<PAGE>
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000
COMMISSION FILE NUMBER #0-25239
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0379417
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16101 LaGrande Drive, Suite 103, Little Rock Arkansas 72223
------------------------------------------------------------
(Address of principle executive offices)
(501) 324-7282
-------------------------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding at June 30, 2000
-------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 9,474,408
<PAGE>
SUPERIOR FINANCIAL CORP.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets,
June 30, 2000 (unaudited) and December 31, 1999.................. 3
Consolidated statements of income,
Three months ended June 30, 2000
and June 30, 1999 (unaudited) and Six months ended
June 30, 2000 and June 30, 1999 (unaudited)...................... 4
Consolidated statements of cash flows,
Six months ended June 30, 2000
and June 30, 1999 (unaudited).................................... 5
Notes to consolidated financial statements (unaudited)........... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities............................................ 17
Item 3. Defaults upon Senior Securities.................................. 17
Item 4. Submission of Matters to a Vote of
Security Holders................................................. 17
Item 5. Other Information................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
SIGNATURES................................................................ 18
<PAGE>
CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities; (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the operation of the
businesses of Superior Financial Corp. ("Superior") are greater than expected;
(iv) changes in the interest rate environment which reduce margins; (v) general
economic conditions, either nationally or regionally, that are less favorable
than expected, resulting in, among other things, a deterioration in credit
quality; (vi) changes which may occur in the regulatory environment; (vii) a
significant rate of inflation (deflation); and (viii) changes in securities
markets. When used in this Report, the words "believes", "estimates", "plans",
"expects", "should", "may", "might", "outlook", and "anticipates", and similar
expressions as they relate to Superior (including its subsidiaries), or its
management are intended to identify forward-looking statements.
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 48,700 $ 48,241
Loans available for sale 42,439 51,406
Loans receivable 1,017,907 1,004,961
Less: allowance for loan losses 11,974 11,346
---------- ----------
Loans receivable, net 1,005,933 993,615
Investments available for sale, net 374,248 354,915
Accrued interest receivable 16,748 15,530
Federal Home Loan Bank stock 22,947 21,907
Premises and equipment, net 34,224 32,507
Mortgage servicing rights, net 6,499 4,310
Prepaid expenses and other assets 5,694 3,837
Goodwill 61,129 62,851
Real estate acquired in settlement of loans, net 576 202
Deferred acquisition costs 2,518 2,624
---------- ----------
Total assets $1,621,655 $1,591,945
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,061,205 $ 977,936
Federal Home Loan Bank borrowings 371,200 424,000
Note payable 13,000 13,000
Senior notes 60,000 60,000
Custodial escrow balances 8,336 7,420
Other liabilities 4,914 4,003
---------- ----------
Total liabilities 1,518,655 1,486,359
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,764 94,755
Retained earnings 24,224 18,041
Accumulated other comprehensive loss (9,668) (6,147)
---------- ----------
109,421 106,750
Treasury stock at cost, 607,500 and 96,000 shares (6,421) (1,164)
---------- ----------
Total stockholders' equity 103,000 105,586
---------- ----------
Total liabilities and stockholders' equity $1,621,655 $1,591,945
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
<CAPTION>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, unaudited)
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans $20,964 $18,152 $41,388 $35,164
Investments 6,262 6,080 12,387 12,187
Interest-bearing deposits 44 188 115 230
Other 442 54 776 146
------- ------- ------- -------
Total interest income 27,712 24,474 54,666 47,727
Interest expense:
Deposits 10,022 8,465 19,194 16,860
Short-term borrowings 2,307 1,272 5,088 1,816
Long-term borrowings 4,809 4,455 9,046 8,920
------- ------- ------- -------
Total interest expense 17,138 14,192 33,328 27,596
Net interest income 10,574 10,282 21,338 20,131
Provision for loan losses 750 700 1,300 1,270
------- ------- ------- -------
Net interest income after
provision for loan losses 9,824 9,582 20,038 18,861
Noninterest income:
Service charges on deposit accounts 6,475 5,440 12,286 10,231
Mortgage operations, net 820 746 1,480 1,440
Income from real estate operations, net 121 122 246 238
Other 548 615 805 1,132
------- ------- ------- -------
Total noninterest income 7,964 6,923 14,817 13,041
Noninterest expense:
Salaries and employee benefits 6,159 5,374 12,053 10,518
Occupancy expense 935 706 1,776 1,450
Deposit insurance premium 51 141 102 271
Data and item processing 1,217 1,080 2,440 2,127
Advertising and promotion 446 505 887 996
Amortization of goodwill 861 861 1,722 1,683
Postage and supplies 749 911 1,564 1,693
Equipment expense 598 513 1,101 891
Other 2,091 1,960 3,909 3,722
------- ------- ------- -------
Total noninterest expense 13,107 12,051 25,554 23,351
Income before income taxes 4,681 4,454 9,301 8,551
Income taxes 1,569 1,724 3,117 3,306
------- ------- ------- -------
Net income $ 3,112 $ 2,730 $ 6,184 $ 5,245
======= ======= ======= =======
Basic and diluted earnings
per common share $ 0.32 $ 0.27 $ 0.63 $ 0.52
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
2000 1999
-------- ---------
<S> <C> <C>
Operating activities
Net income $ 6,184 $ 5,245
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses 1,300 1,270
Depreciation 1,118 846
Deferred income taxes - (2,084)
Additions to mortgage servicing rights (2,499) -
Amortization of mortgage servicing rights 309 120
Amortization of premiums on investments, net 445 786
Amortization of goodwill 1,722 1,683
Amortization of other intangibles 352 338
Loss on sale of real estate 9 2
Gain on sale of loans (333) (141)
Mortgage loans originated for sale (54,868) (21,732)
Mortgage loans purchased - (58,508)
Proceeds from sale of mortgage loans held for sale 72,938 43,750
Increase in accrued interest receivable (1,219) (8,070)
Increase in prepaid expenses and other assets (2,100) (492)
Net increase (decrease) in custodial escrow balances 916 (1,664)
Increase in other liabilities 2,806 1,049
-------- ---------
Net cash provided by (used in) operating activities 27,080 (37,602)
Investing activities
Increase in loans receivable, net (22,912) (141,631)
Purchase of investments (44,559) (87,394)
Gain on sale of investments - (17)
Proceeds from sale of investments 500 16,177
Purchase FHLB stock (1,040) (9,267)
Proceeds from sale of real estate 142 420
Principal payments on investments 18,863 40,417
Purchase of premises and equipment (2,835) (3,252)
-------- ---------
Net cash used in investing activities (51,841) (184,547)
Financing activities
Net increase in deposits 83,269 12,928
Net increase (decrease) in FHLB borrowings (52,800) 179,000
Principal payment on note payable - (7,000)
Proceeds from common stock issued, net 8 -
Purchase of treasury stock (5,257) -
-------- ---------
Net cash provided by financing activities 25,220 184,928
-------- ---------
Net increase (decrease) in cash 459 (37,221)
Cash and cash equivalents, beginning of period 48,241 81,425
-------- ---------
Cash and cash equivalents, end of period $ 48,700 $ 44,204
======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
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 Little Rock,
Arkansas. The Company was organized on November 12, 1997 as SFC Acquisition
Corp. for the purpose of acquiring Superior Federal Bank, F.S.B. (the "Bank"), a
federally chartered savings institution. The Bank provides a broad line of
financial products to small and medium-sized businesses and to consumers,
primarily in Arkansas and Oklahoma. On April 1, 1998, SFC acquired the Bank
from NationsBank, N.A. (now Bank of America) for approximately $162.5 million.
This purchase was accounted for using the purchase method of accounting for
business combinations whereby the assets and liabilities of the Bank were
recorded at fair value at the date of acquisition and the difference between the
net book value of the Bank and the purchase price was recorded as goodwill of
approximately $76.4 million.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the entire year or for any other period. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1999.
2. Per Share Data
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. The Company had approximately 244,500 and 35,000 outstanding
options to purchase shares that were not included in the dilutive EPS
calculation because they would have been antidilutive.
6
<PAGE>
Basic and diluted earnings per common share are computed as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Common shares-weighted averages (basic) 9,638 10,081 9,762 10,081
Common share equivalents-weighted averages 3 10 12 11
Common share weighted average (diluted) 9,641 10,091 9,774 10,092
Net Income $3,112 $ 2,730 $6,184 $ 5,245
Basic and diluted earnings per common share $ 0.32 $ 0.27 $ 0.63 $ 0.52
</TABLE>
3. Recently Issued Accounting Guidance
As of January 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130 ("SFAS 130"), Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no impact
on the Company's net income or stockholders' equity. SFAS 130 requires
unrealized gains or losses on available for sale investments be included in
other comprehensive income.
On December 31, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). 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. Substantially all of the
Company's revenues result from services offered by its bank subsidiary. No
revenues are derived from foreign countries and no single external customer
comprises more than 10% of the Company's revenues.
In June 1998, The Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". SFAS 133, which requires the Company to recognize all derivatives
on the balance sheet at fair value, is effective for years beginning after June
15, 2000. SFAS 133 permits early adoption as of the beginning of any fiscal
quarter that begins after June 1998. The Company expects to adopt SFAS 133
effective January 1, 2001. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either offset
against the change in fair value of the assets, liabilities, or firm commitments
through operating results or recognized in other comprehensive income until the
hedged item is recognized in operating results. The ineffective portions of a
derivative's change in fair value will be immediately recognized in operating
results. The Company has not yet determined what effect the adoption of this
statement will have on its results of operations or financial position.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
Accounting of Certain Transactions involving Stock Compensation an
Interpretation of APB Opinion No. 25.
7
<PAGE>
FIN 44 clarifies the application of Opinion 25 for (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998, or
January 12, 2000. Management believes that the impact of FIN 44 will not have a
material effect on the financial position or results of operations of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF SUPERIOR FINANCIAL CORP.
The Company is a unitary thrift holding company. The Company was organized
in November 1997 as SFC Acquisition Corp. for the purpose of acquiring Superior
Federal Bank, F.S.B. (the "Bank"). On April 1, 1998 the Company financed the
acquisition of 100% of the common stock of the Bank, in a purchase transaction,
through a private placement of the Company's common stock and debt (the "Private
Placement"). Prior to the acquisition of the Bank on April 1, 1998, the Company
did not have any operations, other than the costs associated with the private
placement offering of common stock and debt. The Bank is a federally chartered
savings bank. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations analyzes the major elements of the Bank's
consolidated balance sheets and statements of income. Readers of this report
should refer to the unaudited consolidated financial statements and other
financial data presented throughout this report to fully understand the
following discussion and analysis.
The Bank is a federally chartered and insured savings bank subject to
extensive regulation and supervision by the Office of Thrift Supervision
("OTS"), as its chartering agency, and the Federal Deposit Insurance Corporation
("FDIC"), as the insurer of its deposits. In addition, the Company is a
registered savings and loan holding company subject to OTS regulation,
examination, supervision and reporting.
The Company provides a wide range of retail and small business services
including non-interest bearing and interest bearing checking, savings and money
market accounts, certificates of deposit, and individual retirement accounts.
In addition, the Company offers an extensive array of real estate, consumer,
small business, and commercial real estate loan products. Other financial
services include automated teller machines, debit card, internet banking, bill
payment, credit related life and disability insurance, safe deposit boxes,
telephone banking, discount investment brokerage, and full-service investment
advisory services.
8
<PAGE>
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 166,000 checking customers with average non-interest revenue
of approximately $148 per account annually. Much of this success can be
attributed to the customer-oriented service environment created by the Bank's
personnel.
Results of Operations
The Company's primary asset is its investment in 100% of the common stock
of the Bank and Company's operations are funded primarily from the operations of
the Bank.
For the three months ended June 30, 2000 and 1999
For the three months ended June 30, 2000 the Company had net income of $3.1
million, an increase of $0.4 million from the comparable period in 1999. The
primary reason for this increase was an increase in net interest income and non-
interest income as discussed under the headings Net Interest Income and Non-
interest Income below. For the Company, this resulted in a return on average
assets of .78% and a return on average common equity of 11.18% for the three
months ended June 30, 2000 compared to .73% and 10.44%, respectively for the
same time period in 1999. The Bank had a return on average assets of 1.08% and
10.75% return on average common equity for the three months ended June 30, 2000
compared to 1.01% and 8.99%, respectively for the three months ended June 30,
1999.
Total assets increased to $1.622 billion at June 30, 2000 from $1.592
billion at December 31, 1999, an increase of $30 million, or 1.9%. Net loans
receivable increased from $994 million at December 31, 1999 to $1.006 billion at
June 30, 2000, an increase of $12 million, or 1.2%. Cash and cash equivalents
increased from $48.2 million at December 31, 1999 to $48.7 million at June 30,
2000, an increase of $.5 million, or 1%. Deposits increased $83 million, or
8.5%, to $1.061 billion at June 30, 2000. The increase in deposits was used to
reduce FHLB borrowings in addition to funding loan and investment growth. FHLB
borrowings declined $53 million from $424 million to $371 million at June 30,
2000.
Net Interest Income
Net interest income represents the amount by which interest income on
interest-bearing assets, including investments and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of earnings.
Interest rate fluctuations, as well as changes in the amount and type of earning
assets and liabilities, combine to affect net interest income.
Factors that determine the level of net interest income include the volume
of earning assets and interest-bearing liabilities, yields and rates paid, fee
income from portfolio loans, the level of nonperforming loans and other non-
earning assets, and the amount of noninterest-bearing liabilities supporting
earning assets.
9
<PAGE>
Net interest income for the three months ending June 30, 2000 was $10.6
million, an increase of $.3 million, or 2.8% from $10.3 million for the same
period in 1999. The net interest margin was 2.97% and 3.05% for the three
months ended June 30, 2000 and 1999, respectively. The increase in net interest
income was primarily due to an increase in total interest income of $3.2
million, or 13.2%, from $24.5 million for the three months ended June 30, 1999
to $27.7 million for the three months ended June 30, 2000. Average interest-
earning assets increased $109.2 million, or 8.0%, from $1.36 billion for the
three months ended June 30, 1999 to $1.47 billion for the three months ended
June 30, 2000. Loans were the principal contributor of this increase in earning
assets as average loans were $1.01 billion for the period ended June 30, 2000,
an increase of $59.7 million, or 6.3% from the quarter ended June 30, 1999.
Provision for Loan Losses
The provision for loan losses increased $50,000, or 7.1%, from $700,000 for
the three months ended June 30, 1999 to $750,000 for the three months ended June
30, 2000. Loan loss reserves were 1.18% and 1.13% of gross loans at June 30,
2000 and December 31, 1999, respectively.
Nonperforming loans and real estate owned were $3.6 million and $2.4
million at June 30, 2000 and December 31, 1999, representing .22% and .15% of
total assets at the respective balance sheet dates. The allowance for loan
losses totaled $12.0 million at June 30, 2000, an increase of $628,000, or 5.5%
from December 31, 1999. The allowance for loan losses represented 458% and 579%
of nonperforming loans at June 30, 2000 and December 31, 1999, respectively.
Noninterest Income
Noninterest income for the three months ended June 30, 2000 was $8.0
million, an increase of $1.0 million, or 15.0%, over the same period in 1999.
The following table presents for the periods indicated the major components of
noninterest income:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
------ ------
<S> <C> <C>
(in thousands)
Service charges on deposit accounts $6,475 $5,440
Mortgage operations, net 820 746
Other noninterest income 669 737
------ ------
Total noninterest income $7,964 $6,923
====== ======
</TABLE>
Service charges were $6.5 million for the three months ended June 30, 2000,
compared to $5.4 million for the same period in 1999, an increase of $1.1
million or 19.0%.
10
<PAGE>
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. The growth in service charges has resulted from an
increase in the number of transaction accounts (checking and savings accounts).
The increase in the number of transaction accounts and the related service fee
generation is due largely to the Company's successful execution of its "Totally
Free Checking" program to the lower to middle income customers in the markets in
which the Company operates.
Noninterest Expense
For the three months ended June 30, 2000, noninterest expense totaled $13.1
million, an increase of $1.0 million, or 8.7%, from $12.1 million for the three
months ended June 30, 1999. The efficiency ratio for the quarter ended June 30,
2000 was 66.06%, compared to 65.04% for the three months ended June 30, 1999.
The efficiency ratio is calculated by dividing total noninterest expense,
excluding goodwill amortization and loss on sale of investments, by net interest
income plus noninterest income.
Salaries and employee benefits expense for the three months ended June 30,
2000 was $6.2 million compared to $5.4 million for the three months ended June
30, 1999, an increase of $.8 million, or 14.6%. This increase was due primarily
to the hiring of additional personnel required to accommodate the Bank's loan
growth and expanded products and services.
Occupancy expense increased $229,000, or 32.4%, from $706,000 for the three
months ended June 30, 1999 to $935,000 for the three months ended June 30, 2000,
due to the opening of a loan office in Tulsa, Oklahoma, a mortgage production
center in Little Rock, Arkansas, six new retail banking branches, and two
new consumer finance offices. Major categories included in occupancy expense
are building lease expense, depreciation expense, and utilities expense.
Data and item processing increased $.1 million, or 12.7%, from $1.1 million
for the three months ended June 30, 1999, to $1.2 million for the three months
ended June 30, 2000, due to loan and deposit growth, increased number of
transactions, and new systems.
Income Taxes
For the three months ended June 30, 2000, income tax expense was $1.6
million, a decrease of $155,000 from $1.7 million at June 30, 1999. The
effective tax rate for the three months ended June 30, 2000 was 33.5% compared
to 38.7% for the three months ended June 30, 1999.
For the six months ended June 30, 2000 and 1999
For the six months ended June 30, 2000, net income was $6.2 million, an
increase of $.9 million from the six month period ended June 30, 1999.
Increases in net interest income and non-interest income were the primary
reasons. For the Company, this resulted in a return on average assets of .78%
and a return on average equity of 11.14% for the six months ended June 30, 2000
compared to .73% and 10.21%, respectively for the same time period in 1999. The
Bank had a return on average assets of 1.07% and 10.50% return on average common
equity for the six months ended June 30, 2000 compared to 1.01% and 8.68%,
respectively for the six months ended June 30, 1999.
11
<PAGE>
Net Interest Income
Net interest income for the six months ending June 30, 2000 was $21.3
million, an increase of $1.2 million or 6.0% from $20.1 million for the six
months ending June 30, 1999. Total interest income increased $6.9 million, or
14.5% from $47.7 million for the six months ended June 30, 1999 to $54.7 million
for the six months ended June 30, 2000. Average interest-earning assets for the
six months ended June 30, 2000 increased $143 million, or 10.9%, to $1.46
billion from $1.32 billion for the six months ended June 30, 1999. Average
loans receivable for the six months ended June 30, 2000 were $1.0 billion, an
increase of $65 million or 6.9% from the same period in 1999.
Provision for Loan Losses
The provision for loan losses increased $30,000, or 2.4%, from $1.27
million for the six months ended June 30, 1999 to $1.3 million during the six
month period ended June 30, 2000.
Noninterest Income
Noninterest income for the six months ended June 30, 2000 was $14.8
million, an increase of $1.8 million, or 13.6%, from $13.0 million for the six
month period ended June 30, 1999. The following table presents for the periods
indicated the major components of noninterest income:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
------ ------
<S> <C> <C>
(in thousands)
Service charges on deposit accounts $12,286 $10,231
Mortgage operations, net 1,480 1,440
Other noninterest income 1,051 1,370
------- -------
Total noninterest income $14,817 $13,041
======= =======
</TABLE>
Service charges, as shown above, increased from $10.2 million for the six months
ended June 30, 1999 to $12.3 million for the same period in 2000, an increase of
$2.1 million or 20.0%. This increase is attributed to growth in the number of
accounts and higher transaction fees during 2000 compared to the same period in
1999.
Noninterest Expenses
For the six months ended June 30, 2000, noninterest expense totaled $25.6
million, an increase of $2.2 million, or 9.4% for the six months ended June 30,
1999. The efficiency ratio for the six months ended June 30, 2000 was 65.92%
compared to 65.32% for the same period in 1999.
Salary and benefit expense for the six months ended June 30, 2000 was $12.1
million compared to $10.5 million for the six months ended June 30, 1999, an
increase of $1.6 million, or 14.6%. Additional staff to accommodate the growth
in loans and expanded services is the primary reason for this increase.
Occupancy expense increased from $1.45 million during 1999 to $1.78 million
for the same six month period ending June 30, 2000, an increase of $.3 million
or 22.7%
12
<PAGE>
due to the opening of new offices in 1999 and 2000. Data and item processing
increased $.3 million from $2.1 million for the six months ended 1999 to $2.4
million for the six months ended June 30, 2000 due to increased number of
transaction accounts and loans originated and serviced.
Income Taxes
For the six months ended June 30, 2000, income tax expense was $3.1
million, a decrease of $.2 million from $3.3 million for the six months ended
June 30, 2000. The effective tax rate was 38.7% for the six months ended June
30, 1999 compared to 33.5% during the same period in 2000. Increased tax-exempt
income is the primary contributor to the decrease in effective rates.
Impact of Inflation
The effects of inflation on the local economy and on the Company'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 Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest sensitive assets and liabilities.
Deposits
Deposits consisted of the following at June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ---------------
<S> <C> <C>
(In thousands)
Demand and NOW accounts, including
noninterest-bearing deposits of $90,091
and $76,960 at June 30, 2000 and
December 31, 1999, respectively $ 368,388 $280,587
Money market 39,252 61,619
Statement and passbook savings 100,582 99,797
Certificates of deposit 552,983 535,933
---------- --------
Total deposits $1,061,205 $977,936
========== ========
</TABLE>
Capital Resources
Stockholders' equity decreased to $103.0 million at June 30, 2000 from
$105.6 million at December 31, 1999, a decrease of $2.6 million, or 2.4%. This
decrease was due to the net increase in the unrealized loss on investments
available for sale of $3.5 million, net income of $6.2 million for the six
months ended June 30, 2000, and $5.3 million in treasury stock acquired in the
Company's stock repurchase program.
Capital
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").
13
<PAGE>
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 June 30, 2000, that
the Bank meets all capital adequacy requirements to which it is subject.
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 the Bank's actual capital amounts and ratios as of June
30, 2000 and December 31, 1999 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
Required to be
Categorized as
Well Capitalized
Required for Under Prompt
Company Bank Capital Adequacy Corrective Action
Actual Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Tangible capital to adjusted total
assets $48,451 3.16% $110,086 7.20% $22,939 1.50% $ N/A N/A
Core capital to adjusted total
assets 48,451 3.16% 110,086 7.20% 61,171 4.00% 76,464 5.00%
Total capital to risk weighted
assets 59,797 6.19% 121,432 12.59% 77,178 8.00% 96,473 10.00%
Tier 1 capital to risk weighted
assets 48,451 4.75% 110,086 11.41% N/A N/A 57,884 6.00%
As of June 30, 2000
Tangible capital to adjusted total
assets 50,890 3.24% 113,058 7.21% 23,515 1.50% N/A N/A
Core capital to adjusted total
assets 50,890 3.24% 113,058 7.21% 62,706 4.00% 78,383 5.00%
Total capital to risk weighted
assets 62,864 6.37% 124,969 12.79% 78,163 8.00% 95,283 10.00%
Tier I capital to risk weighted
assets 50,890 5.16% 113,058 11.57% N/A N/A 57,169 6.00%
</TABLE>
14
<PAGE>
Asset Quality
Management is aware of the risks inherent in lending and continually
monitors risk characteristics of the loan portfolio. The Company's policy is to
maintain the allowance for loan losses at a level believed adequate by
management to absorb potential loan losses within the portfolio. Management's
determination of the adequacy of the allowance is performed by an internal loan
review committee and is based on risk characteristics of the loans, including
loans deemed impaired in accordance with Financial Accounting Standards Board
(FASB) Statement No. 114, past loss experience, economic conditions and such
other factors that deserve recognition. Additions to the allowance are charged
to operations.
The following table presents, for the periods indicated, an analysis of the
Company's allowance for loan losses and other related data (amounts in
thousands).
<TABLE>
<CAPTION>
Six Months Twelve
ended Months ended
6/30/00 12/31/99
------------- --------------
<S> <C> <C>
Allowance for loan losses, beginning of period $11,346 $10,472
Provision for loan losses 1,300 2,270
Charge-offs (1,401) (2,895)
Recoveries 729 1,499
------- -------
Allowance for loan losses, end of period $11,974 $11,346
======= =======
Allowance to period-end loans 1.18% 1.13%
Net charge-offs to average loans 0.13% 0.15%
Allowance to period-end nonperforming loans 458% 579%
</TABLE>
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at June 30, 2000 were $3.6 million, compared to
$2.4 million at December 31, 1999. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.35% and 0.24% at June 30, 2000 and
December 31, 1999, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
(in thousands)
<S> <C> <C>
Nonaccrual loans $2,612 $1,959
Other real estate and repossessed assets 941 437
------ ------
Total nonperforming assets $3,553 $2,396
====== ======
Nonperforming assets to total loans and
other real estate owned 0.35% 0.24%
</TABLE>
The Company has developed procedures designed 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
15
<PAGE>
Loan Committee approval for large credit relationships and effective loan
documentation procedures. The loan review department identifies and analyzes
weaknesses in the portfolio and reports credit risk grade changes on a quarterly
basis to Bank management and directors. The Bank also maintains a well-developed
monitoring process for credit extensions in excess of $100,000. The Bank has
established underwriting guidelines to be followed by its officers. The Company
also monitors its delinquency levels for any negative or adverse trends, and
collection efforts are centralized. 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.
At June 30, 2000 and December 31, 1999, respectively, the Company had
$-0- and $-0- in non-government accruing loans that were contractually past
due 90 days or more. The Company continues to accrue interest for government-
sponsored loans such as FHA insured and VA guaranteed loans which are past due
90 or more days, as the interest on these is insured by the federal government.
The aggregate unpaid balance of accruing loans which were past due 90 or more
days was $22.5 million and $48.2 million as of June 30, 2000 and December 31,
1999, respectively.
Year 2000 Readiness Disclosure
The Company has substantially completed its Year 2000 Project as scheduled.
The Company's computer and other systems with imbedded microchips have operated
without Year 2000 related problems and appear to be Year 2000 compliant. The
Company is not aware that any of its software and hardware vendors, major loan
customers, correspondent banks or governmental agencies with which the company
interacts have experienced material Year 2000 related problems.
While the Company believes all of its critical systems are Year 2000 ready,
there can be no guarantee the Company has discovered all possible failure points
including all of its systems, non-ready third parties whose systems and failures
could impact the Company, or other uncertainties. Many experts believe that the
risk of potential Year
16
<PAGE>
2000 related failures could continue beyond January 1, 2000 as certain sensitive
target dates occur. As a result, the Company will continue to monitor its own
systems (including new systems brought into operation by the Company) and
maintain contact with mission critical third parties as these target dates
pass. Additionally, the Company will maintain its previously developed
contingency plan for implementation in the event that mission critical third
party systems fail to address remaining Year 2000 issues.
The Company's aggregate expenses incurred with respect to its Year 2000
Project were less than $250,000, all of which have been expensed through June
30, 2000. A significant portion of these costs were represented by the
redeployment of existing staff to the Year 2000 Project. No projects under
consideration by the Company have been deferred because of Year 2000 efforts.
The Company does not anticipate any additional material costs relating to the
Year 2000 issue.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various lawsuits and litigation matters on an
ongoing basis as a result of its day-to-day operations. However, the Company
does not believe that any of these or any threatened lawsuits and litigation
matters will have a materially adverse effect on the Company or its business.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of the Company was held on May 17,
2000. At this meeting proxies were solicited under Regulation 14a of the
Securities and Exchange Act of 1934. Total shares issued and outstanding
entitled to vote at the meeting were 9,832,108. A total of 6,489,072 shares were
represented by shareholders in attendance or by proxy, representing a quorum.
The following directors were elected for a term expiring in 2001: C.
Stanley Bailey, Brian A. Gahr, Howard B. McMahon, C. Marvin Scott, Ben F.
Scroggin, John M. Stein, John E. Steuri, and David E. Stubblefield.
Additionally, the following matters were voted upon with the votes
indicated:
Approval of an amendment to Superior's Restated and Amended Certificate of
Incorporation reducing the number of shares of Preferred Stock from 10,000,000
to 1,000,000 and making certain other formal revisions.
Number of
Votes
---------
For 5,866,777
Against 605
Abstain 3,322
Broker nonvoters 618,368
Ratification of the selection of Ernst & Young LLP as independent auditors
of the Company for the year ending December 31, 2000.
Number of
Votes
---------
For 6,488,950
Against 101
Abstain 21
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
17
<PAGE>
Superior Financial Corp.
/s/ C. Stanley Bailey 8/14/00
------------------------------------------ ----------------------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner 8/14/00
------------------------------------------ ----------------------------
Rick D. Gardner, Chief Financial Officer Date
18
