-----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, UdLnMjFxL/1ISZMpIPqTkSKp72bFgZ60MyX0nUyvkoHfWXpxfWYy/11YHM9DcB8e 8oMo9FE+XYsq0Juaf8v/LA== /in/edgar/work/0000930661-00-002956/0000930661-00-002956.txt : 20001115 0000930661-00-002956.hdr.sgml : 20001115 ACCESSION NUMBER: 0000930661-00-002956 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SURETY CAPITAL CORP /DE/ CENTRAL INDEX KEY: 0000784932 STANDARD INDUSTRIAL CLASSIFICATION: [6021 ] IRS NUMBER: 752065607 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-12818 FILM NUMBER: 765697 BUSINESS ADDRESS: STREET 1: 1501 SUMMIT AVENUE CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173355955 MAIL ADDRESS: STREET 1: 1501 SUMMIT AVENUE CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: K CAPITAL INC DATE OF NAME CHANGE: 19870407 10QSB 1 0001.txt FORM 10-QSB FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 Mark One [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000, OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________. Commission file number 33-1983 SURETY CAPITAL CORPORATION (Exact name of small business issuer as specified in its charter) Delaware 75-2065607 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1501 Summit Avenue, Fort Worth, Texas 76102 (Address of principal executive offices) 817-335-5955 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ _______ Common stock outstanding on November 9, 2000: 5,895,235 shares SURETY CAPITAL CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. -------- Item 1 Financial Statements (Unaudited) Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Comprehensive Income 5 Condensed Consolidated Statements of Changes in Shareholders' Equity 6 Condensed Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II - OTHER INFORMATION Item 1 Legal Proceedings 20 Item 2 Changes in Securities and Use of Proceeds 20 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 21
2 SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 2000 1999 ------------ ------------ Assets: Cash and due from banks $ 2,605,754 $ 5,416,633 Federal funds sold 7,730,278 4,334,595 ------------ ------------ Total cash and cash equivalents 10,336,032 9,751,228 Interest-bearing time deposits in other financial institutions 26,193 25,000 Securities available for sale, at fair value 12,715,063 12,480,492 Loans, net 58,995,505 65,772,554 Premises and equipment, net 5,862,144 6,295,302 Accrued interest receivable 622,248 514,453 Other real estate and repossessed assets 959,890 825,245 Goodwill, net 5,104,547 5,432,346 Other assets 1,856,562 3,097,313 ------------ ------------ Total assets $ 96,478,184 $104,193,933 ============ ============ Liabilities: Noninterest-bearing demand deposits $ 16,993,074 $ 16,481,651 Savings, NOW and money market accounts 21,934,100 22,959,487 Time deposits, $100,000 and over 14,039,668 13,225,995 Other time deposits 26,878,283 32,210,985 ------------ ------------ Total deposits 79,845,125 84,878,118 Convertible subordinated debt 4,350,000 4,350,000 Accrued interest payable and other liabilities 1,270,148 3,642,845 ------------ ------------ Total liabilities 85,465,273 92,870,963 ------------ ------------ Shareholders' Equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued Common stock, $0.01 par value, 20,000,000 shares authorized, 5,975,071 shares issued 59,751 59,751 Additional paid-in capital 17,152,587 17,152,587 Accumulated deficit (5,416,232) (4,911,864) Stock rights issuable 57,902 57,902 Treasury stock, 79,836 shares at cost (375,443) (375,443) Accumulated other comprehensive income (loss) (465,654) (659,963) ------------ ------------ Total shareholders' equity 11,012,911 11,322,970 ------------ ------------ Total liabilities and shareholders' equity $ 96,478,184 $104,193,933 ============ ============
See accompanying notes to consolidated financial statements. 3 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ------------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Interest Income: Loans, including fees $ 1,541,100 $ 1,838,398 $ 4,664,766 $ 6,177,704 Securities: Taxable 205,912 223,818 628,531 863,581 Tax-exempt -- -- -- 66,016 Medical claims receivables factoring -- -- -- 63,928 Federal funds sold and interest bearing deposits 106,783 59,258 250,673 617,107 ----------- ----------- ----------- ----------- Total interest income 1,853,795 2,121,474 5,543,970 7,788,336 Interest expense: Deposits 759,745 730,964 2,179,099 3,001,742 Notes payable 129,068 108,273 324,818 324,818 ----------- ----------- ----------- ----------- Total interest expense 888,813 839,237 2,503,917 3,326,560 ----------- ----------- ----------- ----------- Net interest income 964,982 1,282,237 3,040,053 4,461,776 Provision for credit losses (70,000) 3,837 35,000 135,782 ----------- ----------- ----------- ----------- Net interest income after provision for credit losses 1,034,982 1,278,400 3,005,053 4,325,994 Noninterest income: Service charges on deposit accounts 166,830 133,795 475,759 557,837 Loan collection fees and late charges 124,034 143,566 450,502 510,087 Securities gains (losses), net -- -- -- (44,807) Net realized gain on sale of branches -- 280,094 -- 3,068,871 Other income 355,725 4,522 834,239 134,953 ----------- ----------- ----------- ----------- Total noninterest income 646,589 561,977 1,760,500 4,226,941 Noninterest expense: Salaries and employee benefits 710,116 981,847 2,433,415 3,316,189 Occupancy and equipment 331,689 385,228 1,022,196 1,521,248 Other expenses 463,676 989,607 1,905,113 3,414,699 ----------- ----------- ----------- ----------- Total noninterest expense 1,505,481 2,356,682 5,360,724 8,252,136 ----------- ----------- ----------- ----------- Net income (loss) before income taxes 176,090 (516,305) (595,171) 300,799 Income tax (benefit) 98,991 (164,382) (90,803) 146,335 ----------- ----------- ----------- ----------- Net income (loss) $ 77,099 $ (351,923) $ (504,368) $ 154,464 =========== =========== =========== =========== Net income (loss) per share - Basic $ 0.01 $ (0.06) $ (0.09) $ 0.02 =========== =========== =========== =========== Net income (loss) per share - Diluted $ 0.01 $ (0.06) $ (0.09) $ 0.02 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 4 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ------------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- Net income (loss) $ 77,099 $ (351,923) $ (504,368) $ 154,464 Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale 196,272 (189,511) 294,408 (876,391) securities arising during period Reclassification adjustment for amounts realized on securities sales included in income -- -- -- 44,807 ----------- ----------- ----------- ----------- Net unrealized gain (loss) 196,272 (189,511) 294,408 (831,584) Tax effect (66,733) 53,065 (100,099) 284,195 ----------- ----------- ----------- ----------- Total other comprehensive income (loss) 129,539 (136,446) 194,309 (547,389) ----------- ----------- ----------- ----------- Comprehensive income $ 206,638 $ (488,369) $ (310,059) $ (392,925) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 5 SURETY CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Nine Months Ended --------------------------------------- September 30, September 30, 2000 1999 ------------- ------------- Balance at beginning of period $ 11,322,970 $ 11,715,851 Net income (loss) (504,368) 154,464 Change in fair value of securities available for sale, net of tax 194,309 (547,389) Balance at end of period $ 11,012,911 $ 11,322,926
See accompanying notes to consolidated financial statements. 6 SURETY CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended ---------------------------------------- September 30, September 30, 2000 1999 ------------ ------------ Net cash from operating activities $ (1,009,132) $ (700,439) Cash flows from investing activities: Net change in loans and medical claims factoring 5,937,448 11,905,602 Securities available for sale: Purchases (937,900) (11,465,028) Maturities and repayments 217,472 17,777,224 Proceeds from sales 775,550 4,584,869 Purchases of interest-bearing time deposits (1,193) (25,000) Proceeds from maturities of interest-bearing time deposits -- 94,939 Proceeds from sale of other real estate 709,598 89,073 Premises and equipment expenditures (68,484) (1,380,756) Net cash paid in sale of branches -- (25,194,973) Other (5,562) -- ------------ ------------ Net cash from investing activities 6,626,929 (3,614,050) ------------ ------------ Cash flows from financing activities: Net change in deposits (5,032,993) (20,097,997) ------------ ------------ Net cash from financing activities (5,032,993) (20,097,997) ------------ ------------ Net change in cash and cash equivalents 584,804 (24,412,486) Cash and cash equivalents at beginning of period 9,751,228 34,051,649 ------------ ------------ Cash and cash equivalents at end of period $ 10,336,032 $ 9,639,163 ============ ============ Supplemental disclosures: Cash paid for interest $ 2,497,430 $ 3,703,967 Cash paid (refunds received) for federal income taxes ( 1,293,200) -- Significant non-cash transactions: Transfers of repossessed collateral to other real estate 868,000 826,801 Additions to loans to facilitate sale of other real estate 78,000 80,000
See accompanying notes to consolidated financial statements. 7 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ The accompanying consolidated financial statements include the accounts of Surety Capital Corporation (the "Holding Company") and its wholly-owned subsidiary, Surety Bank, National Association (the "Bank"), together referred to as the "Company." All significant intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements are prepared without audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2000, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying financial statements have been prepared in accordance with the instructions of Form 10-QSB and, therefore, do not purport to contain all necessary financial disclosures required by generally accepted accounting principles that might otherwise be necessary in the circumstances, and should be read in conjunction with financial statements, and notes thereto, of the Company for the year ended December 31, 1999, included in its annual report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 Form 10-K"). Refer to the accounting policies of the Company described in the notes to financial statements contained in the 1999 Form 10-K. The Company has consistently followed these policies in preparing this Form 10-QSB. The Company is principally engaged in traditional community banking activities provided through its seven branches located in north Texas and south-central Texas. Community banking activities include commercial and retail lending, deposit gathering and investment and liquidity management activities. In addition to its community banking services, the Company offers insurance premium financing. Insurance premium finance ("IPF") lending involves the lending of funds to companies and individuals for the purpose of financing their purchase of property and casualty insurance. Prior to 1999 the Company was engaged in medical claims factoring, purchasing primarily insurance company claims from a variety of health care providers. In 1998 the Company substantially ceased operations of the medical claims factoring business. To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual future results could differ. The allowance for loan losses, fair values of financial instruments, and status of contingencies are particularly subject to change. In 1999 various accounting irregularities were found during the course of an internal audit of the Company's IPF division. Through further investigation, internal audit identified a significant number of transactions whereby refund amounts due to some borrowers were inappropriately diverted. Most of the refunds were applied against the balance of various unrelated loan accounts including past due loan principal, past due interest, assessed late charges, etc. The irregular transactions were reported to the Office of the Comptroller of the Currency ("OCC"), and the Company retained the services of a forensic accountant to conduct an independent review of the IPF division covering the period from January 1, 1996 to December 31, 1999. Based on the results of the independent review of the IPF division, the Company recognized additional losses, including interest, of $2,611,000 ($1,723,000 on a tax-effected basis). These losses primarily related to the recognition of previously unrecognized loan charge-offs and, to a lesser extent, to errors resulting from the absence of appropriate accounting controls within the IPF division. The additional losses were recognized as adjustments to the current and prior years beginning in the first quarter of 1996 and extending through the fourth quarter of 1999. All prior year financial information included in the accompanying consolidated financial statements has been restated to reflect these losses. 8 1. Summary of Significant Accounting Policies (Continued) ------------------------------------------ The Company no longer employs the persons directly responsible for managing the IPF division during the period when the diversions occurred. Beginning January 1, 2001, a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This standard is not expected to have a material effect, but the effect will depend on derivative holdings when this standard applies. Some items in prior financial statements have been reclassified to conform to the current presentation. 2. Earnings Per Share ------------------ Earnings per share is computed in accordance with SFAS No. 128, which requires dual presentation of basic and diluted earnings per share ("EPS") for entities with complex capital structures. Basic EPS is based on net income divided by the weighted-average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of stock options granted using the treasury stock method. Earnings per common share are computed by dividing net income by the weighted-average number of shares outstanding for the year. The weighted- average number of common shares outstanding for basic and diluted earnings per share computations were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Weighted-average shares outstanding-Basic 5,895,235 5,760,235 5,895,235 5,760,235 Effect of stock options - - 455 74,024 --------- --------- --------- --------- Weighted-average shares outstanding-Diluted 5,895,235 5,760,235 5,895,690 5,834,259 ========= ========= ========= =========
The Company reported a net loss for the nine-month period ended September 30, 2000 and three month period ended September 30, 1999. Accordingly, the dilutive effect of stock options is not considered in the net loss per share calculations for these periods. 3. Securities ---------- Securities available for sale consisted of the following: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- September 30, 2000: - ------------------- U.S. Treasury notes $ 199,211 $ -- $ 363 $ 198,848 U.S. government agencies 12,003,293 935 703,039 11,301,189 Mortgage-backed securities 461,391 594 3,663 458,322 Other securities 756,704 -- -- 756,704 ----------- ----------- ----------- ----------- Total securities $13,420,599 $ 1,529 $ 707,065 $12,715,063 =========== =========== =========== =========== December 31, 1999: - ----------------- U.S. government agencies $11,505,376 $ -- $ 995,411 $10,509,965 Mortgage-backed securities 480,706 441 4,974 476,173 Other securities 1,494,354 -- -- 1,494,354 ----------- ----------- ----------- ----------- Total securities $13,480,436 $ 441 $ 1,000,385 $12,480,492 =========== =========== =========== ===========
9 3. Securities (Continued) ---------- There were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders' equity at December 31, 1999 or September 30, 2000. Mortgage-backed securities are backed by pools of mortgages that are insured or guaranteed by the Federal Home Loan Mortgage Corporation and the Government National Mortgage Corporation. Other securities include stock holdings in Independent Bankers Financial Corporation, the Federal Reserve Bank and the Federal Home Loan Bank ("FHLB"). The amortized cost and estimated fair value of securities at September 30, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities and other securities are shown separately since they are not due at a single maturity date. Estimated Amortized Fair Cost Value ----------- ----------- Due within one year $ 199,211 $ 198,848 Due after one year through five years 500,000 500,935 Due after five years through ten 11,503,293 10,800,254 years Mortgage-backed securities 461,391 458,322 Other securities 756,704 756,704 ----------- ----------- Total securities $13,420,599 $12,715,063 =========== ===========
Sales of securities available for sale were as follows:
Nine Months Ended ----------------------------------- September 30, September 30, 2000 1999 ----------- ------------ Proceeds $ 775,550 4,584,869 Gross Gains -- 162 Gross Losses -- 44,969
4. Loans and Medical Claims Receivables ------------------------------------ Loans consisted of the following: September 30, December 31, 2000 1999 ------------ ----------- Real estate loans $ 36,632,484 $31,529,099 Insurance premium financing 8,696,711 20,639,094 Commercial loans 9,906,450 9,870,652 Installment loans 5,263,147 5,678,584 ------------ ----------- Total gross loans 60,498,792 67,717,429 Unearned interest (228,032) (510,834) Allowance for credit losses (1,275,255) (1,434,041) ------------ ----------- Loans, net $ 58,995,505 $65,772,554 ============ ===========
10 4. Loans and Medical Claims Receivables (Continued) ------------------------------------- From 1990 through 1998 the Company was engaged in medical claims factoring, purchasing primarily insurance company claims from a variety of health care providers. In 1998 operation of the medical claims factoring division was discontinued; however, due to the existence of contractual commitments to nine customers and in order to enhance the collectibility of previously charged-off medical claims, the Company continued to factor new medical claims receivables on behalf of these customers in 1999. As of December 31, 1999 the contractual commitments had expired and the Company no longer factors medical claims receivable. Activity in the allowance for credit losses on loans and medical claims receivables was as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ------------ Beginning balance $ 1,325,620 $ 1,813,607 $ 1,434,041 $ 2,103,024 Provision for credit losses (70,000) 3,837 35,000 135,782 Charge-offs: Loans (159,116) (753,370) (601,579) (2,101,305) Medical claims receivables -- (2,490) -- (12,707) Recoveries: Loans 178,686 415,354 403,591 927,957 Medical claims receivables 65 100,982 4,202 525,169 ----------- ----------- ----------- ------------ Ending balance $ 1,275,255 $ 1,577,920 $ 1,275,255 $ 1,577,920 =========== =========== =========== ============
Impaired loans were as follows: September 30, December 31, 2000 1999 ----------- ----------- Impaired loans with allowance allocated $ 2,034,413 $ 3,958,654 Impaired loans with no allowance allocated 676,342 414,419 ----------- ----------- Total impaired loans $ 2,710,755 $ 4,373,073 ----------- ----------- Amount of the allowance allocated $ 529,497 $ 645,899 ----------- -----------
Nonperforming loans were as follows: September 30, December 31, 2000 1999 ----------- ----------- Loans past due over 90 days still on accrual $ 125,836 $ 13,557 Nonaccrual loans 1,326,210 705,969 ----------- ----------- Total nonperforming loans $ 1,452,046 $ 719,526 =========== ===========
11 5. Financial Instruments With Off-Balance-Sheet Risk and Concentration of ---------------------------------------------------------------------- Credit Risk ----------- Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued in the normal course of business to meet the financing needs of customers. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met. These agreements usually have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the total commitments do not necessarily represent future cash requirements. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Financial instruments with off-balance sheet risk at September 30, 2000 and December 31, 1999 included unfunded loan commitments of $6,261,000 and $4,125,000 and letters of credit of $150,000 and $158,000. Unfunded loan commitments and letters of credit carrying fixed interest rates totaled $484,000 and $3,000 at September 30, 2000, with interest rates ranging from 8.0% to 14.0%. Unfunded loan commitments and letters of credit carrying fixed rates totaled $628,000 and $8,000 at December 31, 1999, with interest rates ranging from 7.5% to 18.0%. Federal funds sold totaled $7,730,000 and $4,335,000 at September 30, 2000 and December 31, 1999. These funds represent uncollateralized loans, in varying amounts, to other commercial banks with which the Company has correspondent relationships. The Company maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash and cash equivalents. The Company has geographic concentrations of credit in its principal trade areas of Bexar, Comal, Grayson, and Tarrant Counties, Texas. Additionally, the Company has a significant concentration of credit, based upon like collateral. IPF loans, secured by the residual value of unearned insurance premiums, comprised $8,697,000, or 14.4%, and $20,639,000, or 30.5%, of gross loans at September 30, 2000 and December 31, 1999. 6. Other Noninterest Expense ------------------------- Other noninterest expense consisted of the following:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ------------ Professional services $ 17,111 $ 215,008 $ 508,676 $ 913,548 Postage 30,377 44,438 121,506 196,317 Telephone 41,211 63,690 146,396 223,396 Office supplies 27,668 47,278 91,215 143,023 Amortization of intangibles and debt issuance costs 111,120 125,330 333,361 453,194 Insurance 36,516 37,554 104,282 114,846 FDIC and OCC assessments 17,230 98,268 63,160 377,846 Interest on IPF refunds -- 84,802 38,700 240,268 Other 182,443 273,239 497,817 752,261 ----------- ----------- ----------- ------------ Total other noninterest expense $ 463,676 $ 989,607 $ 1,905,113 $ 3,414,699 =========== ============ =========== ============
12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion focuses on the consolidated financial condition of the Company at September 30, 2000 compared to December 31, 1999, and the consolidated results of operations for the three-month and nine month periods ended September 30, 2000 compared to the same periods in 1999. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements and related footnotes. Forward-Looking Statements When used in this document, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projected," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Factors listed above could affect the Company's financial performance and could cause the Company's results for future periods to differ materially from any statements expressed with respect to future periods. The Company does not undertake, and specifically disclaims any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Restatement of Prior Year Financial Statements In 1999 various accounting irregularities were found during the course of an internal audit of the Company's IPF division. Through further investigation, internal audit identified a significant number of transactions whereby refund amounts due to some borrowers were inappropriately diverted. Most of the refunds were applied against the balance of various unrelated loan accounts including past due loan principal, past due interest, assessed late charges, etc. The refunds due to borrowers were primarily the result of cancellations of the underlying insurance contracts to which the loans related. Insurers require the entire premium to be paid at the inception of the policy. The Company generally finances 75% of the premium, requiring the loan customer to pay the remainder. The insurer earns the premium ratably over the term of the policy coverage. When a policy is canceled prior to the end of the coverage term, the insurer must refund the unearned premium less any cancellation fees. The Company holds a security interest in the unearned premium for all premium finance loans. Accordingly, when a policy is canceled, the insurer remits the entire unearned premium to the Company. Upon receipt, the Company uses the funds to pay-off the loan balance. After the loan is paid in full, any remaining funds should be remitted to the borrower. As indicated above, some refunds due to borrowers were used to pay-down or pay-off various unrelated, delinquent loan accounts. The irregular transactions were reported to the OCC, and in accordance with an amendment to a prior Formal Agreement with the OCC (discussed below), the Company retained the services of a forensic accountant to conduct an independent review of the IPF division covering the period from January 1, 1996 to December 31, 1999. Based on the results of the independent review of the IPF division, the Company recognized additional losses, including interest, of $2,611,000 ($1,723,000 on a tax-effected basis). These losses primarily related to the recognition of previously unrecognized loan charge-offs and, to a lesser extent, to errors resulting from the absence of appropriate accounting controls within the IPF division. The losses were recognized as adjustments to the current and prior years beginning in the first quarter of 1996 and extending through the fourth quarter of 1999. The losses, including interest, totaled $89,000 and $391,000 for the three months and nine months periods ended September 30, 1999. Interest expense on the refunds payable totaled $39,000 for the nine months ended September 30, 2000, all of which was recognized in the first quarter. Final expenses related to the losses were realized during the first quarter of 2000 and all refunds have been paid. All prior year financial information included in the accompanying consolidated financial statements included in the September 30, 2000 Form 10-QSB and in the Company's annual report on Form 10-K for the year ended December 31, 1999 has been restated to reflect these losses. 13 Formal Agreement with the OCC On November 19, 1998 the Bank entered into a formal written agreement (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. The Bank was also required to achieve certain additional capital levels by December 31, 1999. Under the Formal Agreement, by March 31, 1999 the Bank was required to achieve total risk-based capital of at least 12% of risk-weighted assets and Tier I leverage capital of at least 7.5% of adjusted total assets. By December 31, 1999 the Bank was required to achieve total risk-based capital of at least 14% of risk-weighted assets. The Bank failed to achieve the capital requirements set forth in the Formal Agreement by March 31, 1999 and submitted a request for an extension to September 30, 1999. The OCC granted the extension and the Bank achieved the required levels of capital upon completion of the sales of the Midlothian and Waxahachie branches on June 30, 1999. At September 30, 2000 and December 31, 1999 the Bank met the capital levels required by the Formal Agreement, with total risk-based capital of 15.76% and 14.73% of risk-weighted assets, respectively, and Tier I leverage capital of 10.25% and 9.78% of adjusted total assets, respectively. Memorandum of Understanding with the Federal Reserve Board On October 28, 1999 the Holding Company entered into a Memorandum of Understanding (the "MOU") with the Federal Reserve Board (the "FRB"). Under the MOU, the Company is not permitted to declare or pay any corporate dividends or incur any additional debt without the prior approval of the FRB. Also, the Holding Company was required to develop and submit to the FRB a written three- year capital plan, a plan to service the Holding Company's existing debt without incurring any additional debt, and written procedures designed to strengthen and maintain the Holding Company's internal records and controls to ensure that future regulatory reports are filed in a timely and accurate manner. The Holding Company has submitted each of the requested plans and procedures to the FRB. Finally, the Holding Company is mandated under the MOU to comply fully with all formal and informal supervisory actions that have been or may be imposed on the Bank by the OCC. Analysis of Financial Condition The Company's assets totaled $96.5 million at September 30, 2000 representing a $7.7 million or 7.4% decrease compared to $104.2 million at December 31, 1999. The decrease in assets was primarily the result of decreases in loans and other assets, as more fully discussed below. Total securities available for sale remained fairly stable, totaling $12.7 million at September 30, 2000; a $235,000 increase from December 31, 1999. The increase is due primarily to a decrease in net unrealized portfolio losses. At September 30, 2000 the unrealized loss on securities available for sale totaled $706,000 compared to $1.0 million at December 31, 1999. No impairment loss related to these securities has been recognized, as management believes the decline in the fair value is temporary. During the nine month period ended September 30, 2000, the Bank sold $776,000 of Federal Home Loan and Federal Reserve Bank stock, received $217,000 from maturing securities, and reinvested $938,000 Net loans decreased $6.8 million, or 10.3%, from $65.8 million at December 31, 1999 to $59.0 million at September 30, 2000. IPF loans decreased $11.9 million, or 57.8%, from December 31, 1999. IPF loans decreased due to a decline in IPF loan production volume as a result of the loss of three IPF loan production officers and the negative public image of the Company's IPF division stemming from the accounting irregularities discussed above. Real estate loans increased $5.1 million, or 16.2%. Real estate loans increased primarily due to growth in the Company's Small Business Administration ("SBA") lending program. The SBA guarantees portions of such loans. The Company generally sells the guaranteed portion of the loan and retains the unguaranteed portion for its portfolio. Total loans, net of unearned interest, as a percentage of total deposits was 75.5% at September 30, 2000 compared to 79.2% at December 31, 1999. Other real estate and repossessed assets increased $868,000 during the third quarter to $960,000 due to primarily to the foreclosure of a loan in the San Antonio area secured by undeveloped lots. During the second quarter the Company realized $710,000 in proceeds from the sales of two other real estate properties resulting in a $135,000 net increase in other real estate and repossessed assets since December 31, 1999. 14 Other assets decreased $1.2 million from $3.1 million at December 31, 1999 to $1.9 million at September 30, 2000. The reduction is due primarily to the collection of an income tax refund receivable from the Internal Revenue Service for excess tax payments made in 1999. The amount was refunded during the first quarter of 2000. Total deposits were $79.8 million at September 30, 2000, a decrease of $5.0 million, or 5.9%, from December 31, 1999. Noninterest-bearing demand deposits increased $511,000 to $17.0 million, or 21.2% of total deposits, at September 30, 2000 compared to $16.5 million, or 19.4% of total deposits, at December 31, 1999. Savings, NOW and money market accounts decreased $1.0 million while time deposits declined $4.5 million. Time deposits made up 51.2% of the deposit portfolio at September 30, 2000 compared to 53.5% at December 31, 1999. The shift in deposit categories is due to maturity of time deposits retained on sale of branches and normal customer cash-usage patterns. The Company continues to lose certain deposits retained in connection with the sale of the Midlothian and Waxahachie branches in the second quarter of 1999. In order to obtain regulatory approval for the sale of the branches, the Company retained $8.5 million in time certificates of deposit and IRAs. Customers have elected not to renew these deposits as they have matured because the Company no longer has branch facilities in their market areas. All of the Company's time deposits mature in less than five years. Based on past experience and the Company's prevailing pricing strategies, management believes a substantial percentage of such deposits, other than those associated with sold branches, will renew with the Company at maturity. If there is a significant deviation from historical experience, the Company can utilize borrowings from the FHLB as an alternative to this source of funds, subject to regulatory approval under the Formal Agreement. Borrowed funds totaled $4.4 million at September 30, 2000 and December 31, 1999. Borrowed funds consist of convertible subordinated notes issued on March 31, 1998 to provide funds to finance the acquisition of TexStar National Bank. The notes bear interest at a rate of 9% per annum until maturity. No principal payments are due until maturity on March 31, 2008, while interest on the notes is payable semi-annually. Other liabilities decreased $2.4 million from December 31, 1999 to $1.3 million at September 30, 2000. The decrease was primarily the result of the payment of $2.5 million in principal and interest which was accrued in connection with the IPF refunds. As mentioned above, prior financial statements were restated to properly match the expense to the periods in which the losses occurred. Comparison of Results of Operations Net Income. General economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions affect the operating results of the Company. Interest rates on competing investments and general market rates of interest influence the Company's cost of funds. Lending activities are influenced by the demand for various types of loans, which in turn is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities. The Company's net income is primarily dependent upon its net interest income, which is the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Provisions for credit losses, service charges, gains on the sale of assets and other income, noninterest expense and income taxes also affect net income. The Company realized net income of $77,000 for the three months ended September 30, 2000 compared to a $352,000 net loss for the same period in 1999. During the three months ended September 30, 2000 the Company realized a $396,000 bond recovery for fidelity losses incurred during prior periods. Net loss for the nine months ended September 30, 2000 was $504,000 compared to a $154,000 net income for the same period in 1999. During 1999 the Company realized a $3,068,871 gain on the sale of branches. Net income per share was $0.01 for the three months ended September 30, 2000 compared to a $0.06 net loss per share for the three months ended September 30, 1999. Net loss per share was $0.09 for the nine months ended September 30, 2000 compared to $0.02 net income per share for the nine months ended September 30, 1999. 15 Net Interest Income. Net interest income is the largest component of the Company's income and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net interest income decreased $317,000 or 24.7%, and $1,422,000, or 31.9%, for the three and nine months ended September 30, 2000 compared to the same period in 1999. The decrease was primarily due to decreased average balances of interest-earning assets and interest-bearing liabilities combined with a slight decrease in the weighted-average net interest margin earned on interest-earning assets. The weighted-average yield on interest-earning assets increased as a result of general market increases in interest rates over the comparable periods offset by increased rates paid on interest bearing deposits. Additionally, the Company had a significant portion of its average interest-earning assets invested in lower-yielding federal funds sold during the first and second quarters of 1999 in anticipation of the sale of the Midlothian and Waxahachie branches at the end of the second quarter. The decrease in average interest- earning assets and interest-bearing liabilities was primarily the result of the sale of these branch offices. Included in the sale were $13.1 million in loans (including $3.6 million in commercial loans, $8.5 million in real estate loans and $1.0 million in installment loans) and $45.2 million in deposits (including $9.7 million in noninterest-bearing checking, $17.8 million in savings, NOW and money market accounts and $17.7 million in time deposits). The Company's net interest margin was 4.72% for the third quarter of 2000 compared to 5.16% for the third quarter of 1999. The Company's weighted-average yield on interest-earning assets increased to 9.07% for the third quarter of 2000 from 8.54% for the third quarter of 1999. The Company's net interest margin for the nine month period ended September 30, 2000 was 4.96% and the weighted average yield on interest-earning assets was 9.04%, compared to 4.66% and 8.47%, respectively, for the same period in 1999. The Company remains liability sensitive, whereby its interest-bearing liabilities will generally reprice more quickly than its interest-earning assets. Therefore, the Company's net interest margin will generally increase in periods of falling market interest rates and will decrease in periods of increasing market interest rates. Accordingly, in a rising interest rate environment, the Company may need to increase rates to attract and retain deposits. Due to the negative gap position, the rise in interest rates may not have such an immediate effect on interest-earning assets. This lag could negatively affect net interest income. Since the first quarter of 1999 the Board of Governors of the Federal Reserve System steadily increased the discount rate, which has led to a general increase in deposit and loan rates offered by many financial institutions. Allowance and Provision for Credit Losses. The Company maintains an allowance for credit losses in an amount that, in management's judgment, is adequate to absorb reasonably foreseeable losses inherent in the loan portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors, including the performance of the Company's loan portfolio, the economy, changes in real estate values and interest rates and the view of the regulatory authorities toward loan classifications. The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which is considered adequate to absorb losses inherent in the loan portfolio. The amount of the provision is based on management's review of the loan portfolio and consideration of such factors as historical loss experience, general prevailing economic conditions, changes in the size and composition of the loan portfolio and specific borrower considerations, including the ability of the borrower to repay the loan and the estimated value of the underlying collateral. All lending activity contains risks of loan losses and the Company recognizes these credit risks as a necessary element of its business activity. To assist in identifying and managing potential loan losses, the Company contracts with an independent loan review service provider to evaluate individual credit relationships as well as overall loan portfolio conditions. One of the primary objectives of the loan review function is to make recommendations to management as to both specific loss reserves and overall portfolio loss reserves. Loan recoveries exceeded loans charged off by $20,000 in the third quarter of 2000. Net loan recoveries coupled with the declines in loan volumes and the improvement in the level of impaired loans allowed the Company to record a negative $70,000 provision for credit losses. Loans charged off, net of recoveries, for the third quarter of 1999 were $240,000. During the nine month period ended September 30, 2000, net loan charge-offs totaled $194,000, or 0.31% of average loans compared to net loan charge-offs of $661,000, or 0.75% of average loans, for the year earlier period. IPF loans accounted for the largest portions of charge-offs. Net IPF loan charge-offs during the nine months ended September 30, 2000 were $238,000 while there were $41,000 in 16 net recoveries of previously charged off commercial loans. As discussed above, the prior financial statements reflect previously unrecognized losses in the IPF loan portfolio. As the losses were not reported due to an inappropriate diversion of funds, no efforts had been made to collect these loans. Management intends to aggressively pursue collection of these loans. At this time, however, the Company cannot predict the likely amount of any such recoveries. Nonperforming loans, defined as loans past due 90 days or more and loans for which the accrual of interest has been discontinued, totaled $1,452,000 at September 30, 2000 and $720,000 at December 31, 1999. Nonperforming loans as a percentage of total loans totaled 2.4% and 1.06% at such dates. The allowance for loan losses as a percentage of total loans was 2.12% at December 31, 1999 and 2.11% at September 30, 2000. The Company recorded a $70,000 negative provision for credit loss expense in the third quarter of 2000 compared to $4,000 in the same period of 1999. For the nine months period ended September 30, 2000, total provision expense was $35,000 compared to $136,000 for the same period of 1999. The decreases in provision expense compared to prior periods were the result of decreases in the level of net charge-offs when compared to prior periods combined with decreases in loans. Management believes the $159,000 decrease in the allowance for credit losses from December 31, 1999 is consistent with the $11.9 million, or 57.9%, decrease in higher-risk IPF loans. The percentage of IPF loans to total loans has decreased from 30.5% at December 31, 1999 to 14.4% at September 30, 2000. Management does not anticipate significant changes in loan portfolio risk in the near future, and will continue to monitor the appropriate factors when considering future levels of provisions and the allowance for loan losses. While management believes that it uses the best information available to determine the allowance for estimated loan losses, unforeseen market conditions could result in adjustments to the allowance for estimated loan losses and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. The Company substantially discontinued its medical claims factoring operations in 1998 and, by year-end 1999, no longer had an investment in medical claims receivables. The operations were discontinued as a result of significant losses experienced in 1997 and 1998. During the three and nine month periods ended September 30, 2000, the Company recorded net recoveries of previously charged- off medical claims factoring receivables of $65 and $4,202, compared to net recoveries during the year earlier periods of $98,492 and $512,462. Noninterest Income. Noninterest income totaled $647,000 in the third quarter of 2000. The Company realized a $396,000 fidelity bond recovery from losses incurred by one of its branches in a prior period. $339,000 of the bond recovery is included in noninterest income while $57,000 was credited to noninterest expense as a recovery of legal fees. Noninterest income totaled $562,000 in the third quarter of 1999 ($282,000 excluding the gain realized on sale of branches). For the nine month period ended September 30, 2000, noninterest income was $1,761,000 compared to $4,227,000 ($1,203,000 excluding the $3,069,000 gain realized on sale of branches and $45,000 realized security losses) in the prior year. In addition to the bond recovery mentioned above, the Company realized a $389,000 settlement of a bond claim in connection with its now defunct medical claims factoring operations during the first quarter of 2000 and a $40,000 gain on the sale of other real estate in the second quarter of 2000. Noninterest Expense. Noninterest expense totaled $1,506,000 and $5,361,000 for the three and nine month periods ended September 30, 2000, representing decreases from the year earlier periods of $851,001, or 36.1%, and $2,891,000, or 35.0%. Salary, occupancy, and other noninterest expenses declined primarily due to the sale of the Midlothian and Waxahachie branch offices in the second quarter of 1999, and related reductions in full-time equivalent employees. Decreases are also attributable to decreases in expenses related to professional services, deposit insurance premiums, postage, telephone, office supplies, amortization of intangibles, and interest on IPF refunds. Professional services expense were $17,000 and $509,000 for the three month and nine month periods ended September 30, 2000, respectively compared to $215,000 and $914,000 for the comparable periods in 1999. Professional services expenses have been the largest component of other noninterest expense over the comparable periods and the reductions are a result of $57,000 of the bond recovery realized during the third quarter applied as a recovery of legal fees, decreases in on-going litigation, acquisition and divestiture transactions, and the accounting irregularities in the IPF division, discussed above. Interest on IPF loan diversion was $39,000 for the nine months ended September 30, 2000, compared to $240,000 for the same period of 1999. Federal deposit insurance premiums were high during 1999 as the Bank's capital levels failed to comply with the Formal Agreement. 17 The Company's efficiency ratio, excluding the impact of the bond claim settlement and gain on the sale of the branches, was 72.3% and 82.4% for the three and nine month periods ended September 30, 2000, compared to 96.1% and 91.8% for the comparable periods of 1999. The efficiency ratio measures the percentage of total revenues, on a taxable equivalent basis excluding securities gains and other nonrecurring gains, absorbed by non-interest expense. Expressed differently, for example, for every dollar of revenue the Company generated in the third quarter of 2000, the Company incurred $0.72 in overhead expenses. While showing improvement, the Company's efficiency ratios for the comparable periods continue to compare unfavorably to other financial institutions in the Company's peer group. Income Taxes. The change in income tax expense/(benefit) is primarily attributable to the change in income/(loss) before income taxes. The Company recorded $99,000 income tax expense and $91,000 income tax benefits for the three and nine month periods ended September 30, 2000, and $164,000 income tax benefit and $146,000 income tax expense for the comparable periods during 1999. The effective tax rates for the three and nine month periods ended September 30, 2000 were 56.2% and (15.3)%, and for the same periods of 1999 were (31.8)% and 48.6%. Liquidity Liquidity is the ability of the Company to fund customers' needs for borrowing and deposit withdrawals. The purpose of liquidity management is to assure sufficient cash flow to meet all of the financial commitments and to capitalize on opportunities for business expansion. This ability depends on the institution's financial strength, asset quality and types of deposit and investment instruments offered to its customers. The Company's principal sources of funds are deposits, loan and securities repayments, maturities of securities, sales of securities available for sale and other funds provided by operations. The Company also has the ability to borrow from the FHLB, subject to regulatory approval under the Formal Agreement. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan and mortgage-backed security prepayments are more influenced by interest rates, general economic conditions and competition. The Company maintains investments in liquid assets based upon management's assessment of (1) need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets and (4) objectives of the asset/liability management program. Cash and cash equivalents increased $585,000, or 6.0%, from $9.8 million at December 31, 1999 to $10.3 million at September 30, 2000. Cash and cash equivalents represented 10.7% of total assets at September 30, 2000 compared to 9.4% of total assets at December 31, 1999. Subject to regulatory approval under the Formal Agreement, the Company has the ability to borrow funds from the FHLB and has various federal fund sources from correspondent banks, should the Company need to supplement its future liquidity needs in order to meet deposit flows, loan demand or to fund investment opportunities. Management believes the Company's liquidity position is strong based on its high level of cash, cash equivalents, core deposits, the stability of its other funding sources and the support provided by its capital base. As summarized in the Condensed Consolidated Statements of Cash Flows, the most significant transactions which affected the Company's level of cash and cash equivalents, cash flows and liquidity during the first nine months of 2000 were net decreases in loans of $5.9 million and net decreases in deposits of $5.0 million. Capital Resources Total shareholders' equity was $11.0 million at September 30, 2000, representing a $310,000 or 2.7% decrease from December 31, 1999. The impact of the $504,000 net loss was partially offset by a $194,000 after-tax increase in the fair value of securities available for sale. The Holding Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Bank regulators monitor capital adequacy very closely and consider it an important factor in ensuring the safety of depositors' accounts. As a result, bank regulators have established standard risk-based capital ratios that measure the amount of an institution's capital in relation to the degree of risk contained in the balance sheet, as well as off- balance sheet exposure. Federal law requires each federal banking regulatory agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall below one or more prescribed capital ratios. According to the regulations, institutions whose Tier 1 and total capital ratios meet or exceed 6.0% and 10.0% of risk- weighted assets, respectively, are 18 considered "well capitalized." Institutions whose Tier 1 and total capital ratios meet or exceed 4.0% and 8.0% of risk-weighted assets, respectively, are considered "adequately capitalized." Tier 1 capital is shareholders' equity excluding the unrealized gain or loss on securities classified as available for sale and intangible assets. Tier 2 capital, or total capital, includes Tier 1 capital plus the allowance for loan losses not to exceed 1.25% of risk-weighted assets. Risk-weighted assets are the Company's total assets after such assets are assessed for risk and assigned a weighting factor based on their inherent risk. In addition to the risk-weighted ratios, all institutions are required to maintain Tier 1 leverage ratios of at least 5.0% to be considered "well capitalized" and 4.0% to be considered "adequately capitalized." The leverage ratio is defined as Tier 1 capital divided by average adjusted assets for the most recent quarter. As discussed above, the Bank is subject to more stringent capital requirements under the Formal Agreement. The table below sets forth consolidated and Bank- only actual capital levels in addition to the capital requirements under the Formal Agreement and prompt corrective action regulations.
Minimum Requirements Under Prompt Corrective Actual Capital Ratios Requirements Action Regulations -------------------------------- Under ----------------------------- September 30, December 31, Formal Adequately Well 2000 1999 Agreement Capitalized Capitalized ------------ ----------- ------------ ----------- ----------- Leverage Ratio: Tier I capital to average assets Consolidated 5.75% 5.38% -- 4.00% 5.00% Bank 10.25% 9.78% 7.50% 4.00% 5.00% Risk-Based Capital Ratios: Tier I capital to risk-weighted assets Consolidated 8.08% 7.38% -- 4.00% 6.00% Bank 14.41% 13.49% 6.00% 4.00% 6.00% Total capital to risk-weighted assets Consolidated 13.46% 12.31% -- 8.00% 10.00% Bank 15.76% 14.73% 14.00% 8.00% 10.00%
The Holding Company is without significant assets other than its ownership of all the common stock of the Bank, and is entirely dependent upon dividends received from the Bank in order to meet its cash obligations, including debt service on $4,350,000 in 9% Convertible Subordinated Notes due 2008 (the "Notes"). Under the Formal Agreement the Bank is currently precluded from declaring and paying any dividends without prior OCC approval. On March 28, 2000 the OCC approved a reduction in the Bank's surplus in the amount of $500,000 that enabled the Company to meet debt service obligations under the Notes and to pay other operating expenses through March 31, 2000. Approval for an additional dividend to enable the Company to meet its debt service obligations for September 30, 2000 was denied. In October 2000 certain members of the Company's Board of Directors and one employee loaned the Company $260,000 to enable the Company to meet its cash obligations. The promissory notes evidencing the loans mature on December 31, 2001 and bear no interest from the date of issuance until maturity. Additionally, the promissory notes are convertible into Common Stock at the rate of one share of Common Stock per $0.36 of principal amount of the notes. 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 was 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. 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. 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, which affirmed the judgment of the trial court. The timetable for further appeals has expired, resulting in a final judgment in favor of the Bank that Tennessee take nothing by its suit. 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. A satisfactory settlement has been reached in principal regarding the Shortline case, and is expected to be concluded shortly. 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. 20 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 11 Statement Regarding the Computation of Earnings Per Share. - Reference is hereby made to the Consolidated Statements of Operations on page 4 and Note 2 to the Consolidated Financial Statements on page 9 hereof. 27 Financial Data Schedule. - Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2000. 21 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 9, 2000 SURETY CAPITAL CORPORATION By: /s/ Charles M. Ireland ----------------------------------- Charles M. Ireland, Chief Executive Officer and Principal Financial Officer 22 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION PAGE NUMBER 11 Statement Regarding the Computation of Earnings Per Share Reference is hereby made to the Consolidated Statements of Operations on page 4 and Note 2 to the Consolidated Financial Statements on page 9 hereof 27 Financial Data Schedule 24
23 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
9 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 $2,606 26 7,730 0 12,715 0 0 60,271 1,275 96,478 79,845 0 1,270 4,350 0 0 60 10,953 96,478 4,665 628 251 5,544 2,179 2,504 1,761 35 0 5,361 (595) (504) 0 0 (504) (0.09) (0.09) 4.96 1,326 126 0 0 1,434 602 408 1,275 1,275 0 146
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