After initially reporting a second-quarter profit of $434,000, a Texas community banking company is restating its results to show a $709,000 loss.

Surety Capital Corp. in Hurst, Tex., announced the $1.14 million swing last week after boosting loss reserves to cover $5.4 million in chargeoffs.

The Office of the Comptroller of the Currency ordered $240 million-asset Surety to increase reserves as losses mounted in two lines of business: factoring receivables and out-of-state lending.

Surety entered the factoring business in 1996, specializing in financing receivables on medical claims. The division was profitable the first year, but a combination of management missteps and unpaid claims forced Surety to charge off more than $2 million in 1997 and about $3.8 million so far in 1998.

"We discovered that it's way too labor intensive," said Bob Hackler, vice chairman of Surety Capital and president and chief executive officer of the Surety Bank subsidiary. "Then we had some management problems, and that created a problem for us."

Surety fired much of the factoring division's management team late last year. Mr. Hackler said the company is "winding down the business very rapidly" and is looking to sell the factoring division.

The company has also struggled with its insurance premium financing in the Southeast.

Encouraged by its success in financing insurance premiums for small businesses in Texas, Surety opened an office in Atlanta in 1996. But high cancellation rates in Georgia and conflicts with local insurance agencies led to chargeoffs of about $1.6 million last quarter.

"The Atlanta office has been closed and with the exception of a few good relationships, loan production from that market has been terminated," said Surety chairman C. Jack Bean.

Steve Didion, an analyst at San Francisco's Hoefer & Arnett, praised Surety's decision to leave the volatile factoring business. But he said he was concerned that the insurance premium lending business failed in Georgia, even if it is thriving in Texas.

"What's disturbing is that it caused a serious problem in the Southeast," Mr. Didion said. "That shakes our confidence somewhat in that business."

Surety's stock fell 37.5 cents Friday, closing at $3.125. At midday Monday, the stock was unchanged.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.