<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 MARCH 31, 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
incorporation or organization) Identification No.)
5000 Rogers Avenue, Fort Smith Arkansas 72903
----------------------------------------------
(Address of principle executive offices)
(501) 484-4305
-------------------------------
(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 March 31, 1999
- --------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 10,080,503
<PAGE>
SUPERIOR FINANCIAL CORP.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
March 31, 1999 (unaudited) and December 31, 1998 2
Consolidated statement of income,
Three months ended March 31, 1999 (unaudited) 3
Consolidated statement of cash flows,
Three months ended March 31, 1999 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of 15
Security Holders
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
<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 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); (viii) changes in securities markets; and (ix) events specifically
relating to Year 2000 readiness. 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 (including its
subsidiaries), or its management are intended to identify forward-looking
statements.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
(unaudited)
Assets
Cash and cash equivalents $ 41,568 $ 81,425
Investments available for sale, net 391,256 364,061
Loans available for sale 16,577 -
Loans receivable 894,419 825,633
Less: allowance for loan losses 10,743 10,472
------------------- ------------------
Loans receivable, net 883,676 815,161
Accrued interest receivable 8,554 7,526
Federal Home Loan Bank stock 15,157 10,950
Premises and equipment, net 26,398 26,213
Mortgage servicing rights, net 2,138 2,198
Prepaid expenses and other assets 4,502 4,199
Goodwill 65,434 64,130
Real estate acquired in settlement of loans, net 502 331
Deferred acquisition costs 2,478 2,522
------------------- ------------------
Total assets $1,458,240 $1,378,716
=================== ==================
Liabilities and stockholders' equity:
Liabilities:
Deposits $ 975,449 $ 970,821
Federal Home Loan Bank borrowings 294,519 216,500
Note payable 13,000 20,000
Senior notes 60,000 60,000
Custodial escrow balances 3,914 4,011
Other liabilities 7,653 5,572
------------------- ------------------
Total liabilities 1,354,535 1,276,904
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,749 94,749
Retained earnings 9,170 6,655
Accumulated other comprehensive income (loss) (315) 307
------------------- ------------------
Total stockholders' equity 103,705 101,812
------------------- ------------------
Total liabilities and stockholders' equity $1,458,240 $1,378,716
=================== ==================
See accompanying notes.
</TABLE>
2
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
For the three months ended March 31, 1999
(In thousands, unaudited)
<TABLE>
<S> <C>
Interest income:
Loans $ 17,031
Investments 6,107
Interest-bearing deposits 42
Other 92
--------------
Total interest income 23,272
Interest expense:
Deposits 8,395
Short-term borrowings 544
Long-term borrowings 4,465
--------------
Total interest expense 13,404
--------------
Net interest income 9,868
Provision for loan losses 570
--------------
Net interest income after provision for loan losses 9,298
Noninterest income:
Service charges on deposit accounts 4,983
Mortgage operations, net 671
Income from real estate operations, net 116
Other 521
--------------
Total noninterest income 6,291
Noninterest expense:
Salaries and employee benefits 5,144
Occupancy expense 744
Deposit insurance premium 130
Data and item processing 1,047
Advertising and promotion 491
Amortization of goodwill 822
Postage and supplies 782
Equipment expense 378
Other 1,954
--------------
Total noninterest expense 11,492
Income before income taxes 4,097
Income taxes 1,582
--------------
Net income $ 2,515
==============
Basic and diluted earnings per common share $ 0.25
</TABLE>
See accompanying notes.
3
<PAGE>
SUPERIOR FINANCIAL CORP.
STATEMENT OF CASH FLOWS
For the three month ended March 31, 1999
(In thousands, unaudited)
<TABLE>
<S> <C>
Operating activities
Net income $ 2,515
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 570
Depreciation 353
Deferred income taxes 545
Amortization of mortgage servicing rights 60
Amortization of acquisition costs 44
Amortization of premiums on mortgage-backed securities, net 384
Amortization of goodwill 822
Amortization of debt issuance costs 122
Gain on sale of loans (57)
Mortgage loans originated for sale (11,479)
Proceeds from sale of mortgage loans held for sale 14,685
Increase in accrued interest receivable (1,028)
Increase in prepaid expenses and other assets (2,895)
Increase in other liabilities 1,536
-------------
Net cash provided by operating activities 6,177
Investing activities
Increase in loans receivable, net (88,811)
Purchase of investments (49,712)
Purchase FHLB stock (4,208)
Proceeds from sale of real estate 174
Principal payments on mortgage-backed securities 21,511
Purchases of premises and equipment (538)
-------------
Net cash used in investing activities (121,584)
Financing activities
Net increase in deposits 4,628
Principal payment on Colonial Bank debt (7,000)
Proceeds from FHLB borrowings 1,960,019
Reduction in FHLB borrowings (1,882,000)
Net decrease in custodial escrow balances (97)
-------------
Net cash provided by financing activities 75,550
-------------
Net decrease in cash (39,857)
Cash and cash equivalents, beginning of period 81,425
-------------
Cash and cash equivalents, end of period $ 41,568
=============
</TABLE>
See accompanying notes.
4
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 month period ended March 31,
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 three month period ended March 31, 1999 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 is computed as follows (in
thousands, except per share amounts):
Three Months
Ended
March 31, 1999
--------------
Common shares-weighted averages (basic) 10,080
Common share equivalents-weighted averages -
Common share-weighted average (diluted) 10,080
Net income $ 2,515
Basic and diluted earnings per common share $ 0.25
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, 1999. 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, 2000.
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 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 balance sheets
and statement of income. Readers of this report should refer to the
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 and telephone banking.
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 159,000 checking customers with average non-interest revenue
of approximately $113 per account annually. Much of this success can be
attributed to the customer-oriented service environment created by the Bank's
personnel.
7
<PAGE>
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Results of Operations
Company
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.
Total assets and total stockholders' equity at March 31, 1999 were $1.46
billion and $103.7 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 March 31, 1999 was $2.51 million.
Net income per share-basic and diluted for the three months ended March 31, 1999
were $0.25. The interest expense on the Note Payable and the Senior Notes is
recorded by the Company and was $1.7 million for the three months ended March
31, 1999. This interest represents the primary difference between the
operations of the Company and those of the Bank. The Company had return on
average assets of 0.71% and return on average common equity of 9.85% for the
three months ended March 31, 1999.
The following discussion on the Bank compares the results of operations for
the Bank on a stand-alone basis for the three months ended March 31, 1999 to
that of the Bank for the three months ended March 31, 1998. The following table
presents the results of operations of the Bank for the three months ended March
31, 1999, and March 31, 1998:
<TABLE>
<CAPTION>
Superior Federal Superior Federal
Bank, F.S.B. Bank, F.S.B.
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
(In thousands)
(unaudited)
<S> <C> <C>
Interest income $23,198 $20,741
Interest expense 11,707 11,706
------- -------
Net interest income 11,491 9,035
Provision for loan losses 570 7,765
------- -------
Net interest income after provision
for loan losses 10,921 1,270
Noninterest income 6,291 5,516
Noninterest expense 11,421 10,833
------- -------
Income (loss) before income taxes 5,791 (4,047)
Income tax expense (benefit) 2,267 (282)
------- -------
Net income (loss) $ 3,524 $(3,765)
------- -------
</TABLE>
8
<PAGE>
Bank
For the three months ended March 31, 1999 the Bank had net income of $3.5
million, an increase of $7.3 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 1.00% and a
return on average common equity of 8.33% for the three months ended March 31,
1999 compared to (1.16)% and (9.39)%, respectively for the same time period in
1998.
Total assets increased to $1.45 billion at March 31, 1999, from $1.37
billion at December 31, 1998, an increase of $79 million or 5.8%. This increase
was primarily the result of loan growth. Net loans receivable increased from
$815 million at December 31, 1998 to $884 million at March 31, 1999, an increase
of $69 million, or 8.5%. Investment securities also increased, from $359
million at December 31, 1998 to $386 million at March 31, 1999, an increase of
$27 million, or 7.5%. Offsetting these increases was a decrease in cash and
cash equivalents from $81 million at December 31, 1998 to $41 million at March
31, 1999, a decrease of $40 million, or 49%. 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 $168 million at March 31,
1999, representing a decrease of $1 million, or 0.6%, from total stockholder's
equity at December 31, 1998. The Bank paid a $4 million dividend to the Company
in February 1999.
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning 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.
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 ended March 31, 1999 was $11.5
million, an increase of $2.5 million or 28% from $9.0 million for March 31,
1998. This resulted in a net interest margin of 3.65% and 3.21% for the three
months ended March 31, 1999 and March 31, 1998, respectively. This increase was
primarily due to an increase in total interest income of $2.5 million, or 12%,
from $20.7 million for the three months ended March 31, 1998 to $23.2 million
for the three months ended March 31, 1999. The primary reason for higher
interest income was loan growth during the third and fourth quarters of 1998 and
the first quarter of 1999.
Provision for Loan Losses
The provision for loan losses decreased $7.2 million, or 93%, from $7.8
million for the three months ended March 31, 1998 to $570,000 for the three
months ended
9
<PAGE>
March 31, 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 loans in the first
quarter of 1998 to reflect increased risk of losses in automobile within the
Bank's loan portfolio, which experienced an increased level of losses in the
first quarter in 1998. Management believes that the allowance for loan losses at
March 31, 1999 is adequate to cover losses inherent in the portfolio at such
date.
Noninterest income
Noninterest income for the three months ended March 31, 1999 was $6.3
million, an increase of $.8 million, or 14%, over the same period in 1998. The
following table presents for the periods indicated the major components of
noninterest income:
Three Months Ended March 31,
1999 1998
-------- --------
(Dollars in thousands)
Service charges on deposit accounts $ 4,983 $ 4,782
Mortgage operations, net 671 443
Other noninterest income 637 291
------- -------
Total noninterest income $ 6,291 $ 5,516
======= =======
Service charges were $5 million for the three months ended March 31, 1999,
compared to $4.8 million for the same period in 1998, an increase of $.2 million
or 4%. The growth in service charges slowed in 1998 and the first quarter of
1999 due to the sale of ten branches with deposits of approximately $95.2
million.
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 Expenses
For the three months ended March 31, 1999, noninterest expense totaled
$11.4 million, an increase of $.6 million, or 5%, from $10.8 million for the
three months ended March 31, 1998. The efficiency ratio for the quarter ended
March 31, 1999 was 59.42%, compared to 68.00% for the three months ended March
31, 1998. The efficiency ratio is calculated by dividing total noninterest
expense, excluding goodwill amortization and securities losses, by net interest
income plus noninterest income. The decrease in the efficiency ratio from March
31, 1998 to March 31, 1999 was due to a 22% increase in total net interest
income plus noninterest income.
10
<PAGE>
Salary and benefit expense for the three months ended March 31, 1999 was
$5.1 million compared to $4.5 million for the three months ended March 31, 1998,
an increase of $.6 million, or 13%. 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 decreased $74,000, or 9%, from $817,000 for the three
months ended March 31, 1998 to $743,000 for the three months ended March 31,
1999, due to the sale of ten branches. Major categories included in occupancy
expense are building lease expense, depreciation expense, and maintenance
contract expense.
Income Taxes
For the three months ended March 31, 1999, income tax expense was $2.3
million, an increase of $2.5 million from an income tax benefit of $282,000, due
to a net loss for the three months ended March 31, 1998. The effective tax rate
was 39.15% for the three months ended March 31, 1999.
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 $168 million at March 31, 1999 from $169
million at December 31, 1998, a decrease of $1 million, or 0.6%. This decrease
was due to dividends of $4 million paid to the Company in the first quarter of
1999, the net change in the unrealized gain (loss) on investments available for
sale, and net income of $3.5 million for the three months ended March 31, 1999.
The following table provides a comparison of the Bank's leverage and risk-
weighted capital ratios as of March 31, 1999 to the minimum regulatory
standards:
Well-Capitalized
Bank Minimum Minimum
Ratio Required Required
----- -------- ----------------
Tangible capital ratio 7.40% 1.50% 5.00%
Core capital ratio 7.40% 4.00% 6.00%
Risk-based capital ratio 14.97% 8.00% 10.00%
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
11
<PAGE>
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.
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>
Three Nine
Months Months
ended ended
3/31/99 12/31/98
------- --------
<S> <C> <C>
Allowance for loan losses, beginning of period 10,472 10,500
Provision for loan losses 570 1,021
Charge-offs (647) (2,317)
Recoveries 348 1,268
------ ------
Allowance for loan losses, end of period 10,743 10,472
====== ======
Allowance to period-end loans 1.20% 1.27%
Net charge-offs to average loans 0.14% 0.20%
Allowance to period-end nonperforming loans 311% 313%
</TABLE>
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at March 31, 1999 were $3.96 million, compared to
$3.94 million at December 31, 1998. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.44% and 0.48% at March 31, 1999 and
December 31, 1998, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 3,457 $ 3,348
Other real estate and repossessed assets 502 594
------- -------
Total nonperforming assets $ 3,959 $ 3,942
======= =======
Nonperforming assets to total loans and other real estate 0.44% 0.48%
</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
12
<PAGE>
documentation procedures. The loan review department has consistently identified
and analyzed 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 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 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.
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 is well
underway, and the Company expects that such testing will be completed in the
second quarter of 1999. In addition, the Company is actively engaged in the
testing phase of in-house supported microcomputers, telecommunications, and
other electronic/mechanical devices. These tests are scheduled for completion
during the second quarter of 1999. The Company is also actively engaged, in
concert with its third
13
<PAGE>
party providers, in the development of its "business continuity plan". The
Company expects that the plan will be completed and validated by June 30, 1999.
As of March 31 1999, the Company has spent $70,000 and expects to incur
additional internal and third-party costs totaling approximately $130,000
related to assessing the status of the Company's systems (including non-
information technology systems), defining its strategy to bring all systems in
to Year 2000 compliance, and implementing this strategy. 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.
The Company anticipates that all "mission critical" systems (as defined by
the FFIEC) will be Year 2000 compliant and fully tested within the schedule set
forth in the guidelines. 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. The Company is actively engaged with its third-party providers in
the test phase for all "mission critical" deposit, loan, and electronic services
systems. Testing of the century date rollover from December 31, 1999, to January
3, 2000, has been completed for all deposit and loan host applications. Initial
testing for leap year, year-end 2000, and 2001 rollover was also completed in
the first quarter of 1999. Third-party interface testing with item processors,
coupon vendors, credit bureaus, check printers and other vendors was also
completed in the first quarter of 1999. Major vendors have made available their
business continuity plans for validation. 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.
Under a hypothetical "worst case scenario", neither the Company's mission
critical systems, nor those of its material third-party vendors, would be Year
2000 compliant on schedule. In that event, the Company could experience material
disruptions in its ability to process customer accounts and otherwise conduct
its business in the ordinary course. However, based on the current status of its
testing program, the Company does not anticipate material disruptions to arise
as a result of the readiness of its hardware and software systems. Assuming that
(i) the Company's completed testing has provided an accurate assessment of the
readiness of the systems tested and (ii) remaining testing is completed on
schedule and provides positive indications of system readiness, the Company's
operations could still be materially disrupted by local or regional power and
communications failures. The Company is developing 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.
14
<PAGE>
The foregoing forward-looking statements, including the costs of addressing
the Year 2000 issue and dates upon which compliance will be attained, 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
The annual meeting of Stockholders of Superior Financial Corp. was held May
12, 1999. Business transacted at the meeting was outlined in the Notice of
Annual Meeting and Proxy Statement dated April 12, 1999.
Proposal I--Election of Directors. The shareholders elected C. Stanley Bailey,
C. Marvin Scott, Boyd W. Hendrickson, John M. Stein and David E. Stubblefield as
directors of the Company for a term of one year ending in 2000. Pursuant to
Regulation 14 of the Securities and Exchange Act of 1934, as amended, management
solicited proxies for the Annual Meeting and there were no solicitations in
opposition to management's nominees. The director nominees received the
following votes:
For Withheld
C. Stanley Bailey 5,754,667 803
C. Marvin Scott 5,754,667 803
Boyd W. Hendrickson 5,727,191 28,279
John M. Stein 5,754,667 803
David E. Stubblefield 5,754,666 804
15
<PAGE>
Proposal II--Adoption of 1998 Long Term Incentive Plan. On June 17, 1998, The
Board of Directors adopted, subject to shareholder approval, the Long Term
Incentive Plan. The shareholder vote was as follows:
Number of
Votes
For 5,289,378
Against 77,504
Abstain 6
Proposal III--Ratification of the selection of Ernst & Young LLP as Superior's
independent auditors. The shareholder vote was as follows:
Number of
Votes
For 5,754,860
Against 601
Abstain 9
Item 5. Other Information
None
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 March 31, 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.
/s/ C. Stanley Bailey May 17, 1999
- ------------------------------------------------ ------------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner May 17, 1999
- ------------------------------------------------ ------------------
Rick D. Gardner, Chief Financial Officer Date
16
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