-----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, TBfRDoeKBnCX+OF6jXKt/CYkmqypZIejVneWLIUx1BM/Wjr/Y50VADXTl7YW7n/v /HZL2IGfkfVJow8xU3OESQ== 0001051622-99-000006.txt : 19990623 0001051622-99-000006.hdr.sgml : 19990623 ACCESSION NUMBER: 0001051622-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990524 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: 99633320 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 1ST 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 March 31, 1999, or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________________ to ______________. Commission file number 33-1983 SURETY CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 75-2065607 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054 (Address of principal executive offices) (817) 498-2749 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Common stock outstanding on May 14, 1999, 5,760,235 shares SURETY CAPITAL CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. - -------------------------------- -------- Item 1 Financial Statements - ------ Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 3 Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 4 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and 1998 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition - ------ and Results of Operations 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk 18 - ------ PART II - OTHER INFORMATION - ----------------------------- Item 1 Legal Proceedings 19 - ------ Item 2 Changes in Securities and Use of Proceeds 20 - ------ Item 3 Defaults Upon Senior Securities 20 - ------ Item 4 Submission of Matters to a Vote of Security Holders 20 - ------ Item 5 Other Information 20 - ------ Item 6 Exhibits and Reports on Form 8-K 20 - ------ SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS March 31, 1999 and December 31, 1998 (unaudited)
March 31, December 31, 1999 1998 ------------ ------------ Assets: Cash and due from banks $ 7,772,075 $ 9,289,897 Federal funds sold 22,509,673 24,761,752 Interest bearing deposits in financial institutions - 94,939 Investment securities: Available-for-sale 26,419,007 24,366,866 Loans 93,778,953 100,346,913 Less: Unearned interest (790,676) (916,152) Allowance for credit losses (2,245,565) (1,961,840) ------------ ------------ Net loans 90,742,712 97,468,921 Medical claims receivables, net 140,177 505,194 Premises and equipment, net 6,562,402 6,762,223 Accrued interest receivable 927,509 759,833 Other real estate and repossessed assets 329,004 205,877 Other assets 1,846,052 2,451,172 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $2,753,560 and $2,581,074 at March 31, 1999 and December 31, 1998, respectively 8,329,635 8,395,121 ------------ ------------ Total assets $165,578,246 $175,061,795 ============ ============ Liabilities and shareholders' equity: Demand deposits $ 31,591,991 $ 31,732,996 Savings, NOW and money markets 41,798,600 43,282,766 Time deposits, $100,000 and over 20,782,840 24,224,817 Other time deposits 52,592,262 55,922,822 ------------ ------------ Total deposits 146,765,693 155,163,401 Accrued interest payable and other liabilities 1,405,161 1,554,144 Convertible subordinated debt 4,350,000 4,350,000 ------------ ------------ Total liabilities 152,520,854 161,067,545 Shareholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued at March 31, 1999 and December 31, 1998 - - Common stock, $0.01 par value, 20,000,000 shares authorized, 5,840,071 shares issued at March 31, 1999 and December 31, 1998, and 5,760,235 shares outstanding at March 31, 1999 and December 31, 1998 58,401 58,401 Additional paid-in capital 17,093,786 17,093,786 Accumulated deficit (3,682,052) (2,887,548) Stock rights issuable 57,902 57,902 Treasury stock, 79,836 shares at March 31, 1999 and at December 31, 1998 carried at cost (375,443) (375,443) Accumulated other comprehensive income, net of tax (95,202) 47,152 ------------ ------------ Total shareholders' equity 13,057,392 13,994,250 ------------ ------------ Total liabilities and shareholders' equity $165,578,246 $175,061,795 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. -3- SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME for the three months ended March 31, 1999 and 1998 (unaudited) Three Months Ended March 31, March 31, 1999 1998 ----------- ----------- Interest income: Commercial and real estate loans $ 1,379,265 $ 1,184,588 SBA 219,770 - Consumer loans 69,804 273,219 Insurance premium financing 643,961 976,500 Medical claims receivable factoring 60,714 636,366 Federal funds sold 256,493 350,202 Investment securities: Taxable 306,047 352,538 Tax-exempt 33,472 36,070 Interest bearing deposits 1,081 1,432 ----------- ----------- Total interest income 2,970,607 3,810,915 ----------- ----------- Interest expense: Savings, NOW and money market 267,752 284,911 Time deposits, $100,000 and over 294,834 319,273 Other time deposits 629,853 823,364 Interest expense on notes payable 108,273 - ----------- ----------- Total interest expense 1,300,712 1,427,548 ----------- ----------- Net interest income before Provision for credit losses 1,669,895 2,383,367 ----------- ----------- Provision for credit losses on loans and for medical claims receivables losses - 25,000 ----------- ----------- Net interest income 1,669,895 2,358,367 ----------- ----------- Noninterest income 460,162 570,970 ----------- ----------- Noninterest expense: Salaries and employee benefits 1,220,228 1,196,262 Occupancy and equipment 511,207 402,308 General and administrative 1,188,193 805,440 ----------- ----------- Total noninterest expense 2,919,628 2,404,010 ----------- ----------- (Loss) income before income taxes (789,571) 525,327 Income tax expenses: Current - 192,981 ----------- ----------- Net (loss) income $ (789,571) $ 332,346 =========== =========== Basic (loss) earnings per share of common stock $ (0.14) $ 0.06 =========== =========== Weighted average shares outstanding 5,760,235 5,756,838 =========== =========== Diluted (loss) earnings per share of common stock $ (0.14) $ 0.06 =========== =========== Weighted average shares outstanding and common stock equivalents 5,760,235 5,991,740 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. -4- SURETY CAPITAL CORPORATION STATEMENT OF COMPREHENSIVE INCOME for the three months ended March 31, 1999 and 1998 (unaudited) Three Months Ended March 31, March 31, 1999 1998 ---------- ---------- Net (loss) income $(789,571) $ 332,346 Other comprehensive loss, net of income tax Unrealized holding losses (142,354) (61,531) ---------- ---------- Comprehensive (loss) income $(931,925) $ 270,815 ========== ========== Disclosure of reclassification amount: Unrealized holding losses arising during period $(142,354) $ (19,921) Less: reclassification adjustment for losses included in net income, net of income tax - (41,610) ---------- ---------- Net unrealized losses on securities $(142,354) $ (61,531) ========== ========== The accompanying notes are an integral part of the consolidated financial statements. -5- SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the three months ended March 31, 1999 and 1998 (unaudited)
March 31, --------------------------- 1999 1998 ------------ ----------- Cash flows from operating activities: Net income $ (789,571) $ 332,346 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for credit losses - 25,000 Depreciation 249,172 162,549 Amortization of intangible assets 172,486 94,501 Gain on sale of available-for-sale securities - (53,670) Loss on sale or disposal of assets - 86,278 Changes in assets and liabilities: Unearned interest on loans (125,476) 10,898 Other assets 128,566 559,971 Accrued interest payable and other liabilities (148,983) 37,247 ------------ ----------- Net cash (used in) provided by operating activities (513,806) 1,255,120 ------------ ----------- Cash flows from investing activities: Net change in loans 6,992,024 (1,376,522) Payments received on purchased medical claims receivables 437,029 4,930,539 Purchases of medical claims receivables (212,351) (4,054,258) Purchases of available-for-sale securities (7,079,214) (7,562,500) Proceeds from sales of available-for-sale securities - 3,265,331 Proceeds from maturities of available-for-sale securities 4,958,537 8,480,500 Proceeds from maturities of interest bearing deposits in financial institutions 4,939 - Purchases of bank premises and equipment (49,351) (126,960) Proceeds from sale of other real estate and repossessed assets - 60,715 ------------ ----------- Net cash provided by investing activities 5,141,613 3,616,846 ------------ ----------- Cash flows from financing activities: Net change in deposits (8,397,708) 1,587,439 Issuance of subordinated debt - 4,350,000 Exercise of stock options - 8,382 ------------ ----------- Net cash (used in) provided by financing activities (8,397,708) 5,945,821 Net (decrease) increase in cash and cash equivalents (3,769,901) 10,817,787 Beginning cash and cash equivalents 34,051,649 28,461,443 ------------ ----------- Ending cash and cash equivalents $30,281,748 $39,279,230 ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. -6- SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the three months ended March 31, 1999 and 1998 (unaudited) March 31, --------------------------- 1999 1998 ------------ ----------- Supplemental schedule of noncash investing and financing activities: Transfers of repossessed collateral to other assets - $88,417 Additions to loans to facilitate the sale of other real estate and other assets - $ 3,225 The accompanying notes are an integral part of the consolidated financial statements. -7- SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: ---------------------- Surety Capital Corporation (the "Company") is a publicly traded bank holding company located in Hurst, Texas. The Company owns a subsidiary national bank, Surety Bank, National Association, with full service office located in Converse, Hurst, Midlothian, New Braunfels, San Antonio, Schertz, Universal City, Waxahachie and Whitesboro, Texas. The Company has entered into an agreement to sell the Midlothian and Waxahachie branches. Surety Bank engages in general commercial and consumer banking and concentrates its lending activities in the area of insurance premium financing. The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of March 31, 1999, and the results of its operations and its cash flows for the indicated periods have been included. The results of operations for such interim period are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1999. 2. Earnings Per Share: ------------------- Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares and share equivalents outstanding during the period. The weighted average common shares outstanding used in computing basic earnings per common share for the quarters ended March 31, 1999 and 1998, was 5,760,235 and 5,756,838, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the quarters ended March 31, 1999 and 1998, was 5,760,235 and 5,991,740. 3. Loans, net: ----------- At March 31, 1999 and December 31, 1998 the loan portfolio was composed of the following: March 31, December 31, 1999 1998 ------------ ------------ Real estate loans $ 40,474,070 $ 41,939,108 Insurance premium financing 22,014,003 24,887,202 Commercial loans 23,278,527 23,011,395 SBA loans 5,053,646 6,259,049 Installment loans 2,958,707 4,250,159 ------------ ------------ Total gross loans 93,778,953 100,346,913 Unearned interest (790,676) (916,152) Allowance for credit losses (2,245,565) (1,961,840) ------------ ------------ Loans, net $ 90,742,712 $ 97,468,921 ============ ============ -8- 3. Loans, net continued: ---------- Activity in the allowance for credit losses on loans and medical claims receivables is as follows: Three Months Three Months Ended Ended March 31, March 31, 1999 1998 ------------ ------------ Beginning balance $2,103,025 $5,258,694 Provision for credit losses - 25,000 Net loan recoveries (chargeoffs) 156,993 (65,730) Ending balance $2,260,018 $5,217,964 Loans on which the accrual of interest has been discontinued amounted to approximately $1,652,000 and $1,398,000 at March 31, 1999 and March 31, 1998, respectively. 4. Medical Claims Receivables: --------------------------- At March 31, 1999 and December 31, 1998, the medical claims receivables portfolio was composed of the following: March 31, December 31, 1999 1998 --------- ------------ Medical claims receivables $154,630 $ 646,378 Unearned interest - - Allowance for medical claims receivables losses (14,453) (141,184) --------- ---------- Medical claims receivables, net $140,177 $ 505,194 ========= ========== During the first quarter of 1999 the medical claims factoring division was substantially discontinued. 5. Convertible Subordinated Debt: ------------------------------ Effective March 31, 1998, the Company issued $4,350,000 in 9% Convertible Subordinated Notes Due 2008 (the "Notes"), pursuant to an indenture ("Indenture") between the Company and Harris Trust and Savings Bank, Chicago, Illinois, as trustee (the "Trustee"). The Notes are general unsecured obligations of the Company. The terms of the Notes are such that they should qualify as Tier II capital under the Federal Reserve Board's regulatory capital guidelines applicable to bank holding companies. The Notes bear interest at a rate of 9% per annum until maturity. Interest on the Notes is payable semi-annually on March 31 and September 30 of each year, commencing September 30, 1998. No principal payments are due until maturity on March 31, 2008. -9- 5. Convertible Subordinated Debt continued: ----------------------------- The payment of the principal of $4,350,000, premium, if any, and interest on the Notes are subordinated in right of payment to the prior payment in full of all senior indebtedness of the Company. Upon the occurrence of certain events involving the bankruptcy, insolvency, reorganization, receivership or similar proceedings of the Company, either the Trustee or the holders of not less than 25% in aggregate principal amount of the outstanding Notes may declare the principal of the Notes, together with any accrued and unpaid interest, to be immediately due and payable. The Notes do not otherwise provide for any right of acceleration of the payment of principal thereof. Each holder of Notes has the right at any time prior to maturity of the Notes, unless previously redeemed, at the holder's option, to convert such Notes, or any portion thereof which is an integral multiple of $10,000, into shares of Common Stock of the Company, at the conversion price of $6.00 per share, subject to certain antidilutive adjustments. The Notes are not subject to mandatory redemption or sinking fund provision. The Notes are redeemable for cash at the option of the Company on at least 30 but not more than 60 days notice, in whole or in part, at any time after the date of issuance and on or before March 31, 2002 at the redemption prices set forth in the table below, plus accrued interest to the date of redemption, if the closing sales price of the Common Stock shall be at least 130% of the Conversion Price then in effect for a period of 20 consecutive trading days in the principal market in which the Common Stock is then traded. At any time after March 31, 2002 and prior to maturity, the Notes are redeemable for cash at the option of the Company, on at least 30 but not more than 60 days notice, in whole or in part, at the redemption prices set forth in the table below, plus accrued interest to the date of redemption. If Redeemed During Percentage of If Redeemed During Percentage of 12 Months Ended Principal 12 Months Ended Principal March 31, Amount March 31, Amount - ------------------ ------------- ------------------ ------------- 2000 108% 2005 103% 2001 107% 2006 102% 2002 106% 2007 101% 2003 105% 2008 100% 2004 104% The Company made the required March 31, 1999 interest payment on the Notes. After this payment of interest on the Notes, the Company as a stand-alone entity has approximately $51,000 in cash remaining for future operating expenses. See " Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity" regarding plans to meet future requirements. 6. Subsequent Events: ------------------ On April 13, 1999, the Bank entered into a Purchase and Assumption Agreement with The Citizens National Bank in Waxahachie, Waxahachie, Texas ("Citizens"), to sell to Citizens the Bank's two branches located in Waxahachie and Midlothian, Texas (the "Branches"). The purchase price for the Branches will be based upon the net value of the assets less the balance of liabilities assumed plus 11% of the deposit base and 2.5% of the loan base and the value of certain premises, equipment and other assets. The transaction will be structured as a purchase of certain assets and assumption of certain liabilities of the Branches, including deposits, by Citizens. As of March 31, 1999, the Branches had total deposits of approximately $52,883,000, total net loans of approximately $13,963,000 and fixed assets of approximately $1,557,000. The completion of the sale is subject to a number of contingencies, including regulatory approvals by applicable banking authorities and a due diligence review of the Branches by Citizens. There can be no assurance that the transaction will be completed. If consummated, the transaction is expected to close on or about June 30, 1999, upon the expiration of all applicable waiting periods following receipt of all necessary regulatory approvals. -10- 6. Subsequent Events continued: ----------------- On November 19, 1998 the Board of Directors of the Bank entered into a Formal Agreement (the "Formal Agreement") with the Office of the Comptroller of the Currency ("OCC") pursuant to which the Bank was required to achieve certain capital levels and adopt and implement certain plans, policies and strategies by March 31, 1999 and was required to achieve certain additional capital levels by December 31, 1999. Although the Bank failed to achieve the capital levels and the leverage ratio required by the Formal Agreement to be met by March 31, 1999, the OCC on April 14, 1999 granted the Bank an extension to September 30, 1999, subject to revocation based on the results of examinations by the OCC to be conducted in April and June of 1999, to meet such capital levels. -11- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company, owns all of the issued and outstanding shares of capital stock of Surety Bank, National Association, formerly Texas Bank, National Association and formerly Texas National Bank, Lufkin, Texas (the "Bank"). The information presented below reflects the lending and related funding business of the Company: Three Months Three Months Ended Ended March 31, March 31, 1999 1998 -------------- -------------- INSURANCE PREMIUM FINANCING: Average balance outstanding $ 22,846,058 $ 39,430,694 Average yield 11.3% 9.9% Interest income $ 643,961 $ 976,500 CONSUMER, COMMERCIAL AND REAL ESTATE FINANCING: Average balance outstanding $ 73,406,149 $ 59,315,803 Average yield 9.1% 9.8% Interest income $ 1,668,839 $ 1,457,807 MEDICAL CLAIMS RECEIVABLES: Average balance outstanding $ 412,410 $ 6,809,648 Average yield 58.9% 37.4% Interest income $ 60,714 $ 636,366 COST OF FUNDS: Average balance outstanding $ 152,339,121 $ 155,858,576 Average interest rate 3.1% 3.7% Interest expense $ 1,192,439 $ 1,427,548 COST OF DEBT: Average balance outstanding $ 4,350,000 $ - Average interest rate 10.0% Interest expense $ 108,273 $ - AVERAGE MONTHLY AMOUNTS: Total interest income $ 990,202 $ 1,270,305 Total interest expense $ 433,571 $ 475,849 Provision for credit losses $ - $ 120,000 Provision (credit) for medical claims receivables losses $ - $ (111,667) Noninterest income $ 153,387 $ 190,323 Noninterest expense $ 973,209 $ 801,337 Note: Average balances are computed using daily balances throughout each period. -12- AVERAGE BALANCE SHEET
Three Months Ended March 31, 1999 ------------------------------------ Average Average Balance Interest Rate ------------ ---------- ------- ASSETS: Interest earnings assets: U.S. Treasury and agency securities and due from time(1) $ 26,480,730 $ 339,519 5.1% Federal funds sold 24,763,832 257,574 4.2% Loans(2)(3) 96,252,207 2,312,800 9.6% Medical claims receivables 412,410 60,714 58.9% Allowance for credit losses and factoring (2,030,906) N/A N/A ------------ --------- ------- Total interest earning assets 145,878,273 2,970,607 8.2% ------------ --------- ------- Cash and due from banks 7,748,276 Premises and equipment 6,661,660 Accrued interest receivable 803,688 Other assets 10,015,847 ------------ Total assets $171,107,744 ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing liabilities: Interest bearing demand deposits $ 35,589,139 $ 223,625 2.5% Savings deposits 8,374,252 44,127 2.1% Time deposits 76,837,967 924,687 4.8% Convertible subordinated debt 4,350,000 108,273 10.0% ------------ --------- ------- Total interest bearing liabilities 125,151,358 1,300,712 4.3% ------------ --------- ------- Net interest income $1,669,895 ========= Net interest spread 3.9% ------- Net interest income to average earning assets 4.6% ======= Noninterest bearing deposits 30,992,858 Accrued interest payable and other liabilities 1,514,969 ------------ Total liabilities 57,659,185 Shareholders' equity 13,448,559 ------------ Total liabilities and shareholders' equity $171,107,744 ============
Three Months Ended March 31, 1999 Versus Three Months Ended March 31, 1998 Combined Results of Operations - ------------------------------ The Company and its wholly owned subsidiary, the Bank, reported a net loss of $789,571 as compared to net income of $332,346 during the three months ended March 31, 1999 and 1998, respectively. Basic and diluted earnings (loss) per share were $(0.14) and $0.06 for the three months ended March 31, 1999 and 1998, respectively. The Board of Directors and management of the Company have implemented numerous changes to return the Company to its core business of community banking and insurance premium financing. The management team has been restructured with the replacement of the Company's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Controller, and cost reductions have been made in the personnel and occupancy areas of the Bank. The medical claims factoring division has been discontinued with a net factored receivables balance at March 31, 1999 of $140,177. Stringent new controls over core operations have been implemented. Additionally, the Company has contracted to sell two of Surety Bank's branches in Midlothian and Waxahachie, Texas. The sale is expected to result in a significant non-operating gain and to bring the Bank into full compliance with the Formal Agreement capital requirements. Subject to receipt of all regulatory approvals, the Company plans to open a branch in downtown Fort Worth, Texas, with the intent of relocating its headquarters to this new location by the end of 1999. The new location will allow the Bank to fill a void left in this major market during the last two years when many of the large independent banks in Fort Worth merged with larger bank holding companies based outside the local area. These steps are expected to rebuild profitable operations and enhance shareholder value. The yields earned by the Company on its loan portfolio during the three months ended March 31, 1999 and 1998 were 9.6% and 9.9%, respectively, while the average cost of funds for the Company for the same periods was 3.1% and 3.7%, respectively. The decline in rates earned on the loan portfolio and rates paid on deposits can be attributed to lower rates in the marketplace. The average balance of loans outstanding was $96,252,207 and $98,746,297 for the three months ended March 31, 1999 and 1998, respectively. The loan-to- deposit ratio as of March 31, 1999 and 1998 was 63.4% and 65.3%, respectively. Total interest income decreased 22.1% to $2,970,607 from $3,810,915, while total interest expense decreased 8.9% to $1,300,712 from $1,427,548, resulting in a 29.9% decrease in net interest income before provision for credit losses to $1,669,895 from $2,383,367. The Company's gross loans decreased between these two periods by 8.1% to $93,778,953 from $101,997,760. Real estate lending increased by 41.2% to $40,665,977 from $28,665,977, commercial lending increased by 11.9% to $23,278,527 from $20,803,364, consumer lending decreased by 70.7% to $2,958,707 from $10,099,910, and insurance premium financing decreased by 48.1% to $22,014,003 from $42,428,509. The average volume of consumer, commercial, and real estate lending increased 23.8%, with a decrease in the average yields on those loans from 9.8% to 9.1%. The 42.1% decrease in the average volume of insurance premium financing loans was accompanied by a yield of 11.3% and 9.9% on those loans for the three months ended March 31, 1999 and 1998, respectively. The increase in yield realized on insurance premium finance loans is a result of a decision to concentrate on quality and rates charged on insurance premium finance loans. The average balance of interest bearing deposits decreased 9.4%, while the average rate paid increased from 4.3% to 3.9%. The decrease in interest bearing deposits and the subsequent decrease in rates paid on interest bearing deposits is attributed to a decision by management to eliminate those deposits with the highest rate of interest. The Company did not record a provision for loan losses during the either three months ended March 31, 1999 or the three months ended March 31, 1998. The Company's ratio of charge-offs to average loans was 0.3% for these periods and recoveries net of charge-offs for the three months ended March 31, 1999 were in the amount of $156,993 and the Company determined that no provision was necessary. The Company's ratio of allowance to total loans was 2.4% as compared to its peer group's ratio of allowance to total loans of 1.4%. Management believes that all known losses in the portfolio have been recognized. The Company's noninterest income decreased 19.4% to $460,162 from $570,970 for the three months ended March 31, 1999 and 1998, respectively. This decrease compares to a corresponding decrease in insurance premium finance loans of 48.1% for these same periods. Insurance premium finance generates noninterest income from late fees charged on its loans which become past due. -14- Noninterest expense increased 21.5%, primarily the result of a 2.0% increase in salaries and employee benefits, a 27.1% increase in occupancy and equipment expenses, and a 47.5% increase in general and administrative expenses. The increase in occupancy expense relates to the acquisition of TexStar National Bank on March 31, 1998. Increases in general and administrative expenses relate primarily to legal and professional fees. Management has made numerous changes in order to reduce expenses, including staffing reductions for an estimated annual savings in excess of $500,000 per year, reduction of lease space along with efforts to reduce legal and professional fees. Parent Company Only Results of Operations - ----------------------------------------- The Company primarily serves as a parent company to Surety Bank and has nominal separate business activities. For the three months ended March 31, 1999, the Company had no interest income, interest expense on the Notes of approximately $108,000 and noninterest expense of approximately $31,000. The noninterest expenses, which decreased 18% from the same period in the prior year, consisted primarily of legal and professional fees incurred in the operation of the Company and in the maintenance of the Company's public company status under applicable securities laws and regulations. Allowance for Credit Losses The Company did not record a provision for credit losses during either the three months ended March 31, 1999 or the three months ended March 31, 1998. The Company's provision for credit losses is based upon quarterly loan portfolio reviews by management. The purpose of the reviews is to assess loan quality, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the market economy. Management periodically reviews the estimates used in determining the allowance for credit losses and adequately provides for the changes as needed. Credit losses in excess of the amount of the allowance could and probably would have a material adverse effect on the financial condition of the Company. The Company had a net recovery for the three months ended March 31, 1999 of $156,993. The Company's ratio of charge-offs to average loans was 0.3% and 0.2% for the three months ended March 31, 1999 and 1998 and the Company determined that no provision was necessary. The Company's ratio of allowance to total loans was 2.4% as compared to its peer group's ratio of allowance to total loans of 1.4%. The allowance for credit losses was $2,245,565 on March 31, 1999. Current Trends and Uncertainties Economic trends and other developments could adversely affect the Company's operations. Regulatory changes may increase the Company's cost of doing business or otherwise impact it adversely. Liquidity The Company's investment securities portfolio, including federal funds sold, and its cash and due from bank deposit balances serve as the primary sources of liquidity. At March 31, 1999, 14.1% of Surety Bank's interest bearing liabilities were in the form of time deposits of $100,000 and over. Although unlikely, if a large number of these time deposits matured at approximately the same time and were not renewed, Surety Bank's liquidity could be adversely affected. Currently, the maturities of Surety Bank's large time deposits are spread throughout the year, and Surety Bank monitors those maturities in an effort to minimize any adverse effect on liquidity. The ability of the Company to meet its cash obligations depends almost entirely on its receipt of dividends from Surety Bank, which are limited by banking statutes and regulations, and the Formal Agreement. See discussion under "Formal Agreement with the OCC" below. At March 31, 1999 the Company as a stand-alone entity had approximately $51,000 in cash for future operating expenses. The Company, as the holding company for the Bank, does not have material working capital needs separate from those of the Bank, other than the payment of interest on the Notes. The Bank is currently precluded from declaring and paying any dividends to the Company under the Formal Agreement. The Company will attempt to secure a loan to meet its cash flow needs for the twelve months ended March 31, 2000, which includes servicing the interest payment on the Notes. The provisions of the Notes do not allow holders to -15- force an interest payment. After March 31, 2000, the Bank expects to be permitted to make dividends to the Company in an amount necessary to service the interest payments on the Notes and for general corporate purposes. There can be no assurance that the Company's present capital and financing will be sufficient to finance future operations thereafter. If the Company sells additional shares of common and/or preferred stock to raise funds, the terms and conditions of the issuances and any dilutive effect may have an adverse impact on the existing stockholders. If additional financing becomes necessary, there can be no assurance that the financing can be obtained on satisfactory terms. In this event, the Company could be required to restrict its operations. Capital Resources Shareholders' equity at March 31, 1999 was $13,057,392 as compared to $13,994,250 at December 31, 1998. The Company had consolidated net loss of $789,571 for the three months ended March 31, 1999. Exclusive of the Formal Agreement, Surety Bank is expected to meet a minimum risk-based capital ratio to risk-weighted assets ratio of 8%, of which at least one-half, or 4%, must be in the form of Tier 1 (core) capital. The remaining one-half, or 4%, may be either in the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of the loan loss allowances that may be included in capital after the transition period is limited to 1.25% of risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for Surety Bank was 8.98% and 10.24%, respectively, at December 31, 1998 and 9.12% and 10.38%, respectively, at March 31, 1999. In addition, Surety Bank is expected to maintain a Tier 1 capital to total assets ratio (Tier 1 leverage ratio) of at least 3%. Surety Bank is currently, and expects to continue to be, in compliance with these capital requirements. The Company however, is subject to additional capital requirements set forth in the Formal Agreement. See discussion under "Formal Agreement with the OCC" below. The Board of Governors of the Federal Reserve System (the "Federal Reserve") has announced a policy sometimes known as the "source of strength doctrine" that requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. The Federal Reserve has interpreted this requirement to require that a bank holding company, such as the Company, stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. The Federal Reserve has stated that it would generally view a failure to assist a troubled or failing subsidiary bank in these circumstances as an unsound or unsafe banking practice, a violation of Regulation Y, or both, justifying a cease and desist order or other enforcement action, particularly if appropriate resources are available to the bank holding company on a reasonable basis. The requirement that a bank holding company, such as the Company, make its assets and resources available to a failing subsidiary bank could have an adverse effect upon the Company and its stockholders. Formal Agreement with the OCC On November 19, 1998 the Board of Directors of the Bank entered into the Formal Agreement with the OCC pursuant to which the Bank was required to achieve certain capital levels and adopt and implement certain plans, policies and strategies by March 31, 1999 and is required to achieve certain additional capital levels by December 31, 1999. Under the Formal Agreement, the Bank was required to achieve by March 31, 1999 total risk-based capital at least equal to 12% of risk-weighted assets and Tier I leverage capital at least equal to 7.5% of adjusted total assets, and is required to achieve by December 31, 1999 total risk-based capital at least equal to 14% of risk-weighted assets. At March 31, 1999 the Bank had total risk- based capital of 10.38% of risk weighted assets and Tier I leverage capital of 9.12% of adjusted total assets. Although the Bank failed to achieve the capital levels and the leverage ratio required by the Formal Agreement to be met by March 31, 1999, the OCC granted the Company an extension to September 30, 1999, subject to revocation based on the results of examinations by the OCC to be conducted in April and June of 1999, to meet such capital levels. Management expects to achieve all of the Formal Agreement capital requirements upon completion of the branch sales of Midlothian and Waxahachie, which is expected to close on or about June 30, 1999. -16- The Formal Agreement establishes higher capital requirements than those applicable under OCC regulations for an "adequately" and "well capitalized" bank. The table below sets forth the capital requirements for the Bank under OCC regulations, under the Formal Agreement, in addition to the Bank's actual capital ratios at March 31, 1999 and 1998.
Actual Formal Agreement OCC Regulations -------------------- --------------------------- ------------------------- Capital Capital Ratios Ratios March 31, March 31, September 30, December 31, Adequately Well 1999 1998 1999(1) 1999 Capitalized Capitalized --------- --------- ------------- ------------ ----------- ----------- Leverage 5.49% 6.26% 7.50% 7.50% 4.00% 5.00% Risk-Based Capital: Tier I 9.12% 13.32% 6.00% 6.00% 4.00% 6.00% Tier I & II 10.38% 14.57% 12.00% 14.00% 8.00% 10.00%
(1) As extended from March 31, 1999. The Bank's capital amounts and ratios are presented in the table for the years ended March 31, 1999 and 1998. March 31, --------------------------- 1999 1998 ----------- ------------ Tier I risk-based capital $ 8,702,000 $ 14,736,000 Tier II risk-based capital 1,206,000 1,383,000 ----------- ------------ Total capital $ 9,908,000 $ 16,119,000 =========== ============ Risk-weighted assets $96,517,000 $110,608,000 Additionally, pursuant to the Formal Agreement, the Board of Directors was required to develop a three year capital plan program, a plan to enhance its management information systems, a three year strategic plan establishing objectives for the Bank's earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in the volume of non-performing assets, product line development and market segments which the Bank intends to promote or develop, together with strategies to achieve those objectives, a revised loan policy, and a loan classification policy, each for submission to, and approval by, the OCC. All of these recommended enhancements have been implemented and the three year capital plan program, the plan to enhance the Bank's management information systems and the three year strategic plan have been submitted to the OCC for approval. The OCC has extensive enforcement authority over the operations of all national banks, including the Bank. If the OCC fails to grant to the Bank the extension, the OCC may under certain circumstances assess civil monetary damages against the Bank and the Directors of the Bank, issue cease-and-desist or removal orders and initiate injunctive actions. Additionally, the OCC may impose a number of corrective measures on the Bank, including (1) the imposition of restrictions on certain activities involving asset growth, acquisitions, branch establishment, expansion into new lines of business, declaration and payment of dividends, and transactions with affiliates, (2) the imposition of certain additional mandated capital raising activities, and (3) as a last resort, the appointment of a receiver or conservator of the Bank. The Formal Agreement also prohibits the Board of Directors from declaring or paying any dividends unless the Bank (1) is in compliance with 12 U.S.C. section 56 and 60, its approved capital program provided for in the Formal Agreement, and the capital levels set forth in the Formal Agreement, as more fully described above, and (2) has obtained the prior written approval of the OCC. -17- Impact of Inflation, Changing Prices and Monetary Policies The financial statements and related financial data concerning the Company in this report have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of Surety Bank, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policy such as seeking to (1) curb inflation and combat recession by its open market operations in United States government securities, (2) control the discount rate applicable to borrowing by banks and (3) establish reserve requirements against bank deposits. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and affect the interest rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in federal monetary and fiscal policies on Surety Bank and its results of operations are not predictable. Item 3. Qualitative and Quantitative Disclosure About Market Risk In the normal course of conducting business activities, the Company is exposed to market risk, principally interest rate risk, through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments. Interest rate risk is managed by management and the board of directors of the Company. No material changes in market risk strategy occurred during the current period. A detailed discussion of market risk is provided in the Company's Annual Report on Form 10-K for the period ended December 31, 1998. -18- PART II - OTHER INFORMATION Item 1. Legal Proceedings Surety Bank, National Association (the "Bank") is a defendant in two related cases: Tennessee, ex.rel., Douglas Sizemore, Commissioner of Commerce and Insurance for the State of Tennessee, et al. vs. Surety Bank, N.A., filed in June 1995 in the Federal District Court for the Northern District of Texas, Dallas, Division (the "Anchorage Case"), and United Shortline, Inc. Assurance Services, N.A. et al. vs. MacGregor General Insurance Company, Ltd., et al., now pending in the 141st Judicial District Court of Tarrant County, Texas (the "MacGregor Case"). The plaintiff in the Anchorage case is the Tennessee Commissioner of Commerce and Insurance ("Tennessee"), appointed by the Chancery Court for the State of Tennessee, Twentieth Judicial District, Davidson County, to liquidate Anchorage Fire and Casualty Insurance Company ("Anchorage"), including Anchorage deposits at the Bank. Tennessee sought to recover compensatory and punitive damages on various alleged causes of action, including violation of orders issued by a Tennessee court, fraudulent and preferential transfers, common law conversion, fraud, negligence, and bad faith, all of which are based on the same underlying facts and alleged course of conduct. Both the Anchorage case as well as the MacGregor case arise out of the Bank's alleged exercise of control over funds, representing the Bank's collateral, held in accounts at the Bank under agreements with Anchorage and MacGregor. The Bank asserts that it had a right to exercise control over its collateral under contractual agreements between the Bank and the respective insurance companies or the Bank and the policy holders. The Bank also contends that it had a right to exercise control over its collateral to protect itself against the possibility of inconsistent orders regarding the same funds. Tennessee seeks to recover funds allegedly transferred in and out of Anchorage/MacGregor accounts at the Bank during an approximate four month period in 1993. Tennessee also claims that the Bank allegedly transferred funds in and out of Anchorage accounts after receiving notice of a court order prohibiting such transfer. Tennessee is claiming damages in excess of $2,000,000. The Anchorage case was called to trial in July 1998, where, immediately before trial was to begin, the court granted summary judgment in favor of the Bank and entered a take nothing judgment against the Plaintiff. Tennessee has since appealed the trial court's summary judgment to the Fifth Circuit Court of Appeals, where that appeal is pending. The Plaintiff in the MacGregor case, United Shortline, Inc. Assurance Services, N.A. ("Shortline"), purports to be the holder of a Florida judgment against MacGregor General Insurance Company, Ltd. ("MacGregor"), who seeks to recover funds allegedly belonging to MacGregor which were held by the Bank. When the MacGregor case was initially filed, Shortline sought a restraining order against the Bank concerning the MacGregor funds. When the Bank received notice of competing claims to some or all of those funds by Tennessee, the Bank intervened and interpled approximately $600,000 into the court's registry. Shortline now seeks, inter alia, damages against the Bank from an alleged wrongful offset wherein the Bank allegedly exercised control over the MacGregor funds at the Bank pursuant to agreements with MacGregor. The Bank moved for and obtained a summary judgment that its intervention and interpleader of funds was proper. Shortline also sought and obtained a summary judgment from the trial court that the funds interpled by the Bank into the court's registry belonged to Shortline. Tennessee appealed the summary judgment to the Fort Worth Court of Appeals. The Fort Worth Court of Appeals affirmed the trial court's ruling that the Bank's intervention and interpleader was proper but reversed the trial court's ruling that the funds in the court belonged to Shortline. Tennessee then appealed that ruling to the Texas Supreme Court which affirmed the judgment of the Court of Appeals. This case has recently been remanded to the trial court for disposition of the remaining issues. The Bank believes both of these cases lack merit and will continue to defend them vigorously. The final outcome of both of these cases is uncertain at this time. The Bank is also a Defendant in Dr. Christian J. Renna, et al. vs. Barry Carroll, et al., filed in April 1997 in the 348th Judicial District Court of Tarrant County, Texas (the "Renna Case"). Christian J. Renna, D.O. ("Renna") claims that his contract billing and collection manager, James Sharbrough, signed Renna's name to an agreement with the Bank and begin submitting medical claims belonging to Renna and his medical practice to the Bank for factoring. Renna claims that these alleged activities by his billing/collection manager, who was also Renna's brother-in-law at the time, were without -19- his authority. The plaintiffs in the Renna case alleged that damages were suffered as a result of failing to receive advances for collections on the accounts allegedly factored by the Bank. The plaintiffs also contend that they have been further damaged as a result of factoring fees paid to factor the accounts. The plaintiffs assert that they have suffered actual damages of approximately $1,500,000, consisting of the face amount of the receivables, lost profits/income and other consequential damages. Exemplary damages and attorneys fees in an unspecified amount are also sought. The case is currently set for trial to begin on August 2, 1999. The Bank believes that the Renna case lacks merit and will continue to defend it vigorously. The final outcome of this case is uncertain at this time. The Company is a defendant in various other legal proceedings arising in connection with its ordinary course of business. In the opinion of management, the financial position of the Company will not be materially affected by the final outcome of these legal proceedings. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule* -------------------- * Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1999. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 24, 1999 SURETY CAPITAL CORPORATION By: /s/ Robert L. Bintliff Robert L. Bintliff, Chief Executive Officer and Chief Financial Officer -21- EX-27 2 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 7,772,075 0 22,509,673 0 26,419,007 0 0 92,988,277 (2,245,565) 165,578,246 146,765,693 0 1,405,161 4,350,000 0 0 58,401 12,998,991 165,578,246 2,373,514 340,600 0 2,970,607 1,192,439 1,300,712 1,669,895 0 0 2,919,628 (789,571) (789,571) 0 0 (789,571) (0.14) (0.14) 8.04 1,652,000 0 0 0 2,103,025 307,957 199,114 2,245,565 2,000,573 0 244,992
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