-----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, LDK6ifrXZDjPz7std+uNtUyu68dEondkWhWZ7llfyhH1DH4iASuhlrNUa8no96Qn Cwryyyh4qF1XRNzW1PfZ7Q== 0001051622-99-000026.txt : 19990823 0001051622-99-000026.hdr.sgml : 19990823 ACCESSION NUMBER: 0001051622-99-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990820 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: 99696419 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 2ND 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 June 30, 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 August 12, 1999, 5,760,235 share SURETY CAPITAL CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. - -------------------------------- -------- Item 1 Financial Statements Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the Six Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Operations for the Three Months Ended June 30, 1999 and 1998 5 Statement of Comprehensive Income (Loss) for the Six Months Ended June 30, 1999 and 1998 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19 PART II - OTHER INFORMATION - ----------------------------- Item 1 Legal Proceedings 20 Item 2 Changes in Securities and Use of Proceeds 21 Item 3 Defaults Upon Senior Securities 21 Item 4 Submission of Matters to a Vote of Security Holders 21 Item 5 Other Information 21 Item 6 Exhibits and Reports on Form 8-K 22 2 SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 1999 and December 31, 1998 (unaudited)
June 30, December 31, 1999 1998 ------------ ------------ Assets: Cash and due from banks $ 7,849,265 $ 9,289,897 Federal funds sold 27,374,339 24,761,752 Interest bearing deposits in financial institutions - 94,939 Investment securities: Available-for-sale 18,688,649 24,366,866 Loans 77,444,834 100,852,107 Less: Unearned interest (698,698) (916,152) Allowance for credit losses (1,813,608) (1,961,840) ------------ ------------ Net loans 74,932,528 97,974,115 Premises and equipment, net 4,890,126 6,762,223 Accrued interest receivable 614,052 759,833 Other real estate and repossessed assets 157,088 205,877 Other assets 1,743,821 2,451,172 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $984,223 and $2,581,074 at June 30, 1999 and December 31, 1998, respectively 5,683,005 8,395,121 ------------ ------------ Total assets $141,932,873 $175,061,795 ============ ============ Liabilities and shareholders' equity: Demand deposits $ 21,629,889 $ 31,732,996 Savings, NOW and money markets 23,854,117 43,282,766 Time deposits, $100,000 and over 13,386,088 24,224,817 Other time deposits 37,681,867 55,922,822 ------------ ------------ Total deposits 96,551,961 155,163,401 Due to purchaser on branch sale 24,993,724 - Accrued interest payable and other liabilities 1,858,926 1,554,144 Convertible subordinated debt 4,350,000 4,350,000 ------------ ------------ Total liabilities 127,754,611 161,067,545 ------------ ------------ Shareholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued at June 30, 1999 and December 31, 1998 - Common stock, $0.01 par value, 20,000,000 shares authorized, 5,840,071 shares issued at June 30, 1999 and December 31, 1998, and 5,760,235 shares outstanding at June 30, 1999 and December 31, 1998, respectively 58,401 58,401 Additional paid-in capital 17,093,787 17,093,786 Accumulated deficit (2,292,594) (2,887,548) Stock rights issuable 57,902 57,902 Treasury stock, 79,836 shares at June 30, 1999 and at December 31, 1998, carried at cost (375,443) (375,443) Accumulated other comprehensive (loss) income, net of tax (363,791) 47,152 ------------ ------------ Total shareholders' equity 14,178,262 13,994,250 ------------ ------------ Total liabilities and shareholders' equity $141,932,873 $175,061,795 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS for the six months ended June 30, 1999 and 1998 (unaudited)
Six Months Ended June 30, June 30, 1999 1998 ----------- ----------- Interest income: Commercial $ 892,131 $ 1,539,561 Real Estate 2,214,641 1,734,416 Consumer loans 78,499 602,233 Insurance premium financing 1,172,698 1,935,262 Medical claims receivable factoring 63,928 823,721 Federal funds sold 556,768 799,355 Investment securities: Taxable 639,763 946,524 Tax-exempt 66,016 128,327 Interest bearing deposits 1,081 2,903 ----------- ----------- Total interest income 5,685,525 8,512,302 ----------- ----------- Interest expense: Savings, NOW and money market 529,846 696,860 Time deposits, $100,000 and over 531,918 835,996 Other time deposits 1,209,014 1,899,254 Interest expense on notes payable 216,545 100,253 ----------- ----------- Total interest expense 2,487,323 3,532,363 ----------- ----------- Net interest income before provision for credit losses 3,198,202 4,979,939 ----------- ----------- Provision for credit losses on loans and for medical claims receivables losses - 1,638,119 ----------- ----------- Net interest income 3,198,202 3,341,820 ----------- ----------- Non interest income: Non recurring gain - Sale of branches 2,788,777 - Other 876,187 1,219,239 ----------- ----------- Total non interest income 3,664,964 1,219,239 ----------- ----------- Non interest expense: Salaries and employee benefits 2,334,342 2,691,256 Occupancy and equipment 1,138,117 945,720 General and administrative 2,439,411 1,631,576 ----------- ----------- Total non interest expense 5,911,870 5,268,552 ----------- ----------- Income (Loss) before income taxes 951,296 (707,493) Income tax expense (benefit) 356,342 (255,161) ----------- ----------- Net income (loss) $ 594,954 $ (452,332) =========== =========== Basic earnings (loss) per share of common stock $ .10 $ (0.08) =========== =========== Weighted average shares outstanding 5,760,235 5,758,931 =========== =========== Diluted earnings (loss) per share of common stock $ .10 $ (0.08) =========== =========== Weighted average shares outstanding and common stock equivalents 5,880,539 5,999,426 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 4 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS for the three months ended June 30, 1999 and 1998 (unaudited) Three Months Ended June 30, June 30, 1999 1998 ----------- ----------- Interest income: Commercial $ 416,606 $ 993,195 Real Estate Loans 1,091,131 1,096,194 Consumer loans 8,695 329,014 Insurance premium financing 528,737 958,762 Medical claims receivable factoring 3,214 285,154 Federal funds sold 300,275 449,153 Investment securities: Taxable 333,716 593,986 Tax-exempt 32,544 92,257 Interest bearing deposits - 1,471 ----------- ----------- Total interest income 2,714,918 4,799,186 ----------- ----------- Interest expense: Savings, NOW and money market 262,094 411,949 Time deposits, $100,000 and over 237,084 516,723 Other time deposits 579,161 1,075,890 Other interest expense 108,272 100,253 ----------- ----------- Total interest expense 1,186,611 2,104,815 ----------- ----------- Net interest income before provision for credit losses 1,528,307 2,694,371 ----------- ----------- Provision for credit losses on loans and medical claims receivables losses - 1,710,918 ----------- ----------- Net interest income 1,528,307 983,453 ----------- ----------- Non interest income: Non recurring gain - Sale of branches 2,788,777 - Other 416,025 648,269 ----------- ----------- Total non interest income 3,204,802 648,269 ----------- ----------- Non interest expense: Salaries and employee benefits 1,114,114 1,494,994 Occupancy and equipment 626,910 543,412 General and administrative 1,251,218 826,136 ----------- ----------- Total non interest expense 2,992,242 2,864,542 ----------- ----------- Income (Loss) before income taxes 1,740,867 (1,232,820) Income tax expense (benefit) 356,342 (448,142) ----------- ----------- Net income (loss) $ 1,384,525 $ (784,678) =========== =========== Basic earnings (loss) per share of common stock $ .24 $ (0.14) =========== =========== Weighted average shares outstanding 5,760,235 5,760,502 =========== =========== Diluted earnings (loss) per share of common stock $ .23 $ (0.14) =========== =========== Weighted average shares outstanding and common stock equivalents $ 5,999,521 6,007,112 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 5 SURETY CAPITAL CORPORATION STATEMENT OF COMPREHENSIVE INCOME (LOSS) for the six months ended June 30, 1999 and 1998 (unaudited) Six Months Ended June 30, June 30, 1999 1998 ---------- ---------- Net income (loss) $ 594,954 $(452,332) Other comprehensive loss, net of income tax: Unrealized holding losses on available for sale securities (410,943) (69,555) ---------- ---------- Comprehensive income (loss) $ 184,011 $(521,887) ---------- ---------- Disclosure of reclassification amount: Unrealized holding losses arising during period $(382,267) $ (35,206) Less: reclassification adjustment for losses included in net income, net of income tax (28,676) (34,349) ---------- ---------- Net unrealized losses on securities $(410,943) $ (69,555) ---------- ---------- The accompanying notes are an integral part of the consolidated financial statements. 6 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1999 and 1998 (unaudited)
June 30, 1999 1998 ----------- ------------ Cash flows from operating activities: Net (loss) income $ 594,954 $ (452,332) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for credit losses - 1,638,119 Depreciation 465,818 323,229 Amortization of intangible assets 347,989 172,970 Loss (gain) on sale of available-for-sale securities 44,806 (53,670) Loss on sale or disposal of assets - 86,278 Gain on sale of branches (2,788,777) - Changes in assets and liabilities: Unearned interest on loans (217,454) (46,168) Other assets 796,935 (211,447) Accrued interest payable and other liabilities 27,518 (326,912) ----------- ------------ Net cash (used in) provided by operating activities (728,211) 1,130,067 ----------- ------------ Cash flows from investing activities: Net change in loans 9,852,868 2,073,579 Payments received on purchased medical claims receivables 437,029 9,081,806 Purchases of medical claims receivables (212,351) (7,109,061) Purchases of available-for-sale securities (11,465,028) (12,479,949) Proceeds from sales of available-for-sale securities 3,961,647 4,256,197 Proceeds from maturities of available-for-sale securities 12,761,929 13,873,260 Proceeds from maturities of interest bearing deposits in financial institutions 94,939 (228,117) Purchases of bank premises and equipment (137,116) 60,715 Net cash acquired through acquisitions - 2,956,010 ----------- ------------ Net cash provided by investing activities 15,293,917 12,484,440 ----------- ------------ Cash flows from financing activities: Net change in deposits (13,393,751) 206,175 Issuance of subordinated debt - 4,350,000 Purchase of treasury stock - (82,245) Exercise of stock options - 163,858 ----------- ------------ Net cash (used in) provided by financing activities (13,393,751) 4,637,788 ----------- ------------ Net increase in cash and cash equivalents 1,171,955 18,252,295 Beginning cash and cash equivalents 34,051,649 28,461,443 ----------- ------------ Ending cash and cash equivalents $35,223,604 $ 46,713,738 =========== ============
The accompanying notes are an integral part of the consolidated financial statements. 7 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1999 and 1998 (unaudited) June 30 ------------------------- 1999 1998 -------- ------------ Supplemental schedule of noncash investing and financing activities: Transfers of repossessed collateral to other assets $ - $ 147,393 Additions to loans to facilitate the sale of other real estate and other assets $ - $ 3,225 Net cash acquired through acquisitions: Investment securities $ - $ 19,261,707 Net loans - 33,839,277 Premises and equipment, net - 3,785,737 Other assets - 1,099,583 Excess of cost over fair value of net assets acquired/(sold) - 4,505,197 Deposits - (64,761,640) Other liabilities - (685,871) -------- ------------ Net cash acquired through acquisitions/ disposition $ - $ (2,956,010) ======== ============ The accompanying notes are an integral part of the consolidated financial statements. 8 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 (the "Bank"), with full service offices located in Converse, Hurst, New Braunfels, San Antonio, Schertz, Universal City and Whitesboro, Texas. The 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 management 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 Annual Report on Form 10-K for the period ended December 31, 1998. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary to present fairly the financial position of the Company as of June 30, 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. Sale of Midlothian and Waxahachie: --------------------------------- Effective as of June 30, 1999, Surety completed the sale to The Citizens National Bank in Waxahachie ("Citizens National Bank"), Waxahachie, Texas, of the two Ellis County branches of the Bank located in Midlothian and Waxahachie, Texas. In connection with the closing, the Bank sold loans totaling approximately $13,117,000, real property, furniture and equipment totaling approximately $1,543,000, and cash and other assets totaling approximately $413,000 and Citizens National Bank assumed deposits and other liabilities totaling approximately $45,368,000. After giving effect to a deposit premium of 11% on the deposits assumed totaling approximately $4,974,000, and a loan premium of 2.5% of the loans sold totaling approximately $328,000, the Bank paid approximately $24,994,000 in cash to Citizens National Bank in July as consideration for the net deposit liabilities assumed by Citizens National Bank. Surety recorded a gain on the sale of approximately $2,789,000 after goodwill related to the branches and other expenses were netted. 3. Earnings Per Share: ------------------ Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period. The weighted average common shares outstanding used in computing basic earnings per common share for the quarters ended June 30, 1999 and 1998, was 5,760,235 and 5,760,502, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the quarters ended June 30, 1999 and 1998, was 5,999,521 and 6,007,112, respectively. Diluted earnings per share included the effect of potential common shares resulting from the assumed exercise of outstanding stock options with exercise prices less than the market value of the common shares at statement date. 9 4. Loans, net: ---------- At June 30, 1999 and December 31, 1998 the loan portfolio was composed of the following: June 30, December 31, 1999 1998 ------------ ------------ Real estate loans $ 30,535,751 $ 41,939,108 Insurance premium financing 22,075,958 24,887,202 Commercial loans 17,334,517 23,516,589 SBA loans 4,993,123 6,259,049 Installment loans, net 2,505,485 4,250,159 ------------ ------------ Total gross loans 77,444,834 100,852,107 Unearned interest (698,698) (916,152) Allowance for credit losses (1,813,608) (1,961,840) ------------ ------------ Loans, net $ 74,932,528 $ 97,974,115 ============ ============ Activity in the allowance for credit losses is as follows:
Six Three Six Three Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1999 1999 1998 1998 ---------- ---------- ----------- ----------- Beginning balance $1,961,840 $2,245,565 $ 950,809 $ 1,170,928 Provision for credit losses - - 1,611,875 1,251,875 Bank (disposition)acquisition (167,000) (167,000) 820,625 820,625 Loans charged off, net of Recoveries $ 18,768 $ (264,957) (1,908,589) (1,768,708) ---------- ---------- ----------- ----------- Ending balance $1,813,608 $1,813,608 $ 1,474,720 $ 1,474,720 ========== ========== =========== ===========
Loans on which the accrual of interest has been discontinued amounted to approximately $835,000 and $1,328,000 at June 30, 1999 and June 30, 1998, respectively. 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. 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 10 5. Convertible Subordinated Debt continued: --------------------------------------- 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. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity" regarding plans to meet future requirements. 6. Formal Agreement: ---------------- 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 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. As a result of the gains from the sale of the two Ellis County branches in June 1999, the Bank is in compliance with the capital level requirements of the Formal Agreement. 11 7. Business Segments: ----------------- The accounting policies of the segments are the same as those described above in Note 1. The Company evaluates segment performance based on net interest income, or profit or loss from operations before income taxes, not including nonrecurring gains and losses. These schedules are for the six month periods ended June 30, 1999 and 1998.
Insurance Medical Claims Banking Premium Receivables Community Financing Factoring Total ------------ ----------- ----------- ------------ 1999 Net interest income before provision for loan losses $ 2,356,535 $ 859,361 $ (17,694) $ 3,198,202 Provision for credit losses - - - - Non interest income 3,371,422 293,542 - 3,664,964 Non interest expense 4,871,068 810,502 230,300 5,911,870 Net income (loss) 500,546 342,402 (247,994) 594,954 Loans, gross 54,644,729 22,452,364 - 77,097,093 Medical claims receivables, gross - - 347,741 347,741 Total assets 118,775,891 22,750,053 406,929 141,932,873 1998 Net interest income before provision for credit losses 4,121,647 457,949 400,343 4,979,939 Provision for credit losses (382,128) 1,191,666 828,581 1,638,119 Non interest income 744,220 475,019 - 1,219,239 Non interest expense 4,149,673 1,066,779 52,100 5,268,552 Net income (loss) 1,298,824 (1,221,215) (529,941) (452,332) Loans, gross 88,490,539 39,248,394 - 127,738,933 Medical claims receivables, gross - - 1,673,300 1,673,300 Total assets $199,510,774 $39,499,618 $1,760,290 $240,770,682
8. Contingencies: ------------- See "Part II. Other Information - Item 1. Legal Proceedings." 12 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 the Bank. The information presented below reflects the lending and related funding business of the Company: Six Months Six Months Ended Ended June 30, June 30, 1999 1998 ------------- ------------- INSURANCE PREMIUM FINANCING: Average balance outstanding $ 22,440,089 $ 40,800,337 Average yield 10.5% 9.5% Interest income $ 1,172,698 $ 1,935,262 CONSUMER, COMMERCIAL AND REAL ESTATE FINANCING: Average balance outstanding $ 70,895,799 $ 74,678,382 Average yield 9.0% 10.4% Interest income $ 3,185,271 $ 3,876,210 MEDICAL CLAIMS RECEIVABLES: Average balance outstanding $ 225,843 $ 6,369,385 Average yield 56.6% 25.9% Interest income $ 63,928 $ 823,721 COST OF FUNDS: Average balance outstanding $ 146,549,840 $ 189,420,608 Average interest rate 3.1% 3.6% Interest expense $ 2,270,778 $ 3,432,110 COST OF DEBT: Average balance outstanding $ 4,350,000 $ 2,529,730 Average interest rate 10.0% 7.90% Interest expense $ 216,545 $ 100,253 AVERAGE MONTHLY AMOUNTS: Total interest income $ 947,588 $ 1,496,607 Total interest expense $ 414,554 $ 588,727 Provision for credit losses $ - $ 288,487 Provision for medical claims receivables losses $ - $ 62,423 Noninterest income $ 610,827 $ 203,207 Noninterest expense $ 985,312 $ 858,520 Note: Average balances are computed using daily balances throughout each period. 13 AVERAGE BALANCE SHEET
Six Months Ended June 30, 1999 ------------------------------------ Average Average Balance Interest Rate ------------ ---------- ------- ASSETS: Interest earnings assets: U.S. Treasury and agency securities and due from time(1) $ 25,379,785 $ 706,860 5.6% Federal funds sold 24,139,274 556,768 4.6% Loans(2)(3) 93,561,731 4,421,897 9.5% Allowance for credit losses and factoring (2,166,195) N/A N/A ------------ ---------- ------- Total interest earning assets 140,914,595 5,685,525 8.1% ------------ ---------- ------- Cash and due from banks 7,546,762 Premises and equipment 6,518,362 Accrued interest receivable 811,740 Other assets 10,223,826 ------------ Total assets $166,015,285 ============ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest bearing liabilities: Interest bearing demand deposits $ 33,815,090 $ 435,826 2.6% Savings deposits 8,218,917 94,020 2.3% Time deposits 73,661,046 1,740,932 4.7% Convertible subordinated debt 4,350,000 216,545 10.0% ------------ ---------- ------- Total interest bearing liabilities 120,045,053 2,487,323 4.1% ------------ ---------- ------- Net interest income $3,198,202 ========== Net interest spread 4.0% ------- Net interest income to average earning assets 4.5% ======= Noninterest bearing deposits 30,854,787 Accrued interest payable and other liabilities 1,726,725 ------------ Total liabilities 152,626,565 Shareholders' equity 13,388,720 ------------ Total liabilities and shareholders' equity $166,015,285 ============
(1) Interest income on the tax-exempt securities does not reflect the tax equivalent yield. (2) Loans on nonaccrual status have been included in the computation of average balances. (3) The interest income on loans does not include loan fees. Loan fees are immaterial and are included in noninterest income. 14 Six Months Ended June 30, 1999 Versus Six Months Ended June 30, 1998 Combined Results of Operations - ------------------------------ The Company and its wholly owned subsidiary, the Bank, reported a gain of $594,954 as compared to net loss of $(452,332) during the six months ended June 30, 1999 and 1998, respectively. Basic and diluted earnings (loss) per share were $0.10 and $(0.08) for the six months ended June 30, 1999 and 1998, respectively. The majority of the second quarter earnings resulted from the sale of the two branches in Ellis County, Texas. Effective as of June 30, 1999, Surety completed the sale to The Citizens National Bank in Waxahachie ("Citizens National Bank"), Waxahachie, Texas, of the two Ellis County branches of the Bank located in Midlothian and Waxahachie, Texas. The gain recorded from the sale of approximately $2,789,000 enabled the Bank to be in compliance with the capital requirements of the Formal Agreement with the OCC. 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 June 30, 1999 of $347,741. Stringent new controls over core operations have been implemented. Additionally, the Company sold two of the Bank's branches in Midlothian and Waxahachie, Texas in June 1999 and the sale resulted in a gain and brought the Bank into full compliance with the capital requirements of the Formal Agreement. Additionally, the Company has purchased a building near downtown Fort Worth, Texas with the intent of relocating its headquarters to this new location by the end of 1999. These steps are expected to rebuild profitable operations and enhance shareholder value. The yields earned by the Company on its loan portfolio during the six months ended June 30, 1999 and 1998 were 9.5% and 10.1%, respectively, while the average cost of interest bearing liabilities for the Company for the same periods was 4.1% and 4.4%, 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 $93,561,731 and $115,478,719 for the six months ended June 30, 1999 and 1998, respectively. The loan-to-deposit ratio as of June 30, 1999 and 1998 was 80.21% and 59.9%, respectively. Total interest income decreased 33.2% to $5,685,525 from $8,512,302, while total interest expense decreased 29.6% to $2,487,323 from $3,532,363, resulting in a 35.8% decrease in net interest income before provision for credit losses to $3,198,202 from $4,979,939. The Company's gross loans decreased between these two periods by 41.1% to $77,444,834 from $131,379,876. Real estate lending decreased by 3.4% to $30,535,751 from $31,601,851, commercial lending increased by 63.0% to $17,334,517 from $46,880,433, consumer lending decreased by 80.0% to $2,505,485 from $12,529,269 and insurance premium financing decreased by 45.3% to $22,075,958 from $40,368,323. The average balance of interest bearing liabilities decreased 24.9%, while the average rate paid decreased from 4.4% to 4.1%. The decrease in loan and deposits, except for insurance premium finance, was a direct result of the sale of four branches in October 1998 and two branches in June 1999. The Company did not record a provision for loan losses during the six months ended June 30, 1999 as compared to the $1,638,119 provision during the six months ended June 30, 1998. The Company's ratio of allowance to total loans was 2.4%. Management believes that all known losses in the portfolio have been recognized. The Company's other non interest income decreased 28.1% to $876,187 from $1,219,239 for the six months ended June 30, 1999 and 1998, respectively. The decrease compares to a corresponding decrease in insurance premium finance loans for these same periods. Insurance premium finance generates noninterest income from late fees charged on its loans that become past due. Noninterest expense increased 12.2% during the same period. Salaries decreased only 13.2% due to severance packages and general administration expenses increased 49.5% as a result of legal and professional fees. Management has made numerous changes in order to reduce expenses including staffing reductions and reduction of lease space along with efforts to reduce legal and professional fees. 15 Parent Company Only Results of Operations - ----------------------------------------- The Company primarily serves as a parent company to the Bank and has nominal separate business activities. For the six months ended June 30, 1999, the Company had interest expense on the convertible subordinated debt of approximately $216,545. The non interest expenses 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 the six months ended June 30, 1999. 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's ratio of allowance to total loans was 2.4% and the allowance for credit losses was $1,813,608 on June 30, 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 June 30, 1999, 16.9% 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. The ability of the Company to meet its cash obligations depends almost entirely on its receipt of dividends from the Bank, which are limited by banking statutes and regulations, and the Formal Agree- ment. See discussion under "Formal Agreement with the OCC" below. At June 30, 1999 the Company as a stand-alone entity had approximately $12,000 in cash and accrued expenses of approximately $377,000. The accrued expenses consist of $262,000 due to the Bank and $115,000 in Company-related operating expenses. It is contemplated that the $262,000 of accrued expenses due to the Bank will be paid via a special dividend by the Bank to the Company. The Company is in the process of requesting permission from the OCC to allow the Bank to pay the dividend to the Company with the understanding that the dividend proceeds will be used by the Company to repay the Bank. The Company anticipates that it will obtain such approval in September 1999, although no assurances to this effect can be given. It is further contemplated that the remaining expenses will be paid from certain tax refunds and tax payments that the Company will receive in September 1999. The Company will receive a tax refund from the Internal Revenue Service during the third quarter of approximately $80,000. Also, the Company will receive cash from the Bank in September 1999 as a result of its tax sharing agreement with the Bank. The amount of the refund will be determined when the third quarter tax estimate is due. Additionally, an interest payment in the amount of $195,750 is due and payable on the Notes on September 30, 1999. The Company currently does not have sufficient cash to pay the September 30, 1999 interest payment and other operating expenses. The Bank is currently precluded from declaring and paying any dividends to the Company under the Formal Agreement. However, because the Bank is in compliance with the capital level requirements of the Formal Agreement, it will formally seek permission from the OCC to pay a dividend to the Company to enable the Company to pay the September 30, 1999 interest payment on the Notes. No assurance can be given, however, that the Bank will be successful in such efforts. 16 In the event the Company is unable to receive dividends from the Bank, the Company will not be able to pay accrued interest under the Notes on September 30, 1999 and will be in default under the Notes. The Indenture pursuant to which the Notes are issued does not provide for any right of acceleration of the payment of the Notes as a result of any failure of the Company to timely pay principal of and interest on the Notes. The Notes may only be accelerated in the event of the bankruptcy, insolvency or reorganization of the Company. In the event of a default in the payment of interest, principal or premium, if any, by the Company on the Notes, the holder of the Note (or the Trustee on behalf of the holders of all of the Notes affected) may, in lieu of accelerating the maturity of the Notes, seek to enforce payment of such interest, principal or premium, if any. The initiation of such a course of action by the holders of the Notes in the event of the failure of the Company to meet its debt servicing obligations under the Notes could have a significant adverse impact on the future operations of the Company. There can be no assurance that the Company's present capital and financing will be sufficient to finance future operations. 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, and if obtained, there can be no assurance that such financing will be on satisfactory terms. In this event, the Company could be required to restrict its operations. Capital Resources Shareholders' equity at June 30, 1999 was $14,178,262 as compared to $13,994,250 at December 31, 1998. The Company had consolidated gain of $594,954 for the six months ended June 30, 1999. Exclusive of the Formal Agreement, 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 8.98% and 10.24%, respectively, at December 31, 1998 and 16.59% and 17.86%, respectively, at June 30, 1999. 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. The Company however, is subject to higher 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. On April 14, 1999, the OCC granted the Bank an extension from March 31, 1999 to September 30, 1999 to meet the capital requirements of the Formal Agreement. At June 30, 1999 the Bank had total risk-based capital of 17.86% of risk weighted assets and Tier I leverage capital of 9.34% of adjusted total assets. As a result of the sale of the two branches in Ellis County Texas in June 1999, the Bank recorded gains that brought the Bank into compliance with the capital level requirements of the Formal Agreement. The gain also allowed the Bank to record deferred income tax benefits that were not previously recognized. 17 The Formal Agreement established 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 and under the Formal Agreement, in addition to the Bank's actual capital ratios at June 30, 1999.
Actual Formal Agreement OCC Regulations -------- --------------------------- ------------------------ June 30, September 30, December 31, Adequately Well 1999 1999 1999 Capitalized Capitalized -------- ------------- ------------ ----------- ----------- Leverage 9.34% 7.50% 7.50% 4.00% 5.00% Risk-Based Capital: Tier I 16.59% 6.00% 6.00% 4.00% 6.00% Tier I & II 17.86% 12.00% 14.00% 8.00% 10.00%
The Bank is in compliance with all but one requirement of the Formal Agreement, the strategic plan. Due to the recent reorganization of the Bank's management team, a satisfactory strategic plan has not been implemented. Current management is in the process of revising the strategic plan to address the deficiencies noted by the OCC. 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. sections 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. 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 the 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 the Bank and its results of operations are not predictable. Note Regarding Forward-Looking Statements In this report, all statements other than statements of historical fact regarding the Company's financial condition, results of operation, business strategy and future acquisitions or operations are "forward-looking statements." 18 When used in this report, words such as "believes," "anticipates," "intends," "expects," "should," and words of similar import identify a forward-looking statement. Such forward-looking statements may involve numerous assumptions about known and unknown trends, uncertainties, risks, economic conditions and other factors which may ultimately prove to be inaccurate. Certain of these factors are discussed in more detail elsewhere in this report and in the Company's reports and filings with the Commission incorporated by reference herein, including without limitation under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 1. Business" in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Actual results may differ materially from any future results expressed or implied by such forward-looking statements. Prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update or to publicly revise any of the forward- looking statements contained herein to reflect future events or developments. Year 2000 Safety and Soundness The Bank has developed an intensive Action Plan for addressing the concerns and risks associated with the coming millennium. The Bank has reviewed the Federal Reserve's and Federal Financial Institutions Examination Council's ("FFIEC") Interagency Statement entitled "Year 2000 Project Management Awareness" and related materials. In addition, the Bank has done extensive research and documentation to develop a strategy that will facilitate compliance with federal banking agency policies which will be reviewed by regulatory agencies in their monitoring process and examinations. This Action Plan includes the defined phases from the FFIEC: Awareness, Assessment, Renovation, Validation and Implementation. As part of the Awareness phase a Year 2000 Team was organized and developed an overall strategy to encompass systems, vendors, customers and correspondents. This phase has been completed. The Assessment phase identified the size and complexity of potential problems, and in all hardware, software and related systems with interdependencies affected by the Year 2000 date change. The Assessment phase has been completed, but the Bank considers it an ongoing process due to the need to evaluate any new relationships and information system hardware and software obtained through the Year 2000. Under the Renovation phase, code enhancements, hardware and software upgrades, and vendor certifications have been pursued and are complete. Testing under the Validation phase was tracked and results recorded. Testing of in-house mission-critical systems has been successfully completed. The final phase of Implementation includes the acceptance of certified systems and the completed remediation and business resumption contingency plans for all mission-critical items. The Company has completed the remediation and business resumption contingency plans. As additional agency policies and statements are made available, the Bank will modify its Action Plan as necessary to maintain compliance. Current costs and estimated future expenditures are not significant and are expected to have negligible effects on the Company's results of operations, liquidity and capital resources. Costs incurred only to upgrade equipment to Year 2000 compliance are expensed as incurred. Pursuant to the Year 2000 Information and Readiness Disclosure Act of 1998, Publications L. No. {05-27}, 112 Statute 2386 (the "Act"), the Bank hereby designated this Year 2000 Statement as a Year 2000 Readiness Disclosure. This Year 2000 Readiness Disclosure is made for the sole purpose of facilitation responses or communicating or disclosing information aimed at correcting and/or helping to correct and/or avoid Year 2000 failures. By designating the Year 2000 Statement as a Year 2000 Readiness Disclosure, the Bank intends to comply fully with, and to be afforded the protections of, the Act. Therefore, all statements made in this Year 2000 Readiness Disclosure shall be construed within the confines of the Act. This Year 2000 disclosure replaces and supercedes all prior communications related to Year 2000. 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. 19 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 now been remanded to the trial court for disposition of the remaining issues. The Bank believes both of these cases lack merit and will continue to defend them vigorously. The final outcome of both of these cases is uncertain at this time. 20 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 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 trial court recently granted Summary Judgment in favor of the defendants as it relates to all claims asserted by Dr. Renna's medical practice, Doctors Rehab Center, P.A., which should result in a take nothing judgment against that plaintiff. The case is currently set for trial to begin on October 3, 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 The Annual Meeting of Stockholders of the Company was held on June 4, 1999. The stockholders voted on the election of eight directors of the Company. The results of the voting for the election of directors was as follows: Name of Nominee For Against Abstain --------------- --------- ------- ------- C. Jack Bean 4,108,232 107,355 136,125 William B. Byrd 4,109,542 106,045 136,125 Joseph S. Hardin 4,106,342 109,245 136,125 G. M. Heinzelmann, III 4,115,232 100,355 136,125 Margaret E. Holland 4,121,542 94,045 136,125 Michael L. Milam 4,121,542 94,045 136,125 Garrett Morris 4,107,932 108,645 135,135 Cullen W. Turner 4,121,542 94,045 136,125 Item 5. Other Information Not applicable. 21 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule* ---------------- * Filed herewith. (b) Reports on Form 8-K On June 8, 1999 the Company filed a Current Report on Form 8-K to report that on June 3, 1999 the services of PricewaterhouseCoopers LLP as the Company's independent accountants were terminated and that on June 4, 1999 the Company engaged Fisk & Robinson, P.C. as its independent accountants to audit the Company's financial statements for fiscal year 1999. On June 15, 1999 the Company filed a Current Report on Form 8-K/A (Amendment No. 1) to file as an exhibit to the Current Report on Form 8-K filed on June 8, 1999 a letter from PricewaterhouseCoopers LLP to the Securities and Exchange Commission regarding the Company's termination of PricewaterhouseCoopers LLP's services as the Company's independent accountants. On July 15, 1999 the Company filed a Current Report on Form 8-K to report that on June 30, 1999 the Company's subsidiary Surety Bank, National Association ("Surety Bank"), completed the sale of its branches located Midlothian and Waxahachie, Texas to The Citizens National bank in Waxahachie, Waxahachie, Texas. The following financial statements were included: Pro Forma Balance Sheet as of March 31, 1999 and Pro Forma Income Statement for the three months ended March 31, 1999 and for the twelve months ended December 31, 1998. 22 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 17, 1999 SURETY CAPITAL CORPORATION By: /s/ C. Jack Bean ------------------------- C. Jack Bean, Chairman of the Board By: /s/ John D. Blackmon ----------------------- John D. Blackmon, Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 7,849,265 0 27,374,339 0 18,688,649 0 0 76,746,136 1,813,608 141,932,873 96,551,961 0 1,858,926 4,350,000 0 0 58,401 14,119,861 141,932,873 4,421,897 1,262,547 1,081 5,685,525 2,487,323 2,487,323 3,198,202 0 (44,806) 5,911,870 951,296 594,954 0 0 594,954 .10 .10 7.96 835,000 357,000 462,000 0 1,961,840 1,022,000 900,000 1,813,608 1,813,608 0 0
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