<PAGE>
As filed with the Securities and Exchange Commission on March 29, 1999
Registration No. 333-60111
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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SUPERIOR FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
---------------
Delaware 6711 51-0379417
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Identification No.)
Classification Code
Number)
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5000 Rogers Avenue (501) 484-4305
Fort Smith, Arkansas 72903 (Telephone No.)
(Address of principal executive
offices)
C. Stanley Bailey
Chief Executive Officer
Superior Financial Corp.
5000 Rogers Avenue
Fort Smith, Arkansas 72903
(501) 484-4305
(Name and address of agent for service)
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With a copy to:
Willard H. Henson
Miller, Hamilton, Snider & Odom, L.L.C.
One Commerce Street, Suite 305
Montgomery, Alabama 36104
Telephone: 334-834-5550
Facsimile: 334-265-4533
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date as may
be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine.
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<PAGE>
Until May 6, 1999, all dealers effecting transactions in the stock and the
senior notes, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters.
AVAILABLE INFORMATION
Superior Financial Corp. is subject to the information requirements of the
Securities Exchange Act of 1934, as amended, and, as required by that act,
files reports and other information with the U.S. Securities and Exchange
Commission, commonly referred to as the SEC. The public may read and copy
reports and other information filed by Superior with the SEC at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 140, Chicago, Illinois 60661-2511.
Copies of such materials may be obtained by mail from the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Certain of such
information may also be obtained from the SEC's website at http://www.sec.gov.
Superior has filed a registration statement under the Securities Act of 1933
with respect to this offering. As permitted by the rules of the SEC, this
prospectus does not contain all of the information set forth in the
registration statement. Investors are referred to the registration statement
for further information contained in financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about
the contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract
or other document filed as an exhibit to the registration statement. Each such
statement is so qualified. Copies of each document filed as an exhibit may be
obtained at the SEC's Washington, D.C. office upon payment of charges
prescribed by the SEC or, in the case of documents electronically filed, by
accessing the SEC's website at http://www.sec.gov.
<PAGE>
PROSPECTUS
Superior Financial Corp.
10,079,703 Shares of Common Stock
$60,000,000 of 8.65% Senior Notes
Consider The Stock and the Senior Notes--
carefully the
risk factors
beginning on page
9 of this
prospectus.
. were originally issued and sold in a private
placement
. may be resold from time to time by the original
purchasers or their successors
Neither the stock
nor the senior . are traded only over the counter, and trading prices
notes are savings are quoted on the Nasdaq OTC Bulletin Board under
accounts or the symbol SUFI
deposits in
Superior
Financial Corp.
They are not
insured by the
Federal Deposit
Insurance
Corporation or
any other
governmental
agency.
The Original Purchasers--
. may sell the stock and the notes directly or through
underwriters, dealers or brokers
. must deliver a copy of this prospectus to purchasers
of the stock before or at the time of sale
. will receive the proceeds of sales, net of discounts
or commissions
Original
purchasers,
brokers or
dealers who sell
the stock or the
senior notes may
be considered
underwriters
under the federal
securities laws.
Superior Financial Corp.--
. is obligated by contract with the original
purchasers to supply and periodically update this
prospectus and to bear certain costs related to it
. accounted for its acquisition of Superior Federal
Bank, F.S.B., in a way that created a material
difference between the $10.10 book value of the
stock and its $3.71 tangible book value
. may, if market conditions warrant, make an
underwritten offering of additional stock in the
future
Neither the SEC nor any state securities commission has approved the stock or
the senior notes or has determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
March , 1999
<PAGE>
Prospectus Summary
This section of the prospectus summarizes more detailed information found in
the main body of the prospectus. The more detailed information includes the
financial statements and the notes accompanying them. The reader should
carefully read the entire prospectus and should devote particular attention to
the information provided under the heading "Risk Factors."
Information About Superior Financial Corp.
Superior Financial Corp. is a unitary thrift holding company. It is a
Delaware corporation headquartered in Fort Smith, Arkansas. It was organized in
1997 as SFC Acquisition Corp. for the purpose of acquiring Superior Federal
Bank, F.S.B., a federally charted savings bank. In order to avoid confusion,
throughout the prospectus, we will refer to Superior Financial Corp. as the
Company and to Superior Federal Bank, F.S.B., as the Bank.
Since it is a holding company, the Company has no significant business
operations of its own and conducts its business almost entirely through
subsidiaries. The Bank is the Company's primary subsidiary. The Bank owns a
subsidiary, SFS Corporation, and a second-tier subsidiary, Southwest Protective
Life Insurance Company, which sells consumer loan credit life insurance to
consumer loan borrowers of the Bank.
As of December 31, 1998, the Company had:
. $1.4 billion in total assets, and
. $101.8 million in shareholders' equity
The Bank was organized in 1934 and is also headquartered in Fort Smith,
Arkansas. It operates branches in Arkansas and Oklahoma. The Bank offers a
wide range of retail and small business banking services including:
. interest bearing and non-interest bearing checking, savings and money market
accounts;
. certificates of deposit;
. individual retirement accounts and small business loans;
. commercial real estate loans;
. safety deposit boxes;
. ATM services;
. telephone banking;
. credit life and disability insurance; and
. alternative investments.
About the Acquisition of the Bank
The Company acquired 100% of the stock of the Bank from NationsBank, N.A. on
April 1, 1998. The Company financed the acquisition with:
. the private placement of $97.5 million of its stock;
. the private placement of $60.0 million of senior notes; and
. a $20.0 million loan from Colonial Bank.
Resale of the stock and the senior notes issued in the private placement is
restricted under the federal securities laws. Therefore, the Company agreed
with the purchasers of the stock and notes to, among other things, file with
the SEC a shelf registration statement covering resales of the stock and the
senior notes. This prospectus forms a part of that registration statement.
The large debt component of the acquisition financing has created a high
degree of leverage at the level of the Company, as opposed to the level of the
Bank. At December 31, 1998, the Company's leverage ratio was 2.85%.
Furthermore, the purchase method of accounting used in the acquisition created
a significant non-cash amortization charge for goodwill. This charge reduces
the Company's reported GAAP earnings by approximately $3.3 million annually. In
addition, the senior notes and the loan have created a debt service expense of
approximately $7.1 million annually.
The accounting treatment applied to the acquisition created a material
difference between the $10.10 book value of the stock and its $3.71 tangible
book value. This difference derives from the accounting treatment of the
acquisition at the Company level, as opposed to the accounting treatment
required at the Bank level. The Company recorded at the
1
<PAGE>
holding company level $80.0 million in debt incurred to finance the
acquisition. In addition, using "push-down" accounting principles, the Company
recorded $64.0 million allocated to goodwill at the Bank level.
The Company's Goals and Business Strategy
The Company intends to maximize long-term shareholder value through year-to-
year growth in loans, deposits and non-interest revenue in a manner consistent
with safe, sound and prudent banking practices. To achieve this goal, the
Company's business strategy is to:
. increase revenue and enhance operating efficiency;
. expand the loan portfolio and transaction deposit accounts through market-
share growth and selective de novo branching, specifically targeting the
account relocation expected to take place as a result of customer-related
customer dislocation in the Company's market area;
. expand the Bank's product offerings to encompass a wider range of products
and services which will be offered by a locally owned and operated
financial company with motivated employees;
. enhance services by offering expanded ATM, telephone, and personal computer
based banking services; and
. maintain financial safety and soundness.
Certain of these short-term initiatives have already been put into effect.
In August and September 1998, the Bank sold nine branches in Oklahoma and
Arkansas. These branches were either unprofitable, or in locations
inconsistent with the strategic direction of the Bank. Additionally, several
significant outsourcing contracts have been renegotiated on more favorable
terms. The Bank is also analyzing the merits of selling certain underutilized
fixed assets and reallocating this capital into higher earning assets.
The Company's growth strategy focuses on targeting customers displaced and
disenchanted as a result of industry consolidation in its immediate and
contiguous markets. The ongoing consolidation in the financial services
industry is providing significant opportunity for local, community-oriented
financial institutions to capitalize on the resulting merger dislocation of many
customers. The Company is positioned to exploit this opportunity as a newly
independent organization. Furthermore, its reputation in its market for strong
service and its "totally free checking" product should help it to cultivate
these customers.
The Company plans to attract these customers both through promotion in its
existing markets and through de novo branching and acquisitions in new
markets. The Bank has begun building four branches, two in Little Rock and one
each in Conway and Ft. Smith. These locations will introduce a branch design
that emphasizes speed of service and convenience. The Bank opened a loan
production office in Tulsa, Oklahoma in October, 1998.
Regulatory Oversight
The Company is a registered unitary thrift holding company and is subject to
examination and regulation by the OTS, the Office of Thrift Supervision. The
Bank, as a federally chartered savings bank, is subject to comprehensive
regulation and examination by the OTS, as its chartering authority and primary
regulator, and by the FDIC, which administers the Savings Association
Insurance Fund, which insures the Bank's deposits to the maximum extent
permitted by law. The Bank is a member of the Federal Home Loan Bank of
Dallas, which is one of the 12 regional banks which comprise the FHLB System.
The Company is further subject to regulations of the Federal Reserve Board
governing reserves required to be maintained against deposits and certain
other matters.
The Company's Address and Telephone Number
The Company's executive offices are located at 5000 Rogers Avenue, Fort
Smith, Arkansas 72917-7012, and its main telephone number is (501) 484-4305.
2
<PAGE>
THE OFFERING
The Private Placement........... The Superior Securities issued to investors
in the Private Placement were sold by the
Company on April 1, 1998. An aggregate of
10,079,703 million shares of Common Stock and
an aggregate of $60.0 million of the Senior
Notes were sold. In connection therewith, the
Company executed and delivered for the
benefit of the holders of the Superior
Securities the Registration Rights Agreement,
providing for, among other things, the filing
of the Registration Statement of which this
Prospectus forms a part. See "The Private
Placement" and "Registration Rights."
Securities Offered.............. 10,079,703 shares of Common Stock and $60.0
million aggregate principal amount of Senior
Notes.
The Senior Notes................ See "Description of the Senior Notes."
Maturity Date................... April 1, 2003
Interest Payment Dates.......... Semi-annually on April 15 and October 15,
which commenced on October 15, 1998.
Ranking......................... The Senior Notes are general unsecured
obligations of the Company and will rank
senior to such other Indebtedness (as defined
in the Indenture dated April 1, 1998 by and
between the Company and The Bank of New York,
as Trustee (the "Indenture")) as the Company
may incur. Because the Company is the sole
shareholder of the Bank, the rights of
creditors of the Bank to payments from the
Bank are, in effect, senior to the rights of
the Company as a shareholder of the Bank, and
in effect, senior to the rights of holders of
Senior Notes, who will have no direct claim
against the Bank for payment.
Interest Reserve Account........ The Indenture pursuant to which the Senior
Notes are issued required the Company to
establish at the time of issuance of the
Senior Notes the Interest Reserve Account,
which is a segregated account containing a
sufficient amount of cash and other Permitted
Investments to pay the aggregate interest
payments scheduled to be made with respect to
the Senior Notes for the next two succeeding
Interest Payment Dates.
Sinking Fund.................... None
Mandatory or Optional Upon the occurrence of a Change of Control
Redemption...................... the Senior Notes not tendered in accordance
with the provisions set forth under "Change
of Control" shall be redeemable at the option
of the Company, in whole or in part, at any
time or from time to time, upon not less than
45 nor more than 60 days' prior notice mailed
by first-class mail to each holder's
registered address, at a redemption price
equal to the sum of (i) the principal amount
of the Senior Notes being redeemed plus
accrued
3
<PAGE>
notes for 101% of the principal amount, plus
accrued interest through the repurchase date.
There can be no assurance that the Company
will have funds available to complete such a
repurchase.
Certain Additional Covenants.... The Indenture prohibits the Company from:
. incurring additional debt, except for
types of debt specified in the Indenture;
. making certain types of payments to third
parties, or allowing its subsidiaries to
make similar payments;
. incurring liens on the Company's assets;
. selling or transferring capital stock of
the Bank;
. restricting the ability of its
subsidiaries, including the Bank, from
paying dividends to the Company; and
. engaging in various other activities
detailed in the Indenture.
. The Indenture also restricts the Company's
ability to merge, consolidate or sell all
of its or the Bank's assets.
Acceleration............... If the Company defaults on the senior notes,
payment of the senior notes may be
accelerated. A default includes:
. failure to pay interest for a period of 15
days;
. breach of certain warranties and covenants
in the Indenture for 30 days after notice
of breach by the holders of 25% of the
senior notes;
. bankruptcy of the Company or the Bank;
. uncured default by the Company or a
subsidiary on debt in excess of 5% of the
Company's consolidated net worth; and
. Failure of the Bank to comply with its
regulatory capital requirements.
The Common Stock........... See "Description of Capital Stock."
Dividends.................. The Payment of dividends on the stock will be
at discretion of the Board of Directors of
the Company. The Company does not presently
have a plan for paying dividends and does not
presently expect to pay any dividends on the
stock. The Company's ability to pay dividends
will depend principally on the ability of the
Bank to pay dividends to the Company. For a
discussion of certain restrictions on the
ability of the Bank to pay dividends, see
"Regulation," "Description of Senior Notes"
and "Description of Capital Stock."
4
<PAGE>
OTS regulations currently permit a "Tier I"
association such as the Bank to make capital
distributions without OTS approval during a
calendar year up to the higher of:
. 100% of its net income to the date of such
distribution during the calendar year plus
the amount that would reduce by one-half
its surplus capital ratio, as defined, at
the beginning of the calendar year; and
. 75% of its net income over the most recent
four-quarter period. See "Regulation--
Regulation of Federal Savings
Institutions---Capital Distribution
Requirements."
Market for the Stock and the Trades in the Company's stock are quoted on
Senior Notes.................... the Nasdaq OTC Bulletin Board under the
symbol SUFI. Although the Company intends to
apply to have the stock and the senior notes
listed on a national and/or regional
securities exchange or inter-dealer quotation
service upon satisfaction of the applicable
minimum listing requirements, the Company
cannot predict when, or if, it will satisfy
such listing requirements or if any such
application will ultimately be approved.
Accordingly, there can be not assurance that
an active public trading market for either
the stock or the senior notes will develop or
be sustained. See "Dividends and Market for
Superior Securities."
Use of Proceeds................. The selling holders of the stock and the
senior notes will receive all of the proceeds
from sales made pursuant to this Prospectus.
See "Use of Proceeds" for a discussion of the
use of the net proceeds from the private
placement.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA--COMPANY
The following summary consolidated financial data of the Company is derived
from the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company is a unitary thrift holding company. The Company was organized in
1997 as SFC Acquisition Corp. for the purpose of acquiring the Bank. On April
1, 1998, the Company completed the Private Placement, and the proceeds were
used to acquire 100% of the Bank Capital Stock. This transaction was accounted
for using the purchase method of accounting for business combinations, and
accordingly, the results of operations of the Bank were consolidated with those
of the Company from April 1, 1998, the date of the acquisition. The assets and
liabilities of the Bank were adjusted to fair value at the purchase date,
resulting in an excess cost over fair value of $76.4 million.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
(Dollars in thousands)
<S> <C>
Income Statement Data:
Net interest income................................... $ 24,362
Provision for loan losses.............................. 1,021
Net interest income after provision for loan losses... 23,341
Noninterest income..................................... 19,195
Noninterest expenses................................... 28,901
Goodwill amortization.................................. 2,715
Income before taxes.................................... 10,920
Net income............................................. 6,675
Per Share Data:
Net income per share--Basic(1)......................... $ 0.88
Net income per share--Diluted(2)....................... $ 0.88
Book value(3).......................................... $ 10.10
Tangible book value(3)................................. $ 3.71
Weighted average common shares outstanding--Basic (in
thousands)............................................ 7,595
Weighted average common shares outstanding--Diluted (in
thousands)............................................ 7,595
Average Balance Sheet Data:
Total assets........................................... $1,292,196
Securities............................................. 334,321
Loans.................................................. 711,798
Allowance for loan losses(4) .......................... 10,465
Goodwill............................................... 70,856
Total deposits......................................... 984,443
Debt:
Term loans............................................ 20,000
Senior notes.......................................... 60,000
Total shareholders' equity............................. 88,410
Performance Ratios:
Return on average assets............................... 0.52%
Return on average common equity........................ 7.55%
Net interest margin.................................... 2.83%
Efficiency ratio....................................... 72.61%
Asset Quality Ratios(4)(6):
Nonperforming assets to total loans and other real es-
tate.................................................. 0.48%
Net charge-offs to average loans(5).................... 1.48%
Allowance for loan losses to total loans............... 1.27%
Allowance for loan losses to nonperforming loans(6).... 313%
Capital Ratios(4):
Tangible capital ratio(7)--Company..................... 2.85%
Tangible capital ratio(7)--Bank........................ 7.99%
Average shareholders' equity to average total as-
sets(7)--Company...................................... 6.84%
Average shareholders' equity to average total as-
sets(7)--Bank......................................... 12.99%
Core capital ratio(7)--Company......................... 2.85%
Core capital ratio(7)--Bank............................ 7.99%
Risk-based capital ratio(7)--Company................... 5.50%
Risk-based capital ratio(7)--Bank...................... 16.70%
</TABLE>
6
<PAGE>
- --------
(1) Net income per share is based upon weighted average number of common
shares.
(2) Net income per share is based upon the weighted average number of common
shares and common share equivalents outstanding during the period.
(3) As a result of the Acquisition, the Company recorded $80.0 million in
debt incurred. In addition, $64.0 million allocated to goodwill has been
pushed down to the Bank. Moreover, 50% of goodwill is recorded as capital
of the Bank. No goodwill has been recorded as capital of the Company.
(4) At period end, except net charge-offs to average loans and average
shareholders' equity to average total assets.
(5) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(6) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
(7) Core capital, and risk-based capital ratios calculated at the Company and
Bank level.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA--BANK
The following summary consolidated financial data of the Bank is derived from
the Selected Consolidated Financial Data appearing elsewhere in this
Prospectus, and should be read in conjunction with the Consolidated Financial
Statements of the Bank and the Notes thereto and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended(4) December 31,
----------------------------------------------------------
1998(5) 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income... $ 38,979 $ 38,305 $ 36,676 $ 34,113 $ 33,217
Provision for loan
losses............... 8,786 2,155 1,125 1,050 300
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........ 30,193 36,150 35,551 33,063 32,917
Noninterest income.... 24,711 23,280 23,370 20,572 17,389
Noninterest expenses.. 42,242 39,316 46,362 36,527 33,641
---------- ---------- ---------- ---------- ----------
Income before taxes. 12,662 20,113 12,559 17,107 16,665
Net income ........... 6,409 10,922 7,634 10,397 10,128
Average Balance Sheet
Data:
Total assets.......... $1,287,756 $1,291,295 $1,252,641 $1,272,514 $1,229,178
Securities............ 339,384 410,876 480,728 578,879 668,610
Loans................. 706,700 684,379 652,172 589,020 460,313
Allowance for loan
losses(3)............ 9,055 4,886 5,003 4,841 4,770
Total deposits........ 991,311 995,237 1,041,920 1,064,880 1,007,654
Total shareholders'
equity............... 167,296 156,432 85,556 83,041 78,791
Performance Ratios:
Return on average
assets............... 0.50% 0.85% 0.61% 0.82% 0.82%
Return on average
common equity........ 3.83% 6.98% 8.92% 12.52% 12.85%
Net interest margin... 3.42% 3.44% 3.15% 2.88% 2.89%
Efficiency ratio(2)... 66.34% 63.84% 77.21% 66.80% 66.48%
Asset Quality
Ratios(1)(3):
Nonperforming assets
to total loan and
other real estate.... 0.48% 0.82% 0.79% 0.73% 1.59%
Net charge-offs to
average loans........ 1.48% 0.37% 0.15% 0.14% 0.11%
Allowance for loan
losses to total
loans................ 1.27% 0.67% 0.75% 0.77% 0.89%
Allowance for loan
losses to
nonperforming
loans(3)............. 313% 91% 107% 112% 59%
Capital Ratios(1):
Tangible capital
ratio................ 7.99% 7.40% 6.60% 5.97% 5.31%
Average shareholders'
equity to average
total assets......... 12.99% 12.11% 6.83% 6.53% 6.41%
Core capital ratio.... 7.99% 7.40% 6.60% 5.97% 5.31%
Risk-based capital
ratio................ 16.70% 15.69% 15.06% 14.86% 14.84%
</TABLE>
- --------
(1) At period end, except net charge-offs to average loans and average
shareholders' equity to average total assets.
(2) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(3) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
(4) For 1997, the period presented is for January 7, 1997 to December 31, 1997.
(5) A provision of approximately $7.7 million was recorded to increase the
allowance for loan losses for increased risk of losses in the automobile
loans, primarily indirect dealer loans, within the Bank's portfolio--see
"Allowance for Loan Losses" beginning on page 36. This should be considered
in comparing the results of the year ended December 31, 1998.
8
<PAGE>
RISK FACTORS
Prospective investors should carefully review the following factors, as well
as the other information contained in this Prospectus, before deciding to make
an investment in the Superior Securities.
SOURCE OF PAYMENTS ON THE SENIOR NOTES
General. The Company is a holding company with no business operations of
its own. The Company's only significant asset will be the Bank Capital Stock.
Other than any proceeds from the Offering retained by it or reserved in the
Interest Reserve Account, the Company's only source of cash to pay interest on
and principal of the Senior Notes will consist of distributions from the Bank.
The Company has reserved $5.1 million in the Interest Reserve Account, as
required under the terms of the Indenture. The Company expects that the Bank
will pay quarterly or semi-annual dividends sufficient to service the Senior
Notes and the Company's other indebtedness. Current operating budget
assumptions include projections through 2001 indicating that earnings at the
Bank level available for dividends should be sufficient as a source of
payments on the Senior Notes. At September 30, 1998, $6.71 million was
available for distribution from the Bank to the Company. However, there can be
no assurance that the earnings of the Bank will be sufficient to make
distributions to the Company to enable it to pay interest on the Senior Notes
when due or principal of the Senior Notes at maturity or that such
distributions will be permitted by applicable federal banking laws and
regulations.
Default or Change of Control. Distributions from the Bank may not be
sufficient to pay the principal amount of the Senior Notes prior to maturity
upon the occurrence of an Event of Default (as defined in the Indenture) or to
repurchase the Senior Notes upon a Change of Control (as defined in the
Indenture). If there shall occur an Event of Default or a requirement for the
Company to repurchase the Senior Notes upon a Change of Control or, in the
event that earnings from the Bank are not sufficient to make distributions to
the Company to enable it to pay the principal amount of the Senior Notes at
maturity, the Company may be required to adopt one or more alternatives, such
as borrowing funds or selling its equity securities and/or the equity
securities or assets of the Bank. There can be no assurance that any of the
foregoing actions could be effected on satisfactory terms, that any of the
foregoing actions would enable the Company to pay the principal amount of the
Senior Notes or that any of such actions would be permitted by the terms of
the Indenture or applicable federal banking laws and regulations.
Regulatory limitations on distributions from the Bank to the
Company. Federal banking laws and regulations, including the regulations of
the OTS, limit the Bank's ability to pay dividends and make other capital
distributions. OTS regulations currently permit a "Tier 1" association, such
as the Bank, to make capital distributions without OTS approval during a
calendar year up to the higher of (i) 100% of its net income to the date of
such distribution during the calendar year plus the amount that would reduce
by one-half its surplus capital ratio at the beginning of the calendar year;
or (ii) 75% of its net income over the most recent four quarters. See
"Regulation--Regulation of Federal Savings Institutions--Capital Distribution
Regulation." The Bank generally may not declare dividends or make any other
capital distribution to the Company if, after the payment of such dividend or
other distribution, the Bank would be undercapitalized. In addition, the Home
Owners' Loan Act ("HOLA") requires every savings institution subsidiary of a
savings and loan holding company to give the OTS at least 30-days advance
notice of any proposed dividends or capital distributions. The OTS may
prohibit any dividend or other capital distribution that it determines would
constitute an unsafe or unsound practice. There are also various statutory and
regulatory limitations on the extent to which the Bank can finance or
otherwise transfer funds to the Company or nonbanking subsidiaries of the
Company, whether in the form of loans, extensions of credit, investments or
asset purchases. The Director of the OTS may further restrict these
transactions in the interests of safety and soundness. See "Regulation--
Regulation of Federal Savings Institutions--Capital Distribution Regulation."
9
<PAGE>
Adequacy of Allowance for Loan Losses
How the allowance is determined. The Bank's allowance for losses in its loan
portfolio amounted to $10.5 million or 1.27% of total loans at December 31,
1998. In determining the adequacy of the Bank's allowance for loan losses in
the future, the Company will consider, among other things:
. current and future economic conditions and their anticipated impact on
specific borrowers;
. the level of classified and criticized assets and the risk factors
associated with each such asset;
. the level of past due and nonperforming assets;
. the level of the allowance in relation to total loans and to historical
and current loss levels; and
. the growth and composition of the loan portfolio.
Events that may render the allowance inadequate. If delinquency levels
increase as a result of adverse general economic conditions, or other factors
beyond the Company's control, the allowance for loan losses may not be
adequate. In addition, there can be no assurance that the Bank will not
experience significant losses in its loan portfolio which may require
significant increases to the allowance for loan losses in the future. Such
increases may adversely affect the Bank's, and therefore the Company's,
results of operations and financial condition.
Interest Rate Risk
Net interest income. The Company's operating results depend to a large
extent on its net interest income, which is the difference between the
interest income earned on interest earning assets and the interest expense
incurred in connection with its interest bearing liabilities. Changes in the
general level of interest rates can affect the Company's net interest income
by affecting the spread between the Company's interest earning assets and
interest bearing liabilities. This may be due to the disparate maturities when
repricing the Company's interest earning assets and interest bearing
liabilities.
Some effects of changes in interest rates. In addition to its effect on the
Company's interest rate spread, changes in the general level of interest rates
also affect, among other things;
. the ability of the Company to originate loans;
. the value of the Company's interest earning assets and its ability to
realize gains from the sale of certain assets held for sale;
. the average life of the Company's interest earning assets;
. the value of the Company's mortgage servicing rights; and
. the Company's ability to obtain deposits in competition with other
available investment alternatives.
Interest rates are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and political
conditions and other factors beyond the control of the Company.
Dependence on Key Personnel
General. The future success of the Company and the Bank depends in large
part on the services and efforts of its key personnel and the Company's
ability to attract, motivate and retain highly qualified employees.
Competition for such employees is intense, and the process of locating key
personnel with the combination of skills and attributes required to execute
the Company's strategy is often lengthy.
The Chief Executive Officer. In particular, the Company will be highly
dependent on the management services of C. Stanley Bailey, who has been
appointed as the Chairman of the Board of Directors and Chief Executive
Officer of the Company and the Bank and other key executives, each of whom is
considered important to the success of the Company. The loss of such personnel
or other members of senior management could have a material adverse effect on
the Company and the Bank. See "Management."
10
<PAGE>
Dividends
Restrictions on Payment. Payment of dividends on the Company's stock is at
the discretion of the Board of Directors of the Company, subject to applicable
regulatory and other restrictions imposed by law and subject to the terms of
the Indenture governing the senior notes. For a description of such
restrictions, see "Regulation--Regulation of Federal Savings Institutions--
Capital Distribution Regulation," "Description of Senior Notes" and
"Description of Capital Stock."
The Company's plans to pay dividends. The Company does not presently have a
plan for payment of dividends on the common stock and does not presently
expect to pay dividends on its stock. The Company's ability to pay dividends
on its stock will depend principally on the ability of the Bank to pay
dividends to the Company. The Bank's ability to pay such dividends is limited
by certain regulatory requirements. See "Regulation--Regulation of Federal
Savings Institution--Capital Distribution Regulation."
Absence of Public Market
There has been only a limited public market for the Company's stock and the
senior notes. Trades in the stock are posted on the Nasdaq OTC Bulletin Board.
Although the Company intends to apply to have the common stock listed on a
national and/or regional securities exchange or inter-dealer quotation service
upon satisfaction of the applicable minimum listing requirements, no assurance
can be made as to when, if at all, the Company will satisfy such listing
requirements or if any such application will ultimately be approved.
Consequently, there is no assurance that an active public trading market for
either or both of the stock or the senior notes will develop or be sustained.
Economic Conditions
The success of the Company will depend to a certain extent upon general
economic conditions, particularly in the areas in which the Bank conducts its
business activities. Adverse changes in the economic conditions of these areas
may impair the ability of the Bank of collect loans and might otherwise have
an adverse effect on its business, including the demand for new loans, the
ability of customers to repay loans and the value of both the real estate
which secures its loans and its foreclosed assets.
Competition
General. The Bank experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for
deposits historically has come from other thrift institutions, commercial
banks and credit unions doing business in its market areas.
Competition from non-banking sources. In addition, as with all banking
organizations, the Bank has experienced increasing competition from non-
banking sources. For example, the Bank competes for funds with full service
and discount broker-dealers and with other investment alternatives, such as
mutual funds and corporate and governmental debt securities.
Loans and deposits. The Bank's competition for loans comes principally from
other thrift institutions, commercial banks, mortgage banking companies,
consumer finance companies, insurance companies and other institutional
lenders. A number of institutions with which the Bank competes for deposits
and loans have significantly greater assets, capital and other resources than
the Bank. In addition, many of the Company's competitors are not subject to
the same federal regulation that governs savings and loan holding companies
such as the Company and federally chartered and federally insured savings
institutions such as the Bank. As a result, many of the Company's competitors
have advantages over the Company in conducting certain businesses and
providing certain services.
11
<PAGE>
Regulation
Current regulatory regimes. Both the Company, as a unitary thrift holding
company, and the Bank, as a federally chartered savings institution, are
subject to significant governmental supervision and regulation, which is
intended primarily for the protection of depositors and the federal deposit
insurance funds. Statutes and regulations affecting the Company and the Bank
may be changed at any time, and the interpretation of these statutes and
regulations by regulatory authorities and the courts also is subject to
change. There can be no assurance that future changes in applicable statutes
and regulations or in their interpretation will not adversely affect the
business of the Company and Bank. The Company is subject to regulation and
examination by the OTS, and the Bank is subject to examination by the OTS and
by the FDIC. There can be no assurance that the OTS or the FDIC will not, as a
result of such regulation and examination, impose various requirements or
regulatory sanctions upon the Company or the Bank, as applicable. In addition
to governmental supervision and regulation, each of the Company and the Bank
is subject to changes in federal and state laws, including changes in tax
laws, which could materially and adversely affect the real estate industry,
such as a repeal of the federal mortgage interest deduction. See "Regulation."
Proposed legislation. The United States Congress is considering legislation
to enact certain financial services reforms. As proposed, the legislation
would not directly affect the nature of the thrift charter; however, the
legislation would preclude commercial companies from acquiring thrift
charters. Under existing law, commercial companies are allowed to own thrift
institutions, and those companies presently holding thrift charters would be
permitted to retain the institutions they presently own. The prospective
limitation on commercial companies in the proposed legislation would have an
impact on the value of thrift institutions by limiting the number of potential
purchasers.
12
<PAGE>
THE COMPANY
The Company is a thrift holding company organized under the laws of Delaware
and headquartered in Ft. Smith, Arkansas. The Company was organized in 1997 as
SFC Acquisition Corp. for the purpose of acquiring the Bank, a federally
chartered thrift institution. The Bank was founded in 1934 in Fort Smith,
Arkansas. In 1992, the Bank was acquired by Boatmen's Bancshares, Inc.
("Boatmen's") for $27.0 million in a purchase transaction which created no
purchase accounting goodwill. In turn, Boatmen's was acquired by NationsBank
in 1997. The Bank has expanded through de novo growth and acquisitions to 50
branches concentrated in Ft. Smith, Little Rock, and eastern Oklahoma. At
December 31, 1998 the Company had consolidated assets of $1.4 billion, and
shareholders equity of $101.8 million. At December 31, 1998, the Bank had
deposits of $970.8 million and gross loans of $825.6 million.
As a wholly owned subsidiary of Boatmen's and then NationsBank, the
Company's operations were never fully integrated into the parent's
infrastructure and remained essentially autonomous. This arms-length
relationship with successive owners allowed for a stable management and
operating environment which produced strong financial performance unobstructed
by the customer disruptions often associated with multiple consolidations.
However, this relationship did not permit the Bank to capitalize fully upon
its strong brand recognition, excellent community reputation, significant
market share, and the stability of the region's economy.
The Company's acquisition of the Bank (the "Acquisition") was financed
through the private placement of $97.5 million of the Company's common stock
par value $0.01, (the "Common Stock") and $60.0 million of 8.65% Senior Notes
due April 1, 2003 (the "Senior Notes") (the "Private Placement") and a $20.0
million loan from Colonial Bank (the "Loan"). The large debt component of the
Acquisition financing has created a high degree of leverage at the level of
the Company (as opposed to the Bank). At December 31, 1998, the Company's
leverage ratio was 2.85%. Furthermore, as a consequence of the purchase method
of accounting used in the Acquisition, there is a significant non-cash
amortization charge against for goodwill which was created. This charge
reduces the Company's reported GAAP earnings by approximately $3.3. million
annually. In addition, the Senior Notes and the Loan have created a debt
service expense of approximately 7.1 million annually.
The accounting treatment applied to the Acquisition created a material
difference between the book value of the Common Stock ($10.10) and its
tangible book value ($3.71). This difference derives from the accounting
treatment of the acquisition at the Company level, as opposed to the
accounting treatment required at the Bank level. The Company recorded at the
holding company level $80.0 million in debt incurred to finance the
Acquisition. In addition, $64.0 million of allocated goodwill has been
recorded, under push-down accounting principles, at the Bank level.
13
<PAGE>
The following table sets forth certain comparative information illustrating
the relative range of book value, tangible book value and per share price of
other financial institution holding companies similar in asset size to the
Company.
<TABLE>
<CAPTION>
Book
Value 3/15/99
Total per Tangible Stock Price/ Mkt.
Assets Share Book Price Book Price/Tangible Cap
Company Name ($000) ($) Value ($) ($) (%) Book (%) ($000)
------------ --------- ----- -------- ------- ------ -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sun Bancorp. Inc. ...... 1,515,403 10.96 4.95 19.81 1.81 4.00 141,667
Simmons First National
Corporation............ 1,464,362 21.29 16.54 33.50 1.57 2.03 208,012
Commercial Bank of New
York................... 1,462,334 16.48 13.58 12.75 0.77 0.94 67,614
ISB Financial
Corporation............ 1,401,630 18.91 11.99 20.88 1.10 1.74 143,659
Jefferson Savings
Bancorp, Inc. ......... 1,383,460 13.13 10.78* 13.25 1.01 1.23 124,971
Superior Financial
Corp................... 1,378,716 10.10 3.71 9.69 N/A N/A
First Essex Bancorp,
Inc.................... 1,248,014 12.75 9.55 17.00 1.33 1.78 129,398
Independent Bank
Corporation............ 1,085,258 9.44 6.90 18.48 1.96 2.68 136,461
Sterling Bancorp........ 1,044,445 12.31 9.73 20.13 1.63 2.07 165,198
Ottawa Financial
Corporation............ 938,030 13.47 11.08 22.75 1.69 2.05 123,946
Lakeland Financial
Corporation............ 978,909 9.51 7.54* 18.25 1.92 2.42 105,794
Peoples Bancorp Inc..... 880,284 14.99 11.14 24.00 1.60 2.15 137,715
Average:**.............. 1,218,375 13.93 10.34 20.07 1.49 2.10 134,948
</TABLE>
- --------
Data (except stock price) as of December 31, 1998.
*Calculated on the basis of publicly available information.
**Not including Superior Financial Corp.
Business Objectives
It is the Company's goal to maximize shareholder value. The Company's
business strategy is based on a series of initiatives, both short- and long-
term, to achieve this goal. These initiatives are designed to unleash the
inherent strength of the franchise which has not been fully realized. These
various initiatives combine the following elements:
. embarking on a series of short-term and intermediate-term initiatives
designed to enhance suboptimal business practices of the Bank thereby
increasing revenue and enhancing operating efficiency
. expanding the loan portfolio and transaction deposit accounts through
market-share growth and selective de novo branching, specifically
targeting the account relocation expected to take place as a result of
in market merger-related customer dislocations;
. expanding the Bank's product offerings to encompass a wider range of
products and services which will be offered by a locally owned and
operated financial company with motivated employees;
. enhancing delivery systems options by offering expanded ATM, telephone,
and personal computer based banking services; and
. maintaining financial safety and soundness.
Short-Term Initiatives
The Bank was never fully integrated into the Boatmen's or NationsBank
infrastructure, and, therefore, certain inefficient banking practices existed
which were discovered by management during the Acquisition. As a result of
these findings, management began a campaign of near-term initiatives designed
to enhance revenue and improve operating efficiency. Many of these identified
near-term initiatives have already been completed, while others are underway.
A status report regarding specific short-term initiatives is as follows:
Branch Rationalization: In August and September 1998, the Bank completed the
sale of nine branch facilities located in Oklahoma and Arkansas. The Bank has
entered into an agreement to sell one additional
14
<PAGE>
facility in Oklahoma. The sale of this facility should be completed in the
first quarter of 1999. These branches were determined to be either
unprofitable, or not in geographic or demographic locations deemed to fit the
strategic direction of the Bank.
Expense Reduction: Expense reductions relating to contract renewals and
renegotiations were completed in early 1998. Furthermore, unnecessary
NationsBank related inter-company expenses have been eliminated.
Revenue Enhancements: The opportunity to realize revenue enhancements
through the optimal use of free cash, Federal Home Loan Bank funding, and
reserve levels have already been addressed and is anticipated to contribute to
the Bank's reported income in the current and future years. Currently under
review is the potential to implement ATM surcharges and to begin assessing
fees to certain types of deposit products.
Balance Sheet Optimization: The Bank has taken steps to enhance the earnings
contribution of its balance sheet through the redeployment of cash and
overnight investments into higher-yielding securities and loans, growth of
transaction deposit accounts, use of FHLB borrowing capabilities and an
increased loan-to-deposit ratio.
Growth Strategy
The Company's growth strategy focuses on targeting customers displaced and
disenchanted as a result of industry consolidation in Superior's immediate and
contiguous markets. Management believes that the ongoing consolidation in the
financial services industry provides significant opportunities for local,
community-oriented financial institutions to capitalize on the resulting
merger dislocation of many customers. The Company is positioned to exploit
these opportunities as a newly independent organization. Furthermore, its
reputation in its market for strong service and its "totally free checking"
product should help it to cultivate these customers.
The Company plans to capture these customers where it currently has a
presence and through geographic expansion via de novo branching and
acquisitions. The Bank has begun building four branches, two in Little Rock
and one each in Conway and Ft. Smith. These locations will introduce a branch
design that emphasizes speed of service and convenience. The Bank opened a
loan production office in the Tulsa market in October, 1998.
Financial Products and Services
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, safety 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 160,000 checking customers with average non-interest revenue of
approximately $115 per account annually. Much of this success can be
attributed to the customer-oriented service environment created by the Bank's
personnel.
In 1998, management implemented certain initiatives designed to improve the
franchise through enhancing the menu of financial products and services it
offers. These initiatives will allow the Bank to target additional customers
as well as cross-market to its existing, loyal customer base. For example,
management has introduced a comprehensive sales training and a performance
based incentive plan for all branch personnel. Furthermore, the Company is
currently establishing the means to offer a full array of consumer investment
and insurance products through a dedicated, branch-based sales force. The
addition of these services will make it possible for the Company's customers
to take care of essentially all of their financial needs in one place.
Moreover, crucial
15
<PAGE>
to the success of these related initiatives is the addition of key leadership
in the areas of mortgage and small business lending. These additions, in
concert with an expanded presence in metropolitan markets, should position the
Company to provide the locally approved lending relationship desired by small
business owners and individual consumers.
Delivery Systems
Management intends to enhance the Bank's existing delivery network through
various initiatives designed to make banking with the Company more attractive
to new and existing customers. Essential to the successful growth of the
Company is the recognition and fulfillment of its customers' desires to use a
variety of delivery channels to satisfy their financial needs. In this
context, the Company plans to add six new ATM locations by the end of 1998 to
its network of 53 ATMs. In addition, significant progress has been made in
establishing a telephone sales and service function that not only provides
routine customer information, but also allows customers to pay bills, transfer
money, order checks, and apply for loans 24 hours a day, seven days a week.
The Company is providing similar capability to those customers who prefer to
use personal computers to transact banking business and manage their finances.
Asset Quality
The successful implementation of the Company's business strategy requires an
emphasis on maintaining asset quality. The Board of Directors and senior
management regularly monitor asset quality with staff support provided by a
dedicated loan review function. In addition, lending units are supported by
credit scoring models and centralized review.
As of December 31, 1998 the Company's allowance for loan losses approximates
1.27% of total loans. In addition, the Company has adopted procedures to
achieve rapid resolution of non-performing loans and prompt and efficient
liquidation of real estate, automobiles and other forms of collateral. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--non-performing Assets").
Facilities
The Company currently offers a broad range of banking services through a
total of 50 branch offices located in central and northwestern Arkansas and
eastern Oklahoma as follows:
<TABLE>
<CAPTION>
No. of Square
Market Area Locations Footage
----------- --------- -------
<S> <C> <C>
Fayetteville/Springdale MSA............................. 4 10,831
Ft. Smith/Van Buren MSA................................. 7 127,230
Little Rock MSA......................................... 11 74,010
Hot Springs MSA......................................... 4 16,690
Eastern Oklahoma........................................ 13 57,942
North and Central Arkansas.............................. 11 37,208
</TABLE>
The Company owns 35 offices and leases the remaining 15 locations. The
leases have a range of terms and renewal options. Two of these facilities are
multi-story, multi-tenant offices. The Superior Tower located in Ft. Smith
consists of 95,000 square feet and is 63% occupied by the Company. The other
facility located in downtown Little Rock contains 45,000 square feet and is
53% occupied by the Company. The Company has entered into an agreement to sell
one branch in Oklahoma.
The Company is expanding its branch network through the addition of four
locations in Little Rock, Conway, and Ft. Smith. Three of these offices are
being constructed on land currently owned by the Company.
16
<PAGE>
Subsidiaries
The Company's principal subsidiary is the Bank. The Bank owns a subsidiary,
SFS Corporation, and a second-tier subsidiary, Southwest Protective Life
Insurance Company, which sells consumer loan credit life insurance to consumer
loan borrowers of the Bank.
Competition
The banking industry in the Company's market area is highly competitive. In
addition to competing with commercial and savings banks and savings and loan
associations, the Company competes with credit unions, finance companies,
mortgage companies, brokerage and investment banking firms, asset-based non-
bank lenders, and other non-financial institutions. The Company has been able
to compete effectively through the use of its "totally free checking" program,
strong community reputation, and excellent customer service.
A substantial number of the banks operating in the Company's market area are
branches or subsidiaries of much larger regional or national banking
companies. While these organizations may have greater resources, management
believes their customers are experiencing disruption in services as a result
of merger and consolidation activities. Management believes that this merger-
related dislocation creates significant opportunities for the locally based
institution which is committed to quality customer service, competitive fees
and interest rates, and active community involvement. See "Risk Factors--
Competition."
Employees
As of December 31, 1998, the Company had 637 full-time employees, and 154
part-time employees. None of the employees were represented by any union or
similar group, and the Company has not experienced any labor disputes arising
from any such organized labor group. The Company provides medical,
hospitalization, and group life insurance to eligible employees. In addition,
the Company provides a competitive 401(k) plan to which it contributes up to
3% of employee salaries on a matching basis with customary vesting
requirements.
Litigation
As a result of the Acquisition, the Company succeeded to NationsBank's right
and interest in the proceedings brought under the caption Superior Federal
Bank, F.S.B. vs. United States (No. 95-769C) (the "Goodwill Litigation"). The
Goodwill Litigation relates to claims for damages by the Bank against the
United States. Under the terms of the Stock Purchase Agreement with
NationsBank, the Company has agreed to pay NationsBank 50% of any net recovery
(total recovery obtained in a judgment or settlement of the claims less
litigation expenses). The Company is unable to estimate the likelihood or
amount of any judgment or settlement.
17
<PAGE>
THE PRIVATE PLACEMENT
On December 3, 1997, the Company entered into a Stock Purchase Agreement
with the Bank and NB Holdings, Inc., a subsidiary of NationsBank (the
"Purchase Agreement"), which provided for the Company's purchase of the Bank
Capital Stock. In order to raise the funds necessary to complete the
Acquisition, the Company entered into agreements (each, a "Founder's
Agreement" and collectively, the "Founders' Agreements") with each of the
Placement Agent, Financial Stocks, Inc. (the "Lead Investor") and C. Stanley
Bailey, presently Chairman and Chief Executive Officer of the Company (each, a
"Founder" and collectively, the "Founders").
Pursuant to the Founder's Agreement between the Company and the Lead
Investor, affiliates of the Lead Investor purchased 2,344,300 shares of Common
Stock at a price of $9.60 per share, for an aggregate of $22.5 million.
Pursuant to the Founder's Agreement between the Company and the Placement
Agent, the Placement Agent purchased 552,083 shares of Common Stock at a price
of $9.60 per share, or an aggregate of $5.3 million. The agreement also
provided for the payment by the Company to the Placement Agent of (i) a
transaction fee equal to 1.5% of the aggregate purchase price paid in the
Acquisition, or approximately $2.4 million and (ii) placement agent fees
totaling $4.88 million as follows: 4% of the aggregate proceeds from the sale
of the Common Stock (less the amount purchased by the Founders), 3.5% of the
aggregate proceeds from the sale of the Senior Notes, and 1.5% of the
aggregate proceeds of the Loan (as defined below).
Certain affiliates of the Lead Investor, collectively, and the Placement
Agent each advanced the Company $500,000 to cover certain transaction expenses
incurred by the Company in connection with the Acquisition. Before the Private
Placement was completed, the Company did not have funds to pay these expenses
and was unable to borrow money for such purposes at reasonable rates. In the
completion of the Private Placement and the Acquisition, the Company satisfied
its debt to the Lead Investor and the Placement Agent by issuing to each of
them 100,000 shares of Common Stock. For purposes of satisfying this debt, the
Company discounted the value of the shares to $5.00 per share based upon (i)
the extraordinarily high risk incurred by such affiliates of the Lead Investor
and the Placement Agent in advancing the funds when the Company had no source
of funds for repayment, (ii) the time-value of the funds advanced, (iii) the
value to the Company of not having to reduce cash available for operating
expenses by satisfying the debt in cash and (iv) by reference to the Black-
Scholes pricing formula, which, when applied to options for the Common Stock,
indicated a value of approximately $5.00 per share.
Pursuant to the Founder's Agreement between the Company and Mr. Bailey, Mr.
Bailey purchased 104,166 shares of common stock at a price of $9.60 per share,
for an aggregate of $1.0 million. Mr. Bailey's Founder's Agreement also
provided for the grant of certain options to acquire common stock. See
"Management-- Employment Agreements."
Before the completion of the Private Placement, the Company negotiated a
credit facility with Colonial Bank for the loan of $20.0 million (the "Loan").
The promissory note under the Loan is for a term of two years and bears
interest at a rate per annum equal to LIBOR plus one hundred seventy five
basis points (1.75%). The Loan is secured by the pledge of 460 shares of the
Bank Capital Stock, which is equal to 46% of the issued and outstanding Bank
Capital Stock. The Loan closed on April 1, 1998, the date the Private
Placement and the Acquisition were completed.
On April 1, 1998, the Company and Keefe, Bruyette & Woods, Inc. as Placement
Agent, completed the sale of $97.5 million of Common Stock and $60.0 million
of Senior Notes in the Private Placement. The proceeds of the Private
Placement, together with the Loan proceeds and the proceeds raised under the
Founders' Agreements, were used primarily to fund the Acquisition. See "Use of
Proceeds." In connection with the Private Placement, the Company entered into
the Registration Rights Agreement with the initial purchasers of the Superior
Securities and the Placement Agent, pursuant to which, among other things, the
Company agreed to file within 120 days a shelf registration statement with the
Commission providing for the offer and sale of the Superior Securities. The
Registration Statement of which this Prospectus forms a part has been filed in
satisfaction of such requirements. See "Registration Rights."
18
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The following unaudited table presents the consolidated ratios of earnings
to fixed charges. The ratio of earnings to fixed charges has been computed by
dividing income before income taxes and fixed charges by fixed charges. Fixed
charges represent all interest expense (ratios are presented both excluding
and including interest on deposits) and the portion of net rental expense
which is deemed to be equivalent to interest on debt. Interest expense (other
than on deposits) includes interest on notes and debentures, Federal Home Loan
Bank borrowings, federal funds purchased and securities sold under agreements
to repurchase, mortgages, and other funds borrowed. The pro forma ratio of
earnings to fixed charges to combined fixed charges has been presented to
reflect the interest expense of the Senior Notes issued as part of the Private
Placement.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 (A) 1997 1996 1995 1994
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges--Company:
Excluding interest on deposits
Actual........................................... 1.53 -- -- -- --
Pro Forma........................................ 1.34 -- -- -- --
Including interest on deposits
Actual........................................... 1.13 -- -- -- --
Pro Forma........................................ 1.09 -- -- -- --
Earnings to Fixed Charges--Bank:
Excluding interest on deposits
Actual........................................... 2.83 3.83 2.73 3.47 5.64
Pro Forma........................................ 2.77 4.25 -- -- --
Including interest on deposits
Actual........................................... 1.28 1.44 1.26 1.35 1.44
Pro Forma........................................ 1.28 1.46 -- -- --
</TABLE>
- --------
(A) The twelve months ended December 31, 1998, include a $7.7 million
provision for loan losses--See Allowance for Loan Losses beginning on page
36. This should be considered in comparing the results of the twelve
months ended December 31, 1998.
RECENT DEVELOPMENTS
Overview
The Company is a unitary thrift holding company. The Company was organized
in 1997 as SFC Acquisition Corp. for the purpose of acquiring the Bank. On
April 1, 1998 the Company completed the Private Placement and used the
proceeds to acquire 100% of the Bank Capital Stock. This transaction was
accounted for using the purchase method of accounting for business
combinations, and accordingly, the results of operations of the Bank were
consolidated with those of the Company from April 1, 1998, the date of the
acquisition. 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. The Bank is a federally chartered savings association.
Net income available to common shareholders for the Company for the twelve
months ended December 31, 1998 was $6.7 million, or $0.88 per share--basic and
diluted.
19
<PAGE>
The following table presents for the periods indicated certain summary
consolidated financial data reflecting the Company's results of operations and
financial condition. The results of operations of the Bank have been
consolidated with those of the Company from April 1, 1998, the date of the
Acquisition.
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1998
----------------------
(unaudited)
(Dollars in thousands,
except per share data)
<S> <C>
Income Statement Data:
Net income available to common shareholders............ $ 6,675
Net income per share--Basic(1)......................... 0.88
Net income per share--Diluted(2)....................... 0.88
Weighted average common shares outstanding--Basic (in
thousands)(1)......................................... 7,595
Weighted average common shares outstanding--Diluted (in
thousands)(2)......................................... 7,595
<CAPTION>
December 31, 1998
----------------------
(Dollars in thousands
except per share data)
<S> <C>
Balance Sheet Data(3):
Total assets........................................... $1,378,716
Loans.................................................. 825,633
Goodwill............................................... 64,130
Total deposits......................................... 970,821
Debt:
Term Loans............................................. 20,000
Senior Notes........................................... 60,000
Total shareholders' equity............................. 101,812
Book value per share................................... 10.10
Tangible book value.................................... 3.71
Asset Quality Ratios(3):
Nonperforming assets to loans and other real estate.... 0.48%
Allowance for loan losses to nonperforming loans(4).... 313%
Capital Ratios(5)
Tangible Capital Ratio (6)--Company.................... 2.85%
Tangible Capital Ratio (6)--Bank....................... 7.99%
Average Shareholders' equity to average total assets
(6)--Company.......................................... 6.84%
Average Shareholders' equity to average total assets
(6)--Bank............................................. 12.99%
Core Capital Ratio (6)--Company........................ 2.85%
Core Capital Ratio (6)--Bank........................... 7.99%
Risk-based capital Ratio (6)--Company.................. 5.50%
Risk-based capital Ratio (6)--Bank..................... 16.70%
</TABLE>
- --------
(1) Net income per share is based upon the weighted average number of common
shares outstanding.
(2) Net income per share is based upon the weighted average number of common
shares outstanding and common share equivalents during the period.
(3) At period end.
(4) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
(5) Capital ratios calculated at the Company and Bank level.
(6) Core capital and risk-based capital ratios calculated at the Company and
Bank level.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined statements of income for the
years ended December 31, 1998 and 1997 and for the nine month period ended
September 30, 1998 give effect to the following transaction:
On April 1, 1998 the Company paid $162.5 million to acquire 100% of the Bank
Capital Stock. This transaction has been accounted for using the purchase
method of accounting for business combinations, and accordingly, the results
of operations of the Bank were consolidated with those of the Company from
April 1, 1998, the date of the acquisition. The assets and liabilities of the
Bank were adjusted to fair value at the purchase date. The pro forma combined
statement of income for the years ended December 31, 1998 and 1997, are
presented as if the transaction had occurred on January 1, 1997.
The pro forma adjustments reflected in the pro forma combined statement of
income represent estimated values and amounts based on available information
regarding the Bank's assets and liabilities. The actual adjustments that will
result from the transaction will be based on further evaluations and may
differ substantially from the adjustments presented herein. The pro forma
combined statements of income are presented for illustrative purposes only and
are not necessarily indicative of the operating results that would have been
achieved had the transaction been consummated as of the dates indicated or of
the results that may be obtained in the future.
The pro forma combined statements of income should be read in conjunction
with the accompanying notes and historical financial statements of the Company
and the Bank appearing elsewhere in this Prospectus and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
21
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Superior Superior
Financial Corp. Federal Bank Pro forma Pro
(A) (B) Adjustments forma
--------------- ------------ ----------- -------
(In thousands except for per share data.)
<S> <C> <C> <C> <C>
Interest income............ $63,094 $ 20,741 $ -- $83,835
Interest expense........... 38,732 11,706 1,925 (F)
(155)(C) 52,208
------- -------- ------- -------
Net interest income ....... 24,362 9,035 (1,770) 31,627
Provision for loan losses.. 1,021 7,765 0 8,786
------- -------- ------- -------
Net interest income after
provision for loan
losses.................... 23,341 1,270 (1,770) 22,841
Noninterest income......... 19,195 5,516 24,711
Noninterest expenses....... 31,616 10,833 (231)(D) 42,218
------- -------- ------- -------
Income (loss) before income
taxes..................... 10,920 (4,047) (1,539) 5,334
Income tax expense
(benefit)................. 4,245 (282) (601)(E) 3,362
------- -------- ------- -------
Net income (loss).......... $ 6,675 $ (3,765) $ (938) $ 1,972
======= ======== ======= =======
Average common shares
outstanding during
period--Basic (G)......... 7,595 1 (1) 7,595
Net income (loss) per
common share--Basic....... $ 0.88 $(3,765) $ -- $ (0.26)
Average common shares
outstanding during
period--Diluted (H)....... 7,595 1 (1) 7,595
Net income (loss) per
common share--Diluted..... $ 0.88 $(3,765) $ -- $ (0.26)
</TABLE>
- --------
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(A) Represents historical income statement of Superior Financial Corp.
including operations of Superior Federal Bank, F.S.B. from April 1, 1998,
the date of the acquisition.
(B) Represents historical income statement of Superior Federal Bank, F.S.B.
for the three months ended March 31, 1998. The historical financial
statements of the Bank for the three months ended March 31, 1998 include a
provision of approximately $7.7 million to increase the allowance for loan
losses for increased risk of losses in the automobile loans, primarily
indirect dealer loans, within the Bank's portfolio, which experienced
increased historical losses in the first quarter of 1998.
(C) Reflects the reduction in interest expense from the restructuring to the
FHLB advances, as a result of the acquisition.
(D) To reflect the amortization expense based upon the purchase of the Bank by
the Company. Pro forma amortization expense has been calculated based upon
goodwill being amortized over 20 years.
(E) To reflect the reduction in income tax expense due to the effect of the
additional pro forma adjustments.
(F) Pro forma adjustment to record interest expense for additional interest
costs and amortization of debt issuance costs related to the short-term
debt and Senior Notes. Interest on the short-term debt is 7.44% at
December 31, 1998. Interest on the Senior Notes is based on the rate of
8.65% per annum. Debt issuance costs are being amortized over the terms of
the related short-term debt and Senior Notes.
(G) Net income per share based upon weighted average number of common shares.
(H) Net income per share based upon weighted average number of common shares
and common share equivalents outstanding during the period.
22
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Superior Superior
Financial Corp. Federal Bank Pro forma Pro
(A) (B) Adjustments forma
--------------- ------------ ----------- -------
(In thousands except for per share data.)
<S> <C> <C> <C> <C>
Interest income............. $ -- $83,664 $ $83,664
Interest expense............ -- 45,359 7,700 (E)
(780)(D) 52,279
----- ------- ------- -------
Net interest income......... -- 38,305 (6,920) 31,385
Provision for loan losses... -- 2,155 2,155
----- ------- ------- -------
Net interest income after
provision for loan losses.. -- 36,150 (6,920) 29,230
Other operating income...... -- 23,280 23,280
Other operating expenses.... 20 39,317 342 (C) 39,679
----- ------- ------- -------
Income (loss) before income
taxes...................... (20) 20,113 (7,262) 12,831
Income tax expense.......... -- 9,191 (4,137)(F) 5,054
----- ------- ------- -------
Net income (loss)........... $ (20) $10,922 $(3,125) $ 7,777
===== ======= ======= =======
Average common shares
outstanding during period--
Basic (G).................. 7,595 1 (1) 7,595
Net income per common
share--Basic............... -- $10,922 -- $ 1.02
Average common shares
outstanding during the
period--Diluted (H)........ 7,595 1 (1) 7,595
Net income per common
share--Diluted............. -- $10,922 -- $ 1.02
</TABLE>
- --------
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(A) Represents historical income statement of Superior Financial Corp.
(B) Represents historical income statement of Superior Federal Bank, F.S.B.
(C) To reflect the increase in amortization expense based upon the purchase of
the Bank by the Company. Pro forma amortization expense has been
calculated based upon goodwill being amortized over 20 years.
(D) Reflects the reduction in interest expense from the restructuring of the
FHLB advances, as a result of the acquisition.
(E) Pro forma adjustment to record interest expense for additional interest
costs and amortization of debt issuance costs related to the short-term
debt and Senior Notes. Interest on the short-term debt is 7.44% at
December 31, 1997. Interest on the Senior Notes is based on the rate of
8.65% per annum. Debt issuance costs are being amortized over the terms of
the related short-term debt and Senior Notes.
(F) To reflect the reduction in income tax expense due to the deductibility of
the goodwill from the purchase of the Bank and the effect of the
additional pro forma adjustments.
(G) Net income per share based upon weighted average number of common shares.
(H) Net income per share based upon weighted average number of common shares
and common share equivalents outstanding during the period.
23
<PAGE>
USE OF PROCEEDS
The Selling Holders will receive all of the proceeds from the Superior
Securities sold pursuant to this Prospectus.
On April 1, 1998, the Company completed the Private Placement and closed the
Loan. Net Proceeds from the Loan and the sale of the Superior Securities in
the Private Placement were approximately $170.1 million, after deducting the
fees of the Placement Agent. The net proceeds from the sale of the Superior
Securities in the Private Placement were used as follows: (i) $162.5 million
was used to purchase the Bank Capital Stock; (ii) $5.1 million was used to
establish the Interest Reserve Account in accordance with the terms of the
Senior Notes, see "Description of Senior Notes--Interest Reserve Account"; and
(iii) $2.5 million was retained by the Company for general corporate purposes.
DIVIDENDS AND MARKET FOR SUPERIOR SECURITIES
The Board of Directors of the Company does not presently intend to implement
a policy of paying dividends on the Common Stock and does not presently expect
to pay dividends on the Common Stock. Rather, the Company expects to retain
earnings to support the anticipated future growth of the Company. The
initiation of a cash dividend policy will depend upon a number of factors,
including investment opportunities available to the Company and the Bank,
capital requirements, the Company's and the Bank's financial condition and
results of operations, tax considerations, statutory and regulatory
limitations and general economic conditions. No assurances can be given that
any dividends will be paid or that, if paid, will not be reduced or eliminated
in future periods. See "Regulation--Regulation of Federal Savings
Institutions--Capital Distribution Regulation," "Description of Senior Notes--
Certain Covenants--Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries" and "Description of Common Stock."
Dividends from the Company will depend principally on the ability of the
Bank to pay dividends to the Company. As described in "Regulation--Regulation
of Federal Savings Institutions--Capital Distribution Regulation," a Tier 1
institution is authorized to make capital distributions without OTS approval
during a calendar year of up to the higher of (i) 100% of its net income to
the date of such distribution during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year; or (ii) 75% of its net income over the most recent four-quarter
period. Applicable regulations require, however, that all savings institutions
give the OTS at least 30-days advance notice of any capital distributions, and
the OTS may prohibit any capital distribution that it determines would
constitute an unsafe or unsound practice. As of December 31, 1998, under
applicable regulations of the OTS, the total capital available for the payment
of dividends by the Bank to the Company was $6.17 million, assuming
application of the OTS safe harbor for capital distributions. See
"Regulation--Regulation of Federal Savings Institutions--Capital Distribution
Regulation."
Unlike the Bank, the Company is not subject to the aforementioned regulatory
restrictions on the payment of dividends to its shareholders, although the
source of such dividends will depend, in large part, upon dividends from the
Bank. The Company is subject, however, to the requirements of Delaware law,
which generally limit dividends to an amount equal to the excess of the net
assets of the Company (the amount by which total assets exceed total
liabilities) over its statutory capital, or if there is no such excess, to its
net profits for the current and/or immediately preceding fiscal year.
Since consummation of the Private Placement, transactions in the Superior
Securities have been limited, and there is a limited market for the Superior
Securities at this time. Bid and ask prices of the Common Stock are currently
quoted on the Nasdaq OTC Bulletin Board under the symbol SUFI. Although the
Company intends to apply to have the Common Stock and the Senior Notes quoted
on a national and/or regional securities exchange upon satisfaction of the
applicable minimum listing requirements, no assurance can be made as to when,
if at all, the Company will satisfy such listing requirements or if any such
application will ultimately be approved. Accordingly, there can be no
assurance that an active public trading market for either the Common Stock or
the Senior Notes will develop or be sustained.
24
<PAGE>
The Company may make an underwritten public offering (the "Public Offering")
of its Common Stock when and if management and the Board of Directors, in
consultation with the Company's financial advisors, determine that market
conditions are favorable and as the Company's capital needs may require. The
Company does not presently have a need for additional capital that would
warrant a Public Offering in the new future. The Company's decision to
initiate and, if initiated, to consummate, the Public Offering will depend
upon variable factors, many of which are beyond the Company's control. These
factors include, but are not limited to, the Company's performance and results
of operations for 1999, market conditions in the financial services industry,
the perceived market for the Common Stock and the likelihood that the Public
Offering will be sufficiently subscribed at a price that is satisfactory to
the Company. The Company cannot predict with any certainty whether or not the
Public Offering will be initiated, and, if it is initiated, whether or not it
will be consummated. If the Public Offering is consummated, the offering price
of the Common Stock sold therein will be determined at that time on the basis
of then-current market conditions.
The Public Offering, if it is initiated and consummated, will be independent
of any rights of the holders of the Superior Securities under Section 3(c) of
the Registration Rights Agreement. Nevertheless, the Company expects that
holders of the Superior Securities will be offered the opportunity to sell
Superior Securities in the Public Offering, subject to the terms and
conditions of an underwriting agreement between the Company and the managing
underwriter and such other limitations as the Company, in its sole discretion,
may impose.
The development of a liquid public market depends upon the existence of
willing buyers and sellers, a circumstance that is not within the control of
the Company. Accordingly, the number of active buyers and sellers of the
Common Stock or the Senior Notes at any particular time may be limited. Under
such circumstances, investors in the Common Stock or the Senior Notes could
have difficulty disposing of their securities and should not view the Common
Stock or the Senior Notes as a short-term investment. Accordingly, there can
be no assurance that an active and liquid trading market for the Common Stock
or the Senior Notes will develop or that, if developed, it will continue, nor
is there any assurance that persons purchasing shares of Common Stock or
Senior Notes will be able to sell them at or above the purchase price
therefor.
25
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company
as of December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Actual
----------------------
(Dollars in thousands)
<S> <C>
Notes Payable
Term loan.......................................... $ 20,000
Senior Notes....................................... 60,000
Shareholders' equity
Preferred stock, $0.01 par value; 10 million shares
authorized, none issued and outstanding........... --
Common Stock, $0.01 par value; 20 million shares
authorized, 10,080,503 shares issued and
outstanding;(1)................................... 101
Capital in excess of par value..................... 94,749
Retained earnings ................................. 6,655
Accumulated other comprehensive income............. 307
---------
Total shareholders' equity....................... 101,812
---------
Total capitalization............................. $ 181,812
=========
Capital Ratios:(2)
Tangible capital ratio............................. 2.85%
Average shareholders' equity to average total
assets............................................ 6.84%
Core capital ratio................................. 2.85%
Risk-based capital ratio........................... 5.50%
</TABLE>
- --------
(1) Does not include approximately 750,000 actual shares of Common Stock
reserved for issuance upon exercise of options.
(2) Capital ratios calculated at the Company level.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Bank and the Notes thereto, appearing elsewhere in the Prospectus, and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected historical consolidated
financial data as of and for the year ended December 31, 1998 for the Company
and as of the end of and for each of the two years in the period ended
December 31, 1996 and the period from January 7, 1997 to December 31, 1997 are
derived from the Bank's Consolidated Financial Statements which have been
audited by independent public accountants.
<TABLE>
<CAPTION>
Company Bank
------------ ----------------------------------------------------------
Year Ended Years Ended December 31,
December 31, ----------------------------------------------------------
1998(1) 1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income statement data:
Net interest income.... $ 24,362 $ 38,979 $ 38,305 $ 36,676 $ 34,113 $ 33,217
Provision for loan
losses................ 1,021 8,786 2,155 1,125 1,050 300
---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 23,341 30,193 36,150 35,551 33,063 32,917
Non-interest income.... 19,195 24,711 23,280 23,370 20,572 17,389
Non-interest expense... 31,616 42,242 39,316 46,362 36,527 33,641
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.... 10,920 12,662 20,114 12,559 17,108 16,665
Net income............. 6,675 6,409 10,922 7,634 10,397 10,125
Balance sheet data at
period end:
Total assets........... $1,378,716 $1,368,171 $1,256,153 $1,206,235 $1,294,575 $1,252,203
Securities............. 375,011 369,827 382,211 449,006 534,709 618,952
Loans.................. 825,633 825,633 697,869 674,861 639,880 528,901
Allowance for loan
losses................ 10,472 10,472 4,660 5,058 4,930 4,686
Total deposits......... 970,821 974,669 982,442 990,203 1,084,582 1,060,886
Total shareholders'
equity................ 101,812 168,968 161,832 84,521 84,279 76,928
Average balance sheet
data:
Total assets........... $1,292,196 $1,287,756 $1,291,295 $1,252,641 $1,272,514 $1,229,178
Securities............. 334,321 339,384 410,876 480,728 578,879 668,610
Loans.................. 711,798 706,700 684,379 652,172 589,020 460,313
Allowance for loan
losses................ 10,465 9,055 4,886 5,003 4,841 4,770
Total deposits......... 984,443 991,311 995,237 1,041,920 1,064,880 1,007,654
Total shareholders'
equity................ 88,410 167,296 156,432 85,556 83,041 78,791
Performance Ratios:
Return on average
assets................ .52% 0.50% 0.85% 0.61% 0.82% 0.82%
Return on average
common equity......... 7.55 3.83 6.98 8.92 12.52 12.85
Net interest margin.... 2.83 3.42 3.44 3.15 2.88 2.89
Efficiency ratio....... 72.61 66.34 63.84 77.21 66.80 66.48
Asset Quality Ratios:
Nonperforming assets to
total loans and other
real estate........... .48 0.48 .82 .79 .73 1.59
Net charge-offs to
average loans......... 1.48 1.48 .37 .15 .14 .11
Allowance for loan
losses to total
loans................. 1.27 1.27 .67 .75 .77 .89
Allowance for loan
losses to
nonperforming loans... 313 313 91 107 112 59
Capital Ratios:
Tangible capital
ratio................. 2.85 7.99 7.40 6.60 5.97 5.31
Average shareholders'
equity to average
total assets.......... 6.84 12.99 12.11 6.83 6.53 6.41
Core capital ratio..... 2.85 7.99 7.40 6.60 5.97 5.31
Risk-based capital
ratio................. 5.50 16.70 15.69 15.06 14.86 14.84
</TABLE>
- --------
(1) The results of operations of the Bank were consolidated with those of the
Company from April 1, 1998, the date of the acquisition.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Superior Financial Corp. (the "Company") is a unitary thrift holding
company. The Company was organized in 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
balance sheets and statements of operations. This section should be read in
conjunction with the Company's and the Bank's financial statements and
accompanying notes and other detailed information contained in this Annual
Report.
On January 7, 1997 NationsBank, Inc. purchased the Bank from Boatmen's
Bancshares, Inc. in a transaction accounted for by the purchase method of
accounting for business combinations. The phrase "year ended December 31,
1997" in the remainder of this discussion and analysis refers to the period
from January 7, 1997 to December 31, 1997.
For the Twelve Months Ended December 31, 1998 and 1997
Results of Operations
Company
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 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 the Company's operations are funded solely from the operations of the
Bank.
Total assets and total stockholders' equity at December 31, 1998 were $1.4
billion and $102 million, respectively. The $20 million Note Payable with
Colonial Bank 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 twelve months ended December 31, 1998 was $6.675 million.
Net income per share-basic and diluted for the twelve months ended December
31, 1998 were $0.88. The interest expense on the Note Payable and the Senior
Notes is recorded by the Company and was $5.757 million for the twelve months
ended December 31, 1998. This represents the primary difference between the
operations of the Company and that of the Bank. The Company had return on
average assets of .52% and return of average common equity of 7.55% for the
twelve months ended December 31, 1998.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Superior Financial Corp. (the "Company") is a savings and loan holding
company. The Company was organized in 1997 as SFC Acquisition Corp. for the
purpose of acquiring 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. The Bank is a
federally chartered savings association. 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 statements of income. This
section should be read in conjunction with the Bank's financial statements and
accompanying notes and other detailed information appearing elsewhere in this
Prospectus.
On January 7, 1997 NationsBank, Inc. purchased the Bank from Boatmen's
Bancshares, Inc. in a transaction accounted for by the purchase method of
accounting for business combinations. The phrase "year ended December 31,
1997" in the remainder of this discussion and analysis refers to the period
from January 7, 1997 to December 31, 1997.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
COMPANY
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 transaction and
the private placement offering. The Company's primary asset is its investment
in 100% of the common stock of the Bank and the Company's operations are
funded solely from the operations of the Bank.
Total assets and total stockholders' equity at September 30, 1998 were
$1,233 million and $103 million, respectively. The $20 million Note Payable
with Colonial Bank 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 nine months ended was $4,334 million. Net income per
share-basic and net income per share-diluted for the nine months ended were
$0.43 and $0.40, respectively. The interest expense on the Note Payable and
the Senior Notes is recorded by the Company and was $3,858 million for the
nine months ended September 30, 1998. This represents the primary difference
between the operations of the Company and that of the Bank. The Company had
return on average assets of .67% and return of average common equity of 7.10%
for the nine months ended September 30, 1998.
29
<PAGE>
Factors that determine the level of net interest income include the volume
of earnings assets and interest bearing liabilities, yields earned 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 twelve months ended December 31, 1998 was $39.0
million, an increase of $.7 million or 1.8% from $38.3 million for the twelve
months ended December 31, 1997. This resulted in a net interest margin of
3.42% and 3.44%, and a net interest spread of 3.02% and 3.16% for the twelve
months ended December 31, 1998 and December 31, 1997, respectively. The
decrease in the net interest margin and net interest spread was primarily the
result of a lower yield on the investment portfolio caused by a general
decrease in interest rates, resulting in excess principal payments.
Interest income was flat at $83.7 million for the twelve months ended
December 31, 1998 compared to the twelve months ended December 31, 1997. The
overall growth in loans during the third and fourth quarters of 1998,
increased interest income, but this increase was offset by the net change in
the asset mix between investment securities and federal funds sold.
For the Twelve Months Ended December 31, 1997 and 1996
Results of Operations
Bank
Net Interest Income
Net interest income totaled $38.3 million in 1997 compared to $36.7 million
in 1996, an increase of $1.6 million or 4.4%. This resulted in net interest
margins of 3.44% and 3.15% and net interest spreads of 3.16% and 2.90% for
1997 and 1996, respectively.
The primary reason for higher net interest income was growth in loans
coupled with higher yields on the loan portfolio which increased to 8.02% from
7.94%. In addition, the securities portfolio yield increased 12 basis points
to 6.76% for the year ended 1997, while the yield on deposits and other
borrowed funds decreased 9 basis points to 4.35%.
30
<PAGE>
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities, expressed
both in dollars and rates. No tax equivalent adjustments were made as the Bank
does not have any tax-exempt investments and all average balances are monthly
average balances. Nonaccruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Average Interest Avg. Average Interest Avg. Average Interest Avg.
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans.................. $ 706,700 $56,536 8.00% $ 684,379 $54,870 8.02% $ 652,172 $51,800 7.94%
Securities............. 339,384 21,487 6.33 410,876 27,765 6.76 480,728 31,902 6.64
Federal funds sold and
other earning assets.. 92,815 5,638 6.07 18,650 1,029 5.52 30,728 1,706 5.55
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................ 1,138,899 83,661 7.35 1,113,905 83,664 7.51 1,163,628 85,408 7.34
---------- -------
Less allowance for loan
losses................ 9,055 -- 4,886 -- 5,003 --
---------- ------- ---------- ------- ---------- -------
Total earning assets,
net of allowance....... 1,129,845 83,661 1,109,019 83,664 1,158,625 85,408
Nonearning assets....... 157,912 182,276 94,016
---------- ---------- ----------
Total assets........... $1,287,756 $1,291,295 $1,252,641
========== ========== ==========
Liabilities and
stockholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 197,182 $ 3,787 1.92% $ 188,646 $ 3,925 2.08 $ 178,044 $ 3,770 2.12
Savings and money
market accounts....... 164,012 4,573 2.79 161,815 4,240 2.62 165,169 4,081 2.47
Certificates of
deposit............... 556,699 29,551 5.31 577,141 30,269 5.24 636,585 33,817 5.31
Borrowed funds......... 114,463 6,795 5.94 114,408 6,925 6.05 117,253 7,064 6.02
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 1,032,356 44,706 4.33 1,042,010 45,359 4.35 1,097,051 48,732 4.44
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits....... 73,418 67,635 62,122
Other liabilities...... 14,687 6,987 7,912
---------- ---------- ----------
Total liabilities...... 1,120,461 1,116,632 1,167,085
Stockholders' equity.... 167,296 174,663 85,556
---------- ---------- ----------
Total liabilities and
stockholders' equity.. $1,287,756 $1,291,295 $1,252,641
========== ========== ==========
Net interest income..... $38,955 $38,305 $36,676
------- ------- -------
Net interest spread..... 3.02% 3.16% 2.90%
==== ==== ====
Net interest margin..... 3.42% 3.44% 3.15%
==== ==== ====
</TABLE>
31
<PAGE>
The following table presents the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities and distinguishes between the increase (decrease)
related to higher outstanding balances and the volatility of interest rates.
For purposes of this table, changes attributable to both rate and volume which
can be segregated have been allocated. Changes not solely due to volume or
rate changes are allocated to rate.
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1998 versus 1997 1997 versus 1996
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
-------------------- Due to --------------------- Due to
Volume Rate Total Volume Rate Total
---------- --------- ------- ----------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $ 1,790 $ (124) $ 1,666 $ 2,566 $ 504 $ 3,070
Securities............. (4,831) (1,447) (6,278) (4,137) -- (4,137)
Federal funds sold and
other
earnings assets....... 4,092 517 4,609 (677) -- (677)
--------- --------- ------- ----------- -------- -------
Total increase in
interest income...... 1,051 (1,054) (3) (2,248) 504 (1,744)
--------- --------- ------- ----------- -------- -------
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. 178 (316) (138) 155 -- 155
Savings and money
market accounts....... 58 275 333 (84) 243 159
Certificates of
deposits.............. (1,072) 354 (718) (3,548) -- (3,548)
Borrowed funds......... 3 (133) (130) (139) -- (139)
--------- --------- ------- ----------- -------- -------
Total increase in
interest expense..... (833) 180 (653) (3,616) 243 (3,373)
--------- --------- ------- ----------- -------- -------
Increase (decrease) in
net interest income.... $ 1,884 $ (1,234) $ 650 $ 1,368 $ 261 $ 1,629
========= ========= ======= =========== ======== =======
</TABLE>
Noninterest Income
Non interest income for the year ended December 31, 1998 was $24.5 million,
an increase of $1.2 million or 5.12% over the same period in 1997. Noninterest
income for the year ended December 31, 1997 was $23.3 million, a decrease of
$.1 million or .43% over the same period in 1996.
The following table presents for the periods indicated the major components
of noninterest income.
<TABLE>
<CAPTION>
Year ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts.................... $20,575 $20,241 $18,683
Mortgage operations, net............................... 2,201 1,796 1,330
Other noninterest income............................... 1,695 1,243 3,357
------- ------- -------
Total noninterest income............................. $24,471 $23,280 $23,370
======= ======= =======
</TABLE>
Service charges were $20.6 million for the year ended December 31, 1998,
compared to $20.2 million for the year ended December 31, 1997, an increase of
$.4 million or 1.98%. The growth in service charges slowed in 1998 primarily
due to the sale of nine brances in the third quarter.
Service charges were $20.2 million for the year ended December 31, 1997,
compared to $18.7 million for the year ended December 31, 1996, an increase of
$1.5 million or 8.0%. This increase is attributed to the growth in the number
of deposit accounts from 263,904 at December 31, 1996 to 280,328.
32
<PAGE>
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. As demonstrated by the trend from 1996 through
1998, management of the Company believes the growth will be
sustained as the number of transaction accounts (checking and savings
accounts) increase. This increase in the number of transactions and the
related service fee generation is largely due 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 year ended December 31, 1998, noninterest expenses totaled $42.0
million, an increase of $2.7 million, or 6.8%, from $39.3 million during 1997.
The efficiency ratio for the year ended December 31, 1998, was 66.34%,
compared to 63.84% in 1997. For the year ended December 31, 1997, noninterest
expenses totaled $39.3 million, a decrease of $7.1 million, or 15.3%, from
$46.4 million during 1996. For the same time periods the efficiency ratio was
63.84% in 1997 and 77.21% in 1996.
Salary and benefit expense for year ended December 31, 1998, was $18.2
million, compared to $16.3 million for the year ended December 31, 1997, an
increase of $1.9 million or 11.4%. Salary and benefit expense for the year
ended December 31, 1997 was $16.3 million, compared with $16.3 million for the
year ended December 31, 1996. This increase was due primarily to the hiring of
additional personnel required to accommodate the Bank's growth and expanded
products and services.
Occupancy decreased $588,000, or 32.9% during 1998 due to the sale of the
nine branches during the third quarter. Occupancy expense rose $151,000 (5%)
and $69,000 (2%) in 1997 and 1996, respectively. Major categories included
within occupancy expense are building lease expense, depreciation expense, and
maintenance contract expense.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the applicable franchise taxes. The
amount of federal income tax expense is influenced by the amounts of taxable
income, tax-exempt income, nondeductible interest expense, and other
nondeductible expenses. For the twelve months ended December 31, 1998, income
tax expense was $6.2 million, a decrease of $3.0 million or 32% from the $9.2
million of income tax expense for the same period in 1997. The lower income
tax expense in 1998 compared to 1997 is due to the decrease in taxable income,
offset by an increase in the effective tax rate from 45.7% in 1997 to 49.4% in
1998. The higher effective tax rate in 1998 is due to the nondeductibility of
the provision for loan losses, which increased in the first quarter of 1998 of
$7.7 million. See discussion under "Allowance for Loan Losses".
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 rate sensitive assets and liabilities. See "Financial
Condition--Interest Rate Sensitivity and Liquidity" below.
Financial Condition
Loan Portfolio
Loans were $826 million at December 31, 1998, an increase of $128 million or
18.3% from $698 million at December 31, 1997. Consistent with the Bank's
historically high rate of growth, this increase is believed to be the result
of the Bank's style of relationship banking featuring professional, attentive
and responsive service to customers' needs, and focusing on commercial lending
to middle market companies.
33
<PAGE>
At December 31, 1998, total loans represented 85% of deposits and 60% of
total assets. At December 31, 1997, total loans represented 71% of deposits
and 56% of total assets.
The following table summarizes the loan portfolio of the Company by major
category of loans as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 10,800 1.31% $ 4,403 .63% $ 2,704 .40% $ 2,931 .46% $ 3,496 .66%
Consumer
Direct................. 99,704 12.08 75,268 10.79 70,179 10.40 39,612 6.19 39,292 7.43
Indirect............... 174,316 21.11 156,073 22.36 145,059 21.49 131,121 20.49 78,583 14.86
Real Estate:
Construction & land
development........... 15,920 1.93 12,734 1.82 13,304 1.97 24,285 3.80 23,780 4.50
1-4 family
residential........... 484,324 58.66 409,135 58.63 416,668 61.74 419,870 65.62 316,485 68.35
Commercial owner
occupied.............. 40,569 4.91 40,257 5.77 26,947 4.00 22,061 3.44 22,265 4.20
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............. $825,633 100.00% $697,870 100.00% $674,861 100.00% $639,880 100.00% $528,901 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The primary lending focus of the Company is on small and medium-sized
commercial, residential mortgage and consumer loans. The Company offers a
variety of commercial lending products including term loans, lines of credit
and equipment financing. A broad range of short-to-medium-term commercial
loans, both collateralized and uncollateralized, are made available to
businesses for working capital (including inventory and receivables), business
expansion (including acquisitions of real estate and improvements) and the
purchase of equipment. The purpose of a particular loan determines its
structure.
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such
debt from income. As a general practice, the Company takes as collateral a
lien on any available real estate, equipment or other assets. Working capital
loans are primarily collateralized by short-term assets whereas term loans are
primarily collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of single-
family residential mortgage loans collateralized by owner-occupied properties
located in the Company's primary market area. The Company offers a variety of
mortgage loan products which generally are amortized over three to 30 years.
Loans collateralized by single-family residential real estate generally have
been originated in amounts of no more than 90% of appraised value. The company
requires mortgage title insurance and hazard insurance in the amount of the
loan.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized
loans. The terms of these loans typically range from 12 to 60 months and vary
based upon the nature of collateral and size of loan.
Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures."
Under SFAS No. 114, as amended, a loan is considered impaired, based on
current information and events, if it is probable that the Bank will be unable
to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. The measurement of impaired
loans is based on the present value of expected future cash flows discounted
at the loan's effective interest rate or the loan's observable market price or
based on the fair value of the collateral if the loan is collateral-dependent.
The adoption of SFAS No. 114 did not result in any additional provision for
loan losses.
34
<PAGE>
Maturity and Interest Rate Sensitivity of Loans
<TABLE>
<CAPTION>
Loans at December 31, 1998, maturing in:
----------------------------------------------
Over One
One Year Through Over Five
or Less Five Years Years Total
---------- ----------------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural.................... $ 557 $ 204 $ 10,039 $ 10,800
Real estate-construction......... 15,920 -- -- 15,920
---------- ------- ---------- ----------
Total.......................... $ 16,477 $ 204 $ 10,039 $ 26,720
========== ======= ========== ==========
Predetermined rates.............. $16,477 $204 $10,039 $26,720
Variable rates................... -- -- -- --
</TABLE>
Nonperforming Assets
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at December 31, 1998 were $3.9 million, compared
with $5.8 million at December 31, 1997 and $5.3 million at December 31, 1996.
The decrease in nonperforming assets from 1997 to 1998 was primarily the
result of the charge-off of consumer loans during the first quarter of 1998.
This resulted in a ratio of nonperforming assets to loans plus other real
estate of .48%, .82% and .79% as of year end 1998, 1997 and 1996,
respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans....................... $3,348 $5,098 $4,715 $4,407 $7,972
Other real estate and repossessed
assets................................ 594 662 600 242 457
------ ------ ------ ------ ------
Total nonperforming assets........... $3,942 $5,760 $5,315 $4,649 $8,429
====== ====== ====== ====== ======
Nonperforming assets to total loans and
other real estate..................... .48% .82% .79% .73% 1.59%
====== ====== ====== ====== ======
</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 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 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.
35
<PAGE>
Allowance for Loan Losses
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at January
1.................................. $ 4,660 $ 5,058 $ 4,930 $4,686 $4,884
Provision for loan losses........... 8,786 2,115 1,125 1,050 300
Charge-offs......................... (4,351) (2,969) (1,322) (911) (542)
Recoveries.......................... 1,377 416 325 105 44
------- ------- ------- ------ ------
Allowance for loan losses at
December 31........................ $10,472 $ 4,660 $ 5,058 $4,930 $4,686
======= ======= ======= ====== ======
Allowance to period-end loans....... 1.27% .67% .75% .77% .89%
Net charge-offs to average loans.... 1.48 .37 .15 .14 .11
Allowance to period-end
nonperforming loans................ 312.00 91.00 107.00 112.00 59.00
</TABLE>
The principal area of risk continues to be in the indirect consumer loan
portfolio, as this category has experienced the highest level of charge-offs
during the past five years. Charge-offs for the years 1994-1998 have primarily
been in the indirect consumer loan portfolio.
In early 1995 Bank management initiated a series of actions designed to
increase the institution's net interest margin. Among these initiatives was
the redeployment of resources to aggressively grow the higher yielding, higher
risk consumer and commercial loan components of the balance sheet. This
involved a substantial increase in the number of "dual purpose" loan officers,
i.e., lenders who handled consumer loan requests as well as mortgage loan
originations, aggressive solicitation of indirect auto loan paper, and
reductions in mortgage origination staff. As a result the Bank experienced
significant growth in consumer loan balances, particularly indirect auto
paper, and a moderate decline in the mortgage loan portfolio as normal
amortization exceeded new mortgage loan production. These actions resulted in
an increase in the Bank's automobile loan portfolio (direct and indirect) over
the last five years as follows:
<TABLE>
<CAPTION>
Direct Indirect Total
----------- ------------ ------------
<S> <C> <C> <C>
1994...................................... $21,967,000 $ 78,583,000 $100,550,000
1995...................................... 22,969,000 131,121,000 154,090,000
1996...................................... 22,038,000 145,059,000 167,097,000
1997...................................... 27,321,000 156,073,000 183,394,000
1998...................................... 25,308,000 174,316,000 199,624,000
</TABLE>
In May 1996, the loan officer in charge of the indirect automobile loans
left the Bank. During the fall of 1996, the Bank began to experience an
increase in delinquencies and write-offs on indirect automobile loans. This
resulted in an increase in net charge-offs to $997,000 in 1996, from $806,000
in 1995, a 23.70% increase. During 1997, Bank management began to sense that
some higher risk automobile loans had been made and purchased by the Bank. In
April 1997 senior management of the Bank changed when the President and Chief
Executive Officer retired. The new President and Chief Executive Officer took
a more aggressive approach to dealing with problems in the automobile loan
portfolio, particularly the indirect, and implemented new controls and
procedures to provide earlier indications of problems and charge-offs of these
loans. These new controls and procedures indicated that the Bank had been
purchasing higher risk automobile loans. The Bank's net charge-offs increased
significantly in 1997 and 1998 as the result of the problems in the automobile
loan portfolio.
This shift in the mix of the loan portfolio to higher yielding, higher risk
consumer loans and the significant increase in indirect automobile loans
resulted in the increase in the level of charge-offs from 1995 to 1998.
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information as of
the dates indicated. The allocation is made for analytical purposes and
36
<PAGE>
is not necessarily indicative of the categories in which future loan losses may
occur. The total allowance is available to absorb losses from any category of
loans.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance of allowance loan losses applicable to:
Commercial..................................... $ 165 2% 1.31%
Real Estate:
Construction and land development............ -- -- 1.93
1-4 family residential....................... 1,466 14 58.66
Commercial owner occupied.................... 638 6 4.91
Consumer....................................... 6,527 62 33.19
Unallocated.................................... 1,676 16 --
------- --- ------
Total allowance for loan losses............ $10,472 100% 100.00%
======= === ======
<CAPTION>
December 31, 1997
-----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance of allowance loan losses applicable to:
Commercial..................................... $ -- 0% 0.63%
Real Estate:
Construction and land development............ -- 0 1.82
1-4 family residential....................... 694 15 58.63
Commercial owner occupied.................... 319 7 5.77
Consumer....................................... 3,603 77 33.15
Unallocated.................................... 44 1 0.00
------- --- ------
Total allowance for loan losses............ $ 4,660 100% 100.00%
======= === ======
<CAPTION>
December 31, 1996
-----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance of allowance loan losses applicable to:
Commercial..................................... $ 0 0% 0.40%
Real Estate:
Construction and land development............ 0 0 1.97
1-4 family residential....................... 678 13 61.74
Commercial owner occupied.................... 557 11 4.00
Consumer....................................... 3,641 72 31.89
Unallocated.................................... 182 4 0.00
------- --- ------
Total allowance for loan losses............ $ 5,058 100% 100.00%
======= === ======
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance of allowance loan losses applicable to:
Commercial...................................... $ 0 0% 0.46%
Real Estate:
Construction and land development............. 0 0 3.80
1-4 family residential........................ 736 15 65.62
Commercial owner occupied..................... 561 11 3.44
Consumer........................................ 2,013 41 26.68
Unallocated..................................... 1,620 33 0.00
------ --- ------
Total allowance for loan losses............. $4,930 100% 100.00%
====== === ======
<CAPTION>
December 31, 1994
----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance of allowance loan losses applicable to:
Commercial...................................... $ 0 0% .66%
Real Estate:
Construction and land development............. 0 0 4.50
1-4 family residential........................ 2,628 56 68.35
Commercial owner occupied..................... 524 11 4.20
Consumer........................................ 1,150 25 22.29
Unallocated..................................... 384 8 0.00
------ --- ------
Total allowance for loan losses............. $4,686 100% 100.00%
====== === ======
</TABLE>
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the allowance
for loan losses to the Board of Directors, indicating any changes in the
allowance since the last review and any recommendations as to adjustments in
the allowance. In making its evaluation, management considers the
diversification by industry of the Bank's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio
of current economic indicators and their probable impact on borrowers, the
amount of charge-offs for the period, the amount of nonperforming loans and
related collateral security, the evaluation of its loan portfolio by the loan
review function and the annual examination of the Bank's financial statements
by its independent auditors. Charge-offs occur when loans are deemed to be
uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans
and other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Bank's historical charge-off experience. The Bank then charges to operations a
provision for loan losses determined on an annualized basis to maintain the
allowance for loan losses at an adequate level determined according to the
foregoing methodology.
Management believes that the allowance for loan losses at December 31, 1998
is adequate to cover losses inherent in the portfolio as of such date. During
the first quarter of 1998, the Bank made certain changes in
38
<PAGE>
accounting estimates totaling approximately $7.7 million, and the allowance
for loan losses was significantly increased in the first quarter of 1998 to
reflect the increased risk of losses in automobile loans within the Bank's
loan portfolio, which experienced an increased level of losses in the first
quarter of 1998.
The components of the provision for loan losses in the period January 1,
1998 through March 31, 1998 is as follows:
<TABLE>
<S> <C>
.To restore charge-offs on direct and indirect automobile
loans..................................................... $1,925,000 (A)
.To provide quarterly provision on the loan portfolio........ 750,000 (B)
.To provide an allowance for increased inherent risk in the
automobile loan portfolio................................. 4,500,000 (C)
.To provide additional unallocated allowance................. 590,000 (D)
----------
Total provision for loan losses for three months ended
March 31, 1998......................................... $7,765,000
==========
</TABLE>
(A) The higher level of delinquencies and charge-offs noted above for 1997 on
automobile loans, particularly the indirect automobile loans, continued
into the first quarter of 1998 and the losses in this portion of the
portfolio were determined to be significantly more than previously
estimated. Additionally, in the first quarter of 1998, the Bank
experienced increased historical losses attributed to a higher level of
repossessed automobiles and their associated liquidation losses. The Bank
charged-off additional problem automobile loans and took liquidation
losses on the repossessed automobiles during the first quarter, and made a
provision to restore the allowance for these charge-offs and losses.
(B) Represents the quarterly provision to the allowance for loan losses for
the remainder of the loan portfolio.
(C) In light of the trend of problems that began to surface during 1997 and
continued into the first quarter of 1998 in the automobile loan portfolio,
the allowance was increased to reflect management's assessment of
increased risk of loan losses due to the higher historical loss being
experienced by the Bank in the automobile portion of the loan portfolio.
Due to the problems discussed above in the direct and indirect automobile
loan portfolio, the actual losses the Bank was experiencing were running
at approximately 3.5% of the total automobile loan portfolio. The Bank had
been providing for historical losses using a 1% historical loss factor.
Since the Bank had more information on what actual losses on the
automobile portfolio were running, a change of estimate was made in the
first quarter as more experience and additional information on the
historical loss rate was obtained. The following table provides a detail
of the gross charge-offs for direct and indirect loans for the years ended
December 31, 1996 and 1997 and the three months ended March 31, 1998.
<TABLE>
<CAPTION>
Total Direct Total
and Charge-
Direct Loan Indirect Loan Indirect Loan offs for
Charge-offs Charge-offs Charge-offs All Loans
----------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
December 31, 1996........ $226,000 $1,067,000 $1,293,000 $1,322,000
December 31, 1997........ 340,000 2,629,000 2,969,000 2,969,000
March 31, 1998........... 307,000 1,626,000 1,933,000 2,034,000
-------- ---------- ---------- ----------
Total.................. $873,000 $5,322,000 $6,195,000 $6,325,000
======== ========== ========== ==========
</TABLE>
(D) During the first quarter of 1998, the Bank began shifting its management
philosophy and strategic direction more toward that of a commercial bank
rather than a thrift and began to make more commercial loans which have a
greater inherent risk of loss than the mortgage loans the Bank had
traditionally made. Commercial loans increased $7,387,000 or 21.68% during
the first quarter and continued to increase during the second quarter. An
additional general allowance in the first quarter of 1998 was provided due
to the shift to more commercial lending.
39
<PAGE>
The sequence of events which lead to the $7,765,000 provision for loan
losses for the three months ended March 31, 1998 detailed above is as follows.
In October 1997 management of the Company was allowed five days to perform
due diligence on the Bank. During the due diligence review, rapid growth of
the indirect automobile loan portfolio was noted from 1993 to the date of the
review coupled with a deterioration in the credit quality of the portfolio as
shown by past due indirect automobile loans running at 3-4% of total indirect
consumer loans beginning in mid 1996 and a repossessed inventory of
automobiles exceeding 100 units (approximately 3-4 months inventory). Early
estimates of the potential loss based on the limited information and time for
review was $2 million, which was reflected in the 1998 pro-forma financial
data prepared by the Company and included in the private placement memorandum
provided to prospective investors.
On December 3, 1997, the Company entered into an agreement with NationsBank
to acquire the Bank. In January 1998 Messrs. C. Stanley Bailey and C. Marvin
Scott arrived at the Bank to assist in the transition process towards
acquisition and to more fully assess the potential loss in the indirect
automobile loan portfolio. Both of these gentlemen have had considerable
experience with indirect loan portfolio management at other regional banks.
When Messrs. Bailey and Scott began reviewing the indirect automobile loan
portfolio it was determined that the problems were worse than was earlier
estimated in October 1997. Based upon their experience, typical problem
indirect loan portfolios take two years from origination to become evident and
an additional two years to clean up.
Throughout February and March of 1998 further assimilation of indirect
automobile portfolio aging information was performed and a careful analysis of
loans originated by the terminated loan officer noted above was conducted.
Based upon the results of these procedures, Messrs. Bailey and Scott suggested
that the Bank's and NationsBank's management take actions to remedy the
indirect automobile loan quality as follows:
1. Liquidate all repossessed automobiles at auction and maintain no more
than one months inventory (25-35 automobiles). Anticipated liquidation
losses estimated at $3-$5 thousand per unit ($400-$500 thousand.)
2. Charge-off all delinquent indirect loans exceeding 120 days past due and
all bankruptcies. Estimated losses at $1.5 million.
3. Enhance credit scoring to originate "A" quality indirect loans only,
thus causing indirect automobile loan portfolio to shrink over time.
4. Eliminate dealers generating indirect paper with high delinquency
levels.
5. Increase the allowance for loan losses $4.5 million to provide an
adequate reserve for the risk of loss in the settling out process of the
remaining automobile loan portfolio over the next 12-18 months.
These suggestions were presented to Bank management and NationsBank
management during the first quarter 1998. All suggestions were accepted for
implementation during first quarter 1998.
By March 31, 1998, these initiatives resulted in the following:
. Indirect automobile loan delinquencies declined from 3.3% of total
indirect automobile loans at December 31, 1997 to 1.89% at March 31,
1998.
. Repossessed automobile inventory declined from 123 units at December 31,
1997 to 69 units at March 31, 1998.
. Allocated allowance for loan losses for indirect automobile loans was
increased from $1.2 million at December 31, 1997 to $4.5 million at March
31, 1998.
. Unallocated allowance for loan losses was increased from $44,000 at
December 31, 1997 to $1.6 million at March 31, 1998.
Investments
The Company's investments portfolio is the second largest component of
earning assets. It provides a significant source of revenue for the Company
and acts as a source of funding should the Bank experience
40
<PAGE>
unanticipated deposit withdrawals or loan demand. At the date of purchase, the
Company is required to classify debt and equity securities into one of three
categories: held to maturity, trading or available for sale. At each reporting
date, the appropriateness of the classification is reassessed. Investments in
debt securities are classified as held to maturity and measured at amortized
cost in the financial statements only if management has the positive intent
and ability to hold those securities to maturity. Securities that the Bank
does not have the positive intent and ability to hold to maturity and all
marketable equity securities are classified as available-for-sale or trading
and carried at fair value. Unrealized holding gains and losses on securities
classified as available-for-sale are recorded as accumulated other
comprehensive income in stockholders' equity.
The following table summarizes the amortized cost of investments held by the
Company as of the dates shown:
<TABLE>
<CAPTION>
December 31
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities......... $297,359 $369,555 $437,076 $524,410 $608,553
CMOs............................... 59,139
Trust preferred stock.............. 7,563
-------- -------- -------- -------- --------
Total investments................ $364,061 $369,555 $437,076 $524,410 $608,553
======== ======== ======== ======== ========
</TABLE>
The decrease in the investments portfolio is the result of the Company's
strategy of increasing its net interest margin by growing the loan portfolio.
Mortgage-backed securities declined from $608.5 million in 1994 to $297.4
million in 1998, a $311.1 million decrease, while for the same period, total
loans rose from $528.9 million in 1994 to $825.6 million in 1998, a $296.7
million increase. With the anticipated growth in deposits and loans,
management of the Company believes the investments portfolio will remain at
approximately the December 31, 1998 balance.
All investments held by the Company as of December 31, 1998 and 1997 are
classified as available-for-sale. The following table presents the amortized
cost and estimated market values for investments as of the dates shown.
<TABLE>
<CAPTION>
Gross Estimated Amortized Unrealized Market
-----------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
----------------------------------------- -----------------------------------------
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
-------- ---------- ---------- ---------- -------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities............. $296,895 $1,814 $(1,350) $297,359 $369,555 $4,098 $(323) $373,330
CMOs.................... 59,130 56 (47) 59,139
Trust preferred stock... 7,563 -- -- 7,563
-------- ------ ------- -------- -------- ------ ----- --------
Total investments...... $363,588 $1,870 $(1,397) $364,061 $369,555 $4,098 $(323) $373,330
======== ====== ======= ======== ======== ====== ===== ========
</TABLE>
At December 31, 1998, investments totaled $364 million, a decrease of $9
million from 1997. This decrease occurred in mortgage-backed securities. At
December 31, 1997, investments totaled $373 million, a decrease of $76 million
from $449 million at December 31, 1996. The decrease occurred in mortgage-
backed securities. The yield on the investments portfolio for 1998 was 6.33%
while the yield was 6.76% in 1997 and 6.64% in 1996.
The Company has no mortgage-backed securities that have been issued by non-
agency entities.
At December 31, 1998, 84% of investments available for sale held by the
Company had final maturities of more than 10 years. At December 31, 1998,
approximately $182 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase, but
benefit less than fixed rate securities in value changes at times of declining
interest rates.
41
<PAGE>
The following table summarizes the contractual maturity of investments
(including investments available-for-sale, federal funds sold and interest-
bearing deposits) and their weighted average yields at December 31, 1998:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------
After After
One Year FiveYears
but Within but Within
Within One Year FiveYears Ten Years After Ten Years
----------------- ------------ ------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
--------- ------- ------ ----- ------- ----- --------- ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities............. $ $3,209 6.74% $55,485 5.97% $ 238,201 6.14% $296,895 6.17%
CMOs.................... 59,130 6.44 59,130 6.44
Trust preferred stock... 7,563 7.36 7,563 7.36
--------- ------ ------ ---- ------- ---- --------- ----- -------- ----
Total investments
available for sale.... $ -- 0% $3,209 6.74% $55,485 5.97% $ 304,894 6.23 $363,588 6.66
Federal Home Loan Bank
stock.................. 10,950 6.24 10,950 6.24
Interest-bearing
deposits............... 40,514 5.80 40,514 5.80
--------- ------ ------ ---- ------- ---- --------- ----- -------- ----
Total.................. $ 40,514 5.80% $3,209 6.74% $55,485 5.97% $ 315,844 6.23% $415,052 6.19%
========= ====== ====== ==== ======= ==== ========= ===== ======== ====
</TABLE>
Deposits
The Company's ratio of average demand deposits to average total deposits for
years ended December 31, 1998, 1997 and 1996 were 27%, 26%, and 23%,
respectively.
Average total deposits during 1998 decreased to $991 million from $995
million in 1997, a decrease of $4 million or .40%. In addition, average
noninterest-bearing deposits increased to $73 million in 1998 from $68 million
in 1997. Average deposits in 1997 decreased to $995 million from $1,042
million in 1996, a decrease of $47 million or 4.5%.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1998, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1998 1997 1996
------------- ------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- ---------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts...................... $197,182 1.92% $188,646 2.08 $ 178,044 2.12
Regular savings................... 105,400 2.33 104,787 2.37 106,476 2.37
Money market...................... 58,612 3.61 57,028 3.08 58,693 2.65
CD's.............................. 556,699 5.31 577,141 5.24 636,585 5.31
-------- -------- ----------
Total interest-bearing
deposits....................... 917,893 4.13 927,602 4.35 979,798 4.44
Noninterest-bearing deposits...... 73,418 67,635 62,122
-------- -------- ----------
Total deposits.................. $991,311 $995,237 $1,041,920
======== ======== ==========
</TABLE>
The decrease in daily average balance for deposits from $1,041.9 million in
1996 to $991.3 million in 1998 is primarily due to a planned strategy by the
Company of not aggressively pursuing the higher interest rate certificate of
deposit market and to the sale of two branches in 1996 and nine branches in
1998. The Company's strategy is focused on the growth of transaction accounts
(checking and savings accounts) through the "Totally Free Checking" product.
These transaction accounts have lower interest rates than certificates of
deposit, which will tend to increase the Company's net interest margin, and
generate service charge income. The Company continues to experience growth in
the non-interest bearing checking accounts and NOW accounts.
42
<PAGE>
Maturity Distribution of Time Deposits $100,000 and Over
<TABLE>
<CAPTION>
December 31
-----------------------
Certificates
of Deposit Other Time
------------ ----------
(Dollars in thousands)
<S> <C> <C>
Three months or less.................................... $19,060 $ --
Over three months to six months......................... 25,279 --
Over six months to twelve months........................ 8,732 --
Over twelve months...................................... 7,492 --
------- -----
Total................................................. $60,563 $ --
======= =====
</TABLE>
Borrowings
Other short-term borrowings, consisting of Federal Home Loan Bank Advances,
generally represent borrowings with maturities ranging from one to thirty
days. Information relating to these borrowings is summarized as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997 1996
--------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Other short-term borrowings:
Average........................................... $ 12,213 $ -- $ 4,317
Year-end.......................................... 12,040 -- 8,000
Maximum month-end balance during year............... 162,217 -- 8,000
Interest rate:
Average........................................... 3.83% 0.00% 5.80%
Year-end.......................................... 3.83 0.00 5.80
</TABLE>
Interest Rate Sensitivity and Liquidity
Asset and liability management is concerned with the timing and magnitude of
repricing assets compared to liabilities. It is the objective of the Company
to generate stable growth in net interest income and to attempt to control
risks associated with interest rate movements. In general, management's
strategy is to reduce the impact of changes in interest rates on its net
interest income by maintaining a favorable match between the maturities or
repricing dates of its interest-earning assets and interest-bearing
liabilities. The Company's asset and liability management strategy is
formulated and monitored by the Asset Liability Committee, which is composed
of senior officers of the Company, in accordance with policies approved by the
Company's Board of Directors. This committee meets regularly to review, among
other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activity, and maturities of
investments and borrowings. The Asset Liability Committee also approves and
establishes pricing and funding decisions with respect to the Bank's overall
asset and liability composition The Committee reviews the Company's liquidity,
cash flow flexibility, maturities of investments, deposits and borrowings,
retail and institutional deposit activity, current market conditions, and
interest rates on both a local and national level.
The Company reports to the Board of Directors rate sensitive assets minus
rate sensitive liabilities divided by total earning assets on a cumulative
basis quarterly. At December 31, 1998, this ratio was a positive 10.5%. The
Company estimates that a 100 basis point change in interest rates would have
no significant impact on its net interest income over a twelve-month period.
The Committee regularly reviews interest rate risk exposure by forecasting the
impact of alternative interest rate environments on net interest income. The
interest rate sensitivity ("GAP") is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A GAP is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A GAP is considered negative when the amount of
43
<PAGE>
interest rate sensitive liabilities exceeds interest rate sensitive assets.
During a period of rising interest rates, a negative GAP would tend to
adversely affect net interest income, while a positive GAP would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative GAP would tend to result in an increase in net
interest income, while a positive GAP would tend to affect net interest income
adversely. While the interest rate sensitivity GAP is a useful measurement and
contributes toward effective asset and liability management, it is difficult
to predict the effect of changing interest rates solely on this measure.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income
positively or negatively even if an institution were perfectly matched in each
maturity category.
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change.
Consequently, as the interest rate environment has become more volatile, the
Bank's management has increased monitoring its net interest rate sensitivity
position and the effect of various interest rate environments on earnings.
Interest Rate Sensitivity and Liquidity
U.S. money market interest rate market presents the primary risk exposure to
the Company. In measuring and managing interest rate risk, the Company uses
gap analysis, net interest income simulation, and economic value equity
modeling. The following table sets forth a gap interest rate sensitivity
analysis for the Bank as of December 31, 1998:
<TABLE>
<CAPTION>
Period/Cumulative GAP Analysis
----------------------------------------------------------------
0-90 days 91-180 days 181-360 days After One Year Total
--------- ----------- ------------ -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Short term
investments.......... $ 51,464 $ $ $ $ 51,464
Investments available-
for-sale............. 48,734 46,459 42,356 226,512 364,061
Loans................. 44,669 47,639 94,846 638,479 825,633
--------- --------- --------- -------- ----------
Total interest-
earning assets..... $ 144,867 $ 94,098 $ 137,202 $864,991 $1,241,158
========= ========= ========= ======== ==========
Interest-bearing
liabilities:
Demand, money market
and
savings deposits..... $ 368,742 $ $ $ $ 368,742
Certificates of
deposit and other
time deposits........ 143,457 127,850 165,742 89,179 526,228
Borrowings............ 12,000 204,500 216,500
--------- --------- --------- -------- ----------
Total interest-
bearing
liabilities........ $ 524,199 $ 127,850 $ 165,742 $293,679 $1,111,470
========= ========= ========= ======== ==========
Period GAP.............. $(379,332) $ (33,752) $ (28,540) $571,312
Cumulative GAP.......... (379,332) (413,084) (441,624) 129,688 $ 129,688
Period GAP to earning
assets................. (30.1)% (2.7)% (2.3)% 46.0% 10.5%
Cumulative GAP to
earning assets......... (30.1)% (33.3)% (35.6)% 10.5%
</TABLE>
The gap sensitivity analysis shows when balances may be repriced. Net
interest income, however, is also affected by how much the interest rates
change for each of the balances. For example, when national money market rates
change, interest rates on the Company's savings accounts may not change as
much as interest rates on its commercial loans. This is a limiting factor for
the gap analysis.
The Company's net interest income simulation model shows that a parallel 100
basis point increase in interest rates along the yield curve would lower net
interest income by 2% for the next 12 months while a 100 basis point decrease
would raise net interest income by 3%. The model includes balances, asset
prepayment speeds, and interest rate relationships among the balances that
management judges to be reasonable for the various interest rate environments.
Differences in actual occurrences from these assumptions, as well as non-
44
<PAGE>
parallel changes in the yield curve, may change the Company's market risk
exposure. Among the interest rate relationships, there are caps and floors on
the Company's portfolios of adjustable rate mortgage loans and mortgage backed
securities. Additionally, Arkansas usury statutes impose interest rate caps on
certain commercial and consumer loans.
The Company manages its interest rate risk through investment in appropriate
fixed and variable rate assets, acquisition of non-rate sensitive core
deposits, and adjustments in maturities of Federal Home Loan Bank advances.
The Company does not use off-balance sheet instruments.
As of December 31, 1998, the Company's net interest income exposure has
decreased slightly and has remained slightly liability sensitive. The
simulation model indicates that a parallel 100 basis point increase in
interest rates would leave net interest income about unchanged, while a 100
basis point decrease would raise net interest income by 1%. Intermediate and
longer term interest rates have declined moderately since year end. These
lower rates may continue due to low inflation, reduced borrowings by the U.S.
Treasury from an anticipated federal budget surplus, and preference for U.S.
Dollar assets by worldwide investors. The Federal Reserve may maintain low
short term domestic interest rates to help ameliorate any adverse effect of
turmoil in international financial markets.
Management of the Company does not believe the $20 million Note Payable and
the $60 million Senior Notes used to finance the acquisition of the Bank will
have a significant impact on the Company's interest rate exposure. The $20
million Note Payable has a two year maturity and a floating interest rate
based upon LIBOR. The Senior Notes have a term of five years with a fixed
interest rate. Management of the Company believes the combination of these two
financing options minimizes the impact of interest rate changes of the risk
profile of the Company.
The Company did not hold any securities classified as trading securities
during 1998.
Capital Resources
Shareholders' equity increased to $169 million at December 31, 1998 from
$162 million at December 31, 1997, an increase of $7 million, or 4%. This
increase was primarily the result of net income of $6.4 million. Shareholders'
equity increased to $162 million at December 31, 1997 from $84.5 million at
December 31, 1996, an increase of $77.5 million, or 92%. This increase was
primarily the result of net income of $10.9 million and creation of purchase
accounting goodwill of $67 million from the purchase of Superior Federal Bank
by NationsBank. During 1996, shareholders' equity increased by $.2 million, or
.24%, from $84.3 million at December 31, 1995.
The following table provides a comparison of the Bank's leverage and risk-
weighted capital ratios as of December 31, 1998 to the minimum regulatory
standards:
<TABLE>
<CAPTION>
Well-
Capitalized
Minimum Minimum
Bank Ratio Required Required
---------- -------- -----------
<S> <C> <C> <C>
Tangible capital ratio.......................... 7.99% 1.50% 5.00%
Core capital ratio.............................. 7.99 4.00 6.00
Risk-based capital ratio........................ 16.70 8.00 10.00
</TABLE>
Year 2000 Readiness Disclosure
Like most other financial institutions, the operations of the Bank are
particularly sensitive to potential problems arising form 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.
45
<PAGE>
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
system 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 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 December 31,
1998, the Company has spent $50,000 and expects to incur additional internal
and third-party costs totaling approximately $150,000 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. 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
is scheduled for completion in the first quarter of 1999. Third-party
interface testing with item processors, coupon vendors, credit bureaus, check
printers and other vendors is underway and is expected to continue throughout
the first quarter of 1999. Major vendors have also provided assurances that
their business continuity plans will be available in early 1999 for validation
by mid-year. 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. 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.
46
<PAGE>
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--BANK
<TABLE>
<CAPTION>
1998--Three Months Ended For the
------------------------------------------- year ended
Mar. 31 (1) June 30 Sept. 30 Dec. 31 12/31/98
------------ --------- --------- --------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net interest income...... $ 9,035 $ 9,937 $ 9,819 $ 10,164 $ 38,955
Provision for loan
losses.................. 7,765 290 426 305 8,786
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses.................. 1,270 9,647 9,393 9,859 30,169
Non-interest income...... 5,516 6,173 6,469 6,313 24,471
Non-interest expense..... 10,833 10,171 10,451 10,529 41,984
--------- --------- --------- --------- ---------
Income (loss) before
income taxes............ (4,047) 5,649 5,411 5,643 12,656
Income taxes (benefit)... (282) 2,216 2,117 2,196 6,247
--------- --------- --------- --------- ---------
Net income (loss)........ $ (3,765) $ 3,433 $ 3,294 $ 3,447 $ 6,409
========= ========= ========= ========= =========
1. A provision of approximately $7.7 million was recorded for the three months
ended March 31, 1998 to increase the allowance for loan losses for
increased risk of losses in the automobile loans, primarily indirect dealer
loans, within the Bank's portfolio. See discussion under "Allowance for
Loan Losses" in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<CAPTION>
1997--Three Months Ended For the
------------------------------------------- year ended
Mar. 31 June 30 Sept. 30 Dec. 31 12/31/97
------------ --------- --------- --------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net interest income...... $ 9,471 $ 9,566 $ 9,613 $ 9,655 $ 38,305
Provision for loan
losses.................. 375 680 450 650 2,155
--------- --------- --------- --------- ---------
Net interest income after
provision for loan
losses.................. 9,096 8,886 9,163 9,005 36,150
Non-interest income...... 5,664 5,966 5,805 5,844 23,279
Non-interest expense..... 10,259 9,975 10,358 8,724 39,316
--------- --------- --------- --------- ---------
Income before income
taxes................... 4,051 4,877 4,610 6,125 20,113
Income taxes............. 2,156 2,424 2,319 2,292 9,191
--------- --------- --------- --------- ---------
Net income............... $ 2,345 $ 2,453 $ 2,291 $ 3,833 $ 10,922
========= ========= ========= ========= =========
</TABLE>
47
<PAGE>
MANAGEMENT
Directors and Executive Officers of the Company
The following table sets forth all of the directors and executive officers
of the Company, their respective positions with the Company and, if
applicable, the Bank and their ages:
<TABLE>
<CAPTION>
Name Position Age(1)
---- -------- ------
<C> <S> <C>
C. Stanley Bailey....... Chairman of the Board, Chief Executive
Officer, Chairman of the Board of the Bank,
Chief Executive Officer of the Bank 49
C. Marvin Scott......... President, Director, President of the Bank,
Director of the Bank 49
Rick D. Gardner......... Chief Financial Officer, Chief Financial
Officer of the Bank 39
Boyd W. Hendrickson..... Director 53
David E. Stubblefield... Director 61
John M. Stein........... Director 31
</TABLE>
- --------
(1) As of December 31, 1998.
C. Stanley Bailey. Mr. Bailey is Chairman of the Board of Directors of the
Company and Chief Executive Officer of both the Company and the Bank. From May
1995, until joining the Company in January 1998, Mr. Bailey served as the
Chief Financial Officer and Executive Vice President of Hancock Holding
Company and Hancock Bank in Gulfport, Mississippi. Before joining Hancock
Holding Company, Mr. Bailey was Vice Chairman of the Board of Directors of
AmSouth Bancorp and AmSouth Bank, an $18.3 billion multi-state bank holding
company headquartered in Birmingham, Alabama and its wholly owned subsidiary
bank.
C. Marvin Scott. Mr. Scott is currently President and a director of both the
Company and the Bank. From February 1996 until joining the Company in January
1998, Mr. Scott served as Chief Retail Officer and Senior Vice President of
Hancock Holding Company and Hancock Bank in Gulfport, Mississippi. Prior to
his employment with Hancock Holding Company, Mr. Scott was Executive Vice
President--Consumer Banking for AmSouth Bank, a multi-state bank holding
company headquartered in Birmingham, Alabama, where he served for eight years.
Mr. Scott also spent seventeen years at Crestar Bank, a multi-state bank
holding company headquartered in Richmond, Virginia where he served in various
capacities in operations, accounting, marketing, and consumer banking.
Rick D. Gardner. Mr. Gardner is currently Chief Financial Officer of both
the Company and the Bank. From April 1996 until joining the Company in October
1998, Mr. Gardner served as the Chief Financial Officer and subsequently Chief
Executive Officer of First Commercial Mortgage Company in Little Rock,
Arkansas. Prior to his employment with First Commercial Mortgage, Mr. Gardner
was Chief Financial Officer of Metmor Financial, Inc., a commercial and
residential mortgage banking subsidiary of Metropolitan Life Insurance Company
based in Kansas City, Missouri.
David E. Stubblefield. Mr. Stubblefield is President and Chief Executive
Officer of ABF Freight System, Inc. in Fort Smith, Arkansas. He has been a
Director of the Bank since 1994. He was elected to the Board of Directors of
the Company in 1998.
Boyd W. Hendrickson. Mr. Hendrickson is President and Chief Operating
Officer of Beverly Enterprises, Inc., a nursing home management company based
in Fort Smith, Arkansas. He was elected to the Company and Bank Boards of
Directors in 1998.
John M. Stein. Mr. Stein is President and a founder of Financial Stocks,
Inc., a registered investment advisor based in Cincinnati, Ohio. Financial
Stocks, Inc. is the general partner of Financial Stocks Limited Partnership,
Vine Street Exchange Fund, L.P. and Financial Stocks Private Equity Fund 1998
L.P. From 1993 to the formation of Financial Stocks, Inc. in 1995, Mr. Stein
was an officer of Bankers Trust Company and served most
48
<PAGE>
recently as Vice President and manager of the Market Risks Analytics Group.
Before he joined Bankers Trust Company, Mr. Stein was a consultant with The
MAC Group/Gemini Consulting and specialized in commercial and investment
banking issues.
Directors are elected for one-year terms. Each officer of the Company is
elected by the Board of Directors and holds office until his successor is duly
elected and qualified or until his or her earlier death, resignation or
removal.
The Board of Directors has established Audit and Compensation committees.
The Audit Committee currently consists of Messrs. Stubblefield and
Hendrickson, neither of whom is an employee of the Company. The Audit
Committee will review the general scope of the audit conducted by the
Company's independent auditors, the fees charged therefor and matters relating
to the Company's internal control systems. In performing its functions, the
Audit Committee will meet separately with representatives of the Company's
independent auditors and with representatives of senior management.
The Compensation Committee currently consists of Messrs. Stein, Stubblefield
and Hendrickson, none of whom is an employee of the Company. The Compensation
Committee will administer the Company's stock option plans and will grant
options and other awards to Company employees under such plans. In addition,
the Compensation Committee is responsible for making recommendations to the
Board of Directors with respect to the compensation of the Company's executive
officers and is responsible for the establishment of policies dealing with
various compensation and employee benefit matters for the Company.
Compensation Committee Interlocks And Insider Participation
The Compensation Committee currently consists of Messrs. Stein, Stubblefield
and Hendrickson, none of whom is an employee of the Company. Before the
formation of the Compensation Committee, and in connection with the
Acquisition, Messrs. Bailey and Scott negotiated their respective employment
agreements with the Lead Investor and the Placement Agent, each of whom is a
principal shareholder. See "--Employment Agreements."
Other Transactions--Loans
Certain directors, officers and principal shareholders of the Company and
their affiliated interests were customers of and had transactions with the
Bank in the ordinary course of business; additional transactions may be
expected to take place in the ordinary course of business. Included in such
transactions were outstanding loans and commitments from the Bank, all of
which were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than the normal risk of collectability or present other unfavorable features.
Director Compensation
Directors of the Company and of the Bank receive fees of $500 for each Board
meeting of each entity attended. Members of committees of the Company and the
Bank receive fees of $200 for each committee meeting attended. Certain
directors of the Company also serve as directors of the Bank. The Company paid
no directors fees in 1997. Fees paid to directors of the Company from January
1, 1998 to September 30, 1998 totaled $900. The Bank paid directors fees of
$40,350 in 1997, and has paid directors fees of $35,150 from January 1, 1998
to September 30, 1998.
Executive Compensation And Other Information
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chairman of the Board and Chief Executive Officer and the two most highly
compensated executive officers of the Company, in addition to the Chief
Executive Officer, whose total annual salary and bonus for 1998 is expected to
exceed $100,000 (the "Named Executives"). No information is given for 1996 or
1997 because the Company was not organized until 1997 and no executive
compensation was paid until 1998.
49
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Salary Bonus Underlying All Other
Name and Principal Position ($) ($) Options (#) Compensation
- --------------------------- ------ ------- ------------ ------------
<S> <C> <C> <C> <C>
C. Stanley Bailey................ $225,000 $56,250 487,500(2) *
Chairman and CEO
C. Marvin Scott.................. 150,000 37,500 243,750(2) *
President
Rick D. Gardner.................. 125,000 5,889(1) 5,540(2) *
Chief Financial Officer
</TABLE>
- --------
* Does not include amounts attributable to miscellaneous benefits received by
the named officers. The costs of providing such benefits to the named
officers for the year ended 1998 are not anticipated to exceed the lesser
of $50,000 or 10% of the total annual salary and bonus reported.
(1) Represents bonus paid based on employment since September 21, 1998, the
date Mr. Gardner joined the Company.
(2) Represents options granted to Messrs. Bailey, Scott and Gardner on
December 22, 1997, January 9, 1998, and September 21, 1998, respectively.
The exercise price of these options is $10.00 per share for Messrs. Bailey
and Scott and $10.83 per share for Mr. Gardner.
Stock Option Plans
The Company adopted the 1998 Long-Term Incentive Plan (the "LTIP") on June
17, 1998. The LTIP is an omnibus plan administered by the Compensation
Committee to provide equity-based incentive compensation for the Company's key
employees. It provides for issuance of incentive stock options, qualified
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified stock options. The LTIP also provides for issuance
of stock appreciation rights, whether in tandem with options or separately,
and awards of restricted shares subject to time-based restrictions and/or
performance goals. The portion of the LTIP applicable to incentive stock
options is subject to shareholder approval by June 17, 1999.
The LTIP imposes a limit on the total number of shares that may be issued
during the ten-year term of the LTIP equal to 10% of the number of shares
outstanding as of December 31, 1998. It imposes a limit on the number of
awards that may be granted to all employees in any one calendar year equal to
1% of the number of shares outstanding on December 31, 1998. Finally, the LTIP
limits the number of restricted stock awards that may be granted each year,
which are time-based restricted only (i.e., without regard to any performance
goals), to a number of shares equal to .33% (one-third of one percent) of the
number of shares outstanding on December 31, 1998.
Each award is non-transferrable during the life of the employee, except as
permitted by the Compensation Committee to the employee's family or a trust
for the employee's family. The awards do not create a right to employment.
Upon a change in control of the Company any vesting schedules and performance
goals are deemed satisfied.
As discussed further below, options were granted to Mr. Bailey and Mr. Scott
pursuant to their Founder's Agreements and Employment Agreements,
respectively. Those options were issued before adoption of the LTIP by the
Company's Board and, therefore, are non-qualified stock options. They have not
been issued pursuant to the LTIP. The Company may reissue some of those
options as incentive stock options under the LTIP to enhance the federal and
state income tax consequences to Mr. Bailey and Mr. Scott, which provides the
same tax consequences as if the LTIP were in place at the time of execution of
their Founder's Agreements and Employment Agreements. If some of those options
are reissued, the LTIP may be amended to provide that any reissuance of
options to Mr. Bailey and Mr. Scott shall not count against the limits
described above. The Company generally would not be entitled to an income tax
deduction upon exercise of the incentive stock options.
Employment Agreements
The Company and Mr. Bailey have entered into an employment agreement which
provides, among other things, that Mr. Bailey serve as the Chairman of the
Board of Directors and Chief Executive Officer of the Company and the Bank for
an initial term of employment of three years at an initial base annual salary
of
50
<PAGE>
$225,000 and an initial targeted annual bonus of $75,000 based upon the
achievement of certain performance goals. Mr. Bailey is also entitled to
receive options to acquire 487,500 shares of Common Stock, or 5% of the shares
of Common Stock issued and outstanding. The exercise price of such options is
$10.00 per share.
The Company and Mr. Scott have entered into an agreement which provides,
among other things, that Mr. Scott serve as the President of the Company and
the Bank for an initial base annual salary of $150,000 and an annual targeted
bonus of $50,000 based upon the achievement of certain performance goals. Mr.
Scott is also entitled to receive options to acquire 243,750 shares of Common
Stock, 2.5% of the shares of Common Stock issued and outstanding. The exercise
price of such options is $10.00 per share.
The Company has agreed with each of Mr. Bailey, Mr. Scott and Mr. Gardner to
pay certain severance benefits upon a change of control of the Company. A
"change of control" is defined for this purpose as the occurrence of a
transaction the result of which is that more than 25% of the outstanding
shares of the Common Stock of the Company (or a successor or parent) are
acquired by any person, entity or group acting in concert, which, before the
transaction, owned less than 25% of the Common Stock. In the event of a change
of control, Mr. Bailey will be entitled to receive, subject to Section 280(g)
of the Internal Revenue Code of 1986, as amended, an amount equal to three
times his total compensation for the preceding 12 months. Mr. Scott and Mr.
Gardner will be entitled to receive, respectively, an amount equal to 2.99
times his total compensation for the preceding 12 months.
Benefit Plan
The Company has established a contributory profit sharing plan pursuant to
Section 401(k) of the Code covering substantially all employees (the "Plan").
Superior Financial Corp. is the Plan administrator and investment advisor and
Capital Guardian serves as the Plan's trustee. Each year the Company
determines, at its discretion, the amount of matching contributions not to
exceed 6% of the employee's annual compensation vesting ratably over a four
year period. Total Plan expenses charged to the Company's operations in 1998
were $203,863.
Interests of Management and Others in Certain Transactions
Mr. Bailey and Mr. Scott have entered into employment agreements with the
Company. These agreements provide, among other things, that each of them is
entitled to receive options to acquire shares of Common Stock pursuant to a
vesting schedule determined by the occurrence of certain events. See "--
Employment Agreements." In addition, Mr. Bailey, in his individual capacity,
and Mr. John Stein and Mr. Steven Stein, as principals of Financial Stocks,
Inc., are Founders of the Company pursuant to Founders' Agreements. These
Founders' Agreements entitled Mr. Bailey and Financial Stocks, Inc. to
purchase Common Stock in the Private Placement at discounted prices. See "The
Private Placement."
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1998 by each person
known by the Company to own beneficially 5% or more of the Common Stock.
<TABLE>
<CAPTION>
Percentage
Name Number of Shares Beneficially Owned
---- ---------------- ------------------
<S> <C> <C>
Franklin Mutual Advisors................... 550,000 5.46
JP Morgan.................................. 550,000 5.46
Keefe, Bruyette & Woods, Inc............... 552,083 5.48
Keefe Managers, Inc........................ 550,000 5.46
Steven N. Stein............................ 577,600(1) 5.73
Alexander D. Warm.......................... 537,100(1) 5.33
Wellington Management Company.............. 550,000 5.46
</TABLE>
- --------
(1) John M. Stein, a director of the Company, and Steven N. Stein, a principal
shareholder of the Company, are directors, executive officers and
principal shareholders of Financial Stocks, Inc. Alexander D. Warm, who is
the beneficial owner of 537,100 shares of the Company, and Stanley L.
Viagran, who owns 30,000 shares of the Company, are the remaining
directors and shareholders of Financial Stocks, Inc. Financial Stocks,
Inc. is a general partner and investment manager of certain investment
funds, including Vine Street Exchange Fund, L.P. Vine Street Exchange
Fund, L.P. owns 312,500 shares of the Company. Steven N. Stein and John M.
Stein are brothers. Alexander D. Warm and Stuart E. Warm, who owns 20,000
shares of the Company, are brothers. Steven N. Stein and John M. Stein
each disclaim any ownership of the Company stock held by the other.
Alexander D. Warm and Stuart E. Warm each disclaim any ownership of the
Company stock held by the other.
51
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1998 by each
director and each executive officer, and all directors and executive officers
as a group.
<TABLE>
<CAPTION>
Percentage
Name Number of Shares Beneficially Owned
---- ---------------- ------------------
<S> <C> <C>
C. Stanley Bailey.......................... 299,166(1) 2.88
Rick D. Gardner............................ 1,385(2) *
Boyd W. Hendrickson........................ -- *
C. Marvin Scott............................ 97,500(3) 1.00
John M. Stein.............................. 160,800(4) 1.60
David E. Stubblefield...................... 10,000 *
Officers and Directors as a Group.......... 568,851 5.43
</TABLE>
- --------
* Represents less than 1%.
(1) Includes 195,000 shares of Common Stock subject to stock options, 49,398
shares held jointly by Mr. Bailey and his wife Virginia H. Bailey and
10,316 shares held in Mrs. Bailey's IRA.
(2) Represents shares of Common Stock subject to stock options.
(3) Includes 97,500 shares of Common Stock subject to stock options.
(4) John M. Stein, a director of the Company, and Steven N. Stein, a principal
shareholder of the Company, are directors, executive officers and
principal shareholders of Financial Stocks, Inc. Alexander D. Warm, who is
the beneficial owner of 537,100 shares of the Company, and Stanley L.
Viagran, who owns 30,000 shares of the Company, are the remaining
directors and shareholders of Financial Stocks, Inc. Financial Stocks,
Inc. is a general partner and investment manager of certain investment
funds, including Vine Street Exchange Fund, L.P. Vine Street Exchange
Fund, L.P. owns 312,500 shares of the Company. Steven N. Stein and John M.
Stein are brothers. Alexander D. Warm and Stuart E. Warm, who owns 20,000
shares of the Company, are brothers. Steven N. Stein and John M. Stein
each disclaim any ownership of the Company stock held by the other.
Alexander D. Warm and Stuart E. Warm each disclaim any ownership of the
Company stock held by the other.
REGULATION
General
The Bank is a federally chartered and insured stock savings bank subject to
extensive regulation and supervision by the OTS, as its chartering agency, and
the 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 federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings institutions and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description
of these provisions or their effects on the Company or the Bank, is qualified
in its entirety by reference to the particular statutory or regulatory
provisions or proposals.
Regulation of Savings and Loan Holding Companies
Holding Company Acquisitions. The Company is a registered unitary thrift
holding company. The HOLA and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring, directly or indirectly, the ownership or control of any other
savings association or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of
a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
52
<PAGE>
Holding Company Activities. The Company currently operates as a unitary
savings and loan holding company by virtue of its direct ownership of the
Bank. As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions under the HOLA. If the Company acquires
control of another savings association as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company. There generally are more restrictions on the activities of a multiple
savings and loan holding company than on those of a unitary savings and loan
holding company. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof which is not an insured
association shall commence or continue for more than two years after becoming
a multiple savings and loan holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management services
for a subsidiary insured institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary insured institution, (iv) holding or managing
properties used or occupied by a subsidiary insured institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above must be approved
by the OTS prior to being engaged in by a multiple savings and loan holding
company.
Affiliate Restrictions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount
equal to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction"
is defined to include a loan or extension of credit to an affiliate; a
purchase of investment securities issued by an affiliate; a purchase of assets
from an affiliate, with certain exceptions; the acceptance of securities
issued by an affiliate as collateral for a loan or extension of credit to any
party; or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate.
In addition, under the OTS regulations, a savings association may not make a
loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its subsidiaries may
not purchase a low-quality asset from an affiliate; and covered transactions
and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions,
each loan or extension of credit by a savings association to an affiliate must
be secured by collateral with a market value ranging from 100% to 130%
(depending on the type of collateral) of the amount of the loan or extension
of credit.
The OTS regulations generally exclude all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to
treat such subsidiaries as affiliates. The regulations also require savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provide that certain classes of savings associations
may be required to give the OTS prior notice of affiliate transactions.
Regulation of Federal Savings Institutions
Regulatory System. The activities of federal savings institutions are
governed by the HOLA and, in certain respects, the Federal Deposit Insurance
Act (the "FDIA") and the regulations issued by the OTS and the FDIC
53
<PAGE>
to implement these statutes. These laws and regulations delineate the nature
and extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory
and regulatory capital requirements. In addition, the Bank's relationship with
its depositors and borrowers is also regulated to a great extent, especially
in such matters as the ownership of deposit accounts and the form and content
of the Bank's mortgage documents. The Bank must file reports with the OTS and
the FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions. There
are periodic examinations by the OTS and the FDIC to review the Bank's
compliance with various regulatory requirements. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a
member of the FHLB System, is required to acquire and hold shares of capital
stock in an FHLB in an amount equal to the greater of: (i) 1% of its aggregate
outstanding principal amount of its residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each calendar year, or
(ii) 1/20 of its FHLB advances (borrowings). Among other benefits, FHLB
membership provides the Bank with a central credit facility.
Liquid Assets. Under OTS regulations, for each calendar quarter, a savings
institution is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) of
not less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during
the preceding calendar quarter. This liquidity requirement is currently 4.0%.
In addition to meeting the liquidity requirement, each savings association
must maintain sufficient liquidity to ensure its safe and sound operation.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement.
Savings institutions must meet each of these standards in order to be deemed
in compliance with OTS capital requirements. In addition, the OTS may require
savings institutions to maintain capital above the minimum capital levels.
All savings institutions are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal
to 8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS
regulations, all but the most highly-rated institutions must maintain a
minimum leverage ratio of 4% in order to be adequately capitalized. See "--
Prompt Corrective Action.") A savings institution is also required to maintain
tangible capital in an amount at least equal to 1.5% of its adjusted total
assets.
Under OTS regulations, a savings institution with a greater than "normal"
level of interest rate exposure must deduct an interest rate risk ("IRR")
component in calculating its total capital for purposes of determining whether
it meets its risk-based capital requirement. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value
that would result from a 200 basis point increase or decrease in market
interest rates (whichever would result in lower net portfolio value), divided
by the estimated economic value of the savings association's assets. The
interest rate risk component to be deducted from total capital is equal to
one-half of the difference between an institution's measured exposure and
"normal" IRR exposure (which is defined as 2%), multiplied by the estimated
economic value of the institution's assets. The OTS has postponed the date the
component will be deducted from an institution's total capital.
54
<PAGE>
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS
for individual savings institutions, upon a determination that the savings
institution's capital is or may become inadequate in view of its
circumstances. The OTS regulations provide that higher individual minimum
regulatory capital requirements may be appropriate in circumstances where,
among others: (1) a savings institution has a high degree of exposure to
interest rate risk, prepayment risk, credit risk, concentration of credit
risk, certain risks arising from nontraditional activities, or similar risks
or a high proportion of off-balance sheet risk; (2) a savings institution is
growing, either internally or through acquisitions, at such a rate that
supervisory problems are presented that are not dealt with adequately by other
OTS regulations and guidance; and (3) a savings institution may be adversely
affected by activities or condition of its holding company, affiliates,
subsidiaries or other persons or savings institutions with which it has
significant business relationships. The Bank is not subject to any such
individual minimum regulatory capital requirement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings institution's failure to maintain capital at or above
the minimum capital requirements may be deemed an unsafe and unsound practice
and may subject the savings institution to enforcement actions and other
proceedings. Any savings institution not in compliance with all of its capital
requirements is required to submit a capital plan that addresses the
institution's need for additional capital and meets certain additional
requirements. The savings institution must certify that, among other things,
while the capital plan is being reviewed by the OTS, the savings association
will not, without the approval of the appropriate OTS Regional Director, grow
beyond net interest credited or make any capital distributions. If a savings
institution's capital plan is not approved, the institution will become
subject to asset growth restrictions and other restrictions or limitations set
forth in the OTS Regional Director's notice of disapproval. In addition, the
OTS, through a capital directive or otherwise, may restrict the ability of a
savings institution not in compliance with the capital requirements to pay
dividends and compensation, and may require such a bank to take one or more of
certain corrective actions, including, without limitation: (i) increasing its
capital to specified levels, (ii) reducing the rate of interest that may be
paid on savings accounts, (iii) limiting receipt of deposits to those made to
existing accounts, (iv) ceasing issuance of new accounts of any or all classes
or categories except in exchange for existing accounts, (v) ceasing or
limiting the purchase of loans or the making of other specified investments,
and (vi) limiting operational expenditures to specified levels.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the FDIC
Improvement Act of 1991 ("FDICIA"), each federal banking agency is required to
implement a system of prompt corrective action for institutions that it
regulates. The prompt corrective action regulation of the OTS requires certain
mandatory actions and authorizes certain other discretionary actions to be
taken by the OTS against a savings institution that falls within certain
undercapitalized capital categories specified in the regulation.
The regulations establish five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation,
the ratio of total capital to risk-weighted assets, Tier 1 capital to risk-
weighted assets and the leverage ratio are used to determine an institution's
capital classification. Under the prompt corrective action regulations of the
OTS, an institution shall be deemed to be (i) "well-capitalized" if it has
total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital
ratio of 6.0% or more, has a leverage capital ratio of 5.0% or more and is not
subject to any written agreement, order or final capital directive to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier 1 risk-based capital ratio of 4.0% or more and a leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0% or a leverage capital ratio that is less than
4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized"
if it has total risk-based capital ratio that is less than 6.0%, a Tier 1
risk-based capital ratio
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that is less than 3.0% or a leverage capital ratio that is less than 3.0% and
(v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. Federal law authorizes the
OTS to reclassify a well-capitalized institution as adequately-capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the OTS may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
A savings institution is prohibited from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding
company if the institution would thereafter be undercapitalized. Institutions
that are classified as undercapitalized are subject to certain mandatory
supervisory actions, including: (i) increased monitoring by the appropriate
federal banking agency for the institution and periodic review of the
institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time the institution received notice of being undercapitalized,
or the amount necessary to bring the institution into compliance with
applicable capital standards at the time it fails to comply with the plan, and
(iii) a limitation on the institution's ability to make any acquisition, open
any new branch offices, or engage in any new line of business without the
prior approval of the appropriate federal banking agency for the institution
or the FDIC.
The regulations also provide that the OTS may take any of certain additional
supervisory actions against an undercapitalized institution if the agency
determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity deemed to pose excessive risk to the
institution, (vii) prohibiting capital distributions, (viii) requiring the
institution to divest certain subsidiaries, or requiring the institution's
holding company to divest the institution or certain affiliates of the
institution, and (ix) taking any other supervisory action that the agency
believes would better carry out the purposes of the prompt corrective action
provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor of
certain discretionary supervisory actions, and subjects significantly
undercapitalized institutions to additional restrictions, including a
prohibition on paying bonuses or raises to senior executive officers without
the prior written approval of the appropriate federal bank regulatory agency.
In addition, significantly undercapitalized institutions may be subjected to
certain of the restrictions applicable to critically undercapitalized
institutions.
The regulations require that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions
of FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution continues
to be critically undercapitalized on average during the calendar quarter
beginning 270 days after the date on which the institution initially became
critically undercapitalized, unless the institution's federal bank regulatory
agency, with concurrence of the FDIC, makes certain positive determinations
with respect to the institution.
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Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of the FDIC. (However, the regulation does not prevent
unpaid interest from accruing on subordinated debt under the terms of the debt
instrument, to the extent otherwise permitted by law.) In addition, critically
undercapitalized institutions may be prohibited from engaging in a number of
activities, including entering into certain transactions or paying interest
above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
At December 31, 1998, the Bank met the capital requirements of a "well
capitalized" institution under applicable OTS regulations.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC, have
substantial enforcement authority with respect to savings institutions,
including authority to bring various enforcement actions against a savings
institution and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings institution's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring
suspension, removal, prohibition and criminal proceedings against institution-
affiliated parties, and (iv) assess substantial civil money penalties. As part
of a cease-and-desist order, the agencies may require a savings institution or
an institution-affiliated party to take affirmative action to correct
conditions resulting from that party's actions, including to make restitution
or provide reimbursement, indemnification or guarantee against loss; restrict
the growth of the institution; and rescind agreements and contracts.
Capital Distribution Regulation. In addition to the prompt corrective action
restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings institutions. Capital distributions
are defined to include, in part, dividends and payments for stock repurchases
and other distributions charged against the capital accounts of a savings
institution.
Under the regulation, an institution that meets its capital requirement both
before and after a proposed distribution (a "Tier 1 institution") and which
has not been notified by the OTS that it is in need of more than normal
supervision may, after prior notice to but without the approval of the OTS,
make capital distributions during a calendar year up to the higher of: (i)
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its surplus capital ratio at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. A Tier 1 institution may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. A savings institution that meets its minimum capital requirement
both before and after a proposed distribution but does not meet its capital
requirement (a "Tier 2 institution") is authorized after prior notice to the
OTS but without OTS approval, to make capital distributions in an amount up to
75% of its net income over the most recent four-quarter period, taking into
account all prior distributions during the same period. Any distribution in
excess of this amount must be approved in advance by the OTS. A savings
institution that does not meet its minimum capital requirement (a "Tier 3
institution") cannot make any capital distribution without prior approval from
the OTS, unless the capital distribution is consistent with the terms of a
capital plan approved by the OTS.
The Bank has been classified as a Tier 1 institution. As of December 31,
1998, under applicable regulations of the OTS, the total capital available for
the payment of dividends by the Bank to the Company was $6.17 million,
assuming application of the OTS's safe harbor for capital distributions.
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The OTS has proposed to amend its capital distribution regulation to conform
its requirements to those of the other federal banking agencies. Under the
proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and that meets other
specified requirements, would not be required to obtain the prior approval of
the OTS or to provide notice to the OTS prior to making capital distributions
below specified amounts. Under other circumstances, either an application or
notice must be filed with the OTS prior to a proposed capital distribution.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either become a national bank or be subject to the following restrictions on
its operations: (i) the association may not make any new investment or engage
in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish
a branch office; (iii) the association shall be ineligible to obtain new
advances from any FHLB; and (iv) the payment of dividends by the association
shall be subject to the statutory and regulatory dividend restrictions
applicable to national banks. Also, beginning three years after the date on
which the savings institution ceases to be a QTL, the savings institution
would be prohibited from retaining any investment or engaging in any activity
not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the
rules applicable to such companies. A savings institution may requalify as a
QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Code or that 65% of its
"portfolio assets" (as defined) consist of certain housing and consumer-
related assets on a monthly average basis in nine out of every 12 months.
Assets that qualify without limit for inclusion as part of the 65% requirement
are loans made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans; mortgage-
backed securities (where the mortgages are secured by domestic residential
housing or manufactured housing); FHLB stock; direct or indirect obligations
of the FDIC; and loans for educational purposes, loans to small businesses and
loans made through credit cards or credit card accounts. In addition, the
following assets, among others, may be included in meeting the test subject to
an overall limit of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of origination;
100% of consumer loans; and 100% of stock issued by the Federal Home Loan
Mortgage Corporation or FNMA. "Portfolio assets" consist of total assets minus
the sum of (i) goodwill and other intangible assets, (ii) property used by the
savings institution to conduct its business, and (iii) liquid assets up to 20%
of the institution's total assets. At December 31, 1998, the Bank met the QTL
test.
Activities of Associations and Their Subsidiaries. Subject to a number of
restrictions and limitations, savings associations are permitted to establish
or acquire subsidiaries that engage in various activities. Pursuant to the
FDIA and OTS regulations, at least 30 days prior to establishing or acquiring
such a subsidiary, or conducting any new activity through a subsidiary, the
savings association must notify the FDIC and the OTS and provide the
information each agency may, by regulation, require. In certain circumstances,
written approval of the OTS must be obtained prior to acquiring or
establishing a subsidiary or engaging in a new activity in an existing
subsidiary. Savings associations also must conduct the activities of
subsidiaries in accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
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FDIC Assessments. The FDIC is an independent federal agency established
originally to insure the deposits, up to prescribed statutory limits, of
federally insured banks and to preserve the safety and soundness of the
banking industry. The FDIC maintains two separate insurance funds: the BIF and
the SAIF. As insurer of the Bank's deposits, the FDIC has examination,
supervisory and enforcement authority over all savings associations. The
Bank's deposit accounts are insured by the FDIC under the SAIF to the maximum
extent permitted by law. The Bank pays deposit insurance premiums to the FDIC
based on a risk-based assessment system established by the FDIC for all SAIF-
member institutions.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes--"well capitalized," "adequately
capitalized" and "undercapitalized"--which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
previously. These three groups are then divided into subgroups which are based
on supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured
institutions ranged from 0% of insured deposits for well-capitalized
institutions with minor supervisory concerns to .27% of insured deposits for
undercapitalized institutions with substantial supervisory concerns. In
addition, an assessment of 6.4 basis points and 1.3 basis points is added to
the regular SAIF-assessment and the regular BIF-assessment, respectively,
until the earlier of December 31, 1999 or the date upon which the last savings
association ceases to exist in order to cover Financing Corporation debt
service payments. The Bank's assessment expense for the year ended December
31, 1998 equaled $554,771.
Conservatorship/Receivership. In addition to the grounds discussed under "--
Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings institution if any
one or more of a number of circumstances exist, including, without limitation,
the following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books,
papers, records or assets or refusal to submit such items for inspection to
any examiner or lawful agent of the appropriate federal banking agency or
state bank or savings association supervisor, (vi) the institution is likely
to be unable to pay its obligations or meet its depositors' demands in the
normal course of business, (vii) the institution has incurred, or is likely to
incur, losses that will deplete all or substantially all of its capital, and
there is no reasonable prospect for the institution to become adequately
capitalized without federal assistance, (viii) any violation of law or unsafe
or unsound practice that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institution's condition, or
otherwise seriously prejudice the interests of the institution's depositors or
the federal deposit insurance fund, (ix) the institution is undercapitalized
and the institution has no reasonable prospect of becoming adequately
capitalized, fails to become adequately capitalized when required to do so,
fails to submit a timely and acceptable capital restoration plan, or
materially fails to implement an accepted capital restoration plan, (x) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital, or (xi) the institution is found guilty of certain
criminal offenses related to money laundering.
Cross-Guarantee Liability and Effect of a Resolution of the Bank. Depository
institutions insured by the FDIC, such as the Bank, can be held liable for any
loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled depository institution in danger of default. "Default" is
defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. Accordingly, to the extent that the FDIC incurs or anticipates
incurring any loss in connection with any other insured depository institution
owned by the Company, the Bank could be required to compensate the FDIC by
reimbursing it for the amount of such loss. Such cross-guarantee liability can
result in the ultimate failure or insolvency of all insured depository
institutions in a holding company structure. Any obligation or liability owed
by a banking subsidiary to its parent company, any other shareholder or any of
the banking subsidiary's other affiliates is subordinate to the banking
subsidiary's cross-guarantee liability.
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Because the Company is a legal entity separate and distinct from the Bank,
the Company's right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of the Bank or any other insured depository
institution owned by the Company, the claims of depositors and other general
or subordinated creditors of such Bank would be entitled to a priority of
payment over the claims of holders of any obligation of the Bank to its
shareholders, including any depository institution holding company (such as
the Company) or any shareholder or creditor of such holding company.
Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings associations and
commercial banks; and, in the event that the thrift charter was eliminated by
January 1, 1999, would require the merger of the BIF and the SAIF into a
single Deposit Insurance Fund on that date. The Bank cannot determine whether,
or in what form, such legislation may eventually be enacted and there can be
no assurance that any legislation that is enacted would contain adequate
grandfather rights for the Company or the Bank.
In the absence of appropriate "grandfather" provisions, legislation
eliminating the savings association charter could cause the Company to be
treated as a bank holding company subject to extensive regulation by the
Federal Reserve Board. Bank holding companies are generally not permitted to
engage directly or indirectly in any nonbanking activities other than certain
nonbanking activities that are considered closely related to banking. Bank
holding companies are also subject, on a consolidated basis, to minimum
regulatory capital requirements similar to those imposed on banks and on
savings associations such as the Bank. A bank holding company is generally
expected to maintain a Tier 1 leverage capital ratio of at least 3-5% of
adjusted total assets (depending on the bank holding company's particular
circumstances), a Tier 1 risk-based capital ratio of 4% of risk-weighted
assets, and a total risk-based capital ratio of 8% of risk-weighted assets.
Tier 1 capital is limited to common stockholders' equity and related surplus,
certain perpetual preferred stock instruments and related surplus, and
minority interests in equity accounts of consolidated subsidiaries, less the
amount of goodwill and certain other intangible assets deducted from Tier 1
capital. Total capital includes Tier 1 capital plus the amount of the
allowance for loan and lease losses, certain perpetual preferred stock and
related surplus, certain hybrid capital instruments and mandatory convertible
debt securities, and certain subordinated debt and intermediate-term preferred
stock and related surplus, less the amount of goodwill and certain other
intangible assets deducted from capital. Risk-weighted assets comprise the
total amount of assets and adjusted off-balance-sheet items after each is
multiplied by a credit-risk factor of 0% to 100%. The Company would be
materially undercapitalized if such capital requirements were made applicable
to the Company.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions
have a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low-and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis
of characteristics specified in those statutes. An institution's failure to
comply with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice.
Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators.
The OTS and the other agencies have also established guidelines regarding
asset quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the
OTS, and no person may acquire control of a savings association
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without the prior approval of the OTS. Any company that acquires control of a
savings association becomes a savings and loan holding company subject to
extensive registration, examination and regulation by the OTS. Conclusive
control exists, among other ways, when an acquiring party acquires more than
25% of any class of voting stock of a savings association or savings and loan
holding company, or controls in any manner the election of a majority of the
directors of the company. In addition, a rebuttable presumption of control
exists if, among other things, a person acquires more than 10% of any class of
a savings association or savings and loan holding company's voting stock (or
25% of any class of stock) and, in either case, any of certain additional
control factors exist.
TAXATION
Federal Taxation
General. The Company and its subsidiaries, including the Bank, are subject
to federal income taxation under the Code in the same general manner as other
corporations with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal
income tax matters and is not a comprehensive description of the tax rules
applicable to the Bank. The Company and its subsidiaries will file its initial
consolidated federal income tax return for the calendar year ending December
31, 1998.
Method of Accounting. The Company and subsidiaries for financial and federal
income tax purposes will use the accrual method of accounting.
Bad Debt Reserves. The Company and its subsidiaries are required to use the
specific charge-off method. Under the specific charge-off method, bad debts
are deducted as they become wholly worthless or partially worthless, as the
case may be. The deduction must be claimed for wholly worthless debts in the
year in which the debt becomes worthless.
Minimum Tax. The Company and its subsidiaries may be subject to the
corporate alternative minimum tax which is imposed to the extent it exceeds
the Company's regular income tax for the year. The alternative minimum tax
will be imposed at the rate of 20% of a specially computed tax base.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from its subsidiaries, including the Bank,
as a member of the same affiliated group of corporations. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued
on their behalf.
State and Local Taxation
Delaware State Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The Delaware franchise tax is based on the Company's
authorized capital stock or on its assumed par and non-par capital, whichever
yields a lower result. Under the authorized capital method, each share is
taxed at a graduated rate based on the number of authorized shares with a
maximum aggregate tax of $150,000 per year. Under the assumed par value
capital method, Delaware taxes each $1,000,000 of assumed par-capital at the
rate of $200.
Arkansas State Taxation. The Company and its subsidiaries will be required
to file a consolidated Arkansas income tax return because it will be doing
business in Arkansas. For Arkansas tax purposes, corporations are presently
taxed at a rate equal to 6.5% of taxable income. For this purpose, "taxable
income" generally means federal taxable income subject to Arkansas
modifications.
Oklahoma State Taxation. The Company's subsidiary, Superior Federal Bank,
will be required to file a separate company Oklahoma income tax return because
it will be doing business in Oklahoma. For Oklahoma
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tax purposes, corporation are presently taxed at a rate equal to 6% of taxable
income. Oklahoma taxable income is federal taxable income, subject to Oklahoma
modifications.
DESCRIPTION OF SENIOR NOTES
General
The Senior Notes were issued pursuant to the Indenture. The Indenture will
be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act") in connection with the filings of the Registration Statement
of which this Prospectus forms a part. This summary of certain terms and
provisions of the Senior Notes and the Indenture does not purport to be
complete, and where reference is made to particular provisions of the
Indenture, such provisions, including the definitions of certain terms, some
of which are not otherwise defined herein, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a
part of the Indenture by the Trust Indenture Act. Capitalized terms not
otherwise defined herein have the meanings specified in the Indenture. The
Indenture has been filed as an Exhibit to the Registration Statement of which
this Prospectus forms a part. Capitalized terms not otherwise defined in the
following discussion or elsewhere in this Prospectus are defined below at "--
Certain Definitions."
The Senior Notes will mature on April 1, 2003. The Senior Notes are general
unsecured obligations of the Company and rank senior to such other
Indebtedness as the Company may incur that is not expressly subordinated to
the Senior Notes. The Indenture generally restricts the incurrence of
additional Indebtedness by the Company, except for certain Junior
Indebtedness. See "--Certain Covenants--Limitations on Indebtedness."
The Senior Notes were issued and are transferable only in registered form
without coupons and only in denominations of $100,000 and any integral
multiple above that amount.
The Senior Notes bear interest from the date of their initial issuance, at
the rate of 8.65% per annum, payable semi-annually in arrears on April 15 and
October 15 of each year (each an "Interest Payment Date"), which commenced
October 15, 1998, to the holders of record at the close of business on the
October 1st or April 1st (whether or not a business day), as the case may be,
next preceding such Interest Payment Date (each, a "Regular Record Date").
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Senior Notes are not savings accounts or deposits and are not insured by
the FDIC or by the United States or any agency or fund thereof. The Senior
Notes are not secured by the assets of the Company or any of its Subsidiaries,
including the Bank, or otherwise and do not have the benefit of a sinking fund
for the retirement of principal or interest. Because the Company is a holding
company that conducts substantially all of its operations through the Bank,
the right of the Company to participate in any distribution of assets of the
Bank, upon its liquidation or reorganization or otherwise (and thus the
ability of Holders to benefit indirectly from such distribution), is subject
to the prior claims of creditors of the Bank, including claims of depositors
of the Bank. Additionally, distributions to the Company by the Bank, whether
in liquidation, reorganization or otherwise, are subject to regulatory
restrictions and, under certain circumstances, may be prohibited. See
"Regulation-- Regulation of Federal Savings Institutions--Capital Distribution
Regulation."
No Sinking Fund or Mandatory Redemption
The Senior Notes are not entitled to the benefit of any sinking fund or
mandatory redemption.
Interest Reserve Account
In connection with the issuance of the Senior Notes, the Company established
the Interest Reserve Account, which consists of a segregated deposit account
and segregated Permitted Investments in a bank or trust company which is
unaffiliated with the Company and which meets specified requirements. The
arrangements relating to
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the Interest Reserve Account are set forth in a Custody and Security Agreement
between the Company and The Bank of New York (the "Security Agreement").
Any funds or other assets in the Interest Reserve Account from time to time
may not be commingled with any other funds or assets of the Company or any of
the Company's subsidiaries or affiliates, provided, however, that if on any
Interest Payment Date, the amount of funds and the Fair Market Value of any
Permitted Investments in the Interest Reserve Account shall exceed the amount
required to be maintained therein in accordance with the Indenture, the
Company shall be entitled to withdraw all or any portion of such excess.
The Company is required to carry in the Interest Reserve Account an
aggregate amount of cash and Fair Market Value of Permitted Investments
(determined not less frequently than on each Interest Payment Date) sufficient
at all times to pay the interest on the next two succeeding semi-annual
interest payments due on the Senior Notes.
Optional Redemption
Upon the occurrence of a Change of Control, the Senior Notes not tendered in
accordance with the provisions set forth under "Offer to Purchase upon a
Change of Control" shall be redeemable at the option of the Company, in whole
or in part, at any time or from time to time, upon not less than 45 nor more
than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at a redemption price equal to the sum of (i) the
principal amount of the Senior Notes being redeemed plus accrued interest
thereon to the redemption date and (ii) the Make-Whole Amount, if any, with
respect to such Senior Notes (the "Redemption Price"). If notice has been
given as provided in the Indenture and funds for the redemption of any Senior
Notes called for redemption shall have been made available on the redemption
date referred to in such notice, such Senior Notes will cease to bear interest
on the date fixed for such redemption specified in such notice and the only
right of the Holders of the Senior Notes will be to receive payment of the
Redemption Price.
Notice of any optional redemption of any Senior Notes will be given to
Holders not more than 60 nor less than 45 days prior to the date fixed for
redemption. The notice of redemption will specify, among other things, the
Redemption Price and the principal amount of the Senior Notes held by such
Holder to be redeemed.
If less than all the Senior Notes are to be redeemed at the option of the
Company, the Company will notify the Trustee at least 60 days prior to the
redemption date (or such shorter period as is satisfactory to the Trustee) of
the aggregate principal amount of the Senior Notes to be redeemed and their
redemption date. The Trustee shall select, in such manner as it shall deem
fair and appropriate, the Senior Notes to be redeemed in whole or in part.
Senior Notes may be redeemed in part in the minimum authorized denomination
for the Senior Notes or in any integral multiple thereof.
For purposes of the foregoing discussion:
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Senior Note, the excess, if any, of (i) the
aggregate present value as of the date of such redemption or accelerated
payment of each dollar of principal being redeemed or paid and the amount
of interest (exclusive of interest accrued to the date of redemption or
accelerated payment) that would have been payable in respect of such dollar
if such redemption or accelerated payment had not been made, determined by
discounting, on a semi-annual basis, such principal and interest at the
Reinvestment Rate (determined on the third Business Day preceding the date
such notice of Redemption is given or declaration of acceleration is made)
from the respective dates on which such principal and interest would have
been payable if such redemption or accelerated payment had not been made,
over (ii) the aggregate principal amount of the Senior Notes being redeemed
or paid.
"Reinvestment Rate" means .50% (fifty one-hundredths of one percent) plus
the arithmetic mean of the yields under the respective headings "This Week"
and "Last Week" published in the Statistical Release under the caption
"Treasury Constant Maturities" for the maturity (rounded to the nearest
month)
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corresponding to the remaining life to maturity of the Senior Notes, as of
the payment date of the principal being redeemed or paid. If no maturity
exactly corresponds to such maturity, yields for the two published
maturities most closely corresponding to such maturity shall be calculated
pursuant to the immediately preceding sentence and the Reinvestment Rate
shall be interpolated or extrapolated from such yields on a straight-line
basis, rounding in each of such relevant periods to the nearest month. For
such purposes of calculating the Reinvestment Rate, the most recent
Statistical Release published prior to the date of determination of the
Make-Whole Amount shall be used.
"Statistical Release" means the statistical release which is published
weekly by the Federal Reserve System and which establishes yields on
actively traded United States government securities adjusted to constant
maturities or, if the statistical release is not published at the time of
any determination under the Indenture, then such other reasonably
comparable index which shall be designated by the Company.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitations on Indebtedness. Neither the Company nor any Subsidiary may
create, incur, issue, assume, guarantee or otherwise in any manner become
directly or indirectly liable for or with respect to, or otherwise permit to
exist any Indebtedness, except: (i) Indebtedness represented by the Senior
Notes; (ii) Indebtedness incurred under the Loan Agreement in the amount and
on such terms as are in effect on the Issue Date; (iii) Junior Indebtedness
with a Stated Maturity of principal (or any required repurchase, redemption,
defeasance or sinking fund payments) which is after the final Stated Maturity
of the Senior Notes; (iv) Indebtedness the proceeds of which are immediately
applied to redeem or repurchase Senior Notes and provided that if such
Indebtedness is used to redeem or repurchase only a portion of the Senior
Notes, such Indebtedness has a Stated Maturity of principal (or any required
repurchase, redemption, defeasance or sinking fund payments) which is after
the final Stated Maturity of the Senior Notes; (v) Indebtedness specified in
paragraph (b) of the definition of "Permitted Payment;" and (vi) Excluded
Indebtedness.
Notwithstanding the foregoing exceptions, the Company may not, and may not
permit any Subsidiary to, create, incur, assume, guarantee or otherwise in any
manner become directly or indirectly liable for or with respect to, or
otherwise permit to exist, any Indebtedness (including any Indebtedness
assumed in connection with the acquisition of assets from another Person or as
a result of the merger of any Person with or into the Company) unless, at the
time of such event, the principal amount of total Indebtedness of the Company
and its Subsidiaries would not exceed 100% of the Company's Consolidated Net
Worth, provided that for purposes of this requirement, Indebtedness shall be
net of any fund or interest reserve account which has been established to fund
the payment of principal and/or interest on Indebtedness.
Limitations on Restricted Payments. The Company may not, and may not permit
any Subsidiary to, directly or indirectly, make any Restricted Payment if, at
the time of such Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be continuing; or
(b) the Company would fail to maintain sufficient Liquid Assets to comply
with the terms of the covenant described below under "--Liquidity
Maintenance;"
(c) the Bank would fail to meet any applicable minimum capital requirements
under the regulations of the OTS which are necessary to enable it to qualify
as an "adequately capitalized" institution under such regulations; or
(d) the aggregate amount of all Restricted Payments (the amount of such
payments, if other than in cash, having been determined in good faith by the
Board of Directors, whose determination shall be conclusive and
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evidenced by a resolution of the Board of Directors filed with the Trustee)
declared and made after the Issue Date would exceed the sum of
(i) 25% of the aggregate Consolidated Net Income (or, if such
Consolidated Net Income is a deficit, 100% of such deficit) of the Company
accrued on a cumulative basis during the period beginning on the first day
of the fiscal quarter during which the Issue Date occurred and ending on
the last day of the Company's last fiscal quarter ending prior to the date
of such proposed Restricted Payment, plus
(ii) the aggregate Net Cash Proceeds received by the Company as capital
contributions (other than from a Subsidiary) after the Issue Date, plus
(iii) the aggregate Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company from
the issuance or sale (other than to a Subsidiary) of Qualified Capital
Stock after the Issue Date; plus
(iv) 100% of the amount of any Indebtedness of the Company or a
Subsidiary that is converted into or exchanged for Qualified Capital Stock
of the Company after the Issue Date;
provided, however, that the foregoing provisions will not prevent (x) the
payment of a dividend within 60 days after the date of its declaration if at
the date of declaration such payment was permitted by the foregoing provisions
or (y) any Permitted Payment.
Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company may not, and may not permit any of its Subsidiaries
to, create, assume or otherwise cause or suffer to exist or to become
effective any consensual encumbrance or restriction on the ability of any such
Subsidiary to:
(a) pay any dividends or make any other distribution on its Capital Stock;
(b) make payments in respect of any Indebtedness owed to the Company or any
other Subsidiary; or make loans or advances to the Company or any Subsidiary
or to guarantee Indebtedness of the Company or any other Subsidiary; other
than, in the case of (a), (b) and (c),
(1) restrictions imposed by applicable laws and regulations;
(2) restrictions existing under agreements in effect on the date of the
Indenture;
(3) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions on the transfer of assets which are subject to Liens;
(5) restrictions existing under agreements evidencing Indebtedness which
is incurred after the date of the Indenture as permitted by the covenants
described above under "--Limitations on Indebtedness," provided that the
terms and conditions of any such restrictions are no more restrictive than
those contained in the Indenture; and
(6) restrictions existing under any agreement which refinances or
replaces any of the agreements containing the restrictions in clauses (2),
(3) and (5), provided that the terms and conditions of any such
restrictions are not less favorable to the Holders than those under the
agreement evidencing or relating to the Indebtedness refinanced or
replaced.
Restrictions on Issuance and Sale or Disposition of Capital Stock of
Subsidiaries. Except as otherwise provided in the Indenture, the Company may
not, and may not permit any Subsidiary to, issue or sell, pledge, convey or
otherwise transfer any shares of the Bank Capital Stock or the Capital Stock
of any other Subsidiary (including Capital Stock of any successor entity
thereto), other than (i) to the Company or a Wholly Owned Subsidiary; (ii)
with respect to any Subsidiary which is a bank, directors' qualifying shares;
(iii) as expressly required under the relevant provisions of the Loan
Agreement as in effect on the Issue Date; and (iv) solely with respect to the
Company, as permitted pursuant to duly approved stock option plans and
employment agreements.
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In the event that the amount of Bank Capital Stock pledged to secure the
Company's obligations under the Loan Agreement exceeds the amount required
under the relevant provisions thereof, as in effect on the Issue Date, the
Company shall promptly obtain the release and return of such excess stock.
Limitations on Transactions with Affiliates. The Company may not, and may
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including without limitation,
the sale, purchase, exchange or lease of assets, property or services) with
any Affiliate of the Company (except that the Company and any of its
Subsidiaries may enter into any transaction or series of related transactions
with any other Subsidiary of the Company without limitation under this
covenant) unless: (i) such transactions or series of related transactions is
on terms that are no less favorable to the Company or such Subsidiary, as the
case may be, than would be available in a comparable transaction in an arm's
length dealing with a Person that is not such an Affiliate; (ii) with respect
to any transaction or series of related transactions involving aggregate
payments in excess of $500,000, the Company delivers an Officers' Certificate
to the Trustee certifying that such transaction or series of transactions
complies with clause (i) above and has been approved by a majority of the
Board of Directors of the Company; and (iii) with respect to any transaction
or series of related transactions involving aggregate payments in excess of
$2,000,000, the Company delivers to the Trustee a written opinion of a
nationally-recognized investment banking firm to the effect that the
transaction or series of transactions are fair to the Company or such
Subsidiary from a financial point of view. The limitations set forth in this
paragraph will not apply to (a) transactions entered into pursuant to any
agreement already in effect on the date of the Indenture, (b) any employment
agreement, stock option, employee benefit, indemnification, compensation,
business expense reimbursement or other employment-related agreement,
arrangement or plan entered into by the Company or any of its Subsidiaries
either (A) in the ordinary course of business of the Company or in the
ordinary course of business and consistent with the past practice of such
Subsidiary or (B) which agreement, arrangement or plan was adopted by the
Board of Directors of the Company or such Subsidiary, as the case may be, (c)
residential mortgage, credit card and other consumer loans to an Affiliate who
is an officer, director or employee of the Company or any of its Subsidiaries
and which comply with the applicable provisions of 12 U.S.C.(S) 1468(b) and
any rules and regulations of the OTS thereunder, (d) any Restricted Payments
or (e) any transaction or series of transactions in which the total amount
involved does not exceed $250,000.
Limitations on Liens and Guarantees. Except for Permitted Liens, the Company
may not create, assume, incur or suffer to exist any Lien upon (i) the Bank
Capital Stock (except for any Liens securing Indebtedness under the Loan
Agreement as in effect on the Issue Date) or (ii) any of the Company's
property or assets (other than the Bank Capital Stock) now owned, or acquired
after the date of the Indenture, or any income or profits from any such
property or assets, as security for Indebtedness which may be incurred by the
Company under the Indenture and having a contractual time to maturity greater
than one year (other than the Senior Notes), without in the case of either (i)
or (ii), effectively providing that the Senior Notes will be equally and
ratably secured with (or prior to) such Indebtedness, provided that if such
Indebtedness is Junior Indebtedness, any security interest with respect to
such Junior Indebtedness shall be subordinated to the security interest with
respect to the Senior Notes to the same extent as such Junior Indebtedness is
subordinated to the Senior Notes.
Except for Permitted Liens and Liens securing Indebtedness under the Loan
Agreement pursuant to the terms of such Loan Agreement as in effect on the
Issue Date, the Company may not permit any Subsidiary of the Company, directly
or indirectly, to guarantee or assume, or subject any of its assets to a Lien
to secure, any Indebtedness which may be incurred by the Company or any
Subsidiary under the Indenture (other than the Senior Notes) unless (i) such
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a guarantee of, or pledge of assets to secure, the
Senior Notes by such Subsidiary on terms at least as favorable to the Holders
as such guarantee or security interest in such assets is to the holders of
such Indebtedness, except that in the event of a guarantee or security
interest in such assets with respect to Junior Indebtedness, any such
guarantee of security interest in such assets with respect to such Junior
Indebtedness shall be subordinated to such Subsidiary's guarantee or security
interest in such assets with respect to the Senior Notes to the same extent as
such Junior Indebtedness is subordinated to the Senior Notes and (ii) such
Subsidiary
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waives, and agrees that it will not in any manner whatsoever claim, or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Subsidiary of
the Company as a result of any payment by such Subsidiary under its
guarantees.
Liquidity Maintenance. The Company must at all times when the Senior Notes
are not rated in an investment grade category by one or more nationally
recognized statistical rating organizations, maintain Liquid Assets with a
value equal to at least 100% of the required interest payments due on the
Senior Notes on the next succeeding semi-annual Interest Payment Date.
Offer to Purchase upon a Change of Control. Upon the occurrence of a Change
of Control, each Holder will have the right to require that the Company
purchase all or a portion of such Holder's Senior Notes in cash pursuant to
the offer described below (the "Change of Control Offer"), at a purchase price
equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase.
Within 30 days following the date on which a Change of Control occurs (the
"Change of Control Date"), the Company will send, by first class mail, postage
prepaid, a notice to each Holder of Senior Notes and the Trustee, which notice
will govern the terms of the Change of Control Offer. The notice to the
Holders will contain all instructions and materials necessary to enable such
Holders to tender Senior Notes pursuant to the Change of Control Offer. Such
notice will state, among other things:
(1) that the Change of Control Offer is being made pursuant to the
Indenture and that all Senior Notes validly tendered and not withdrawn will
be accepted for payment;
(2) the purchase price (including the amount of accrued interest, if any)
and the purchase date (which will be no earlier than 30 days nor later than
60 days from the date such notice is mailed, other than as may be required
by law) (the "Change of Control Payment Date"); provided, however, that
with respect to a Change of Control occurring solely by operation of clause
(iii) of the definition of "Change of Control" and the reference to clause
(ii) of such definition therein, in no event shall the Change of Control
Payment Date occur until the time and date on which the Company shall
consummate the transaction referred to in such clause (ii).
(3) that any Senior Note not tendered will continue to accrue interest;
(4) that, unless the Company defaults in making payment therefor, any
Senior Note accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest after the Change of Control Payment Date;
(5) the instructions that Holders will be required to follow in order to
have such Holders' Senior Notes repurchased;
(6) that Holders will be entitled to withdraw their election, not later
than the third Business Day prior to the Change of Control Payment Date and
the instructions that Holders must follow in order to withdraw such
election;
(7) any other information necessary to enable Holder to tender their
Senior Notes and have such Senior Notes repurchased; and
(8) the circumstances and relevant facts regarding such Change of
Control.
On or before the Change of Control Payment Date, the Company will (i) accept
for payment Senior Notes or portions thereof (in integral multiples of
$100,000) validly tendered pursuant to the Change of Control Offer, (ii)
deposit with the Paying Agent money sufficient to pay the purchase price plus
accrued and unpaid interest, if any, of all Senior Notes to be purchased and
(iii) deliver to the Trustee Senior Notes so accepted together with an
Officers' Certificate stating the Senior Notes or portions thereof being
purchased by the Company. Upon receipt by the Paying Agent of the monies
specified in clause (ii) above and a copy of the Officers' Certificate
specified in clause (iii) above, the Paying Agent will promptly mail to the
Holders of Senior Notes so accepted payment in an amount equal to the purchase
price plus accrued and unpaid interest, if any, out of the funds deposited
with the Paying Agent in accordance with the preceding sentence. The Trustee
will promptly
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authenticate and mail to such Holders new Senior Notes equal in principal
amount to any unpurchased portion of the Senior Notes surrendered.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such rule, laws and regulations are applicable in connection with the
purchase of the Senior Notes pursuant to a Change of Control Offer. There can
be no assurance that the Company will have sufficient financial resources to
repurchase any or all of the Senior Notes at such time as it might be required
to do so.
Except as required by applicable law or regulations, the Company shall not
enter into any agreement which conflicts with, would be breached by, or
requires the Company to obtain consent of another Person for the Company's
performance of its obligations under this provision.
Maintenance of Depository Institution Subsidiary and Minimum Total Capital
of Bank. The Company will (a) subject to requirements governing
consolidations, mergers and conveyances, maintain at all times as a Wholly
Owned Subsidiary an entity that is a bank or thrift or substantially similar
institution subject to regulation by federal or state authorities and do all
things necessary to ensure that savings accounts of the Bank or such other
institution are insured by the FDIC or any successor organization up to the
maximum amount permitted by the Federal Deposit Insurance Act and regulations
thereunder or any succeeding federal law hereinafter enacted and (b) only for
so long as any Indebtedness remains outstanding under the Loan Agreement, do
or cause to be done all things necessary to cause the Bank to maintain Total
Capital equal to or greater than $85,000,000.
Additional Covenants. The Indenture will also contain covenants with respect
to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment
of taxes and other claims; (iv) maintenance of properties; (v) maintenance of
insurance; (vi) maintenance of business; (vii) maintenance of books and
records; and (viii) registration rights.
Merger and Consolidation
The Indenture provides that the Company will not, in a single transaction or
a series of transactions, consolidate or merge with or into or transfer, sell,
lease or convey all or substantially all of it assets to another Person
unless: (i) either the Company will be the entity surviving such merger or
consolidation or the corporation formed by or surviving such consolidation or
merger, or the Person to which such transfer, sale, lease or conveyance shall
have been made, shall be a corporation duly organized and existing under the
laws of the United States, any state thereof or the District of Columbia and
will unconditionally expressly assume by a supplemental indenture hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of the Company under the Senior Notes and the Indenture;
(ii) immediately before and immediately after giving effect to the transaction
or series of transactions, no Default or Event of Default shall have occurred
and be continuing; (iii) immediately after giving effect to the transaction or
series of transactions, the Company or the surviving entity, as applicable,
and their respective banking and thrift subsidiaries, as applicable, will be
in compliance with all applicable regulatory capital requirements; (iv)
immediately after giving effect to the transaction or series of transactions,
the Company or the surviving entity, as applicable, could incur at least $1.00
of additional Indebtedness without violating the limitations on Indebtedness
provisions of the Indenture; and (v) the Company has delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel each stating that such
consolidation, merger, business combination, transfer, sale, lease or
conveyance and such supplemental indenture complies with the Indenture and
that all conditions precedent therein relating to such transaction have been
complied with.
Modification of the Indenture; Waiver of Covenants
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of greater than 50% in aggregate
principal amount of the Senior Notes then Outstanding; provided, however, that
no such modification or amendment may, without the consent of the Holder of
each
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outstanding Senior Note affected thereby, (i) change the Stated Maturity of
the principal of, or any installment of interest on, any Senior Note or reduce
the principal amount thereof, premium, if any, or the rate of interest thereon
or change any Place of Payment, or change the coin or currency in which any
Senior Note or any premium or the interest thereon is payable or impair the
right to institute suit for the enforcement of any such payment after the
Stated Maturity thereof; (ii) reduce the percentage in principal amount of the
outstanding Senior Notes, the consent of whose Holders is required for any
such amendment or modification, or the consent of whose Holders is required
for any waiver of compliance with the Indenture or certain defaults
thereunder, and (iii) modify any of the provisions relating to supplemental
indentures requiring the consent of Holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase
the percentage in principal amount of outstanding Senior Notes required for
such action or to provide that certain other provisions of the Indenture may
not be modified or waived without the consent of the Holder of each Senior
Note affected thereby.
Notwithstanding the foregoing, without the consent of any Holders, the
Company and the Trustee may modify or amend the Indenture (i) to evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Senior
Notes in accordance with the provisions of the Indenture described above under
"--Merger and Consolidation," (ii) to add any additional covenants of the
Company for the benefit of the Holders, or to surrender any right or power
conferred upon the Company in the Indenture or in the Senior Notes; (iii) to
secure the Senior Notes or to add a guarantor; (iv) to comply with any
requirements of the Commission in order to effect and maintain the
qualification of the Indenture under the Trust Indenture Act; or (v) to cure
any ambiguity, to correct or supplement any provision of the Indenture which
may be defective or inconsistent with any other provision of the Indenture, or
to make any other provisions with respect to matters or questions arising
under the Indenture which shall not be inconsistent with the provisions of the
Indenture, provided such action pursuant to clause (v) shall not adversely
affect the interests of the Holders in any material respect.
The Holders of greater than 50% in aggregate principal amount of the Senior
Notes outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Events of Default
An Event of Default will be defined in the Indenture to include:
(i) failure by the Company to pay the principal of, or premium, if any,
on any Senior Note when due and payable at maturity or upon redemption,
acceleration or otherwise;
(ii) failure by the Company to pay interest on any Senior Note when due
and payable, such failure continues for a period of 15 days;
(iii) default in the performance, or breach, of the provisions described
above under "--Merger and Consolidation;"
(iv) default, on the Change of Control Purchase Date, in the purchase of
Senior Notes required to be purchased by the Company pursuant to an Offer
to Purchase;
(v) failure by the Company to comply with any other agreement or covenant
contained in the Indenture if such failure continues for a period of 30
days after notice to the Company by the Trustee or to the Company and the
Trustee by the holders of at least 25% in principal amount of the Senior
Notes then Outstanding;
(vi) default by the Company or any Subsidiary of the Company in the
payment of any Indebtedness of the Company or any Subsidiary of the Company
after any applicable grace period after final maturity or in the event that
final maturity is accelerated because of a default, which default is not
cured, waived or consented to for 30 days and the total amount of such
Indebtedness unpaid or accelerated is equal to or greater than 5% of the
Company's Consolidated Net Worth;
(vii) the existence of certain events of bankruptcy or insolvency of the
Company or the Bank;
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(viii) the rendering of one or more final judgments, decrees or orders
against the Company or any Subsidiary for the payment of an amount of money
which, individually or in the aggregate, is equal to or greater than 5% of
the Company's Consolidated Net Worth and which remains unsatisfied for a
period of 60 days without a stay of execution of any such judgment, decree
or order;
(ix) failure by the Bank to comply with any of its Regulatory Capital
Requirements; provided, that an Event of Default under this paragraph (ix)
shall not be deemed to have occurred (a) during the 45-day period following
the first day on which the Bank fails to comply with any of its Regulatory
Capital Requirements, if within such 45-day period the Bank files a capital
plan with the OTS, (b) during the 60-day period following the initial
submission of a capital plan to the OTS by the Bank (or, if the OTS
notifies the Bank in writing that it needs a longer period of time to
determine whether to approve such capital plan, such longer period as is so
specified by the OTS), unless prior to such date the OTS shall have
notified the Bank of its determination not to approve such capital plan, or
(c) during the period that the Bank is operating in material compliance
with a capital plan approved by the OTS, provided, further, that if the
Bank meets the minimum amount of capital required to meet each of the
industry-wide regulatory capital requirements pursuant to 12 U.S.C. Section
1464(t) and 12 C.F.R. Part 567 (and any amendment to either thereof) or any
successor law or regulation, notwithstanding the Bank's failure to meet an
individual minimum capital requirement pursuant to 12 U.S.C. Section
1464(s) and 12 C.F.R. Section 567.3 (and any amendment to either thereof)
or any successor law or regulation, no Event of Default shall have occurred
pursuant to this clause unless written notice thereof shall have been given
(x) to the Company by the Trustee or (y) to the Company and the Trustee by
the Holders of 25% in aggregate principal amount of the Senior Notes then
outstanding; and
(x) the termination of the Acquisition Agreement prior to the
consummation of the transactions contemplated thereby.
The Company has covenanted in the Indenture to file annually with the
Trustee a statement regarding compliance by the Company with the terms of the
Indenture and specifying any defaults of which the signers may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of not less than 25% in principal amount of the Senior Notes then outstanding
may declare all the Senior Notes to be immediately due and payable by notice
to the Company (and to the Trustee if given by the Holders). Under certain
circumstances, the Holders of a majority in principal amount of the Senior
Notes then Outstanding may rescind such a declaration.
Defeasance
The Indenture provides that (i) if applicable, the Company will be
discharged from any and all obligations in respect of then Outstanding Senior
Notes, other than the obligation to duly and punctually pay the principal of,
premium, if any, and interest on, the Senior Notes in accordance with the
terms of the Senior Notes and the Indenture, or (ii) if applicable, the
Company may omit to comply with certain restrictive covenants, and that such
omission shall not be deemed to be an Event of Default under the Indenture or
the Senior Notes, in either case (i) or (ii), upon irrevocable deposit with
the Trustee, in trust, of money and/or U.S. Government Obligations which will
provide money in an amount sufficient in the opinion of a nationally-
recognized accounting firm to pay the principal of and premium, if any, and
each installment of interest, if any, on the Outstanding Senior Notes. With
respect to clause (ii), the obligations under the Indenture other than with
respect to such covenants shall remain in full force and effect. Such trust
may only be established if, among other things, (a) with respect to clause
(i), the Company has received from, or there has been published by, the IRS a
ruling or there has been a change in law, which in an Opinion of Counsel
provides that Holders of the Senior Notes will not recognize gain or loss for
federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or with respect to clause (ii), the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the Holders of the Senior Note will not recognize gain or loss for federal
income tax purposes as a result of such deposit and defeasance and
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will be subject to federal income tax on the same amount, in the same manner
and at the same times as would have been the case if such deposit and
defeasance had not occurred; (b) no Event of Default or event that with the
passing of time or the giving of notice, or both, shall constitute an Event of
Default shall have occurred or be continuing; and (c) certain other customary
conditions precedent are satisfied.
Satisfaction and Discharge
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Senior Notes, as
expressly provided for in the Indenture) as to all outstanding Senior Notes
when (i) either (a) all the Senior Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Senior Notes which have been
replaced or paid) have been delivered to the Trustee for cancellation or (b)
all Senior Notes not theretofore delivered to the Trustee for cancellation
have become due and payable, or will become due and payable or are to be
called for redemption within one year, and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Senior Notes
not theretofore delivered to the Trustee for cancellation, for principal of,
and premium, if any, and interest on the Senior Notes to the date of deposit
together with irrevocable instructions to the Trustee from the Company
directing the Trustee to apply such funds to the payment thereof at maturity
or redemption, as the case may be; (ii) the Company has paid all other sums
payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel
each stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
The Trustee
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs.
The Indenture, and provisions of the Trust Indenture Act incorporated by
reference, contain limitations on the rights of the Trustee, should it become
a creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee will be permitted to engage in other
transactions with the Company or any Affiliate; provided, however, that if it
acquires any conflicting interest (as defined in the Indenture or in the Trust
Indenture Act), it must eliminate such conflict or resign.
Governing Law
The Indenture provides that it and the Senior Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
Certain Definitions
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings corresponding to
the foregoing.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
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obligation; and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents in the equity (however designated) of such
Person and any rights (other than debt securities convertible into an equity
interest), warrants or options to acquire an equity interest in such Person.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed
to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 35% of the total
Voting Stock of the Company; (ii) the Company consolidates with, or merges
into, another person, or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any person, or
any person consolidates with, or merges into, the Company, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the Company
is changed into or exchanged for cash, securities or other property, other
than any such transaction between the Company and a Wholly Owned Subsidiary;
(iii) the Company, the Board of Directors or any executive officer of the
Company enters into or approves any agreement, transaction or proposal that
would result in the occurrence of any event described in clauses (i) and (ii)
(including without limitation any agreement, transaction or proposal that
would have such result with the passage of time, upon the payment of money or
other consideration, or upon the occurrence of any contingency or
contingencies); or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Company's
Board of Directors (together with any new directors whose elections by the
Company's Board of Directors or whose nomination for elections by the
Stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the directors then
in office.
"Consolidated Net Income (Loss)" of any Person means, for any period the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period determined in accordance with GAAP; provided,
however, that there shall be excluded therefrom:
(a) any net income (or loss) of any Person if such Person is not a
Subsidiary, except that (A) the Company's equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Subsidiary, to the limitations contained in clause (c)
below) and (B) the Company's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net Income;
(b) any net income (but not loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(c) any net income (or loss) of any Subsidiary if such Subsidiary is
subject to restrictions, directly or indirectly, on the payment of
dividends or the making of distributions by such Subsidiary, directly or
indirectly, to the Company, except that (A) the Company's equity in the net
income of any such Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Subsidiary during such period to the Company or another
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution to another Subsidiary, to the limitation
contained in this clause) and (B) the Company's equity in a net loss of any
such Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(d) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback
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arrangement) and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(e) the cumulative effect of a change in accounting principles; and
(f) the gain (but not the loss) from the sale, transfer, conveyance or
other disposition (other than to the Company or any of its Subsidiaries) in
a single transaction or in a series of related transactions, in either case
occurring outside the ordinary course of business, of more than 75% of the
assets of the Bank shown on a balance sheet of the Bank as of the end of
the most recent fiscal quarter ending at least 45 days prior to such
transaction (or the first transaction in such related series of
transactions).
"Consolidated Net Worth" of any Person means, at any date, all amounts which
would, in conformity with GAAP, be included under stockholders' equity on a
consolidated balance sheet of such Person as at such date.
"Default" means any event or condition that upon the giving of notice or the
passage of time or both would be an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part on, or
prior to, or is exchangeable for debt securities of the Company or its
Subsidiaries with a maturity prior to, the final Stated Maturity of principal
of the Senior Notes.
"Excluded Indebtedness" with respect to any Subsidiary of the Company shall
mean any liability or obligation of any Subsidiary of the Company with respect
to (i) any deposits with or funds collected by it, (ii) any banker's
acceptance or letter of credit issued by it, (iii) any check, note,
certificate of deposit, money order, traveler's check, draft or bill of
exchange, issued, accepted or endorsed by it, (iv) any discount with,
borrowing from, or other obligation to any Federal Reserve Bank, the FDIC or
any Federal Home Loan Bank (or successor organization), (v) any agreement,
made by it in the ordinary course of its banking business, to purchase or
repurchase securities, loans or federal funds or to participate in any such
purchase or repurchases, (vi) any transactions in the nature of an extension
of credit, whether in the form of commitment, guaranty or otherwise,
undertaken by it for account of a third party with the application by it of
the same banking considerations and legal lending limits that would be
applicable if the transaction were a loan to such party, (vii) any transaction
in which it acts solely in a fiduciary or agency capacity, (viii) any pledge
of mortgage assets to the Federal Home Loan Bank, (ix) any Liens incurred in
the ordinary course of making payments by and transferring securities by,
wire, (x) Liens incurred in connection with the acquisition of property or
assets acquired in the ordinary course of business pursuant to foreclosure
proceedings or pursuant to an acquisition of such property or assets in lieu
of foreclosure, (xi) other obligations to customers of a bank Subsidiary,
(xii) other obligations incurred by it in the ordinary course of its banking,
mortgage banking or trust business to its customers solely in their capacities
as such, (xiii) any other liability or obligation of such Subsidiary incurred
in the ordinary course of its banking business not involving any obligation
for borrowed money, (xiv) Capitalized Leases, (xv) any borrowings under
warehousing lines of credit, (xvi) any borrowings under revolving lines of
credit with a maturity date of less than one year up to an aggregate amount at
any time outstanding equal to 30% of Consolidated Net Worth, and (xvii) drafts
outstanding or official bank checks outstanding used to fund mortgage loan
volume.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under
compulsion to complete the transaction as determined by the Board of Directors
of the Company, acting reasonably and in good faith, and shall be evidenced by
a Board Resolution delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as
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may be approved by a significant segment of the accounting profession of the
United States, which are in effect from time to time after the date of the
Indenture.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness; (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such Indebtedness
against loss; (iii) to supply funds to, or in any other manner invest in, the
debtor (including any agreement to pay for property or services without
requiring that such property be received or such services be rendered); (iv)
to maintain working capital or equity capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the debtor;
or (v) otherwise to assure a creditor with respect to Indebtedness against
loss; provided that the term "guarantee" shall not include endorsements for
collection of deposit, in the ordinary course of business.
"Holder" when used with respect to any Senior Note means a Noteholder.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all the principal of and premium (if any) in respect of indebtedness of such
Person for borrowed money or for the deferred purchase price of property or
services, excluding any trade payables and other accrued current liabilities
arising in the ordinary course of business, but including, without limitation,
all obligations, contingent or otherwise, of such Person in connection with
any letters of credit issued under letter of credit facilities, and in
connection with any agreement by such Person to purchase, redeem, exchange,
convert or otherwise acquire for value any Capital Stock of such Person now or
hereafter outstanding; (ii) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments; (iii) all indebtedness of such
Person created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even if the rights
and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), but excluding
trade payables arising in the ordinary course of business; (iv) all
obligations under interest rate swap agreements of such Person; (v) all
Capital Lease Obligations of such Person; (vi) any agreement to purchase or
repurchase securities, loans or federal funds, except to the extent that such
agreement is made by such Person in the ordinary course of its banking
business; (vii) all Indebtedness referred to in clauses (i) through (vi) above
of other Persons and all dividends payable by other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien, upon or
with respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or
asset or the amount of the obligations so secured); (viii) all guarantees by
such Person of Guaranteed Indebtedness; (ix) all Disqualified Capital Stock
(valued at the greater of book value and voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends) of such Person; and
(x) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing or any liability of the types referred to in clauses
(i) through (ix) above. For purposes hereof, (x) the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital Stock, such fair market
value is to be determined reasonably and in good faith by the board of
directors of the issuer of such Disqualified Capital Stock, and (y)
Indebtedness is deemed to be incurred pursuant to a revolving credit facility
each time an advance is made thereunder.
"Issue Date" means April 1, 1998.
"Junior Indebtedness" means any Indebtedness of the Company subordinated in
right of payment of either principal, premium (if any) or interest thereon to
the Senior Notes.
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"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days
from the determination date: (a) repurchase agreements on obligations of, or
which are guaranteed as to timely receipt of principal and interest by, the
United States or any agency or instrumentality thereof when such obligations
are backed by the full faith and credit of the United States, provided that
the party agreeing to repurchase such obligations is a primary dealer in U.S.
government securities, (b) federal funds and deposit accounts, including but
not limited to certificates of deposit, time deposits and bankers' acceptances
of any U.S. depositary institution or trust company incorporated under the
laws of the United States or any state, provided that the debt of such
depository institution or trust company at the date of acquisition thereof has
been rated by Standard & Poor's Corporation in the highest short-term rating
category or has an equivalent rating from another nationally recognized rating
agency, or (c) commercial paper of any corporation incorporated under the laws
of the United States or any state thereof that on the date of acquisition is
rated investment grade by Standard & Poor's Corporation or has an equivalent
rating from another nationally recognized rating agency; (iii) any debt
instrument which is an obligation of, or is guaranteed as to the receipt of
principal and interest by the United States, its agencies or any U.S.
government sponsored enterprise, or (iv) any mortgage-backed or mortgage-
related security issued by the United States, its agencies, or any U.S.
government sponsored enterprise, as to which the payment of principal and
interest from the mortgages underlying such securities will be passed through
to the holder thereof and which has a remaining weighted average maturity of
15 years or less.
"Loan Agreement" means the Loan Agreement, dated as of April 1, 1998 among
the Company and Colonial Bank, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such Loan Agreement and related documents may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing (whether or not contemporaneously) or
otherwise restructuring (including adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement
and whether by the same or any other agent, lender or group of lenders.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock, or any capital contribution in respect of Capital Stock, the
proceeds of such issuance or sale or capital contribution in the form of cash
or cash equivalents, including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed for, cash or cash equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Subsidiary of the Company), net of attorney's fees, accountant's fees and
brokerage, consulting, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale or capital contribution and
net of taxes paid or payable by the Company as a result thereof.
"Noteholder" means a Person in whose name a Senior Note is registered in the
Note Register.
"Permitted Investments" means (i) a marketable obligation, maturing within
two years after issuance thereof, issued or guaranteed by the United States of
America or an instrumentality or agency thereof, (ii) a certificate of deposit
or banker's acceptance, maturing within one year after issuance thereof,
issued by a national or state bank or trust company having capital, surplus
and undivided profits of at least $100,000,000 and whose long-term unsecured
debt has a rating of "A" or better by S&P or A2 or better by Moody's or the
equivalent rating by any other nationally recognized rating agency, (iii) open
market commercial paper, maturing within 270 days after issuance thereof,
which has a rating of A1 or better by S&P or P1 or better by Moody's, or the
equivalent rating by any other nationally recognized rating agency, (iv)
repurchase agreements and reverse repurchase agreements with a term not in
excess of one year with any financial institution which has been elected
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a primary government securities dealer by the Federal Reserve Board or whose
securities are rated AA- or better by S&P or Aa3 or better by Moody's or the
equivalent rating by any other nationally recognized rating agency relating to
marketable direct obligations issued or unconditionally guaranteed by the
United States of America or any agency or instrumentality thereof and backed
by the full faith and credit of the United States of America and (v) "Money
Market" preferred stock maturing within six months after issuance thereof or
municipal bonds issued by a corporation organized under the laws of any state
of the United States, which has a rating of "A" or better by S&P or Moody's or
the equivalent rating by any other nationally recognized rating agency;
provided, that, notwithstanding anything to the contrary contained herein,
Permitted Investments shall not include any of the foregoing investments to
the extent that any such investment, in the good faith business judgment of
the Board of Directors of the Company, involves at the time of acquisition or
thereafter a reasonable likelihood of a loss of principal.
"Permitted Liens" shall mean the following Liens so long as such Liens do
not in the aggregate materially and adversely affect the conduct of the
business of the Company or the Bank: (i) Liens securing taxes, assessments,
fees or other governmental charges or levies or the claims of materialmen,
mechanics, carriers, warehousemen, landlords and other similar persons; (ii)
Liens incurred or deposits made in the ordinary course of business (x) in
connection with workmen's compensation, unemployment insurance, social
security or other similar laws, or (y) to secure the performance of letters of
credit issued by persons other than the Company or any Subsidiary, bids,
tenders, contracts, leases, public or statutory obligations, surety, customs,
appeal and performance bonds and other similar obligations not incurred in
connection with indebtedness for money borrowed; (iii) attachment, judgment
and other similar Liens arising in connection with court proceedings;
provided, however, that the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are currently being
contested in good faith by appropriate proceedings; (iv) easements, rights of
way, restrictions, and other similar encumbrances affecting real or tangible
personal property, which do not in the aggregate materially detract form the
value of said property or materially impair its use in the operation of the
business of the Company or the Bank; (v) Liens outstanding on the date hereof
with respect to property then owned by the Company or the Bank; (vi)
capitalized leases not otherwise prohibited by any provision of this
Agreement; (vii) Liens on real or tangible personal property owned and used by
the Company or the Bank in the ordinary course of its business and incurred to
secure the payment of the cost of such property or any improvement thereof;
(viii) Liens on tangible personal property acquired by the Company or the Bank
in the ordinary course of its business and securing the purchase price of such
property; (ix) Liens on property owned and used by any person in the ordinary
course of its business existing prior to the time such person becomes a
Subsidiary; (x) Liens on property owned and used by any Subsidiary in the
ordinary course of its business existing prior to the time of acquisition of
such property by such Subsidiary through purchase, merger, consolidation or
otherwise, whether or not such Liens are assumed by such Subsidiary; (xi) any
extensions or renewals of any of the foregoing Liens; (xii) pledges,
assignments, or security devices entered into in connection with the financing
and refinancing of customers' leases, mortgages, conditional sales contracts,
accounts receivable, credit cards and other loans which arise in the ordinary
course of the banking or trust business; (xiii) pledges of securities against
deposits of municipalities or other governmental agencies created or incurred
in the ordinary course of business in order to receive deposits from such
entities; (xiv) Liens securing Excluded Indebtedness; and (xv) other Liens;
provided that the aggregate indebtedness of the Company and the Bank secured
thereby does not at any time exceed $1,000,000.
"Permitted Payment" means, so long as no Default or Event of Default is
continuing,
(a) the purchase, redemption, defeasance or other acquisition or retirement
for value of any Capital Stock of the Company or any Affiliate (other than a
Wholly-Owned Subsidiary, which is unrestricted) of the Company, or any Junior
Indebtedness of the Company which may be incurred pursuant to the covenant
described above under "--Certain Covenants--Limitations on Indebtedness" in
exchange for (including any such exchange pursuant to the exercise of a
conversion right or privilege where, in connection therewith, cash is paid in
lieu of the issuance of fractional shares or scrip), or out of the Net Cash
Proceeds or Fair Market Value of property not constituting Net Cash Proceeds
of, a substantially concurrent issue and sale (other than to a Subsidiary of
the Company or to an employee benefit plan of the Company or any of its
Subsidiaries) of Qualified Capital Stock
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of the Company; provided that the Net Cash Proceeds or Fair Market Value of
such property received by the Company from the issuance of such shares of
Qualified Capital Stock, to the extent so utilized, shall be excluded from
clause (c)(iii) of the covenant described above under "--Certain Covenants--
Limitations on Restricted Payments;" and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness of the Company which may be
incurred pursuant to the covenant described under "--Certain Covenants--
Limitations on Indebtedness" above in exchange for, or out of the Net Cash
Proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of new Indebtedness to the Company (such a
transaction, a "refinancing"); provided, that (i) any such new Indebtedness of
the Company shall be in a principal amount that does not exceed an amount
equal to the sum of (A) the principal amount of the Junior Indebtedness so
refinanced less any discount from the face amount of such Junior Indebtedness
to be refinanced expected to be deducted from the amount payable to the
holders of such Junior Indebtedness in connection with such refinancing, (B)
the amount of any premium expected to be paid in connection with such
refinancing pursuant to the terms of any Junior Indebtedness of the Company
which may be incurred pursuant to the covenant described above under "--
Certain Covenants--Limitations on Indebtedness" refinanced or the amount of
any premium reasonably determined by the Company as necessary to accomplish
such refinancing by means of a tender offer, privately negotiated repurchase
or otherwise and (C) the amount of legal, accounting, printing and other
similar expenses of the Company incurred in connection with such refinancing;
provided, further, that for purposes of this clause (i), the principal amount
of any Indebtedness shall be deemed to mean the principal amount thereof or,
if such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration thereof, such
lesser amount as of the date of determination; (ii) each Stated Maturity of
principal (or any required repurchase, redemption, defeasance or sinking fund
payments) of such new Indebtedness shall be after the final Stated Maturity of
principal of the Senior Notes then outstanding; and (iii) any such new
Indebtedness of the Company is made expressly subordinated to the Senior Notes
to substantially the same extent as the Junior Indebtedness being refinanced
or expressly subordinate to such refinanced Indebtedness.
"Person" means any natural person, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Regulatory Capital Requirements" means (i) the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Part 567 (and any amendment to either thereof) or any successor law or
regulation, and (ii) such higher amount of capital as the Bank is required to
maintain in order to meet any individual minimum capital standard applicable
to it pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R. Section 567.3 (and
any amendment to either thereof) or any successor law or regulation.
"Restricted Payment" means:
(a) the declaration, payment or setting apart of any funds for the
payment of any dividend on, or making of any distribution to holders of,
the Capital Stock of the Company or any Subsidiary of the Company (other
than (i) dividends or distributions in Qualified Capital Stock of the
Company, and (ii) dividends or distributions payable on or in respect of
any class or series of Capital Stock of a Wholly Owned Subsidiary of the
Company);
(b) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any Capital Stock of the Company or any
Affiliate of the Company (other than a Wholly-Owned Subsidiary); or
(c) the making of any principal payments on, or repurchase, redemption,
defeasance, retirement or other acquisition for value, directly or
indirectly, of any Junior Indebtedness, prior to the Stated Maturity of
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principal or scheduled redemption or defeasance of, or any scheduled
sinking fund payment on, such Junior Indebtedness.
"Stated Maturity" when used with respect to any Senior Note or any
installment of interest thereon means the date specified in such Senior Note
as the fixed date on which the principal of such Senior Note or such
installment of interest is due and payable.
"Subsidiary" means any corporation of which at least a majority of the
outstanding stock having ordinary voting power to elect a majority of the
directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency, is at the
time directly or indirectly owned by the Company, by one or more Subsidiaries
of the Company, or by the Company and one or more Subsidiaries.
"Total Capital" shall mean, without duplication, the Bank's consolidated
total equity capital surplus and retained earnings at the time of
determination thereof plus net income or loss less the sum of cash dividends
on stock, plus the net effect of the on-going retirement of capital stock plus
loan loss reserves.
"Voting Stock" means Capital Stock of any class or classes, however
designated, having ordinary voting power for the election of a majority of the
board of directors, other than stock having such power only by reason of the
occurrence of a contingency.
"Wholly Owned Subsidiary" means a Subsidiary of which all of the outstanding
Capital Stock (other than directors' qualifying shares) is at the time
directly or indirectly owned by the Company, or by one or more Wholly Owned
Subsidiaries or by the Company and one or more Wholly Owned Subsidiaries.
DESCRIPTION OF CAPITAL STOCK
The Company is currently authorized to issue up to 20,000,000 shares of
Common Stock, par value $.01 per share and 10,000,000 shares of Preferred
Stock, par value $.01 per share. As of December 31, 1998, 10,080,503 shares of
Common Stock were issued and outstanding, and no shares of Preferred Stock
were issued and outstanding. The capital stock of the Company does not
represent or constitute a deposit account and is not insured by the FDIC.
Common Stock
General. Each share of Common Stock has the same relative rights and is
identical in all respects with each other share of Common Stock. The Common
Stock is not subject to call for redemption.
Voting Rights. Except as provided in any resolution or resolutions adopted
by the Board of Directors establishing any series of Preferred Stock, the
holders of Common Stock possess exclusive voting rights in the Company. Each
holder of Common Stock is entitled to one vote for each share held on all
matters to be voted upon by shareholders. Shareholders are not permitted to
cumulate votes in elections of directors.
Dividends. The holders of the Common Stock are entitled to such dividends as
may be declared from time to time by the Board of Directors of the Company out
of funds legally available therefor. For a discussion of the requirements and
limitations relating to the Company's ability to pay dividends to shareholders
and the ability of the Bank to pay dividends to the Company, see "Certain
Regulatory Matters--Restrictions on Capital Distributions and Transactions by
the Bank with Affiliates."
Preemptive Rights. Holders of the Common Stock of the Company are not
entitled to preemptive rights with respect to any shares which may be issued
in the future.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of the Common Stock would be entitled to receive,
after payment of all debts and liabilities of the Company, all assets
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<PAGE>
of the Company available for distribution, subject to the rights of the
holders of Preferred Stock, if any, which would have a priority in liquidation
or dissolution over the holders of the Common Stock.
Preferred Stock
Within the limits and restrictions contained in the Certificate of
Incorporation, the Board of Directors of the Company is authorized without
further action by the shareholders of the Company, to issue up to an aggregate
of 10,000,000 shares of the Company's authorized class of Preferred Stock, in
one or more series. Each series of Preferred Stock may have such number of
shares, designations, preferences, powers, qualifications and special or
relative rights or privileges as may be determined by the Board of Directors,
which may include, among others, dividend rights, voting rights, redemption
and sinking fund provisions, liquidation preferences, conversion rights and
preemptive rights.
Restrictions on Acquisition of the Company
Several provisions of the Delaware General Corporation Law ("DGCL") could
affect the acquisition of Common Stock or control of the Company. Section 203
of the DGCL generally provides that a Delaware corporation shall not engage in
any "business combination" with an "interested stockholder" for a period of
three years following the time that such stockholder became an interested
stockholder unless (1) prior to such time the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; or (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for this purpose, shares owned by persons who are
directors and also officers and shares owned by employee stock ownership plans
in which employee participants do not have the right to determine
confidentially whether the shares held subject to the plan will be tendered in
a tender offer or exchange offer; or (3) on or subsequent to such time, the
business combination is approved by the board of directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. The three-year prohibition on
business combinations with an interested stockholder does not apply under
certain circumstances, including business combinations with a corporation
which does not have a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on an inter-dealer
quotation system of a registered national securities association, or (iii)
held of record by more than 2,000 stockholders, unless in each case this
result was directly or indirectly caused by the interested stockholder.
An "interested stockholder" generally means any person that (i) is the owner
of 15% of more of the outstanding voting stock of the corporation or (ii) is
an affiliate or associate of the corporation and was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder; and the
affiliates and associates of such a person. The term "business combination" is
broadly defined to include a wide variety of transactions, including mergers,
consolidations, sales of 10% or more of a corporation's assets and various
other transactions which may benefit an interested stockholder.
The Change in Bank Control Act provides that no person, acting directly or
indirectly or through or in concert with one or more persons, may acquire
control of a savings association unless the OTS has been given 60 days' prior
written notice. The HOLA provides that no company may acquire "control" of a
savings association without the prior approval of the OTS. Any company that
acquires such control becomes a savings and loan holding company subject to
registration, examination and regulation by the OTS. See "Certain Regulatory
Matters--General."
Limitation of Liability. The Company's Certificate of Incorporation provides
that a director of the Company shall not be personally liable for monetary
damages for any breach of fiduciary duty by such director as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders,
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<PAGE>
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law ("DGCL") for approval of an unlawful dividend
or an unlawful stock purchase or redemption, or (iv) for any transaction from
which the director derived an improper personal benefit.
Indemnification of Directors, Officers, Employees and Agents. The Company's
Certificate of Incorporation provides that the Company shall indemnify
officers, directors, employees and agents to the full extent permitted under
the DGCL. Section 145 of the DGCL contains detailed and comprehensive
provisions providing for indemnification of directors and officers of Delaware
corporations against expenses, judgments, fines and settlements in connection
with litigation. Under the DGCL, other than an action brought by or in the
right of the Company, such indemnification is available if it is determined
that the proposed indemnitee acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In actions
brought by or in the right of the Company, such indemnification is limited to
expenses (including attorneys' fees) actually and reasonably incurred in the
defense of settlement of such action if the indemnitee acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person has been
adjudged to be liable to the Company unless and only to the extent that the
Delaware Court of Chancery or the court in which the action was brought
determines upon application that in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
as the court deems proper.
To the extent that the proposed indemnitee has been successful on the merits
or otherwise in defense of any action, suit or proceeding (or any claim, issue
or matter therein), he or she must be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
The Company maintains an officers' and directors' insurance policy and a
separate indemnification agreement pursuant to which directors and certain
officers of the Company would be entitled to indemnification against certain
liabilities, including reimbursement of certain expenses that extends beyond
the minimum indemnification provided by Section 145 of the DGCL.
REGISTRATION RIGHTS
In connection with the Private Placement, the Company on or about April 1,
1998, entered into the Registration Rights Agreement with the initial
purchasers of the Superior Securities and with Keefe, Bruyette & Woods, Inc.,
the Placement Agent in the Private Placement, pursuant to which the Company
agreed to (i) cause to be filed with the Commission within 120 days after the
original issuance of the Superior Securities pursuant to the Purchase
Agreement, a shelf registration statement providing for the offer and sale of
the Superior Securities issued in the Private Placement, (ii) use its best
efforts to cause the shelf registration statement to be declared effective
under the Securities Act as promptly as possible and (iii) use its best
efforts to keep effective the shelf registration statement until the earlier
of the second anniversary of the date such shelf registration statement is
declared effective by the Commission or such time as all of the Superior
Securities have been sold thereunder or otherwise may be sold without the need
for the shelf registration statement, as set forth in the Registration Rights
Agreement. The Company agreed to bear its expenses arising out of the filing
of such shelf registration statement and up to $50,000 of certain expenses
incurred by the initial purchasers. The Registration Statement of which this
Prospectus forms a part has been filed to satisfy the Company's obligations
under the Registration Rights Agreement.
Pursuant to the terms of the Registration Rights Agreement, a holder of
Superior Securities and the Placement Agent desiring to sell some or all of
such securities pursuant to the shelf registration statement shall give the
Company not less than five days' prior written notice, and the Company will
use its best efforts to file promptly any required amendment(s) to the shelf
registration statement in order to facilitate such sales. Initiating
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<PAGE>
Holders, as defined in the Registration Rights Agreement to mean one or more
holders of either not less than 35% in aggregate principal amount of Senior
Notes or not less than 25% of the then-outstanding Common Stock, may elect
that the offering of Superior Securities be in the form of an underwritten
offering. Under such circumstances, the Company will provide written notice to
all holders of the Superior Securities and the Placement Agent of such
underwritten offering and will provide them with an opportunity to participate
in such underwritten offering, under terms and with such conditions as set
forth in the Registration Rights Agreement.
Under the Registration Rights Agreement, a holder that sells Superior
Securities pursuant to the shelf registration statement generally will be
required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
that are applicable to such a holder (including certain indemnification rights
and obligations). Each holder of Superior Securities may be required to
deliver information to be used in connection with the shelf registration
statement in order to have such holder's Superior Securities included in the
shelf registration statement and to benefit from the provisions of the
succeeding paragraph.
Each of the Superior Securities contain a legend to the effect that the
holder thereof, by its acceptance thereof, is deemed to have agreed to be
bound by the provisions of the Registration Rights Agreement. In that regard,
each holder is deemed to have agreed that, upon receipt of notice from the
Company of the occurrence of any event which makes a statement in the
prospectus which is part of the shelf registration statement untrue in any
material respect or which requires the making of any changes in such
prospectus in order to make the statements therein not misleading, such holder
will suspend the sale of Superior Securities pursuant to such prospectus until
the Company has amended or supplemented such prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such holder or the Company has given notice that
the sale of the Superior Securities may be resumed.
The Registration Rights Agreement is governed by, and construed in
accordance with, the laws of the State of Delaware. The summary herein of
certain provisions of the Registration Rights Agreement does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement.
SELLING HOLDERS
The Superior Securities were originally issued and sold by the Company in
the Private Placement in transactions exempt from the registration
requirements of the Securities Act, to persons reasonably believed by the
Company to be "qualified institutional buyers" (as defined in Rule 144A under
the Securities Act) or other "accredited investors" (as defined in Rule 501(a)
under the Securities Act). The Selling Holders (which term includes their
transferees, pledgees, donees or their successors) may from time to time offer
and sell pursuant to this Prospectus any or all of the Superior Securities
owned by each of them.
The following table sets forth information with respect to the Selling
Holders named herein and the shares of Common Stock and/or Senior Notes
beneficially owned and offered hereby by such Selling Holders. Such
information has been obtained from such Selling Holders. Except as otherwise
disclosed herein, such Selling Holders do not have, or within the past three
years have not had, any position, office or other material relationship with
the Company or affiliates. Because such Selling Holders may offer all or some
portion of the Common Stock or Senior Notes pursuant to this Prospectus, no
estimate can be given as to the amount of the Common Stock or Senior Notes
that will be held by such Selling Holders upon termination of any such sales.
In addition, the Selling Holders identified below may have sold, transferred
or otherwise disposed of all or a portion of their Common Stock and/or Senior
Notes since the date on which it provided the information regarding their
Common
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<PAGE>
Stock and/or Senior Notes in transactions exempt from the registration
requirements of the Securities Act. Finally, if required, additional Selling
Holders may from time to time be identified and information with respect to
such Selling Holders be provided in a Prospectus Supplement.
COMMON STOCK
<TABLE>
<CAPTION>
Position with Company
NAME OF HOLDER No. Shares (if any)
-------------- ---------- ---------------------
<S> <C> <C>
CEO & Chairman
C. Stanley & Virginia H. Bailey............... 104,166 of the Board and Wife
Joseph J. Berry............................... 22,395
Frank S. Cicero............................... 5,562
Charles A. Crowley............................ 1,562
Philip J. Cuthbertson......................... 10,416
Emmett J. Daly and Regina Daly JT TEN......... 21,016
Donald W. Delson.............................. 15,812
James Dooner and Teresa Dooner JT TEN......... 1,562
Frank J. Doyle................................ 20,833
John G. Duffy................................. 32,995
Joan Feldman.................................. 1,041
Brian Furbish................................. 8,604
Eric J. Grubelich............................. 2,604
William A. Houlihan........................... 14,812
John Howard, Jr............................... 10,416
Kathleen Kenny................................ 2,083
Joseph A. Lenihan............................. 5,562
Adam J. Lewis................................. 16,416
Thomas B. Michaud............................. 3,125
T. Treadway Mink, Jr.......................... 2,604
Joseph Moeller................................ 2,000
Michael T. O'Brien and Julie B. O'Brien JT
TEN.......................................... 7,812
James B. Penny................................ 2,083
Dean W. Rybeck................................ 30,433
Andrew M. Senchak............................. 16,416
Ellen F. Spalluto............................. 11,208
Bradley H. Vadas.............................. 20,833
Peter J. Wirth................................ 21,016
Keefe, Bruyette & Woods, Inc.................. 552,083
OZ Master Fund, Ltd........................... 500,000
Bay Pond Partners, L.P........................ 352,000
Bay Pond Investors (Bermuda) L.P.............. 181,500
Basswood Financial Partners, LP............... 311,990
Basswood International Fund, Inc.............. 61,915
Whitewood Financial Partners, LP.............. 3,480
1994 Garden State Trust....................... 22,615
Minnesota Mining & Manufacturing Company...... 100,400
BASF Corporation.............................. 17,200
Blue Cross and Blue Shield Association........ 18,500
Brunswick Master Pension Trust................ 12,700
Brunswick Retirement Savings Trust............ 8,500
Central Pension Fund of the International
Union of Operating Engineers and
Participating Employers...................... 31,900
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position with
Company
NAME OF HOLDER No. Shares (if any)
-------------- ---------- -------------
<S> <C> <C>
Comm Edison Pooled Fund............................... 40,800
Emerson Electric Co................................... 27,600
Financial Institutions Retirement Fund................ 16,800
Fleming Companies Intermountain Retirement Fund....... 1,500
Fleming Companies, Inc. Master Pension Plan Trust..... 8,100
Goldman Sachs & Co. Employees Pension Plan............ 1,300
Loyola University of Chicago.......................... 11,100
Loyola University Medical Center...................... 2,400
Loyola University Employee's Retirement Plan Trust.... 10,400
Pillsbury Master Retirement Trust..................... 17,400
Prince George's Fire Service Pension Plan............. 2,500
Prince George's Police Pension Plan................... 5,800
Savannah International Longshoremen's Association
Employers Pension Trust.............................. 12,900
University of Southern California Endowment Fund...... 7,100
Farallon Capital Partners, LP......................... 112,000
Farallon Capital Institutional Partners, LP........... 105,000
Farallon Capital Institutional Partners II, LP........ 24,500
Farallon Capital Management........................... 87,500
Farallon Capital Institutional Partners III, LP....... 10,500
Tinicum Partners, LP.................................. 10,500
Keefe Partners, L.P................................... 264,000
GAM Equity #10........................................ 27,500
Keefe Offshore........................................ 258,500
Whiting & Co.......................................... 550,000
Silver Oak Capital, L.L.C............................. 250,000
Egger & Co............................................ 50,000
Castle Creek Capital Partners Fund I, L.P............. 300,000
Lenient & Co. f/b/o John Hancock Bank & Thrift
Opportunity.......................................... 150,000
Skeid & Co. f/b/o Southeastern Thrift & Bank Fund..... 50,000
Pacholder Value Opportunity Fund, LP.................. 50,000
Simmons Family, Inc................................... 250,000
Philip & Nancy Timyan................................. 60,000
Philip Timyan Trust................................... 40,000
William W. Harris Trust............................... 15,000
Roxanne H. Frank Trust................................ 15,000
Couderay Partners..................................... 15,000
Jerome Kahn, Jr. Revocable Trust...................... 2,500
Fred Holubow.......................................... 2,500
Malta Partners........................................ 46,000
Malta Partners II..................................... 14,000
Malta Hedge Fund...................................... 29,000
Richard A. Horstmann.................................. 50,000
Patrick E. Malloy, III................................ 20,000
Clarke H. Ulmer....................................... 10,000
Barbara Schlactus..................................... 2,500
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position with
Company
NAME OF HOLDER No. Shares (if any)
-------------- ---------- -------------
<S> <C> <C>
Simpson Family Trust.................................. 2,500
The Del Co Irrevocable Trust.......................... 25,000
John W. Allison....................................... 20,000
Walnut Street Partners................................ 50,000
Sigler & Co FBO Gene Bruyette......................... 10,000
Sigler & Co FBO Kathleen Bruyette..................... 10,000
The Belden Brick Company.............................. 83,300
Neil K. Bortz......................................... 15,000
William O. Brisben.................................... 83,300
Benjamin Diesbach..................................... 20,000
James E. Evans........................................ 30,000
Larry A. Frieder...................................... 20,000
Dennis Scott Fulmer................................... 3,100
Joseph W. Harris...................................... 20,000
Bruce M. Jacobson..................................... 7,800
Irwin Katz, TTEE U/A/W Herbert Simon Dated October 21,
1976................................................. 15,000
Irwin Katz, TTEE U/A/W Melvin Simon Dated April 4,
1972................................................. 15,000
David Knall........................................... 20,000
Dean G. Lauritzen TTEE U/D by Dean G. Lauritzen Dated
June 8, 1989......................................... 5,000
United National Bank and Trust Co., TTEE U/A/W Dean G.
and Jane G. Lauritzen
Dated June 14, 1990 F/BO Kathryn L. Alday............. 4,000
United National Bank and Trust Co., TTEE U/A/W Dean G.
and Jane G. Lauritzen................................
Dated June 14, 1990 F/BO Kristine Fellows............. 4,000
United National Bank and Trust Co., TTEE U/A/W Dean G.
and Jane G. Lauritzen................................
Dated June 14, 1990 F/BO Karen L. Woodard............. 4,000
United National Bank and Trust Co., TTEE U/A/W Dean G.
and Jane G. Lauritzen................................
Dated June 14, 1990 F/BO Nancy Lauritzen.............. 4,000
Neal H. Mayerson...................................... 20,000
J. David Rosenberg.................................... 280,000
Marvin Rosenberg...................................... 15,000
Anne Schlezinger Safdi................................ 20,000
Raymond Schneider..................................... 20,000
Bren Simon............................................ 10,000
Philip H. Steiner..................................... 15,000
Richard Steiner....................................... 15,000
Daniel C. Staton...................................... 30,000
Bradley E. Turner..................................... 7,800
Stanley L. Vigran..................................... 30,000
Vine Street Exchange Fund, L.P........................ 312,500
Alexander D. Warm..................................... 537,100
Stuart E. Warm........................................ 20,000
David A. Wolf......................................... 20,000
Frank Wood............................................ 30,000
Trusara Holdings...................................... 200,000
John M. Stein......................................... 160,800 Director
Steven N. Stein....................................... 567,600
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position with
Company
NAME OF HOLDER No. Shares (if any)
-------------- ---------- -------------
<S> <C> <C>
Barlow Partners, Inc............................. 16,500
Jackson National Life Insurance Company.......... 295,500
Old Hickory Fund I, LLC.......................... 4,500
Northaven Partners, L.P.......................... 85,000
Northaven Partners II, L.P....................... 130,000
Northaven Partners III, L.P...................... 85,000
James T. Healey, Jr.............................. 12,725
James C. Lott and Mary M. Lott JT TEN............ 2,604
Banc Fund IV L.P................................. 68,760
Banc Fund IV Trust............................... 231,240
Bosworth & Co.................................... 550,000
Marshall T. Reynolds............................. 51,000
David E. Stubblefield & Suzanna S. Stubblefield
JT Ten.......................................... 10,000 Director and Wife
Howard B. McMahon................................ 3,000
Joe Edwards, Jr. & Judy Edwards JT Ten........... 14,120
Ralph G. Kramer, M.D............................. 3,000
Bradley D. Jesson................................ 1,000
DLJSC IRA FBO Joe Edwards, Jr.................... 11,880
Ruel Russell, Jr. & Margaret Russell JT Ten...... 6,000
HARE & CO........................................ 4,200
Pitt & Co. F/B/O The GTE Service Corporation..... 12,000
Bost & CO. F/B/O The Minnesota Mining and
Manufacturing Company........................... 28,900
Craig R. McMahen................................. 2,604
Safdi Investments Limited Partnership............ 20,000
SENIOR NOTES
<CAPTION>
Amount
NAME OF HOLDER of Notes
-------------- --------
<S> <C> <C>
The Bank of New York............................. $10,750,000
Boston Safe Deposit and Trust Company............ 4,910,000
Chase Manhattan Bank, Trust...................... 800,000
Firstar Trust Company............................ 3,250,000
The Northern Trust Company....................... 1,600,000
U.S. Bank National Association................... 5,000,000
Bankers Trust Company............................ 18,540,000
Chase Manhattan Bank............................. 8,000,000
Donaldson, Lufkin and Jenrette Securities
Corporation..................................... 3,000,000
Norwest Bank Minnesota National Association...... 750,000
State Street Bank and Trust Company.............. 3,400,000
</TABLE>
The Company has agreed to indemnify the Selling Holders against certain
liabilities arising out of any actual or alleged material misstatements or
omissions in the Registration Statement, other than liabilities arising from
information supplied by the Selling Holders for use in the Registration
Statement. Each Selling Holder, severally but not jointly, has agreed to
indemnify the Company against liabilities arising out of any actual or alleged
material misstatements or omissions in the Registration Statement insofar as
such misstatements or omissions were made in reliance upon written information
furnished to the Company by such Selling Holder expressly for use in the
Registration Statement.
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<PAGE>
PLAN OF DISTRIBUTION
The Superior Securities offered hereby may be sold from time to time to
purchasers directly by the Selling Holders. Alternatively, the Selling Holders
may from time to time offer the Superior Securities to or through
underwriters, dealers or agents who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Holders or
the purchasers of Superior Securities, for whom they may act as agents. The
Selling Holders and any underwriters, dealers or agents which participate in
the distribution of Superior Securities may be deemed to be "underwriters"
within the meaning of the Securities Act and any profit on the sale of
Superior Securities by them and any discounts, commissions, concessions or
other compensation received by any such underwriter, dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Superior Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Superior Securities may be effected in transactions (which may
involve crosses or block transactions) (i) on any national securities exchange
or quotation service on which the Superior Securities may be listed or quoted
at the time of sale, (ii) in the over-the-counter market or (iii) in
transactions otherwise than on such exchanges or in the over-the-counter
market. At the time a particular offering of the Superior Securities is made,
a Prospectus Supplement, if required, will be distributed which will set forth
the aggregate amount and type of Superior Securities being offered and the
terms of the offering, including the name or names of any underwriters,
dealers or agents, any discounts, commissions and other terms constituting
compensation from the Selling Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the Superior Securities will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Superior Securities may not be offered or sold unless they
have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied
with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Superior Securities may not simultaneously
engage in market-making activities with respect to such securities for a
restricted period prior to the commencement of such distribution. In addition
to and without limiting the foregoing, each Selling Holder and any other
person participating in a distribution will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Rules 102, 103 and 104, which provisions may
limit the timing of purchases and sales of any of the securities by the
Selling Holders or any such other person. All of the foregoing may affect the
marketability of the Superior Securities and brokers' and dealers' ability to
engage in market-making activities with respect to these securities.
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Superior Securities will be paid by the Company,
including, without limitation, Commission filing fees and expenses of
compliance with state securities or "blue sky" laws; provided, however, that
the Selling Holders will pay all underwriting discounts and selling
commissions, if any. The Selling Holders will be indemnified by the Company
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
The Company will be indemnified by the Selling Holders against certain civil
liabilities, including certain liabilities under the Securities Act, or will
be entitled to contribution in connection therewith.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1998 there were 10,080,503 shares of Common Stock of the
Company outstanding. All shares of Common Stock sold in the Offering will be
freely tradable without restriction or further registration under the
Securities Act, except that any shares purchased by affiliates of the Company,
as that term is defined in Rule 144 under the Securities Act, may generally
only be resold in compliance with applicable provisions of Rule 144.
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<PAGE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares for
at least one year is entitled to sell, within any three-month period, a number
of such shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the date of the
notice filed pursuant to Rule 144. Sales under Rule 144 are also subject to
certain manner of sale restrictions and notice requirements and to the
availability of current public information about the Company. In addition, a
person who is deemed an "affiliate" of the Company must comply with Rule 144
in any sale of shares of Common Stock not covered by a registration statement
(except, in the case of registered shares acquired by the affiliate on the
open market, for the holding period requirement). A person (or person whose
shares are aggregated) who is not deemed an "affiliate" of the Company and who
has beneficially owned restricted shares for at least two years is entitled to
sell such shares under Rule 144(k) without regard to the volume, notice and
other limitations of Rule 144. In meeting the one and two year holding periods
described above, a holder of restricted shares can include the holding periods
of a prior owner who was not an affiliate.
The Company anticipates making the Public Offering of its Common Stock when,
in consultation with its financial advisors, it determines that market
conditions are favorable and as the Company's capital needs may require. The
Company's decision to initiate and, if initiated, to consummate, the Public
Offering will depend upon variable factors, many of which are beyond the
Company's control. These factors include, but are not limited to, the
Company's performance and results of operations for the third quarter of 1998,
market conditions in the financial services industry, the perceived market for
the Common Stock and the likelihood that the Public Offering will be
sufficiently subscribed at a price that is satisfactory to the Company. The
Company cannot predict with any certainty whether or not the Public Offering
will be initiated, and, if it is initiated, whether or not it will be
consummated. If the Public Offering is consummated, the offering price of the
Common Stock sold therein will be determined at that time on the basis of
then-current market conditions.
The Public Offering, if it is initiated and consummated, will be independent
of any rights of the holders of the Superior Securities under Section 3(c) of
the Registration Rights Agreement. Nevertheless, the Company expects that
holders of the Superior Securities will be offered the opportunity to sell
Superior Securities in the Public Offering, subject to the terms and
conditions of an underwriting agreement between the Company and the managing
underwriter and such other limitations as the Company, in its sole discretion,
may impose.
The Company has reserved 10% of the common shares outstanding on December
31, 1998 for grants under the LTIP. As of December 31, 1998, the Company had
options outstanding to purchase up to 731,250 shares of Common Stock outside
of the LTIP and had not yet granted any options under the LTIP. See
"Management--Stock Option Plan." The Company intends to file a registration
statement under the Securities Act to register all shares of Common Stock
issuable under such Stock Option Plan. Shares covered by this registration
statement will be eligible for sale in the public market after the effective
date of such registration statement.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
On April 22, 1998, pursuant to authorization of its Board of Directors, the
Company engaged the firm of Ernst & Young LLP as its auditors. The Bank, prior
to its becoming a subsidiary of the Company, was served by
Deloitte & Touche LLP. Deloitte & Touche LLP's report on the Bank's financial
statement for the period from January 7, 1997 to December 31, 1997 and for the
years ended December 31, 1996 and 1995 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to audit scope or
accounting principles. A letter from Deloitte & Touche LLP is attached to the
Registration Statement as Exhibit 16.1.
During the two fiscal years ended December 31, 1997 and the subsequent
interim period through April 22, 1998, (i) there were no disagreements with
Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to the satisfaction of Deloitte & Touche LLP
would have caused them to make reference to the subject matter of the
disagreement in connection with their reports on the Company's financial
statements, and (ii) Deloitte &
87
<PAGE>
Touche LLP has not advised the Company of any reportable events as defined in
paragraph (A) through (D) of Regulation S-K Item 304(a)(i)(b) of the Exchange
Act.
CERTAIN LEGAL MATTERS
The validity of the Superior Securities offered hereby have been passed upon
for the Company by Miller, Hamilton, Snider & Odom, L.L.C., Montgomery,
Alabama.
EXPERTS
The consolidated financial statements of Superior Financial Corp. at
December 31, 1998 and 1997, and for the year ended December 31, 1998 and for
the period from November 12, 1997 (date of inception) to December 31, 1997
then ended, the consolidated balance sheet of Superior Financial Corp. at June
30, 1998 and the consolidated statements of operations, changes in
stockholders' equity and cash flows for Superior Federal Bank, F.S.B. and
Subsidiary for the three months ended March 31, 1998 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Superior Federal Bank, F.S.B. and
Subsidiary as of December 31, 1997 and for the period from January 7, 1997 to
December 31, 1997, and the consolidated financial statements of Superior
Federal Bank, F.S.B. and Subsidiary ("Predecessor Entity") as of December 31,
1996 and for each of the two years in the period ended December 31, 1996
included in this prospectus and registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and are included
in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
88
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Superior Financial Corp. at
December 31, 1998 and 1997, and for the year ended December 31, 1998 and for
the period from November 12, 1997 (date of inception) to December 31, 1997 and
the consolidated statements of operations, changes in stockholder's equity and
cash flows for Superior Federal Bank, F.S.B. and Subsidiary for the three
months ended March 31, 1998 were audited by Ernst & Young LLP and they
expressed an unqualified opinion on them in their reports dated February 3,
1999 and July 22, 1998.
The consolidated financial statements of Superior Federal Bank, F.S.B. and
Subsidiary as of December 31, 1997, and for the period from January 7, 1997 to
December 31, 1997, and the consolidated financial statements of Superior
Federal Bank, F.S.B. and Subsidiary as of December 31, 1996 and for each of
the two years in the period ended December 31, 1996 were audited by Deloitte &
Touche LLP and they expressed an unqualified opinion on them in their reports
dated January 16, 1998 and January 13, 1997.
Superior Financial Corp.
<TABLE>
<S> <C>
Audited Financial Statements--
December 31, 1998 and 1997
Report of Independent Auditors................................. F-1
Consolidated Balance Sheets.................................... F-2
Consolidated Statements of Operations.......................... F-3
Consolidated Statements of Changes in Stockholders' Equity..... F-4
Consolidated Statements of Cash Flows.......................... F-5 thru F-6
Notes to Financial Statements.................................. F-6 thru F-22
</TABLE>
F-i
<PAGE>
<TABLE>
<S> <C>
Superior Federal Bank, F.S.B.
Audited Financial Statements
March 31, 1998
Report of Independent Auditors............................... F-23
Consolidated Statement of Operations
Three months ended March 31, 1998........................... F-24
Consolidated Statement of Changes in Stockholder's Equity
Three months ended March 31, 1998........................... F-25
Consolidated Statement of Cash Flows
Three months ended March 31, 1998........................... F-26
Notes to Consolidated Statements of Operations, Changes in
Stockholder's Equity and Cash Flows Three months ended March
31, 1998.................................................... F-27 thru F-29
December 31, 1997
Independent Auditors' Report................................. F-30
Consolidated Statement of Financial Condition December 31,
1997........................................................ F-31
Consolidated Statement of Income for the period from January
7, 1997 to December 31, 1997................................ F-32
Consolidated Statement of Stockholder's Equity for the period
from January 7, 1997 to December 31, 1997................... F-33
Consolidated Statement of Cash Flows for the period from
January 7, 1997 to December 31, 1997........................ F-34
Notes to Consolidated Financial Statements
for the period from January 7, 1997 to December 31, 1997.... F-35 thru F-46
December 31, 1996 and 1995
Independent Auditors' Report................................. F-47
Consolidated Statement of Financial Condition December 31,
1996........................................................ F-48
Consolidated Statements of Income
for the years ended December 31, 1996 and 1995.............. F-49
Consolidated Statements of Stockholder's Equity
for the years ended December 31, 1996 and 1995.............. F-50
Consolidated Statements of Cash Flows
for the years ended December 31, 1996 and 1995.............. F-51
Notes to Consolidated Financial Statements
for the years ended December 31, 1996 and 1995.............. F-52 thru F-64
</TABLE>
F-ii
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Superior Financial Corp.
We have audited the accompanying consolidated balance sheet of Superior
Financial Corp. (the "Company") and its wholly owned subsidiary, Superior
Federal Bank, F.S.B. (the "Bank") as of December 31, 1998 and the related
statements of operations, stockholders' equity and cash flows for the year
then ended and the accompanying balance sheet of the Company as of December
31, 1997 and the related statements of operations, stockholders' equity and
cash flows for the period from November 12, 1997 (date of inception) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Superior
Financial Corp. at December 31, 1998 and 1997 and the consolidated results of
its operations and its cash flows for the year ended December 31, 1998 and for
the period from November 12, 1997 (date of inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
February 3, 1999
F-1
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents.......................... $ 81,425,010 $ 94,072
Loans receivable................................... 825,632,882
Less: allowance for loan losses.................... 10,471,770
--------------
Loans receivable, net.............................. 815,161,112
Investments available-for-sale, net................ 364,061,312
Accrued interest receivable........................ 7,525,559
Federal Home Loan Bank stock....................... 10,949,600
Premises and equipment, net........................ 26,213,466
Mortgage servicing rights, net..................... 2,198,260
Prepaid expenses and other assets.................. 4,198,856
Goodwill........................................... 64,129,701
Real estate acquired in settlement of loans, net... 331,496
Deferred acquisition costs and other assets........ 2,521,769 328,520
-------------- --------
Total assets................................... $1,378,716,141 $422,592
============== ========
Liabilities and stockholders' equity
Liabilities:
Deposits.......................................... $ 970,821,417 $
Federal Home Loan Bank borrowings................. 216,500,000
Note payable...................................... 20,000,000
Senior notes...................................... 60,000,000
Custodial escrow balances......................... 4,010,366
Other liabilities................................. 5,572,079 182,549
-------------- --------
Total liabilities.............................. 1,276,903,862
Commitments and contingencies
Stockholders' equity:
Preferred stock--$0.01 par value; 10 million
shares authorized, none issued and outstanding... -- --
Common stock--$0.01 par value; 20 million shares
authorized, 10,080,503 issued and outstanding.... 100,805 --
Capital in excess of par value.................... 94,748,872 260,000
Retained earnings (deficit)....................... 6,655,064 (19,957)
Accumulated other comprehensive income............ 307,538 --
-------------- --------
Total stockholders' equity..................... 101,812,279 240,043
-------------- --------
Total liabilities and stockholders' equity..... $1,378,716,141 $422,592
============== ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period from
November 12,
1997 (date of
Year ended inception) to
December 31 December 31
1998 1997
----------- -------------
<S> <C> <C>
Interest income:
Loans..................................... $42,807,953 $
Investments............................... 15,702,142
Interest-bearing deposits................. 4,210,897
Other..................................... 373,440
-----------
Total interest income....................... 63,094,432
Interest expense:
Deposits.................................. 28,229,805
Short-term borrowings..................... 1,886,745
Long-term borrowings...................... 8,615,682
-----------
Total interest expense...................... 38,732,232
-----------
Net interest income......................... 24,362,200
Provision for loan losses................... 1,021,000
-----------
Net interest income after provision for loan
losses..................................... 23,341,200
Noninterest income
Service charges on deposit accounts....... 15,792,664
Mortgage operations, net.................. 1,758,089
Income from real estate operations, net... 374,318
Other..................................... 1,270,121
-----------
Total noninterest income.. 19,195,192
Noninterest expense:
Salaries and employee benefits............ 13,689,847
Occupancy expense......................... 2,135,500
Deposit insurance premium................. 594,969
Data processing........................... 1,814,420
Advertising and promotion................. 1,411,189
Amortization of goodwill.................. 2,715,172
Postage and supplies...................... 2,199,977
Equipment expense......................... 1,052,741
Other..................................... 6,002,704 19,957
----------- --------
Total noninterest
expense.................................... 31,616,519 19,957
----------- --------
Income (loss) before income taxes........... 10,919,873 (19,957)
Income taxes................................ 4,244,852
----------- --------
Net income (loss)........................... $ 6,675,021 $(19,957)
=========== ========
Basic and diluted earnings
per common share........................... $ 0.88 --
</TABLE>
See accompanying notes.
F-3
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended December 31, 1998 and for the period from
November 12, 1997 (date of inception) to December 31, 1997
<TABLE>
<CAPTION>
Accumulated
Capital in Other Retained Total
Preferred Common Excess of Comprehensive Earnings Stockholders'
Stock Stock Par Value Income (Deficit) Equity
--------- -------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 12,
1997 (inception date).. $ -- $ -- $ -- $ -- $ -- $ --
Contribution from
investors.............. -- -- 260,000 -- -- 260,000
Net loss and
comprehensive loss..... -- -- -- -- (19,957) (19,957)
----- -------- ----------- -------- ---------- ------------
Balance, December 31,
1997................... -- -- 260,000 -- (19,957) 240,043
Original issuance of
common stock,
10,079,703 shares,
(less cost of issuance
of $3,429,417)......... -- 100,797 94,481,180 -- -- 94,581,977
Issuance of common stock
to employees, 800
shares................. -- 8 7,692 -- -- 7,700
Comprehensive income:
Net income............ -- -- -- -- 6,675,021 6,675,021
Other comprehensive
income, net of tax:
Net change in
unrealized gains on
investments available
for sale, net of
taxes of $165,598.... -- -- -- 307,538 -- 307,538
------------
Total comprehensive
income................. 6,982,559
----- -------- ----------- -------- ---------- ------------
Balance, December 31,
1998................... $ -- $100,805 $94,748,872 $307,538 $6,655,064 $101,812,279
===== ======== =========== ======== ========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
period from
November 12,
1997 (date of
Year ended inception) to
December 31 December 31
1998 1997
------------- -------------
<S> <C> <C>
Operating activities
Net income (loss)................................. $ 6,675,021 $ (19,957)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for loan losses........................ 1,021,000
Deferred income taxes............................ 375,413
Depreciation..................................... 1,027,264
Amortization of mortgage servicing rights........ 144,979
Amortization of premiums on mortgage-backed
securities, net................................. 1,458,467
Amortization of goodwill......................... 2,715,172
Amortization of debt issuance costs.............. 769,500
Gain on sale of real estate...................... (9,115)
Mortgage loans originated for sale............... (39,016,175)
Proceeds from sale of mortgage loans held for
sale............................................ 30,750,271
Gain on sale of loans............................ (162,312)
Gain on sale of investments...................... (12,089)
Increase in accrued interest receivable.......... (1,465,756)
Increase in prepaid expenses and other assets.... (4,657,658)
Increase in other liabilities.................... 2,210,547
------------- ---------
Net cash provided by (used in) operating
activities....................................... 1,824,529 (19,957)
Investing Activities
Increase in loans receivable, net................ (128,032,122)
Principal payments on mortgage-backed
securities...................................... 68,765,626
Proceeds from sale of nine branches.............. (79,044,057)
Proceeds from sale or maturity of available-for-
sale investments................................ 15,903,093
Purchases of available-for-sale investment
securities...................................... (103,086,125)
Purchase of FHLB stock........................... (2,675,700)
Proceeds from sale of FHLB stock................. 4,381,100
Proceeds from sale of real estate................ 371,194
Purchases of premises and equipment.............. (3,923,015)
Purchase of Superior Federal Bank, F.S.B., net of
cash acquired................................... 127,575,515
Deferred acquisition costs....................... -- (145,971)
------------- ---------
Net cash used in investing activities............. (99,764,491) (145,971)
Financing Activities
Net increase in deposits......................... 38,534,397
Proceeds from FHLB borrowings.................... 126,500,000
Proceeds from borrowings under bank debt......... 20,000,000
Proceeds from borrowings under senior notes...... 60,000,000
Proceeds from common stock issued, net........... 94,589,677
Reduction in FHLB borrowings..................... (162,198,000)
Contribution from investors...................... -- 260,000
Net increase in advance payments by borrowers for
taxes and insurance............................. 1,844,826
------------- ---------
Net cash provided by financing activities......... 179,270,900 260,000
------------- ---------
Net increase in cash.............................. 81,330,938 94,072
Cash and cash equivalents at beginning of period.. 94,072 --
------------- ---------
Cash and cash equivalents at end of period........ $ 81,425,010 $ 94,072
============= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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
Corporation 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 accounting and reporting policies of the Company and the Bank conform to
generally accepted accounting principles ("GAAP") and general practices within
the thrift and mortgage banking industries. The following summarizes the more
significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
the Bank, and the Bank's wholly owned subsidiary, SFS Corporation. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand and interest bearing deposits in other depository institutions.
Interest bearing deposits were $40,514,000 at December 31, 1998.
Liquidity Requirements
Regulations require the Bank to maintain an amount equal to 4% of deposits
(net of loans on deposits) and short-term borrowings in cash and U.S.
Government and other approved securities.
Investments
Investments that the Bank has the positive intent and ability to hold to
maturity are classified as held-to-maturity and recorded at cost, adjusted for
the amortization of premiums and the accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity.
F-6
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments that the Bank intends to hold for indefinite periods of time are
classified as available-for-sale and are recorded at fair value. Unrealized
holding gains and losses are excluded from operating results until realized
and reported net of tax as other comprehensive income in stockholders' equity.
Investments in the available-for-sale portfolio may be used as part of the
Bank's asset and liability management practices and may be sold in response to
changes in interest rate risk, prepayment risk or other economic factors.
The overall return or yield earned on mortgage-backed securities included in
investments depends on the amount of interest collected over the amortization
of any premium or discount. Premiums and discounts are recognized in income
using the level-yield method over the assets' remaining lives adjusted for
anticipated prepayments. Although the Bank receives the full amount of
principal if prepaid, the interest income that would have been collected
during the remaining period to maturity, net of any discount or premium
amortization, is lost. Accordingly, the actual yields and maturities of
mortgage-backed securities included in investments depend on when the
underlying mortgage principal and interest are repaid. Prepayments primarily
result when market interest rates fall below a mortgage's contractual interest
rate and it is to the borrower's advantage to prepay the existing loan and
obtain new, lower rate financing. In addition to changes in interest rates,
mortgage prepayments are affected by other factors such as loan types and
geographic location of the related properties.
If the fair value of an investment available-for-sale declines for reasons
other than temporary market conditions, the carrying value of such an
investment would be written down to current value by a charge to operations.
Gains and losses on the sale of investments available-for-sale are determined
using the specific-identification method.
The Bank did not hold any investments classified as held-to-maturity or as
trading securities at December 31, 1998 and 1997.
Loans Receivable
Loans generally are stated at their unpaid principal balances plus premium
from acquisition less allowance for loan losses and deferred fees. The premium
arising from fair value adjustments of loans in business combinations is being
accreted over the remaining contractual lives of the loans using the level-
yield method adjusted for actual experience.
The Bank defers loan fees received and certain incremental direct costs, and
recognizes them as adjustments to interest income over the estimated remaining
life of the related loans. When a loan is fully repaid or sold, the
unamortized portion of the deferred fee and cost is credited in income. Other
loan fees, such as prepayment penalties, late charges, and release fees are
recorded as income when collected.
Uncollectible interest on loans that are contractually past due 90 days or
greater and is not probable of collection is charged off and the loan is
placed on nonaccrual status. Income is subsequently recognized when cash
payments for interests are received. When collectibility is determined to be
probable, the loan is returned to accrual status.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely, and subsequent recoveries, if
any, are credited to the allowance.
F-7
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allowance is maintained at a level that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, historical loan loss experience and
current economic and business conditions that may affect the borrowers'
ability to pay or the value of the collateral securing the loans.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans is initially recorded at
estimated fair value, less estimated selling costs, and is subsequently
carried at the lower of depreciated cost or fair value, less estimated selling
costs. Valuations are periodically performed by management, and an allowance
for losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value. The ability of the Bank to recover
the carrying value of real estate is based upon future sales of the land and
the projects. The ability to effect such sales is subject to market conditions
and other factors, many of which are beyond the Bank's control.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using straight-line and accelerated methods over the
respective estimated useful lives of the assets of approximately 3 to 30
years. Depreciation expense is included in occupancy expense in the statement
of operations.
Goodwill
Goodwill (excess of purchase price of the Bank over the fair value of net
assets acquired) is being amortized on a straight-line basis over 20 years.
Debt Issuance Costs
Costs associated with the issuance of the $20 million Colonial Bank note
payable and the $60 million Senior Notes have been capitalized and are being
amortized over the life of the debt.
Loan Origination and Commitment Fees
The Bank defers loan fees received and certain incremental direct costs, and
recognizes them as adjustments to interest income over the estimated remaining
life of the related loans. When a loan is fully repaid or sold, the
unamortized portion of the deferred fee and cost is credited in income. Other
loan fees, such as prepayment penalties, late charges, and release fees are
recorded as income when collected.
F-8
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage Servicing Rights
Purchased mortgage servicing rights represent the cost of acquiring the
rights to service mortgage loans owned by others, and such cost is capitalized
and amortized in proportion to, and over the period of, estimated net
servicing income. The Bank's carrying values of purchased mortgage servicing
rights and the amortization thereon are periodically evaluated in relation to
estimated future net servicing income to be received, and such carrying values
are adjusted for indicated impairments based on management's best estimate of
remaining cash flows, using the disaggregated method. Such estimates may vary
from the actual remaining cash flows due to prepayments of the underlying
mortgage loans, increases in servicing costs, and changes in other factors.
The Bank's carrying values of purchased mortgage servicing rights do not
purport to represent the amount that would be realized by a sale of these
assets in the open market. Mortgage servicing rights earned by the Bank
through the origination and subsequent sale of mortgages while retaining the
right to service those mortgages are considered by management to be
insignificant.
Comprehensive Income
As of January 1, 1998, 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. The components of comprehensive income are disclosed in
the Consolidated Statement of Changes in Stockholders' Equity.
Segment Disclosures
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.
Effect of Pending Statements of Financial Accounting Standards
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 positions.
F-9
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Private Placement and Acquisition
On April 1, 1998, the Company completed a private placement offering
totaling $175 million, consisting of $95 million in common stock, $60 million
in 8.65% Senior Notes due 2003, and $20 million in LIBOR plus 1.75% bank debt
due 2000. The proceeds from the private placement offering were used to
acquire, in a purchase transaction, 100% of the common stock of the Bank. In
connection with the private placement offering, the Company entered into a
Registration Rights Agreement and completed a Shelf Registration Statement on
December 10, 1998 to register the common stock and senior notes with the
Securities and Exchange Commission.
On April 1, 1998, the Company acquired the Bank for a purchase price of
$162.5 million. The transaction was accounted for as a purchase and resulted
in the recording of goodwill in the amount of $76.4 million. The Bank's
results of operations since the purchase date are included in operations of
the Company.
The following table sets forth selected unaudited financial information for
the Company as if the above described transaction had been consummated as of
January 1, 1997 and January 1, 1998, with adjustments primarily for interest
charges attributable to the financing of the purchase and amortization of
goodwill. The pro forma data is based on pre-acquisition earnings and is
therefore not necessarily indicative of future performance.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(dollars in thousands)
<S> <C> <C>
Total revenue....................................... $ 108,547 $ 106,944
Income before income taxes.......................... 6,681 12,831
Net income.......................................... 2,898 7,777
Earnings per common share-diluted................... 0.29 0.77
</TABLE>
During the third quarter of 1998, the Company completed the sale of nine (9)
branch facilities located in Oklahoma and Arkansas. The sale of these branches
resulted in a gain of $4.5 million 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 9 branches sold were
approximately $84.5 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. In addition, after the completion of an appraisal in the third
quarter of 1998, the Company recorded an adjustment to the purchase price
allocation based on the fair value of the Bank's headquarters building in Ft.
Smith. This resulted in a $5.7 million increase to office premises and
equipment and an equal reduction to goodwill.
3. Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. The basis for market information and other valuation
methodologies are significantly affected by assumptions used including the
timing of future cash flows, discount rates, judgments regarding economic
conditions, risk characteristics and other factors. Because assumptions are
inherently subjective in nature, the estimated fair values of certain
financial instruments cannot be substantiated by comparison to independent
market quotes and, in many cases, the estimated fair values could not
necessarily be realized in an immediate sale or settlement of the instrument.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange, and the
use of different market assumptions and /or estimation methodologies may have
a material effect on the estimated fair value amounts. Potential tax
ramifications related to the realization of unrealized gains and losses that
would be incurred in an actual sale and/or settlement have not been taken into
consideration.
F-10
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of financial instruments at December 31, 1998,
consist of the following:
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value Value
----------- --------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents....................... $81,425,010 $81,425,010
Loans receivable, net........................... 815,161,112 820,691,833
Investments available-for-sale, net............. 364,061,312 364,061,312
Accrued interest receivable..................... 7,525,559 7,525,559
Federal Home Loan Bank stock.................... 10,949,600 10,949,600
Financial liabilities:
Demand deposits................................. 444,593,896 444,593,896
Time deposits................................... 526,227,521 527,730,970
Federal Home Loan Bank borrowings............... 216,500,000 216,500,000
Notes payable................................... 80,000,000 80,755,886
Off-balance sheet financial instruments......... 3,348,000 3,348,000
</TABLE>
The fair value of loans receivable is estimated based on present values
using applicable risk-adjusted spreads to the U.S. Treasury curve to
approximate current entry-level interest rates considering anticipated
prepayment speeds. The fair value of nonperforming loans with a recorded book
value net of allowance of approximately $3.2 million was not estimated, and
therefore is included in estimated fair value at carrying amount because it is
not practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loss.
The fair value of mortgage-backed securities, collateralized mortgage
obligations and trust preferred stock included in investments available-for-
sale is based on quoted market prices, dealer quotes and prices obtained from
independent pricing services. The fair value of accrued interest receivable
and Federal Home Loan Bank ("FHLB") stock is considered to be carrying value.
The fair value of cash and cash equivalents is considered the same as its
carrying value. The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit, Federal Home
Loan Bank borrowings and notes payable is estimated using the rates currently
offered for liabilities of similar remaining maturities.
The fair value of off-balance sheet financial instruments is estimated using
the fees currently charged to enter into similar agreements taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date. The unrealized gain or loss for off-balance sheet items is not
significant.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since the reporting date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
F-11
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Loans Receivable and Financial Instruments with Off-Balance Sheet Risk
Loans receivable consisted of approximately the following at December 31,
1998:
<TABLE>
<S> <C>
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences................ $484,324,000
Collateralized by other properties............................. 40,569,000
Construction loans............................................. 21,610,000
Other.......................................................... 2,753,000
------------
549,256,000
------------
Undisbursed portion of construction loans...................... (8,443,000)
------------
Total first mortgage loans..................................... 540,813,000
============
Consumer and other loans:
Automobile..................................................... 174,316,000
Savings........................................................ 6,624,000
Home equity and second mortgage................................ 29,494,000
Commercial, financial, and agricultural........................ 10,800,000
Other.......................................................... 63,365,000
------------
Total consumer and other loans................................. 284,599,000
------------
Deferred loan costs, net....................................... 220,882
Allowance for loan losses...................................... (10,471,770)
------------
Loans receivable, net.......................................... $815,161,112
============
</TABLE>
Loans to directors and executive officers totaled $1,988,330 at December 31,
1998. Such loans are made on substantially the same terms as those for other
loan customers.
The Bank, through its normal lending activity, originates and maintains
loans receivable which are substantially concentrated in its lending territory
(primarily Arkansas and Oklahoma). The Bank's policy calls for collateral or
other forms of repayment assurance to be received from the borrower at the
time of loan origination. Such collateral or other form of repayment assurance
is subject to changes in economic value due to various factors beyond the
control of the Bank and such changes could be significant.
The Bank originates and purchases adjustable rate mortgage loans to hold for
investment. The Bank also originates 15-year and 30-year fixed rate mortgage
loans and sells substantially all new originations of the 30-year loans to
outside investors with servicing released. Loans held for sale at December 31,
1998, are considered by management to be immaterial. Such loans bear interest
substantially equal to market rates.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheet. The Bank does not use financial instruments with off- balance sheet
risk as part of its own asset/liability management program or for trading
purposes.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
F-12
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
counterparty. Such collateral consists primarily of residential properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank had outstanding loan
commitments and lines of credit aggregating approximately $38,581,000 and
standby letters of credit of approximately $3,348,000 at December 31, 1998.
5. Mortgage Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of these loans at
December 31, 1998 are summarized as follows:
<TABLE>
<S> <C>
FHLMC........................................................... $ 59,069,544
GNMA............................................................ 109,088,314
Private investors............................................... 21,906,354
------------
$190,064,212
============
</TABLE>
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors, and
foreclosure processing. Loan servicing income is recorded on the accrual basis
and includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. In connection with these loans serviced
for others, the Bank held borrowers' escrow balances of approximately
$3,047,000 at December 31, 1998. Of the loans serviced by the Bank at December
31, 1998, approximately $3,675,000 were sold with recourse.
Errors and omissions and fidelity bond insurance coverage under the
Company's loan servicing bond was $2,000,000 at December 31, 1998.
Additionally, at December 31, 1998, the Company was covered by an excess
liability umbrella policy in the amount of $20 million.
6. Investments Available-for-Sale
The amortized cost and estimated fair value of investments available-for-
sale are summarized as follows at December 31, 1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
GNMA....................... $ 75,818,061 $ 103,255 $ (621,059) $ 75,300,257
FNMA....................... 165,168,316 1,161,525 (242,869) 166,086,972
FHLMC...................... 55,908,327 549,249 (486,105) 55,971,471
CMOs....................... 59,130,262 56,325 (47,185) 59,139,402
Trust Preferred Stock...... 7,563,210 -- -- 7,563,210
------------ ---------- ----------- ------------
$363,588,176 $1,870,354 $(1,397,218) $364,061,312
============ ========== =========== ============
</TABLE>
F-13
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and estimated fair value by contractual maturity of
investments available-for-sale at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less........................... $ -- $ --
Due from one year to five years................... 3,209,000 3,209,000
Due from five years to ten years.................. 55,485,000 55,930,000
Due after ten years............................... 304,894,000 304,922,000
------------ ------------
Totals.......................................... $363,588,000 $364,061,000
============ ============
</TABLE>
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
For purposes of the maturity table, investments which are not due at a
single maturity date have been allocated over maturity groupings based on
anticipated maturities. The investments may mature earlier than their weighted
average contractual maturities because of principal prepayments.
Mortgage-backed securities with carrying values of approximately
$182,456,000 at December 31, 1998 were subject to adjustable rates.
The carrying value of mortgage-backed securities pledged for letters of
credit, treasury, tax and loan accounts, and public fund deposits at December
31, 1998 was approximately $13,356,000.
7. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses follows:
<TABLE>
<S> <C>
Balance, January 1, 1998....................................... $ --
Allowance resulting from acquisition of Bank on April 1,
1998........................................................ 10,592,718
Provision for loan losses.................................... 1,021,000
Charge-offs, net of recoveries............................... (1,141,948)
-----------
Balance, December 31, 1998................................... $10,471,770
===========
</TABLE>
8. Premises and Equipment
Premises and equipment consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Land............................................................ $ 6,114,646
Buildings and improvements.................................... 15,217,095
Furniture and equipment....................................... 5,067,859
Construction in progress...................................... 841,130
-----------
27,240,730
Accumulated depreciation...................................... (1,027,264)
-----------
Premises and equipment, net................................... $26,213,466
===========
</TABLE>
F-14
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Debt Issuance Costs
At December 31, 1998, debt issuance costs, which are included in prepaid
expenses and other assets in the consolidated balance sheet, consisted of the
following:
<TABLE>
<CAPTION>
$20 Million $60 Million
Colonial Bank 8.65% Senior
Note Payable Notes
------------- ------------
<S> <C> <C>
Capitalized debt issuance costs...................... $ 404,742 $2,465,272
Amortization......................................... (404,742) (364,758)
--------- ----------
Net debt issuance costs.............................. $ -- $2,100,514
========= ==========
</TABLE>
10. Deposits
Deposits consisted of the following at December 31, 1998:
<TABLE>
<S> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $75,851,452...................................... $283,030,331
Money market.................................................. 60,391,549
Statement and passbook savings................................ 101,172,016
Certificates of deposit....................................... 526,227,521
------------
$970,821,417
============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $60,562,838 at December 31, 1998.
At December 31, 1998, the scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<S> <C>
1999......................................................... $433,928,544
2000......................................................... 54,242,175
2001......................................................... 22,376,735
2002......................................................... 9,111,111
2003......................................................... 5,200,087
Thereafter................................................... 1,368,869
------------
$526,227,521
============
</TABLE>
11. Federal Home Loan Bank ("FHLB") Borrowings
The Bank had borrowings from the FHLB as follows at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Interest Rate Borrowings
---------------- ------------
<S> <C> <C>
Maturing in year ending December 31:
1999........................................ 4.95% $ 12,000,000
2000........................................ 4.95 31,500,000
2001........................................ 4.94 18,000,000
2002........................................ -- --
Thereafter.................................. 5.17% 155,000,000
------------
$216,500,000
============
</TABLE>
F-15
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a member of the FHLB, the Bank is required to maintain an investment in
capital stock of the FHLB of Dallas in an amount equal to the greater of 1% of
its outstanding home loans or 1/20 of its outstanding advances from the FHLB
of Dallas. No ready market exists for such stock and it has no quoted market
value. Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage loans.
Additionally, at December 31, 1998, the Bank has unused commitments totaling
$50 million which expire on March 31, 1999. There is no commitment fee to
maintain this credit line.
12. Long Term Debt
At December 31, 1998, long term debt consisted of a $20 million note payable
to Colonial Bank ("Colonial Note") and $60 million of Senior Notes ("Senior
Notes"). These notes are obligations of the parent company, Superior Financial
Corp.
The $20 million Colonial Note bears interest at LIBOR plus 1.75% (6.81% at
December 31, 1998) and requires quarterly interest payments. In January 1999,
the interest rate was reduced to LIBOR plus 1.25%. The entire principal
balance is due April 1, 2000. The note is secured by shares of the Bank in
such an amount that the book value of pledged stock will be equal to at least
two times the outstanding balance of the loan. The note contains certain
covenants of which the most restrictive includes a minimum total capital,
minimum return on assets and a maximum nonperforming assets to total loans and
other real estate ratio. At December 31, 1998, the Company was not in
violation of these covenants.
The $60 million Senior Notes bear interest at 8.65% and require semiannual
interest payments that began October 1, 1998. The entire principal balance is
due April 1, 2003. The agreement requires the Company to maintain an interest
rate reserve account with cash or permitted investments sufficient to pay
interest due on the next two succeeding interest payment dates. At December
31, 1998, the interest rate reserve account held a mortgage-backed security
with a carrying value of approximately $5.2 million. This account is
classified in investments available-for-sale on the balance sheet. The loan
agreement contains certain covenants of which the most restrictive include
minimum total capital and minimum liquidity maintenance. Additionally, the
agreement restricts certain payments for dividends. At December 31, 1998, the
Company was not in violation of these covenants.
13. Regulatory Matters
The Company is a unitary thrift holding company and, as such, is subject to
regulation, examination and supervision by the Office of Thrift Supervision
("OTS").
The Bank is also subject to various regulatory requirements administered by
the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory--and possibly additional discretionary--actions by regulators that,
if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations) to
adjusted total assets (as defined), and of total capital (as defined) and Tier
1 to risk weighted assets (as defined). Management believes, as of December
31, 1998, that the Bank meets all capital adequacy requirements to which it is
subject.
F-16
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The most recent notification from the OTS categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total,
tangible, and core capital ratios as set forth in the table below. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Company's and Bank's actual capital amounts and ratios as of December
31, 1998 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
Required to be
Categorized as
Well Capitalized
Required for Under Prompt
Company Bank Capital/Adequacy Corrective
------------- -------------- Purposes Action Provisions
Actual Actual ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Tangible capital to
adjusted total
assets................ $37,389 2.85% $104,324 7.99% $ 19,589 1.5% N/A N/A
Core capital to
adjusted total
assets................ 37,389 2.85 104,324 7.99 39,178 4.0 $ 65,296 5.0%
Total capital to risk
weighted assets....... 47,861 5.50 114,770 16.70 54,975 8.0 68,719 10.0
Tier I capital to risk
weighted assets....... 37,389 4.30 104,324 15.18 N/A N/A 59,231 6.0
</TABLE>
14. Income Taxes
Included in other liabilities are deferred income taxes which reflect the
net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Prepaid assets................................................... $261,299
Goodwill amortization............................................ 517,698
Unrealized gain on investments available-for-sale................ 165,598
Premises and equipment........................................... 7,396
--------
Total deferred liabilities..................................... 951,991
Deferred tax assets:
Accrued bonuses.................................................. 9,190
Allowance for loan losses........................................ 390,941
Mortgage servicing rights........................................ 10,659
Other............................................................ 190
--------
Total deferred tax assets...................................... 410,980
--------
Net deferred tax liabilities....................................... $541,011
========
</TABLE>
F-17
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the provision for income taxes for the year ended
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Current:
Federal......................................................... $3,242,030
State........................................................... 627,409
----------
Total current................................................. 3,869,439
Deferred:
Federal 295,110
State........................................................... 80,303
----------
375,413
----------
$4,244,852
==========
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. Federal statutory tax rates to income tax expense for the
year ended December 31, 1998 is:
<TABLE>
<S> <C>
Tax at U.S. statutory rate............................................. 35.0%
State income tax expense, net of Federal income tax benefit............ 3.9
----
38.9%
====
</TABLE>
The Company files a consolidated federal income tax return with the Bank.
Income tax expense is allocated to the Bank and recorded in the Bank's
consolidated financial statements, generally on the basis of the tax which
would be payable if the Bank had filed a separate return.
15. Earnings Per Common Share
The Company computes earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128. Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted
average shares outstanding. No dilution for any potentially dilutive
securities is included. Diluted EPS includes the dilutive effect of stock
options. In computing dilution for stock options, the average share price is
used for the period presented.
Basic and diluted earnings per common share is computed as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended
December 31,
1998
------------
<S> <C>
Common shares--weighted averages (basic)........................ 7,594,520
Common share equivalents--weighted averages..................... --
Common shares weighted average (diluted)........................ 7,594,520
Net income...................................................... $6,675,021
Basic and diluted earnings per common share..................... $ 0.88
16. Mortgage Servicing Rights
Following is a summary of the changes in purchased mortgage servicing rights
follows:
Balance, January 1, 1998........................................ $ --
Acquired in Bank acquisition on April 1, 1998................. 2,343,239
Amortization.................................................. (144,979)
Balance, December 31, 1998.................................... $2,198,260
==========
</TABLE>
F-18
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under OTS regulations, the lower of the amortized carrying value, 90% of the
fair market value, or 90% of the original cost of purchased mortgage servicing
rights may be included in calculating capital standards. The amount to be
included as regulatory capital cannot exceed 50% of tangible capital.
17. Commitments and Contingencies
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. A schedule of future minimum rental payments under operating
leases, as of December 31, 1998 follows:
<TABLE>
<S> <C>
1999.............................................................. $ 527,102
2000.............................................................. 431,340
2001.............................................................. 415,480
2002.............................................................. 258,457
2003.............................................................. 197,237
Thereafter........................................................ 1,589,391
----------
$3,419,007
==========
</TABLE>
On April 1, 1998, the Company became the legal successor to NationsBank's
right and interest in the related proceedings brought under the action
Superior Federal Bank, F.S.B. vs. United States (No. 95-769C) (the "Goodwill
Litigation"). Within five (5) business days following the Company's receipt of
payment pursuant to irrevocable settlement or other resolution of the Goodwill
Litigation by final judgment subject to no further appeal, and, as further
consideration for the sale of the Bank to the Company, the Company shall pay
NationsBank fifty percent (50%) of the "net recovery" from the Goodwill
Litigation. "Net recovery" shall be the gross aggregate amount the Company
receives from such settlement or resolution, net of the total litigation
expenses incurred and paid by the Company after the Closing Date. "Total
litigation expense" shall include, without limitation, attorneys' fees, court
costs, expenses, fees of experts and consultants, filing fees and all other
costs reasonably incurred in prosecution of the Goodwill Litigation.
The Company and its legal counsel are unable to estimate the amount or
likelihood of any potential settlement, if any, that may result from the
Goodwill Litigation. Although the outcome of the Goodwill Litigation cannot be
determined, the Company's legal counsel and management are of the opinion that
such final outcome should not have a material effect on the Company's results
of operations or financial condition.
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.
F-19
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Supplemental Disclosure of Cash Flow Information and Noncash Activity
Cash Flow Information
The Company purchased all of the capital stock of Superior Federal Bank,
F.S.B. on April 1, 1998. In conjunction with the acquisition, liabilities were
assumed as follows:
<TABLE>
<S> <C>
Fair value of noncash assets acquired...................... $1,081,435,551
Cash acquired.............................................. 288,692,364
Cash paid for the capital stock............................ (162,500,000)
Transaction costs.......................................... (8,757,618)
Excess of investment over fair value of net assets
acquired.................................................. 76,426,482
--------------
Liabilities assumed........................................ $1,275,296,779
==============
Cash paid during the period for:
Interest................................................. $ 37,727,773
Taxes.................................................... $ 4,199,000
Costs paid from the proceeds of the issuance of common
stock and borrowings under the bank debt and senior notes:
Debt issuance costs...................................... $ 2,870,014
Stock issuance costs..................................... $ 3,429,417
Noncash Activity:
Additions to other real estate from settlement of loans.. $ 343,968
Repayment of funds advanced by the Placement Agent and
Lead Investor to pay transaction costs through issuance
of 200,000 shares of common stock....................... $ 1,000,000
Deferred acquisition costs incurred but not paid......... $ 182,549
</TABLE>
19. Employee Benefit Plan
In April 1998 the Company established a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Internal
Revenue Code (the "401(k) Plan"). The 401(k) Plan permits the employees of the
Company to defer a portion of their compensation in accordance with the
provisions of Section 401(k) of the Code. Matching contributions may be made
in amounts and at times determined by the Company. Certain other statutory
limitations with respect to the Company's contribution under the 401(k) Plan
also apply. Amounts contributed by the Company for a participant will vest
over four years and will be held in trust until distributed pursuant to the
terms of the 401(k) Plan.
Employees of the Company are eligible to participate in the 401(k) Plan when
they meet certain requirements concerning minimum age and period of credited
service. All contributions to the 401(k) Plan will be invested in accordance
with participant elections among certain investment options. Distributions
from participant accounts will not be permitted before age 59 1/2, except in
the event of death, permanent disability, certain financial hardships or
termination of employment. The Company made matching contributions to the
401(k) Plan during 1998 of $203,863.
20. Stock Option Plan
On June 17, 1998, the Company adopted the 1998 Long-Term Incentive Plan (the
"LTIP"). The LTIP is an omnibus plan administered by the Company's
Compensation Committee to provide equity-based incentive compensation for the
Company's key employees. It provides for issuance of incentive stock options,
qualified under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), and non-qualified stock options. The LTIP also provides for
issuance of stock appreciation rights, whether in tandem with options or
F-20
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
separately, and awards of restricted shares subject to time-based restrictions
and/or performance goals. The portion of the LTIP applicable to incentive
stock options is subject to shareholder approval by June 17, 1999.
The LTIP imposes a limit on the total number of shares that may be issued
during the ten-year term of the LTIP equal to 10% of the number of shares
outstanding as of December 31, 1998 (1,008,000 total shares limit). It imposes
a limit on the number of awards that may be granted to all employees in any
one calendar year equal to 1% of the number of shares outstanding on December
31, 1998 (100,800 annual shares limit). Finally, the LTIP limits the number of
restricted stock awards that may be granted each year, which are time-based
restricted only (i.e., without regard to any performance goals), to a number
of shares equal to .33% (one-third of one percent) of the number of shares
outstanding on December 31, 1998 (33,932 annual restricted shares limit). As
of December 31, 1998 there were no shares granted or exercisable under the
LTIP.
As of December 31, 1998, 487,500 options were granted to the Chairman and
Chief Executive Officer of the Company and 243,750 options were granted to the
President of the Company pursuant to their Founder's Agreements and Employment
Agreements, respectively. Those options were issued before the adoption of the
LTIP by the Company's Board and, therefore, are non-qualified stock options.
They have not been issued pursuant to the LTIP. The exercise price of these
options is $10.00 per share. These stock options are not exercisable unless
the following occurs:
<TABLE>
<CAPTION>
Number of
Shares
Exercisable
-----------
<S> <C>
Successful acquisition of the Bank and consummation of public
offering of equity securities................................. 292,500
Company's stock reaches price of $15 per share................. 146,250
Company's stock reaches price of $20 per share................. 146,250
Company's stock reaches price of $25 per shares................ 146,250
</TABLE>
These stock options have a term of 10 years. As of December 31, 1998,
292,500 stock options were exercisable.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123). Under the provisions of SFAS No. 123,
companies can elect to account for stock-based compensation plans using a fair
value based method or continue measuring compensation expense for those plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
requires that companies electing to continue using the intrinsic value method
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied. The Company elected to
account for its stock-based compensation plans using the intrinsic value
method. Accordingly, no compensation cost has been recognized for the stock
option plans. The pro forma effects on reported net income and earnings per
share for the year ended December 31, 1998 assuming the Company had elected to
account for its stock option grants in accordance with SFAS No. 123 would have
been net income of $6,441,509 or $0.85 basic and diluted earnings per share.
Such pro forma effects are not necessarily indicative of the effect on future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for the 731,250 options granted in 1998: dividend yield
of 0%; expected volatility of 0%; risk-free interest rate of 6.73% and
expected life of 10 years.
F-21
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. Parent Company Financial Information
Presented below are the condensed balance sheets, statements of operations
and cash flows for the parent company, Superior Financial Corp., as of
December 31, 1998 and 1997 and for the year ended December 31, 1998 and for
the period from November 12, 1997 (date of inception) to December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
--------- -------
(In Thousands)
<S> <C> <C>
Balance Sheets
Assets
Cash and cash equivalents.................................. $ 3,848 $ 94
Investment in subsidiary................................... 168,968 --
Investment securities...................................... 5,330 --
Other...................................................... 5,160 329
--------- -----
Total assets............................................. $ 183,306 $ 423
========= =====
Liabilities and Stockholders' Equity
Notes payable.............................................. $ 80,000 $ --
Accrued interest and other liabilities..................... 1,494 183
--------- -----
Total liabilities........................................ 81,494 183
Stockholders' equity......................................... 101,812 240
--------- -----
Total liabilities and stockholders' equity................... $ 183,306 $ 423
========= =====
<CAPTION>
1998 1997
--------- -------
(In thousands)
<S> <C> <C>
Statements of Operations
Income
Dividends from subsidiary.................................. $ 4,000 $ --
Expenses
Interest, net.............................................. 5,582 --
Other...................................................... 194 20
--------- -----
Total expenses........................................... 5,776 20
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiary........................ (1,776) (20)
Income tax benefit........................................... 2,291 --
Equity in undistributed earnings of subsidiary............... 6,160 --
--------- -----
Net income (loss)............................................ $ 6,675 $ (20)
========= =====
</TABLE>
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Audit Committee
of the Board of Directors
Superior Federal Bank, F.S.B.
We have audited the accompanying consolidated statement of operations of
Superior Federal Bank, F.S.B. and Subsidiary (the "Bank") and the related
consolidated statements of changes in stockholder's equity and cash flows for
the three months ended March 31, 1998. These consolidated financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and changes in stockholder's equity of Superior Federal Bank,
F.S.B. and Subsidiary and their cash flows for the three months ended March
31, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
July 22, 1998
F-23
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended March 31, 1998
<TABLE>
<S> <C>
Interest income:
Loans:
First mortgage loans............................................ $ 8,194,236
Consumer and other loans........................................ 5,534,227
Mortgage-backed securities....................................... 5,959,658
Interest-bearing deposits........................................ 831,649
Other............................................................ 221,463
-----------
Total interest income........................................... 20,741,233
Interest expense:
Deposits......................................................... 9,657,058
Short-term borrowings............................................ 230,363
Long-term borrowings............................................. 1,818,863
-----------
Total interest expense.......................................... 11,706,284
-----------
Net interest income............................................... 9,034,949
Provision for loan losses (Note 2)................................ 7,765,000
-----------
Net interest income after provision for loan losses............... 1,269,949
Other income:
Deposit account and other fees................................... 4,781,705
Loan servicing fees, net......................................... 443,145
Income from real estate operations, net.......................... 22,345
Other............................................................ 268,861
-----------
5,516,056
Other expense:
Salaries and employee benefits................................... 4,528,829
Net occupancy expense of premises................................ 817,487
Deposit insurance premium........................................ 151,683
Data processing.................................................. 784,126
Advertising and promotion........................................ 499,597
Amortization of core deposit premium............................. 217,519
Amortization of goodwill......................................... 938,551
Postage and supplies............................................. 683,608
Equipment expense................................................ 500,348
Other............................................................ 1,711,196
-----------
Total other expenses............................................ 10,832,944
-----------
Loss before income taxes benefit.................................. (4,046,939)
Income taxes benefit.............................................. 281,794
-----------
Net loss.......................................................... $(3,765,145)
===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Three months ended March 31, 1998
<TABLE>
<CAPTION>
Capital in Accumulated
Excess of Other Total
Common Par Comprehensive Retained Stockholders'
Stock Value Income (loss) Earnings Equity
------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... $1,000 $150,603,054 $1,887,334 $9,340,588 $161,831,976
Comprehensive income
(loss):
Net loss.............. (3,765,145) (3,765,145)
Other comprehensive
income (loss), net of
tax:.................
Net change in
unrealized gains on
securities available
for sale............. 931,022 931,022
------------
Total comprehensive
income (loss).......... (2,834,123)
------ ------------ ---------- ---------- ------------
Balance, March 31, 1998. $1,000 $150,603,054 $2,818,356 $5,575,443 $158,997,853
====== ============ ========== ========== ============
</TABLE>
See accompanying notes.
F-25
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, 1998
<TABLE>
<S> <C>
Operating activities
Net loss........................................................ $ (3,765,145)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for loan losses..................................... 7,765,000
Depreciation.................................................. 504,676
Amortization of loan servicing rights......................... 108,001
Amortization of core deposit premium.......................... 217,519
Amortization of premiums on mortgage-backed securities, net... 499,361
Amortization of goodwill...................................... 938,551
Loss on sales of real estate.................................. 14,433
Gain on sales of loans........................................ (34,176)
Mortgage loans originated for resale.......................... 6,956,469
Proceeds from sale of mortgage loans held for sale............ (5,456,725)
Decrease in accrued interest receivable....................... 178,881
Decrease in prepaid expenses and other assets................. 6,308,423
Increase in other liabilities................................. 221,375
------------
Net cash provided by operating activities................... 14,456,643
Investing activities
Decrease in loans receivable, net............................... $ (2,407,484)
Principal payments on mortgage-backed securities................ 18,605,494
Proceeds from sales of loans.................................... 5,490,901
Proceeds from sales of property and equipment................... 56,084
Proceeds from sales of real estate.............................. 76,115
Purchases of office property and equipment...................... (672,179)
------------
Net cash provided by investing activities................... 21,148,931
Financing activities
Net change in deposits.......................................... 34,332,698
Borrowings of Federal Home Loan Bank Advances................... 147,198,000
Net decrease in advance payments by borrowers for taxes and
insurance...................................................... (1,764,266)
------------
Net cash provided by financing activities................... 179,766,432
------------
Net increase in cash............................................ 215,372,006
Cash and cash equivalents at December 31, 1997.................. 73,320,358
------------
Cash and cash equivalents at March 31, 1998..................... $288,692,364
============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest...................... $ 11,648,661
============
Cash paid during the period for income taxes.................. 1,407,681
============
</TABLE>
See accompanying notes.
F-26
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH FLOWS
Three months ended March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Superior Federal Bank, F.S.B. (the "Bank") is a wholly owned subsidiary of
NationsBank, Inc. ("NationsBank"). The Bank is a federally chartered savings
association which provides a broad line of financial products to small to
medium sized businesses and consumers.
On December 3, 1997, NationsBank entered into an agreement with SFC
Acquisition Corporation ("SFC") whereby SFC acquired 100% of the issued and
outstanding shares of common stock of the Bank. The transaction closed on
April 1, 1998. The transaction was accounted for using the purchase method of
accounting for business combinations.
Basis of Presentation
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles ("GAAP") and general practices within the
thrift and mortgage banking industries. The following summarizes the more
significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bank and
its wholly owned subsidiary, SFS Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand and amounts due from depository institutions.
Interest Revenue Recognition
Loans generally are stated at their unpaid principal balances plus premium
from acquisition less allowance for loan losses and deferred fees. The premium
arising from fair value adjustments of loans in business combinations is being
accreted over the remaining contractual lives of the loans using the level-
yield method adjusted for actual experience.
The Bank defers loan fees received and certain incremental direct costs, and
recognizes them as adjustments to interest income over the estimated remaining
life of the related loans. When a loan is fully repaid or sold, the
unamortized portion of the deferred fee and cost is credited in income. Other
loan fees, such as prepayment penalties, late charges, and release fees are
recorded as income when collected.
F-27
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH FLOWS--(Continued)
Three months ended March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Uncollectible interest on loans that are contractually past due 90 days or
greater or not probable of collection is charged off. Income is subsequently
recognized when cash payments are received and collectibility is probable, in
which case the loan is returned to accrual status.
Provision for Losses
Provisions for losses on loans have been provided based on amounts
outstanding and historical experience. Provisions for losses include charges
to reduce the recorded balance of mortgage loans and real estate to their
estimated net realizable value or fair value less estimated selling costs, as
applicable. Such provisions are based on management's estimate of the net
realizable value or fair value of the collateral or real estate, as
applicable, considering current and currently anticipated future operating or
sales information which may be affected by changing economic and/or operating
conditions beyond the Bank's control, thereby causing these estimates to be
particularly susceptible to changes that could result in a material adjustment
to their carrying value in the future.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Goodwill
Goodwill is being amortized on a straight-line basis over 25 years.
Pension Plan
Pension expense is computed on the basis of accepted actuarial methods and
pension costs are funded as incurred.
Income Taxes
The Bank is a member of a consolidated group of corporations as defined by
the Internal Revenue Code and the Bank files its federal income tax return as
part of a consolidated tax return. For financial reporting purposes, however,
the Bank computes its tax on a separate company basis. Deferred tax assets and
liabilities are recognized for the estimated tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
Core Deposit Premium
The premium resulting from the valuation of core deposits acquired in the
purchase of the deposits of other financial institutions is amortized over a
period (generally ten years) not exceeding the estimated average remaining
life of the existing customer deposit base acquired. Such amortization is
provided at the same rate the related deposits are expected to be withdrawn.
The amortization period is periodically evaluated to determine if events and
circumstances require the period to be reduced.
2. ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for losses on loans:
<TABLE>
<S> <C>
Balance, January 1, 1998...................................... $ 4,659,949
Provision for losses........................................ 7,765,000
Charge-offs, net of recoveries.............................. (1,924,949)
-----------
Balance, March 31, 1998....................................... $10,500,000
===========
</TABLE>
F-28
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH FLOWS--(Continued)
Three months ended March 31, 1998
2. ALLOWANCE FOR LOAN LOSSES--(continued)
During the first quarter of 1998, the Bank made certain changes in
accounting estimates totaling approximately $7.7 million due to the rapid
deterioration of the performance of automobile loans. The changes included
increasing the provision for loan losses for the charge-off of problem
automobile loans and liquidation losses of repossessed automobiles of
approximately $1.9 million following a change in management's approach to
handling delinquencies. This change resulted in expedited repossession and
rapid wholesaling of collateral. Management also increased the provision for
loan losses by $4.5 million to reflect management's assessment of the
increasing risk of loan losses due to the greater losses experienced by the
Bank in the automobile portion of the loan portfolio during the first three
months of 1998.
3. INCOME TAXES
The income tax benefit for the period from January 1, 1998 to March 31,
1998, consists of the following:
<TABLE>
<S> <C>
Current:
Federal......................................................... $239,525
State........................................................... 42,269
--------
$281,794
========
</TABLE>
The Bank files a consolidated federal income tax return with NationsBank.
Income tax expense is allocated to the Bank and recorded in the Bank's
consolidated financial statements, generally on the basis of the tax which
would be payable if the Bank had filed a separate return.
4. COMMITMENTS
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. Rental expense amounted to approximately $139,574 for the
three month period ended March 31, 1998.
F-29
<PAGE>
Independent Auditors' Report
The Board of Directors of
Superior Federal Bank, F.S.B.:
We have audited the accompanying consolidated statement of financial
condition of Superior Federal Bank, F.S.B. (a wholly owned subsidiary of
NationsBank, Inc.) and subsidiary (the "Bank") as of December 31, 1997, and
the related consolidated statements of income, stockholder's equity and cash
flows for the period from January 7, 1997 to December 31, 1997. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Bank at
December 31, 1997, and the results of its operations and its cash flows for
the period from January 7, 1997 to December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
January 16, 1998
F-30
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents....................................... $ 73,320,358
Loans receivable, net........................................... 693,208,982
Mortgage-backed securities available-for-sale................... 369,555,494
Accrued interest receivable..................................... 6,257,386
Federal Home Loan Bank stock.................................... 12,655,000
Office properties and equipment, net............................ 17,981,830
Loan servicing rights........................................... 1,991,230
Core deposit premium, net....................................... 7,802,695
Prepaid expenses and other assets............................... 8,661,420
Goodwill........................................................ 64,056,164
Real estate acquired in settlement of loans, net................ 662,085
--------------
TOTAL........................................................... $1,256,152,644
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits....................................................... $ 982,442,127
Federal Home Loan Bank borrowings.............................. 105,000,000
Advance payments by borrowers for taxes and insurance.......... 3,929,806
Other liabilities.............................................. 2,948,735
--------------
Total liabilities............................................. 1,094,320,668
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock--$1 par value; 1,000 shares authorized, issued and
outstanding................................................... 1,000
Capital in excess of par value................................. 150,603,054
Retained earnings.............................................. 9,340,588
Net unrealized gains on securities available-for-sale, net of
taxes......................................................... 1,887,334
--------------
Total stockholder's equity.................................... 161,831,976
--------------
TOTAL........................................................... $1,256,152,644
==============
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF INCOME
for the period from January 7, 1997 to December 31, 1997
<TABLE>
<S> <C>
INTEREST INCOME:
Loans:
First mortgage loans............................................. $33,626,800
Consumer and other loans......................................... 21,242,845
Mortgage-backed securities........................................ 27,036,633
Interest-bearing deposits......................................... 1,029,018
Other............................................................. 728,293
-----------
Total interest income............................................ 83,663,589
INTEREST EXPENSE:
Deposits.......................................................... 38,433,919
Other............................................................. 6,924,999
-----------
Total interest expense........................................... 45,358,918
-----------
NET INTEREST INCOME................................................ 38,304,671
PROVISION FOR LOAN LOSSES.......................................... 2,154,998
-----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................ 36,149,673
OTHER INCOME:
Deposit account and other fees.................................... 20,241,242
Loan servicing fees, net.......................................... 1,796,431
Income from real estate operations, net........................... 261,760
Other............................................................. 980,265
-----------
Total other income............................................... 23,279,698
OTHER EXPENSES:
Salaries and employee benefits.................................... 16,340,929
Net occupancy expense of premises................................. 3,041,154
Deposit insurance premium......................................... 635,843
Data processing................................................... 2,867,346
Advertising and promotion......................................... 2,314,908
Amortization of core deposit premium.............................. 797,571
Amortization of goodwill.......................................... 2,556,359
Postage and supplies.............................................. 2,522,934
Equipment expense................................................. 1,906,656
Other............................................................. 6,332,547
-----------
Total other expenses............................................. 39,316,247
-----------
INCOME BEFORE INCOME TAX PROVISION................................. 20,113,124
INCOME TAX PROVISION............................................... 9,191,236
-----------
NET INCOME......................................................... $10,921,888
===========
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the period from January 7, 1997 to December 31, 1997
<TABLE>
<CAPTION>
Net Unrealized
Gains on
Capital in Securities Total
Common Excess of Retained Available Stockholder's
stock Par Value Earnings For Sale Equity
------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 7,
1997................... $1,000 $150,603,054 $150,604,054
Dividends............. $ (1,581,300) (1,581,300)
Net income............ 10,921,888 10,921,888
Net change in
unrealized gains in
securities
available for sale. $1,887,334 1,887,334
------ ------------ ------------ ---------- ------------
BALANCE, DECEMBER 31,
1997................... $1,000 $150,603,054 $ 9,340,588 $1,887,334 $161,831,976
====== ============ ============ ========== ============
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
for the period from January 7, 1997 to December 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income...................................................... $10,921,888
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses..................................... 2,154,998
Depreciation.................................................. 2,068,445
Amortization of loan servicing rights......................... 276,968
Amortization of core deposit premium.......................... 797,571
Amortization of premiums on mortgage-backed securities, net... 3,156,936
Amortization of goodwill...................................... 2,556,359
Loss on sales oF real estate.................................. 138,715
Gain on sales of Loans........................................ (66,946)
Proceeds from sales of loans held for sale.................... 11,610,425
Decrease in accrued interest receivable....................... 853,953
Increase in prepaid expenses and other assets................. (7,027,047)
Decrease in other liabilities................................. (3,727,554)
-----------
Net cash provided by operating activities................... 23,714,741
INVESTING ACTIVITIES:
Increase in loans receivable, net............................... (40,979,885)
Principal payments on mortgage-backed securities................ 68,138,748
Purchase of Federal Home Loan Bank stock........................ (726,000)
Proceeds from sales of real estate.............................. 1,056,787
Purchase of office property and equipment....................... (988,729)
-----------
Net cash provided by investing activities................... 26,500,921
FINANCING ACTIVITIES:
Net change in deposits.......................................... (7,760,799)
Payments of Federal Home Loan Bank advances..................... (18,000,000)
Payment of dividends............................................ (1,581,300)
Net increase in advance payments by borrowers for taxes and
insurance...................................................... 207,368
-----------
Net cash used by financing activities....................... (27,134,731)
-----------
NET INCREASE IN CASH.............................................. 23,080,931
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 50,239,427
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $73,320,358
===========
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................ $45,364,061
===========
Cash paid during the period for income taxes.................... $ 7,108,479
===========
SUPPLEMENT NONCASH ACTIVITIES:
Additions to other real estate from settlement of loans......... $ 1,214,263
===========
</TABLE>
See notes to consolidated financial statements.
F-34
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the period from January 7, 1997 to December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Superior Federal Bank, F.S.B. (the "Bank") is a
wholly-owned subsidiary of NationsBank, Inc. ("NationsBank"). The Bank is a
federally chartered savings association which provides a broad line of
financial products to small to medium sized businesses and consumers. On
January 7, 1997, NationsBank acquired the Bank through its acquisition of
Boatmen's Bankshares, Inc. (the former sole shareholder of the Bank's common
stock). This purchase was accounted for under the purchase (pushdown) method
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 allocated purchase price was recorded as goodwill of
approximately $66,600,000.
On December 3, 1997, NationsBank entered into an agreement with SFC
Acquisition Corporation ("SFC") whereby SFC will purchase 100% of the issued
and outstanding shares of common stock of the Bank. While the terms of the
agreement have been established, the agreement is subject to regulatory
approval. Pending such approval, the deal is expected to close in the second
quarter of 1998.
Basis of Presentation--The accounting and reporting policies of the Bank
conform to generally accepted accounting principles ("GAAP") and general
practices within the thrift and mortgage banking industries. The following
summarizes the more significant of these policies.
Use of Estimates--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiary, SFS Corporation. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand and amounts due from depository
institutions.
Liquidity Requirements--Regulations require the Bank to maintain an amount
equal to 5% of deposits (net of loans on deposits) and short-term borrowings
in cash and U. S. Government and other approved securities.
Mortgage-backed Securities--Mortgage-backed securities ("MBSs") that the
Bank has the positive intent and ability to hold to maturity are classified as
held-to-maturity and recorded at cost, adjusted for the amortization of
premiums and the accretion of discounts, which are recognized in interest
income using the interest method over the period to maturity.
MBSs that the Bank intends to hold for indefinite periods of time are
classified as available-for-sale and are recorded at fair value. Unrealized
holding gains and losses are excluded from earnings and reported net of tax as
a separate component of stockholder's equity until realized. MBSs in the
available-for-sale portfolio may be used as part of the Bank's asset and
liability management practices and may be sold in response to changes in
interest rate risk, prepayment risk or other economic factors.
The overall return or yield earned on MBSs depends on the amount of interest
collected over the life of the security and the amortization of any premium or
discount. Premiums and discounts are recognized in income using the level-
yield method over the assets' remaining lives adjusted for anticipated
prepayments. Although the
F-35
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
Bank receives the full amount of principal if prepaid, the interest income
that would have been collected during the remaining period to maturity, net of
any discount or premium amortization, is lost. Accordingly, the actual yields
and maturities of MBSs depend on when the underlying mortgage principal and
interest are repaid. Prepayments primarily result when market interest rates
fall below a mortgage's contractual interest rate and it is to the borrower's
advantage to prepay the existing loan and obtain new, lower rate financing. In
addition to changes in interest rates, mortgage prepayments are affected by
other factors such as loan types and geographic location of the related
properties.
If the fair value of a MBS for sale declines for reasons other than
temporary market conditions, the carrying value of such a MBS would be written
down to current value by a charge to operations. Gains and losses on the sale
of MBSs available-for-sale are determined using the specific-identification
method. The Bank did not hold any MBSs classified as held-to-maturity or as
trading securities during 1997.
Loans Receivable--Loans receivable are stated at unpaid principal balances
plus premium from acquisition less allowance for loan losses and deferred
fees. The premium arising from fair value adjustments of the loans in business
combinations is being accreted over the remaining contractual lives of the
loans using the level-yield method adjusted for actual experience. Loans held
for sale are carried at the lower of book value or fair value as determined by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources.
Uncollectible interest on loans that are contractually past due 90 days or
greater or not probable of collection is charged off. Income is subsequently
recognized when cash payments are received and collectibility is probable, in
which case the loan is returned to accrual status.
Provision for Losses--Provisions for losses on loans have been provided
based on amounts outstanding and historical experience. Provisions for losses
include charges to reduce the recorded balance of mortgage loans and real
estate to their estimated net realizable value or fair value less estimated
selling costs, as applicable. Such provisions are based on management's
estimate of the net realizable value or fair value of the collateral or real
estate, as applicable, considering current and currently anticipated future
operating or sales information which may be affected by changing economic
and/or operating conditions beyond the Bank's control, thereby causing these
estimates to be particularly susceptible to changes that could result in a
material adjustment to their carrying value in the future.
Real Estate Acquired in Settlement of Loans--Real estate acquired in
settlement of loans is initially recorded at estimated fair value, less
estimated selling costs, and is subsequently carried at the lower of
depreciated cost or fair value, less estimated selling costs. Valuations are
periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a property
exceeds its estimated fair value. The ability of the Bank to recover the
carrying value of real estate is based upon future sales of the land and the
projects. The ability to effect such sales is subject to market conditions and
other factors, many of which are beyond the Bank's control.
Office Properties and Equipment--Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the respective estimated useful
lives of the assets of approximately 3 to 30 years.
Accretion and Amortization of Valuation Accounts from Acquisition--Discounts
and premiums arising from fair value adjustments of assets and liabilities in
business combinations are being amortized over the remaining contractual lives
of the related assets or liabilities, using a method which approximates the
level-yield method adjusted for actual experience.
F-36
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
Goodwill--Goodwill is being amortized on a straight-line basis over 25
years.
Loan Origination and Commitment Fees--The Bank defers loan fees received and
certain incremental direct costs, and recognizes them as adjustments to
interest income over the estimated remaining life of the related loans. When a
loan is fully repaid or sold, the unamortized portion of the deferred fee and
cost is credited in income. Other loan fees, such as prepayment penalties,
late charges, and release fees are recorded as income when collected.
Pension Plan--Pension expense is computed on the basis of accepted actuarial
methods and pension costs are funded as incurred.
Income Taxes--The Bank is a member of a consolidated group of corporations
as defined by the Internal Revenue Code and the Bank files its federal income
tax return as part of a consolidated tax return. For financial reporting
purposes, however, the Bank computes its tax on a separate company basis.
Deferred tax assets and liabilities are recognized for the estimated tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Core Deposit Premium--The premium resulting from the valuation of core
deposits acquired in the purchase of the deposits of other financial
institutions is amortized over a period (generally ten years) not exceeding
the estimated average remaining life of the existing customer deposit base
acquired. Such amortization is provided at the same rate the related deposits
are expected to be withdrawn. The amortization period is periodically
evaluated to determine if events and circumstances require the period to be
reduced.
Loan Servicing Rights--Purchased loan servicing rights represent the cost of
acquiring the rights to service mortgage loans owned by others, and such cost
is capitalized and amortized in proportion to, and over the period of,
estimated net servicing income. The Bank's carrying values of purchased loan
servicing rights and the amortization thereon are periodically evaluated in
relation to estimated future net servicing income to be received, and such
carrying values are adjusted for indicated impairments based on management's
best estimate of remaining cash flows, using a pool-by-pool method. Such
estimates may vary from the actual remaining cash flows due to prepayments of
the underlying mortgage loans, increases in servicing costs, and changes in
other factors. The Bank's carrying values of purchased loan servicing rights
do not purport to represent the amount that would be realized by a sale of
these assets in the open market. Loan servicing rights earned by the Bank
through the origination and subsequent sale of mortgages while retaining the
right to service those mortgages are considered by management to be
insignificant.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. The basis for market information and
other valuation methodologies are significantly affected by assumptions used
including the timing of future cash flows, discount rates, judgments regarding
economic conditions, risk characteristics and other factors. Because
assumptions are inherently subjective in nature, the estimated fair values of
certain financial instruments cannot be substantiated by comparison to
independent market quotes and, in many cases, the estimated fair values could
not necessarily be realized in an immediate sale or settlement of the
instrument. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Bank could realize in a current market exchange,
and the use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts. Potential tax
ramifications related to the realization of unrealized gains and losses that
would be incurred in an actual sale and/or settlement have not been taken into
consideration.
F-37
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
The estimated fair values of financial instruments at December 31, 1997,
consist of the following:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Value Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................... $ 73,320,358 $ 73,320,358
Loans receivable, net............................... 693,208,982 697,912,280
Mortgage-backed securities.......................... 369,555,494 369,555,494
Accrued interest receivable......................... 6,257,386 6,257,386
Federal Home Loan Bank stock........................ 12,655,000 12,655,000
Financial liabilities:
Demand deposits..................................... 413,521,512 413,521,512
Time deposits....................................... 568,920,615 570,546,040
Federal Home Loan Bank borrowings................... 105,000,000 105,880,000
Off-balance sheet financial instruments.............. -- --
</TABLE>
The fair value of loans receivable is estimated based on present values
using applicable risk-adjusted spreads to the U. S. Treasury curve to
approximate current entry-level interest rates considering anticipated
prepayment speeds. The fair value of nonperforming loans with a recorded book
value net of allowance of approximately $4.7 million was not estimated, and
therefore is included in estimated fair value at carrying amount because it is
not practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loans. The fair value of mortgage-backed
securities is based on quoted market prices, dealer quotes and prices obtained
from independent pricing services. The fair value of accrued interest
receivable and Federal Home Loan Bank ("FHLB") stock is considered to be
carrying value. The fair value of cash and cash equivalents is considered the
same as its carrying value.
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit and Federal Home Loan Bank
borrowings is estimated using the rates currently offered for liabilities of
similar remaining maturities.
The fair value of off-balance sheet financial instruments is estimated using
the fees currently charged to enter into similar agreements taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date. The unrealized gain or loss for off-balance sheet items is not
significant.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since the reporting date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
F-38
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
3. LOANS RECEIVABLE AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loans receivable consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences.................. $409,009,512
Collateralized by other properties............................... 38,749,475
Construction loans............................................... 18,927,643
Other............................................................ 1,507,524
------------
468,194,154
Undisbursed portion of construction loans........................ (6,194,146)
------------
Total first mortgage loans...................................... 462,000,008
Consumer and other loans:
Automobile....................................................... 183,393,741
Savings.......................................................... 7,305,044
Home equity and second mortgage.................................. 10,967,267
Commercial....................................................... 4,403,379
Other............................................................ 29,675,377
------------
Total consumer and other loans.................................. 235,744,808
Deferred loan costs, net.......................................... 124,115
Allowance for loan losses......................................... (4,659,949)
------------
Loans receivable, net........................................... $693,208,982
============
</TABLE>
Loans to directors and executive officers totaled $281,929 at December 31,
1997. Such loans are made on substantially the same terms as those for other
loan customers.
The Bank, through its normal lending activity, originates and maintains
loans receivable which are substantially concentrated in its lending territory
(primarily Arkansas and Oklahoma). The Bank's policy calls for collateral or
other forms of repayment assurance to be received from the borrower at the
time of loan origination. Such collateral or other form of repayment assurance
is subject to changes in economic value due to various factors beyond the
control of the Bank and such changes could be significant.
The Bank originates and purchases adjustable rate mortgage loans to hold for
investment. The Bank also originates 15 year and 30 year fixed rate mortgage
loans and sells substantially all new originations of the 30 year loans to
outside investors with servicing retained. Loans held for sale at December 31,
1997, are considered by management to be immaterial. Such loans bear interest
substantially equal to market rates.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the statement of financial
condition. The Bank does not use financial instruments with off-balance sheet
risk as part of its own asset/liability management program or for trading
purposes.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
F-39
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
counterparty. Such collateral consists primarily of residential properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank had outstanding loan commitments and lines of credit aggregating
approximately $9,814,300 at December 31, 1997. At December 31, 1997, the Bank
had an outstanding letter of credit to secure the payment of principal and
interest on a $970,000 municipal bond issue to finance the construction of a
nursing home. The letter is collateralized by the Bank's mortgage-backed
securities with an carrying value of approximately $801,000 at December 31,
1997.
4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statement of financial condition. The unpaid principal balances of these loans
at December 31, 1997, are summarized as follows:
<TABLE>
<S> <C>
Mortgage loans underlying pass-through securities:
FHLMC......................................................... $ 71,297,152
Ginnie Mae.................................................... 150,605,837
Mortgage loan portfolios serviced for other investors......... 17,304,803
------------
Total........................................................ $239,207,792
============
</TABLE>
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
processing foreclosures. Loan servicing income is recorded on the accrual
basis and includes servicing fees from investors and certain charges collected
from borrowers, such as late payment fees. In connection with these loans
serviced for others, the Bank held borrowers' escrow balances of approximately
$3,500,000 at December 31, 1997. Of the loans serviced by the Bank at December
31, 1997, approximately $4,834,000 were sold with recourse.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable on loans and mortgage-backed securities
consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Loans receivable................................................ $4,095,312
Mortgage-backed securities...................................... 2,162,074
----------
Total.......................................................... $6,257,386
==========
</TABLE>
F-40
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of pass-through mortgage-backed
securities are summarized as follows at December 31, 1997:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Ginnie Mae................... $105,944,794 $2,120,140 $ (1,356) $108,063,578
Fannie Mae................... 174,888,901 1,658,955 (633,797) 175,914,059
FHLMC........................ 80,875,349 1,527,681 (599,841) 81,803,189
------------ ---------- ----------- ------------
Total....................... $361,709,044 $5,306,776 $(1,234,994) $365,780,826
============ ========== =========== ============
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Ginnie Mae................... $108,063,578 $1,267,022 $ 0 $109,330,600
Fannie Mae................... 175,914,059 1,511,514 (320,863) 177,104,710
FHLMC........................ 81,803,189 1,319,115 (2,120) 83,120,184
------------ ---------- ----------- ------------
Total....................... $365,780,826 $4,097,651 $ (322,983) $369,555,494
============ ========== =========== ============
</TABLE>
Mortgage-backed securities with carrying values of approximately
$239,443,000 at December 31, 1997, had adjustable rates.
The carrying value of mortgage-backed securities pledged was approximately
$775,000 for letters of credit, $6,699,000 for treasury, tax and loan
accounts, and $9,544,000 for public fund deposits at December 31, 1997.
7. ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for losses on loans:
<TABLE>
<S> <C>
BALANCE, JANUARY 7, 1997......................................... $5,058,282
Provision for losses............................................ 2,154,998
Charge-offs, net of recoveries.................................. (2,553,331)
----------
BALANCE, DECEMBER 31, 1997....................................... $4,659,949
==========
</TABLE>
8.OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following at December 31,
1997:
<TABLE>
<S> <C>
Land............................................................ $ 4,897,408
Buildings and improvements...................................... 11,301,694
Furniture and equipment......................................... 3,851,173
-----------
Total.......................................................... 20,050,275
Accumulated depreciation........................................ (2,068,445)
-----------
Office properties and equipment, net........................... $17,981,830
===========
</TABLE>
F-41
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
9.DEPOSITS
Deposits consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $70,473,551 in 1997.............................. $255,092,537
Money market.................................................. 56,981,819
Statement and passbook savings................................ 101,447,156
Certificates of deposit....................................... 568,920,615
------------
Total deposits............................................ $982,442,127
============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $22,873,000 at December 31, 1997.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998........................................................... $426,615,681
1999........................................................... 109,051,452
2000........................................................... 19,395,789
2001........................................................... 3,268,776
2002........................................................... 9,928,328
Thereafter..................................................... 660,589
------------
Total....................................................... $568,920,615
============
</TABLE>
Interest expense on deposits for the period ended December 31, 1997, is
summarized below:
<TABLE>
<S> <C>
Demand, NOW, money market and statement and passbook savings... $ 8,135,897
Certificates accounts.......................................... 30,543,295
Early withdrawal penalties..................................... (245,273)
-----------
Total interest expense on deposits......................... $38,433,919
===========
</TABLE>
At December 31, 1997, the Bank had pledged mortgage-backed securities with a
carrying value of approximately $9,544,000 as collateral for public fund
deposits.
10.FEDERAL HOME LOAN BANK BORROWINGS
The Bank had advances from the FHLB as follows at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Interest
Rate Advances
-------- ------------
<S> <C> <C>
Maturing during year ending December 31:
1998................................................. 5.19% $ 15,000,000
1999................................................. 6.28% 30,000,000
2000................................................. 6.33% 30,000,000
2001................................................. 6.39% 30,000,000
------------
Total............................................. $105,000,000
============
</TABLE>
F-42
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
As a member of the FHLB, the Bank is required to maintain an investment in
capital stock of the FHLB of Dallas in an amount equal to the greater of 1% of
its outstanding home loans or 1/20 of its outstanding advances from the FHLB
of Dallas. No ready market exists for such stock and it has no quoted market
value. Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage loans.
11.REGULATORY MATTERS
The Bank is subject to various regulatory requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations) to
adjusted total assets (as defined), and of total capital (as defined) to risk
weighted assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the Office of Thrift Supervision ("OTS")
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total, tangible, and core capital ratios as set forth in the
table below. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table
(amounts in thousands):
<TABLE>
<CAPTION>
Required To
Be
Categorized
As Well
Capitalized
Required For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Tangible capital to adjusted total
assets........................... $87,861 7.40% $17,805 1.50% N/A N/A
Core capital to adjusted total
assets........................... $87,861 7.40% $35,609 3.00% $59,349 5.00%
Total capital to risk weighted
assets........................... $92,424 15.69% $47,119 8.00% $58,899 10.00%
Tier I capital to risk weighted
assets........................... $87,861 14.92% N/A N/A $35,340 6.00%
</TABLE>
F-43
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
12.REAL ESTATE OPERATIONS
Income from real estate operations consisted of the following for the period
from January 7, 1997 to December 31, 1997:
<TABLE>
<S> <C>
Rental income, net................................................. $400,505
Recognized net loss on sales of real estate........................ (138,745)
--------
Income from real estate operations, net........................ $261,760
========
</TABLE>
13.RETIREMENT BENEFITS
NationsBank provides a noncontributory defined benefit pension plan which
covers substantially all employees of NationsBank and its subsidiaries.
Pension benefits are based upon the employee's length of service and
compensation during the final years of employment. During the period from
January 7, 1997 to December 31, 1997, the Bank recognized $114,480 of cost
under the NationsBank plan. NationsBank also provides postemployment life and
contributory medical benefits to retired employees of NationsBank and its
subsidiaries including the Bank. NationsBank includes Bank employees in its
recorded liability. Amounts paid to NationsBank and costs recognized by the
Bank related to these benefits during 1997 were not significant.
14.INCOME TAXES
The income tax provision for the period from January 7, 1997 to December 31,
1997, consists of the following:
<TABLE>
<S> <C>
Current:
Federal....................................................... $ 9,984,211
State......................................................... 995,148
-----------
Total current provision.................................... 10,979,359
Deferred tax benefit........................................... (1,788,123)
-----------
Income tax provision....................................... $ 9,191,236
===========
</TABLE>
A reconciliation of federal income tax expense on pre-tax income at the
statutory rate with income tax expense reported is as follows:
<TABLE>
<S> <C>
Tax at the statutory rate....................................... $7,039,593
State income taxes, net of federal benefit...................... 991,484
Non-deductible goodwill......................................... 1,173,876
Other, net...................................................... (13,717)
----------
Income tax provision........................................ $9,191,236
==========
</TABLE>
The Bank is permitted under the Internal Revenue Code to deduct an annual
addition to a reserve for bad debts in determining taxable income, subject to
certain limitations. This addition differs from the bad debt expense used for
financial reporting purposes.
F-44
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
As of December 31, 1997, the Bank's deferred tax asset account was comprised
of the following:
<TABLE>
<S> <C>
Deferred tax assets:
Intangible assets............................................... $4,258,626
Investment securities........................................... 1,047,905
Fixed assets.................................................... 342,595
Other, net...................................................... 7,157
----------
Total deferred tax assets.................................... 5,656,283
Deferred tax liabilities:
Mortgage-backed securities...................................... 1,887,334
Reserve for loan losses......................................... 1,589,812
Other, net...................................................... 373,660
----------
Total deferred tax liabilities............................... 3,850,806
----------
Net deferred tax asset....................................... $1,805,477
==========
</TABLE>
The Bank files a consolidated federal income tax return with NationsBank.
Income tax expense is allocated to the Bank and recorded in the Bank's
consolidated financial statements, generally on the basis of the tax which
would be payable if the Bank had filed a separate return.
15.COMMITMENTS
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. Rental expense amounted to approximately $546,442 for the
period from January 7, 1997 to December 31, 1997. A schedule of future minimum
rental payments under operating leases, as of December 31, 1997, follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................. $ 525,037
1999............................................................. 432,834
2000............................................................. 353,791
2001............................................................. 328,947
2002............................................................. 160,381
Thereafter....................................................... 567,503
----------
Total......................................................... $2,368,493
==========
</TABLE>
16.LOAN SERVICING RIGHTS
Following is a summary of the changes in purchased loan servicing rights:
<TABLE>
<S> <C>
BALANCE, JANUARY 7, 1997......................................... $2,268,198
Amortization.................................................... 276,968
----------
BALANCE, DECEMBER 31, 1997....................................... $1,991,230
==========
</TABLE>
F-45
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
Under OTS regulations, the lower of the amortized carrying value, 90% of the
fair market value or 90% of the original cost of purchased mortgage servicing
rights may be included in calculating capital standards. The amount to be
included as regulatory capital cannot exceed 50% of tangible capital.
17.CONTINGENCIES
In the normal course of the banking business, there are various commitments,
legal proceedings and contingencies which are not reflected in the
accompanying consolidated financial statements. In the opinion of management,
no material losses are expected to result from any such commitments, legal
proceedings or contingencies.
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally prescribed oversight of
the savings and loan industry. Based on these examinations, the regulators can
direct that the Bank's financial statements be adjusted in accordance with
their findings. A future examination by the OTS or the FDIC could include a
review of certain transactions or other amounts reported in the Bank's 1997
financial statements. In view of the uncertain regulatory environment in which
the Bank operates, the extent, if any, to which a forthcoming regulatory
examination may ultimately result in adjustments to the 1997 consolidated
financial statements cannot presently be determined.
The Bank's asset base is exposed to risk including the risk resulting from
changes in interest rates, market values of collateral for borrowings and
changes in the timing of cash flows. The Bank analyzes the effect of such
risks by considering the mismatch of the maturities of its assets and
liabilities in the current interest rate environment and the sensitivity of
assets and liabilities to changes in interest rates. Based on such analyses at
December 31, 1997, the Bank's management has considered the effect of
significant increases and decreases in interest rates and believes such
changes, if they occurred, would be manageable and would not affect the
ability of the Bank to hold its assets to maturity. However, the Bank is
exposed to significant market risk in the event of significant and prolonged
interest rate increases because certain fixed rate assets and certain variable
rate assets that are capped are funded with short-term liabilities.
* * * * * *
F-46
<PAGE>
Independent Auditors' Report
The Board of Directors of
Superior Federal Bank, F.S.B.:
We have audited the accompanying consolidated statement of financial
condition of Superior Federal Bank, F.S.B. (a wholly owned subsidiary of
Boatmen's Bancshares, Inc.) and subsidiary (the "Bank") as of December 31,
1996, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the two years in the period ended December 31,
1996. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Bank at
December 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
January 13, 1997
F-47
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1996
<TABLE>
<CAPTION>
1996
--------------
<S> <C>
ASSETS
Cash and cash equivalents.................................... $ 50,239,427
Loans receivable, net (Notes 3, 7, 10 and 18)................ 669,802,624
Mortgage-backed securities available for sale (Notes 3, 6
and 9)..................................................... 437,076,510
Accrued interest receivable (Note 5)......................... 7,111,339
Federal Home Loan Bank stock (Note 10)....................... 11,929,000
Office properties and equipment, net (Notes 8 and 18)........ 19,061,546
Purchased loan servicing rights (Note 16).................... 2,268,197
Core deposit premium, net.................................... 4,564,110
Prepaid expenses and other assets (Note 14).................. 3,539,067
Real estate acquired in settlement of loans, net............. 643,354
--------------
TOTAL........................................................ $1,206,235,174
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits (Notes 9 and 18)................................... $ 990,202,926
Federal Home Loan Bank borrowings (Note 10)................ 123,000,000
Advance payments by borrowers for taxes and insurance...... 3,722,438
Other liabilities (Note 13)................................. 4,788,955
--------------
Total liabilities.......................................... 1,121,714,319
COMMITMENTS AND CONTINGENCIES (Notes 3, 15 and 17)
STOCKHOLDER'S EQUITY (Note 11):
Common stock--$1 par value; 1,000 shares authorized, issued
and outstanding............................................ 1,000
Capital in excess of par value.............................. 65,499,000
Retained earnings........................................... 19,481,705
Net unrealized depreciation on securities available for
sale, net of taxes of $297,501............................. (460,850)
--------------
Total stockholder's equity.................................. 84,520,855
--------------
TOTAL........................................................ $1,206,235,174
==============
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans:
First mortgage loans.................................. $33,163,113 $32,174,581
Consumer and other loans.............................. 18,633,674 12,941,766
Mortgage-backed securities............................. 31,222,981 36,448,476
Interest-bearing deposits.............................. 1,709,997 1,126,836
Other.................................................. 679,003 746,956
----------- -----------
Total interest income................................ 85,408,768 83,438,615
INTEREST EXPENSE:
Deposits (Note 9)...................................... 41,668,588 42,578,339
Other.................................................. 7,063,851 6,747,362
----------- -----------
Total interest expense............................... 48,732,439 49,325,701
----------- -----------
NET INTEREST INCOME..................................... 36,676,329 34,112,914
PROVISION FOR LOAN LOSSES (Note 7)...................... 1,125,000 1,050,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..... 35,551,329 33,062,914
OTHER INCOME:
Loan servicing fees, net (Notes 4 and 16).............. 1,330,380 1,241,647
Deposit accounts and other fees........................ 18,682,978 17,235,829
Income from real estate operations, net (Note 12)...... 650,156 933,049
Other.................................................. 2,706,256 1,161,052
----------- -----------
Total other income................................... 23,369,770 20,571,577
OTHER EXPENSES:
Salaries and employee benefits (Note 13)............... 16,352,091 14,721,125
Net occupancy expense of premises (Note 15)............ 2,889,919 2,821,510
Deposit insurance premium (Note 9)..................... 8,910,747 2,420,738
Data processing........................................ 3,113,584 2,462,056
Advertising and promotion.............................. 2,388,023 2,290,647
Amortization of core deposit premium................... 1,530,376 1,713,200
Postage and supplies................................... 2,700,683 2,384,162
Equipment expense...................................... 2,254,945 2,071,203
Other.................................................. 6,221,271 5,642,409
----------- -----------
Total other expenses................................. 46,361,639 36,527,050
----------- -----------
INCOME BEFORE INCOME TAX PROVISION...................... 12,559,460 17,107,441
INCOME TAX PROVISION (Note 14).......................... 4,925,537 6,710,394
----------- -----------
NET INCOME.............................................. $ 7,633,923 $10,397,047
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on
Capital in Securities Total
Common Excess of Retained Available Stockholder's
Stock Par Value Earnings For Sale Equity
------ ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1995................... $1,000 $65,499,000 $11,427,685 $76,927,685
Dividends............. (2,467,600) (2,467,600)
Net income............ 10,397,047 10,397,047
Effect of adoption of
A Guide to
Implementation of
Statement 115 on
Accounting for
Certain Debt and
Equity Securities
(Note 6)............. $(578,073) (578,073)
------ ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1995................... 1,000 65,499,000 19,357,132 (578,073) 84,279,059
------ ----------- ----------- --------- -----------
Dividends............. (7,509,350) (7,509,350)
Net income............ 7,633,923 7,633,923
Net change in
unrealized
depreciation on
securities available
for sale............. 117,223 117,223
------ ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1996................... $1,000 $65,499,000 $19,481,705 $(460,850) $84,520,855
====== =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................ $ 7,633,923 $ 10,397,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses....................... 1,125,000 1,050,000
Depreciation.................................... 2,319,756 2,079,620
Accretion of valuation accounts from
acquisition.................................... 562,260 600,933
Amortization of purchased loan servicing rights. 789,958 1,008,429
Amortization of core deposit premium............ 1,530,376 1,713,200
Amortization of premiums on mortgage-backed
securities, net................................ 1,923,480 2,104,156
Gains on sales of real estate................... (26,227) (296,723)
Gain on sale of branch operations............... (1,284,259)
Proceeds from sales of loans held for sale...... 24,216,422 19,129,332
Decrease (increase) in accrued interest
receivable..................................... 612,269 (711,326)
Decrease in prepaid expenses and other assets... (861,859) 155,381
Decrease (increase) in other liabilities........ (750,163) 468,941
----------- ------------
Net cash provided by operating activities..... 37,790,936 37,698,990
INVESTING ACTIVITIES:
Increase in loans receivable, net................. (68,514,103) (131,942,911)
Principal payments on mortgage-backed securities.. 84,651,744 82,039,226
Purchase of Federal Home Loan Bank stock.......... (678,800) (851,600)
Proceeds from sales of real estate................ 346,573 1,203,365
Purchase of property and equipment................ (3,300,307) (3,262,880)
----------- ------------
Net cash provided (used) in investing
activities................................... 12,505,107 (52,814,800)
FINANCING ACTIVITIES:
Net change in deposits, net of the effect of the
sale of branch operations........................ (83,165,279) 23,695,823
Proceeds of Federal Home Loan Bank advances....... 8,000,000 90,000,000
Repayments of securities sold under agreements to
repurchase....................................... (80,000,000)
Payments of dividends............................. (7,509,350) (2,167,600)
Net (decrease) increase in advance payments by
borrowers for taxes and insurance................ (1,452,502) 1,229,595
----------- ------------
Net cash provided (used) by financing
activities................................... (84,127,131) 32,457,818
NET INCREASE (DECREASE) IN CASH..................... (33,831,088) 17,342,008
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 84,070,515 66,728,507
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $50,239,427 $ 84,070,515
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $48,761,199 $ 49,235,429
=========== ============
Cash paid during the period for income taxes...... $ 5,384,437 $ 8,157,440
=========== ============
SUPPLEMENTAL NONCASH ACTIVITIES:
Additions to other real estate from settlement of
loans............................................ $ 625,615 $ 539,237
=========== ============
Transfer of securities to available for sale
portfolio........................................ $523,458,838
============
Transfer of assets in settlement of sale of branch
operations....................................... $ 9,929,516
===========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Superior Federal Bank, F.S.B. (the "Bank") is a
wholly-owned subsidiary of Boatmen's Bancshares, Inc. ("Boatmen's"). The Bank
is a federally chartered savings association which provides a broad line of
financial products to small to medium sized businesses and consumers. On
January 7, 1997, NationsBank Corporation ("NationsBank") completed acquisition
of Boatmen's. NationsBank has not informed Bank management of planned changes,
if any, in the operations of the Bank.
Basis of Presentation--The accounting and reporting policies of the Bank
conform to generally accepted accounting principles and general practices
within the thrift and mortgage banking industries. The following summarizes
the more significant of these policies.
Use of Estimates--The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiary, SFS Corporation. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand and amounts due from depository
institutions.
Liquidity Requirements--Regulations require the Bank to maintain an amount
equal to 5% of deposits (net of loans on deposits) and short-term borrowings
in cash and U. S. Government and other approved securities.
Mortgage-backed Securities--Mortgage-backed securities ("MBSs") that the
Bank has the positive intent and ability to hold to maturity are classified as
held-to-maturity and recorded at cost, adjusted for the amortization of
premiums and the accretion of discounts, which are recognized in interest
income using the interest method over the period to maturity.
MBSs that the Bank intends to hold for indefinite periods of time are
classified as available-for-sale and are recorded at fair value. Unrealized
holding gains and losses are excluded from earnings and reported net of tax as
a separate component of stockholder's equity until realized. MBSs in the
available-for-sale portfolio may be used as part of the Bank's asset and
liability management practices and may be sold in response to changes in
interest rate risk, prepayment risk or other economic factors.
The overall return or yield earned on MBSs depends on the amount of interest
collected over the life of the security and the amortization of any premium or
discount. Premiums and discounts are recognized in income using the level-
yield method over the assets' remaining lives adjusted for anticipated
prepayments. Although the Bank receives the full amount of principal if
prepaid, the interest income that would have been collected during the
remaining period to maturity, net of any discount or premium amortization, is
lost. Accordingly, the actual yields and maturities of MBSs depend on when the
underlying mortgage principal and interest are repaid. Prepayments primarily
result when market interest rates fall below a mortgage's contractual interest
rate and it is to the borrower's advantage to prepay the existing loan and
obtain new, lower rate financing. In addition to changes in interest rates,
mortgage prepayments are affected by other factors such as loan types and
geographic location of the related properties.
F-52
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
If the fair value of a MBS for sale declines for reasons other than
temporary market conditions, the carrying value of such a MBS would be written
down to current value by a charge to operations. Gains and losses on the sale
of MBSs available-for-sale are determined using the specific-identification
method. The Bank did not hold any MBSs classified as trading securities during
1996 or 1995.
Loans Receivable--Loans receivable are stated at unpaid principal balances
plus premium from acquisition less allowance for loan losses and deferred
fees. The premium arising from fair value adjustments of the loans in business
combinations is being accreted over the remaining contractual lives of the
loans using the level-yield method adjusted for actual experience. Loans held
for sale are carried at the lower of book value or fair value as determined by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources.
Uncollectible interest on loans that are contractually past due 90 days or
greater or not probable of collection is charged off. Income is subsequently
recognized when cash payments are received and collectibility is probable, in
which case the loan is returned to accrual status.
Provision for Losses--Provisions for losses on loans have been provided
based on amounts outstanding and historical experience. Provisions for losses
include charges to reduce the recorded balance of mortgage loans and real
estate to their estimated net realizable value or fair value less estimated
selling costs, as applicable. Such provisions are based on management's
estimate of the net realizable value or fair value of the collateral or real
estate, as applicable, considering current and currently anticipated future
operating or sales information which may be affected by changing economic
and/or operating conditions beyond the Bank's control, thereby causing these
estimates to be particularly susceptible to changes that could result in a
material adjustment to their carrying value in the future.
Real Estate Acquired in Settlement of Loans--Real estate acquired in
settlement of loans is initially recorded at the lower of cost or estimated
fair value, less estimated selling costs, and is subsequently carried at the
lower of depreciated cost or fair value, less estimated selling costs.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value. The ability of the Bank to recover
the carrying value of real estate is based upon future sales of the land and
the projects. The ability to effect such sales is subject to market conditions
and other factors, many of which are beyond the Bank's control.
Office Properties and Equipment--Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the respective estimated useful
lives of the assets of approximately 3 to 30 years.
Accretion and Amortization of Valuation Accounts from Acquisition--Discounts
and premiums arising from fair value adjustments of assets and liabilities in
business combinations are being amortized over the remaining contractual lives
of the related assets or liabilities, using a method which approximates the
level-yield method adjusted for actual experience.
Loan Origination and Commitment Fees--The Bank defers loan fees received and
certain incremental direct costs, and recognizes them as adjustments to
interest income over the estimated remaining life of the related loans. When a
loan is fully repaid or sold, the unamortized portion of the deferred fee and
cost is credited in income. Other loan fees, such as prepayment penalties,
late charges, and release fees are recorded as income when collected.
F-53
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
Pension Plan--Pension expense is computed on the basis of accepted actuarial
methods and pension costs are funded as incurred.
Income Taxes--The Bank is a member of a consolidated group of corporations
as defined by the Internal Revenue Code and the Bank files its federal income
tax return as part of a consolidated tax return. For financial reporting
purposes, however, the Bank computes its tax on a separate company basis.
Deferred tax assets and liabilities are recognized for the estimated tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Core Deposit Premium--The premium resulting from the valuation of core
deposits acquired in the purchase of the deposits of other financial
institutions is amortized over a period (generally seven years) not exceeding
the estimated average remaining life of the existing customer deposit base
acquired. Such amortization is provided at the same rate the related deposits
are expected to be withdrawn. The amortization period is periodically
evaluated to determine if events and circumstances require the period to be
reduced.
Purchased Loan Servicing Rights--Purchased loan servicing rights represent
the cost of acquiring the rights to service mortgage loans owned by others,
and such cost is capitalized and amortized in proportion to, and over the
period of, estimated net servicing income. The Bank's carrying values of
purchased loan servicing rights and the amortization thereon are periodically
evaluated in relation to estimated future net servicing income to be received,
and such carrying values are adjusted for indicated impairments based on
management's best estimate of remaining cash flows, using a pool-by-pool
method. Such estimates may vary from the actual remaining cash flows due to
prepayments of the underlying mortgage loans, increases in servicing costs,
and changes in other factors. The Bank's carrying values of purchased loan
servicing rights do not purport to represent the amount that would be realized
by a sale of these assets in the open market.
Reclassification--Certain 1995 amounts have been reclassified to conform to
the 1996 presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. The basis for market information and
other valuation methodologies are significantly affected by assumptions used
including the timing of future cash flows, discount rates, judgments regarding
economic conditions, risk characteristics and other factors. Because
assumptions are inherently subjective in nature, the estimated fair values of
certain financial instruments cannot be substantiated by comparison to
independent market quotes and, in many cases, the estimated fair values could
not necessarily be realized in an immediate sale or settlement of the
instrument. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Bank could realize in a current market exchange,
and the use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts. Potential tax
ramifications related to the realization of unrealized gains and losses that
would be incurred in an actual sale and/or settlement have not been taken into
consideration.
F-54
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
The estimated fair values of financial instruments at December 31, 1996,
consist of the following:
<TABLE>
<CAPTION>
1996
-------------------------
Carrying Estimated
Value Fair Value
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents....................... $ 50,239,427 $ 50,239,427
Loans receivable................................ 669,802,624 650,471,000
Mortgage-backed securities...................... 437,076,510 437,076,510
Accrued interest receivable..................... 7,111,339 7,111,339
Federal Home Loan Bank stock.................... 11,929,000 11,929,000
Financial liabilities:
Demand deposits................................. 396,160,737 396,160,737
Time deposits................................... 594,042,189 591,862,000
Federal Home Loan Bank borrowings............... 123,000,000 122,934,000
Off-balance sheet financial instruments.......... -- --
</TABLE>
The fair value of loans receivable is estimated based on present values
using applicable risk-adjusted spreads to the U. S. Treasury curve to
approximate current entry-level interest rates considering anticipated
prepayment speeds. The fair value of nonperforming loans with a recorded book
value net of allowance of approximately $5.0 million was not estimated, and
therefore is included in estimated fair value at carrying amount because it is
not practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loans. The fair value of mortgage-backed
securities is based on quoted market prices, dealer quotes and prices obtained
from independent pricing services. The fair value of accrued interest
receivable and Federal Home Loan Bank stock is considered to be carrying
value.
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit and Federal Home Loan Bank
borrowings is estimated using the rates currently offered for liabilities of
similar remaining maturities.
The fair value of off-balance sheet financial instruments is estimated using
the fees currently charged to enter into similar agreements taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date. The unrealized gain or loss for off-balance sheet items is not
significant.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since the reporting date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
F-55
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
3. LOANS RECEIVABLE AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loans receivable consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences.............. $410,653,231
Collateralized by other properties........................... 25,696,981
Construction loans........................................... 21,735,107
Other........................................................ 1,248,474
------------
459,333,793
Undisbursed portion of construction loans.................... (8,430,519)
------------
Total first mortgage loans.................................. 450,903,274
Consumer and other loans:
Automobile................................................... 167,097,018
Savings...................................................... 8,601,720
Home equity and second mortgage.............................. 10,967,267
Commercial................................................... 2,703,746
Other........................................................ 28,572,622
------------
Total consumer and other loans.............................. 217,942,373
Acquisition premium........................................... 7,004,946
Deferred loan fees, net....................................... (989,687)
Allowance for loan losses..................................... (5,058,282)
------------
Loans receivable, net....................................... $669,802,624
============
</TABLE>
Loans to directors and executive officers totaled $216,665 at December 31,
1996. Such loans are made on substantially the same terms as those for other
loan customers.
The Bank, through its normal lending activity, originates and maintains
loans receivable which are substantially concentrated in its lending territory
(primarily Arkansas and Oklahoma). The Bank's policy calls for collateral or
other forms of repayment assurance to be received from the borrower at the
time of loan origination. Such collateral or other form of repayment assurance
is subject to changes in economic value due to various factors beyond the
control of the Bank and such changes could be significant.
The Bank originates and purchases adjustable rate mortgage loans to hold for
investment. The Bank also originates 15 year and 30 year fixed rate mortgage
loans and sells substantially all new originations of the 30 year loans to
outside investors with servicing retained. Loans held for sale at December 31,
1996, are considered by management to be immaterial. Such loans bear interest
substantially equal to market rates.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the statement of financial
condition. The Bank does not use financial instruments with off-balance sheet
risk as part of its own asset/liability management program or for trading
purposes.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual
F-56
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. The amount of collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
counterparty. Such collateral consists primarily of residential properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank had outstanding loan commitments and lines of credit aggregating
approximately $9,867,000 at December 31, 1996. At December 31, 1996, the Bank
had an outstanding letter of credit to secure the payment of principal and
interest on a $1,005,000 municipal bond issue to finance the construction of a
nursing home. The letter is collateralized by the Bank's mortgage-backed
securities with an amortized cost of approximately $829,000 and a market value
of approximately $886,000 at December 31, 1996.
4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these
loans at December 31, 1996, are summarized as follows:
<TABLE>
<S> <C>
Mortgage loans underlying pass-through securities:
FHLMC.......................................................... $ 78,838,130
GNMA........................................................... 172,587,628
Mortgage loan portfolios serviced for other investors.......... 20,469,512
------------
Total........................................................ $271,895,270
============
</TABLE>
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
processing foreclosures. Loan servicing income is recorded on the accrual
basis and includes servicing fees from investors and certain charges collected
from borrowers, such as late payment fees. In connection with these loans
serviced for others, the Bank held borrowers' escrow balances of approximately
$3,975,000 at December 31, 1996. Of the loans serviced by the Bank at December
31, 1996, approximately $6,549,000 were sold with recourse.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Loans receivable................................................. $4,050,560
Mortgage-backed securities....................................... 3,060,779
----------
Total.......................................................... $7,111,339
==========
</TABLE>
F-57
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of pass-through mortgage-backed
securities are summarized as follows at December 31, 1996:
<TABLE>
<CAPTION>
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
GNMA..................... $127,161,269 $1,937,786 $ (138,184) $128,960,871
FNMA..................... 204,217,707 4,731,922 208,949,629
FHLMC.................... 98,468,815 1,888,985 (433,439) 99,924,361
------------ ---------- ----------- ------------
Total.................. $429,847,791 $8,558,693 $ (571,623) $437,834,861
============ ========== =========== ============
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
GNMA..................... $128,960,871 $1,841,090 $ (349,284) $130,452,677
FNMA..................... 208,949,629 193,778 (2,968,764) 206,174,643
FHLMC.................... 99,924,361 1,351,208 (826,379) 100,449,190
------------ ---------- ----------- ------------
Total.................. $437,834,861 $3,386,076 $(4,144,427) $437,076,510
============ ========== =========== ============
</TABLE>
Mortgage-backed securities with carrying values of approximately
$288,957,000 at December 31, 1996, had adjustable rates.
The amortized cost of mortgage-backed securities pledged was approximately
$829,000 for letters of credit, $8,080,000 for treasury, tax and loan
accounts, and $11,665,000 for public fund deposits at December 31, 1996.
In November 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities (the "Guide"). The Guide provides that an enterprise
may, concurrent with initial adoption of the Guide but no later than December
31, 1995, reassess the appropriateness of the classification of all securities
held at that time and account for any resulting reclassification from the
held-to-maturity category at fair value in accordance with SFAS 115, paragraph
15. Such reclassifications resulting from this one-time reassessment do not
call into question the intent of an enterprise to hold other debt securities
to maturity in the future. The Bank adopted the implementation guidance during
December 1995 and reclassified all mortgage-backed securities from held-to-
maturity to available-for-sale.
7. ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for losses on loans:
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1995......................................... $4,685,869
Provision for losses............................................ 1,050,000
Charge-offs, net of recoveries.................................. (805,711)
----------
BALANCE, DECEMBER 31, 1995....................................... 4,930,158
Provision for losses............................................ 1,125,000
Charge-offs, net of recoveries.................................. (996,876)
----------
BALANCE, DECEMBER 31, 1996....................................... $5,058,282
==========
</TABLE>
F-58
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following at December 31,
1996:
<TABLE>
<S> <C>
Land............................................................ $ 4,455,671
Buildings and improvements...................................... 14,464,347
Furniture and equipment......................................... 8,639,929
-----------
Total.......................................................... 27,559,947
Accumulated depreciation........................................ (8,498,401)
-----------
Office properties and equipment, net........................... $19,061,546
===========
</TABLE>
9. DEPOSITS
Deposits consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Demand and NOW accounts, including noninterest-bearing depos-
its of $58,684,705 in 1996................................... $235,695,222
Money market.................................................. 58,664,450
Statement and passbook savings................................ 101,801,065
Certificates of deposit....................................... 594,042,189
------------
Total deposits............................................... $990,202,926
============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $24,852,000 at December 31, 1996.
At December 31, 1996, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997........................................................... $476,934,190
1998........................................................... 64,948,594
1999........................................................... 39,587,131
2000........................................................... 3,767,901
2001........................................................... 2,258,185
Thereafter..................................................... 6,546,188
------------
Total......................................................... $594,042,189
============
</TABLE>
Interest expense on deposits for the years ended December 31, 1996 and 1995,
is summarized below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Demand, NOW, money market and statement and pass-
book savings.................................... $ 7,850,965 $ 7,962,556
Certificates accounts............................ 34,063,456 34,864,165
Early withdrawal penalties....................... (245,833) (248,382)
----------- -----------
Total interest expense on deposits.............. $41,668,588 $42,578,339
=========== ===========
</TABLE>
At December 31, 1996, the Bank had pledged mortgage-backed securities of
approximately $11,665,000, as collateral for public fund deposits.
F-59
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
Eligible deposits of the Bank are insured up to $100,000 by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Both the SAIF and the Bank Insurance Fund ("BIF"), the
federal deposit insurance fund that covers commercial bank deposits, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits.
Legislation, passed by the U. S. House of Representatives and the Senate,
was signed into law by the President on September 30, 1996, to recapitalize
the SAIF. The special assessment was fully anticipated by the Bank because
legislation had been close to enactment on several occasions over the past
year. As a result of such legislation, the Bank was required to pay a one-time
special assessment of 65.7 cents for every $100 of deposits which amounted to
$6.7 million pre-tax with a $4.4 million after-tax effect.
The legislation also mandated that SAIF-insured institutions' (such as the
Bank) deposit insurance premiums decline to approximately 6.4 basis points,
effective January 1, 1997. The mandated decline in the premium rate is
expected to reduce the Bank's pre-tax annual SAIF premiums by approximately
$1,600,000 (based on current deposit levels).
10. FEDERAL HOME LOAN BANK BORROWINGS
The Bank had advances from the FHLB as follows at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Average
Interest
Rate Advances
-------- ------------
<S> <C> <C>
Maturing during year ending December 31:
1997................................................. 5.80% $ 8,000,000
1997................................................. 4.93% 10,000,000
1998................................................. 5.19% 15,000,000
1999................................................. 6.28% 30,000,000
2000................................................. 6.33% 30,000,000
2001................................................. 6.39% 30,000,000
------------
Total............................................... $123,000,000
============
</TABLE>
As a member of the FHLB, the Bank is required to maintain an investment in
capital stock of the FHLB of Dallas in an amount equal to the greater of 1% of
its outstanding home loans or 1/20 of its outstanding advances from the FHLB
of Dallas. No ready market exists for such stock and it has no quoted market
value. Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage loans.
11. REGULATORY MATTERS
The Bank is subject to various regulatory requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
F-60
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations) to
adjusted total assets (as defined), and of total and Tier I capital (as
defined) to risk weighted assets (as defined). Management believes, as of
December 31, 1996 that the Bank meets all capital adequacy requirements to
which it is subject.
Prior to December 31, 1996, the most recent notification from the Office of
Thrift Supervision ("OTS") categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total, tangible, and core capital
ratios as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios as of December 31, 1996 are
presented in the following table (amounts in thousands):
<TABLE>
<CAPTION>
Required
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Tangible capital to adjusted total
assets $80,191 6.60% $18,228 1.50% N/A N/A
Core capital to adjusted total
assets........................... $80,191 6.60% $36,456 3.00% $60,761 5.00%
Total capital to risk weighted
assets........................... $85,140 15.06% $45,230 8.00% $56,537 10.00%
Tier I capital to risk weighted
assets........................... $80,191 14.18% $22,615 4.00% $33,922 6.00%
</TABLE>
12. REAL ESTATE OPERATIONS
Income from real estate operations consisted of the following for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Rental income, net........................................ $623,929 $643,933
Recognized gross profit on sales of real estate........... 26,227 289,116
-------- --------
Total income............................................ $650,156 $933,049
======== ========
</TABLE>
13. RETIREMENT BENEFITS
Boatmen's provides a noncontributory defined benefit pension plan which
covers substantially all employees of Boatmen's and its subsidiaries. Pension
benefits are based upon the employee's length of service and compensation
during the final years of employment. During the years ended December 31, 1996
and 1995, the Bank recognized $486,000 and $224,400, respectively, of cost
under the Boatmen's plan. Boatmen's also provides postemployment life and
contributory medical benefits to retired employees of Boatmen's and its
subsidiaries including the Bank. Boatmen's includes Bank employees in its
recorded liability. Amounts paid to Boatmen's and costs recognized by the Bank
related to these benefits during 1996 and 1995 were not significant.
F-61
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
14. INCOME TAXES
Income tax provision for the years ended December 31, 1996 and 1995,
consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current:
Federal............................................. $4,636,123 $6,366,091
State............................................... 961,278 1,151,635
---------- ----------
Total current provision............................ 5,597,401 7,517,726
Deferred tax benefit................................. (671,864) (807,332)
---------- ----------
Income tax provision............................... $4,925,537 $6,710,394
========== ==========
</TABLE>
A reconciliation of federal income tax expense on pre-tax income at the
statutory rate with income tax expense reported is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Tax at the statutory rate............................ $4,395,811 $5,987,604
State income taxes, net of federal benefit........... 531,265 723,645
Other, net........................................... (1,539) (855)
---------- ----------
Income tax provision................................ $4,925,537 $6,710,394
========== ==========
</TABLE>
The Bank is permitted under the Internal Revenue Code to deduct an annual
addition to a reserve for bad debts in determining taxable income, subject to
certain limitations. This addition differs from the bad debt expense used for
financial reporting purposes.
As of December 31, 1996, the Bank's deferred tax asset account was comprised
of the following:
<TABLE>
<S> <C>
Deferred tax assets:
Reserve for loan losses........................................ $ 270,388
Intangible assets.............................................. 2,397,881
Investment securities.......................................... 297,501
Other, net..................................................... 656,252
----------
Total deferred tax assets..................................... 3,622,022
Deferred tax liabilities:
Loans.......................................................... (312,856)
Mortgage-backed securities..................................... (410,135)
FHLB stock..................................................... (974,923)
Reserve for loan losses........................................ --
Other, net..................................................... (19,420)
----------
Total deferred tax liabilities................................ (1,717,334)
----------
Net deferred tax asset........................................ $1,904,688
==========
</TABLE>
The Bank files a consolidated federal income tax return with Boatmen's.
Income tax expense is allocated to the Bank and recorded in the Bank's
consolidated financial statements, generally on the basis of the tax which
would be payable if the Bank had filed a separate return.
F-62
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
15. COMMITMENTS
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. Rental expense amounted to approximately $490,025 and
$551,282 for the years ended December 31, 1996 and 1995, respectively. A
schedule of future minimum rental payments under operating leases, as of
December 31, 1996, follows:
<TABLE>
<S> <C>
Year ending December 31:
1997............................................................ $ 416,558
1998............................................................ 326,017
1999............................................................ 262,074
2000............................................................ 183,181
2001............................................................ 166,037
Thereafter...................................................... 673,814
----------
Total.......................................................... $2,027,681
==========
</TABLE>
16. PURCHASED LOAN SERVICING RIGHTS
Following is a summary of the changes in purchased loan servicing rights:
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1995....................................... $4,066,584
Amortization.................................................. (1,008,429)
----------
BALANCE, DECEMBER 31, 1995..................................... 3,058,155
Amortization.................................................. (789,958)
----------
BALANCE, DECEMBER 31, 1996..................................... $2,268,197
==========
</TABLE>
Under OTS regulations, the lower of the amortized carrying value, 90% of the
fair market value or 90% of the original cost of purchased mortgage servicing
rights may be included in calculating all three FIRREA capital standards. The
amount to be included as regulatory capital cannot exceed 50% of tangible
capital.
17. CONTINGENCIES
In the normal course of the banking business, there are various commitments,
legal proceedings and contingencies which are not reflected in the
accompanying consolidated financial statements. In the opinion of management,
no material losses are expected to result from any such commitments, legal
proceedings or contingencies.
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally prescribed oversight of
the savings and loan industry. Based on these examinations, the regulators can
direct that the Bank's financial statements be adjusted in accordance with
their findings. A future examination by the OTS or the FDIC could include a
review of certain transactions or other amounts reported in the Bank's 1996
financial statements. In view of the uncertain regulatory environment in which
the Bank operates, the extent, if any, to which a forthcoming regulatory
examination may ultimately result in adjustments to the 1996 consolidated
financial statements cannot presently be determined.
The Bank's asset base is exposed to risk including the risk resulting from
changes in interest rates, market values of collateral for borrowings, and
changes in the timing of cash flows. The Bank analyzes the effect of
F-63
<PAGE>
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
such risks by considering the mismatch of the maturities of its assets and
liabilities in the current interest rate environment and the sensitivity of
assets and liabilities to changes in interest rates. Based on such analyses at
December 31, 1996, the Bank's management has considered the effect of
significant increases and decreases in interest rates and believes such
changes, if they occurred, would be manageable and would not affect the
ability of the Bank to hold its assets to maturity. However, the Bank is
exposed to significant market risk in the event of significant and prolonged
interest rate increases, because certain fixed rate assets and certain
variable rate assets that are capped are funded with short-term liabilities.
18. SALE OF BRANCH OPERATIONS
In June of 1996, the Bank sold two branches located in Oklahoma in order to
comply with federal regulatory requirements relating to the concentration of
deposits. Deposits of approximately $53,388,000 were assumed by the purchaser,
and cash and other assets with carrying values of approximately $42,180,000
and $9,930,000, respectively, were transferred to the purchaser. This resulted
in a gain of $1,284,000 recorded by the Bank.
* * * * * *
F-64
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Summary Consolidated Financial and Other Data............................. 6
Risk Factors.............................................................. 9
The Company............................................................... 13
The Private Placement..................................................... 18
Ratio of Earnings to Fixed Charges........................................ 19
Recent Developments....................................................... 19
Unaudited Pro Forma Combined Financial Information........................ 21
Use of Proceeds........................................................... 24
Dividends and Market for Superior Securities.............................. 24
Capitalization............................................................ 26
Selected Consolidated Financial Data--Bank................................ 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Management................................................................ 48
Summary Compensation Table................................................ 50
Principal Shareholders.................................................... 51
Security Ownership of Management.......................................... 52
Regulation................................................................ 52
Taxation.................................................................. 61
Description of Senior Notes............................................... 62
Description of Capital Stock.............................................. 78
Registration Rights....................................................... 80
Selling Holders........................................................... 81
Plan of Distribution...................................................... 86
Shares Eligible for Future Sale........................................... 86
Change in Independent Public Accountants.................................. 87
Certain Legal Matters..................................................... 88
Experts................................................................... 88
Index to Consolidated Financial Statements................................ F-i
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following statement sets forth the estimated amount of expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the securities being registered. Except as
specifically indicated, all of such expenses are being borne by the Registrant.
SEC filing fees....................................... $ 47,435
Printing and distribution............................. 190,000
Legal fees and expenses............................... 140,000
Blue Sky fees and expenses............................ 25,000
Accounting fees and expenses.......................... 265,000
Miscellaneous fees and expenses....................... 45,000
----------
Total................................................. $ 712,435
==========
Item 14. Indemnification of Directors and Officers.
Article 10 of the Registrant's Certificate of Incorporation provides as
follows:
The corporation shall indemnify its directors, officers, employees and
agents to the full extent permitted under the Delaware General Corporation Law.
Article IX of the Registrant's Bylaws provides as follows:
1. Definitions. As used in this Section the following terms shall have the
-----------
meanings set out below:
(a) "Board" - the Board of Directors of the Corporation.
(b) "Claim" - any threatened or pending or completed claim, action, suit,
or proceeding, whether civil, criminal, administrative or investigative and
whether made judicially or extra-judicially, or any separate issue or matter
therein, as the context requires.
(c) "Determining Body" - (i) those members of the Board who are not named
as parties to the Claim for which indemnification is being sought ("impartial
Directors"), if there are at least three Impartial Directors, or (ii) a
committee of at least three directors appointed by the Board (regardless whether
the members of the Board of Directors voting on such appointment are fewer than
three Impartial Directors or if the Board of Directors or the committee
appointed pursuant to clause (ii) of this paragraph so directs (regardless
<PAGE>
whether the members thereof are Impartial Directors), independent legal counsel,
which may be the regular outside counsel of the Corporation.
(d) "Disbursing Officer" - the Chief Executive Officer of the Corporation
or, if the Chief Executive Officer is a party to the Claim for which
indemnification is being sought, any officer not a party to such Claim who is
designated by the Chief Executive Officer to be the Disbursing Officer with
respect to indemnification request related to the Claim, which designation shall
be made promptly after receipt of the initial request for indemnification with
respect to such Claim.
(e) "Expenses" - any expenses or costs (including, without limitation,
attorney's fees, judgements, punitive or exemplary damages, fines and amounts
paid in settlement).
(f) "Indemnitee" - each person who is or was a director or officer of the
Corporation or the spouse of such person.
2. Indemnity.
---------
(a) To the extent such Expenses exceed the sum or amounts paid or due under
or pursuant to (i) policies of liability insurance maintained by the
Corporation, (ii) policies of liability insurance maintained by or on behalf of
the Indemnitee, and (iii) provisions for indemnification in the by-laws,
resolutions or other instruments of any entity other than the Corporation, the
Corporation shall indemnify Indemnitee against any Expenses actually and
reasonably incurred by him (as they are incurred) in connection with any Claim
either against him or as to which he is involved solely as a witness or person
required to give evidence, by reason of his position.
(i) as a director or officer of the Corporation,
(ii) as a director or officer of any subsidiary of the Corporation or
as a fiduciary with respect to any employee benefit plan of the Corporation,
(iii) as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other for profit or not for
profit entity or enterprise, if such position is or was held at the request of
the Corporation, or
(iv) as the spouse of any person who is or was a director or officer
of the Corporation with respect to any Claim involving the spouse arising by
reason of such person's position as described in clauses (i) , (ii) or (iii),
whether relating to service in such position before or after the effective date
of this Section, if he (i) is successful in his defense of the Claim on the
merits or otherwise or (ii) has been found by the Determining Body (acting in
good faith) to have met the Standard of Conduct; provided that (A) the amount
otherwise payable by the Corporation may be reduced by the Determining Body to
such amount as it deems proper if it determines that the Claim involved the
receipt of a personal benefit by Indemnitee, and (B) no indemnification shall be
made in respect of any Claim as to which Indemnitee shall have been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable for willful or intentional misconduct in the performance of his duty
to the Corporation or to have obtained an improper personal benefit, unless, and
only to the extent that, a court shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as
the court deems proper.
(b) The Standard of Conduct is met when the conduct by an Indemnitee with
respect to which a Claim is asserted was conduct that he reasonably believed to
be in, or not opposed to, the best interest of the Corporation, and, in the case
of a criminal action or proceeding, that he had no reasonable cause to believe
<PAGE>
was unlawful. The termination of any Claim by judgment, or order, settlement,
conviction, or upon a plea of nolo contendere or it equivalent, shall not, of
itself, create a presumption that Indemnitee did not meet the Standard of
Conduct.
(c) Promptly upon becoming aware of the existence of any Claim as to which
he may be indemnified hereunder, Indemnitee shall notify the Chief Executive
Officer of the Corporation of the Claim and whether he intends to seek
indemnification hereunder. If such notice indicates that Indemnitee does so
intend, the Chief Executive Officer shall promptly advise the Board thereof and
notify the Board that the establishment of the Determining Body with respect to
the Claim will be a matter presented at the next regularly scheduled meeting of
the Board. After the Determining Body has been established, the Chief Executive
Officer shall inform the Indemnitee thereof and Indemnitee shall immediately
provide the Determining Body with all facts relevant to the Claim known to him.
Within 60 days of the receipt of such information, together with such additional
information as the Determining Body may request of Indemnitee, the Determining
Body shall determine, and shall advise Indemnitee of its determination, whether
Indemnitee has met the Standard of Conduct. The Determining Body may extend
such 60 day period by no more than an additional 60 days.
(d) Indemnitee shall promptly inform the Determining Body upon his becoming
aware of any relevant facts not therefore provided by him to the Determining
Body, unless the Determining Body has obtained such facts by other means. If,
after determining that the Standard of Conduct has been met, the Determining
Body obtains facts of which it was not aware at the time it made such
determination, the Determining Body on its own motion, after notifying the
Indemnitee and providing him an opportunity to be heard, may, on the basis of
such facts, revoke such determination, provided that in the absence of actual
fraud by Indemnitee no such revocation may be made later than 30 days after
final disposition of the Claim.
(e) In the case of any Claim not involving a proposed, threatened or
pending criminal proceeding,
(i) If Indemnitee has, in the good faith judgment of the Determining
Body, met the Standard of Conduct, the Corporation may, in its sole discretion
after notice to Indemnitee, assume all responsibility for the defense of the
Claim, and, in any event, the Corporation and the Indemnitee each shall keep the
other informed as to the progress of the defense, including prompt disclosure of
any proposals for settlement; provided that if the Corporation is a party to the
Claim and Indemnitee reasonably determines that there is a conflict between the
positions of the Corporation and Indemnitee with respect to the Claim, then
Indemnitee shall be entitled to conduct his defense, with counsel of his choice;
and provided further that Indemnitee shall in any event be entitled at is
expense to employ counsel chosen by him to participate in the defense of the
Claim; and
(ii) The Corporation shall fairly consider any proposals by
Indemnitee for settlement of the Claim. If the Corporation (A) proposes a
settlement acceptable to the person asserting the Claim, or (B) believes a
settlement proposed by the person asserting the Claim should be accepted, it
shall inform Indemnitee of the terms thereof and shall fix a reasonable date by
which Indemnitee shall respond. If Indemnitee agrees to such terms, he shall
execute such documents as shall be necessary to effect the terms, he shall
execute such documents as shall be necessary to effect the settlement. If he
does not agree he may proceed with the defense of the Claim in any manner he
chooses, but if he is not successful on the merits or otherwise, the
Corporation's obligation to indemnify him for any Expenses incurred following
his disagreement shall be limited to the lesser of (A) the total Expenses
<PAGE>
incurred by him following his decision not to agree to such proposed settlement
or (B) the amount the Corporation would have paid pursuant to the terms of the
proposed settlement. If, however, the proposed settlement would impose upon
Indemnitee any requirement to act or refrain from acting that would materially
interfere with the conduct of his affairs, Indemnitee may refuse such settlement
and proceed with the defense of the Claim, if he so desires, at the
Corporation's expense without regard to the limitations imposed by the preceding
sentence. In no event, however, shall the Corporation be obligated to indemnify
Indemnitee for any amount paid in a settlement that the Corporation has not
approved.
(f) In the case of a Claim involving a proposed, threatened or pending
criminal proceeding, Indemnitee shall be entitled to conduct the defense of the
Claim, and to make all decisions with respect thereto, with counsel of his
choice; provided that the Corporation shall not be obligated to indemnify
Indemnitee for an amount paid in settlement that the Corporation has not
approved.
(g) After notifying the Corporation of the existence of a Claim, Indemnitee
may from time to time request the Corporation to pay the Expenses (other than
judgments, fines, penalties or amounts paid in settlement) that he incurs in
pursuing a defense of the Claim prior to the time that the Determining Body
determines whether the Standard of Conduct has been met. If the Disbursing
Officer believes the amount requested to be reasonable, he shall pay to
Indemnitee the amount requested (regardless of Indemnitee's apparent ability to
repay such amount) upon receipt of an undertaking by or on behalf of Indemnitee
to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation under the circumstances. If the
Disbursing Officer does not believe such amount to be reasonable, the
Corporation shall pay the amount deemed by him to be reasonable and Indemnitee
may apply directly to the Determining Body for the remainder of the amount
requested.
(h) After it has been determined that the Standard of Conduct was met, for
so long as and to the extent that the Corporation is required to indemnify
Indemnitee under this Agreement, the provisions of Paragraph (g) shall continue
to apply with respect to Expenses incurred after such time, expect that (i) no
undertaking shall be required of Indemnitee and (ii) the Disbursing Officer
shall pay to Indemnitee such amount of any fines, penalties or judgments against
him which have become final as the Corporation is obligated to indemnify him.
(i) Any determination by the Corporation with respect to settlements of a
Claim shall be made by the Determining Body.
(j) The Corporation and Indemnitee shall keep confidential, to the extent
permitted by law and their fiduciary obligations, all facts and determinations
provided or made pursuant to or arising out of the operation of this Agreement,
and the Corporation and Indemnitee shall instruct it or his agents and employees
to do likewise.
3. Enforcement.
-----------
(a) The rights provided by this Section shall be enforceable by Indemnitee
in any court of competent jurisdiction.
(b) If Indemnitee seeks a judicial adjudication of his rights under this
Section, Indemnitee shall be entitled to recover from the Corporation, and shall
be indemnified by the Corporation against, any and all Expenses actually and
reasonably incurred by him in connection with such proceeding, but only if he
prevails therein. If it shall be determined that Indemnitee is entitled to
receive part but not all of the relief sought, then the Indemnitee shall be
entitled to be reimbursed for all Expenses incurred by him in connection with
<PAGE>
such judicial adjudication if the amount to which he is determined to be
entitled exceeds 50% of the amount of his claim. Otherwise, the Expenses
incurred by Indemnitee in connection with such judicial adjudication shall be
appropriately prorated.
(c) In any judicial proceeding described in this subsection, the
Corporation shall bear the burden of proving that Indemnitee is not entitled to
any Expenses sought with respect to any Claim.
4. Saving Clause. If any provision of this Section is determined by a court
-------------
having jurisdiction over the matter to require the Corporation to do or refrain
from doing any act that is in violation of applicable law, the court shall be
empowered to modify or reform such provision so that, as modified or reformed,
such provision provides the maximum indemnification permitted by law, and such
provision, as so modified or reformed, and the balance of this Section, shall be
applied in accordance with their terms. Without, the generality of the
foregoing, if any portion of this Section shall be invalidated on any ground,
the Corporation shall nevertheless indemnify an Indemnitee to the full extent
permitted by any applicable portion of this Section that shall not have been
invalidated and to the full extent permitted by law with respect to that portion
that has been invalidated.
5. Non-Exclusivity.
---------------
(a) The indemnification and advancement of Expenses provided by or granted
pursuant to this Section shall not be deemed exclusive of any other rights to
which Indemnitee is or may become entitled under any statue, article of
incorporation, by-law, authorization of shareholders or directors, agreement, or
otherwise.
(b) It is the intent of the Corporation by this Section to indemnify and
hold harmless Indemnitee to the full extent permitted by law, so that if
applicable law would permit the Corporation to provide broader indemnification
rights that are currently permitted, the Corporation shall indemnify and hold
harmless Indemnitee to the full extent permitted by applicable law
notwithstanding that the other terms of this Section would provide for lesser
indemnification.
6. Successors and Assigns. This Section shall be binding upon the Corporation,
----------------------
its successors and assigns, and shall inure to the benefit of the Indemnitee's
heirs, personal representatives, and assigns and to the benefit of the
Corporation, its successors and assigns.
7. Indemnification of Other Persons.
--------------------------------
(a) The Corporation may indemnify any person not covered by Section 1
through 6 to the extent provided in a resolution of the Board or a separate
Section of these By-laws.
(b) Nothing in this Section 11 shall obligate the Corporation to indemnify
or advance expenses to any person who was a director, officer or agent of any
corporation merged into this Corporation or otherwise acquired by this
Corporation. Any such person's right to indemnification or advancement of
expenses, if any, shall consist of those rights contained in the agreement
relating to such merger or acquisition.
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
In accordance with Item 701 of Regulation S-K, the following information is
presented with respect to securities sold by the Registrant within the past
three years which were not registered under the Securities Act of 1933, as
amended ("Securities Act"):
(a) On April 1, 1998, the Registrant sold in a private placement an
aggregate of 10,079,703 million shares of its common stock, par value
$.01 per share ("Common Stock"), and $60.0 million of its Senior Notes
due 2003 ("Senior Notes").
(b) Keefe, Bruyette & Woods, Inc. ("KBW" or the "Placement Agent") acted
as Placement Agent for the Registrant in connection with the private
placement transaction. The securities were offered and sold to
institutional and accredited investors.
(c) The Registrant's Common Stock was sold for $10.00 per share and the
Senior Notes were sold for an aggregate principal amount of $60.0
million. KBW received $7.28 million as compensation in the transaction
(a transaction fee equal to 1.5% of the aggregate purchase price
paid in the Acquisition, a 4% commission on the Common Stock sold to
purchasers other than Founders, a 3.5% commission on the Senior Notes
sold and 1.5% of the aggregate proceeds of the Loan), plus
reimbursement of expenses. Additionally, the Placement Agent bought
100,000 shares of the Company's common stock for $5.00 per share.
(d) Based upon representations of the offerees and purchasers, the Common
Stock and the Senior Notes were offered and sold in reliance upon an
exemption from registration under Section 4(2) of the Securities Act
and in compliance with Rules 502 and 506 promulgated thereunder.
(e) Not applicable.
(f) Not applicable.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits
3.1* Amended and Restated Certificate of Incorporation of Superior Financial
Corp. ("Superior")
3.2* Bylaws of Superior
4.1* Form of Equity Subscription Agreement among Superior, KBW and various
investors, dated April 1, 1998
4.2* Form of Registration Rights Agreement between Superior, KBW and various
investors named therein, dated April 1, 1998
<PAGE>
4.3* Indenture between Superior and The Bank of New York, as
Trustee, dated April 1, 1998
4.4* Form of Common Stock certificate of Superior
4.5* Form of Senior Note (included in Exhibit 4.3)
4.6* Stock Purchase Agreement by and among Superior, NB Holdings Corporation
and Superior Federal Bank, F.S.B. providing for the acquisition of the
stock of Superior Federal Bank, F.S.B. by Superior, dated as of
December 3, 1997
4.7* Article 4 of Superior's Amended and Restated Certificate of
Incorporation (included in Exhibit 3.1)
5.0* Opinion of Miller, Hamilton, Snider & Odom, L.L.C. re: legality
10.1* Custody and Security Agreement between Superior and BONY, as Trustee,
dated April 1, 1998
10.2* Securities Account Control Agreement between Superior, Trustee and BONY
dated April 1, 1998
10.3* Founders Agreement between Superior and C. Stanley Bailey, dated
December 2, 1997.
10.4* Founders Agreement between Superior and KBW, dated December 2, 1997
10.5* Founders Agreement between Superior and the Lead Investor, dated
December 2, 1997.
10.6* Agreement between C. Marvin Scott and Superior, dated January 1, 1998.
10.7* Superior Long Term Incentive Plan
10.8* Agreement between Rick D. Gardner and Superior dated September 21, 1998
16.1 Letter from the Predecessor Auditor
21.0 Subsidiaries of the Registrant (see "Business--Subsidiaries" in the
Prospectus)
23.1* Consent of Miller, Hamilton, Snider & Odom, L.L.C.
23.2 Consent of Ernst & Young LLP
23.3 Consent of Deloitte & Touche LLP
24.0* Power of Attorney
25.0* Statement of Eligibility of Trustee
27.0 Financial Data Schedule
- -----------
* Previously filed.
<PAGE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) (1) to file, during any period in which offers or sales are being
made, a post- effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
<PAGE>
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Form S-1 Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in Fort Smith, Arkansas on
March 26, 1999.
SUPERIOR FINANCIAL CORP.
By: /s/ C. STANLEY BAILEY
----------------------------------------
C. Stanley Bailey
Chairman of the Board and Chief Executive Officer
By: /s/ C. MARVIN SCOTT
----------------------------------------
C. Marvin Scott
President and Director
By: /s/ RICK D. GARDNER
----------------------------------------
Rick D. Gardner
Chief Financial Officer
Name Title Date
- ---- ----- ----
/s/ C. STANLEY BAILEY Chairman of the Board and **
- ---------------------- Chief Executive Officer
C. Stanley Bailey (principal executive officer)
<PAGE>
/s/ C. Marvin Scott President and Director **
- --------------------------
C. Marvin Scott
/s/ Boyd W. Hendrickson* Director **
- --------------------------
Boyd W. Hendrickson
/s/ David E. Stubblefield* Director **
- --------------------------
David E. Stubblefield
/s/ John M. Stein* Director **
- --------------------------
John M. Stein
* By C. Stanley Bailey, Attorney-in-fact.
** March 26, 1999.
<PAGE>
EXHIBIT INDEX
Item
No. Description
- ---- -----------
3.1* Amended and Restated Certificate of Incorporation of Superior Financial
Corp. ("Superior")
3.2* Bylaws of Superior
4.1* Form of Equity Subscription Agreement among Superior, KBW and various
investors dated April 1, 1998
4.2* Form of Registration Rights Agreement between Superior, KBW and various
investors named therein, dated April 1, 1998
4.3* Indenture between Superior and The Bank of New York ("BONY"), as
Trustee, dated April 1, 1998
4.4* Form of Common Stock certificate of Superior
4.5* Form of Senior Note (included in Exhibit 4.3)
4.6* Stock Purchase Agreement by and among Superior, NB Holdings Corporation
and Superior Federal Bank, F.S.B. providing for the acquisition of the
stock of Superior Federal Bank, F.S.B. by Superior, dated as of
December 3, 1997
4.7* Article 4 of Superior's Amended and Restated Certificate of
Incorporation (included in Exhibit 3.1)
5.0* Opinion of Miller, Hamilton, Snider & Odom, L.L.C. re: legality
10.1* Custody and Security Agreement between Superior and BONY, as Trustee,
dated April 1, 1998
10.2* Securities Account Control Agreement between Superior, Trustee and BONY
dated April 1, 1998
10.3* Founders Agreement between Superior and C. Stanley Bailey, dated
December 2, 1997.
10.4* Founders Agreement between Superior and KBW, dated December 2,
1997.
10.5* Founders' Agreement between Superior and the Lead Investor, dated
December 2, 1997.
10.6* Agreement between C. Marvin Scott and Superior, dated January 9,
1998.
10.7* Superior Long Term Incentive Plan
10.8* Agreement between Rick D. Gardner and Superior dated September 28, 1998
16.1 Letter from the Predecessor Auditor
21.0 Subsidiaries of the Registrant (see "Business--Subsidiaries" in the
Prospectus)
23.1* Consent of Miller, Hamilton, Snider & Odom, L.L.C.
<PAGE>
23.2 Consent of Ernst & Young LLP
23.3 Consent of Deloitte & Touche LLP
24.0* Power of Attorney
25.0* Statement of Eligibility of Trustee
27.0 Financial Data Schedule
- ----------
* Previously filed.
<PAGE>
EXHIBIT 16.1
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments in the second paragraph in the section
titled "CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS" of Post-Effective Amendment
No. 1 to Registration Statement No. 333-60111 of Superior Financial Corp. on
Form S-1 dated on or about March 26, 1999.
/s/ Deloitte & Touche LLP
- -------------------------
Little Rock, Arkansas
March 26, 1999
<PAGE>
EXHIBIT 23.2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 3, 1999 and July 22, 1998 in the
Post-Effective Amendment No. 1 to the Registration Statement on (Form S-1,
No. 333-60111) and related Prospectus of Superior Financial Corp. for the
registration of 10,079,703 shares of its common stock and $60,000,000 of 8.65%
Senior Notes due April 1, 2003.
/s/ Ernst & Young LLP
Little Rock, Arkansas
March 26, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 1 to Registration
Statement No. 333-60111 of Superior Financial Corp. on Form S-1 dated on or
about March 26, 1999, of our reports dated January 16, 1998, and January 13,
1997, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
Little Rock, Arkansas
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 81,425
<INT-BEARING-DEPOSITS> 10,950
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 364,061
<INVESTMENTS-CARRYING> 364,061
<INVESTMENTS-MARKET> 364,061
<LOANS> 825,633
<ALLOWANCE> 10,472
<TOTAL-ASSETS> 1,378,716
<DEPOSITS> 970,821
<SHORT-TERM> 236,500
<LIABILITIES-OTHER> 9,582
<LONG-TERM> 60,000
0
0
<COMMON> 101
<OTHER-SE> 101,711
<TOTAL-LIABILITIES-AND-EQUITY> 1,378,716
<INTEREST-LOAN> 42,808
<INTEREST-INVEST> 15,702
<INTEREST-OTHER> 4,584
<INTEREST-TOTAL> 63,094
<INTEREST-DEPOSIT> 28,230
<INTEREST-EXPENSE> 10,502
<INTEREST-INCOME-NET> 24,362
<LOAN-LOSSES> 1,021
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 3,617
<INCOME-PRETAX> 10,920
<INCOME-PRE-EXTRAORDINARY> 10,920
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,675
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 3.44
<LOANS-NON> 3,348
<LOANS-PAST> 8,475
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 2,317
<RECOVERIES> 1,268
<ALLOWANCE-CLOSE> 10,472
<ALLOWANCE-DOMESTIC> 10,472
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,676
</TABLE>
