FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2000, OR
[ ] TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
Delaware 75-2065607
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1501 Summit Avenue, Fort Worth, Texas 76102
(Address of principal executive offices)
817-335-5955
(Issuer's telephone number)
1845 Precinct Line Road, Suite 100, Hurst, Texas 76054
(Former address, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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 No X
Common stock outstanding on May 15, 2000: 5,895,235 shares
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SURETY CAPITAL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Comprehensive Income 5
Condensed Consolidated Statements of Changes in Shareholders'
Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
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 21
2
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SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2000 1999
------------- ------------
Assets:
Cash and due from banks $ 3,753,454 $ 5,416,633
Federal funds sold 5,610,000 4,334,595
------------- ------------
Total cash and cash equivalents 9,363,454 9,751,228
Interest-bearing time deposits in
other financial institutions 25,000 25,000
Securities available for sale, at
fair value 12,812,878 12,480,492
Loans, net 63,764,450 65,772,554
Premises and equipment, net 6,156,120 6,295,302
Accrued interest receivable 608,196 514,453
Other real estate and repossessed assets 750,245 825,245
Goodwill, net 5,321,225 5,432,346
Other assets 1,832,895 3,097,313
------------- ------------
Total assets $ 100,634,463 $104,193,933
============= ============
Liabilities:
Noninterest-bearing demand deposits $ 17,578,805 $ 16,481,651
Savings, NOW and money market accounts 20,793,481 22,959,487
Time deposits, $100,000 and over 12,508,044 13,225,995
Other time deposits 31,633,404 32,210,985
------------- ------------
Total deposits 82,513,734 84,878,118
Convertible subordinated debt 4,350,000 4,350,000
Accrued interest payable and other
liabilities 2,449,311 3,642,845
------------- ------------
Total liabilities 89,313,045 92,870,963
------------- ------------
Shareholders' Equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized, none
issued
Common stock, $0.01 par value, 20,000,000
shares authorized, 5,975,071 shares
issued 59,751 59,751
Additional paid-in capital 17,152,587 17,152,587
Accumulated deficit (5,007,402) (4,911,864)
Stock rights issuable 57,902 57,902
Treasury stock, 79,836 shares at cost (375,443) (375,443)
Accumulated other comprehensive income
(loss) (565,977) (659,963)
------------- ------------
Total shareholders' equity 11,321,418 11,322,970
------------- ------------
Total liabilities and
shareholders' equity $ 100,634,463 $104,193,933
============= ============
See accompanying notes to consolidated financial statements.
3
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SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
-------------------------
March 31, March 31,
2000 1999
----------- ------------
Interest income:
Loans, including fees $ 1,597,393 $ 2,305,071
Securities:
Taxable 199,708 306,047
Tax-exempt -- 33,472
Medical claims receivables factoring -- 60,714
Federal funds sold and interest bearing
deposits 52,754 257,574
----------- ------------
Total interest income 1,849,855 2,962,878
Interest expense:
Deposits 700,685 1,192,439
Notes payable 97,875 108,273
----------- ------------
Total interest expense 798,560 1,300,712
----------- ------------
Net interest income 1,051,295 1,662,166
Provision for loan losses -- 95,355
----------- ------------
Net interest income after provision for
loan losses 1,051,295 1,566,811
Noninterest income:
Service charges on deposit accounts 138,117 221,267
Loan collection fees and late charges 143,306 202,862
Securities gains, net -- 162
Other income 406,725 35,871
----------- ------------
Total noninterest income 688,148 460,162
Noninterest expense:
Salaries and employee benefits 755,306 1,220,228
Occupancy and equipment 357,296 509,110
Other expenses 763,570 1,102,322
----------- ------------
Total noninterest expense 1,876,172 2,831,660
----------- ------------
Net loss before income taxes (136,729) (804,687)
Income tax benefit (41,191) (3,462)
----------- ------------
Net loss $ (95,538) $ (801,225)
=========== ============
Net income (loss) per share - Basic $ (0.02) $ (0.14)
=========== ============
Net income (loss) per share - Diluted $ (0.02) $ (0.14)
=========== ============
See accompanying notes to consolidated financial statements.
4
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SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
---------------------------
March 31, March 31,
2000 1999
----------- ------------
Net loss $ (95,538) $ (801,225)
Other comprehensive income (loss):
Unrealized gain (loss) on
available-for-sale securities arising
during the period 142,404 (222,242)
Reclassification adjustment for amounts
realized on securities sales included
in income -- (162)
----------- ------------
Net unrealized gain(loss) 142,404 (222,404)
Tax effect (48,418) 80,050
----------- ------------
Total other comprehensive income (loss) 93,986 (142,354)
----------- ------------
Comprehensive loss $ (1,552) $ (943,579)
=========== ============
See accompanying notes to consolidated financial statements.
5
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SURETY CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Three Months Ended
----------------------------
March 31, March 31,
2000 1999
------------- -------------
Balance at beginning of period $ 11,322,970 $ 11,715,851
Net loss (95,538) (801,225)
Change in fair value of securities available
for sale, net of tax 93,986 (142,354)
------------- -------------
Balance at end of period $ 11,321,418 $ 10,772,272
============= =============
See accompanying notes to consolidated financial statements.
6
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SURETY CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
--------------------------
March 31, March 31,
2000 1999
------------ -----------
Net cash from operating activities $ 111,574 $ (491,827)
Cash flows from investing activities:
Net change in loans 2,086,104 6,608,940
Net payments received on purchased
medical claims receivables -- 224,678
Securities available for sale:
Purchases (197,394) (7,021,793)
Maturities and repayments 7,550 4,742,221
Proceeds from sales -- 520,000
Proceeds from maturities of interest
-bearing time deposits -- 94,939
Premises and equipment expenditures (31,224) (49,351)
------------ -----------
Net cash from investing activities 1,865,036 5,119,634
------------ -----------
Cash flows from financing activities:
Net change in deposits (2,364,384) (8,397,708)
------------ -----------
Net cash from financing activities (2,364,384) (8,397,708)
------------ -----------
Net change in cash and cash equivalents (387,774) (3,769,901)
Cash and cash equivalents at beginning of period 9,751,228 34,051,649
------------ -----------
Cash and cash equivalents at end of period $ 9,363,454 $30,281,748
============ ===========
Supplemental disclosures:
Cash paid for interest $ 922,352 $ 1,472,362
Cash paid for federal income taxes -- --
Significant non-cash transactions:
Transfers of repossessed collateral to
other real estate -- 125,000
Additions to loans to facilitate sale of
other real estate (78,000) --
See accompanying notes to consolidated financial statements.
7
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SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the
accounts of the Surety Capital Corporation (the "Holding
Company") and its wholly-owned subsidiary, Surety Bank,
National Association (the "Bank"), together referred to as the
"Company." All significant intercompany accounts and
transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit
and reflect all adjustments that, in the opinion of management,
are necessary to present fairly the financial position of the
Company at March 31, 2000, and its results of operations and
cash flows for the periods presented. All such adjustments are
normal and recurring in nature. The accompanying financial
statements have been prepared in accordance with the
instructions of Form 10-QSB and, therefore, do not purport to
contain all necessary financial disclosures required by
generally accepted accounting principles that might otherwise
be necessary in the circumstances, and should be read in
conjunction with financial statements, and notes thereto, of
the Company for the year ended December 31, 1999, included in
its annual report on Form 10-K for the fiscal year ended
December 31, 1999 (the "1999 Form 10-K"). Refer to the
accounting policies of the Company described in the notes to
financial statements contained in the 1999 Form 10-K. The
Company has consistently followed these policies in preparing
this Form 10-QSB.
The Company is principally engaged in traditional community
banking activities provided through its seven branches located
in north Texas and south-central Texas. Community banking
activities include the Company's commercial and retail lending,
deposit gathering and investment and liquidity management
activities. In addition to its community banking services, the
Company offers insurance premium financing. Insurance premium
finance ("IPF") lending involves the lending of funds to
companies and individuals for the purpose of financing their
purchase of property and casualty insurance. Prior to 1999,
the Company was engaged in medical claims factoring, purchasing
primarily insurance company claims from a variety of health
care providers. In 1998, the Company substantially ceased
operations of the medical claims factoring business.
To prepare financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates
and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and actual future
results could differ. The allowance for loan losses, fair
values of financial instruments, and status of contingencies
are particularly subject to change.
In 1999, various accounting irregularities were found during
the course of an internal audit of the Company's IPF division.
Through further investigation, internal audit identified a
significant number of transactions whereby refund amounts due
to some borrowers were inappropriately diverted. Most of the
refunds were applied against the balance of various unrelated
loan accounts including past due loan principal, past due
interest, assessed late charges, etc. The irregular
transactions were reported to the Office of the Comptroller of
the Currency ("OCC"), and the Company retained the services of
a forensic accountant to conduct an independent review of the
IPF division covering the period from January 1, 1996 to
December 31, 1999.
Based on the results of the independent review of the IPF
division, the Company recognized additional losses, including
interest, of $2,611,000 ($1,723,000 on a tax-effected basis).
These losses primarily related to the recognition of previously
unrecognized loan charge-offs and, to a lesser extent, to
errors resulting from the absence of appropriate accounting
controls within the IPF division. The additional losses were
recognized as adjustments to the current and prior years
beginning in the first quarter of 1996 and extending through
the fourth quarter of 1999. All prior year financial
information included in the accompanying consolidated financial
statements has been restated to reflect these losses.
8
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
The Company no longer employs the persons directly responsible
for managing the IPF division during the period when the
diversions occurred.
Beginning January 1, 2001, a new accounting standard, Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," will
require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be
recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair
value of the hedged item is not otherwise recorded. This
standard is not expected to have a material effect but the
effect will depend on derivative holdings when this standard
applies.
Some items in prior financial statements have been reclassified
to conform to the current presentation.
2. Earnings Per Share
Earnings per share is computed in accordance with SFAS No. 128,
which requires dual presentation of basic and diluted earnings
per share ("EPS") for entities with complex capital structures.
Basic EPS is based on net income divided by the weighted-
average number of shares outstanding during the period.
Diluted EPS includes the dilutive effect of stock options
granted using the treasury stock method.
Earnings per common share is computed by dividing net income by
the weighted-average number of shares outstanding for the year.
The weighted-average number of common shares outstanding for
basic and diluted earnings per share computations were as
follows:
Three Months Ended
--------------------
March 31, March 31,
2000 1999
--------- ---------
Weighted-average shares outstanding - Basic 5,895,235 5,760,235
Effect of stock options 6,750 1,587
--------- ---------
Weighted-average shares outstanding - Diluted 5,901,985 5,761,822
========= =========
The Company reported a net loss for the first quarters of 2000
and 1999. Accordingly, the dilutive effect of stock options is
not considered in the net loss per share calculations for these
periods.
3. Securities
Securities available for sale consisted of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
March 31, 2000:
U.S. Treasury notes $ 199,221 $ -- $ 347 $ 198,874
U.S. government agencies 11,504,610 -- 852,657 10,651,954
Mortgage-backed securities 473,245 399 4,935 468,708
Other securities 1,493,342 -- -- 1,493,342
----------- ---------- ---------- -----------
Total securities $13,670,418 $ 399 $ 857,939 $12,812,878
=========== ========== ========== ===========
December 31, 1999:
U.S. government agencies $11,505,376 $ -- $ 995,411 $10,509,965
Mortgage-backed securities 480,706 441 4,974 476,173
Other securities 1,494,354 -- -- 1,494,354
----------- ---------- ---------- -----------
Total securities $13,480,436 $ 441 $1,000,385 $12,480,492
=========== ========== ========== ===========
9
<PAGE>
3. Securities (Continued)
There were no holdings of securities of any one issuer, other
than the U.S. government and its agencies, in an amount greater
than 10% of shareholders' equity at December 31, 1999 or March
31, 2000.
Mortgage-backed securities are backed by pools of mortgages
that are insured or guaranteed by the Federal Home Loan
Mortgage Corporation and the Government National Mortgage
Corporation. Other securities include stock holdings in
Independent Bankers Financial Corporation, the Federal Reserve
Bank and the Federal Home Loan Bank ("FHLB").
The amortized cost and estimated fair value of securities at
March 31, 2000, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay
obligations. Mortgage-backed securities and other securities
are shown separately since they are not due at a single
maturity date.
Estimated
Amortized Fair
Cost Value
----------- -----------
Due within one year $ 199,221 $ 198,874
Due after one year through five years -- --
Due after five years through ten years 11,504,610 10,651,954
Mortgage-backed securities 473,245 468,708
Other securities 1,493,342 1,493,342
----------- -----------
Total securities $13,670,418 $12,812,878
=========== ===========
Sales of securities available for sale were as follows:
Three Months Ended
--------------------------
March 31, March 31,
2000 1999
---------- --------------
Proceeds $ -- $ 520,000
Gross Gains -- 162
Gross Losses -- --
4. Loans and Medical Claims Receivables
Loans consisted of the following:
March 31, December 31,
2000 1999
----------- -----------
Real estate loans $33,802,839 $31,529,099
Insurance premium financing 17,407,529 20,639,094
Commercial loans 9,166,350 9,870,652
Installment loans 5,117,903 5,678,584
----------- -----------
Total gross loans 65,494,621 67,717,429
Unearned interest (417,555) (510,834)
Allowance for credit losses (1,312,616) (1,434,041)
----------- -----------
Loans, net $63,764,450 $65,772,554
=========== ===========
10
<PAGE>
4. Loans and Medical Claims Receivables (Continued)
From 1990 through 1998, the Company was engaged in medical
claims factoring, purchasing primarily insurance company claims
from a variety of health care providers. In 1998, operation of
the medical claims factoring division was discontinued;
however, due to the existence of contractual commitments to
nine customers and in order to enhance the collectibility of
previously charged-off medical claims, the Company continued to
factor new medical claims receivables on behalf of these
customers in 1999. As of December 31, 1999 the contractual
commitments had expired and there were no medical claims
receivable balances outstanding at such date.
Activity in the allowance for credit losses on loans and
medical claims receivables was as follows:
Three Months Ended
------------------------------
March 31, March 31,
2000 1999
-------------- --------------
Beginning balance $ 1,434,041 $ 2,103,024
Provision for credit losses -- 95,355
Charge-offs:
Loans (266,925) (423,684)
Medical claims receivables -- (10,025)
Recoveries:
Loans 141,806 219,486
Medical claims receivables 3,694 275,862
-------------- --------------
Ending balance $ 1,312,616 $ 2,260,018
============== ==============
Impaired loans were as follows:
March 31, December 31,
2000 1999
------------ ------------
Impaired loans with allowance allocated $ 3,105,111 $ 3,958,654
Impaired loans with no allowance allocated 651,665 414,419
------------ ------------
Total impaired loans $ 3,756,776 $ 4,373,073
------------ ------------
Amount of the allowance allocated $ 620,708 $ 645,899
============ ============
Three Months Ended
---------------------------
March 31, March 31,
2000 1999
------------ ------------
Average impaired loans during the period $ 3,853,603 $ 4,198,538
Interest income recognized during
impairment - all cash basis 311,373 299,681
Nonperforming loans were as follows:
March 31, December 31,
2000 1999
----------- -----------
Loans past due over 90 days still on accrual $ 361,277 $ 13,577
Nonaccrual loans 791,962 705,969
----------- -----------
Total nonperforming loans $ 1,153,239 $ 719,526
=========== ===========
11
<PAGE>
5. Financial Instruments With Off-Balance-Sheet Risk and
Concentration of Credit Risk
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued
in the normal course of business to meet the financing needs of
customers. These are agreements to provide credit or to
support the credit of others, as long as conditions established
in the contract are met. These agreements usually have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being used, the total commitments do not
necessarily represent future cash requirements. Off-balance-
sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The
same credit policies are used to make such commitments as are
used for loans, including obtaining collateral at exercise of
the commitment.
Financial instruments with off-balance sheet risk at March 31,
2000 and December 31, 1999 included unfunded loan commitments
of $3,996,000 and $4,125,000 and letters of credit of $155,000
and $158,000.
Unfunded loan commitments carrying fixed interest rates totaled
$775,000 at March 31, 2000, with interest rates ranging from
8.0% to 14.0%. There were no letters of credit carrying fixed
rates at March 31, 2000. Unfunded loan commitments and letters
of credit carrying fixed rates totaled $628,000 and $8,000 at
December 31, 1999, with interest rates ranging from 7.50% to
18.0%.
Federal funds sold totaled $5,610,000 and $4,335,000 at March
31, 2000 and December 31, 1999. These funds represent
uncollateralized loans, in varying amounts, to other commercial
banks with which the Company has correspondent relationships.
The Company maintains deposits with other financial
institutions in amounts that exceed federal deposit insurance
coverage. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant
credit risks on cash and cash equivalents.
The Company has geographic concentrations of credit in its
principal trade areas of Bexar, Comal, Grayson, and Tarrant
Counties, Texas. Additionally, the Company has a significant
concentration of credit, based upon like collateral. IPF
loans, secured by the residual value of unearned insurance
premiums, comprise $17,408,000, or 26.6%, and $20,639,000, or
30.5%, of gross loans at March 31, 2000 and December 31, 1999.
6. Other Noninterest Expense
Other noninterest expense consisted of the following:
Three Months Ended
-----------------------------
March 31, March 31,
2000 1999
------------- ------------
Professional services $ 263,625 $ 370,045
Postage 44,628 99,571
Telephone 54,482 86,009
Office supplies 32,319 47,122
Amortization of intangibles and debt
issuance costs 121,518 172,486
Insurance 34,482 30,830
FDIC assessment 11,055 102,081
Interest on IPF refunds 38,700 75,565
Other 162,761 118,613
------------- ------------
Total other noninterest expense $ 763,570 $ 1,102,322
============= ============
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion focuses on the consolidated financial
condition of the Company at March 31, 2000 compared to December 31,
1999, and the consolidated results of operations for the three
months ended March 31, 2000 compared to the same period in 1999.
The purpose of this discussion is to provide the reader with a more
thorough understanding of the consolidated financial statements.
This discussion should be read in conjunction with the consolidated
financial statements and related footnotes.
Forward-Looking Statements
When used in this document, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated,"
"estimated," "projected," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, that
could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. Factors
listed above could affect the Company's financial performance and
could cause the Company's results for future periods to differ
materially from any statements expressed with respect to future
periods.
The Company does not undertake, and specifically disclaims any
obligation, to publicly revise any forward-looking statements to
reflect events or circumstances after the date of such statements or
to reflect the occurrence of anticipated or unanticipated events.
Restatement of Prior Year Financial Statements
In 1999, various accounting irregularities were found during the
course of an internal audit of the Company's IPF division. Through
further investigation, internal audit identified a significant
number of transactions whereby refund amounts due to some borrowers
were inappropriately diverted. Most of the refunds were applied
against the balance of various unrelated loan accounts including
past due loan principal, past due interest, assessed late charges,
etc.
The refunds due to borrowers were primarily the result of
cancellations of the underlying insurance contracts to which the
loans related. Insurers require the entire premium to be paid at
the inception of the policy. The Company generally finances 75% of
the premium, requiring the loan customer to pay the remainder. The
insurer earns the premium ratably over the term of the policy
coverage. When a policy is canceled prior to the end of the
coverage term, the insurer must refund the unearned premium less any
cancellation fees. The Company holds a security interest in the
unearned premium for all premium finance loans. Accordingly, when a
policy is canceled, the insurer remits the entire unearned premium
to the Company. Upon receipt, the Company uses the funds to pay-off
the loan balance. After the loan is paid in full, any remaining
funds should be remitted to the borrower. As indicated above, some
refunds due to borrowers were used to pay-down or pay-off various
unrelated, delinquent loan accounts. The irregular transactions were
reported to the OCC, and in accordance with an amendment to a prior
Formal Agreement with the OCC (discussed below), the Company
retained the services of a forensic accountant to conduct an
independent review of the IPF division covering the period from
January 1, 1996 to December 31, 1999.
Based on the results of the independent review of the IPF division,
the Company recognized additional losses, including interest, of
$2,611,000 ($1,723,000 on a tax-effected basis). These losses
primarily related to the recognition of previously unrecognized loan
charge-offs and, to a lesser extent, to errors resulting from the
absence of appropriate accounting controls within the IPF division.
The losses were recognized as adjustments to the current and prior
years beginning in the first quarter of 1996 and extending through
the fourth quarter of 1999. The losses, including interest, totaled
$178,000 in the first quarter of 1999. Interest expense on the
refunds payable totaled $39,000 in the first quarter of 2000.
Through April 30, 2000 all refunds have been paid. All prior year
financial information included in the accompanying consolidated
financial statements included in the March 31, 2000 Form 10-QSB and
in the Company's annual report on Form 10-K for the year ended
December 31, 1999 has been restated to reflect these losses.
13
<PAGE>
Formal Agreement with the OCC
On November 19, 1998 the Bank entered into a formal written
agreement (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. The Bank was also required to achieve certain additional
capital levels by December 31, 1999. Under the Formal Agreement, by
March 31, 1999 the Bank was required to achieve total risk-based
capital of at least 12% of risk-weighted assets and Tier I leverage
capital of at least 7.5% of adjusted total assets. By December 31,
1999 the Bank was required to achieve total risk-based capital of at
least 14% of risk-weighted assets. The Bank failed to achieve the
capital requirements set forth in the Formal Agreement by March 31,
1999 and submitted a request for an extension to September 30, 1999.
The OCC granted the extension and the Bank achieved the required
levels of capital upon completion of the sales of the Midlothian and
Waxahachie branches on June 30, 1999. At March 31, 2000 and
December 31, 1999 the Bank met the capital levels required by the
Formal Agreement, with total risk-based capital of 14.86% and 14.73%
of risk-weighted assets and Tier I leverage capital of 9.99% and
9.78% of adjusted total assets.
Memorandum of Understanding with the Federal Reserve Board
On October 28, 1999 the Holding Company entered into a Memorandum of
Understanding (the "MOU") with the Federal Reserve Board (the
"FRB"). Under the MOU, the Company is not permitted to declare or
pay any corporate dividends or incur any additional debt without the
prior approval of the FRB. Also, the Holding Company was required
to develop and submit to the FRB a written three-year capital plan,
a plan to service the Holding Company's existing debt without
incurring any additional debt, and written procedures designed to
strengthen and maintain the Holding Company's internal records and
controls to ensure that future regulatory reports are filed in a
timely and accurate manner. The Holding Company has submitted each
of the requested plans and procedures to the FRB. Finally, the
Holding Company is mandated under the MOU to comply fully with all
formal and informal supervisory actions that have been or may be
imposed on the Bank by the OCC.
Analysis of Financial Condition
The Company's assets totaled $100.6 million at March 31, 2000
compared to $104.2 million at December 31, 1999, a decrease of
$3.6 million, or 3.5%. The decrease in assets was primarily the
result of a decrease in loans and other assets, as more fully
discussed below.
Total securities available for sale remained fairly stable,
increasing only $332,000, or 2.7%, from $12.5 million at December
31, 1999 to $12.8 million at March 31, 2000. At March 31, 2000 the
unrealized loss on securities available for sale totaled $858,000,
compared to $1.0 million at December 31, 1999. No impairment loss
related to these securities has been recognized, as management
believes the decline in the fair value is temporary.
Net loans decreased $2.0 million, or 3.0%, from $65.8 million at
December 31, 1999 to $63.8 million at March 31, 2000. IPF,
commercial and installment loans decreased $3.2 million, $704,000
and $561,000, respectively, from December 31, 1999. IPF loans
decreased due to a decline in IPF loan production volume as a result
of the loss of three IPF loan production officers and the negative
public image of the Company's IPF division stemming from the
accounting irregularities discussed above. Other loan categories
decreased as the Company experienced a slight decrease in production
volume due to a general rise in interest rates. Real estate loans
increased $2.3 million from $31.5 million at December 31, 1999 to
$33.8 million at March 31, 2000. The increase was primarily due to
growth in the Company's Small Business Administration ("SBA")
lending program. The SBA guarantees portions of such loans. The
Company generally sells the guaranteed portion of the loan and
retains the unguaranteed portion for its portfolio.
Total loans, net of unearned interest, as a percentage of total
deposits remained fairly constant totaling 78.9% at March 31, 2000
and 79.2% at December 31, 1999.
Other assets decreased $1.3 million from $3.1 million at December
31, 1999 to $1.8 million at March 31, 2000. Other assets included a
receivable from the Internal Revenue Service for excess tax payments
made in 1999 totaling $1.3 million. The amount was refunded during
the first quarter of 2000.
Total deposits decreased $2.4 million, or 2.8%, from $84.9 million
at December 31, 1999 to $82.5 million at March 31, 2000. The mix of
the deposit portfolio remained stable with only a slight shift from
savings, NOW and money market accounts to noninterest-bearing demand
deposits. Noninterest-bearing demand deposits totaled 21.3% of total
deposits at March 31, 2000 compared to 19.4% of total deposits at
December 31, 1999. Savings, NOW and money market accounts totaled
25.2% and 27.1% of total deposits at the same dates. The shift in
deposit categories is due to normal customer cash-usage patterns.
14
<PAGE>
Time deposits made up 53.5% of the deposit portfolio at March 31,
2000 and December 31, 1999 despite a decrease of $1.3 million during
the quarter. The Company continues to lose certain deposits
retained in connection with the sale of the Midlothian and
Waxahachie branches in the second quarter of 1999. In order to
obtain regulatory approval for the sale of the branches, the Company
retained $8.5 million in time certificates of deposit and IRAs.
Customers have elected not to renew these deposits as they have
matured because the Company no longer has branch facilities in their
market areas. All of the Company's time deposits mature in less
than five years. Based on past experience and the Company's
prevailing pricing strategies, management believes a substantial
percentage of such deposits will renew with the Company at maturity.
If there is a significant deviation from historical experience, the
Company can utilize borrowings from the FHLB as an alternative to
this source of funds, subject to regulatory approval under the
Formal Agreement.
Borrowed funds totaled $4.4 million at March 31, 2000 and December
31, 1999. Borrowed funds consist of convertible subordinated notes
issued on March 31, 1998 to provide funds to finance the acquisition
of TexStar National Bank. The notes bear interest at a rate of 9%
per annum until maturity. No principal payments are due until
maturity on March 31, 2008, while interest on the notes is payable
semi-annually.
Other liabilities decreased $1.2 million from $3.6 million at
December 31, 1999 to $2.4 million at March 31, 2000. The decrease
was primarily the result of the payment of $1.6 million in principal
and interest related to the IPF refunds discussed above. The
accrual for the refunds totaled $2.5 million at December 31, 1999.
At March 31, 2000, the accrued refunds payable, including interest,
totaled $1.0 million, including $39,000 in interest accrued during
the quarter. All remaining refunds were subsequently paid as of
April 30, 2000.
Comparison of Results of Operations
Net Income. General economic conditions, the monetary and fiscal
policies of federal agencies and the regulatory policies of agencies
that regulate financial institutions affect the operating results of
the Company. Interest rates on competing investments and general
market rates of interest influence the Company's cost of funds.
Lending activities are influenced by the demand for various types of
loans, which in turn is affected by the interest rates at which such
loans are made, general economic conditions and the availability of
funds for lending activities.
The Company's net income is primarily dependent upon its net
interest income, which is the difference between interest income
generated on interest-earning assets and interest expense incurred
on interest-bearing liabilities. Provisions for credit losses,
service charges, gains on the sale of assets and other income,
noninterest expense and income taxes also affect net income.
The Company experienced a net loss $96,000 for the three months
ended March 31, 2000, compared to a net loss of $801,000 for the
same period in 1999. Net loss per share was $0.02 per share for the
three months ended March 31, 2000 compared to $0.14 for the three
months ended March 31, 1999.
Net Interest Income. Net interest income is the largest component
of the Company's income and is affected by the interest rate
environment and the volume and composition of interest-earning
assets and interest-bearing liabilities.
Net interest income decreased $611,000, or 36.8%, for the three
months ended March 31, 2000 compared to the same period in 1999.
The decrease was primarily due to decreased average balances of
interest-earning assets and interest-bearing liabilities offset by
an overall increase in the weighted-average yield earned on
interest-earning assets. The weighted-average yield on interest-
earning assets increased as a result of general market increases in
interest rates over the comparable periods. Additionally, the
Company had a significant portion of its average interest-earning
assets invested in lower-yielding federal funds sold during the
first quarter of 1999 in anticipation of the sale of the Midlothian
and Waxahachie branches in the second quarter. The decrease in
average interest-earning assets and interest-bearing liabilities was
the result of the sale of the these branch offices. Included in the
sale were $13.1 million in loans (including $3.6 million in
commercial loans, $8.5 million in real estate loans and $1.0 million
in installment loans) and $45.2 million in deposits (including
$9.7 million in noninterest-bearing checking, $17.8 million in
savings, NOW and money market accounts and $17.7 million in time
deposits).
15
<PAGE>
The Company's net interest margin was 5.12% for the first quarter of
2000 compared to 4.24% for the first quarter of 1999. The increase
resulted as the Company's weighted-average yield on interest-earning
assets increased to 9.01% for the first quarter of 2000 from 8.01%
for the first quarter of 1999. As discussed above, 16.7% of average
interest-earning assets were invested in lower-yielding federal
funds sold during the first quarter of 1999 compared to 4.3% during
the first quarter of 2000. Despite the restructuring of the
portfolio of interest-earning assets, the Company remains liability
sensitive, whereby its interest-bearing liabilities will generally
reprice more quickly than its interest-earning assets. Therefore,
the Company's net interest margin will generally increase in periods
of falling market interest rates and will decrease in periods of
increasing market interest rates. Accordingly, in a rising interest
rate environment, the Company may need to increase rates to attract
and retain deposits. Due to the negative gap position, the rise in
interest rates may not have such an immediate effect on interest-
earning assets. This lag could negatively affect net interest
income. Since the first quarter of 1999 the Board of Governors of
the Federal Reserve System increased the discount rate by 100 basis
points, which has lead to a general increase in deposit and loan
rates offered by many financial institutions. Accordingly, over the
same period, the Company's weighted-average cost of deposits
increased 30 basis points while the weighted-average yield earned on
loans increased only 10 basis points.
Allowance and Provision for Credit Losses. The Company maintains an
allowance for credit losses in an amount that, in management's
judgment, is adequate to absorb reasonably foreseeable losses
inherent in the loan portfolio. While management utilizes its best
judgment and information available, the ultimate adequacy of the
allowance is dependent upon a variety of factors, including the
performance of the Company's loan portfolio, the economy, changes in
real estate values and interest rates and the view of the regulatory
authorities toward loan classifications. The provision for loan
losses is determined by management as the amount to be added to the
allowance for loan losses after net charge-offs have been deducted
to bring the allowance to a level which is considered adequate to
absorb losses inherent in the loan portfolio. The amount of the
provision is based on management's review of the loan portfolio and
consideration of such factors as historical loss experience, general
prevailing economic conditions, changes in the size and composition
of the loan portfolio and specific borrower considerations,
including the ability of the borrower to repay the loan and the
estimated value of the underlying collateral.
All lending activity contains risks of loan losses and the Company
recognizes these credit risks as a necessary element of its business
activity. To assist in identifying and managing potential loan
losses, the Company contracts with an independent loan review
service provider to evaluate individual credit relationships as well
as overall loan portfolio conditions. One of the primary objectives
of the loan review function is to make recommendations to management
as to both specific loss reserves and overall portfolio loss
reserves.
Net loan charge-offs totaled $125,000, or 0.19% of average loans, in
the first quarter of 2000 compared to $204,000, or 0.21% of average
loans, during the first quarter of 1999. Commercial and IPF loans
accounted for the largest portions of charge-offs. As discussed
above, the prior financial statements reflect previously
unrecognized losses in the IPF loan portfolio. As the losses were
not reported due to an inappropriate diversion of funds, no efforts
had been made to collect these loans. Management intends to
aggressively pursue collection of these loans. At this time,
however, the Company cannot predict the likely amount of any such
recoveries.
Nonperforming loans, defined as loans past due 90 days or more and
loans for which the accrual of interest has been discontinued,
totaled $1.2 million at March 31, 2000 and $720,000 at December 31,
1999. Nonperforming loans as a percentage of total loans totaled
1.76% and 1.06% at such dates. The allowance for loan losses as a
percentage of total loans decreased from 2.12% in at December
31,1999 to 2.00% at March 31, 2000. The Company did not recognize a
provision for loan losses in the first quarter of 2000, while a
provision of $95,000 was recognized in the first quarter of 1999.
The lack of a provision in the first quarter of 2000 was the result
of a decrease in the level of net charge-offs when compared to prior
quarters combined with a decrease in total loans. Management
believes the $121,000, or 8.5%, decrease in the allowance for credit
losses is consistent with the $3.2 million, or 15.7%, decrease in
higher-risk IPF loans. The percentage of IPF loans to total loans
has decreased from 30.5% at December 31, 1999 to 26.6% at March 31,
2000. Management does not anticipate significant changes in loan
portfolio risk in the near future, and will continue to monitor the
appropriate factors when considering future levels of provisions and
the allowance for loan losses. While management believes that it
uses the best information available to determine the allowance for
estimated loan losses, unforeseen market conditions could result in
adjustments to the allowance for estimated loan losses and net
earnings could be significantly affected if circumstances differ
substantially from the assumptions used in determining the
allowance.
16
<PAGE>
The Company substantially discontinued its medical claims factoring
operations in 1998 and, by year-end 1999, no longer had an
investment in medical claims receivables. The operations were
discontinued as a result of significant losses experienced in 1997
and 1998. In the first quarter of 1999 the Company recorded $10,000
in charge-offs and $276,000 in recoveries related to medical claims
receivables. Recoveries of previously charged-off medical claims
factoring receivables totaled $4,000 in the first quarter of 2000.
Noninterest Income. Noninterest income totaled $688,000 in the
first quarter of 2000, increasing 49.6%, from $460,000 in the first
quarter of 1999. The increase was due to the realization of
$389,000 settlement of a bond claim in connection with the Company's
now defunct medical claims factoring operations. The increase in
noninterest income resulting from the bond claim settlement was
partly offset by decreases in service charges on deposit accounts
and loan collection fees and late charges. Decreases in these
categories of noninterest income were due to decreases in the
average balances of loans and deposits outstanding due to the sale
of the Midlothian and Waxahachie branches in the second quarter of
1999.
Noninterest Expense. Noninterest expense totaled $1,876,000 for the
first quarter of 2000, decreasing $956,000, or 33.8%, from
$2,832,000 for the same period in 1999. Salaries and employee
benefits expense decreased $465,000, while occupancy and equipment
expense decreased $152,000. The decreases in these categories of
noninterest expense were due to the sale of the Midlothian and
Waxahachie branch offices in the second quarter of 1999 and the
related reduction in full-time equivalent employees from these
actions. Total other noninterest expense decreased $339,000. The
overall decrease is attributable to decreases in expenses related to
professional services, deposit insurance premiums, postage,
telephone, office supplies, amortization of intangibles, and
interest on IPF refunds. Professional services expense, totaling
$263,000 and $370,000 for the three months ended March 31, 2000 and
1999, has been the largest component of other noninterest expense
over the comparable periods as a result of on-going litigation,
acquisition and divestiture transactions and the accounting
irregularities in the IPF division, discussed above. Federal
deposit insurance premiums were high in the first quarter of 1999 as
the Bank's capital levels failed to comply with the Formal
Agreement. Reductions in expenses related to postage, telephone,
office supplies and amortization of intangibles are primarily the
result of the sale of the branch offices in the second quarter of
1999. Interest accrued on IPF refunds decreased in the first
quarter of 2000 as a large portion of the refunds payable was paid
early in the quarter.
The Company's efficiency ratio was 87.3%, excluding the impact of
the bond claim settlement, for the first quarter of 2000 compared to
82.3% for the first quarter of 1999. The efficiency ratio measures
the percentage of total revenues, on a taxable equivalent basis
excluding securities gains and other nonrecurring gains, absorbed by
non-interest expense. Expressed differently, for example, for every
dollar of revenue the Company generated in the first quarter of
2000, the Company incurred $0.87 in overhead expenses. The
Company's efficiency ratios for the comparable periods compare
unfavorably to other financial institutions in the Company's peer
group.
Income Taxes. The change in income tax expense/(benefit) is
primarily attributable to the change in income/(loss) before income
taxes. The Company recorded income tax benefits totaling $41,000
for the first quarter of 2000 and $3,000 for the first quarter of
1999, resulting in effective tax rates of (30.1)% and (0.4)%. A
full tax benefit was not recognized in the first quarter of 1999, as
management believed the recognition of additional deferred tax
assets could not be justified as the realization of such deferred
tax assets could not be assured within a reasonable period of time.
At such time, the Bank was not in compliance with the capital levels
required by the Formal Agreement.
17
<PAGE>
Liquidity
Liquidity is the ability of the Company to fund customers' needs for
borrowing and deposit withdrawals. The purpose of liquidity
management is to assure sufficient cash flow to meet all of the
financial commitments and to capitalize on opportunities for
business expansion. This ability depends on the institution's
financial strength, asset quality and types of deposit and
investment instruments offered by the Company to its customers. The
Company's principal sources of funds are deposits, loan and
securities repayments, maturities of securities, sales of securities
available for sale and other funds provided by operations. The
Company also has the ability to borrow from the FHLB, subject to
regulatory approval under the Formal Agreement. While scheduled
loan repayments and maturing investments are relatively predictable,
deposit flows and early loan and mortgage-backed security
prepayments are more influenced by interest rates, general economic
conditions and competition. The Company maintains investments in
liquid assets based upon management's assessment of (1) need for
funds, (2) expected deposit flows, (3) yields available on short-
term liquid assets and (4) objectives of the asset/liability
management program.
Cash and cash equivalents decreased $388,000, or 4.0%, from
$9.8 million at December 31, 1999 to $9.4 million at March 31, 2000.
Cash and cash equivalents represented 9.3% of total assets at March
31, 2000 compared to 9.4% of total assets at December 31, 1999.
Subject to regulatory approval under the Formal Agreement, the
Company has the ability to borrow funds from the FHLB and has
various federal fund sources from correspondent banks, should the
Company need to supplement its future liquidity needs in order to
meet deposit flows, loan demand or to fund investment opportunities.
Management believes the Company's liquidity position is strong based
on its high level of cash, cash equivalents, core deposits, the
stability of its other funding sources and the support provided by
its capital base.
As summarized in the Condensed Consolidated Statements of Cash
Flows, the most significant transactions which affected the
Company's level of cash and cash equivalents, cash flows and
liquidity during the first quarter of 2000 were the net decrease in
loans of $2.1 million, securities purchases of $197,000 and the net
decrease in deposits of $2.4 million.
Capital Resources
Total shareholders' equity remained stable totaling $11.3 million at
March 31, 2000 and December 31, 1999 as the impact of the $96,000
net loss was offset by a $94,000 after-tax increase in the fair
value of securities available for sale.
The Holding Company and the Bank are subject to regulatory capital
requirements administered by federal banking agencies. Bank
regulators monitor capital adequacy very closely and consider it an
important factor in ensuring the safety of depositors' accounts. As
a result, bank regulators have established standard risk based
capital ratios that measure the amount of an institution's capital
in relation to the degree of risk contained in the balance sheet, as
well as off-balance sheet exposure. Federal law requires each
federal banking regulatory agency to take prompt corrective action
to resolve problems of insured depository institutions including,
but not limited to, those that fall below one or more prescribed
capital ratios. According to the regulations, institutions whose
Tier 1 and total capital ratios meet or exceed 6.0% and 10.0% of
risk-weighted assets, respectively, are considered "well
capitalized." Institutions whose Tier 1 and total capital ratios
meet or exceed 4.0% and 8.0% of risk-weighted assets, respectively,
are considered "adequately capitalized." Tier 1 capital is
shareholders' equity excluding the unrealized gain or loss on
securities classified as available for sale and intangible assets.
Tier 2 capital, or total capital, includes Tier 1 capital plus the
allowance for loan losses not to exceed 1.25% of risk weighted
assets. Risk weighted assets are the Company's total assets after
such assets are assessed for risk and assigned a weighting factor
based on their inherent risk. In addition to the risk-weighted
ratios, all institutions are required to maintain Tier 1 leverage
ratios of at least 5.0% to be considered "well capitalized" and 4.0%
to be considered "adequately capitalized." The leverage ratio is
defined as Tier 1 capital divided by average adjusted assets for the
most recent quarter.
18
<PAGE>
As discussed above, the Bank is subject to more stringent capital
requirements under the Formal Agreement. The table below sets forth
Consolidated and Bank only actual capital levels in addition to the
capital requirements under the Formal Agreement and prompt
corrective action regulations.
<TABLE>
<CAPTION>
Minimum Requirements
Formal Under Prompt Corrective
Actual Year-end Capital Ratios Agreement at Action Regulations
------------------------------ December 31, ------------------------
Unaudited 1999 Adequately Well
1999 1998 Capitalized Capitalized
------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Leverage Ratio:
Tier I capital to average assets
Consolidated 5.72% 5.38% -- 4.00% 5.00%
Bank 9.99% 9.78% 7.50% 4.00% 5.00%
Risk-Based Capital Ratios:
Tier I capital to risk-
weighted assets
Consolidated 7.75% 7.38% -- 4.00% 6.00%
Bank 13.61% 13.49% 6.00% 4.00% 6.00%
Total capital to risk-
weighted assets
Consolidated 12.87% 12.31% -- 8.00% 10.00%
Bank 14.86% 14.73% 14.00% 8.00% 10.00%
</TABLE>
The Holding Company is without significant assets other than its
ownership of all the common stock of the Bank, and is entirely
dependent upon dividends received from the Bank in order to meet its
cash obligations, including debt service on $4,350,000 in 9%
Convertible Subordinated Notes due 2008 (the "Notes"). Under the
Formal Agreement the Bank is currently precluded from declaring and
paying any dividends without prior OCC approval.
On March 28, 2000 the OCC approved a reduction in the Bank's surplus
in the amount of $500,000 that enabled the Company to meet debt
service obligations under the Notes and pay for other operating
expenses through March 31, 2000. No assurance can be given,
however, that the OCC will continue to approve such reductions in
the Bank's surplus, particularly if the Bank is unable to commence
operating profitably in the near future. On April 26, 2000 certain
members of the Company's Board of Directors resolved to guarantee to
personally loan the Company up to $200,000, if necessary, to enable
the Company to meet its cash obligations in 2000.
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,
which affirmed the judgment of the trial court.
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 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
11 Statement Regarding the Computation of Earnings Per Share.
- Reference is hereby made to the Consolidated
Statements of Operations on page 4 and Note 2 to the
Consolidated Financial Statements on page 9 hereof.
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, 2000.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: May 19, 2000 SURETY CAPITAL CORPORATION
By: /s/ Charles M. Ireland
Charles M. Ireland, Chief
Executive Officer
/s/ John D. Blackmon
John D. Blackmon, Chief
Financial Officer
22
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
11 Statement Regarding the Computation of Earnings Reference is
Per Share hereby made to
the Consolidated
Statements of
Operations on
page 4 and Note
2 to the
Consolidated
Financial
Statements on
page 9 hereof
27 Financial Data Schedule 24
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF
INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,734
<INT-BEARING-DEPOSITS> 25
<FED-FUNDS-SOLD> 5,610
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,813
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 65,077
<ALLOWANCE> 1,313
<TOTAL-ASSETS> 100,634
<DEPOSITS> 82,514
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,449
<LONG-TERM> 4,350
0
0
<COMMON> 60
<OTHER-SE> 11,261
<TOTAL-LIABILITIES-AND-EQUITY> 100,634
<INTEREST-LOAN> 1,597
<INTEREST-INVEST> 200
<INTEREST-OTHER> 53
<INTEREST-TOTAL> 1850
<INTEREST-DEPOSIT> 701
<INTEREST-EXPENSE> 799
<INTEREST-INCOME-NET> 1,051
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,876
<INCOME-PRETAX> (137)
<INCOME-PRE-EXTRAORDINARY> (96)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
<YIELD-ACTUAL> 5.12
<LOANS-NON> 792
<LOANS-PAST> 361
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,434
<CHARGE-OFFS> 267
<RECOVERIES> 146
<ALLOWANCE-CLOSE> 1,313
<ALLOWANCE-DOMESTIC> 1,313
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 54
</TABLE>
