-----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, VzZh59gcTktddG6Y/XDFP8i7DnFNzDwTJPLjyou+TqljoINoJcexN2MNxrhZreYC Oc3DfTrNsEkrSgzqeofIHw== 0000784932-97-000010.txt : 19971120 0000784932-97-000010.hdr.sgml : 19971120 ACCESSION NUMBER: 0000784932-97-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971119 SROS: AMEX 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-12818 FILM NUMBER: 97724241 BUSINESS ADDRESS: STREET 1: 1845 PRECINCT LINE RD STE 100 CITY: HURST STATE: TX ZIP: 76054 BUSINESS PHONE: 8174982749 MAIL ADDRESS: STREET 1: 1845 PRECINCT LINE RD STE 100 CITY: HURST STATE: TX ZIP: 76054 FORMER COMPANY: FORMER CONFORMED NAME: K CAPITAL INC DATE OF NAME CHANGE: 19870407 10-Q 1 THIRD QUARTER FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Mark One [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1997. [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ______________. Commission file number 33-1983 SURETY CAPITAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 75-2065607 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054 ------------------------------------------------------- (Address of principal executive offices) (817) 498-2749 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Common stock outstanding on November 5, 1997, 5,751,882 shares PAGE SURETY CAPITAL CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements - ------- Consolidated Balance Sheets at September 30, 1997 (unaudited) and December 31, 1996 3 Consolidated Statements of Income for the Nine Months Ended September 30, 1997 and 1996 (unaudited) 4 Consolidated Statements of Income for the Three Months Ended September 30, 1997 and 1996 (unaudited) 5 Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 1997 (unaudited) and for the Years Ended December 31, 1996 and 1995 6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 (unaudited) 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial - ------- Condition and Results of Operations 12 PART II. - OTHER INFORMATION - ------------------------------ Item 1. Legal Proceedings 19 - ------- Item 2. Changes in Securities 20 - ------- Item 3. Defaults Upon Senior Securities 20 - ------- Item 4. Submission of Matters to a Vote of Security Holders 20 - ------- Item 5. Other Information 20 - ------- Item 6. Exhibits and Reports on Form 8-K 20 - ------- 2 PAGE SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30, 1997 (unaudited) and December 31, 1996
September 30, December 31, 1997 1996 ------------- ------------ Assets: Cash and due from banks $ 6,671,815 $ 6,094,457 Federal funds sold 11,485,000 16,772,000 Interest bearing deposits in financial institutions 190,000 285,842 Investment securities: Available-for-sale 14,369,508 16,221,273 Held-to-maturity 18,376,112 22,561,270 ------------ ------------ Total investment securities 32,745,620 38,782,543 Loans 117,183,231 105,696,491 Less: Unearned interest (2,508,953) (2,544,803) Allowance for credit losses (1,366,662) (1,284,774) ------------ ------------ Net loans 113,307,616 101,866,914 Premises and equipment, net 3,777,650 3,970,193 Accrued interest receivable 855,707 1,083,336 Other real estate and repossessed assets 130,992 738,198 Other assets 1,738,969 607,214 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $1,109,716 and $719,288 at September 30, 1997 and December 31, 1996, respectively 5,990,140 6,238,613 ------------ ------------ Total assets $176,893,509 $176,439,310 ============ ============ Liabilities and shareholders' equity: Demand deposits $ 22,607,969 $ 23,878,744 Savings, NOW and money markets 45,076,627 48,372,642 Time deposits, $100,000 and over 21,631,301 20,276,235 Other time deposits 65,683,422 63,162,720 ------------ ------------ Total deposits 154,999,319 155,690,341 Accrued interest payable and other liabilities 1,087,832 1,518,417 ------------ ------------ Total liabilities 156,087,151 157,208,758 ------------ ------------ Shareholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued at September 30, 1997 and December 31, 1996 - - Common stock, $.01 par value, 20,000,000 shares authorized, 5,786,171 and 5,763,737 shares issued at September 30, 1997 and December 31, 1996, respectively, and 5,751,882 and 5,748,119 outstanding at September 30, 1997 and December 31, 1996, respectively 57,862 57,637 Additional paid-in capital 16,850,067 16,752,003 Retained earnings 3,982,998 2,509,771 Stock rights issuable 57,862 Treasury stock, 34,289 shares at September 30, 1997 and 15,618 shares at December 31, 1996 carried at cost (172,828) (74,539) Unrealized gain (loss) on available-for -sale securities, net of tax 30,397 (14,320) ------------ ------------ Total shareholders' equity 20,806,358 19,230,552 ------------ ------------ Total liabilities and shareholders' equity $176,893,509 $176,439,310 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 PAGE SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME for the Nine Months Ended September 30, 1997 and 1996 (unaudited)
Nine Months Ended September 30, September 30, 1997 1996 ------------- ------------- Interest income: Insurance premium financing $ 3,717,187 $ 2,509,161 Commercial and real estate loans 3,472,758 3,245,672 Medical receivables factoring 1,713,678 843,071 Consumer loans 968,832 1,084,355 Federal funds sold 323,455 875,221 Investment securities: Taxable 1,561,055 1,637,835 Tax-exempt 237,685 243,673 Interest bearing deposits 12,763 36,771 ------------ ------------ Total interest income 12,007,413 10,475,759 ------------ ------------ Interest expense: Savings, NOW and money market 937,393 760,635 Time deposits, $100,000 and over 839,902 754,507 Other time deposits 2,512,759 2,439,884 Other interest expense - 6,612 ------------ ------------ Total interest expense 4,290,054 3,961,638 ------------ ------------ Net interest income before provision for credit losses 7,717,359 6,514,121 ------------ ------------ Provision for credit losses 295,000 90,000 ------------ ------------ Net interest income 7,422,359 6,424,121 ------------ ------------ Noninterest income 1,764,705 1,354,776 ------------ ------------ Noninterest expense: Salaries and employee benefits 3,392,296 3,153,119 Occupancy and equipment 1,123,513 933,008 General and administrative 2,265,249 1,965,581 ------------ ------------ Total non interest expense 6,781,058 6,051,708 ------------ ------------ Income before income taxes 2,406,006 1,727,189 Income tax expense: Current 874,917 593,972 ------------ ------------ Net income $ 1,531,089 $ 1,133,217 ============ ============ Net income per share of common stock $0.27 $0.22 ============ ============ Weighted average shares outstanding 5,751,212 5,262,716 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4 PAGE SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME for the Three Months Ended September 30, 1997 and 1996 (unaudited)
Three Months Ended September 30, September 30, 1997 1996 ------------- ------------- Interest income: Insurance premium financing $1,257,910 $1,015,623 Commercial and real estate loans 1,167,596 975,364 Medical receivables factoring 514,403 504,193 Consumer loans 312,418 376,151 Federal funds sold 63,481 211,590 Investment securities: Taxable 430,965 597,225 Tax-exempt 79,180 82,622 Interest bearing deposits 1,544 6,060 ---------- ---------- Total interest income 3,827,497 3,768,828 ---------- ---------- Interest expense: Savings, NOW and money market 282,380 242,743 Time deposits, $100,000 and over 300,645 275,101 Other time deposits 856,708 835,780 Other interest expense ---------- ---------- Total interest expense 1,439,733 1,353,624 ---------- ---------- Net interest income before provision for credit losses 2,387,764 2,415,204 ---------- ---------- Provision for credit losses 145,000 45,000 ---------- ---------- Net interest income 2,242,764 2,370,204 ---------- ---------- Noninterest income 642,930 474,663 ---------- ---------- Noninterest expense: Salaries and employee benefits 974,048 1,132,097 Occupancy and equipment 389,769 335,743 General and administrative 724,199 698,978 ---------- ---------- Total non interest expense 2,088,016 2,166,818 ---------- ---------- Income before income taxes 797,678 678,049 Income tax expense: Current 277,304 235,266 ---------- ---------- Net income $ 520,374 $ 442,783 ========== ========== Net income per share of common stock $0.09 $0.08 ========== ========== Weighted average shares outstanding 5,751,882 5,746,512 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 5 PAGE SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the Nine Months Ended September 30, 1997 (unaudited) and for the years ended December 31, 1996 and 1995
Unrealized Gain/(Loss) Common Stock on ------------------- Additional Retained Stock Available- Par Paid-In Earnings/ Rights Treasury for-Sale Total Shares Value Capital (Deficit) Issuable Stock Securities Equity --------- ------- ---------- ---------- -------- -------- ----------- ----------- Balance at December 31, 1994 3,040,829 $30,408 $8,113,214 $ (75,102) $(2,839) $8,065,681 --------- ------- ---------- ---------- -------- -------- ----------- ----------- Sale of Common Stock 459,500 4,595 1,192,587 1,197,182 Purchase of Treasury Stock (10,166 shares) $(50,830) $ (50,830) Net Income 886,886 886,886 Exercise of stock options 16,266 163 50,668 50,831 Change in unrealized gain/ (losses) on available- for-sale securities, net of tax, $74,544 144,722 144,722 --------- ------- ---------- ---------- -------- -------- ----------- ----------- Balance at December 31, 1995 3,516,595 35,166 9,356,469 811,784 (50,830) 141,883 10,294,472 --------- ------- ---------- ---------- -------- -------- ----------- ----------- Sale of Common Stock 2,239,218 22,392 7,371,901 7,394,293 Purchase of Treasury Stock (5,452 shares) (23,709) (23,709) Net Income 1,697,987 1,697,987 Exercise of stock options 7,924 79 23,633 23,712 Change in unrealized gain/ (losses)on available- for-sale securities, net of tax, $(81,147) (156,203) (156,203) --------- ------- ---------- ---------- -------- -------- ----------- ----------- Balance at December 31, 1996 5,763,737 57,637 16,752,003 2,509,771 (74,539) (14,320) 19,230,552 --------- ------- ---------- ---------- -------- -------- ----------- ----------- Stock Rights Issuable (57,862) $57,862 Purchase of Treasury Stock (18,671 shares) (98,289) (98,289) Net Income 1,531,089 1,531,089 Exercise of stock options 22,434 225 98,064 98,289 Change in unrealized gain/ (losses) on available- for-sale securities, net of tax, $19,800 44,717 44,717 --------- ------- ----------- ---------- -------- ---------- ----------- ------------ Balance at September 30, 1997 5,786,171 $57,862 $16,850,067 $3,982,998 $57,862 $(172,828) $30,397 $20,806,358 --------- ------- ----------- ---------- -------- ---------- ----------- ------------
The accompanying notes are an integral part of the consolidated financial statements. 6 PAGE SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the Nine Months Ended September 30, 1997 and 1996 (unaudited)
September 30, ------------- 1997 1996 ----------- ----------- Cash flows from operating activities: Net income $ 1,531,089 $ 1,133,217 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 295,000 90,000 Provision for depreciation 510,022 457,502 Amortization of intangible assets 390,428 182,849 Gain on sale of available-for-sale securities (10,379) Gain on sale or disposal of assets (110,888) Net (decrease) increase in unearned interest on loans (35,850) 451,427 Net increase(decrease) in other assets 239,399 (103,009) Net decrease in accrued interest payable and other liabilities (450,385) (243,238) ----------- ----------- Net cash provided by operating activities 2,358,436 1,968,748 ----------- ----------- Cash flows from investing activities: Net increase in loans (9,101,888) (14,059,111) Payments received on purchased medical claims receivables 14,899,958 13,278,557 Purchases of medical claims receivables (18,753,754) (10,404,482) Purchases of available-for-sale securities (5,973,016) (7,239,958) Proceeds from sales of available-for-sale securities 2,948,507 Proceeds from maturities of available-for-sale securities 4,951,170 4,883,718 Purchases of held-to-maturity securities (2,977,925) Proceeds from maturities of held-to-maturity securities 4,185,158 8,495,145 Proceeds from maturities of interest bearing deposits in financial institutions 95,842 1,034,216 Purchases of bank premises and equipment (362,352) (429,747) Proceeds from sale of bank premises and equipment 119,780 Proceeds from sale of other real estate and repossessed assets 613,539 Direct cost incurred for bank acquisition (106,113) Net cash acquired through acquisition 3,876,901 ----------- ----------- Net cash used in investing activities (6,377,056) (3,648,799) ----------- ----------- Cash flows from financing activities: Net decrease in deposits (691,022) (6,555,012) Principal payments on notes payable (375,000) Purchase of treasury stock (98,289) (23,709) Exercise of stock options 98,289 23,712 Proceeds from the sale of stock 7,452,098 ----------- ----------- Net cash (used in) provided by financing activities (691,022) 522,089 ----------- ----------- Net decrease in cash and cash equivalents (4,709,642) (1,157,962) Beginning cash and cash equivalents 22,866,457 23,217,018 ----------- ----------- Ending cash and cash equivalents $18,156,815 $22,059,056 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 7 PAGE SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the Nine Months Ended September 30, 1997 and 1996 (unaudited)
September 30, ----------------------- 1997 1996 -------- ----------- Supplemental schedule of noncash investing and financing activities: Transfers of repossessed collateral to other assets $750,739 Transfer from loans to other assets $850,000 Additions to loans to facilitate the sale of other real estate and other assets $344,907 Adjustments to other assets subsequent to acquisition $141,955 Declaration of Stock Dividend $ 57,862 Net cash acquired through acquisitions: Interest bearing deposits in financial institutions $ 274,242 Investment securities 21,214,629 Net loans 18,476,948 Premises and equipment, net 1,270,401 Other assets 896,832 Excess of cost over fair value of net assets acquired 3,881,881 Deposits (49,237,113) Other liabilities (654,721) ------------ Net cash acquired through acquisitions $(3,876,901) ============
The accompanying notes are an integral part of the consolidated financial statements. 8 PAGE SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: ---------------------- The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 1997, and the results of its operations and its cash flows for the indicated periods have been included. The results of operations for such interim period are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1997. 2. Loans, net: ----------- At September 30, 1997 and December 31, 1996, the loan portfolio was composed of the following: September 30, December 31, 1997 1996 ------------- ------------ Insurance premium financing $ 46,395,314 $ 39,168,604 Installment loans 10,316,265 12,631,520 Commercial loans 22,715,798 22,745,139 Real estate loans 27,255,527 24,774,167 Medical claims receivable 10,500,327 6,377,061 ------------ ------------ Total gross loans 117,183,231 105,696,491 Unearned interest (2,508,953) (2,544,803) Allowance for credit losses (1,366,662) (1,284,774) ------------ ------------ Loans, net $113,307,616 $101,866,914 ============ ============ Activity in the allowance for credit losses is as follows:
Nine Months Three Months Nine Months Three Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 1997 1997 1996 1996 ------------ ------------ ------------ ------------ Beginning balance $1,284,774 $1,300,567 $ 702,927 $1,295,165 Provision for credit losses 295,000 145,000 90,000 45,000 Bank acquisition - 614,700 - Loans charged off, net of recoveries (213,112) (78,905) (115,438) (47,976) ---------- ---------- ---------- ---------- Ending balance $1,366,662 $1,366,662 $1,292,189 $1,292,189 ========== ========== ========== ==========
Loans on which the accrual of interest has been discontinued amounted to approximately $126,000 and $144,000 at September 30, 1997 and December 31, 1996, respectively. 9 PAGE SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued At September 30, 1997 and December 31, 1996, the Company's recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS 114") consists primarily of commercial loans and installment loans as follows:
September 30, December 31, 1997 1996 ------------- ------------ Impaired loans $ 10,356,686 $ 4,837,271 Impaired loans with related allowance calculated under SFAS 114 9,165,643 3,209,403 Allowance on impaired loans calculated under SFAS 114 853,522 387,386 Impaired loans with no allowance calculated under SFAS 114 1,191,043 1,627,868
For the nine For the twelve months ended months ended September 30, December 31, 1997 1996 ------------- -------------- Average impaired loans $ 7,651,462 $ 3,436,870 Interest income recognized on impaired loans 694,370 415,861
As of September 30, 1997 and December 31, 1996, there were no commitments to lend additional funds for loans considered impaired. 3. Stock Option Plans: ------------------- The Company has two long-term incentive stock option plans for key senior officers of the Company. The stock option plans provide these key employees with options to purchase shares of the Company's Common Stock at an exercise price equal to the fair market value of such Common Stock on the date of grant. The Company has also adopted a stock option plan for directors of the Company who are not employees of the Company. 4. Stockholders' Rights Agreement: ------------------------------- Pursuant to the Rights Agreement dated June 17, 1997 between the Company and Securities Transfer Corporation, as rights agent, the Company declared a dividend of one common stock purchase right (a "Right") for each outstanding share of common stock, $0.01 par value, of the Company (the "Common Stock Purchase Plan") to stockholders of record at the close of business on June 6, 1997. Each Right initially entitles stockholders to buy one share of Common Stock at an exercise price of $50.00 (the "Purchase Price"). The Rights will be exercisable only if a person or group acquires 15% or more of the Common Stock or announces a tender offer the consummation of which would result in ownership by such person or group of 15% or more of the Common Stock. The Company will be entitled to redeem the Rights at $0.0001 per Right at any time prior to the tenth day after a person or group acquires 15% or more of the Common Stock, other than pursuant to a transaction approved by the Company's Board of Directors. The Rights are redeemable even after a 15% or more acquisition, if the Board so determines, in connection with a merger of the Company with a "white knight" and under other circumstances. In the event of a 15% or more acquisition, each Right will entitle its holder to purchase that number of shares of Common Stock equal to the result obtained by dividing the Purchase Price by 50% of the then current market price of the Common Stock. If the Company, or any subsidiary of the Company, is acquired in a merger or other business combination transaction in which the Common Stock is exchanged or changed, or 50% or more of the Company's assets or earning power are sold, each Right will entitle its holder to purchase that number of shares of common stock of the surviving or acquiring entity equal to the result obtained by dividing the Purchase Price by 50% of the then current market price of the common stock of the surviving or acquiring entity. 5. Other Receivables: ------------------ The Company's subsidiary, Surety Bank, National Association (the "Bank"), has learned that a number of insurance premium finance agreements on which it has made loans may be fictitious or forged. The matter is under continuing investigation by state and federal authorities. All of the loans were originated through one insurance agency. The total unpaid balance of all of the loans in question is approximately $1,100,000. This amount has been reclassified from loans to other receivables and will remain in a non-accrual account until collected. The Bank has commenced legal action against the parties believed to be responsible. Management believes it has meritorious avenues of collection and no material losses are expected. 10 PAGE SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 6. Subsequent Events: ------------------ On October 10, 1997 the Company and Surety Bank entered into an agreement to acquire TexStar National Bank ("TexStar"), located in Universal City, Texas. The purchase price for TexStar is projected to be approximately $19.59 per share of TexStar common stock outstanding (total cash consideration: approximately $9,500,000), which will be paid to the shareholders of TexStar in connection with the merger of TexStar with and into Surety Bank. As of September 30, 1997, TexStar had total assets of $73,635,427, total deposits of $65,681,173, total loans of $32,551,203, total equity of $5,647,545 and year to date net income of $394,682. TexStar has five full service banking facilities located primarily in suburban areas northeast of San Antonio, Texas. The completion of the merger will result in Surety Bank increasing its asset size to approximately $250,000,000. This will represent an approximate 43% increase in asset size. The completion of the merger is subject to a number of contingencies, including regulatory approvals by applicable banking authorities, due diligence review by Surety Bank of TexStar's business operations, the raising of sufficient funds by Surety Capital to facilitate the transaction, approval by TexStar's shareholders, and other matters. If consummated, the transaction is expected to close on or before March 31, 1998. 11 PAGE ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: --------------------- GENERAL The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company has one wholly owned subsidiary, Surety Bank, National Association, a national banking association ("Surety Bank"). The information presented below reflects the lending and related funding business of the Company: Nine Months Ended Nine Months Ended September 30, September 30, 1997 1996 ----------------- ----------------- INSURANCE PREMIUM FINANCING: Average balance outstanding $ 45,009,669 $ 26,849,509 Average yield 11.0% 12.5% Interest income $ 3,717,187 $ 2,509,161 MEDICAL FACTORING, CONSUMER, COMMERCIAL AND REAL ESTATE FINANCING: Average balance outstanding $ 67,559,030 $ 54,775,163 Average yield 12.2% 12.6% Interest income $ 6,155,268 $ 5,173,098 COST OF FUNDS: Average balance outstanding (1) $ 154,999,987 $ 144,184,834 Average interest rate 3.7% 3.7% Interest expense $ 4,290,054 $ 3,961,638 AVERAGE MONTHLY AMOUNTS: Total interest income $ 1,334,157 $ 1,163,973 Total interest expense $ 476,673 $ 440,182 Provision for credit losses $ 32,778 $ 10,000 Noninterest income $ 196,078 $ 150,531 Noninterest expense $ 753,451 $ 672,412 (1) Includes $0 and $80,144 of short-term borrowings and $0 and $6,612 of interest expense on short-term borrowings for the nine months ended September 30, 1997 and 1996, respectively. Note: Average balances are computed using daily balances throughout each period. 12 PAGE AVERAGE BALANCE SHEET
Nine Months Ended September 30, 1997 --------------------------------------- Average Average Balance Interest Rate --------- ---------- --------- ASSETS: Interest earnings assets: U.S. Treasury and agency securities and due from time $ 37,585,012 $1,811,503(1) 6.4% Federal funds sold 8,613,801 323,455 5.0% Loans(2) 112,568,699 9,872,455(3) 11.7% Allowance for credit losses (1,319,124) N/A N/A ------------ ---------- ----- Total interest earning assets 157,448,388 12,007,413 10.2% ------------ ---------- ----- Cash and due from banks 5,668,715 Premises and equipment 3,882,628 Accrued interest receivable 972,556 Other assets 7,456,061 ------------ Total assets $175,428,348 ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing liabilities: Interest bearing demand deposits $ 39,227,467 $ 797,744 2.7% Savings deposits 7,737,747 139,649 2.4% Time deposits 85,717,079 3,352,661 5.2% ------------ ---------- ----- Total interest bearing liabilities 132,682,293 4,290,054 4.3% ------------ ---------- ----- Net interest income $7,717,359 ========== Net interest spread 5.9% ----- Net interest income to average earning assets 6.5% ===== Noninterest bearing deposits 22,317,694 Accrued interest payable and other liabilities 1,504,300 ------------ Total liabilities 156,504,287 Shareholders' equity 18,924,061 ------------ Total liabilities and shareholders' equity $175,428,348 ============
(1) Interest income on the tax-exempt securities does not reflect the tax equivalent yield. (2) Loans on nonaccrual status have been included in the computation of average balances. (3) The interest income on loans does not include loan fees. Loan fees are immaterial and are included in noninterest income. 13 PAGE Nine Months Ended September 30, 1997 Versus Nine Months Ended September 30, 1996. The Company reported an increase of 35.1% in net earnings of $1,531,089 as compared to $1,133,217 during the nine months ended September 30, 1997 and 1996, respectively. Earnings per share were $0.27 and $0.22 for the nine months ended September 30, 1997 and 1996, respectively. The increase in net earnings is principally attributed to an increase in the average balance of loans outstanding. The yields earned by the Company on its loan portfolio during the nine months ended September 30, 1997 and 1996 were 11.7% and 12.0%, respectively, while the average cost of funds for the Company for the same periods was unchanged at 3.7%. The average balance of loans outstanding was $112,568,699 and $85,351,415 for the nine months ended September 30, 1997 and 1996, respectively. The loan-to-deposit ratio as of September 30, 1997 and 1996 was 73.1% and 62.7%, respectively. With the completion of the acquisition of First National Bank in Midlothian, Texas in early 1996, Surety's loan-to- deposit ratio fell to approximately 50.0%. At that time management determined that until Surety's loan-to-deposit ratio returned to its desired level of 75%, Surety would suspend its merger and acquisition activity, and concentrate on asset utilization and profit maximization. Surety's average loan-to-deposit ratio for the third quarter of 1997 was 75.6%, and Surety resumed its growth and acquisition strategy. Total interest income increased 14.6% to $12,007,413 from $10,475,759, for the nine months ended September 30, 1997 and 1996, respectively, while total interest expense increased 8.3% to $4,290,054 from $3,961,638, for the nine months ended September 30, 1997 and 1996, respectively, resulting in a 18.5% increase in net interest income before provision for credit losses to $7,717,359 from $6,514,121 for these same periods. The Company's loan growth for the nine months ended September 30, 1997 was concentrated within medical claims factoring and insurance premium financing. For the nine months ended September 30, 1997, real estate loans increased by 10.0% to $27,255,527 from $22,745,139, commercial lending decreased by 0.1% to $22,715,798 from $22,774,167, consumer loans decreased by 18.3% to $10,316,266 from $12,631,520, medical claims factoring increased by 64.7% to $10,500,327 from $6,377,061, and insurance premium financing increased by 18.4% to $46,395,314 from $39,168,604. The overall net growth in the loan portfolio is attributed to management's marketing efforts. The average volume of medical claims factoring, consumer, commercial, and real estate lending increased 23.3%, with a decrease in the average yields on those loans from 12.6% to 12.2%, over the last twelve months. The 67.6% increase in the average volume of insurance premium financing loans was accompanied by a yield of 11.0% and 12.4% on those loans for the nine months ended September 30, 1997 and 1996, respectively. The average balance of interest bearing deposits increased 7.5%, while the average rate paid remained unchanged at 3.7%. The Company recorded a $295,000 provision for credit losses during the nine months ended September 30, 1997 compared to a $90,000 provision for credit losses during the nine months ended September 30, 1996. The increased provision taken during 1997 can be attributed to the loan growth in insurance premium finance and medical claims factoring. As the Company's ratio of net charge-offs to average loans remained unchanged for these periods, the Company provided amounts, through charges to earnings, to maintain the allowance for credit losses at an adequate level. Management believes that all known losses in the portfolio have been recognized. The Company's noninterest income increased 30.3% to $1,764,705 from $1,354,776 for the nine months ended September 30, 1997 and 1996, respectively. This increase compares to a corresponding increase in average noninterest bearing deposits of 11.3% to $22,317,694 from $20,061,217 for these same periods along with a growth in average volume of insurance premium finance loans of 67.6% (over the prior twelve months). Noninterest income is generated primarily from fees associated with noninterest and interest bearing accounts. Noninterest expense increased 12.1%, primarily the result of a 7.6% increase in salaries and employee benefits, a 20.4% increase in occupancy and equipment expenses, and a 15.2% increase in general and administrative expenses. The increase in salaries and benefits was due primarily to additional staffing required by the acquisitions of First National Bank in Midlothian, Texas, and Providers Funding Corporation in the first quarter of 1996. Increases in general and administrative expenses relate primarily to the operation of the Midlothian branch and the medical claims factoring division, and legal and professional fees. 14 PAGE Three Months Ended September 30, 1997 Versus Three Months Ended September 30, 1996 The Company earned $520,374 as compared to $442,783 during the three months ended September 30, 1997 and 1996, respectively. Earnings per share were $0.09 and $0.08 for the three months ended September 30, 1997 and 1996, respectively. Total interest income increased 1.6% to $3,827,497 from $3,768,828, while total interest expense increased 6.4% to $1,439,733 from $1,353,624, resulting in a 1.1% decrease in net interest income before provision for credit losses to $2,387,764 from $2,415,204. The Company recorded a $145,000 provision for credit losses during the three months ended September 30, 1997 compared to $45,000 provision for credit losses during the three months ended September 30, 1996. The increased provision taken during the three months ended September 30, 1997 can be attributed to the loan growth in insurance premium finance and medical claims factoring. As the three month's ended September 30, the Company's ratio of net charge-offs to average loans remained unchanged for these periods, the Company provided amounts, through charges to earnings, to maintain the allowance for credit losses at an adequate level. Management believes that all known losses in the portfolio have been recognized. The Company's noninterest income increased 35.4% to $642,930 from $474,663 for the three months ended September 30, 1997 and 1996, respectively, while noninterest expense decreased 3.6%. Parent Company Only Results of Operations. - ------------------------------------------ The Company serves as a parent company to Surety Bank and has minimal separate business activities. For the nine months ended September 30, 1997, the Company had only nominal interest income of approximately $16,000, and approximately $118,000 in noninterest expenses. The noninterest expenses, which increased 19.7% from the same period in the prior year, consisted primarily of legal and professional fees incurred in the operation of the Company and in the maintenance of the Company's public company status under applicable securities laws and regulations. ALLOWANCE FOR CREDIT LOSSES The Company recorded a $295,000 provision for credit losses during the nine months ended September 30, 1997 compared to a $90,000 provision during the nine months ended September 30, 1996. The increased provision taken during 1997 can be attributed to the loan growth in insurance premium finance and medical claims factoring. The Company's provision for credit losses is based upon quarterly loan portfolio reviews by management. The purpose of the reviews is to assess loan quality, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the market economy. Credit losses different from the allowance provided by the Company are likely, and credit losses in excess or deficient of the allowance for credit losses are possible. Credit losses in excess of the amount of the allowance could and probably would have a material adverse effect on the financial condition of the Company. The ratio of charge-offs, net of recoveries, to average loans at September 30, 1997 was 0.19%, as compared to 0.18% at September 30, 1996. The ratio of the allowance for credit losses to total loans was 1.2% at September 30, 1997 as compared to 1.3% at September 30, 1996. The allowance for credit losses was $1,366,662 and $1,292,189 at September 30, 1997 and 1996, respectively. 15 PAGE CURRENT TRENDS AND UNCERTAINTIES Economic trends and other developments could adversely affect the Company's operations. Regulatory changes may increase the Company's cost of doing business or otherwise impact it adversely. LIQUIDITY The Company's investment securities portfolio, including federal funds sold, and its cash and due from bank deposit balances serve as the primary sources of liquidity. At September 30, 1997, 16.3% of Surety Bank's interest bearing liabilities were in the form of time deposits of $100,000 and over. Although unlikely, if a large number of these time deposits matured at approximately the same time and were not renewed, Surety Bank's liquidity could be adversely affected. Currently, the maturities of Surety Bank's large time deposits are spread throughout the year, and Surety Bank monitors those maturities in an effort to minimize any adverse effect on liquidity. Over the long term, the ability of the Company to meet its cash obligations will depend substantially on its receipt of dividends from Surety Bank, which are limited by banking statutes and regulations. CAPITAL RESOURCES Shareholders' equity at September 30, 1997 was $20,806,358 as compared to $19,230,552 at December 31, 1996. The Company had consolidated net income of $1,531,089 for the nine months ended September 30, 1997. Under the regulatory risk-based capital framework, Surety Bank is expected to meet a minimum risk-based capital ratio to risk-weighted assets ratio of 8%, of which at least one-half, or 4%, must be in the form of Tier 1 (core) capital. The remaining one-half, or 4%, may be either in the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of the loan loss allowances that may be included in capital is limited to 1.25% of risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for Surety Bank was 11.10% and 12.29%, respectively, at December 31, 1996 and 11.90% and 13.07%, respectively, at September 30, 1997. In addition, Surety Bank is expected to maintain a Tier 1 capital to total assets ratio (Tier 1 leverage ratio) of at least 3%. Surety Bank is currently, and expects to continue to be, in compliance with these capital requirements. While the Company believes it has sufficient financing for its working capital needs until the end of its 1997 fiscal year, there can be no assurance that the Company's present capital and financing will be sufficient to finance future operations thereafter. If the Company sells additional shares of common and/or preferred stock to raise funds, the terms and conditions of the issuances and any dilutive effect may have an adverse impact on the existing shareholders. If additional financing becomes necessary, there can be no assurance that the financing can be obtained on satisfactory terms. In this event, the Company could be required to restrict its operations. The Board of Governors of the Federal Reserve System (the "Federal Reserve") has established a policy sometimes known as the "source of strength doctrine" that requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. The Federal Reserve has interpreted this requirement to require that a bank holding company, such as the Company, stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. The Federal Reserve has stated that it would generally view a failure to assist a troubled or failing subsidiary bank in these circumstances as an unsound or unsafe banking practice, a violation of Regulation Y, or both, justifying a cease and desist order or other enforcement action, particularly if appropriate resources are available to the bank holding company on a reasonable basis. The requirement that a bank holding company, such as the Company, make its assets and resources available to a failing subsidiary bank could have an adverse effect upon the Company and its shareholders. 16 PAGE RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing earnings per share ("EPS") previously found in APB Opinion No. 15, "Earnings per Share" ("Opinion 15"), and makes them comparable to international EPS standards. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. SFAS 128 also requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 31, 1997, including interim periods; earlier application is not permitted. Basic EPS under SFAS 128 was $0.27 and $0.22 for the nine months ended September 30, 1997 and 1996, respectively, and fully diluted EPS was $0.26 and $0.22 for the nine months ended September 30, 1997 and 1996, respectively. SFAS 128 requires restatement of all prior-period EPS data presented. In February 1997, FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 129 establishes standards for disclosing information about an entity's capital structure, including the pertinent rights and privileges of various securities outstanding. SFAS 129 is effective for financial statements issued for periods after December 15, 1997. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management believes that the adoption of these pronouncements will not have a material impact on the financial statements of the Company. IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The financial statements and related financial data concerning the Company in this report have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of Surety Bank, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Bank. The Federal Reserve Bank implements national monetary policy such as seeking to curb inflation and combat recession by its open market operations in United States government securities, control of the discount rate applicable to borrowing by banks and establishment of reserve requirements against bank deposits. The actions of the Federal Reserve Bank in these areas influence the growth of bank loans, 17 PAGE investments and deposits, and affect the interest rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in federal monetary and fiscal policies on Surety Bank and its results of operations are not predictable. 18 PAGE PART II - OTHER INFORMATION Item 1. Legal Proceedings. Surety Bank (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 claimant 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 seeks 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 course of conduct. The plaintiff in the MacGregor Case, United Shortline Inc. Assurance Services, N.A. ("Shortline"), is 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. Both cases 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, and also in order to protect the Bank against the possibility of inconsistent orders regarding the same funds. Tennessee also seeks to recover funds allegedly transferred in and out of the Anchorage/MacGregor accounts at the Bank during an approximate four month period in 1993. 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 these funds by Tennessee, the Bank intervened and interpled approx imately $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. Currently, Shortline and Tennessee have made application to the Texas Supreme Court to allow an appeal of the ruling from the Fort Worth Court of Appeals. Shortline and Tennessee have appealed that decision to the Texas Supreme Court which has yet to rule on that appeal. In the Anchorage case, Tennessee claims that the Bank allegedly transferred funds in and out of the Anchorage accounts after allegedly receiving notice of court orders prohibiting such transfers. Discovery in this case is in the initial stages and the damages sought by Tennessee are not yet certain. Discovery in this case is ongoing and the damages sought by Tennessee are not yet certain. 19 PAGE The Bank believes both of these cases lack merit and intends to defend them vigorously. The outcome of both of these cases is uncertain at this time. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27 Financial Data Schedule* * Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended September 30, 1997. 20 PAGE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 17, 1997 SURETY CAPITAL CORPORATION By: /s/ C. Jack Bean ---------------- C. Jack Bean Chairman of the Board and Chief Executive Officer By: /s/ B.J. Curley --------------- B.J. Curley Vice President, Chief Financial Officer and Secretary 21 EX-27 2 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,671,815 190,000 11,485,000 0 14,369,508 18,376,112 18,647,261 114,674,278 (1,366,662) 176,893,509 154,999,319 0 1,087,832 0 0 0 57,862 20,748,496 176,893,509 9,872,455 2,134,958 0 12,007,413 4,290,054 4,290,054 7,717,359 295,000 0 6,781,058 2,406,006 1,531,089 0 0 1,531,089 0.27 0.26 10.29 126,000 110,444 0 0 1,284,774 324,921 111,809 1,366,662 1,366,662 0 0
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