and 5,760,235 shares
outstanding at June 30, 1999 and December 31,
1998, respectively 58,401 58,401
Additional paid-in capital 17,093,787 17,093,786
Accumulated deficit (2,292,594) (2,887,548)
Stock rights issuable 57,902 57,902
Treasury stock, 79,836 shares at June 30, 1999 and
at December 31, 1998, carried at cost (375,443) (375,443)
Accumulated other comprehensive (loss) income,
net of tax (363,791) 47,152
------------ ------------
Total shareholders' equity 14,178,262 13,994,250
------------ ------------
Total liabilities and shareholders' equity $141,932,873 $175,061,795
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1999 1998
----------- -----------
<S> <C> <C>
Interest income:
Commercial $ 892,131 $ 1,539,561
Real Estate 2,214,641 1,734,416
Consumer loans 78,499 602,233
Insurance premium financing 1,172,698 1,935,262
Medical claims receivable factoring 63,928 823,721
Federal funds sold 556,768 799,355
Investment securities:
Taxable 639,763 946,524
Tax-exempt 66,016 128,327
Interest bearing deposits 1,081 2,903
----------- -----------
Total interest income 5,685,525 8,512,302
----------- -----------
Interest expense:
Savings, NOW and money market 529,846 696,860
Time deposits, $100,000 and over 531,918 835,996
Other time deposits 1,209,014 1,899,254
Interest expense on notes payable 216,545 100,253
----------- -----------
Total interest expense 2,487,323 3,532,363
----------- -----------
Net interest income before
provision for credit losses 3,198,202 4,979,939
----------- -----------
Provision for credit losses on loans and
for medical claims receivables losses - 1,638,119
----------- -----------
Net interest income 3,198,202 3,341,820
----------- -----------
Non interest income:
Non recurring gain - Sale of branches 2,788,777 -
Other 876,187 1,219,239
----------- -----------
Total non interest income 3,664,964 1,219,239
----------- -----------
Non interest expense:
Salaries and employee benefits 2,334,342 2,691,256
Occupancy and equipment 1,138,117 945,720
General and administrative 2,439,411 1,631,576
----------- -----------
Total non interest expense 5,911,870 5,268,552
----------- -----------
Income (Loss) before income taxes 951,296 (707,493)
Income tax expense (benefit) 356,342 (255,161)
----------- -----------
Net income (loss) $ 594,954 $ (452,332)
=========== ===========
Basic earnings (loss) per share of common stock $ .10 $ (0.08)
=========== ===========
Weighted average shares outstanding 5,760,235 5,758,931
=========== ===========
Diluted earnings (loss) per share of common stock $ .10 $ (0.08)
=========== ===========
Weighted average shares outstanding
and common stock equivalents 5,880,539 5,999,426
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended June 30, 1999 and 1998
(unaudited)
Three Months Ended
June 30, June 30,
1999 1998
----------- -----------
Interest income:
Commercial $ 416,606 $ 993,195
Real Estate Loans 1,091,131 1,096,194
Consumer loans 8,695 329,014
Insurance premium financing 528,737 958,762
Medical claims receivable factoring 3,214 285,154
Federal funds sold 300,275 449,153
Investment securities:
Taxable 333,716 593,986
Tax-exempt 32,544 92,257
Interest bearing deposits - 1,471
----------- -----------
Total interest income 2,714,918 4,799,186
----------- -----------
Interest expense:
Savings, NOW and money market 262,094 411,949
Time deposits, $100,000 and over 237,084 516,723
Other time deposits 579,161 1,075,890
Other interest expense 108,272 100,253
----------- -----------
Total interest expense 1,186,611 2,104,815
----------- -----------
Net interest income before
provision for credit losses 1,528,307 2,694,371
----------- -----------
Provision for credit losses on loans and
medical claims receivables losses - 1,710,918
----------- -----------
Net interest income 1,528,307 983,453
----------- -----------
Non interest income:
Non recurring gain - Sale of branches 2,788,777 -
Other 416,025 648,269
----------- -----------
Total non interest income 3,204,802 648,269
----------- -----------
Non interest expense:
Salaries and employee benefits 1,114,114 1,494,994
Occupancy and equipment 626,910 543,412
General and administrative 1,251,218 826,136
----------- -----------
Total non interest expense 2,992,242 2,864,542
----------- -----------
Income (Loss) before income taxes 1,740,867 (1,232,820)
Income tax expense (benefit) 356,342 (448,142)
----------- -----------
Net income (loss) $ 1,384,525 $ (784,678)
=========== ===========
Basic earnings (loss) per share of common stock $ .24 $ (0.14)
=========== ===========
Weighted average shares outstanding 5,760,235 5,760,502
=========== ===========
Diluted earnings (loss) per share of common stock $ .23 $ (0.14)
=========== ===========
Weighted average shares outstanding
and common stock equivalents $ 5,999,521 6,007,112
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
SURETY CAPITAL CORPORATION
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
for the six months ended June 30, 1999 and 1998
(unaudited)
Six Months Ended
June 30, June 30,
1999 1998
---------- ----------
Net income (loss) $ 594,954 $(452,332)
Other comprehensive loss, net of income tax:
Unrealized holding losses on available
for sale securities (410,943) (69,555)
---------- ----------
Comprehensive income (loss) $ 184,011 $(521,887)
---------- ----------
Disclosure of reclassification amount:
Unrealized holding losses arising during period $(382,267) $ (35,206)
Less: reclassification adjustment for losses
included in net income, net of income tax (28,676) (34,349)
---------- ----------
Net unrealized losses on securities $(410,943) $ (69,555)
---------- ----------
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
June 30,
1999 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ 594,954 $ (452,332)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for credit losses - 1,638,119
Depreciation 465,818 323,229
Amortization of intangible assets 347,989 172,970
Loss (gain) on sale of available-for-sale securities 44,806 (53,670)
Loss on sale or disposal of assets - 86,278
Gain on sale of branches (2,788,777) -
Changes in assets and liabilities:
Unearned interest on loans (217,454) (46,168)
Other assets 796,935 (211,447)
Accrued interest payable and other liabilities 27,518 (326,912)
----------- ------------
Net cash (used in) provided by operating
activities (728,211) 1,130,067
----------- ------------
Cash flows from investing activities:
Net change in loans 9,852,868 2,073,579
Payments received on purchased medical claims receivables 437,029 9,081,806
Purchases of medical claims receivables (212,351) (7,109,061)
Purchases of available-for-sale securities (11,465,028) (12,479,949)
Proceeds from sales of available-for-sale securities 3,961,647 4,256,197
Proceeds from maturities of available-for-sale securities 12,761,929 13,873,260
Proceeds from maturities of interest bearing deposits in
financial institutions 94,939 (228,117)
Purchases of bank premises and equipment (137,116) 60,715
Net cash acquired through acquisitions - 2,956,010
----------- ------------
Net cash provided by investing activities 15,293,917 12,484,440
----------- ------------
Cash flows from financing activities:
Net change in deposits (13,393,751) 206,175
Issuance of subordinated debt - 4,350,000
Purchase of treasury stock - (82,245)
Exercise of stock options - 163,858
----------- ------------
Net cash (used in) provided by financing activities (13,393,751) 4,637,788
----------- ------------
Net increase in cash and cash equivalents 1,171,955 18,252,295
Beginning cash and cash equivalents 34,051,649 28,461,443
----------- ------------
Ending cash and cash equivalents $35,223,604 $ 46,713,738
=========== ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
7
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1999 and 1998
(unaudited)
June 30
-------------------------
1999 1998
-------- ------------
Supplemental schedule of noncash investing
and financing activities:
Transfers of repossessed collateral to
other assets $ - $ 147,393
Additions to loans to facilitate the sale
of other real estate and other assets $ - $ 3,225
Net cash acquired through acquisitions:
Investment securities $ - $ 19,261,707
Net loans - 33,839,277
Premises and equipment, net - 3,785,737
Other assets - 1,099,583
Excess of cost over fair value of net
assets acquired/(sold) - 4,505,197
Deposits - (64,761,640)
Other liabilities - (685,871)
-------- ------------
Net cash acquired through acquisitions/
disposition $ - $ (2,956,010)
======== ============
The accompanying notes are an integral part
of the consolidated financial statements.
8
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
Surety Capital Corporation (the "Company") is a publicly traded
bank holding company located in Hurst, Texas. The Company owns
a subsidiary national bank, Surety Bank, National Association
(the "Bank"), with full service offices located in Converse,
Hurst, New Braunfels, San Antonio, Schertz, Universal City and
Whitesboro, Texas. The Bank engages in general commercial and
consumer banking and concentrates its lending activities in the
area of insurance premium financing. 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 management 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 Annual Report on Form 10-K for the
period ended December 31, 1998. In the opinion of management,
all adjustments consisting only of normal recurring adjustments
necessary to present fairly the financial position of the
Company as of June 30, 1999, 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, 1999.
2. Sale of Midlothian and Waxahachie:
---------------------------------
Effective as of June 30, 1999, Surety completed the sale to The
Citizens National Bank in Waxahachie ("Citizens National
Bank"), Waxahachie, Texas, of the two Ellis County branches of
the Bank located in Midlothian and Waxahachie, Texas. In
connection with the closing, the Bank sold loans totaling
approximately $13,117,000, real property, furniture and
equipment totaling approximately $1,543,000, and cash and other
assets totaling approximately $413,000 and Citizens National
Bank assumed deposits and other liabilities totaling
approximately $45,368,000. After giving effect to a deposit
premium of 11% on the deposits assumed totaling approximately
$4,974,000, and a loan premium of 2.5% of the loans sold
totaling approximately $328,000, the Bank paid approximately
$24,994,000 in cash to Citizens National Bank in July as
consideration for the net deposit liabilities assumed by
Citizens National Bank. Surety recorded a gain on the sale of
approximately $2,789,000 after goodwill related to the branches
and other expenses were netted.
3. Earnings Per Share:
------------------
Basic earnings per share is computed by dividing net income
available to common stockholders by the weighted average number
of shares outstanding during the period. The weighted average
common shares outstanding used in computing basic earnings per
common share for the quarters ended June 30, 1999 and 1998, was
5,760,235 and 5,760,502, respectively. The weighted average
common shares outstanding used in computing diluted earnings
per common share for the quarters ended June 30, 1999 and 1998,
was 5,999,521 and 6,007,112, respectively. Diluted earnings
per share included the effect of potential common shares
resulting from the assumed exercise of outstanding stock
options with exercise prices less than the market value of the
common shares at statement date.
9
<PAGE>
4. Loans, net:
----------
At June 30, 1999 and December 31, 1998 the loan portfolio was
composed of the following:
June 30, December 31,
1999 1998
------------ ------------
Real estate loans $ 30,535,751 $ 41,939,108
Insurance premium financing 22,075,958 24,887,202
Commercial loans 17,334,517 23,516,589
SBA loans 4,993,123 6,259,049
Installment loans, net 2,505,485 4,250,159
------------ ------------
Total gross loans 77,444,834 100,852,107
Unearned interest (698,698) (916,152)
Allowance for credit losses (1,813,608) (1,961,840)
------------ ------------
Loans, net $ 74,932,528 $ 97,974,115
============ ============
Activity in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Six Three Six Three
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1999 1998 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Beginning balance $1,961,840 $2,245,565 $ 950,809 $ 1,170,928
Provision for credit losses - - 1,611,875 1,251,875
Bank (disposition)acquisition (167,000) (167,000) 820,625 820,625
Loans charged off, net of
Recoveries $ 18,768 $ (264,957) (1,908,589) (1,768,708)
---------- ---------- ----------- -----------
Ending balance $1,813,608 $1,813,608 $ 1,474,720 $ 1,474,720
========== ========== =========== ===========
</TABLE>
Loans on which the accrual of interest has been discontinued
amounted to approximately $835,000 and $1,328,000 at June 30,
1999 and June 30, 1998, respectively.
5. Convertible Subordinated Debt:
-----------------------------
Effective March 31, 1998, the Company issued $4,350,000 in 9%
Convertible Subordinated Notes Due 2008 (the "Notes"), pursuant
to an indenture ("Indenture") between the Company and Harris
Trust and Savings Bank, Chicago, Illinois, as trustee (the
"Trustee"). The Notes are general unsecured obligations of the
Company. The terms of the Notes are such that they should
qualify as Tier II capital under the Federal Reserve Board's
regulatory capital guidelines applicable to bank holding
companies. The Notes bear interest at a rate of 9% per annum
until maturity. Interest on the Notes is payable semi-annually
on March 31 and September 30 of each year, commencing September
30, 1998. No principal payments are due until maturity on
March 31, 2008.
The payment of the principal of $4,350,000, premium, if any,
and interest on the Notes are subordinated in right of payment
to the prior payment in full of all senior indebtedness of the
Company. Upon the occurrence of certain events involving the
bankruptcy, insolvency, reorganization, receivership or similar
proceedings of the Company, either the Trustee or the holders
of not less than 25% in aggregate principal amount of the
outstanding Notes may declare the principal of the Notes,
together with any accrued and unpaid interest, to be
immediately due and payable. The Notes do not otherwise
provide for any right of acceleration of the payment of
principal thereof.
Each holder of Notes has the right at any time prior to
maturity of the Notes, unless previously redeemed, at the
holder's option, to convert such Notes, or any portion thereof
which is an integral multiple of $10,000, into shares of Common
Stock of the Company, at the conversion price of $6.00 per
share, subject to certain antidilutive adjustments.
The Notes are not subject to mandatory redemption or sinking
fund provision. The Notes are redeemable for cash at the
option of the Company on at least 30 but not more than 60 days
notice, in whole or in part, at any time after the date of
issuance and on or before March 31, 2002 at the redemption
prices set forth in the table below, plus accrued interest to
the date of redemption, if the closing sales price of
10
<PAGE>
5. Convertible Subordinated Debt continued:
---------------------------------------
the Common Stock shall be at least 130% of the Conversion Price
then in effect for a period of 20 consecutive trading days in
the principal market in which the Common Stock is then traded.
At any time after March 31, 2002 and prior to maturity, the
Notes are redeemable for cash at the option of the Company, on
at least 30 but not more than 60 days notice, in whole or in
part, at the redemption prices set forth in the table below,
plus accrued interest to the date of redemption.
If Redeemed During Percentage of If Redeemed During Percentage of
12 Months Ended Principal 12 Months Ended Principal
March 31, Amount March 31, Amount
------------------ ------------- ------------------ -------------
2000 108% 2005 103%
2001 107% 2006 102%
2002 106% 2007 101%
2003 105% 2008 100%
2004 104%
The Company made the required March 31, 1999 interest payment
on the Notes. See "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity" regarding plans to meet future requirements.
6. Formal Agreement:
----------------
On November 19, 1998 the Board of Directors of the Bank entered
into a Formal Agreement (the "Formal Agreement") with the
Office of the Comptroller of the Currency ("OCC") pursuant to
which the Bank was required to achieve certain capital levels
and adopt and implement certain plans, policies and strategies
by March 31, 1999 and was required to achieve certain
additional capital levels by December 31, 1999. Although the
Bank failed to achieve the capital levels required by the
Formal Agreement to be met by March 31, 1999, the OCC, on April
14, 1999, granted the Bank an extension to September 30, 1999,
subject to revocation based on the results of examinations by
the OCC to be conducted in April and June of 1999, to meet such
capital levels. As a result of the gains from the sale of the
two Ellis County branches in June 1999, the Bank is in
compliance with the capital level requirements of the Formal
Agreement.
11
<PAGE>
7. Business Segments:
-----------------
The accounting policies of the segments are the same as those
described above in Note 1. The Company evaluates segment
performance based on net interest income, or profit or loss
from operations before income taxes, not including nonrecurring
gains and losses. These schedules are for the six month
periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Insurance Medical Claims
Banking Premium Receivables
Community Financing Factoring Total
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
1999
Net interest income before provision
for loan losses $ 2,356,535 $ 859,361 $ (17,694) $ 3,198,202
Provision for credit losses - - - -
Non interest income 3,371,422 293,542 - 3,664,964
Non interest expense 4,871,068 810,502 230,300 5,911,870
Net income (loss) 500,546 342,402 (247,994) 594,954
Loans, gross 54,644,729 22,452,364 - 77,097,093
Medical claims receivables, gross - - 347,741 347,741
Total assets 118,775,891 22,750,053 406,929 141,932,873
1998
Net interest income before provision
for credit losses 4,121,647 457,949 400,343 4,979,939
Provision for credit losses (382,128) 1,191,666 828,581 1,638,119
Non interest income 744,220 475,019 - 1,219,239
Non interest expense 4,149,673 1,066,779 52,100 5,268,552
Net income (loss) 1,298,824 (1,221,215) (529,941) (452,332)
Loans, gross 88,490,539 39,248,394 - 127,738,933
Medical claims receivables, gross - - 1,673,300 1,673,300
Total assets $199,510,774 $39,499,618 $1,760,290 $240,770,682
</TABLE>
8. Contingencies:
-------------
See "Part II. Other Information - Item 1. Legal Proceedings."
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended. The Company, owns all of
the issued and outstanding shares of capital stock of the Bank.
The information presented below reflects the lending and related
funding business of the Company:
Six Months Six Months
Ended Ended
June 30, June 30,
1999 1998
------------- -------------
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 22,440,089 $ 40,800,337
Average yield 10.5% 9.5%
Interest income $ 1,172,698 $ 1,935,262
CONSUMER, COMMERCIAL AND REAL
ESTATE FINANCING:
Average balance outstanding $ 70,895,799 $ 74,678,382
Average yield 9.0% 10.4%
Interest income $ 3,185,271 $ 3,876,210
MEDICAL CLAIMS RECEIVABLES:
Average balance outstanding $ 225,843 $ 6,369,385
Average yield 56.6% 25.9%
Interest income $ 63,928 $ 823,721
COST OF FUNDS:
Average balance outstanding $ 146,549,840 $ 189,420,608
Average interest rate 3.1% 3.6%
Interest expense $ 2,270,778 $ 3,432,110
COST OF DEBT:
Average balance outstanding $ 4,350,000 $ 2,529,730
Average interest rate 10.0% 7.90%
Interest expense $ 216,545 $ 100,253
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 947,588 $ 1,496,607
Total interest expense $ 414,554 $ 588,727
Provision for credit losses $ - $ 288,487
Provision for medical claims
receivables losses $ - $ 62,423
Noninterest income $ 610,827 $ 203,207
Noninterest expense $ 985,312 $ 858,520
Note: Average balances are computed using daily balances throughout
each period.
13
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
------------------------------------
Average Average
Balance Interest Rate
------------ ---------- -------
<S> <C> <C> <C>
ASSETS:
Interest earnings assets:
U.S. Treasury and agency securities and
due from time(1) $ 25,379,785 $ 706,860 5.6%
Federal funds sold 24,139,274 556,768 4.6%
Loans(2)(3) 93,561,731 4,421,897 9.5%
Allowance for credit losses and factoring (2,166,195) N/A N/A
------------ ---------- -------
Total interest earning assets 140,914,595 5,685,525 8.1%
------------ ---------- -------
Cash and due from banks 7,546,762
Premises and equipment 6,518,362
Accrued interest receivable 811,740
Other assets 10,223,826
------------
Total assets $166,015,285
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $ 33,815,090 $ 435,826 2.6%
Savings deposits 8,218,917 94,020 2.3%
Time deposits 73,661,046 1,740,932 4.7%
Convertible subordinated debt 4,350,000 216,545 10.0%
------------ ---------- -------
Total interest bearing liabilities 120,045,053 2,487,323 4.1%
------------ ---------- -------
Net interest income $3,198,202
==========
Net interest spread 4.0%
-------
Net interest income to average earning assets 4.5%
=======
Noninterest bearing deposits 30,854,787
Accrued interest payable and other liabilities 1,726,725
------------
Total liabilities 152,626,565
Shareholders' equity 13,388,720
------------
Total liabilities and shareholders'
equity $166,015,285
============
</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.
14
<PAGE>
Six Months Ended June 30, 1999 Versus Six Months Ended June 30, 1998
Combined Results of Operations
- ------------------------------
The Company and its wholly owned subsidiary, the Bank, reported a
gain of $594,954 as compared to net loss of $(452,332) during the six
months ended June 30, 1999 and 1998, respectively. Basic and diluted
earnings (loss) per share were $0.10 and $(0.08) for the six months
ended June 30, 1999 and 1998, respectively. The majority of the
second quarter earnings resulted from the sale of the two branches in
Ellis County, Texas.
Effective as of June 30, 1999, Surety completed the sale to The
Citizens National Bank in Waxahachie ("Citizens National Bank"),
Waxahachie, Texas, of the two Ellis County branches of the Bank
located in Midlothian and Waxahachie, Texas. The gain recorded from
the sale of approximately $2,789,000 enabled the Bank to be in
compliance with the capital requirements of the Formal Agreement
with the OCC.
The Board of Directors and management of the Company have
implemented numerous changes to return the Company to its core
business of community banking and insurance premium financing. The
management team has been restructured with the replacement of the
Company's Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer and Controller, and cost reductions have been made
in the personnel and occupancy areas of the Bank. The medical
claims factoring division has been discontinued with a net factored
receivables balance at June 30, 1999 of $347,741. Stringent new
controls over core operations have been implemented. Additionally,
the Company sold two of the Bank's branches in Midlothian and
Waxahachie, Texas in June 1999 and the sale resulted in a gain and
brought the Bank into full compliance with the capital requirements
of the Formal Agreement. Additionally, the Company has purchased a
building near downtown Fort Worth, Texas with the intent of
relocating its headquarters to this new location by the end of 1999.
These steps are expected to rebuild profitable operations and
enhance shareholder value.
The yields earned by the Company on its loan portfolio during the
six months ended June 30, 1999 and 1998 were 9.5% and 10.1%,
respectively, while the average cost of interest bearing liabilities
for the Company for the same periods was 4.1% and 4.4%,
respectively. The decline in rates earned on the loan portfolio and
rates paid on deposits can be attributed to lower rates in the
marketplace. The average balance of loans outstanding was
$93,561,731 and $115,478,719 for the six months ended June 30, 1999
and 1998, respectively. The loan-to-deposit ratio as of June 30,
1999 and 1998 was 80.21% and 59.9%, respectively.
Total interest income decreased 33.2% to $5,685,525 from $8,512,302,
while total interest expense decreased 29.6% to $2,487,323 from
$3,532,363, resulting in a 35.8% decrease in net interest income
before provision for credit losses to $3,198,202 from $4,979,939.
The Company's gross loans decreased between these two periods by
41.1% to $77,444,834 from $131,379,876. Real estate lending
decreased by 3.4% to $30,535,751 from $31,601,851, commercial
lending increased by 63.0% to $17,334,517 from $46,880,433, consumer
lending decreased by 80.0% to $2,505,485 from $12,529,269 and
insurance premium financing decreased by 45.3% to $22,075,958 from
$40,368,323. The average balance of interest bearing liabilities
decreased 24.9%, while the average rate paid decreased from 4.4% to
4.1%. The decrease in loan and deposits, except for insurance
premium finance, was a direct result of the sale of four branches in
October 1998 and two branches in June 1999.
The Company did not record a provision for loan losses during the
six months ended June 30, 1999 as compared to the $1,638,119
provision during the six months ended June 30, 1998. The Company's
ratio of allowance to total loans was 2.4%. Management believes
that all known losses in the portfolio have been recognized.
The Company's other non interest income decreased 28.1% to $876,187
from $1,219,239 for the six months ended June 30, 1999 and 1998,
respectively. The decrease compares to a corresponding decrease in
insurance premium finance loans for these same periods. Insurance
premium finance generates noninterest income from late fees charged
on its loans that become past due.
Noninterest expense increased 12.2% during the same period.
Salaries decreased only 13.2% due to severance packages and general
administration expenses increased 49.5% as a result of legal and
professional fees. Management has made numerous changes in order to
reduce expenses including staffing reductions and reduction of lease
space along with efforts to reduce legal and professional fees.
15
<PAGE>
Parent Company Only Results of Operations
- -----------------------------------------
The Company primarily serves as a parent company to the Bank and has
nominal separate business activities. For the six months ended June
30, 1999, the Company had interest expense on the convertible
subordinated debt of approximately $216,545. The non interest
expenses 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 did not record a provision for credit losses during the
six months ended June 30, 1999. 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. Management periodically reviews the estimates used in
determining the allowance for credit losses and adequately provides
for the changes as needed. 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 Company's ratio of allowance to total loans was 2.4% and the
allowance for credit losses was $1,813,608 on June 30, 1999.
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 June 30, 1999, 16.9% of the
Bank's interest bearing liabilities were in the form of time
deposits of $100,000 and over. Although unlikely, if a large number
of these time deposits matured at approximately the same time and
were not renewed, the Bank's liquidity could be adversely affected.
Currently, the maturities of the Bank's large time deposits are
spread throughout the year, and the Bank monitors those maturities
in an effort to minimize any adverse effect on liquidity.
The ability of the Company to meet its cash obligations depends
almost entirely on its receipt of dividends from the Bank, which are
limited by banking statutes and regulations, and the Formal Agree-
ment. See discussion under "Formal Agreement with the OCC" below.
At June 30, 1999 the Company as a stand-alone entity had
approximately $12,000 in cash and accrued expenses of approximately
$377,000. The accrued expenses consist of $262,000 due to the Bank
and $115,000 in Company-related operating expenses. It is
contemplated that the $262,000 of accrued expenses due to the Bank
will be paid via a special dividend by the Bank to the Company. The
Company is in the process of requesting permission from the OCC to
allow the Bank to pay the dividend to the Company with the
understanding that the dividend proceeds will be used by the Company
to repay the Bank. The Company anticipates that it will obtain such
approval in September 1999, although no assurances to this effect
can be given. It is further contemplated that the remaining
expenses will be paid from certain tax refunds and tax payments that
the Company will receive in September 1999. The Company will
receive a tax refund from the Internal Revenue Service during the
third quarter of approximately $80,000. Also, the Company will
receive cash from the Bank in September 1999 as a result of its tax
sharing agreement with the Bank. The amount of the refund will be
determined when the third quarter tax estimate is due.
Additionally, an interest payment in the amount of $195,750 is due
and payable on the Notes on September 30, 1999. The Company
currently does not have sufficient cash to pay the September 30,
1999 interest payment and other operating expenses. The Bank is
currently precluded from declaring and paying any dividends to the
Company under the Formal Agreement. However, because the Bank is in
compliance with the capital level requirements of the Formal
Agreement, it will formally seek permission from the OCC to pay a
dividend to the Company to enable the Company to pay the September
30, 1999 interest payment on the Notes. No assurance can be given,
however, that the Bank will be successful in such efforts.
16
<PAGE>
In the event the Company is unable to receive dividends from the
Bank, the Company will not be able to pay accrued interest under the
Notes on September 30, 1999 and will be in default under the Notes.
The Indenture pursuant to which the Notes are issued does not
provide for any right of acceleration of the payment of the Notes as
a result of any failure of the Company to timely pay principal of
and interest on the Notes. The Notes may only be accelerated in the
event of the bankruptcy, insolvency or reorganization of the
Company. In the event of a default in the payment of interest,
principal or premium, if any, by the Company on the Notes, the
holder of the Note (or the Trustee on behalf of the holders of all
of the Notes affected) may, in lieu of accelerating the maturity of
the Notes, seek to enforce payment of such interest, principal or
premium, if any. The initiation of such a course of action by the
holders of the Notes in the event of the failure of the Company to
meet its debt servicing obligations under the Notes could have a
significant adverse impact on the future operations of the Company.
There can be no assurance that the Company's present capital and
financing will be sufficient to finance future operations. 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
stockholders. If additional financing becomes necessary, there can
be no assurance that the financing can be obtained, and if obtained,
there can be no assurance that such financing will be on
satisfactory terms. In this event, the Company could be required to
restrict its operations.
Capital Resources
Shareholders' equity at June 30, 1999 was $14,178,262 as compared to
$13,994,250 at December 31, 1998. The Company had consolidated gain
of $594,954 for the six months ended June 30, 1999.
Exclusive of the Formal Agreement, the Bank is expected to meet a
minimum risk-based capital ratio to risk-weighted assets ratio of
8%, of which at least one-half, or 4%, must be in the form of Tier 1
(core) capital. The remaining one-half, or 4%, may be either in the
form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount
of the loan loss allowances that may be included in capital after
the transition period is limited to 1.25% of risk-weighted assets.
The ratio of Tier 1 (core) and the combined amount of Tier 1 (core)
and Tier 2 (supplementary) capital to risk-weighted assets for the
Bank was 8.98% and 10.24%, respectively, at December 31, 1998 and
16.59% and 17.86%, respectively, at June 30, 1999. In addition, the
Bank is expected to maintain a Tier 1 capital to total assets ratio
(Tier 1 leverage ratio) of at least 3%. The Bank is currently, and
expects to continue to be, in compliance with these capital
requirements. The Company however, is subject to higher capital
requirements set forth in the Formal Agreement. See discussion
under "Formal Agreement with the OCC" below.
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 stockholders.
Formal Agreement with the OCC
On November 19, 1998 the Board of Directors of the Bank entered into
the Formal Agreement with the OCC pursuant to which the Bank was
required to achieve certain capital levels and adopt and implement
certain plans, policies and strategies by March 31, 1999 and is
required to achieve certain additional capital levels by December
31, 1999. Under the Formal Agreement, the Bank was required to
achieve by March 31, 1999 total risk-based capital at least equal to
12% of risk-weighted assets and Tier I leverage capital at least
equal to 7.5% of adjusted total assets, and is required to achieve
by December 31, 1999 total risk-based capital at least equal to 14%
of risk-weighted assets. On April 14, 1999, the OCC granted the
Bank an extension from March 31, 1999 to September 30, 1999 to meet
the capital requirements of the Formal Agreement. At June 30, 1999
the Bank had total risk-based capital of 17.86% of risk weighted
assets and Tier I leverage capital of 9.34% of adjusted total
assets. As a result of the sale of the two branches in Ellis County
Texas in June 1999, the Bank recorded gains that brought the Bank
into compliance with the capital level requirements of the Formal
Agreement. The gain also allowed the Bank to record deferred income
tax benefits that were not previously recognized.
17
<PAGE>
The Formal Agreement established higher capital requirements than
those applicable under OCC regulations for an "adequately" and "well
capitalized" bank. The table below sets forth the capital
requirements for the Bank under OCC regulations and under the Formal
Agreement, in addition to the Bank's actual capital ratios at
June 30, 1999.
<TABLE>
<CAPTION>
Actual Formal Agreement OCC Regulations
-------- --------------------------- ------------------------
June 30, September 30, December 31, Adequately Well
1999 1999 1999 Capitalized Capitalized
-------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Leverage 9.34% 7.50% 7.50% 4.00% 5.00%
Risk-Based Capital:
Tier I 16.59% 6.00% 6.00% 4.00% 6.00%
Tier I & II 17.86% 12.00% 14.00% 8.00% 10.00%
</TABLE>
The Bank is in compliance with all but one requirement of the Formal
Agreement, the strategic plan. Due to the recent reorganization of
the Bank's management team, a satisfactory strategic plan has not
been implemented. Current management is in the process of revising
the strategic plan to address the deficiencies noted by the OCC.
The Formal Agreement also prohibits the Board of Directors from
declaring or paying any dividends unless the Bank (1) is in
compliance with 12 U.S.C. sections 56 and 60, its approved capital program
provided for in the Formal Agreement, and the capital levels set
forth in the Formal Agreement, as more fully described above, and
(2) has obtained the prior written approval of the OCC.
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 the 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. The Federal
Reserve implements national monetary policy such as seeking to (1)
curb inflation and combat recession by its open market operations in
United States government securities, (2) control the discount rate
applicable to borrowing by banks and (3) establish reserve
requirements against bank deposits. The actions of the Federal
Reserve 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 the Bank
and its results of operations are not predictable.
Note Regarding Forward-Looking Statements
In this report, all statements other than statements of historical
fact regarding the Company's financial condition, results of
operation, business strategy and future acquisitions or operations
are "forward-looking statements."
18
<PAGE>
When used in this report, words such as "believes," "anticipates,"
"intends," "expects," "should," and words of similar import identify
a forward-looking statement. Such forward-looking statements may
involve numerous assumptions about known and unknown trends,
uncertainties, risks, economic conditions and other factors which may
ultimately prove to be inaccurate. Certain of these factors are
discussed in more detail elsewhere in this report and in the Company's
reports and filings with the Commission incorporated by reference
herein, including without limitation under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Item 1. Business" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998. Actual results may differ materially
from any future results expressed or implied by such forward-looking
statements. Prospective investors are cautioned not to place undue
reliance on such forward-looking statements. The Company disclaims
any obligation to update or to publicly revise any of the forward-
looking statements contained herein to reflect future events or
developments.
Year 2000 Safety and Soundness
The Bank has developed an intensive Action Plan for addressing
the concerns and risks associated with the coming millennium. The
Bank has reviewed the Federal Reserve's and Federal Financial
Institutions Examination Council's ("FFIEC") Interagency Statement
entitled "Year 2000 Project Management Awareness" and related
materials. In addition, the Bank has done extensive research and
documentation to develop a strategy that will facilitate compliance
with federal banking agency policies which will be reviewed by
regulatory agencies in their monitoring process and examinations.
This Action Plan includes the defined phases from the FFIEC:
Awareness, Assessment, Renovation, Validation and Implementation.
As part of the Awareness phase a Year 2000 Team was organized and
developed an overall strategy to encompass systems, vendors,
customers and correspondents. This phase has been completed. The
Assessment phase identified the size and complexity of potential
problems, and in all hardware, software and related systems with
interdependencies affected by the Year 2000 date change. The
Assessment phase has been completed, but the Bank considers it an
ongoing process due to the need to evaluate any new relationships
and information system hardware and software obtained through the
Year 2000. Under the Renovation phase, code enhancements, hardware
and software upgrades, and vendor certifications have been pursued
and are complete. Testing under the Validation phase was tracked
and results recorded. Testing of in-house mission-critical systems
has been successfully completed. The final phase of Implementation
includes the acceptance of certified systems and the completed
remediation and business resumption contingency plans for all
mission-critical items. The Company has completed the remediation
and business resumption contingency plans. As additional agency
policies and statements are made available, the Bank will modify its
Action Plan as necessary to maintain compliance.
Current costs and estimated future expenditures are not
significant and are expected to have negligible effects on the
Company's results of operations, liquidity and capital resources.
Costs incurred only to upgrade equipment to Year 2000 compliance are
expensed as incurred.
Pursuant to the Year 2000 Information and Readiness Disclosure
Act of 1998, Publications L. No. {05-27}, 112 Statute 2386 (the
"Act"), the Bank hereby designated this Year 2000 Statement as a
Year 2000 Readiness Disclosure. This Year 2000 Readiness Disclosure
is made for the sole purpose of facilitation responses or
communicating or disclosing information aimed at correcting and/or
helping to correct and/or avoid Year 2000 failures. By designating
the Year 2000 Statement as a Year 2000 Readiness Disclosure, the
Bank intends to comply fully with, and to be afforded the
protections of, the Act. Therefore, all statements made in this
Year 2000 Readiness Disclosure shall be construed within the
confines of the Act.
This Year 2000 disclosure replaces and supercedes all prior
communications related to Year 2000.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
In the normal course of conducting business activities, the Company
is exposed to market risk, principally interest rate risk, through
the operations of its banking subsidiary. Interest rate risk arises
from market driven fluctuations in interest rates that affect cash
flows, income, expense and values of financial instruments.
Interest rate risk is managed by management and the board of
directors of the Company. No material changes in market risk
strategy occurred during the current period. A detailed discussion
of market risk is provided in the Company's Annual Report on Form
10-K for the period ended December 31, 1998.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Surety Bank, National Association (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 plaintiff 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 sought 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 alleged course of
conduct.
Both the Anchorage case as well as the MacGregor case 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. The Bank also contends that it had a right to
exercise control over its collateral to protect itself against
the possibility of inconsistent orders regarding the same
funds. Tennessee seeks to recover funds allegedly transferred
in and out of Anchorage/MacGregor accounts at the Bank during
an approximate four month period in 1993. Tennessee also
claims that the Bank allegedly transferred funds in and out of
Anchorage accounts after receiving notice of a court order
prohibiting such transfer. Tennessee is claiming damages in
excess of $2,000,000.
The Anchorage case was called to trial in July 1998, where,
immediately before trial was to begin, the court granted
summary judgment in favor of the Bank and entered a take
nothing judgment against the Plaintiff. Tennessee has since
appealed the trial court's summary judgment to the Fifth
Circuit Court of Appeals, where that appeal is pending.
The Plaintiff in the MacGregor case, United Shortline, Inc.
Assurance Services, N.A. ("Shortline"), purports to be 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. 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 those funds by Tennessee, the Bank
intervened and interpled approximately $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. Tennessee then appealed that ruling to the Texas
Supreme Court which affirmed the judgment of the Court of
Appeals. This case has now been remanded to the trial court
for disposition of the remaining issues.
The Bank believes both of these cases lack merit and will
continue to defend them vigorously. The final outcome of both
of these cases is uncertain at this time.
20
<PAGE>
The Bank is also a Defendant in Dr. Christian J. Renna, et al.
vs. Barry Carroll, et al., filed in April 1997 in the 348th
Judicial District Court of Tarrant County, Texas (the "Renna
Case"). Christian J. Renna, D.O. ("Renna") claims that his
contract billing and collection manager, James Sharbrough,
signed Renna's name to an agreement with the Bank and begin
submitting medical claims belonging to Renna and his medical
practice to the Bank for factoring. Renna claims that these
alleged activities by his billing/collection manager, who was
also Renna's brother-in-law at the time, were without his
authority. The plaintiffs in the Renna case alleged that
damages were suffered as a result of failing to receive
advances for collections on the accounts allegedly factored by
the Bank. The plaintiffs also contend that they have been
further damaged as a result of factoring fees paid to factor
the accounts. The plaintiffs assert that they have suffered
actual damages of approximately $1,500,000, consisting of the
face amount of the receivables, lost profits/income and other
consequential damages. Exemplary damages and attorneys fees in
an unspecified amount are also sought. The trial court recently
granted Summary Judgment in favor of the defendants as it
relates to all claims asserted by Dr. Renna's medical practice,
Doctors Rehab Center, P.A., which should result in a take
nothing judgment against that plaintiff. The case is currently
set for trial to begin on October 3, 1999. The Bank believes
that the Renna case lacks merit and will continue to defend it
vigorously. The final outcome of this case is uncertain at
this time.
The Company is a defendant in various other legal proceedings
arising in connection with its ordinary course of business. In
the opinion of management, the financial position of the
Company will not be materially affected by the final outcome of
these legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
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
June 4, 1999. The stockholders voted on the election of eight
directors of the Company.
The results of the voting for the election of directors was as
follows:
Name of Nominee For Against Abstain
--------------- --------- ------- -------
C. Jack Bean 4,108,232 107,355 136,125
William B. Byrd 4,109,542 106,045 136,125
Joseph S. Hardin 4,106,342 109,245 136,125
G. M. Heinzelmann, III 4,115,232 100,355 136,125
Margaret E. Holland 4,121,542 94,045 136,125
Michael L. Milam 4,121,542 94,045 136,125
Garrett Morris 4,107,932 108,645 135,135
Cullen W. Turner 4,121,542 94,045 136,125
Item 5. Other Information
Not applicable.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule*
----------------
* Filed herewith.
(b) Reports on Form 8-K
On June 8, 1999 the Company filed a Current Report on Form
8-K to report that on June 3, 1999 the services of
PricewaterhouseCoopers LLP as the Company's independent
accountants were terminated and that on June 4, 1999 the
Company engaged Fisk & Robinson, P.C. as its independent
accountants to audit the Company's financial statements for
fiscal year 1999. On June 15, 1999 the Company filed a
Current Report on Form 8-K/A (Amendment No. 1) to file as an
exhibit to the Current Report on Form 8-K filed on June 8,
1999 a letter from PricewaterhouseCoopers LLP to the
Securities and Exchange Commission regarding the Company's
termination of PricewaterhouseCoopers LLP's services as the
Company's independent accountants.
On July 15, 1999 the Company filed a Current Report on Form
8-K to report that on June 30, 1999 the Company's subsidiary
Surety Bank, National Association ("Surety Bank"),
completed the sale of its branches located Midlothian and
Waxahachie, Texas to The Citizens National bank in
Waxahachie, Waxahachie, Texas. The following financial
statements were included: Pro Forma Balance Sheet as of
March 31, 1999 and Pro Forma Income Statement for the
three months ended March 31, 1999 and for the twelve
months ended December 31, 1998.
22
<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 17, 1999 SURETY CAPITAL CORPORATION
By: /s/ C. Jack Bean
-------------------------
C. Jack Bean, Chairman of
the Board
By: /s/ John D. Blackmon
-----------------------
John D. Blackmon, Chief
Financial Officer
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0
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