-----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, I0BJ89TnKtCr7Ub9It1axcsZ+HR02bhV5G/Ui6KP8AJ/pw1X6JeiWQHcjRDQj7WT YHxGkHWmKZ5Nx2MqeBvNNw== 0001010549-96-000168.txt : 19960816 0001010549-96-000168.hdr.sgml : 19960816 ACCESSION NUMBER: 0001010549-96-000168 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 1934 Act SEC FILE NUMBER: 001-12818 FILM NUMBER: 96612810 BUSINESS ADDRESS: STREET 1: 1845 PRECINCT LINE RD STE 100 CITY: HURST STATE: TX ZIP: 76054 BUSINESS PHONE: 8174988154 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 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 Mark One {X} Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 1996. { } 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 July 31, 1996, 5,746,512 shares 1 SURETY CAPITAL CORPORATION
INDEX PART I - FINANCIAL INFORMATION Page No. - ---------------------------- -------- Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 unaudited) 3 Consolidated Statements of Income for the Six Months Ended June 30, 1996 and 1995 (unaudited) 4 Consolidated Statements of Income for the Three Months Ended June 30, 1996 and 1995 (unaudited) 5 Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 1996 and for the Year Ended December 31, 1995 (unaudited) 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995 (unaudited) 7 Notes to Consolidated Financial Statements 9 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 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 - ------- Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 - -------
2
SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 1996 and December 31, 1995 (unaudited) ASSETS June 30, December 31, 1996 1995 --------------- ---------------- Assets: Cash and due from banks $7,519,519 $4,727,018 Federal funds sold 18,435,000 18,490,000 Interest bearing deposits in financial institutions 381,805 1,046,297 Investment securities: Available-for-sale 17,628,242 10,128,157 Held-to-maturity 23,799,657 13,780,538 --------------- ---------------- Total investment securities 41,427,899 23,908,695 Loans 92,862,728 68,991,700 Less: Unearned interest (2,408,274) (1,889,461) Allowance for credit losses (1,295,165) (702,927) --------------- ---------------- Net loans 89,159,289 66,399,312 Premises and equipment, net 4,139,877 2,775,688 Accrued interest receivable 1,198,313 781,031 Other real estate and repossessed assets 673,121 85,528 Other assets 841,746 467,147 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $490,009 and $359,572 at June 30, 1996 and December 31, 1995, respectively 6,410,000 2,658,557 --------- --------- Total assets $170,186,569 $121,339,273 =============== ================ Liabilities and shareholders' equity: Demand deposits $22,207,699 $13,182,888 Savings, NOW and money markets 42,109,572 30,612,855 Time deposits, $100,000 and over 20,193,272 15,472,674 Other time deposits 66,147,217 50,330,085 --------------- ---------------- Total deposits 150,657,760 109,598,502 Note payable - 375,000 Accrued interest payable and other liabilities 1,352,397 1,071,299 ---------------------------------------------- --------------- --------------- Total liabilities 152,010,157 111,044,801 --------------- ---------------- Commitments and contingent liabilities Shareholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued at June 30, 1996 and December 31, 1995 - - Common stock, $.01 par value, 20,000,000 shares authorized, 5,758,429 and 3,516,595 shares issued at June 30, 1996 and December 31, 1995, respectively, and 5,746,512 and 3,506,429 outstanding at June 30, 1996 and December 31, 1995, respectively 57,584 35,166 Additional paid-in capital 16,875,100 9,356,469 Retained earnings 1,502,218 811,784 Treasury stock, 11,917 shares at June 30, 1996 and 10,166 shares at at December 31, 1995 carried at cost (56,959) (50,830) Unrealized gain on available-for-sale securities, net of tax (201,531) 141,883 --------------- ---------------- Total shareholders' equity 18,176,412 10,294,472 --------------- ================ Total liabilities and shareholders' equity $170,186,569 $121,339,273 =============== ================ 3
SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME for the six months ended June 30, 1996 and 1995 (unaudited) Six Months Ended June 30, 1996 June 30,1995 ------------- --------------- Interest income: $ 2,609,187 1,829,221 Commercial and real estate loas 708,204 556,328 Consumer loans 1,493,538 1,377,723 Insurance premium financing 663,631 240,724 Federal funds sold Investment securities; Taxable 1,040,610 330,900 Tax-exempt 161,051 143,594 Interest bearing deposits 30,711 98,842 ------------- -------------- Total interest income 6,706,932 4,532,977 -------------- -------------- Interest expense: Savings, NOW and money market 532,023 376,955 Time deposits, $100,000 and over 508,078 391,059 Other time deposits 1,561,301 773,556 Other interest expense 6,612 54,487 ------------- -------------- Total interest expense 2,608,014 1,640,412 -------------- -------------- Net interest income before provision for credit losses 4,098,918 2,892,565 -------------- -------------- Provision for credit losses 45,000 60,000 -------------- -------------- Net interest income 4,053,918 2,832,565 -------------- -------------- Noninterest income 880,112 717,946 --------------- -------------- Noninterest expense: Salaries and employee benefits 2,021,022 1,427,033 Occupancy and equipment 597,265 440,536 General and administrative 1,266,602 1,098,866 ------------ ----------- Total noninterest expense 3,884,889 2,966,435 ----------- ----------- Income before income taxes expenses: 1,049,141 584,076 Current 358,707 186,904 ------------- ----------- Net income $690,434 $397,172 ================== =========== Net income per share of common stock $0.14 $0.13 ================== ============ Weighted average shares outstanding 5,033,116 3,135,247 ================== ================== 4 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME for the three months ended June 30, 1996 and 1995 (unaudited) Three Months Ended Three Months Ended June 30, 1996 June 30, 1995 --------------- ----------------- Interest income: Commercial and real estate loan $1,515,382 $925,373 Consumer loans 374,535 301,239 Insurance premium financing 812,637 729,545 Federal funds sold 321,125 87,366 Investment securities: Taxable 636,355 230,342 Tax-exempt 84,543 22,932 Interest bearing deposits 11,707 25,847 -------------- ----------- Total interest income 3,756,284 2,322,644 -------------- ----------- Interest expense: Savings, NOW and money market 284,365 187,124 Time deposits, $100,000 and 237,748 198,468 Other time deposits 865,265 424,902 Other interest expense - 48,787 ------------ ----------- Total interest expense1, 387,378 859,281 -------------- ----------- Net interest income before provision for credit losses 2,368,906 1,463,363 --------------- ----------- Provision for credit losses 15,000 15,000 --------------- ----------- Net interest income 2,353,906 1,448,363 -------------- ----------- Noninterest income 482,843 350,383 -------------- ----------- Noninterest expense: Salaries and employee benefits 1,119,843 719,814 Occupancy and equipment 331,417 221,849 General and administrative 699,784 584,240 ------------ ----------- Total noninterest expense 2,151,044 1,525,903 ----------- ----------- Income before income taxes 685,705 272,843 Income tax expenses: Current 239,181 86,035 -------------- ----------- Net income $446,524 $186,808 ============== =========== Net income per share of common stock $0.08 $0.06 ============== =========== Weighted average shares outstanding 5,746,512 3,156,771 =============== =========== 5 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the six months ended June 30, 1996 and for the year ended December 31, 1995 (unaudited)
Unrealized Gain/ Accumulate (Loss) on Common Stock Additional Retained Available- --------------------- Par Paid-in Earnings/ Treasury for-Sale Total Shares Value Capital (Deficit) 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 $(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 income taxes 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 7,512,528 7,534,920 Purchase of Treasury Stock (6,129) (6,129) Net Income 690,434 690,434 Exercise of stock options 2,616 26 6,103 6,129 Change in unrealized gain/(losses) on available-for-sale securities, net of income taxes (343,414) (343,414) ----------- --------- ------------ ------------- -------------- -------------- ------------ Balance at June 30, 1996 5,758,429 $57,584 $16,875,100 $1,502,218 $(56,959) $(201,531) $18,176,412 =========== ========= ============ ============= ============== ============== ============
6 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1996 and 1995 (unaudited)
June 30, ------------------------------------ 1996 1995 ---------------- ---------------- Cash flows from operating activities: Net income $690,434 $397,172 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for credit losses 45,000 60,000 Provision for depreciation 276,146 227,568 Amortization of intangible assets 130,438 62,997 Gain on sale or disposal of assets - 100 Net increase in unearned interest on loans 311,475 472,898 Net increase in other assets (376,529) (216,314) Net increase (decrease) in accrued interest payable and other (214,715) 358,732 liabilities ---------------- ---------------- Net cash provided by operating activities 862,249 1,363,153 ---------------- ---------------- Cash flows from investing activities: Net increase in loans (8,428,499) (5,001,528) Payments received on purchased medical claims receivables 10,429,762 8,691,206 Purchases of medical claims receivables (6,640,767) (9,842,623) Purchases of available-for-sale securities (6,738,752) (1,631,556) Proceeds from sales of available-for-sale securities - 4,736,538 Proceeds from maturities of available-for-sale securities 4,758,844 334,864 Purchases of held-to-maturity securities (2,977,925) (160,820) Proceeds from maturities of held-to-maturity securities 8,150,935 1,559,780 Proceeds from maturities of interest bearing deposits in financial 938,734 90,435 institutions Purchases of bank premises and equipment (369,934) (289,081) Direct cost incurred for bank acquisition (106,113) Net cash acquired through acquisition 3,876,901 ---------------- ---------------- Net cash provided by (used in) investing activities 2,893,186 (1,512,785) ---------------- ---------------- Cash flows from financing activities: Net (decrease) increase in deposits (8,177,854) 496,152 Principal payments on notes payable (375,000) (1,250,000) Purchase of treasury stock (6,129) Exercise of stock options 6,129 Proceeds from the sale of stock 7,534,920 1,173,600 ---------------- ---------------- Net cash (used in) provided by financing activities (1,017,934) 419,752 ---------------- ---------------- Net increase in cash and cash equivalents 2,737,501 270,120 Beginning cash and cash equivalents 23,217,018 11,194,360 ---------------- ---------------- Ending cash and cash equivalents $25,954,519 $11,464,480 ================ ================
7 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1996 and 1995 (unaudited)
June 30, ------------------------------------ 1996 1995 ---------------- ---------------- Supplemental disclosure: Cash paid during the period for interest $2,430,284 $1,593,555 Cash paid during the period for federal income taxes $327,500 $10,358 Supplemental schedule of investing activities: 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) ================ ================
8 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued 1. Basis of Presentation: ---------------------- The condensed 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 June 30, 1996, 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, 1996. 2. Acquisitions: ------------- BANK ONE, TEXAS, NATIONAL ASSOCIATION BRANCH IN WAXAHACHIE, TEXAS On June 16, 1995, Surety Bank entered into an agreement with Bank One, Texas, National Association ("Bank One") for the acquisition of certain assets and the assumption of certain liabilities by Surety Bank relating to the branch of Bank One located in Waxahachie, Texas (the "Waxahachie Branch"). The acquisition was consummated on September 28, 1995. Surety Bank financed the acquisition through the use of internally-generated funds. At the closing, Surety Bank assumed deposits and other liabilities totaling approximately $16,642,000. In addition, Surety Bank acquired certain small business and consumer loans totaling approximately $875,000, certain real property, furniture and equipment related to the Waxahachie Branch totaling approximately $271,000, and cash and other assets totaling approximately $15,496,000. After paying a deposit premium of two percent (2%) on the deposits assumed totaling approximately $331,000, Surety Bank received approximately $15,419,000 in cash from Bank One as consideration for the net deposit liabilities assumed. The Waxahachie Branch and deposits acquired in the acquisition have been incorporated into Surety Bank's existing branch network. FIRST NATIONAL BANK, MIDLOTHIAN, TEXAS On February 28, 1996, the Company completed a primary and secondary offering of its Common Stock. The offering was underwritten by Hoefer & Arnett, Incorporated, a San Francisco investment banking firm. A total of 2,388,759 shares of Common Stock were sold in the offering at a price of $3.75 per share, including 288,759 shares of Common Stock sold as an over-allotment and 174,939 shares of Common Stock held by a shareholder of the Company. The proceeds from this offering were used by the Company to finance the acquisition of First National Bank, Midlothian, Texas, to retire the Company's outstanding bank debt and for general corporate purposes. On February 29, 1996 the Company completed the acquisition of First National Bank, Midlothian, Texas ("First National"), through the consolidation of First National and Surety Bank. In connection with the transaction, Surety Bank changed its main office to the former main office of First National in Midlothian, Texas, and operates its own former main office in Lufkin, Texas as a branch. Effective April 18, 1996, Surety Bank changed the location of its main office to Hurst, Texas, and operates its former main office in Midlothian, Texas as a branch. 9 2. Acquisitions continued: ------------ With the completion of this acquisition, Surety Bank increased its asset size by approximately 42%. As of December 31, 1995, First National had total assets of $51,253,000, and Surety Bank had total assets of $121,262,000. In the transaction, a subsidiary of Surety Bank was first merged with and into First National's parent holding company, First Midlothian Corporation ("First Midlothian"), pursuant to which merger the shareholders of First Midlothian received cash in exchange for their shares of capital stock of First Midlothian in an amount equal to approximately one hundred fifty percent (150%) of the book value of First National. Immediately following the merger, First National and Surety Bank consolidated under the charter of Surety Bank. The acquisition has been accounted for as a purchase in the accompanying consolidated financial statements. The assets and liabilities of First National have been recorded at their fair values as of February 29, 1996. Included in the accompanying consolidated financial statements are the following amounts for First National as of June 30, 1996 and for the six months ended June 30, 1996: Balance sheet data: Cash and due from banks $ 395,893 Federal funds sold 9,775,000 Investment securities 16,265,359 Net loans 15,803,811 Premises and equipment, net 1,423,581 Accrued interest receivable 118,562 Other assets 618,022 ------------- Total assets $ 44,400,228 ============= Income statement data: Total interest income $ 982,968 Total interest expense 497,682 Other income 128,761 Noninterest expense 531,609 ------------- Net income $ 82,438 =========== The consolidated results of operations include the operations of First National subsequent to March 1, 1996. The unaudited information for the six months ended June 30, 1996 and the unaudited pro forma information for the six months ended June 30, 1995, presented below, reflect the acquisition of First National, as if it had been acquired as of January 1, 1995. Pro forma adjustments consisting of a provision for income taxes and interest expense have been made to properly reflect the unaudited pro forma information. Six months ended Six months ended June 30, 1996 June 30, 1995 Interest income $6,706,932 $5,546,977 Net income 266,760 522,172 Net income per share of common stock $0.05 $0.09 10 2. Acquisitions continued: ------------ Providers Funding Corporation On March 15, 1996, Surety Bank completed the acquisition of Providers Funding Corporation ("PFC"), a Dallas-based medical claims servicing company. The acquisition was accomplished through the purchase of certain assets and the assumption of certain liabilities of PFC by Surety Bank. Surety Bank used cash on hand to fund this purchase. Surety Bank operates PFC as a division titled "Providers Funding a division of Surety Bank, N.A." PFC's former president, Barry T. Carroll, has joined Surety Bank to head up the division. 3. Investment Securities: ---------------------- At June 30, 1996, the amortized cost and estimated market values of investment securities are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Held-to-Maturity: U.S. Treasury $ 4,003,167 $749 $ 7,826 $ 3,996,090 Obligations of other U.S. Government agencies and corporations 14,452,145 248 166,321 14,286,072 State and county municipals 5,344,345 153,502 5,782 5,492,065 ------------ --------- ---------- ------------- Total Held-to-Maturity $23,799,657 $154,499 $179,929 $23,774,227 ============ ========= ========= ============ Available-for-Sale: U.S. Treasury $ 6,303,364 $6,421 $12,298 $ 6,297,487 Obligations of other U.S. Government agencies and corporations 10,696,717 18,490 301,247 10,413,960 State and county municipals 410,456 16,715 393,741 Federal Reserve Bank Stock 446,250 446,250 Other investment securities 76,804 76,804 ------------------------------- --------------- --------------- Total Available-for-Sale $ 17,933,591 $ 24,911 $330,260 $17,628,242 ============= ========== ========= ============
The amortized cost and estimated market value of investment securities at June 30, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 11 3. Investment Securities continued: --------------------- Estimated Amortized Fair Cost Value HELD-TO-MATURITY: Due within one year $2,488,925 $2,488,402 Due after one year through five years 16,613,703 16,551,410 Due after five years through ten years 4,253,894 4,296,127 Mortgage-backed securities 443,135 438,288 -------------- ------------ Total Held-to-Maturity $23,799,657 $23,774,227 =========== ============ AVAILABLE-FOR-SALE: Due within one year $ 4,216,194 $ 4,213,582 Due after one year through five years 6,693,614 6,627,491 Due after five years through ten years 6,314,225 6,074,789 Mortgage-backed securities 186,504 189,326 Other securities 523,054 523,054 -------------- -------------- Total Available-for-Sale $17,933,591 $17,628,242 ============ =============
Proceeds from sales of available-for-sale investment securities during the six months ended June 30, 1996 and 1995 were $0 and $4,736,538 with gross recognized gains of $0 and $100 and no losses, respectively. At June 30, 1996 and 1995 the carrying values of the Federal Reserve Bank stock were $446,250 and $280,850, respectively. The fair value of the Federal Reserve Bank stock was estimated to be the same as its carrying value at both dates. 4. Net Loans: ---------- At June 30, 1996 and December 31, 1995, the loan portfolio was composed of the following: June 30, December 31, 1996 1995 ---- ---- Insurance premium financing $28,844,971 $22,409,356 Commercial loans 22,823,692 16,301,840 Installment loans 13,221,733 10,645,406 Real estate loans 24,601,510 16,281,558 Medical claims receivable 3,370,822 3,353,540 ------------ ------------ Total gross loans 92,862,728 68,991,700 Unearned interest (2,408,274) (1,889,461) Allowance for credit losses (1,295,165) (702,927) --------------- ------------- Net loans $89,159,289 $66,399,312 ----------- ----------- ----------- ----------- 12 4. Net Loans continued: ---------
Activity in the allowance for credit losses is as follows: Six Months Three Months Six Months Three Months Ended Ended Ended Ended June 30, 1996 June 30, 1996 June 30, 1995 June 30, 1995 ------------------ ----------------- --------------- ---------------- Beginning balance $702,927 $1,302,492 $697,948 $719,216 Provision for credit losses 45,000 15,000 45,000 15,000 Bank acquisition 614,700 - - - Loan charged off, net of recoveries (67,462) (22,327) (23,732) (15,588) -------- -------- -------- -------- Ending balance $1,295,165 $1,295,165 $719,216 $718,628 ========== ========== ======== ========
Loans on which the accrual of interest has been discontinued amounted to approximately $29,000 and $31,000 at June 30, 1996 and December 31, 1995, respectively. 5. Shareholders' Equity: --------------------- During the six months ended June 30, 1996, the Company completed a primary and secondary offering of its Common Stock. The offering was underwritten by Hoefer & Arnett, Incorporated, a San Francisco investment banking firm. A total of 2,388,759 shares of Common Stock were sold in the offering at a price of $3.75 per share, including 288,759 shares of Common Stock sold as an over-allotment. The proceeds from this offering were used by the Company to finance the acquisition of First National Bank, Midlothian, Texas, to retire the Company's outstanding bank debt and for general corporate purposes. 6. 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 at least the fair market value of such Common Stock on the date of grant. 13 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 changed the name of its subsidiary bank to Surety Bank, National Association ("Surety Bank"), effective January 1, 1995, in order to establish name recognition for Surety Bank and to avoid confusion with other similarly named banks. The information presented below reflects the lending and related funding business of the Company: Six months ended Six months ended June 30, June 30, 1996 1995 --------------------- --------------------- INSURANCE PREMIUM FINANCING: Average balance outstanding $ 24,350,648 $ 23,401,618 Average yield 12.3% 11.8% Interest incom $ 1,493,538 $ 1,377,723 CONSUMER, COMMERCIAL AND REAL ESTATE FINANCING: Average balance outstanding $ 55,688,400 $ 44,111,245 Average yield 11.9% 10.8% Interest incom $ 3,317,391 $ 2,385,549 COST OF FUNDS: Average balance outstanding $ 141,250,180 $ 92,943,762 Average interest rate 3.7% 3.5% Interest expens $ 2,608,014 $ 1,640,412 AVERAGE MONTHLY AMOUNTS: Total interest income $ 1,117,822 $ 755,496 Total interest expense 434,669 $ 273,402 Provision for loan losses 7,500 $ 10,000 Noninterest income 146,685 $ 119,658 Noninterest expense 647,482 $ 494,406 Includes $120,218 and $1,642,000 of short term borrowings and $6,612 and $98,842 of interest expense on short term borrowings for the six months ended June 30, 1996 and 1995, respectively. Note: Average balances are computed using daily balances throughout each period.
NOTE: AVERAGE BALANCES ARE COMPUTED USING DAILY BALANCES TROUGHOUT EACH PERIOD. 14
AVERAGE BALANCE SHEET Six months ended June 30, 1996 ------------------------------ Average Average Balance Interest Rate ------- -------- ---- ASSETS: Interest earnings assets: U.S. Treasury and agency securities and due from time $36,124,846 $ 1,232,372 6.8% Federal funds sold 24,274,608 663,631 5.5% Loans 80,039,050 4,810,929 12.0% Allowance for credit losses (1,208,008) N/A N/A -------------- ------------- ---------- Total interest earning assets 139,230,496 6,706,932 9.6% ------------- ---------- ---------- Cash and due from banks 5,178,226 Premises and equipment 3,569,661 Accrued interest receivable 1,008,706 Other assets 7,982,179 -------------- Total assets $156,969,268 LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing liabilities: Interest bearing demand deposits $34,962,900 $ 425,855 2.4% Savings deposits 8,318,316 106,168 2.6% Time deposits 77,980,832 2,069,379 5.3% Notes payable 120,218 6,612 11.0% ---------------- ------------- --------- Total interest bearing liabilities 121,382,266 2,608,014 4.3% ------------- ---------- --------- Net interest income $4,098,918 Net interest spread 5.3% Net interest income to average earning assets 5.9% ======== Noninterest bearing deposits 19,074,627 Accrued interest payable and other liabilities 729,774 ------- Total liabilities 141,186,667 Shareholders' equity 15,782,601 ---------- Total liabilities and shareholders' equity $156,969,268 ============ Interest income on the tax exempt securities does not reflect the tax equivalent yield. Loans on nonaccrual status have been included in the computation of average balances. The interest income on loans does not include loan fees. Loan fees are immaterial and are included in noninterest income.
15 SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995. - --------------------------------------------------------------------- Surety Capital Corporation ("Surety") and its wholly owned subsidiary, Surety Bank, National Association (the "Bank"), reported an increase of 73.8% in net earnings of $690,434 as compared to $397,172 during the six months ended June 30, 1996 and 1995, respectively. Earnings per share were $0.14 and $0.13 for the six months ended June 30, 1996 and 1995, respectively. The increase in earnings per share is principally attributed to Surety's loan-to-deposit ratio as well as Surety's liquidity. The loan-to-deposit ratio indicates the percentage of the Bank's interest earning assets which are invested in the loan portfolio relative to deposits. The yields earned by Surety on its loan portfolio during the six months ended June 30, 1996 and 1995 were 12.0% and 11.1%, respectively, while the average cost of funds for Surety for the same periods was 4.3% and 4.1%, respectively. The loan-to-deposit ratio as of June 30, 1996 and 1995 was 60.0% and 70.3%, respectively, and the drop is attributed to the consolidation of First National Bank, Midlothian, Texas, with and into the Bank (the "Midlothian Consolidation"). It is the goal of Surety to increase its loan production in order to improve the Bank's loan-to-deposit ratio, which will result in a transfer from the Bank's overnight federal funds sold (with a 5.5% yield for the first half of 1996) to the higher yielding loan portfolio. Total interest income increased 48.0% to $6,706,932 from $4,532,977, while total interest expense increased 59.0% to $2,608,014 from $1,640,412, resulting in a 41.7% increase in net interest income before provision for credit losses to $4,098,918 from $2,892,565. Surety's loan growth between these two periods was concentrated within the real estate lending, commercial loans, consumer loans and the insurance premium financing. Real estate lending increased by 49.8% to $24,601,510 from $16,419,348, commercial lending increased by 43.5% to $22,823,692 from $15,903,653, consumer lending increased by 28.0% to $13,221,733 from $10,330,594 and insurance premium financing increased by 10.5% to $28,844,971 from $26,106,808. This growth is attributed to the Midlothian Consolidation and management's marketing efforts. The average volume of consumer, commercial, and real estate lending increased 26.3%, with an increase in the average yields on those loans from 10.8% to 11.9%. The 4.1% increase in the average volume of insurance premium loans was accompanied by a yield of 12.3% and 11.8% on those loans for the six months ended June 30, 1996 and 1995, respectively. The average balance of interest bearing deposits increased 52.0%, while the average rate paid increased from 3.5% to 3.7%. Surety recorded a $45,000 provision for loan losses during the six months ended June 30, 1996 compared to $60,000 provision for loan losses during the six months ended June 30, 1995. As Surety's ratio of net charge-offs to average loans remained unchanged for these periods, Surety provided amounts, through charges to earnings, to maintain the allowance for loan losses at an adequate level. Management believes that all known losses in the portfolio have been recognized. Surety's noninterest income increased 22.6% to $880,112 from $717,946 for the six months ended June 30, 1996 and 1995, respectively. This increase compares to a corresponding increase in average noninterest bearing deposits of 53.5% to $19,074,627 from $12,426,651 for these same periods. Noninterest income is generated primarily from fees associated with noninterest and interest bearing accounts. Noninterest expense increased 31.0%, primarily the result of a 41.6% increase in salaries and employee benefits, a 35.6% increase in occupancy and equipment expenses, and a 15.3% increase in general and administrative expenses. The increase in salaries and benefits was due primarily to additional staffing required by the Midlothian Consolidation and the Providers Funding Corporation acquisition. Increases in general and administrative expenses relate primarily to legal and professional fees. Three Months Ended June 30, 1996 Versus Three Months Ended June 30, 1995. - ------------------------------------------------------------------------- The Company earned $446,524 as compared to $186,808 during the three months ended June 30, 1996 and 1995, respectively. Earnings per share were $0.08 and $0.06 for the three months ended June 30, 1996 and 1995, respectively. Total interest income increased 61.7% to $3,756,284 from $2,322,644, while total interest expense increased 61.5% to $1,387,378 from $859,281, resulting in a 61.9% increase in net interest income before provision for loan losses to $2,368,906 from $1,463,363. Surety recorded $15,000 provision for loan losses during the three months ended June 30, 1996 compared to $15,000 provision for credit losses during the three months ended June 30, 1995. As Surety's ratio of net charge-offs to average loans remained unchanged for these periods, Surety provided amounts, through charges to earnings, to maintain the allowance for loan losses at an adequate level. Management believes that all known losses in the portfolio have been recognized. 16 Surety's noninterest income increased 37.8% to $482,843 from $350,383 for the three months ended June 30, 1996 and 1995, respectively. Noninterest expense increased 41.0%, primarily the result of a 55.6% increase in salaries and employee benefits, a 49.4% increase in occupancy and equipment expenses, and a 19.8% increase in general and administrative expenses. The increase in salaries and benefits was due primarily to additional staffing required by the Midlothian Consolidation and the Providers Funding Corporation acquisition. Increases in general and administrative expenses relate primarily to legal and professional fees. Parent Company Only Results of Operations. - ------------------------------------------ Surety did not own the Bank prior to December 30, 1989. Since that time, Surety has served as a parent company to The Bank and has wound down Surety's own separate business activities. For the six months ended June 30, 1996, Surety had only nominal income, other than equity in net income of the Bank of approximately $7,900, and approximately $56,000 in noninterest expenses. The noninterest expenses, which decreased 63.4% from the same period in the prior year, consisted primarily of legal and professional fees incurred in the operation of Surety and in the maintenance of Surety's public company status under applicable securities laws and regulations. ALLOWANCE FOR CREDIT LOSSES Surety recorded a $45,000 provision for credit losses during the six months ended June 30, 1996 compared to a $60,000 provision during the six months ended June 30, 1995. Surety'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 Surety are likely, and credit losses in excess or deficient of the allowance for loan losses are possible. Loan losses in excess of the amount of the allowance could and probably would have a material adverse effect on the financial condition of Surety. The ratio of charge-offs, net of recoveries, to average loans during the six months ended June 30, 1996 was 0.08%. The ratio of the allowance for credit losses to total loans was 1.4% on June 30, 1996 as compared to 1.0% on June 30, 1995. The allowance for credit losses was $1,295,165 and $718,628 on June 30, 1996 and 1995, respectively. CURRENT TRENDS AND UNCERTAINTIES Economic trends and other developments could adversely affect Surety's operations. Regulatory changes may increase Surety's cost of doing business or otherwise impact it adversely. LIQUIDITY Surety's investment securities portfolio, including federal funds sold, and its cash and due from bank deposit balances serve as the primary sources of liquidity. At June 30, 1996, 15.7% of the Bank's interest bearing liabilities were in the form of time deposits of $100,000 and over. Although unlikely, if a large number of these time deposits matured at approximately the same time and were not renewed, the Bank's liquidity could be adversely affected. Currently, the maturities of the Bank's large time deposits are spread throughout the year, and the Bank monitors those maturities in an effort to minimize any adverse effect on liquidity. Over the long term, the ability of Surety to meet its cash obligations will depend substantially on its receipt of dividends from the Bank, which are limited by banking statutes and regulations. CAPITAL RESOURCES Shareholders' equity at June 30, 1996 was $18,176,412 as compared to $10,294,472 at December 31, 1995. Surety had consolidated net income of $690,434 for the six months ended June 30, 1996. 17 Under the regulatory risk-based capital framework, the Bank is expected to meet a minimum risk-based capital ratio to risk-weighted assets ratio of 8%, of which at least one-half, or 4%, must be in the form of Tier 1 (core) capital. The remaining one-half, or 4%, may be either in the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of the loan loss allowances that may be included in capital after the transition period is limited to 1.25% of risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for the Bank was 10.76% and 11.72%, respectively, at December 31, 1995 and 10.31% and 11.56%, respectively, at June 30, 1996. In addition, the Bank is expected to maintain a Tier 1 capital to total assets ratio (Tier 1 leverage ratio) of at least 3%. the Bank is currently, and expects to continue to be, in compliance with these capital requirements. While Surety believes it has sufficient financing for its working capital needs until the end of its 1996 fiscal year, there can be no assurance that Surety's present capital and financing will be sufficient to finance future operations thereafter. If Surety 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, Surety could be required to restrict its operations. The Board of Governors of the Federal Reserve System (the "Federal Reserve") has announced a policy sometimes known as the "source of strength doctrine" that requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. The Federal Reserve has interpreted this requirement to require that a bank holding company, such as Surety, stand ready to use available resources to provide adequate capital funds to their 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 endorsement 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 Surety, make its assets and resources available to a failing subsidiary bank could have an adverse effect upon Surety and its shareholders. On December 8, 1994, Surety obtained a $1,750,000, 90-day note payable to a local financial institution to finance the acquisition of First National Bank, Whitesboro, Texas. After the note matured on June 7, 1995, Surety reduced the balance of the note to $500,000, and a new note was obtained for the remaining balance of $500,000 with a maturity of January 23, 1996. On February 28, 1996, Surety repaid this debt. EFFECTS OF INFLATION A financial institution's asset and liability structure is substantially different from that of an industrial company, in that virtually all assets and liabilities are monetary in nature and, therefore, Surety's operations are not affected by inflation in a material way. Other factors, such as interest rates and liquidity, exert greater influence on a bank's performance than does inflation. The effects of inflation, however, can magnify the growth of assets in the banking industry. If significant, this would require that equity capital increase at a faster rate than would otherwise be necessary. OTHER Deposits held by the Bank are insured by the FDIC's Bank Insurance Fund ("BIF"). On August 8, 1995, the FDIC Board of Directors voted to significantly reduce the deposit insurance premiums paid by most banks but to keep existing assessment rates intact for savings associations. Under the new rate structure, which went into effect in October 1995, the best-rated institutions insured by the BIF, including the Bank, paid $0.04 cents per $100 of domestic deposits. On November 14, 1995, the FDIC announced that commencing in 1996 it would eliminate insurance deposit premiums for all but the banks in the highest level of supervisory concern. Based on the risk category applicable to the Bank, the premium paid by the Bank is presently $0.00 per $100 of domestic deposits. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings. 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 a liquidator (the "Liquidator"), the Tennessee Commissioner of Commerce and Insurance, appointed by the Chancery Court for the State of Tennessee, Twentieth Judicial District, Davidson County, to liquidate Anchorage Fire and Casualty Insurance Company ("Anchorage"). The Liquidator 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. ("United Shortline"), is the holder of a Florida judgment against MacGregor General Insurance Company, Ltd. ("MacGregor") and 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 held in accounts at the Bank under agreements with Anchorage and MacGregor. The exercise of control included the setoff of approximately $570,000, and the interpleader, in the MacGregor Case, of approximately $600,000. The Bank asserts that it had a right to exercise control over the funds, in the first instance under contractual agreements between the Bank and the respective insurance companies or the Bank and the policy holders, and in the second instance in order to protect the Bank against the possibility of inconsistent orders regarding the same funds. The Liquidator also seeks to recover funds allegedly transferred from Anchorage/MacGregor accounts at the Bank during an approximate four month period in 1993, which exceed $2.6 million in the aggregate. The Bank believes that the claims lack merit and intends to defend the cases vigorously. 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. The Annual Meeting of Stockholders of the Company was held on June 19, 1996. The stockholders voted (1) to elect eight directors of the Company; and (2) to approve the appointment of Coopers & Lybrand, L.L.P. as the independent public accountants of the Company for the fiscal year ending December 31, 1996. 19 The results of the voting for the election of Directors was as follows: Broker Name For Against Withheld Non-votes C. Jack Bean 4,016,106 0 11,500 78,823 William B. Byrd 4,025,506 0 2,100 78,823 Bobby W. Hackler 4,025,606 0 2,000 78,823 Joseph S. Hardin 4,004,606 0 23,000 78,823 G.M. Heinzlmann, III 4,025,516 0 2,090 78,823 Michael Milam 4,014,006 0 13,600 78,823 Garrett Morris 3,986,666 0 40,940 78,823 Cullen W. Turner 4,020,356 0 7,250 78,823 The results of the other votes were as follows: BROKER DESCRIPTION FOR AGAINST ABSTAIN NON-VOTES Approval of Coopers & Lybrand, 4,016,861 83,543 6,025 0 L.L.P. as the Company's independent accountants for the fiscal year ending December 31, 1996 All proposals were approved by the vote of the stockholders. 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 June 30, 1996. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 12, 1996 Surety Capital Corporation By: /s/ C. Jack Bean --------------------------------- C. Jack Bean Chairman By /s/ B.J. Curley --------------------------------- B.J. Curley Vice President, Chief Accounting Officer & Secretary 21 [ARTICLE] 9 [PERIOD-TYPE] 6-MOS [FISCAL-YEAR-END] DEC-31-1995 [PERIOD-START] JAN-01-1995 [PERIOD-END] JUN-30-1996 [CASH] 7,519,519 [INT-BEARING-DEPOSITS] 381,805 [FED-FUNDS-SOLD] 18,435,000 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 17,628,242 [INVESTMENTS-CARRYING] 23,799,657 [INVESTMENTS-MARKET] 23,774,227 [LOANS] 90,454,454 [ALLOWANCE] (1,295,165) [TOTAL-ASSETS] 170,186,569 [DEPOSITS] 150,657,760 [SHORT-TERM] 0 [LIABILITIES-OTHER] 1,352,397 [LONG-TERM] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 57,584 [OTHER-SE] 18,118,828 [TOTAL-LIABILITIES-AND-EQUITY] 170,186,569 [INTEREST-LOAN] 4,810,929 [INTEREST-INVEST] 1896,003 [INTEREST-OTHER] 0 [INTEREST-TOTAL] 6,706,932 [INTEREST-DEPOSIT] 2601,402 [INTEREST-EXPENSE] 2,608,014 [INTEREST-INCOME-NET] 4,098,918 [LOAN-LOSSES] 45,000 [SECURITIES-GAINS] 0 [EXPENSE-OTHER] 3,884,889 [INCOME-PRETAX] 1049,141 [INCOME-PRE-EXTRAORDINARY] 1049,141 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 690,434 [EPS-PRIMARY] 0.14 [EPS-DILUTED] 0.14 [YIELD-ACTUAL] .10 [LOANS-NON] 29,000 [LOANS-PAST] 87,000 [LOANS-TROUBLED] 0 [LOANS-PROBLEM] 0 [ALLOWANCE-OPEN] 702,927 [CHARGE-OFFS] 84,252 [RECOVERIES] 16,790 [ALLOWANCE-CLOSE] 1,295,165 [ALLOWANCE-DOMESTIC] 1,295,165 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 0
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