<PAGE>

                                  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 JUNE 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 August 9, 2000:  5,895,235 shares
<PAGE>

                          SURETY CAPITAL CORPORATION


                                     INDEX

<TABLE>
<CAPTION>
PART I  -  FINANCIAL INFORMATION                                                                         Page No.
                                                                                                         --------
<S>           <C>                                                                                    <C>
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                           13
            of Operations


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
</TABLE>

                                       2
<PAGE>

                          SURETY CAPITAL CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                         June 30,            December 31,
                                                                          2000                  1999
                                                                    ----------------     -----------------
<S>  <C>                                                              <C>                  <C>
Assets:
     Cash and due from banks                                             $ 4,144,657          $  5,416,633
     Federal funds sold                                                    5,450,153             4,334,595
                                                                    ----------------     -----------------
     Total cash and cash equivalents                                       9,594,810             9,751,228
     Interest-bearing time deposits in other financial institutions           25,000                25,000
     Securities available for sale, at fair value                         12,509,315            12,480,492
     Loans, net                                                           61,327,617            65,772,554
     Premises and equipment, net                                           6,008,185             6,295,302
     Accrued interest receivable                                             584,196               514,453
     Other real estate and repossessed assets                                 91,269               825,245
     Goodwill, net                                                         5,210,105             5,432,346
     Other assets                                                          1,934,187             3,097,313
                                                                    ----------------     -----------------
     Total assets                                                        $97,284,684          $104,193,933
                                                                    ================     =================

Liabilities:
     Noninterest-bearing demand deposits                                 $17,851,422          $ 16,481,651
     Savings, NOW and money market accounts                               24,309,876            22,959,487
     Time deposits, $100,000 and over                                     11,564,277            13,225,995
     Other time deposits                                                  27,378,338            32,210,985
                                                                    ----------------     -----------------
     Total deposits                                                       81,103,913            84,878,118
     Convertible subordinated debt                                         4,350,000             4,350,000
     Accrued interest payable and other liabilities                        1,024,498             3,642,845
                                                                    ----------------     -----------------
     Total liabilities                                                    86,478,411            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                                                  (5,493,331)           (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)                          (595,193)             (659,963)
                                                                    ----------------     -----------------
     Total shareholders' equity                                           10,806,273            11,322,970
                                                                    ----------------     -----------------
     Total liabilities and shareholders' equity                          $97,284,464          $104,193,933
                                                                    ================     =================

</TABLE>

         See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

                          SURETY CAPITAL CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                   Three Months Ended                             Six Months Ended
                                             --------------------------------             ---------------------------------
                                             June 30,               June 30,               June 30,               June 30,
                                               2000                  1999                   2000                   1999
                                             ----------            ----------             ----------             ----------
<S>                         <C>                               <C>                   <C>                    <C>
Interest income:
  Loans, including fees                      $1,526,273            $2,034,235             $3,123,666             $4,339,306
  Securities:
    Taxable                                     222,911               333,716                422,619                639,763
    Tax-exempt                                       --                32,544                     --                 66,016
  Medical claims receivables factoring               --                 3,214                     --                 63,928
  Federal funds sold and interest bearing
  deposits                                       91,136               300,275                143,890                557,849
                                             ----------            ----------             ----------             ----------
          Total interest income               1,840,320             2,703,984              3,690,175              5,666,862

Interest expense:
  Deposits                                      718,669             1,078,339              1,419,354              2,270,778
  Notes payable                                  97,875               108,272                195,750                216,545
                                             ----------            ----------             ----------             ----------
      Total interest expense                    816,544             1,186,611              1,615,104              2,487,323
                                             ----------            ----------             ----------             ----------
Net interest income                           1,023,776             1,517,373              2,075,071              3,179,539

Provision for credit losses                     105,000                36,590                105,000                131,945
                                             ----------            ----------             ----------             ----------

Net interest income after provision for
credit losses                                   918,776             1,480,783              1,970,071              3,047,594

Noninterest income:
  Service charges on deposit accounts           170,812               210,911                308,929                349,028
  Loan collection fees and late charges         183,162               155,524                326,468                298,830
  Securities gains (losses), net                     --               (44,969)                    --                (44,807)
  Net realized gain on sale of branches              --             2,788,777                     --              2,788,777
  Other income                                   71,789                94,559                478,514                273,136
                                             ----------            ----------             ----------             ----------
      Total noninterest income                  425,763             3,204,802              1,113,911              3,664,964

Noninterest expense:
  Salaries and employee benefits                967,993             1,114,114              1,723,299              2,334,342
  Occupancy and equipment                       333,211               626,910                690,507              1,136,020
  Other expenses                                677,867             1,322,770              1,441,437              2,425,092
                                             ----------            ----------             ----------             ----------
      Total noninterest expense               1,979,071             3,063,794              3,855,243              5,895,454
                                             ----------            ----------             ----------             ----------

Net loss before income taxes                   (634,532)            1,621,791               (771,261)               817,104
Income tax (benefit)                           (148,603)              314,179               (189,794)               310,717
                                             ----------            ----------             ----------             ----------
Net income (loss)                            $ (485,929)           $1,307,612             $ (581,467)            $  506,387
                                             ==========            ==========             ==========             ==========

Net income (loss) per share - Basic          $    (0.08)           $     0.22             $    (0.10)            $     0.08
                                             ==========            ==========             ==========             ==========
Net income (loss) per share - Diluted        $    (0.08)           $     0.22             $    (0.10)            $     0.08
                                             ==========            ==========             ==========             ==========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                          SURETY CAPITAL CORPORATION
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                  (Unaudited)


<TABLE>
<CAPTION>

                                                       Three Months Ended                       Six Months Ended
                                              ----------------------------------     ------------------------------------
                                                  June 30,            June 30,           June 30,             June 30,
                                                    2000               1999                2000                 1999
                                              ---------------     --------------     ---------------     ----------------
<S>                                             <C>                 <C>                <C>                 <C>

Net income (loss)                                   $(485,929)        $1,307,612           $(581,467)           $ 506,387
Other comprehensive income (loss):
 Unrealized gain (loss) on available-for-sale
  securities arising during period                    (44,267)          (464,638)             98,136             (686,880)
Reclassification adjustment for amounts realized
  on securities sales included in income                   --            (44,969)                 --              (44,807)
                                              ---------------     --------------     ---------------     ----------------

 Net unrealized gain (loss)                           (44,267)          (419,669)             98,136             (642,073)
 Tax effect                                            15,051            151,080             (33,366)             231,130
                                              ---------------     --------------     ---------------     ----------------
Total other comprehensive income (loss)               (29,216)          (268,589)             64,770             (410,943)
                                              ---------------     --------------     ---------------     ----------------

Comprehensive income                                $(515,145)        $1,039,023           $(516,697)           $  95,444
                                              ===============     ==============     ===============     ================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                          SURETY CAPITAL CORPORATION
     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                          Six Months Ended
                                                                  ----------------------------------
                                                                   June 30,                June 30,
                                                                     2000                    1999
                                                                  -----------             -----------
<S>                                                               <C>                     <C>
Balance at beginning of period                                    $11,322,970             $11,715,851

Net income (loss)                                                    (581,467)                506,387

Change in fair value of securities available
  for sale, net of tax                                                 64,770                (410,943)
                                                                  -----------             -----------
Balance at end of period                                          $10,806,273             $11,811,295
                                                                  ===========             ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                           SURETY CAPITAL CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)



<TABLE>
<CAPTION>


                                                                                       Six Months Ended
                                                                           ----------------------------------------
                                                                             June 30,                    June 30,
                                                                               2000                        1999
                                                                           ------------                ------------
<S>                                                                        <C>                         <C>
Net cash from operating activities                                         $ (1,528,103)               $   (728,211)

Cash flows from investing activities:
  Net change in loans                                                         4,417,937                   9,852,868
  Net payments received on purchased medical claims
     receivables                                                                     --                     224,678
  Securities available for sale:
     Purchases                                                                 (918,051)                (11,465,028)
     Maturities and repayments                                                  214,197                  12,761,929
     Proceeds from sales                                                        775,550                   3,961,647
  Proceeds from maturities of interest-bearing time deposits                         --                      94,939
  Proceeds from sale of other real estate                                       709,598
  Premises and equipment expenditures                                           (53,341)                   (137,116)
                                                                           ------------                ------------
  Net cash from investing activities                                          5,145,890                  15,293,917
                                                                           ------------                ------------

Cash flows from financing activities:
  Net change in deposits                                                     (3,774,205)                (13,393,751)
                                                                           ------------                ------------
      Net cash from financing activities                                     (3,774,205)                (13,393,751)
                                                                           ------------                ------------
Net change in cash and cash equivalents                                        (156,418)                  1,171,955
Cash and cash equivalents at beginning of period                              9,751,228                  34,051,649
                                                                           ------------                ------------
Cash and cash equivalents at end of period                                 $  9,594,810                $ 35,223,604
                                                                           ============                ============

Supplemental disclosures:
  Cash paid for interest                                                   $  1,639,986                $  2,861,886
  Cash paid (refunds received) for federal income taxes                     ( 1,293,200)                         --

Significant non-cash transactions:
  Transfers of repossessed collateral to other real estate                           --                     125,000
  Additions to loans to facilitate sale of other real estate                     78,000                          --
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       7
<PAGE>

                          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 June 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
<PAGE>

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 is 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:

<TABLE>
<CAPTION>
                                                                    Three Months Ended         Six Months Ended
                                                                  -----------------------    ----------------------
                                                                    June 30,     June 30,     June 30,     June 30,
                                                                      2000         1999         2000         1999
                                                                  ----------    ---------    ---------    ---------
<S>                                                                <C>          <C>          <C>          <C>
      Weighted-average shares outstanding-Basic                    5,895,235    5,760,235    5,895,235    5,760,235
      Effect of stock options                                          6,250       38,075        6,250       85,382
                                                                  ----------    ---------    ---------    ---------

      Weighted-average shares outstanding-Diluted                  5,901,485    5,798,310    5,901,485    5,845,617
                                                                  ==========    ==========   =========    =========
</TABLE>

     The Company reported a net loss for the three and six month periods ended
     June 30, 2000. 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:

<TABLE>
<CAPTION>
                                                                       Gross                Gross            Estimated
                                                Amortized            Unrealized          Unrealized            Fair
                                                   Cost                Gains               Losses              Value
                                               -------------      ----------------      -------------      -------------
<S>                                           <C>                 <C>                   <C>                <C>
     June 30,  2000:
     --------------
        U.S. Treasury notes                      $   196,308                  $ --         $      326        $   195,982
        U.S. government agencies                  12,004,113                    --            896,365         11,107,748
        Mortgage-backed securities                   466,509                   123              5,239            461,393
        Other securities                             744,192                    --                 --            744,192
                                               -------------      ----------------      -------------      -------------

        Total securities                         $13,411,122                  $123         $  901,930        $12,509,315
                                               =============      ================      =============      =============

     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
                                              ==============      ================      =============      =============
</TABLE>

                                       9
<PAGE>

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 June 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 June 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.

<TABLE>
<CAPTION>
                                                                                     Estimated
                                                             Amortized                 Fair
                                                                Cost                   Value
                                                       --------------------    -------------------
<S>                                                    <C>                     <C>
                  Due within one year                           $   196,308            $   195,982
                  Due after one year through five years             500,000                498,515
                  Due after five years through ten               11,504,113             10,609,233
                  years
                  Mortgage-backed securities                        466,509                461,393
                  Other securities                                  744,192                744,192
                                                       --------------------    -------------------

                  Total securities                              $13,411,122            $12,509,315
                                                       ====================    ===================
</TABLE>


     Sales of securities available for sale were as follows:

<TABLE>
<CAPTION>
                                                                         Six Months Ended
                                                                   --------------------------------------
                                                                     June 30,                  June 30,
                                                                       2000                      1999
                                                                   -----------                -----------
<S>                                                                <C>                        <C>
          Proceeds                                                    $775,550                  3,961,647
          Gross Gains                                                       --                        162
          Gross Losses                                                      --                     44,968
</TABLE>


4.   Loans and Medical Claims Receivables
     ------------------------------------

     Loans consisted of the following:

<TABLE>
<CAPTION>
                                                                    June 30,             December 31,
                                                                      2000                   1999
                                                                 ----------------      ---------------
<S>                                                              <C>                   <C>
          Real estate loans                                           $35,841,270          $31,529,099
          Insurance premium financing                                  11,887,064           20,639,094
          Commercial loans                                              9,902,723            9,870,652
          Installment loans                                             5,330,549            5,678,584
                                                                 ----------------      ---------------

          Total gross loans                                            62,961,606           67,717,429

          Unearned interest                                              (308,369)            (510,834)
          Allowance for credit losses                                  (1,325,620)          (1,434,041)
                                                                 ----------------      ---------------

          Loans, net                                                  $61,327,617          $65,772,554
                                                                 ================      ===============
</TABLE>

                                       10
<PAGE>

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 there were no medical
     claims receivable balances outstanding at such date.

     Activity in the allowance for credit losses on loans and medical claims
     receivables was as follows:

<TABLE>
<CAPTION>
                                                   Three Months Ended                        Six Months Ended
                                              ------------------------------          -------------------------------
                                               June 30,            June 30,            June 30,             June 30,
                                                 2000                1999                2000                 1999
                                              ----------          ----------          ----------          -----------
<S>                                           <C>                 <C>                 <C>                 <C>
      Beginning balance                       $1,312,616          $2,260,018          $1,434,041          $ 2,103,024

      Provision for credit losses                105,000              36,590             105,000              131,945
      Charge-offs:
        Loans                                   (175,538)           (924,251)           (442,463)          (1,347,935)
        Medical claims receivables                    --                (192)                 --              (10,217)
      Recoveries:
        Loans                                     83,099             293,117             224,905              512,603
        Medical claims receivables                   443             148,325               4,137              424,187
                                              ----------          ----------          ----------          -----------

      Ending balance                          $1,325,620          $1,813,607          $1,325,620          $ 1,813,607
                                              ==========          ==========          ==========          ===========

</TABLE>

     Impaired loans were as follows:

<TABLE>
<CAPTION>
                                                                    June 30,                December 31,
                                                                      2000                      1999
                                                                  -----------               ------------
<S>                                                               <C>                       <C>
           Impaired loans with allowance allocated                $ 2,869,151               $  3,958,654
           Impaired loans with no allowance allocated                 931,903                    414,419
                                                                  -----------               ------------

             Total impaired loans                                 $ 3,801,054               $  4,373,073
                                                                  ===========               ============

           Amount of the allowance allocated                      $   666,542               $    645,899
                                                                  ===========               ============
</TABLE>

     Nonperforming loans were as follows:

<TABLE>
<CAPTION>
                                                                              June 30,                  December 31,
                                                                                2000                        1999
                                                                           --------------               ------------
<S>                                                                        <C>                          <C>
           Loans past due over 90 days still on accrual                      $  130,000                   $ 13,557
           Nonaccrual loans                                                   2,451,508                    705,969
                                                                           --------------               ------------

           Total nonperforming loans                                         $2,581,508                   $719,526
                                                                           ==============               ==============
</TABLE>

                                       11
<PAGE>

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 June 30, 2000 and
     December 31, 1999 included unfunded loan commitments of $5,969,000 and
     $4,125,000 and letters of credit of $155,000 and $158,000.

     Unfunded loan commitments and letters of credit carrying fixed interest
     rates totaled $937,000 and $3,000 at June 30, 2000, with interest rates
     ranging from 7.5% 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 $5,450,000 and $4,335,000 at June 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 $11,887,000, or 18.9%, and $20,639,000, or 30.5%, of
     gross loans at June 30, 2000 and December 31, 1999.


6.   Other Noninterest Expense
     -------------------------

     Other noninterest expense consisted of the following:

<TABLE>
<CAPTION>
                                                             Three Months Ended             Six Months Ended
                                                          ------------------------     --------------------------
                                                           June 30,     June 30,        June 30,       June 30,
                                                             2000         1999            2000           1999
                                                          ----------   ----------      ----------     ----------
<S>                                                       <C>          <C>             <C>            <C>
     Professional services                                $  227,940   $  328,495      $  491,565     $  698,540
     Postage                                                  46,501       52,308          91,129        151,879
     Telephone                                                50,703       73,697         105,185        159,706
     Office supplies                                          31,228       48,623          63,547         95,745
     Amortization of intangibles and debt
        issuance costs                                       100,723      155,378         222,241        327,864
     Insurance                                                33,284       46,462          67,766         77,292
     FDIC assessment                                          10,381      151,142          21,436        253,223
     Interest on IPF refunds                                      --       79,901          38,700        155,466
     Other                                                   177,107      386,764         339,868        505,377
                                                          ----------   ----------      ----------     ----------

        Total other noninterest expense                   $  677,867   $1,322,770      $1,441,437     $2,425,092
                                                          ==========   ==========      ==========     ==========
</TABLE>

                                       12
<PAGE>

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 June 30, 2000 compared to December 31, 1999, and the consolidated
results of operations for the three month and six month periods ended June 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 $124,000 and $302,000
for the three months and six months periods ended June 30, 1999. Interest
expense on the refunds payable totaled $39,000 for the six months period ended
June 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 June 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
<PAGE>

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 June 30, 2000 and December 31, 1999 the Bank met the
capital levels required by the Formal Agreement, with total risk-based capital
of 14.50% and 14.73% of risk-weighted assets, respectively, and Tier I leverage
capital of 9.81% 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 $97.3 million at June 30, 2000 representing a $6.9
million or 6.6% 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 $12.5
million at December 31, 1999 and June 30, 2000. During the quarter ended June
30, 2000, the bank sold $775,550 of Federal Home Loan and Federal Reserve Bank
stock, received $214,000 from maturing securities, and reinvested $721,000. At
June 30, 2000 the unrealized loss on securities available for sale totaled
$902,000 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.

Net loans decreased $4.5 million, or 6.8%, from $65.8 million at December 31,
1999 to $61.3 million at June 30, 2000. IPF and installment loans decreased $8.8
million and $348,000, respectively, from December 31, 1999. Real estate loans
and commercial loans increased $4.3 million and $32,000, respectively. 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 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
77.3% at June 30, 2000 compared to 79.2% at December 31, 1999.

Other real estate and repossessed assets declined $734,000 to $91,000 due to
sales of two other real estate properties. The Company realized a net gain of
$40,000 on these sales. Other assets decreased $1.2 million from $3.1 million at
December 31, 1999 to $1.9 million at June 30, 2000. Other assets included a
receivable from the Internal Revenue Service for excess tax payments made in
1999 totaling $1.3 million. The amount was refunded during the first quarter of
2000.

                                       14
<PAGE>

Total deposits were $81.1 million at June 30, 2000, a decrease of $3.8 million,
or 4.5%, from December 31, 1999. Noninterest-bearing demand deposits increased
$1.4 million to $17.9 million, or 22.0% of total deposits, at June 30, 2000
compared to $16.5 million, or 19.4% of total deposits, at December 31, 1999.
Savings, NOW and money market accounts increased $1.3 million while time
deposits declined $6.5 million. The shift in deposit categories is due to
normal customer cash-usage patterns.

Time deposits made up 48.0% of the deposit portfolio at June 30, 2000 compared
to 53.5% at December 31, 1999, a decrease of $6.5 million. 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 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 June 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 $2.6 million from December 31, 1999 to $1,024,000 at
June 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 experienced a net loss of $485,929 for the three months ended June
30, 2000 compared to net income of $1,307,612 for the same period in 1999. Net
loss for the six months ended June 30, 2000 was $581,467 compared to a $506,387
net income for the same period in 1999. Net loss per share was $0.08 per share
for the three months ended June 30, 2000 compared to a $0.22 net income per
share for the three months ended June 30, 1999. Net loss per share was $0.10 for
the six months ended June 30, 2000 compared to $0.08 net income per share for
the six months period ended June 30, 1999.

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 $493,597, or 32.5%, and $1,104,468, or 34.7%, for
the three and six months ended June 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 offset by an overall increase in
the weighted-average yield 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. Additionally, the
Company had a significant portion of its average interest-earning assets
invested in lower-

                                       15
<PAGE>

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 4.96% for the second quarter of 2000
compared to 4.32% for the second quarter of 1999. The increase from the previous
year resulted as increase in the Company's weighted-average yield on interest-
earning assets increased to 8.92% for the second quarter of 2000 from 8.71% for
the second quarter of 1999. The Company's net interest margin for the six month
period ended June 30, 2000 was 5.02% and the weighted average yield on interest-
earning assets was 8.92%, compared to 4.38% and 7.87%, 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 lead to a general increase in deposit and loan rates offered by many
financial institutions. The Company increased its balance of non-interest
bearing deposits from $16.5 million at December 31, 1999 to $17.9 million at
June 30, 2000 and decreased its reliance on time deposits in denominations over
$100,000, which slightly mitigated the negative gap position.

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.

Net loan charge-offs totaled $91,996, or 0.15% of average loans, in the second
quarter of 2000 compared to $483,001, or 0.23% of average loans, during the
second quarter of 1999. Net loan charge-offs totaled $213,421, or 0.33% of
average loans, during the six month period ended June 30, 2000 compared to
$421,362, or 0.45% 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 six months ended June 30, 2000 were $228,520 of the total while there
were $40,774 in 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 $2,581,000 at June
30, 2000 and $720,000 at December 31, 1999. Nonperforming loans as a percentage
of total loans totaled 4.10% and 1.06% at such dates. The allowance for loan
losses as a

                                       16
<PAGE>

percentage of total loans decreased from 2.12% at December 31, 1999 to 2.11% at
June 30, 2000. The Company recorded a $105,000 provision for credit loss expense
in the second quarter of 2000 compared to $36,590 in the same period of 1999.
For the six months period ended June 30, 2000, total provision expense was
$105,000 compared to $131,945 for the same period of 1999. The decrease in
provision expense over the six months ended June 30, 2000 was the result of a
decrease in the level of net charge-offs when compared to prior quarters
combined with a decrease in total loans. Management believes the $108,000, or
7.6%, decrease in the allowance for credit losses from December 31, 1999 is
consistent with the $8.8 million, or 42.4%, decrease in higher-risk IPF loans.
The percentage of IPF loans to total loans has decreased from 30.5% at December
31, 1999 to 18.9% at June 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 six month periods ended June
30, 2000, the Company recorded net recoveries of previously charged-off medical
claims factoring receivables of $443 and $4,137, compared to net recoveries
during the year earlier periods of $148,133 and $413,970.

Noninterest Income. Noninterest income totaled $425,763 in the second quarter of
2000, compared to $3,204,802 ($460,994 excluding the gain realized on sale of
branches and realized security losses) in the second quarter of 1999. For the
six month period ended June 30, 2000, noninterest income was $1,113,911 compared
to $3,664,964 ($920,994 excluding the gain realized on sale of branches and
realized security losses) in the prior year. A $2,788,777 gain on the sale of
two Ellis County branches was recorded in the 1999 second quarter. In the first
quarter of 2000, the Company realized a $389,000 settlement of a bond claim in
connection with the Company's now defunct medical claims factoring operations.
The Company also realized a $37,000 gain on the sale of other real estate in the
second quarter of 2000. Service charges on deposit accounts decreased from the
prior year due primarily to the sale of the two branches, while loan collection
fee and late charge income increased modestly.

Noninterest Expense. Noninterest expense totaled $1,979,071 and $3,855,243 for
the three and six month periods ended June 30, 2000, representing decreases from
the year earlier periods of $1,084,723, or 35.4%, and $2,040,211, or 34.6%.
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
$227,940 and $491,565 for the three month and six months period ended June 30,
2000, respectively compared to $328,495 and $698,540 for the comparable periods
in 1999. Professional service expenses has been the largest component of other
noninterest expense over the comparable periods and the reductions are a result
of 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 $38,700 for the six months ended June 30, 2000,
compared to $155,466 for the same period of 1999. Federal deposit insurance
premiums were high in the first quarter of 1999 as the Bank's capital levels
failed to comply with the Formal Agreement.

The Company's efficiency ratio, excluding the impact of the bond claim
settlement and gain on the sale of the branches, was 87.3%, for both the three
and six month periods ended June 30, 2000, compared to 96.8% and 89.5% 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 first quarter of 2000, the Company incurred $0.87 in overhead expenses. The
Company's efficiency ratios for the comparable periods 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 income tax benefits totaling $149,000 and $190,000 for the three and
six month periods ended June 30, 2000, and income tax expense of $314,000 and

                                       17
<PAGE>

$311,000 for the comparable periods during 1999. The effective tax rates for the
three and six month periods ended June 30, 2000 were (23.4)% and (24.6)%, and
for the same periods of 1999 were 19.4% and 38.0%.

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 decreased $156,000, or 1.6%, from $9.8 million at
December 31, 1999 to $9.6 million at June 30, 2000. Cash and cash equivalents
represented 9.9% of total assets at June 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 six months of 2000 were
the net decrease in loans of $4.4 million, securities purchases of $918,000, the
net decrease in deposits of $3.8 million, net proceeds from security sales and
maturities of $990,000 and other real estate sales of $709,000.

Capital Resources

Total shareholders' equity was $10.8 million at June 30, 2000, representing a
$517,000 or 4.6% decrease from December 31, 1999. The impact of the $581,000 net
loss was partially offset by a $65,000 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 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.

                                       18
<PAGE>

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.

<TABLE>
<CAPTION>
                                                                                               Minimum Requirements
                                                                                              Under Prompt Corrective
                                                Actual Capital Ratios       Requirements        Action Regulations
                                           -----------------------------       Under         --------------------------
                                           March 31,        December 31,       Formal        Adequately        Well
                                             2000               1999         Agreement       Capitalized    Capitalized
                                           ---------        ------------    ------------     -----------    -----------
<S>                                        <C>              <C>             <C>              <C>            <C>
Leverage Ratio:
  Tier I capital to average assets
    Consolidated                              5.51%             5.38%             --             4.00%           5.00%
    Bank                                      9.81%             9.78%           7.50%            4.00%           5.00%

Risk-Based Capital Ratios:
  Tier I capital to risk-weighted assets
    Consolidated                              7.44%             7.38%             --             4.00%           6.00%
    Bank                                     13.27%            13.49%           6.00%            4.00%           6.00%
  Total capital to risk-weighted assets
    Consolidated                             12.39%            12.31%             --             8.00%          10.00%
    Bank                                     14.50%            14.73%          14.00%            8.00%          10.00%
</TABLE>

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. No
assurance can be given, however, that the OCC will continue to approve such
reductions in the Bank's surplus, particularly if the Bank is unable to commence
operating profitably in the near future. On April 26, 2000 certain members of
the Company's Board of Directors resolved to guarantee to personally loan the
Company up to $200,000, if necessary, to enable the Company to meet its cash
obligations in 2000.

                                       19
<PAGE>

                          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 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.

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
<PAGE>

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 June
               30, 2000.

                                       21
<PAGE>

                                  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:   August 9, 2000                 SURETY CAPITAL CORPORATION



                                       By:  /s/ Charles M. Ireland
                                            -----------------------------------
                                            Charles M. Ireland, Chief Executive
                                            Officer and Principal Financial
                                            Officer

                                       22
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                      DESCRIPTION                                           PAGE NUMBER
<S>       <C>                                                            <C>
   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
</TABLE>

                                       23