<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER #0-25239
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0379417
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
16101 LaGrande Drive, Suite 103, Little Rock Arkansas 72223
-----------------------------------------------------------------------------
(Address of principle executive offices)
(501) 324-7255
- ------------------------------------------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at September 30, 1999
- --------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 10,081,152
<PAGE>
SUPERIOR FINANCIAL CORP.
INDEX
<TABLE>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets, 2
September 30, 1999 (unaudited) and December 31, 1998
Consolidated statements of income, 3
For the three months ended September 30, 1999 and 1998
and for the nine months ended September 30, 1999 and 1998
(unaudited)
Consolidated statements of cash flows, 4
For the nine months ended September 30, 1999 and 1998
(unaudited)
Notes to consolidated financial statements (unaudited) 5
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of 18
Security Holders
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
</TABLE>
<PAGE>
CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities; (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the operation of the
businesses of Superior Financial Corp. are greater than expected; (iv) changes
in the interest rate environment which reduce margins; (v) general economic
conditions, either nationally or regionally, that are less favorable than
expected, resulting in, among other things, a deterioration in credit quality;
(vi) changes which may occur in the regulatory environment; (vii) a significant
rate of inflation (deflation); and (viii) changes in securities markets. When
used in this Report, the words "believes", "estimates", "plans", "expects",
"should", "may", "might", "outlook", and "anticipates", and similar expressions
as they relate to Superior Financial Corp. (including its subsidiaries), or its
management are intended to identify forward-looking statements.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- ---------------------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 40,797 $ 81,425
Investments available for sale, net 355,960 364,061
Loans available for sale 53,922 -
Loans receivable 987,326 825,633
Less: allowance for loan losses 11,352 10,472
---------------------- ---------------------
Loans receivable, net 975,974 815,161
Accrued interest receivable 16,146 7,526
Federal Home Loan Bank stock 21,142 10,950
Premises and equipment, net 31,360 26,213
Mortgage servicing rights, net 2,304 2,198
Prepaid expenses and other assets 5,511 4,199
Goodwill 63,712 64,130
Real estate acquired in settlement of loans, net 221 331
Deferred acquisition costs 2,674 2,522
---------------------- ---------------------
Total assets $ 1,569,723 $ 1,378,716
====================== =====================
Liabilities and stockholders' equity
Liabilities:
Deposits $ 983,169 $ 970,821
Federal Home Loan Bank borrowings 401,700 216,500
Note payable 13,000 20,000
Senior notes 60,000 60,000
Custodial escrow balances 2,479 4,011
Other liabilities 5,936 5,572
---------------------- ---------------------
Total liabilities 1,466,284 1,276,904
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,749 94,749
Retained earnings 14,899 6,655
Accumulated other comprehensive income (loss) (6,310) 307
---------------------- ---------------------
Total stockholders' equity 103,439 101,812
---------------------- ---------------------
Total liabilities and stockholders' equity $ 1,569,723 $ 1,378,716
====================== =====================
</TABLE>
See accompanying notes.
2
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Interest income:
Loans $19,704 $14,079 $55,051 $27,928
Investments 5,859 4,965 17,646 10,415
Interest-bearing deposits 6 1,815 236 3,689
Other 287 125 686 249
------------ ------------ ----------- ------------
Total interest income 25,856 20,984 73,619 42,281
Interest expense:
Deposits 8,450 9,601 25,310 19,487
Short-term borrowings 2,296 1,996 4,112 3,941
Long-term borrowings 4,437 1,419 13,357 2,838
------------ ------------ ----------- ------------
Total interest expense 15,183 13,016 42,779 26,266
------------ ------------ ----------- ------------
Net interest income 10,673 7,968 30,840 16,015
Provision for loan losses 500 426 1,770 716
------------ ------------ ----------- ------------
Net interest income after
provision for loan losses 10,173 7,542 29,070 15,299
Noninterest income:
Service charges on deposit accounts 5,843 5,286 16,511 10,491
Mortgage operations, net 505 710 1,850 1,151
Income from real estate operations, net 115 122 353 258
Other 453 449 1,599 911
------------ ------------ ----------- ------------
Total noninterest income 6,916 6,567 20,313 12,811
Noninterest expense:
Salaries and employee benefits 5,559 4,588 16,077 8,967
Occupancy expense 838 764 2,288 1,408
Deposit insurance premium 136 139 407 290
Data and item processing 1,125 946 3,252 1,862
Advertising and promotion 486 458 1,482 995
Amortization of goodwill 861 772 2,544 1,697
Postage and supplies 837 748 2,530 1,490
Equipment expense 497 338 1,388 658
Other 2,217 1,923 6,331 3,603
------------ ------------ ----------- ------------
Total noninterest expense 12,556 10,676 36,299 20,970
Income before income taxes 4,533 3,433 13,084 7,140
Income taxes 1,534 1,347 4,840 2,800
------------ ------------ ----------- ------------
Net income $ 2,999 $ 2,086 $ 8,244 $ 4,340
============ ============ =========== ============
Basic and diluted earnings
per common share $ 0.30 $ 0.21 $ 0.82 $ 0.43
</TABLE>
See accompanying notes.
3
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Operating activities
Net income $ 8,244 $ 4,340
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Provision for loan losses 1,770 716
Depreciation 1,418 638
Amortization of mortgage servicing rights 186 85
Amortization of acquisition costs 142 87
Amortization of premiums on investments, net 976 1,070
Amortization of goodwill 2,544 1,697
Amortization of debt issuance costs 368 513
Loss (gain) on sale of real estate 2 (45)
Loss (gain) on sale of loans 24 (135)
Mortgage loans originated for sale (34,287) (25,369)
Mortgage loans purchased (57,065) -
Proceeds from sale of mortgage loans held for sale 53,158 19,880
Increase in accrued interest receivable (8,620) (452)
Increase in prepaid expenses and other assets (3,538) (5,430)
Increase in other liabilities 1,355 6,411
----------- -----------
Net cash (used) provided by operating activities (33,323) 4,006
Investing activities
Increase in loans receivable, net (178,365) (7,557)
Purchase of investments (113,252) (50,399)
Loss (gain) on sale of investments 149 (12)
Proceeds from sale of investments 55,675 15,903
Retail branch sales (10,122) (78,641)
Proceeds from sale of FHLB stock - 4,506
Purchase FHLB stock (10,192) (125)
Proceeds from sale of real estate 901 231
Principal payments on investments 54,854 47,201
Purchases of premises and equipment (6,681) (1,507)
Purchase of Superior Federal Bank, F.S.B., net of cash acquired - 126,192
----------- -----------
Net cash (used) provided by investing activities (207,033) 55,792
Financing activities
Net increase (decrease) in deposits 23,060 (11,712)
Proceeds from borrowings under note payable - 20,000
Proceeds from borrowings under senior notes - 60,000
Proceeds from common stock issued, net - 94,816
Principal payment on note payable (7,000) -
Net increase (decrease) in FHLB borrowings 185,200 (137,198)
Net increase (decrease) in custodial escrow balances (1,532) 2,034
----------- -----------
Net cash provided by financing activities 199,728 27,940
----------- -----------
Net increase (decrease) in cash (40,628) 87,738
Cash and cash equivalents, beginning of period 81,425 94
----------- -----------
Cash and cash equivalents, end of period $ 40,797 $ 87,832
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
1. Summary of Significant Accounting Policies
Nature of Operations
Superior Financial Corp. ("SFC" or "Company") is a unitary thrift holding
company organized under the laws of Delaware and headquartered in Fort Smith,
Arkansas. The Company was organized on November 12, 1997 as SFC Acquisition
Corp. for the purpose of acquiring Superior Federal Bank, F.S.B. (the
"Bank"), a federally chartered savings institution. The Bank provides a broad
line of financial products to small-and medium-sized businesses and to
consumers, primarily in Arkansas and Oklahoma. On April 1, 1998, SFC acquired
the Bank from NationsBank, Inc. for approximately $162.5 million. This purchase
was accounted for using the purchase method of accounting for business
combinations whereby the assets and liabilities of the Bank were recorded at
fair value at the date of acquisition and the difference between the net book
value of the Bank and the purchase price was recorded as goodwill of
approximately $76.4 million.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year or for any other period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1998.
2. Per Share Data
The Company computes earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128. Earnings per share
for the interim periods presented was calculated based on the number of basic
and diluted shares at period end. Stock options are regarded as common stock
equivalents computed using the Treasury Stock method.
5
<PAGE>
Basic and diluted earnings per common share are computed as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
---------------------------------------------------
<S> <C> <C>
Common shares-weighted averages (basic) 10,081 10,081
Common share equivalents-weighted averages 91 37
Common share weighted averages (diluted) 10,172 10,118
Net income $ 2,999 $ 8,244
Basic and diluted earnings per common share $ 0.30 $ 0.82
</TABLE>
3. Recently Issued Accounting Guidance
As of January 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no impact
on the Company's net income or stockholders' equity. SFAS 130 requires
unrealized gains or losses on available for sale securities be included in other
comprehensive income.
On December 31, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 established
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
As the Company operates in only one segment - community banking - the adoption
of SFAS 131 did not have a material effect on the financial statements or the
disclosure of segment information. All the Company's revenues result from
services offered by its bank subsidiary. No revenues are derived from foreign
countries and no single external customer comprises more than 10% of the
Company's revenues.
In June 1998, The Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133,
which requires the Company to recognize all derivatives on the balance sheet at
fair value, is effective for years beginning after June 15, 2000. SFAS 133
permits early adoption as of the beginning of any fiscal quarter that begins
after June 1998. The Company expects to adopt FAS 133 effective January 1, 2001.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair value
of the assets, liabilities, or firm commitments through operating results or
recognized in other comprehensive income until the hedged item is recognized in
operating results. The ineffective portions of a derivative's change in fair
value will be immediately recognized in operating results. The Company has not
yet determined what effect the adoption of this statement will have on its
results of operations or financial position.
6
<PAGE>
4. Branch Sale
During the first quarter of 1999, the Company completed the sale of one
branch facility located in Oklahoma. The sale of this branch resulted in a gain
of $450,000, which was recorded as an adjustment to the purchase price
allocation for the acquisition of the Bank and resulted in a related reduction
in goodwill. The total deposits for the sold branch were approximately $10.7
million. These deposits were funded by the Company through the reduction of
interest bearing deposits held by the Company at the Federal Home Loan Bank.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF SUPERIOR FINANCIAL CORP.
The Company is a unitary thrift holding company. The Company was organized
in November 1997 as SFC Acquisition Corp. for the purpose of acquiring Superior
Federal Bank, F.S.B. (the "Bank"). On April 1, 1998 the Company completed the
Private Placement, and the proceeds were used to acquire, in a purchase
transaction, 100% of the common stock of the Bank. Prior to the acquisition of
the Bank on April 1, 1998, the Company did not have any operations, other than
the costs associated with the private placement offering of common stock and
debt. The Bank is a federally chartered savings bank. The following Management's
Discussion and Analysis of Financial Condition and Results of Operations
analyzes the major elements of the Bank's consolidated balance sheets and
statements of income. Readers of this report should refer to the unaudited
consolidated financial statements and other financial data presented throughout
this report to fully understand the following discussion and analysis.
The Bank is a federally chartered and insured savings bank subject to
extensive regulation and supervision by the Office of Thrift Supervision
("OTS"), as its chartering agency, and the Federal Deposit Insurance Corporation
("FDIC"), as the insurer of its deposits. In addition, the Company is a
registered savings and loan holding company subject to OTS regulation,
examination, supervision and reporting.
The Company provides a wide range of retail and small business services
including non-interest bearing and interest bearing checking, savings and money
market accounts, certificates of deposit, and individual retirement accounts. In
addition, the Company offers an extensive array of real estate, consumer, small
business, and commercial real estate loan products. Other financial services
include automated teller machines, debit card, credit related life and
disability insurance, safe deposit boxes, telephone banking, discount investment
brokerage, and full-service investment advisory services.
The Company has been effective in establishing primary banking
relationships with lower to middle income market segments through the successful
execution of its "totally free checking" programs. This has resulted in the
Company having over 162,000 checking customers with average non-interest revenue
of approximately $114 per account annually. Much of this success can be
attributed to the customer-oriented service environment created by the Bank's
personnel.
7
<PAGE>
Results of Operations
Prior to the acquisition of the Bank of April 1, 1998, the Company did
not have any operations, other than the costs associated with the transaction
and the private placement offering of the Company's common stock and debt. The
Company's primary asset is its investment in 100% of the common stock of the
Bank and Company's operations are funded solely from the operations of the Bank.
For the three months ended September 30, 1999
Company
- -------
Total assets and total stockholders' equity at September 30, 1999 were
$1.6 billion and $103 million, respectively. The $13 million Note Payable
with Colonial Bank (a $7 million principal payment was made on this note in
February, 1999, reducing the balance from $20 million to $13 million) and the
$60 million Senior Notes used to finance the acquisition of the Bank are
recorded as liabilities of the Company.
Net income for the three months ended September 30, 1999 was $3.0 million.
Net income per share-basic and diluted for the three months ended September 30,
1999 was $0.30. The interest expense on the Note Payable and the Senior Notes is
recorded by the Company and was $1.6 million for the three months ended
September 30, 1999. This interest represents the primary difference between the
operations of the Company and those of the Bank. The Company had a return on
average assets of 0.76% and a return on average common equity of 11.15% for the
three months ended September 30, 1999.
Bank
- ----
Since the consolidated income statement of the Company for the nine months
ended September 30, 1998 includes only the operations of the Bank from the
acquisition date (April 1, 1998) to September 30, 1998, the following
discussions on the Bank compare the results of operations for the Bank on a
stand-alone basis for the three months and the nine months ended September 30,
1999 to that of the Bank for the three months and the nine months ended
September 30, 1998. The following table presents the results of operations of
the Bank for the three months and the nine months ended September 30, 1999, and
September 30, 1998:
8
<PAGE>
<TABLE>
<CAPTION>
Superior Federal Superior Federal
Bank, F.S.B Bank, F.S.B
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income $25,780 $20,906 $73,387 $62,916
Interest expense 13,584 11,087 37,843 34,125
------------ ------------ ----------- ------------
Net interest income 12,196 9,819 35,544 28,791
Provision for loan losses 500 426 1,770 8,481
------------ ------------ ----------- ------------
Net interest income after provision 11,696 9,393 33,774 20,310
for loan losses
Noninterest income 6,916 6,469 20,310 18,158
Noninterest expense 12,392 10,451 35,947 31,455
------------ ------------ ----------- ------------
Income before income taxes 6,220 5,411 18,137 7,013
Income tax expense 2,189 2,117 6,834 4,051
------------ ------------ ----------- ------------
Net income (loss) $ 4,031 $ 3,294 $11,303 $ 2,962
============ ============ =========== ============
</TABLE>
For the three months ended September 30, 1999 the Bank had net income of
$4.03 million, an increase of $0.74 million from the comparable period in 1998.
The primary reason for this increase was an increase in net interest income as
discussed under the heading Net Interest Income below. This resulted in a return
on average assets of 1.03% and a return on average common equity of 9.68% for
the three months ended September 30, 1999 compared to 1.02% and 7.68%,
respectively for the same time period in 1998.
Total assets increased to $1.56 billion at September 30, 1999, from $1.37
billion at December 31, 1998, an increase of $191 million or 14%. This increase
was primarily the result of loan growth. Net loans receivable increased from
$815 million at December 31, 1998 to $987 million at September 30, 1999, an
increase of $172 million, or 21%. Offsetting this increase was a decrease in
cash and cash equivalents from $81 million at December 31, 1998 to $40 million
at September 30, 1999, a decrease of $41 million, or 51%. The decrease in cash
and cash equivalents resulted from the Bank utilizing those funds in the
origination of loans receivable. Total stockholder's equity was $ 162.7 million
at September 30, 1999, representing a decrease of $6 million, or 4%, from total
stockholder's equity at December 31, 1998. The Bank paid the Company dividends
of $4 million in February 1999, $3.5 million in April 1999, and $3.5 million in
September 1999.
Net Interest Income
Net interest income represents the amount by which interest income on
interest-bearing assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Bank's
earnings. Interest rate fluctuation, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.
9
<PAGE>
Factors that determine the level of net interest income include the volume
of earning assets and interest-bearing liabilities, yields and rates paid, fee
income from portfolio loans, the level of nonperforming loans and other
non-earning assets, and the amount of noninterest-bearing liabilities supporting
earning assets.
Net interest income for the three months ending September 30, 1999 was
$12.2 million, an increase of $2.4 million or 24.5% from $9.8 million for
September 30, 1998. This resulted in a net interest margin of 3.52% and 3.48%
for the three months ended September 30, 1999 and September 30, 1998,
respectively. This increase was primarily due to an increase in total interest
income of $4.9 million, or 23.3%, from $20.9 million for the three months ended
September 30, 1998 to $25.8 million for the three months ended September 30,
1999. Average interest-earning assets increased $278.1 million, or 24.3%, from
$1.14 billion for the three months ended September 30, 1998 to $1.42 billion for
the three months ended September 30, 1999. Average loans receivable for the
three months ended September 30, 1999 were $967.6 million, an increase of $272.8
million, or 39.3%, from average loans receivable for the same period in 1998.
Provision for Loan Losses
The provision for loan losses increased $74,000, or 17.4%, from $426,000
for the three months ended September 30, 1998 to $500,000 for the three months
ended September 30, 1999. Total reserves were 1.15% and 1.27% of gross loans at
September 30, 1999 and December 31, 1998, respectively.
Nonperforming loans and real estate owned were $2.3 million and $3.9
million at September 30, 1999, and December 31, 1998, representing 0.15% and
0.29% of total assets at the respective balance sheet dates. Total allowance for
loan losses at September 30, 1999 were $11.4 million compared to $10.5 million
at December 31, 1998, an increase of $.88 million, or 8.4%.
Noninterest income
Noninterest income for the three months ended September 30, 1999 was $6.9
million, an increase of $.45 million, or 6.9%, over the same period in 1998. The
following table presents for the periods indicated the major components of
noninterest income:
Three Months Ended September 30,
1999 1998
------------ ------------
(Dollars in thousands)
Service charges on deposit accounts $ 5,843 $ 5,286
Mortgage operations, net 505 710
Other noninterest income 568 473
------------ ------------
Total noninterest income $ 6,916 $ 6,469
============ ============
Service charges were $5.8 million for the three months ended September 30,
1999, compared to $5.3 million for the same period in 1998, an increase of $.5
million or 10.5%.
10
<PAGE>
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. Management of the Company believes the growth in
service charges will be sustained as the number of transaction accounts
(checking and savings accounts) increases. The increase in the number of
transaction accounts and the related service fee generation is due largely to
the Company's successful execution of its "Totally Free Checking" program to the
lower to middle income customers in the markets in which the Company operates.
Noninterest Expense
For the three months ended September 30, 1999, noninterest expense totaled
$11.7 million, an increase of $2.3 million, or 24.5%, from $9.4 million for the
three months ended September 30, 1998. The efficiency ratio for the quarter
ended September 30, 1999 was 59.30%, compared to 59.48% for the three months
ended September 30, 1998. The efficiency ratio is calculated by dividing total
noninterest expense, excluding goodwill amortization and securities losses, by
net interest income plus noninterest income.
Salaries and employee benefits expense for the three months ended September
30, 1999 was $5.6 million compared to $4.6 million for the three months ended
September 30, 1998, an increase of $1.0 million, or 21.7%. This increase was due
primarily to the hiring of additional personnel required to accommodate the
Bank's loan growth and expanded products and services.
Occupancy expense increased $74,000, or 9.7%, from $764,000 for the three
months ended September 30, 1998 to $838,000 for the three months ended September
30, 1999, due to the opening of a loan office in Tulsa, Oklahoma, a mortgage
production center in Little Rock, Arkansas, and four new retail banking
branches. Major categories included in occupancy expense are building lease
expense, depreciation expense, and maintenance contract expense.
Data and item processing increased $180,000, or 19%, from $946,000 for the
three months ended September 30, 1998, to $1.1 million for the three months
ended September 30, 1999, due to loan and deposit growth, increased number of
transactions, and new systems.
Income Taxes
For the three months ended September 30, 1999, income tax expense was $2.2
million, an increase of $.1 million from $2.1 million at September 30, 1998. The
effective tax rate for the three months ended September 30, 1999 was 35.2%
compared to 39.1% for the three months ended September 30, 1998.
11
<PAGE>
For the nine months ended September 30, 1999
Company
- -------
Net income for the nine months ended September 30, 1999 was $8.2 million.
Net income per share-basic and diluted for the nine months ended September 30,
1999 was $0.30. Interest expense on the Note Payable and the Senior Notes was
$4.9 million for the nine months ended September 30, 1999. The Company had a
return on average assets of 0.73% and a return on average common equity of
10.46% for the nine months ended September 30, 1999.
Bank
- ----
For the nine months ended September 30, 1999 the Bank had net income of
$11.3 million, an increase of $8.3 million from the comparable period in 1998.
The primary reason for this increase was a reduction in the provision for loan
losses, which is more fully discussed under the section "Provision for Loan
Losses" below. This resulted in a return on average assets of 1.02% and a return
on average common equity of 9.02% for the nine months ended September 30, 1999
compared to 0.30% and 2.38%, respectively for the same time period in 1998.
Net Interest Income
Net interest income for the nine months ending September 30, 1999 was $35.5
million, an increase of $6.7 million or 23.3% from $28.8 million for September
30, 1998. This resulted in a net interest margin of 3.59% and 3.41% for the nine
months ended September 30, 1999 and September 30, 1998, respectively. This
increase was primarily due to an increase in total interest income of $4.9
million, or 23.4%, from $20.9 million for the nine months ended September 30,
1998 to $25.8 million for the nine months ended September 30, 1999. Average
interest-earning assets for the nine months ended September 30, 1999 increased
$206.9 million, or 18.1%, from $1.1 billion for the nine months ended September
30, 1998 to $1.3 billion for the nine months ended September 30, 1999. Average
loans receivable for the nine months ended September 30, 1999 were $915.4
million, an increase of $223.5 million, or 32.3%, from average loans receivable
for the same period in 1998.
Provision for Loan Losses
The provision for loan losses decreased $6.7 million, or 78.8%, from $8.5
million for the nine months ended September 30, 1998 to $1.8 million for the
nine months ended September 30, 1999. During the three months ended March 31,
1998, the Bank made certain changes in accounting estimates totaling
approximately $7.7 million, and the allowance for loan losses was significantly
increased in the first quarter of 1998 to reflect increased risk of losses in
the automobile portion of the Bank's loan portfolio, which experienced an
increased level of losses in the first quarter of 1998. Management believes that
the allowance for loan losses at September 30, 1999 is adequate to cover losses
inherent in the portfolio at such date.
12
<PAGE>
Noninterest income
Noninterest income for the nine months ended September 30, 1999 was
$20.3 million, an increase of $2.1 million, or 11.5%, over the same period in
1998. The following table presents for the periods indicated the major
components of noninterest income:
Nine Months Ended September 30,
1999 1998
------------ ------------
(Dollars in thousands)
Service charges on deposit accounts $16,511 $15,273
Mortgage operations, net 1,850 1,594
Other noninterest income 1,949 1,291
------------ ------------
Total noninterest income $20,310 $18,158
============ ============
Service charges were $16.5 million for the nine months ended September 30,
1999, compared to $15.3 million for the same period in 1998, an increase of $1.2
million or 7.8%. This increase is attributed to the growth in the number of
checking accounts from approximately 154,000 at September 30, 1998 to
approximately 162,000 at September 30, 1999. Increased mortgage activity
resulted in income from mortgage operations of $1.9 million for the nine months
ended September 30, 1999, an increase of $.3 million, or 16.1%, from $1.6
million for the nine months ended September 30, 1998.
Noninterest Expense
For the nine months ended September 30, 1999, noninterest expense totaled
$36.0 million, an increase of $4.5 million, or 14.3%, from $31.5 million for the
nine months ended September 30, 1998. The efficiency ratio for the nine months
ended September 30, 1999 was 59.26%, compared to 63.38% for the nine months
ended September 30, 1998. The decrease in the efficiency ratio from September
30, 1998 to September 30, 1999 was due to an 18.2% increase in total net
interest income plus noninterest income.
Salaries and employee benefit expense for the nine months ended September
30, 1999 was $16.5 million compared to $13.5 million for the nine months ended
September 30, 1998, an increase of $3 million, or 22.2%. This increase was due
primarily to the hiring of additional personnel required to accommodate the
Bank's loan growth and expanded products and services.
Occupancy expense increased $64,000, or 2.9%, from $2.2 million for the
nine months ended September 30, 1998 to $2.3 million for the nine months ended
September 30, 1999, due to the net effect of the sale of ten branches and the
opening of new mortgage locations and retail branches. Major categories included
in total occupancy expense are building lease expense, depreciation expense, and
maintenance contract expense.
Data and item processing expense increased $371,000, or 12.9%, from $2.9
million for the nine months ended September 30, 1998, to $3.3 million for the
nine months ended September 30, 1999, due to growth in loans and deposits, an
increased number of transactions, and new systems.
13
<PAGE>
Income Taxes
For the nine months ended September 30, 1999, income tax expense was $6.8
million, an increase of $2.7 million from $4.1 million for the nine months ended
September 30, 1998. The effective tax rate was 37.68% for the nine months ended
September 30, 1999. Because of the change of ownership of the Bank on April 1,
1998, the income tax benefit resulting from a loss in the first quarter of 1998
was not taken into account when the tax expense was calculated in the third
quarter. The effective tax rate for the nine months ended September 30, 1998 was
57.76%.
Impact of Inflation
The effects of inflation on the local economy and on the Bank's operating
results have been relatively modest for the past several years. Since
substantially all of the Bank's assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates. The Bank tries to control
the impact of interest rate fluctuations by managing the relationship between
its interest sensitive assets and liabilities.
Capital Resources
Stockholder's equity decreased to $162.7 million at September 30, 1999 from
$169 million at December 31, 1998, a decrease of $6.3 million, or 3.7%. This
decrease was due to $11 million dividends paid to the Company, the net change in
the unrealized gain (loss) on investments available for sale of $6.6 million,
and net income of $11.3 million for the nine months ended September 30, 1999.
The following table provides a comparison of the Bank's leverage and
risk-weighted capital ratios as of September 30, 1999 and 1998 to the minimum
regulatory standards:
<TABLE>
<CAPTION>
Bank Ratio Well-Capitalized
September 30, Minimum Minimum
1999 1998 Required Required
------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Tangible capital ratio 6.97% 9.02% 1.50% 5.00%
Core capital ratio 6.97% 9.02% 4.00% 6.00%
Risk-based capital ratio 12.22% 19.14% 8.00% 10.00%
</TABLE>
Asset Quality
Management is aware of the risks inherent in lending and continually
monitors risk characteristics of the loan portfolio. The Company's policy is to
maintain the allowance for loan losses at a level believed adequate by
management to absorb potential loan losses within the portfolio. Management's
determination of the adequacy of the allowance is performed by an internal loan
review committee and is based on risk characteristics of the loans, including
loans deemed impaired in accordance with Financial Accounting Standards Board
(FASB) Statement No. 114, past loss experience, economic conditions and such
other factors that deserve recognition. Additions to the allowance are charged
to operations.
14
<PAGE>
The following table presents, for the periods indicated, an analysis of the
Company's allowance for loan losses and other related data. The Bank's results
of operations since the purchase date are included in the December 31, 1998
operations of the Company.
<TABLE>
<CAPTION>
Nine Nine
Months Months
ended ended
9/30/99 12/31/98
--------------------------
<S> <C> <C>
Allowance for loan losses, beginning of period 10,472 10,500
Provision for loan losses 1,770 1,021
Charge-offs (2,057) (2,317)
Recoveries 1,167 1,268
----------- ------------
Allowance for loan losses, end of period 11,352 10,472
=========== ============
Allowance to period-end loans 1.15% 1.27%
Net charge-offs to average loans 0.13% 0.20%
Allowance to period-end nonperforming loans 645% 496%
</TABLE>
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at September 30, 1999 were $2.3 million, compared
to $2.7 million at December 31, 1998. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.24% and 0.33% at September 30, 1999
and December 31, 1998, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 1,760 $ 2,110
Other real estate and repossessed assets 565 594
------------- ------------
Total nonperforming assets $ 2,325 $ 2,704
============= ============
Nonperforming assets to total loans and
other real estate owned 0.24% 0.33%
</TABLE>
The Company has well developed procedures in place to maintain a high
quality loan portfolio. These procedures begin with approval of lending policies
and underwriting guidelines by the Board of Directors, low individual lending
limits for officers, Senior Loan Committee approval for large credit
relationships and quality loan documentation procedures. The loan review
department identifies and analyzes weaknesses in the portfolio and reports
credit risk grade changes on a quarterly basis to Bank management and directors.
The Bank also maintains a well-developed monitoring process for credit
extensions in excess of $100,000. The Bank has established underwriting
guidelines to be followed by its officers. The Company also monitors its
delinquency levels for any negative or adverse trends and collection efforts are
done on a centralized basis. The Company also has procedures to bring rapid
resolution of
15
<PAGE>
nonperforming loans and prompt and orderly liquidation of real estate,
automobiles and other forms of collateral.
The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well collateralized and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring. The Company regularly updates appraisals on loans collateralized
by real estate; particularly those categorized as nonperforming loans and
potential problem loans. In instances where updated appraisals reflect reduced
collateral values, an evaluation of the borrower's overall financial condition
is made to determine the need, if any, for possible writedowns or appropriate
additions to the allowance for loan losses.
The Company records real estate acquired by foreclosure at the lesser of
the outstanding loan balance, net of any reduction in basis, or the fair value
at the time of foreclosure, less estimated costs to sell.
As of September 30, 1999, the Company had no non-government accruing loans
that were contractually past due 90 days or more. However, the Company continues
to accrue interest for government-sponsored loans such as FHA insured and VA
guaranteed loans which are past due 90 or more days, as the interest on these is
insured by the federal government. The aggregate unpaid principal balance of
accruing loans which were past due 90 or more days was $51.4 million and $15.6
million, as of September 30, 1999, and December 31, 1998, respectively.
Year 2000 Readiness Disclosure
Like most other financial institutions, the operations of the Bank are
particularly sensitive to potential problems arising from the inability of many
existing computer hardware and software systems and associated applications to
process accurately information relating to any two-digit "date field" entries
referring to the year 2000 and beyond. Many existing systems are constructed to
read such entries as referring to dates beginning with "19" rather than "20".
This set of issues is generally referred to as the "Year 2000 problem."
The Federal Financial Institutions Examination Council (the "FFIEC"),
through bank regulatory agencies including the OTS and the FDIC, has issued
mandatory compliance guidelines requiring financial institutions to develop and
implement plans for addressing Year 2000 issues relevant to their operations.
The Company and the Bank have developed a plan as required under the guidelines.
The Company and its major third-party providers have completed the awareness,
assessment and renovation phases for all "mission critical" deposit, loan and
electronic services systems. The testing phase for these systems was completed
in June 1999. In addition, the Company has tested in-house supported
microcomputers, telecommunications, and other electronic/mechanical devices.
The Company, in concert with its third party providers, completed and validated
its "business continuity plan" by July 31, 1999. As of September 30, the
Company has spent $98,000 and expects to incur additional internal and third-
party costs totaling approximately $114,000 related to contingency training for
employees, customer communications, and system replacement. These costs have
been and will continue to be expensed as incurred and are not expected to be
material to the Company's on-going operating costs.
16
<PAGE>
The Company's "mission critical" systems (as defined by the FFIEC) have
been fully tested within the schedule set forth in the guidelines and found to
be Year 2000 compliant. However, the Company and the Bank depend upon data
processing and other services provided by third-party vendors. These vendors
have provided assurances that their systems will also be Year 2000 compliant by
year-end 1999. In order to validate these assurances, the Company has tested
all "mission critical" deposit, loan, and electronic services systems including
the century date rollover from December 31, 1999, to January 3, 2000; initial
testing for leap year, year-end 2000, and 2001 rollover; and, third-party
interface testing with item processors, coupon vendors, credit bureaus, check
printers and other vendors. Nevertheless, the Company could experience material
disruptions in its operations if the systems of such vendors are not Year 2000
compliant as scheduled. The Company is unable to quantify at this time the cost
to the Company if such vendors fail to achieve Year 2000 compliance. Moreover,
to the extent that the risks posed by the Year 2000 problem are pervasive in
data processing and transmission and communications services worldwide, the
Company cannot predict with any certainty that its operations will remain
materially unaffected after January 1, 2000 or on dates preceding this date at
which time post-January 1, 2000 dates become significant within the Company's
systems.
Assuming that the Company's completed testing has provided an accurate
assessment of the readiness of the systems tested, the Company's operations
could still be materially disrupted by local or regional power and
communications failures. The Company has developed a contingency plan to
address the challenges presented by such a worst case scenario.
Based upon 1998 expenditures and the anticipated 1999 expenditures,
management believes that the costs of the Year 2000 compliance efforts will not
materially affect Superior Financial Corp.'s results of operations, liquidity or
capital resources.
17
<PAGE>
The foregoing forward-looking statements, including the costs of addressing
the Year 2000 issue and assurance of compliance, reflect management's current
assessment and estimates with respect to Superior Financial Corp.'s Year 2000
compliance effort. Various factors could cause actual plans and results to
differ materially from those contemplated by such assessments, estimates, and
forward-looking statements, many of which are beyond the control of management.
Some of these factors include, but are not limited to, third-party modification
plans, availability of technological and monetary resources, representations by
vendors and counter parties, technological advances, economic considerations and
consumer perceptions. Superior Financial Corp.'s Year 2000 compliance program
is an ongoing process involving continual evaluation and may be subject to
change in response to new developments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various lawsuits and litigation matters on
an ongoing basis as a result of its day-to-day operations. However, the Company
does not believe that any of these or any threatened lawsuits and litigation
matters will have a materially adverse effect on the Company or its business.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On July 21, 1999, the Board of Directors of the Company unanimously
consented to adoption of a resolution electing Howard "Buddy" McMahon to fill a
vacant directorship on the Board of Directors of Superior Financial Corp.
Item 6. Exhibits and reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Financial Corp.
18
<PAGE>
/s/ C. Stanley Bailey 11/15/99
- ------------------------------------------ ------------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner 11/15/99
- ------------------------------------------ ------------------
Rick D. Gardner, Chief Financial Officer Date
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 40,797
<INT-BEARING-DEPOSITS> 1,187
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 355,960
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 987,326
<ALLOWANCE> 11,352
<TOTAL-ASSETS> 1,569,723
<DEPOSITS> 983,169
<SHORT-TERM> 183,200
<LIABILITIES-OTHER> 8,416
<LONG-TERM> 291,500
0
0
<COMMON> 101
<OTHER-SE> 103,337
<TOTAL-LIABILITIES-AND-EQUITY> 1,569,723
<INTEREST-LOAN> 19,704
<INTEREST-INVEST> 5,859
<INTEREST-OTHER> 293
<INTEREST-TOTAL> 25,856
<INTEREST-DEPOSIT> 8,450
<INTEREST-EXPENSE> 15,183
<INTEREST-INCOME-NET> 10,673
<LOAN-LOSSES> 500
<SECURITIES-GAINS> (152)
<EXPENSE-OTHER> 12,556
<INCOME-PRETAX> 4,533
<INCOME-PRE-EXTRAORDINARY> 4,533
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,533
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 3.08
<LOANS-NON> 1,760
<LOANS-PAST> 53,153
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,152
<CHARGE-OFFS> 691
<RECOVERIES> 391
<ALLOWANCE-CLOSE> 11,352
<ALLOWANCE-DOMESTIC> 11,352
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
