FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Mark One
[X] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
March 31, 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 May 14, 1999, 5,760,235 shares
<PAGE>
SURETY CAPITAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
- -------------------------------- --------
Item 1 Financial Statements
- ------
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition
- ------ and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
- ------
PART II - OTHER INFORMATION
- -----------------------------
Item 1 Legal Proceedings 19
- ------
Item 2 Changes in Securities and Use of Proceeds 20
- ------
Item 3 Defaults Upon Senior Securities 20
- ------
Item 4 Submission of Matters to a Vote of Security Holders 20
- ------
Item 5 Other Information 20
- ------
Item 6 Exhibits and Reports on Form 8-K 20
- ------
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks $ 7,772,075 $ 9,289,897
Federal funds sold 22,509,673 24,761,752
Interest bearing deposits in financial
institutions - 94,939
Investment securities: Available-for-sale 26,419,007 24,366,866
Loans 93,778,953 100,346,913
Less: Unearned interest (790,676) (916,152)
Allowance for credit losses (2,245,565) (1,961,840)
------------ ------------
Net loans 90,742,712 97,468,921
Medical claims receivables, net 140,177 505,194
Premises and equipment, net 6,562,402 6,762,223
Accrued interest receivable 927,509 759,833
Other real estate and repossessed assets 329,004 205,877
Other assets 1,846,052 2,451,172
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $2,753,560 and $2,581,074 at March 31,
1999 and December 31, 1998, respectively 8,329,635 8,395,121
------------ ------------
Total assets $165,578,246 $175,061,795
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 31,591,991 $ 31,732,996
Savings, NOW and money markets 41,798,600 43,282,766
Time deposits, $100,000 and over 20,782,840 24,224,817
Other time deposits 52,592,262 55,922,822
------------ ------------
Total deposits 146,765,693 155,163,401
Accrued interest payable and other liabilities 1,405,161 1,554,144
Convertible subordinated debt 4,350,000 4,350,000
------------ ------------
Total liabilities 152,520,854 161,067,545
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized, none issued at March 31,
1999 and December 31, 1998 - -
Common stock, $0.01 par value, 20,000,000
shares authorized, 5,840,071 shares issued
at March 31, 1999 and December 31, 1998,
and 5,760,235 shares outstanding at March 31,
1999 and December 31, 1998 58,401 58,401
Additional paid-in capital 17,093,786 17,093,786
Accumulated deficit (3,682,052) (2,887,548)
Stock rights issuable 57,902 57,902
Treasury stock, 79,836 shares at March 31,
1999 and at December 31, 1998 carried
at cost (375,443) (375,443)
Accumulated other comprehensive income,
net of tax (95,202) 47,152
------------ ------------
Total shareholders' equity 13,057,392 13,994,250
------------ ------------
Total liabilities and shareholders' equity $165,578,246 $175,061,795
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended March 31, 1999 and 1998
(unaudited)
Three Months Ended
March 31, March 31,
1999 1998
----------- -----------
Interest income:
Commercial and real estate loans $ 1,379,265 $ 1,184,588
SBA 219,770 -
Consumer loans 69,804 273,219
Insurance premium financing 643,961 976,500
Medical claims receivable factoring 60,714 636,366
Federal funds sold 256,493 350,202
Investment securities:
Taxable 306,047 352,538
Tax-exempt 33,472 36,070
Interest bearing deposits 1,081 1,432
----------- -----------
Total interest income 2,970,607 3,810,915
----------- -----------
Interest expense:
Savings, NOW and money market 267,752 284,911
Time deposits, $100,000 and over 294,834 319,273
Other time deposits 629,853 823,364
Interest expense on notes payable 108,273 -
----------- -----------
Total interest expense 1,300,712 1,427,548
----------- -----------
Net interest income before
Provision for credit losses 1,669,895 2,383,367
----------- -----------
Provision for credit losses on loans and
for medical claims receivables losses - 25,000
----------- -----------
Net interest income 1,669,895 2,358,367
----------- -----------
Noninterest income 460,162 570,970
----------- -----------
Noninterest expense:
Salaries and employee benefits 1,220,228 1,196,262
Occupancy and equipment 511,207 402,308
General and administrative 1,188,193 805,440
----------- -----------
Total noninterest expense 2,919,628 2,404,010
----------- -----------
(Loss) income before income taxes (789,571) 525,327
Income tax expenses:
Current - 192,981
----------- -----------
Net (loss) income $ (789,571) $ 332,346
=========== ===========
Basic (loss) earnings per share of common stock $ (0.14) $ 0.06
=========== ===========
Weighted average shares outstanding 5,760,235 5,756,838
=========== ===========
Diluted (loss) earnings per share of common stock $ (0.14) $ 0.06
=========== ===========
Weighted average shares outstanding
and common stock equivalents 5,760,235 5,991,740
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
<PAGE>
SURETY CAPITAL CORPORATION
STATEMENT OF COMPREHENSIVE INCOME
for the three months ended March 31, 1999 and 1998
(unaudited)
Three Months Ended
March 31, March 31,
1999 1998
---------- ----------
Net (loss) income $(789,571) $ 332,346
Other comprehensive loss, net of income tax
Unrealized holding losses (142,354) (61,531)
---------- ----------
Comprehensive (loss) income $(931,925) $ 270,815
========== ==========
Disclosure of reclassification amount:
Unrealized holding losses arising during period $(142,354) $ (19,921)
Less: reclassification adjustment for losses
included in net income, net of income tax - (41,610)
---------- ----------
Net unrealized losses on securities $(142,354) $ (61,531)
========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
March 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (789,571) $ 332,346
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for credit losses - 25,000
Depreciation 249,172 162,549
Amortization of intangible assets 172,486 94,501
Gain on sale of available-for-sale
securities - (53,670)
Loss on sale or disposal of assets - 86,278
Changes in assets and liabilities:
Unearned interest on loans (125,476) 10,898
Other assets 128,566 559,971
Accrued interest payable and other
liabilities (148,983) 37,247
------------ -----------
Net cash (used in) provided by
operating activities (513,806) 1,255,120
------------ -----------
Cash flows from investing activities:
Net change in loans 6,992,024 (1,376,522)
Payments received on purchased medical claims
receivables 437,029 4,930,539
Purchases of medical claims receivables (212,351) (4,054,258)
Purchases of available-for-sale securities (7,079,214) (7,562,500)
Proceeds from sales of available-for-sale
securities - 3,265,331
Proceeds from maturities of available-for-sale
securities 4,958,537 8,480,500
Proceeds from maturities of interest bearing
deposits in financial institutions 4,939 -
Purchases of bank premises and equipment (49,351) (126,960)
Proceeds from sale of other real estate and
repossessed assets - 60,715
------------ -----------
Net cash provided by investing
activities 5,141,613 3,616,846
------------ -----------
Cash flows from financing activities:
Net change in deposits (8,397,708) 1,587,439
Issuance of subordinated debt - 4,350,000
Exercise of stock options - 8,382
------------ -----------
Net cash (used in) provided by
financing activities (8,397,708) 5,945,821
Net (decrease) increase in cash and cash
equivalents (3,769,901) 10,817,787
Beginning cash and cash equivalents 34,051,649 28,461,443
------------ -----------
Ending cash and cash equivalents $30,281,748 $39,279,230
============ ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-6-
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1999 and 1998
(unaudited)
March 31,
---------------------------
1999 1998
------------ -----------
Supplemental schedule of noncash investing
and financing activities:
Transfers of repossessed collateral to
other assets - $88,417
Additions to loans to facilitate the sale
of other real estate and other assets - $ 3,225
The accompanying notes are an integral part
of the consolidated financial statements.
-7-
<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,
with full service office located in Converse, Hurst,
Midlothian, New Braunfels, San Antonio, Schertz, Universal
City, Waxahachie and Whitesboro, Texas. The Company has
entered into an agreement to sell the Midlothian and Waxahachie
branches. Surety 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 the Company believes that the disclosures
are adequate to make the information presented not misleading.
These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments consisting only
of normal recurring adjustments necessary to present fairly the
financial position of the Company as of March 31, 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. Earnings Per Share:
-------------------
Basic earnings per share is computed by dividing net income
available to common stockholders by the weighted average number
of shares and share equivalents outstanding during the period.
The weighted average common shares outstanding used in
computing basic earnings per common share for the quarters
ended March 31, 1999 and 1998, was 5,760,235 and 5,756,838,
respectively. The weighted average common shares outstanding
used in computing diluted earnings per common share for the
quarters ended March 31, 1999 and 1998, was 5,760,235 and
5,991,740.
3. Loans, net:
-----------
At March 31, 1999 and December 31, 1998 the loan portfolio was
composed of the following:
March 31, December 31,
1999 1998
------------ ------------
Real estate loans $ 40,474,070 $ 41,939,108
Insurance premium financing 22,014,003 24,887,202
Commercial loans 23,278,527 23,011,395
SBA loans 5,053,646 6,259,049
Installment loans 2,958,707 4,250,159
------------ ------------
Total gross loans 93,778,953 100,346,913
Unearned interest (790,676) (916,152)
Allowance for credit losses (2,245,565) (1,961,840)
------------ ------------
Loans, net $ 90,742,712 $ 97,468,921
============ ============
-8-
<PAGE>
3. Loans, net continued:
----------
Activity in the allowance for credit losses on loans and
medical claims receivables is as follows:
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
------------ ------------
Beginning balance $2,103,025 $5,258,694
Provision for credit losses - 25,000
Net loan recoveries (chargeoffs) 156,993 (65,730)
Ending balance $2,260,018 $5,217,964
Loans on which the accrual of interest has been discontinued
amounted to approximately $1,652,000 and $1,398,000 at March
31, 1999 and March 31, 1998, respectively.
4. Medical Claims Receivables:
---------------------------
At March 31, 1999 and December 31, 1998, the medical claims
receivables portfolio was composed of the following:
March 31, December 31,
1999 1998
--------- ------------
Medical claims receivables $154,630 $ 646,378
Unearned interest - -
Allowance for medical claims
receivables losses (14,453) (141,184)
--------- ----------
Medical claims receivables, net $140,177 $ 505,194
========= ==========
During the first quarter of 1999 the medical claims factoring
division was substantially discontinued.
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.
-9-
<PAGE>
5. Convertible Subordinated Debt continued:
-----------------------------
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 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. After this payment of interest on the Notes, the
Company as a stand-alone entity has approximately $51,000 in
cash remaining for future operating expenses. See " Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity" regarding plans to meet
future requirements.
6. Subsequent Events:
------------------
On April 13, 1999, the Bank entered into a Purchase and
Assumption Agreement with The Citizens National Bank in
Waxahachie, Waxahachie, Texas ("Citizens"), to sell to Citizens
the Bank's two branches located in Waxahachie and Midlothian,
Texas (the "Branches"). The purchase price for the Branches
will be based upon the net value of the assets less the balance
of liabilities assumed plus 11% of the deposit base and 2.5% of
the loan base and the value of certain premises, equipment and
other assets. The transaction will be structured as a purchase
of certain assets and assumption of certain liabilities of the
Branches, including deposits, by Citizens. As of March 31,
1999, the Branches had total deposits of approximately
$52,883,000, total net loans of approximately $13,963,000 and
fixed assets of approximately $1,557,000. The completion of
the sale is subject to a number of contingencies, including
regulatory approvals by applicable banking authorities and a
due diligence review of the Branches by Citizens. There can be
no assurance that the transaction will be completed. If
consummated, the transaction is expected to close on or about
June 30, 1999, upon the expiration of all applicable
waiting periods following receipt of all necessary regulatory
approvals.
-10-
<PAGE>
6. Subsequent Events continued:
-----------------
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 and the leverage
ratio 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.
-11-
<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 Surety Bank,
National Association, formerly Texas Bank, National Association and
formerly Texas National Bank, Lufkin, Texas (the "Bank").
The information presented below reflects the lending and related
funding business of the Company:
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
-------------- --------------
INSURANCE PREMIUM FINANCING:
Average balance outstanding $ 22,846,058 $ 39,430,694
Average yield 11.3% 9.9%
Interest income $ 643,961 $ 976,500
CONSUMER, COMMERCIAL AND REAL
ESTATE FINANCING:
Average balance outstanding $ 73,406,149 $ 59,315,803
Average yield 9.1% 9.8%
Interest income $ 1,668,839 $ 1,457,807
MEDICAL CLAIMS RECEIVABLES:
Average balance outstanding $ 412,410 $ 6,809,648
Average yield 58.9% 37.4%
Interest income $ 60,714 $ 636,366
COST OF FUNDS:
Average balance outstanding $ 152,339,121 $ 155,858,576
Average interest rate 3.1% 3.7%
Interest expense $ 1,192,439 $ 1,427,548
COST OF DEBT:
Average balance outstanding $ 4,350,000 $ -
Average interest rate 10.0%
Interest expense $ 108,273 $ -
AVERAGE MONTHLY AMOUNTS:
Total interest income $ 990,202 $ 1,270,305
Total interest expense $ 433,571 $ 475,849
Provision for credit losses $ - $ 120,000
Provision (credit) for
medical claims receivables
losses $ - $ (111,667)
Noninterest income $ 153,387 $ 190,323
Noninterest expense $ 973,209 $ 801,337
Note: Average balances are computed using daily balances throughout
each period.
-12-
<PAGE>
AVERAGE BALANCE SHEET
<TABLE>
<CAPTION>
Three Months Ended March 31, 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) $ 26,480,730 $ 339,519 5.1%
Federal funds sold 24,763,832 257,574 4.2%
Loans(2)(3) 96,252,207 2,312,800 9.6%
Medical claims receivables 412,410 60,714 58.9%
Allowance for credit losses and
factoring (2,030,906) N/A N/A
------------ --------- -------
Total interest earning assets 145,878,273 2,970,607 8.2%
------------ --------- -------
Cash and due from banks 7,748,276
Premises and equipment 6,661,660
Accrued interest receivable 803,688
Other assets 10,015,847
------------
Total assets $171,107,744
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing liabilities:
Interest bearing demand deposits $ 35,589,139 $ 223,625 2.5%
Savings deposits 8,374,252 44,127 2.1%
Time deposits 76,837,967 924,687 4.8%
Convertible subordinated debt 4,350,000 108,273 10.0%
------------ --------- -------
Total interest bearing
liabilities 125,151,358 1,300,712 4.3%
------------ --------- -------
Net interest income $1,669,895
=========
Net interest spread 3.9%
-------
Net interest income to average earning
assets 4.6%
=======
Noninterest bearing deposits 30,992,858
Accrued interest payable and other
liabilities 1,514,969
------------
Total liabilities 57,659,185
Shareholders' equity 13,448,559
------------
Total liabilities and
shareholders' equity $171,107,744
============
</TABLE
(1) Interest income on the tax-exempt securities does not reflect the
tax equivalent yield.
(2) Loans on nonaccrual status have been included in the computation
of average balances.
(3) The interest income on loans does not include loan fees. Loan
fees are immaterial and are included in noninterest income.
-13-
<PAGE>
Three Months Ended March 31, 1999 Versus Three Months Ended March 31, 1998
Combined Results of Operations
- ------------------------------
The Company and its wholly owned subsidiary, the Bank, reported a
net loss of $789,571 as compared to net income of $332,346 during
the three months ended March 31, 1999 and 1998, respectively. Basic
and diluted earnings (loss) per share were $(0.14) and $0.06 for the
three months ended March 31, 1999 and 1998, respectively.
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 March 31, 1999 of $140,177. Stringent new
controls over core operations have been implemented. Additionally,
the Company has contracted to sell two of Surety Bank's branches in
Midlothian and Waxahachie, Texas. The sale is expected to result in
a significant non-operating gain and to bring the Bank into full
compliance with the Formal Agreement capital requirements. Subject
to receipt of all regulatory approvals, the Company plans to open a
branch in downtown Fort Worth, Texas, with the intent of relocating
its headquarters to this new location by the end of 1999. The new
location will allow the Bank to fill a void left in this major
market during the last two years when many of the large independent
banks in Fort Worth merged with larger bank holding companies based
outside the local area. These steps are expected to rebuild
profitable operations and enhance shareholder value.
The yields earned by the Company on its loan portfolio during the
three months ended March 31, 1999 and 1998 were 9.6% and 9.9%,
respectively, while the average cost of funds for the Company for
the same periods was 3.1% and 3.7%, 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 $96,252,207 and $98,746,297 for the three
months ended March 31, 1999 and 1998, respectively. The loan-to-
deposit ratio as of March 31, 1999 and 1998 was 63.4% and 65.3%,
respectively.
Total interest income decreased 22.1% to $2,970,607 from $3,810,915,
while total interest expense decreased 8.9% to $1,300,712 from
$1,427,548, resulting in a 29.9% decrease in net interest income
before provision for credit losses to $1,669,895 from $2,383,367.
The Company's gross loans decreased between these two periods by
8.1% to $93,778,953 from $101,997,760. Real estate lending
increased by 41.2% to $40,665,977 from $28,665,977, commercial
lending increased by 11.9% to $23,278,527 from $20,803,364, consumer
lending decreased by 70.7% to $2,958,707 from $10,099,910, and
insurance premium financing decreased by 48.1% to $22,014,003 from
$42,428,509. The average volume of consumer, commercial, and real
estate lending increased 23.8%, with a decrease in the average
yields on those loans from 9.8% to 9.1%. The 42.1% decrease in the
average volume of insurance premium financing loans was accompanied
by a yield of 11.3% and 9.9% on those loans for the three months
ended March 31, 1999 and 1998, respectively. The increase in yield
realized on insurance premium finance loans is a result of a
decision to concentrate on quality and rates charged on insurance
premium finance loans. The average balance of interest bearing
deposits decreased 9.4%, while the average rate paid increased from
4.3% to 3.9%. The decrease in interest bearing deposits and the
subsequent decrease in rates paid on interest bearing deposits is
attributed to a decision by management to eliminate those deposits
with the highest rate of interest.
The Company did not record a provision for loan losses during the
either three months ended March 31, 1999 or the three months ended
March 31, 1998. The Company's ratio of charge-offs to average loans
was 0.3% for these periods and recoveries net of charge-offs for the
three months ended March 31, 1999 were in the amount of $156,993 and
the Company determined that no provision was necessary. The
Company's ratio of allowance to total loans was 2.4% as compared to
its peer group's ratio of allowance to total loans of 1.4%.
Management believes that all known losses in the portfolio have been
recognized.
The Company's noninterest income decreased 19.4% to $460,162 from
$570,970 for the three months ended March 31, 1999 and 1998,
respectively. This decrease compares to a corresponding decrease in
insurance premium finance loans of 48.1% for these same periods.
Insurance premium finance generates noninterest income from late
fees charged on its loans which become past due.
-14-
<PAGE>
Noninterest expense increased 21.5%, primarily the result of a 2.0%
increase in salaries and employee benefits, a 27.1% increase in
occupancy and equipment expenses, and a 47.5% increase in general
and administrative expenses. The increase in occupancy expense
relates to the acquisition of TexStar National Bank on March 31,
1998. Increases in general and administrative expenses relate
primarily to legal and professional fees. Management has made
numerous changes in order to reduce expenses, including staffing
reductions for an estimated annual savings in excess of $500,000 per
year, reduction of lease space along with efforts to reduce legal
and professional fees.
Parent Company Only Results of Operations
- -----------------------------------------
The Company primarily serves as a parent company to Surety Bank and
has nominal separate business activities. For the three months
ended March 31, 1999, the Company had no interest income, interest
expense on the Notes of approximately $108,000 and noninterest
expense of approximately $31,000. The noninterest expenses, which
decreased 18% 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 did not record a provision for credit losses during
either the three months ended March 31, 1999 or the three months
ended March 31, 1998. 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 had a net recovery for the three months ended March 31,
1999 of $156,993. The Company's ratio of charge-offs to average
loans was 0.3% and 0.2% for the three months ended March 31, 1999
and 1998 and the Company determined that no provision was necessary.
The Company's ratio of allowance to total loans was 2.4% as compared
to its peer group's ratio of allowance to total loans of 1.4%. The
allowance for credit losses was $2,245,565 on March 31, 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 March 31, 1999, 14.1% 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.
The ability of the Company to meet its cash obligations depends
almost entirely on its receipt of dividends from Surety Bank, which
are limited by banking statutes and regulations, and the Formal
Agreement. See discussion under "Formal Agreement with the OCC"
below. At March 31, 1999 the Company as a stand-alone entity had
approximately $51,000 in cash for future operating expenses.
The Company, as the holding company for the Bank, does not have
material working capital needs separate from those of the Bank,
other than the payment of interest on the Notes. The Bank is
currently precluded from declaring and paying any dividends to the
Company under the Formal Agreement. The Company will attempt to
secure a loan to meet its cash flow needs for the twelve months
ended March 31, 2000, which includes servicing the interest payment
on the Notes. The provisions of the Notes do not allow holders to
-15-
<PAGE>
force an interest payment. After March 31, 2000, the Bank expects
to be permitted to make dividends to the Company in an amount
necessary to service the interest payments on the Notes and for
general corporate purposes. 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 stockholders. 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.
Capital Resources
Shareholders' equity at March 31, 1999 was $13,057,392 as compared
to $13,994,250 at December 31, 1998. The Company had consolidated
net loss of $789,571 for the three months ended March 31, 1999.
Exclusive of the Formal Agreement, 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 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
Surety Bank was 8.98% and 10.24%, respectively, at December 31, 1998
and 9.12% and 10.38%, respectively, at March 31, 1999. 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. The Company however, is subject to additional
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. At March 31, 1999 the Bank had total risk-
based capital of 10.38% of risk weighted assets and Tier I leverage
capital of 9.12% of adjusted total assets. Although the Bank failed
to achieve the capital levels and the leverage ratio required by the
Formal Agreement to be met by March 31, 1999, the OCC granted the
Company 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. Management
expects to achieve all of the Formal Agreement capital requirements
upon completion of the branch sales of Midlothian and Waxahachie,
which is expected to close on or about June 30, 1999.
-16-
<PAGE>
The Formal Agreement establishes 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, under the Formal
Agreement, in addition to the Bank's actual capital ratios at March
31, 1999 and 1998.
</TABLE>
<TABLE>
<CAPTION>
Actual Formal Agreement OCC Regulations
-------------------- --------------------------- -------------------------
Capital Capital
Ratios Ratios
March 31, March 31, September 30, December 31, Adequately Well
1999 1998 1999(1) 1999 Capitalized Capitalized
--------- --------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leverage 5.49% 6.26% 7.50% 7.50% 4.00% 5.00%
Risk-Based Capital:
Tier I 9.12% 13.32% 6.00% 6.00% 4.00% 6.00%
Tier I & II 10.38% 14.57% 12.00% 14.00% 8.00% 10.00%
</TABLE>
(1) As extended from March 31, 1999.
The Bank's capital amounts and ratios are presented in the table for
the years ended March 31, 1999 and 1998.
March 31,
---------------------------
1999 1998
----------- ------------
Tier I risk-based capital $ 8,702,000 $ 14,736,000
Tier II risk-based capital 1,206,000 1,383,000
----------- ------------
Total capital $ 9,908,000 $ 16,119,000
=========== ============
Risk-weighted assets $96,517,000 $110,608,000
Additionally, pursuant to the Formal Agreement, the Board of
Directors was required to develop a three year capital plan program,
a plan to enhance its management information systems, a three year
strategic plan establishing objectives for the Bank's earnings
performance, growth, balance sheet mix, off-balance sheet
activities, liability structure, capital adequacy, reduction in the
volume of non-performing assets, product line development and market
segments which the Bank intends to promote or develop, together with
strategies to achieve those objectives, a revised loan policy, and a
loan classification policy, each for submission to, and approval by,
the OCC. All of these recommended enhancements have been
implemented and the three year capital plan program, the plan to
enhance the Bank's management information systems and the three year
strategic plan have been submitted to the OCC for approval.
The OCC has extensive enforcement authority over the operations of
all national banks, including the Bank. If the OCC fails to grant
to the Bank the extension, the OCC may under certain circumstances
assess civil monetary damages against the Bank and the Directors of
the Bank, issue cease-and-desist or removal orders and initiate
injunctive actions. Additionally, the OCC may impose a number of
corrective measures on the Bank, including (1) the imposition of
restrictions on certain activities involving asset growth,
acquisitions, branch establishment, expansion into new lines of
business, declaration and payment of dividends, and transactions
with affiliates, (2) the imposition of certain additional mandated
capital raising activities, and (3) as a last resort, the
appointment of a receiver or conservator of the Bank.
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. section 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.
-17-
<PAGE>
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.
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 Surety Bank and its results of operations are not predictable.
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.
-18-
<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 recently 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.
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
-19-
<PAGE>
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 case is
currently set for trial to begin on August 2, 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
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule*
--------------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1999.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: May 24, 1999 SURETY CAPITAL CORPORATION
By: /s/ Robert L. Bintliff
Robert L. Bintliff, Chief
Executive Officer and Chief
Financial Officer
-21-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,772,075
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,509,673
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,419,007
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 92,988,277
<ALLOWANCE> (2,245,565)
<TOTAL-ASSETS> 165,578,246
<DEPOSITS> 146,765,693
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,405,161
<LONG-TERM> 4,350,000
0
0
<COMMON> 58,401
<OTHER-SE> 12,998,991
<TOTAL-LIABILITIES-AND-EQUITY> 165,578,246
<INTEREST-LOAN> 2,373,514
<INTEREST-INVEST> 340,600
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,970,607
<INTEREST-DEPOSIT> 1,192,439
<INTEREST-EXPENSE> 1,300,712
<INTEREST-INCOME-NET> 1,669,895
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,919,628
<INCOME-PRETAX> (789,571)
<INCOME-PRE-EXTRAORDINARY> (789,571)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (789,571)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
<YIELD-ACTUAL> 8.04
<LOANS-NON> 1,652,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,103,025
<CHARGE-OFFS> 307,957
<RECOVERIES> 199,114
<ALLOWANCE-CLOSE> 2,245,565
<ALLOWANCE-DOMESTIC> 2,000,573
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 244,992
</TABLE>
