-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RWcWeBVMMC9as5Jr4UXqoYHNAquTZgahKRyC6Pl2nGhutvxDNbRO99ea1Mjpx+EN QVZaooXSZfP3YYrzqa125g== 0000784932-03-000008.txt : 20030401 0000784932-03-000008.hdr.sgml : 20030401 20030401141641 ACCESSION NUMBER: 0000784932-03-000008 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20030401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SURETY CAPITAL CORP /DE/ CENTRAL INDEX KEY: 0000784932 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 752065607 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-12818 FILM NUMBER: 03633762 BUSINESS ADDRESS: STREET 1: 1501 SUMMIT AVENUE CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173355955 MAIL ADDRESS: STREET 1: 1501 SUMMIT AVENUE CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: K CAPITAL INC DATE OF NAME CHANGE: 19870407 10QSB 1 september10qsb.txt 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 SEPTEMBER 30, 2002, 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 001-12818 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) 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 X No Common stock outstanding on November 14, 2002: 9,926,244 shares. 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 14 PART II - OTHER INFORMATION Item 1 Legal Proceedings 19 Item 2 Changes in Securities and Use of Proceeds 19 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 SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30, December 31, 2002 2001 Assets: (Unaudited) Cash and due from banks $ 5,017,881 $ 4,387,913 Federal funds sold 5,520,159 10,015,000 Total cash and cash equivalents 10,538,040 14,402,913 Interest-bearing time deposits in other financial institutions 28,274 27,771 Securities available for sale, at fair value 7,993,892 10,597,837 Securities to be held to maturity - -- - -- Loans, net 74,702,506 60,996,714 Premises and equipment, net 5,100,449 5,310,166 Accrued interest receivable 476,047 439,190 Other real estate and repossessed assets 810,013 737,000 Goodwill, net 2,536,679 2,536,679 Other assets 342,539 512,161 Total assets $102,528,439 $95,560,431 Liabilities: Noninterest-bearing demand deposits $ 20,184,002 $15,936,327 Savings, NOW and money market accounts 29,707,585 28,196,609 Time deposits, $100,000 and over 14,986,415 14,392,822 Other time deposits 26,952,149 24,628,757 Total deposits 91,830,151 83,154,515 Convertible subordinated debt 4,350,000 4,350,000 Notes payable - -- 132,746 Accrued interest payable and other liabilities 1,024,062 948,478 0 Total liabilities 97,204,213 88,585,739 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, 9,319,080 and 8,074,688 shares issued, respectively 100,061 80,747 Additional paid-in capital 18,085,534 17,803,491 Accumulated deficit (12,547,087) (10,522,414) Treasury stock, 79,836 shares at cost (375,443) (375,443) Accumulated other comprehensive income (loss) 61,161 (11,689) Total shareholders' equity 5,324,226 6,974,692 Total liabilities and shareholders' equity $102,528,439 $95,560,431 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 Interest income: Loans, including fees $ 1,496,933 $ 1,624,628 $4,135,241 $4,562,568 Securities, all taxable 86.838 200,530 302,081 609,912 Federal funds sold and interest bearing deposits 19,000 53,557 97,681 241,157 Total interest income 1,602,771 1,878,715 4,535,003 5,413,637 Interest expense: Deposits 425,080 697,397 1,370,420 2,235,241 Notes payable 97,877 97,875 293,627 293,625 Total interest expense 522,957 795,272 1,664,047 2,528,866 Net interest income 1,079,814 1,083,443 2,839,765 2,884,771 Provision for credit losses 1,135,000 - --- 1,385,000 --- Net interest income after provision for credit losses (55,186) 1,083,443 1,485,956 2,884,771 Noninterest income: Service charges on deposit accounts 201,376 156,588 567,887 467,584 Loan collection fees and late charges 91,377 31,355 165,385 119,212 Other income 3,638 20,456 210,245 69,634 Total noninterest income 296,391 208,399 943,517 656,430 Noninterest expense: Salaries and employee benefits 724,442 658,775 2,331,421 1,946,499 Occupancy and equipment 263,779 296,671 787,937 929,493 Other expenses 371,467 703,153 1,334,789 1,575,209 Total noninterest expense 1,359,688 1,658,599 4,454,147 4,451,201 Net loss before income taxes (1,118,483) (366,757) (2,024,674) (910,000) Income tax (benefit) - -- - -- - -- - -- Net income (loss) $ (1,118,483) $ (366,757) $ (2,024,674) $ (910,000) Net income (loss) per share - - Basic $ (0.11) $ (0.05) $ (0.20) $ (0.14) Net income (loss) per share - - Diluted $ (0.11) $ (0.05) $ (0.20) $ (0.14) SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 Net income (loss) $(1,118,483) $( 366,757) $(2,024,674) $ (910,000) Other comprehensive income (loss): Unrealized gain (loss) on available -for sale securities arising during period 18,712 110,527 92,668 371,222 Tax effect (6,363) (37,579) (31,507) (126,215) Total other comprehensive income (loss) 12,349 72,948 61,161 245,007 Comprehensive income (loss) $(1,106,134) $ (293,809) $(1,963,513) $ (664,993) SURETY CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) Nine Months Ended September 30, September 30, 2002 2001 Balance at beginning of period $ 6,974,692 $ 7,677,669 Issuance of Common Stock 313,047 403,000 Net income (loss) (2,024,674) (910,000) Change in fair value of securities available for sale, net of tax 61,161 245,007 Balance at end of period $ 5,324,226 $ 7,415,676 SURETY CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, September 30, 2002 2001 Net cash from operating activities $ 148,371 $ (133,259) Cash flows from investing activities: Net change in loans (15,099,143) (4,234,897) Securities: Purchases (8,304,272) (1,710,863) Maturities and repayments 10,855,000 1,761,437 Proceeds from sale of other real estate and repossessed assets - -- 37,455 Premises and equipment expenditures (162,719) (173,689) Net cash from investing activities (12,711,134) (4,320,557) Cash flows from financing activities: Increase in notes payable - -- 31,000 Repayments of notes payable (37,746) (40,000) Issuance of common stock 60,000 263,000 Net change in deposits 8,675,636 760,493 Net cash from financing activities 8,697,890 1,014,493 Net change in cash and cash equivalents (3,864,873) (3,439,323) Cash and cash equivalents at beginning of period 14,402,913 11,023,209 Cash and cash equivalents at end of period $10,538,040 $ 7,583,886 Supplemental disclosures: Cash paid for interest $1,360,369 $2,392,989 Cash paid (refunds received) for federal income taxes - -- - -- Significant non-cash transactions: Write-down carrying value of other real estate owned (41,095) (204,000) Transfers of repossessed collateral to other real estate and repossessed assets $73,013 $25,000 Conversion of notes payable to common stock and accrue director fees. $241,357 $140,000 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of Surety Capital Corporation (the "Holding Company") and its wholly-owned subsidiary, Surety Bank, National Association (the "Bank"), together, with the Holding Company, referred to as the "Company". All significant intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements are unaudited and reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2002, 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, 2001, included in its annual report on Form 10-KSB for the fiscal year ended December 31, 2001 (the "2001 Form 10-KSB"). Please refer to the accounting policies of the Company described in the notes to financial statements contained in the 2001 Form 10-KSB. The Company has consistently followed these policies in preparing this Form 10-QSB. Some items in prior financial statements have been reclassified to conform to the current presentation. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 effective January, 2002. SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before the initial application of the standard, and indefinite-lived intangible assets will not be amortized but will be tested for impairment at least annually. Identified finite-lived intangible assets will be amortized over their useful lives and reviewed for impairment when circumstances warrant. Within six months of initial application of the new standard, a transitional impairment test must be performed on all goodwill. Any ultimate impairment loss recognized must be reported as a change in accounting principle. In addition to the transitional impairment test, the required annual impairment test must be performed in the year of adoption of the standard. The new standard is required to be applied prospectively. As required, the Company adopted SFAS No. 142 on January 1, 2002, and estimates that the elimination of goodwill amortization will reduce noninterest expense by approximately $262,000 for 2002. Included in other operating expense for the three and six month periods ended June 30, 2001 is $ 66,000 and $132,000, respectively, Goodwill amortization expense. The Company's transitional impairment test indicated no impairment. 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 are 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 was as follows: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 Weighted- average shares outstanding- Basic 9,662,588 7,014,675 9,140,363 6,343,768 Effect of stock options - - - -- - -- - -- Weighted- average shares outstanding- Diluted 9,662,588 7,014,675 9,140,363 6,343,768 The Company reported a net loss for the three and nine-month periods ended September 30, 2002 and 2001. 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 September 30,2002: U.S. Treasury notes $ 202,616 $ 1,008 $ -- $ 203,625 U.S. government agencies 6,328,229 92,168 - -- 6,420,397 Mortgage-backed securities 601,374 583 (1,090) 600,866 Other securities 769,004 - -- - -- 769,004 Total securities $7,901,223 $ 93,759 $ (1,090) $7,993,892 December 31, 2001: U.S. government agencies $9,100,582 $ 4,389 $ (22,775) $9,082,196 Mortgage-backed securities 748,061 4,457 (3,781) 748,737 Other securities 766,904 - -- - -- 766,904 Total securities $10,615,547 $ 8,846 $ ( 26,556) $10,597,837 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, 2001 or September 30, 2002. 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 September 30, 2002 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. Amortized Cost Estimated Fair Value Due within one year $ 202,616 $ 203,625 Due after one year through five years 5,825,504 5,865,553 Due after five years through ten years 502,725 554,844 Mortgage-backed securities 601,374 600,866 Other securities 769,004 769,004 Total securities $7,901,223 $7,993,892 There were no sales of securities available for sale during the three-month or nine-month periods ended September 30, 2002 or September 30, 2001. 4. Loans Loans consisted of the following: September 30, December 31, 2002 2001 Real estate loans $ 44,271,794 $ 38,296,528 Insurance premium financing 10,328,656 4,588,151 Commercial loans 15,126,061 13,311,170 Consumer 6,923,046 6,202,544 Total gross loans 76,685,557 62,398,393 Unearned interest (289,342) (135,216) Allowance for credit losses (1,693,709) (1,266,463) Loans, net $ 74,702,506 $ 60,996,714 Activity in the allowance for credit losses on loans was as follows: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 Beginning balance $1,328,028 $ 1,321,241 $ 1,266,463 $ 1,263,961 Provision for credit losses 1,135,000 - -- 1,385,000 - -- Charge-offs (899,623) (77,956) (1,249,623) (238,726) Recoveries 130,012 149,652 291,869 367,702 Ending balance $1,693,709 $ 1,392,937 $ 1,693,709 $ 1,392,937 Impaired loans were as follows: September 30 December 31, 2002 2001 Impaired loans with allowance allocated $ 2,858,908 $ 1,495,244 Impaired loans with no allowance allocated 617,221 1,217,478 Total impaired loans $ 3,476,129 $ 2,712,722 Amount of the allowance allocated $ 1,053,602 $ 263,020 Nonperforming loans were as follows: September 30, December 31, 2002 2001 Loans past due over 90 days still on accrual $ 1,105,147 $ -- Nonaccrual loans 3,147,124 732,131 Total nonperforming loans $ 4,252,271 $ 732,131 5. Convertible Subordinated Debt and Notes Payable On March 31, 1998, the Company issued $4,350,000 in 9% Convertible Subordinated Notes Due 2008 (the "Notes"), pursuant to an 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 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. No principal payments are due until maturity on March 31, 2008. The Company did not pay the interest due March 31, 2002 and September 30, 2002. The Company is attempting to negotiate with Note holders and has offered them non-interest bearing notes, warrants to purchase Company stock, and/or modified conversion features in exchange for interest to be due over the next three years. The Company does not know if it will be successful in these ongoing negotiations. The amount of the principal and any accrued and unpaid interest on the Notes is subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company, including the Bank's deposits. 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. Other notes payable of $132,746 at December 31, 2001 represent funds borrowed from current and former members of the Company's Board of Directors to provide the Company funds to meet its cash obligations. $37,746, which represents amounts to a former director's law firm for services provided, was paid in January 2002. The remaining $95,000 were non interest bearing notes and were converted into common stock during the second quarter of 2002 at the rate of $0.2167 per share. 6. 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 September 30, 2002 and December 31, 2001 included unfunded loan commitments of $4,050,000 and $4,897,000 and letters of credit of $234,000 and $450,000. Federal funds sold totaled $5,520,159 and $10,015,000 at September 30, 2002 and December 31, 2001. 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 market areas of Bexar, Comal, Grayson, and Tarrant Counties, Texas. Additionally, the Company has a significant concentration of credit, based upon like collateral. Insurance Premium Finance ("IPF") loans, secured by the residual value of unearned insurance premiums, comprised $10,328,656 or 13.5%, and $4,588,151 or 7.6%, of gross loans at September 30, 2002 and December 31, 2001. 8. Other Noninterest Expense Other noninterest expense consisted of the following: Three Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 20 2002 September 30, 2001 Professional services $ 107,011 $ 135,745 $358,160 $354,096 Postage and delivery 32,043 38,956 96,163 113,530 Telephone 42,388 41,009 103,701 117,376 Office supplies 20,359 26,092 63,572 62,168 Amortization of intangibles and debt issuance costs 10,397 44,791 31,193 196,756 Insurance 30,136 31,668 111,928 94,687 FDIC and OCC assessment s 25,942 23,576 76,288 66,109 Write-down other real esestate Other 72,000 204,000 104,786 462,593 204,000 366,487 Total other noninterest Expense $ 340,276 $703,153 $1,303,598 $ 1,575,209 9. Subsequent Events On June 18, 2002, the Company authorized 1,041,666 shares to be issued for $100,000. 625,000 shares were issued in July to two directors for $60,000. Funds were used for parent company operating expenses. 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 September 30, 2002 compared to December 31, 2001, and the consolidated results of operations for the three-month and nine month periods ended September 30, 2002 compared to the same periods in 2001. 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 This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have material adverse effects on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, the following: ? The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company's assets. ? The economic impact of the terrorist attacks that occurred on September 11th, as well as any future threats and attacks, and the response of the United States to any such threats and attacks. ? The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters. ? The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company's assets) and the policies of the Board of Governors of the Federal Reserve System. ? The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector. ? The inability of the Company to obtain new customers and to retain existing customers. ? The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet. ? Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers. ? The ability of the Company to develop and maintain secure and reliable electronic systems. ? The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner. ? Consumer spending and saving habits which may change in a manner that affects the Company's business adversely. ? Business combinations and the integration of acquired businesses that may be more difficult or expensive than expected. ? The costs, effects and outcomes of existing or future litigation. ? Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board. ? The ability of the Company to manage the risks associated with the foregoing as well as its inability to meet its interest obligations under the subordinated convertible notes, an interest payment of $196,000 that was due March 31, 2002 and September 30, 2002 which remains unpaid. ? Regulatory actions related to the Company's non- compliance with the Formal Agreement in place with the OCC. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and its business, including other factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. Regulatory Relations Formal Agreement with the OCC. On November 19, 1998 the Board of Directors of the Bank entered into a formal written agreement (the "Formal Agreement") with the Office of the Comptroller of the Currency (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 initially was unable to achieve the capital requirements set forth in the Formal Agreement and after receiving an extension from the OCC the Bank achieved the required levels of capital upon completion of the sale of the Midlothian and Waxahachie branches on June 30, 1999, and had remained in compliance since that time. At September 30, 2002 the Bank was not in compliance with the Formal Agreement. The Bank's risk-based capital ratio was 10.79% compared to the 14.00% required by the Formal Agreement. Management is uncertain what action, if any, the OCC will take as a result. The Bank was in compliance with other terms of the Formal Agreement. The Company remains subject to the Formal Agreement and management does not know when or if the OCC will agree to terminate the Formal Agreement. Memorandum of Understanding with the Federal Reserve Board. On October 28, 1999 the Board of Directors of the Company entered into a Memorandum of Understanding (the "MOU") with the Board of Governors of the Federal Reserve System (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 Company was required to develop and submit to the FRB a written three-year capital plan, a plan to service the Company's existing debt without incurring any additional debt, and written procedures designed to strengthen and maintain the Company's internal records and controls to ensure that future regulatory reports are filed in a timely and accurate manner. Finally, the 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. The Company has complied with the requirements of the MOU. However, the Company has not yet met its interest payment obligation on the $4.350 million subordinated convertible debt, which was due March 31, 2002 and September 2002. Management does not know when or if the FRB will agree to terminate the MOU or what action the FRB may take if the Company falls out of compliance. Securities and Exchange Commission Agreement. The Company is subject to reporting requirements of the Securities and Exchange Act of 1934, as amended. The Securities and Exchange Commission ("SEC") investigated the Company and others with respect to various accounting irregularities found by the Company in its IPF division during an internal audit of the division conducted in 1999 and the first quarter of 2000. Upon finding the irregularities, the Company reported them to the SEC, the OCC as well as certain legal authorities. The Company fully cooperated with the SEC as well as the banking regulatory agencies involved in investigation. In February 2002, the SEC issued a finding that the Company violated certain sections of the Securities and Exchange Act of 1934. In March 2002, the Company entered into settlement with the SEC. In connection with the settlement, the Company acknowledged certain reporting and internal control deficiencies and agreed to cease and desist from the stipulated violations in the future. The SEC acknowledged the efforts and cooperation of the Company's current Board of Directors and management and recognized that none of the current members of the Board of Directors or senior management were associated with or employed by the Company during the periods investigated. The Company and the Bank no longer employ the persons directly responsible for managing the IPF division during the period when the diversions occurred and the Company no longer uses the services of the accounting firm auditing the Company at that time. None of the current members of the Company or Bank's Board of Directors served in those capacities during the period when the violations of the Securities and Exchange Act of 1934 occurred. Analysis of Financial Condition The Company's assets totaled $102.5 million at September 30, 2002, representing a 7.29% increase compared to $95.6 million at December 31, 2001. The increase in assets was primarily the result of increases in loans funded by an increase in deposits, reduction in federal funds sold and securities which were called prior to maturity. Federal funds sold declined $4.5 million or 45% primarily as a result of increased loan volumes. Total securities decreased 24.57% and were $8 million at September 30, 2002. The $2.6 million decrease from December 31, 2001 was due primarily to the issuing entity exercising the call provision of the security thereby paying the principal in full prior to the original maturity date. This decrease in securities does however includes a $111,000 increase in market value. Net unrealized gains were $93,000 at September 30, 2002 compared to net unrealized losses of $18,000 at December 31, 2001. Net loans increased $13.7 million, or 22.5%, from $61.0 million at December 31, 2001 to $74.7 million at September 30, 2002, due to an increase in IPF and real estate loans. IPF loans increased $5.7 million, or 125.1% and real estate loans were up $6.0 million or 15.6% from December 31, 2001. The increase in IPF loan volumes reverses a trend of steady decline in IPF loans that began in 1999. Total deposits were $91.8 million at September 30, 2002, an increase of $8.7 million, or 10.4%, from December 31, 2001. The growth was primarily in noninterest-bearing demand and money market, now and savings deposits. Non-interest bearing demand deposits increased $4.2 million or 26.7% and represented 22.0% of total deposits at September 30, 2002 compared to $15.9 million, or 19.2% of total deposits at December 31, 2001. Savings, NOW and money market accounts increased $5.4 million and represented 32.4% of total deposits. Deposits denominated over $100,000 increased $.6 million. The shift in deposit categories is due to the growth in commercial accounts. Time deposits made up 29.35% of the deposit portfolio at September 30, 2002 compared to 46.9% at December 31, 2001. Substantially all of the Company's time deposits mature in less than five years and are obtained from customers in the Company's trade market. 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. Convertible subordinated debt totaled $4.35 million at September 30, 2002 and December 31, 2001. Convertible subordinated notes were 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. The Company did not pay the interest due March 31, 2002 and September 30, 2002. The Company is attempting to negotiate with Note holders and has offered them non-interest bearing notes, warrants to purchase Company stock, and/or modified conversion features in exchange for interest to be due over the next three years. The Company does not know if it will be successful in these ongoing negotiations. $95,000 of the notes payable at December 31, 2001, which represented funds borrowed from current and former directors, officers, and other insiders were converted into 438,400 shares of common stock at $0.2167 per share. The remaining $37,746 of notes payable at December 31, 2001 was repaid at a slight discount. 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 $1,118,483 net loss for the three months ended September 30, 2002 compared to $366,757 net loss for the same period in 2001. Net loss per share was $0.11 and $0.05, respectively, per share for both three months periods. The Company did not reflect any tax benefit with the losses because the Company cannot be certain that it will receive a future income tax benefit. The increased loss compared to the year earlier period is due primarily to a $1,135,000 provision for credit losses recorded in the third quarter of 2002, no provision expense was recorded during 2001, and a $66,000 increase in salary and employee benefit expenses. Partly offsetting these increased costs were a $45,000 increase in service charge on deposit account income and a $60,000 increase in loan collection fees and late charges. For the nine months ended September 30, 2002, the Company recorded a $2,024,674 loss ($0.20 per share) compared to a $910,000 loss ($0.14) during the same period of 2001. 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. At September 30, 2001, the average prime interest rate was 6.50% and is currently 4.75%. The Federal Reserve Board, in an attempt to stimulate the economy, steadily reduced interest rates during 2001 and 2002. Future moves by the Federal Reserve are not accurately predictable. The decline in general interest rates had the effect of immediately reducing the yield on federal funds sold, variable rate loans, and investment securities. Federal funds sold represented 4.6% and 8.9% of average earning assets during the three and nine month periods ended September 30, 2002. For the third quarter 2002, net interest income decreased $4,000, or ..3%, compared to the same period last year due primarily to the reduction of prime interest rate and loss of interest income from loans placed on non accrual. Conversely, during the third quarter 2001, the Company received an additional $150,000 of interest from the repayment of a loan previously on non accrual. The Company's net interest margin declined 29 basis points, from 5.20% in 2001 to 4.91% in 2002. The net interest margin was also adversely effected by the decreased yields on federal funds and investment securities which was offset only partly by loan growth. Federal funds sold represented 4.6% of earning assets during the third quarter of 2002 versus 7.3% during the year ago period and the average yield declined from 3.5% to 1.88%. Yield on investment securities declined from 5.22% to 3.57%, due primarily to the reinvestment of called or matured securities at lower yields. Average balance of loans increased $11.5 million from the year ago quarter; however, the average yield on loans decreased from 10.17% to 8.07%. Interest bearing deposits increased $4.5 million. The weighted-average yield on interest-earning assets was 7.29% versus 9.01% last year and the average rate paid on interest bearing deposits declined to 2.41% from 4.26%. For the nine months ended September 30, 2002, net interest income declined $44,000 due primarily to a decline in average yields, an increase in loans on non-accrual, and a shift in earning assets from investment securities to federal funds sold. These effects were offset partly by an increase in average earning assets. The Company's net interest margin was 4.45% for the first nine months of 2002 compared to 4.75% during the same period last year. The 30 basis point decrease in average net interest margin was primarily due to decreased in yields on federal funds and investment securities and the reinvestment of matured or called investment securities into federal funds sold, offset partly by an increase in average loan balances. Federal funds sold represented 8.9% of earning assets during the first nine months of 2002 versus 8.6% during the same period a year ago and average yield declined from 4.63% to 1.70%. Yield on investment securities declined from 6.20% to 3.74% due primarily to the reinvestment of called or matured securities at lower yields. Average loan volumes increased $6.8 million while the average yield declined from 9.85% to 8.14%. The weighted-average yield on interest-earning assets was 7.02% versus 8.92% last year. Management believes that the Company's success in real estate and IPF lending will result in further shifts in earning assets from federal funds sold to higher yielding loans. The Company is asset sensitive, whereby its interest-bearing assets will generally mature, or re-price, more quickly than its interest-bearing liabilities. Based on the Company's gap position, income should generally rise in periods of rising market interest rates and fall in periods of declining market interest rates. However, in a falling interest rate environment, the Company may need to increase rates to attract and retain deposits. A shift in the earning asset base from low yielding federal funds to higher yielding loan categories would benefit the Company's net income in either rate environment. The Company increased its balance of noninterest bearing deposits from $15.9 million at December 31, 2001 to $20.2 million at September 30, 2002 and decreased its reliance on time deposits in denominations over $100,000, which slightly mitigated the negative gap position. Since December 31, 2001, total loans increased $13.7 million and non- accrual loans increased $2.4 million. Allowance and Provision for Credit Losses. The Company has recorded $1,385,000 to provision for credit losses during the nine- month period ended September 30, 2002 while no provision expense was recorded last year. All lending activity contains risks of loan losses and the Company recognizes these credit risks as a necessary element of its business activity. 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 credit 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 that 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. During the second quarter, the Company engaged an independent third party to review the credit worthiness of the Company's loan portfolio and individual credit relationships. 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. The loan review report was issued during the third quarter. Based on results of that review, the Company's internal calculations and recommendations made by the OCC, the Company recorded a $250,000 provision for credit losses expense during the second quarter and $1,135,000 during the third quarter. .. The Company did not record a provision for credit losses during 2001 as management considered the allowance for credit losses adequate to absorb reasonably foreseeable losses inherent in the loan portfolio. During 2002, the Company recorded a $1,385,000 provision for credit losses. The provision for credit loss expense was necessitated by a $13.7 million increase in loans since year end, a $.8 million increase in impaired loans, and a $3.5 million increase in nonperforming loans, which included a $2.4 million increase in loans on nonaccrual. Loans charged to the allowance for credit losses, net of recoveries, was $770,000 during the third quarter of 2002 while loan loss recoveries exceeded loan charge-offs by $72,000 during the third quarter of 2001. For the nine months ended September 30, 2002, loans charged to the allowance for credit losses, net of recoveries, was $958,000 while loan recoveries exceeded loan charge-offs by $129,000 during the previous year period. The allowance for credit losses at September 30, 2002 was $1.7 million or 2.22% of loans outstanding versus $1.4 million or 2.28% of loans at September 30, 2001 and $1.4 million or 2.24% of loans outstanding at December 31, 2001. Nonperforming loans, defined as loans past due 90 days or more and loans for which the accrual of interest has been discontinued, totaled $4.3 million at September 30, 2002 versus $1 million at September 30, 2001 and $0.7 million at December 31, 2001. Nonperforming loans as a percentage of total loans totaled 5.6%, 1.5% and 1.2%, respectively, at such dates. The bank increased its IPF loans $5.7 million since year end. IPF loans charged to the allowance, net of recoveries, was $19,000 during the nine months ended September 30, 2002. 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. Noninterest Income. Noninterest income totaled $296,000 for the third quarter of 2002 compared to $208,000 in the third quarter of 2001. Included in the year 2002 results is a $ 133,000 benefit from the settlement of a retirement package with Jack Bean, the Company's previous chairman. Service charges on deposit accounts increased $88,000 due primarily to a 29% increase in the period end balance of transactional deposits. Noninterest income for the first nine months of 2002 was $944,000 versus $656,000 during the first nine months of 2001, a $288,000 increase, attributed primarily to the above mentioned settlement of the retirement package and the increase in charges on deposit accounts. Noninterest Expense. Noninterest expense totaled $1.4 million for the three months period ended September 30, 2002, representing a $299,000 decrease, or 18.2%, from the same period in 2001. For the nine month period ended September 30, 2002, noninterest expense increased $3,000 from the year earlier period. Salary and employee benefit expenses increased $66,000 or 10% for the third quarter of 2002 compared to the year earlier period and increased $385,000 or 20% for the nine month period ended September 30, 2002 versus 2001. The Company hired branch presidents during 2001 for each of its branches and added two loan officers and a marketing officer at its Fort Worth location during early 2002. Included in salary expense for the nine month period ended September 30, 2002 is a $29,000 severance package paid to a long term employee of the Company's Whitesboro branch who was terminated as part of a reduction in force. Occupancy and equipment expense decreased $33,000 or 11% for the three month period ended September 30, 2002 as compared to the same period in 2001 and decreased $142,000 or 14% for the nine month period ended September 30, 2002 as compared to the same period in 2001. The reduction in Occupancy and equipment expense is due primarily to the retirement of fixed assets fully depreciated and corrections to depreciation recorded in 2001. Amortization of intangibles and debt issuance cost was $10,000 for the Third quarter of 2002 and $31,000 for the nine month period ended September 30, 2002, versus $76,000 and $228,000, respectively, for the comparable periods of 2001. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142. SFAS No. 142 applies to all goodwill and identified intangible assets acquired in a business combination. Under the new standard, all goodwill, including that acquired before the initial application of the standard, and indefinite-lived intangible assets will not be amortized but will be tested for impairment at least annually. Included in other noninterest expense for the three and Nine month periods ended September 30, 2002 are $40,000 write down expense of other real estate owned in Converse, Texas. The Company's efficiency ratio was 71.6% for the three-month period ended September 30, 2002 compared to 79.5% for the comparable period of 2001. For the nine month period ended September 30, 2002, the efficiency ratio was 81.3% versus 73.3% for the year earlier nine month period. 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 thirde quarter of 2002, the Company incurred $0.72 in overhead expenses. The Company's efficiency ratios compare unfavorably to other financial institutions in the Company's peer group. The Company operates seven full service branches. The high salary and occupancy expenses associated with the high number of physical locations relative to asset size is the primary reason for the poor efficiency ratio. Management is attempting to correct the situation by increasing the loan and marketing officer staff. While this may worsen the ratio in the short term, management is hopeful the result will be increased loans and deposits and thereby lower the ratio through growth. 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 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 Bank has a $5,000,000 line of credit with an unrelated bank under which it can borrow federal funds. The Bank also has the ability to borrow from the FHLB. Finally, the Bank can sell performing loans through participation agreements to other financial institutions. 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 represented of 10.3% total assets at September 30, 2002 versus 11.3% of total assets at June 30, 2002 and 15.1% of total assets at December 31, 2001. 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. The Company, as a 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 or borrowings from its officers and directors in order to meet its cash obligations, including debt service on the $4,350,000 aggregate principal amount of 9% Convertible Subordinated Notes due 2008 issued under an indenture dated as of March 31, 1998 between the Company and Harris Trust and Savings Bank, Chicago, Illinois, as trustee. Under the Formal Agreement the Bank is currently precluded from declaring and paying any dividends without prior OCC approval. During 2001, the Company met its obligations by selling stock or borrowing funds from members of its board of directors. However, there are no commitments by any of the board of director members to lend additional funds. Accordingly, the Company does not have the financial means to service the interest payments on the Notes. The Company did not pay the interest due March 31, 2002 and September 30, 2002. The Company is attempting to negotiate with Note holders and has offered them non-interest bearing notes, warrants to purchase Company stock, and/or modified conversion features in exchange for interest to be due over the next three years. The Company does not know if it will be successful in these ongoing negotiations. Capital Resources Total shareholders' equity was $5.3 million at September 30, 2002 30, 2002, representing a $1.6 million decrease from December 31, 2001 or 23.7%. 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. As discussed above, the Bank is subject to more stringent capital requirements under the Formal Agreement. The Bank is currently not in compliance with the risk based capital ratios required by the Agreement and management is uncertain what action, if any, the OCC will take as a result. 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. As required under Formal Agreement Actual Period-End Capital ratios Sept. 30,2002 Dec. 31, 2001 For Capital Adequacy Purposes Minimum Requirements To Be Well Capitalized Under Prompt Action Requirements Leverage Ratio: Tier I capital to average assets Consolidated Bank 2.97% 7.73% 4.98% 9.31% -- 7.00% 4.00% 4.00% 5.00% 5.00% Risk-Based Capital Ratios: Tier I capital to risk-weighted assets Consolidated Bank 3.67% 9.54% 6.92% 13.60% -- 6.00% 4.00% 4.00% 6.00% 6.00% Total capital to risk-weighted assets Consolidated Bank 6.74% 10.79% 11.64% 14.86% -- 14.00% 8.00% 8.00% 10.00% 10.00% PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in various 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 During the third quarter of 2002, the Company issued 687,000 unregistered shares of common stock to directors as compensation for year 2001 board and committee meeting attendance. Item 3. Defaults Upon Senior Securities Although no default has been declared, the Company did not pay interest that was due March 31, 2002 and September 30, 2002 on $4,350,000 aggregate principal amount of 9% Convertible Subordinated Notes due 2008, issued under an indenture dated as of March 31, 1998 between the Company and Harris Trust and Savings Bank, Chicago, Illinois, as trustee. 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 8 hereof. Incorporated by reference are the exhibits attached to the Company's form 10KSB filed with the Commission. 99.1 Certification of the chief executive officer pursuant to section 906 of the Sarbaines-Oxley Act of 2002. 99.2 Certification of the chief financial officer pursuant to section 906 of the Sarbaines-Oxley Act of 2002. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2002. 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: NOVEMBER 14, 2002 SURETY CAPITAL CORPORATION By: Richard N. Abrams, Chief Executive Officer and Director (Principal Executive Officer) By: R. G. Lowrey, Vice President and Chief Financial Officer. (Principal Financial Officer and Chief Accounting Officer) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Surety Capital Corporation (the "Company") on Form 10-QSB for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, Richard N. Abrams, chief executive officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ _________ ______________ Richard N. Abrams Chief executive officer August 13, 2002 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Surety Capital Corporation (the "Company") on Form 10-QSB for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report), I, R. G. Lowrey, chief financial officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ ___________ ____________ R. G. Lowrey, Chief financial officer August 13, 2002 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION PAGE NUMBER 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 8 hereof 99.1 Certification of the chief executive officer pursuant to section 906 of the Sarbaines-Oxley Act of 2002. 99.2 Certification of the chief executive officer pursuant to section 906 of the Sarbaines-Oxley Act of 2002. 3.01 Certificate of Incorporation, as amended Filed with the Company's Form 10-K dated December 31, 1993 and incorporated by reference herein. 3.02 Form of Common Stock certificate (specimen) Filed with the Company's Form 10-K dated December 31, 1993 and incorporated by reference herein. 3.03 Restated Bylaws of the Company Filed with the Company's Form 10-K dated December 31, 1994 and incorporated by reference herein. 4.01 Indenture dated as of March 31, 1998 between the Company and Harris Trust and Savings Bank, Chicago, Illinois, as trustee Filed with the Company's Form 10-Q for the quarter ended March 31, 1998 and incorporated by reference herein. 4.02 Form of Notes (included in Exhibit 4.02) Filed with the Company's Form 10-Q for the quarter ended March 31, 1998 and incorporated by reference herein. 4.03 Form of Note Purchase Agreements dated March 31, 1998 Filed with the Company's Registration Statement No. 333-57601 on Form S-3 and incorporated by reference herein. 10.01 Surety Capital Corporation 1988 Incentive Stock Option Plan Filed with the Company's Form 10-K dated December 31, 1991 and incorporated by reference herein. 10.02 Surety Capital Corporation 1995 Incentive Stock Option Plan Filed with the Company's Form 10-K dated December 31, 1994 and incorporated by reference herein. 10.03 Surety Capital Corporation Amended and Restated Stock Option Plan for Directors, and Form of Stock Option Agreement Filed with the Company's Form 10-K dated December 31, 1996 and incorporated by reference herein. 10.04 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Officers and Key Employees, and Form of Stock Option Agreement Filed with the Company's Form 10-K dated December 31, 1997 and incorporated by reference herein. 10.05 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Non-Employee Directors, and Form of Stock Option Agreement Filed with the Company's Form 10-K dated December 31, 1997 and incorporated by reference herein. 10.06 Amended and Restated Post Retirement Services Agreement Between Surety Capital Corpora- tion, Surety Bank, National Association and C. Jack Bean, dated November 1, 1998 Filed with the Company's Form 10-K dated December 31, 1998 and incorporated by reference herein. 10.07 Surety Capital Corporation Amended and Restated 1998 Incentive Stock Option Plan Filed with the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 21, 1998 and incorporated by reference herein. 10.08 Earnest Money Contract between Curtis F. Nooner, Norman S. Moize, and Waldron Property Company No. Two, L.P., as seller, and Surety Bank, National Association, as purchaser, dated April 29, 1999, and First Amendment to Earnest Money Contract, dated June 25, 1999 Filed with the Company's Form 10-K dated December 31, 1999 and incorporated by reference herein. 10.09 Form of Redeemable Convertible Promissory Note between Surety Capital Corporation and C. Jack Bean, Charles M. Ireland, Margaret E. Holland, Aaron M. Siegel, Garrett Morris, Cullen W. Turner, William B. Byrd, Michael L. Milam and Lloyd W. Butts, and related Warrant, dated October 29, 1999 Filed with the Company's Form 10-K dated December 31, 1999 and incorporated by reference herein. 10.10 Form of Indemnification Agreement between Surety Capital Corporation and William B. Byrd, Lloyd W. Butts, Charles M. Ireland, Margaret E. Holland, Michael L. Milam, Garrett Morris, Cullen W. Turner and John D. Blackmon, dated January 18, 2000 Filed with the Company's Form 10-K dated December 31, 1999 and incorporated by reference herein. 10.11 Form of Indemnification Agreement between Surety Bank, National Association and William B. Byrd, Lloyd W. Butts, Charles M. Ireland, Margaret E. Holland, Michael L. Milam, Garrett Morris, Cullen W. Turner and John D. Blackmon, dated January 18, 2000 Filed with the Company's Form 10-K dated December 31, 1999 and incorporated by reference herein. 10.12 Employment Agreement between Surety Capital Corporation, Surety Bank, National Association and Charles M. Ireland, dated January 14, 2001 X 10.13 Form of Redeemable Convertible Promissory Note between Surety Capital Corporation and various directors and an employee, dated October 2, 2000 X 16.01 Letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission dated June 11, 1999 Filed with the Company's Form 8-K/A (Amendment No. 1) dated June 3, 1999 and incorporated by reference herein. 21.01 Subsidiaries of the Registrant X 23.01 Consent of Weaver and Tidwell, L.L.P. X 21 2 3 See accompanying notes to consolidated financial statements. 8 September 10QSB.doc 3 32 -----END PRIVACY-ENHANCED MESSAGE-----