<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 JUNE 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 or organization)
16101 LaGrande Drive, Suite 103, Little Rock Arkansas 72223
-----------------------------------------------------------
(Address of principal 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 June 30, 1999
- --------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 10,081,152
<PAGE>
SUPERIOR FINANCIAL CORP.
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Number
------
Consolidated balance sheets, 2
June 30, 1999 (unaudited) and December 31, 1998
Consolidated statements of income, 3
For the three months ended June 30, 1999 and 1998
and for the six months ended June 30, 1999 and 1998
(unaudited)
Consolidated statements of cash flows, 4
For the six months ended June 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 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of 17
Security Holders
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
<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); 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
(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>
June 30, December 31,
1999 1998
---------- ------------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 44,204 $ 81,425
Investments available for sale, net 388,475 364,061
Loans available for sale 61,274 --
Loans receivable 942,031 825,633
Less: allowance for loan losses 11,152 10,472
---------- ----------
Loans receivable, net 930,879 815,161
Accrued interest receivable 15,596 7,526
Federal Home Loan Bank stock 20,217 10,950
Premises and equipment, net 28,619 26,213
Mortgage servicing rights, net 2,078 2,198
Prepaid expenses and other assets 3,505 4,199
Goodwill 64,573 64,130
Real estate acquired in settlement of loans, net 531 331
Deferred acquisition costs 2,723 2,522
---------- ----------
Total assets $1,562,674 $1,378,716
========== ==========
Liabilities and stockholders' equity
Liabilities:
Deposits $ 984,170 $970,821
Federal Home Loan Bank borrowings 395,500 216,500
Note payable 13,000 20,000
Senior notes 60,000 60,000
Custodial escrow balances 1,926 4,011
Other liabilities 4,890 5,572
---------- ----------
Total liabilities 1,459,486 1,276,904
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,749 94,749
Retained earnings 11,900 6,655
Accumulated other comprehensive income (loss) (3,562) 307
---------- ----------
Total stockholders' equity 103,188 101,812
---------- ----------
Total liabilities and stockholders' equity $1,562,674 $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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Interest Income:
Loans $18,169 $13,849 $35,200 $13,849
Investments 6,080 5,450 12,187 5,450
Interest-bearing deposits 188 1,875 230 1,875
Other 54 123 146 123
------- ------- ------- -------
Total interest income 24,491 21,297 47,763 21,297
Interest expense:
Deposits 8,465 9,886 16,860 9,886
Short-term borrowings 1,272 1,945 1,816 1,945
Long-term borrowings 4,455 1,419 8,920 1,419
------- ------- ------- -------
Total interest expense 14,192 13,250 27,596 13,250
------- ------- ------- -------
Net interest income 10,299 8,047 20,167 8,047
Provision for loan losses 700 290 1,270 290
------- ------- ------- -------
Net interest income after 9,599 7,757 18,897 7,757
provision for loan losses
Noninterest income:
Service charges on deposit accounts 5,640 5,205 10,623 5,205
Mortgage operations, net 654 437 1,325 437
Income from real estate operations, net 122 136 238 136
Other 690 466 1,211 466
------- ------- ------- -------
Total noninterest income 7,106 6,244 13,397 6,244
Noninterest expense:
Salaries and employee benefits 5,374 4,379 10,518 4,379
Occupancy expense 706 644 1,450 644
Deposit insurance premium 141 151 271 151
Data and item processing 1,080 916 2,127 916
Advertising and promotion 505 537 996 537
Amortization of goodwill 861 925 1,683 925
Postage and supplies 911 742 1,693 742
Equipment expense 513 320 891 320
Other 2,160 1,680 4,114 1,680
------- ------- ------- -------
Total noninterest expense 12,251 10,294 23,743 10,294
Income before income taxes 4,454 3,707 8,551 3,707
Income taxes 1,724 1,453 3,306 1,453
------- ------- ------- -------
Net income $ 2,730 $ 2,254 $ 5,245 $ 2,254
======= ======= ======= =======
Basic and diluted earnings
per common share $ 0.27 $ 0.22 $ 0.52 $ 0.22
</TABLE>
See accompanying notes.
3
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Operating activities
Net income $ 5,245 $ 2,254
Adjustments to reconcile net income to net cash used by operating activities:
Provisions for loan losses 1,270 290
Depreciation 846 286
Deferred income taxes (2,084) --
Amortization of mortgage servicing rights 120 45
Amortization of acquisition costs 93 44
Amortization of premiums on investments, net 786 626
Amortization of goodwill 1,683 924
Amortization of debt issuance costs 245 257
(Gain) loss on sale of real estate 2 (8)
Gain on sale of loans (141) (58)
Mortgage loans originated for sale (21,732) (11,320)
Mortgage loans purchased (58,508) --
Proceeds from sale of mortgage loans held for sale 43,750 8,035
Increase in accrued interest receivable (8,070) (387)
Increase in prepaid expenses and other assets (492) (5,866)
Increase in other liabilities 1,049 3,105
----------- ---------
Net cash used by operating activities (35,938) (1,773)
Investing activities
Increase in loans receivable, net (141,631) 1,731
Purchase of investments (87,394) (5,184)
Gain on sale of investments (17) --
Proceeds from sale of investments 16,177 --
Proceeds from sale of FHLB stock -- 4,381
Purchase FHLB stock (9,267) --
Proceeds from sale of real estate 420 152
Principal payments on investments 40,417 26,322
Purchases of premises and equipment (3,252) (644)
Purchase of Superior Federal Bank, F.S.B., net of cash acquired -- 126,192
----------- ---------
Net cash provided (used) by investing activities (184,547) 152,950
Financing activities
Net increase in deposits 13,349 4,874
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 179,000 (147,198)
Net (increase) decrease in custodial escrow balances (2,085) 919
----------- ---------
Net cash provided by financing activities 183,264 33,411
----------- ---------
Net increase (decrease) in cash (37,221) 184,588
Cash and cash equivalents, beginning of period 81,425 94
----------- ---------
Cash and cash equivalents, end of period $ 44,204 $ 184,682
=========== =========
</TABLE>
See accompanying notes.
4
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 six month periods ended June
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 Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Common shares-weighted averages (basic) 10,080 10,080
Common share equivalents-weighted averages 15 16
Common share weighted averaged (diluted) 10,095 10,096
Net income $ 2,730 $ 5,245
Basic and diluted earnings per common share $ 0.27 $ 0.52
</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 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 161,000 checking customers with average non-interest revenue
of approximately $115 per account
7
<PAGE>
annually. Much of this success can be attributed to the customer-oriented
service environment created by the Bank's personnel.
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.
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 six months ended
June 30, 1999 to that of the Bank for the three months and the six months ended
June 30, 1998. The following table presents the results of operations of the
Bank for the three months and the six months ended June 30, 1999, and June 30,
1998:
<TABLE>
<CAPTION>
Superior Federal Superior Federal
Bank, F.S.B. Bank, F.S.B.
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- ------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income $24,409 $21,269 $47,607 $ 42,010
Interest expense 12,552 11,332 24,259 23,038
------- ------- ------- -------
Net interest income 11,857 9,937 23,348 18,972
Provision for loan losses 700 290 1,270 8,055
------- ------- ------- -------
Net interest income after provision 11,157 9,647 22,078 10,917
for loan losses
Noninterest income 7,102 6,173 13,393 11,689
Noninterest expenses 12,133 10,171 23,554 21,004
------- ------- ------- -------
Income before income taxes 6,126 5,649 11,917 1,602
Income tax expense 2,378 2,216 4,645 1,934
------- ------- ------- -------
Net income (loss) $ 3,748 $ 3,433 $ 7,272 $ (332)
======= ======= ======= =======
</TABLE>
For the three months ended June 30, 1999
Company
- -------
Total assets and total stockholders' equity at June 30, 1999 were $1.56
billion and $103.2 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 June 30, 1999 was $2.73 million. Net
income per share-basic and diluted for the three months ended June 30, 1999 was
$0.27. The interest expense on the Note Payable and the Senior Notes is recorded
by the
8
<PAGE>
Company and was $1.6 million for the three months ended June 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
0.73% and a return on average common equity of 10.42% for the three months ended
June 30, 1999.
Bank
- ----
For the three months ended June 30, 1999 the Bank had net income of $3.7
million, an increase of $0.3 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 1.01% and a return on average common equity of 8.99% for
the three months ended June 30, 1999 compared to 1.05% and 8.30%, respectively
for the same time period in 1998. The decrease in the return on average assets
is a result of a 14% increase in average assets from $1.3 billion for the three
months ended June 30, 1998 to $1.5 billion for the three months ended June 30,
1999.
Total assets increased to $1.55 billion at June 30, 1999, from $1.37
billion at December 31, 1998, an increase of $180 million or 13.1%. This
increase was primarily the result of loan growth. Net loans receivable increased
from $815 million at December 31, 1998 to $931 million at June 30, 1999, an
increase of $116 million, or 14.2%. Investment securities also increased, from
$359 million at December 31, 1998 to $383 million at June 30, 1999, an increase
of $24 million, or 6.7%. Offsetting these increases was a decrease in cash and
cash equivalents from $81 million at December 31, 1998 to $44 million at June
30, 1999, a decrease of $37 million, or 45.7%. 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 $165 million at June 30, 1999,
representing a decrease of $4 million, or 2.4%, from total stockholder's equity
at December 31, 1998. The Bank paid the Company dividends of $4 million in
February 1999, and $3.5 million in April 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.
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 June 30, 1999 was $11.9
million, an increase of $2 million or 20% from $9.9 million for June 30, 1998.
This resulted in a net interest margin of 3.59% and 3.43% for the three months
ended June 30, 1999 and
9
<PAGE>
June 30, 1998, respectively. This increase was primarily due to an increase in
total interest income of $3.1 million, or 15%, from $21.3 million for the three
months ended June 30, 1998 to $24.4 million for the three months ended June 30,
1999. Average interest-earning assets increased $200 million, or 17%, from $1.2
billion for the three months ended June 30, 1998 to $1.4 billion for the three
months ended June 30, 1999. Average loans receivable for the three months ended
June 30, 1999 were $925 million, an increase of $236 million, or 34%, from
average loans receivable for the same period in 1998.
Provision for Loan Losses
The provision for loan losses increased $410,000, or 141%, from $290,000
for the three months ended June 30, 1998 to $700,000 for the three months ended
June 30, 1999. Total reserves were 1.18% and 1.27% of gross loans at June 30,
1999 and December 31, 1998, respectively.
Nonperforming loans and real estate owned were $3.6 million and $3.9
million at June 30, 1999, and December 31, 1998, representing 0.23% and 0.29% of
total assets at the respective balance sheet dates. Total loan loss reserves at
June 30, 1999 were $11.2 million compared to $10.5 million at December 31, 1998,
an increase of $.7 million, or 6.7%.
Noninterest income
Noninterest income for the three months ended June 30, 1999 was $7.1
million, an increase of $.9 million, or 15.1%, over the same period in 1998. The
following table presents for the periods indicated the major components of
noninterest income:
Three Months Ended June 30,
1999 1998
------ ------
(Dollars in thousands)
Service charges on deposit accounts $5,640 $5,205
Mortgage operations, net 654 437
Other noninterest income 808 531
------ ------
Total noninterest income $7,102 $6,173
====== ======
Service charges were $5.6 million for the three months ended June 30, 1999,
compared to $5.2 million for the same period in 1998, an increase of $.4 million
or 7.7%.
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 June 30, 1999, noninterest expense totaled $12.1
million, an increase of $1.9 million, or 19%, from $10.2 million for the three
months
10
<PAGE>
ended June 30, 1998. The efficiency ratio for the quarter ended June 30, 1999
was 59.00%, compared to 57.37% for the three months ended June 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. The increase in the efficiency ratio from June 30, 1998 to
June 30, 1999 was due to a 19.8% increase in total noninterest expenses; mainly
in salaries and benefits expense as described below. This increase in
noninterest expense was partially offset by a 16.5% increase in net interest
income plus noninterest income.
Salary and benefit expense for the three months ended June 30, 1999 was
$5.4 million compared to $4.4 million for the three months ended June 30, 1998,
an increase of $1 million, or 23%. 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 9%, from $642,000 for the three
months ended June 30, 1998 to $706,000 for the three months ended June 30, 1999,
due to the opening of a loan office in Tulsa, Oklahoma, a mortgage production
center in Little Rock, Arkansas, and one of the four planned new retail banking
branches. Major categories included with occupancy expense are building lease
expense, depreciation expense, and maintenance contract expense.
Income Taxes
For the three months ended June 30, 1999, income tax expense was $2.4
million, an increase of $.2 million from $2.2 million at June 30, 1998. The
effective tax rate for the three months ended June 30, 1999 was 38.82% compared
to 39.23% for the three months ended June 30, 1998.
For the six months ended June 30, 1999
Company
- -------
Net income for the six months ended June 30, 1999 was $5.25 million. Net
income per share-basic and diluted for the six months ended June 30, 1999 was
$0.52. Interest expense on the Note Payable and the Senior Notes was $3.3
million for the six months ended June 30, 1999. The Company had a return on
average assets of 0.72% and a return on average common equity of 10.12% for the
six months ended June 30, 1999.
Bank
- ----
For the six months ended June 30, 1999 the Bank had net income of $7.3
million, an increase of $7.6 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 1.01% and a return
on average common equity of 8.68% for the six
11
<PAGE>
months ended June 30, 1999 compared to (.05%) and (.41%), respectively for the
same time period in 1998.
Net Interest Income
Net interest income for the six months ending June 30, 1999 was $23.3
million, an increase of $4.3 million or 23% from $19 million for June 30, 1998.
This resulted in a net interest margin of 3.63% and 3.32% for the six months
ended June 30, 1999 and June 30, 1998, respectively. This increase was primarily
due to an increase in total interest income of $5.6 million, or 13%, from $42
million for the six months ended June 30, 1998 to $47.6 million for the six
months ended June 30, 1999. Average interest-earning assets for the six months
ended June 30, 1999 increased $170 million, or 15%, from $1.1 billion for the
six months ended June 30, 1998 to $1.3 billion for the six months ended June 30,
1999. Average loans receivable for the six months ended June 30, 1999 were $889
million, an increase of $198 million, or 29%, from average loans receivable for
the same period in 1998.
Provision for Loan Losses
The provision for loan losses decreased $6.8 million, or 84%, from $8.1
million for the six months ended June 30, 1998 to $1.3 million for the six
months ended June 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 June 30, 1999 is adequate to cover losses inherent in the
portfolio at such date.
Noninterest income
Noninterest income for the six months ended June 30, 1999 was $13.4
million, an increase of $1.7 million, or 15%, over the same period in 1998. The
following table presents for the periods indicated the major components of
noninterest income:
Six Months Ended June 30,
1999 1998
------- -------
(Dollars in thousands)
Service charges on deposit accounts $10,623 $ 9,987
Mortgage operations, net 1,325 880
Other noninterest income 1,445 822
------- -------
Total noninterest income $13,393 $11,689
======= =======
Service charges were $10.6 million for the six months ended June 30, 1999,
compared to $10 million for the same period in 1998, an increase of $.6 million
or 6%. This increase is attributed to the growth in the number of checking
accounts from 148,197 at June 30, 1998 to 161,182 at June 30, 1999. Increased
mortgage activity resulted in income from mortgage operations of $1.3 million
for the six months ended June 30, 1999, an increase of $.4 million, or 45%, from
$.9 million for the six months ended June 30, 1998.
12
<PAGE>
Noninterest Expenses
For the six months ended June 30, 1999, noninterest expense totaled $23.6
million, an increase of $2.6 million, or 12%, from $21 million for the six
months ended June 30, 1998. The efficiency ratio for the six months ended June
30, 1999 was 59.21%, compared to 62.42% for the six months ended June 30, 1998.
The decrease in the efficiency ratio from June 30, 1998 to June 30, 1999 was due
to a 19% increase in total net interest income plus noninterest income.
Salary and benefit expense for the six months ended June 30, 1999 was $10.5
million compared to $8.9 million for the six months ended June 30, 1998, an
increase of $1.6 million, or 18%. 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 $.1 million, or 7%, from $1.5 million for the
six months ended June 30, 1998 to $1.4 million for the six months ended June 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.
Income Taxes
For the six months ended June 30, 1999, income tax expense was $4.6
million, an increase of $2.7 million from $1.9 million for the six months ended
June 30, 1998. The effective tax rate was 38.98% for the six months ended June
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 second quarter.
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
The Bank's Stockholder's equity decreased to $164.9 million at June 30,
1999 from $169 million at December 31, 1998, a decrease of $4.1 million, or 2%.
This decrease was due to dividends paid to the Company of $4 million in the
first quarter of 1999 and $3.5 million in the second quarter, the net change in
the unrealized gain (loss) on investments available for sale, and net income of
$7.3 million for the six months ended June 30, 1999.
The following table provides a comparison of the Bank's leverage and
risk-weighted capital ratios as of June 30, 1999 and 1998 to the minimum
regulatory standards:
13
<PAGE>
<TABLE>
<CAPTION>
Bank Ratio
June 30, Minimum
1999 1998 Required Well-Capitalized
--------- ------ --------- ----------------
<S> <C> <C> <C> <C>
Tangible capital ratio 6.93% 7.32% 1.50% 5.00%
Core capital ratio 6.93% 7.32% 4.00% 6.00%
Risk-based capital ratio 13.42% 16.82% 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.
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.
Six Nine
Months Months
ended ended
6/30/99 12/31/98
------- --------
Allowance for loan losses, beginning of period 10,472 10,500
Provision for loan losses 1,270 1,021
Charge-offs (1,366) (2,317)
Recoveries 776 1,268
------ ------
Allowance for loan losses, end of period 11,152 10,472
====== ======
Allowance to period-end loans 1.18% 1.27%
Net charge-offs to average loans 0.13% 0.20%
Allowance to period-end nonperforming loans 401% 313%
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at June 30, 1999 were $3.6 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 0.38% and 0.48% at June 30, 1999 and
December 31, 1998, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
14
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $2,779 $3,348
Other real estate and repossessed assets 783 594
------ ------
Total nonperforming assets $3,562 $3,942
====== ======
Nonperforming assets to total loans and
other real estate owned 0.38% 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 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 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 may 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.
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
15
<PAGE>
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 is also actively engaged, in concert with its third party providers, in
the development of its "business continuity plan". The Company's plan was
completed and validated by July 31, 1999. As of June 30, the Company has spent
$75,000 and expects to incur additional internal and third-party costs totaling
approximately $125,000 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
1999 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 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.
16
<PAGE>
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.
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
None
Item 5. Other Information
None
17
<PAGE>
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 June 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.
/s/ C. Stanley Bailey 8/16/99
- ------------------------------------------ -----------------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner 8/16/99
- ------------------------------------------ -----------------------
Rick D. Gardner, Chief Financial Officer Date
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-01-1999
<CASH> 44,204
<INT-BEARING-DEPOSITS> 975
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 388,475
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 942,031
<ALLOWANCE> 11,152
<TOTAL-ASSETS> 1,562,674
<DEPOSITS> 984,170
<SHORT-TERM> 177,000
<LIABILITIES-OTHER> 6,816
<LONG-TERM> 291,500
0
0
<COMMON> 103
<OTHER-SE> 103,087
<TOTAL-LIABILITIES-AND-EQUITY> 1,562,674
<INTEREST-LOAN> 18,169
<INTEREST-INVEST> 6,080
<INTEREST-OTHER> 242
<INTEREST-TOTAL> 24,491
<INTEREST-DEPOSIT> 8,465
<INTEREST-EXPENSE> 5,727
<INTEREST-INCOME-NET> 10,299
<LOAN-LOSSES> 700
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 12,251
<INCOME-PRETAX> 4,454
<INCOME-PRE-EXTRAORDINARY> 4,454
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,730
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 3.10
<LOANS-NON> 2,779
<LOANS-PAST> 10,307
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,743
<CHARGE-OFFS> 719
<RECOVERIES> 428
<ALLOWANCE-CLOSE> 11,152
<ALLOWANCE-DOMESTIC> 11,152
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
