<PAGE>
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 September 30, 2000
--------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 9,106,908
<PAGE>
SUPERIOR FINANCIAL CORP.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets, September 30, 2000 (unaudited)
and December 31, 1999....................................... 3
Consolidated statements of income, September 30, 2000
Three months ended September 30, 2000
and September 30, 1999 (unaudited) and Nine months ended
September 30, 2000 and September 30, 1999
(unaudited)................................................. 4
Consolidated statements of cash flows,
Nine months ended September 30, 2000
and September 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........................................... 16
Item 2. Changes in Securities....................................... 16
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............................................................ 17
</TABLE>
<PAGE>
CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the operation of the
businesses of Superior Financial Corp. ("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, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 50,704 $ 48,241
Loans available for sale 37,959 51,406
Loans receivable 1,049,873 1,004,961
Less: allowance for loan losses 12,253 11,346
--------- ---------
Loans receivable, net 1,037,620 993,615
Investments available for sale, net 367,142 354,915
Accrued interest receivable 17,339 15,530
Federal Home Loan Bank stock 23,330 21,907
Premises and equipment, net 34,610 32,507
Mortgage servicing rights, net 6,704 4,310
Prepaid expenses and other assets 6,213 3,837
Goodwill 60,268 62,851
Real estate acquired in settlement of loans, net 190 202
Deferred acquisition costs 2,469 2,624
--------- ---------
Total assets $1,644,548 $1,591,945
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,058,583 $ 977,936
Federal Home Loan Bank borrowings 390,500 424,000
Note payable 13,000 13,000
Senior notes 60,000 60,000
Custodial escrow balances 11,255 7,420
Other liabilities 7,135 4,003
---------- -----------
Total liabilities 1,540,473 1,486,359
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,764 94,755
Retained earnings 27,281 18,041
Accumulated other comprehensive loss (7,560) (6,147)
---------- -----------
114,586 106,750
Treasury stock at cost, 975,000 and 96,000 shares (10,511) (1,164)
---------- -----------
Total stockholders' equity 104,075 105,586
---------- -----------
Total liabilities and stockholders' equity $1,644,548 $ 1,591,945
========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income:
Loans $21,380 $19,666 $62,768 $54,830
Investments 6,189 5,859 18,576 18,046
Interest-bearing deposits 37 6 152 236
Other 647 287 1,423 433
------- ------- ------- -------
Total interest income 28,253 25,818 82,919 73,545
Interest expense:
Deposits 10,903 8,450 30,097 25,310
Short-term borrowings 2,324 2,296 7,412 4,112
Long-term borrowings 5,004 4,437 14,050 13,357
------- ------- ------- -------
Total interest expense 18,231 15,183 51,559 42,779
Net interest income 10,022 10,635 31,360 30,766
Provision for loan losses 500 500 1,800 1,770
------- ------- ------- -------
Net interest income after provision
for loan losses 9,522 10,135 29,560 28,996
Noninterest income:
Service charges on deposit accounts 6,637 5,663 18,923 15,894
Mortgage operations, net 603 354 2,083 1,794
Income from real estate operations, net 126 115 372 353
Other 595 642 1,400 1,774
------- ------- ------- -------
Total noninterest income 7,961 6,774 22,778 19,815
Noninterest expense:
Salaries and employee benefits 6,090 5,559 18,143 16,077
Occupancy expense 926 838 2,702 2,288
Deposit insurance premium 52 136 154 407
Data and item processing 1,306 1,125 3,746 3,252
Advertising and promotion 433 486 1,320 1,482
Amortization of goodwill 861 861 2,583 2,544
Postage and supplies 714 837 2,278 2,530
Equipment expense 628 497 1,729 1,388
Other 1,952 2,037 5,861 5,759
------- ------- ------- -------
Total noninterest expense 12,962 12,376 38,516 35,727
Income before income taxes 4,521 4,533 13,822 13,084
Income taxes 1,465 1,534 4,582 4,840
------- ------- ------- -------
Net income $ 3,056 $ 2,999 $ 9,240 $ 8,244
------- ------- ------- -------
Basic and diluted earnings
per common share $ 0.33 $ 0.30 $ 0.96 $ 0.82
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Operating activities
Net income $ 9,240 $ 8,244
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 1,800 1,770
Depreciation 1,737 1,418
Additions to mortgage servicing rights (2,928) -
Amortization of mortgage servicing rights 533 186
Amortization of premiums on investments, net 503 976
Amortization of goodwill 2,583 2,544
Amortization of other intangibles 524 510
Loss on sale of real estate 20 2
(Gain) loss on sale of loans (440) 24
Mortgage loans originated for sale (81,410) (34,287)
Mortgage loans purchased - (57,065)
Proceeds from sale of mortgage loans held for sale 72,944 53,158
Increase in accrued interest receivable (1,810) (8,620)
Increase in prepaid expenses and other assets (2,742) (2,948)
Net increase (decrease) in custodial escrow balances 3,835 (520)
Increase in other liabilities 3,893 1,355
-------- ---------
Net cash provided by (used in) operating activities 8,282 (33,253)
Investing activities
Increase in loans receivable, net (23,603) (178,365)
Purchase of investments (45,374) (113,252)
Loss on sale of investments 3 149
Proceeds from sale of investments 760 55,675
Purchases of FHLB stock (1,423) (10,192)
Proceeds from sale of real estate 142 901
Principal payments on investments 29,708 54,854
Purchases of premises and equipment (3,840) (6,681)
-------- ---------
Net cash used in investing activities (43,627) (196,911)
Financing activities
Net increase in deposits 80,646 11,336
Net (decrease) increase in FHLB borrowings (33,500) 185,200
Principal payment on note payable - (7,000)
Proceeds from common stock issued, net 8 -
Purchases of treasury stock (9,346) -
-------- ---------
Net cash provided by financing activities 37,808 189,536
-------- ---------
Net increase (decrease) in cash 2,463 (40,628)
Cash and cash equivalents, beginning of period 48,241 81,425
-------- ---------
Cash and cash equivalents, end of period $ 50,704 $ 40,797
======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 nine month periods
ended September 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. For the third quarter of 2000 and 1999, all outstanding
options to purchase shares were included in the dilutive EPS calculation.
6
<PAGE>
Basic and diluted earnings per common share are computed as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
---------------------- -------------------------
<S> <C> <C> <C> <C>
Common shares-weighted averages (basic) 9,297 10,081 9,606 10,081
Common share equivalents-weighted averages 38 91 21 37
Common share weighted average (diluted) 9,335 10,172 9,627 10,118
Net Income $3,056 $ 2,999 $9,240 $ 8,244
Basic and diluted earnings per common share $ 0.33 $ 0.30 $ 0.96 $ 0.82
</TABLE>
3. Recently Issued Accounting Guidance
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 does not anticipate the adoption of this statement to have
a material impact on its 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. 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.
7
<PAGE>
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"), a federally chartered savings 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 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 noninterest 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 brokerage, and full-service investment advisory
services.
The Company has been effective in establishing primary banking
relationships with lower to middle income market segments through the successful
execution of its "totally free checking" programs. This has resulted in the
Company having over 166,000 checking customers with average noninterest revenue
of approximately $150 per account annually. Much of this success can be
attributed to the customer-oriented service environment created by the Bank's
personnel.
On November 1, 2000, the Company announced that the Bank's wholly-owned
subsidiary, Superior Finance Company, had completed the acquisition of the
assets of four consumer finance offices in north Alabama for approximately
$125,000 in cash from Southern Financial, Inc., a Nashville, Tennessee based
consumer finance company. The four offices had net loans outstanding of
8
<PAGE>
approximately $6.5 million. The acquisition will be accounted for under the
purchase method of accounting.
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 September 30, 2000 and 1999
For the three months ended September 30, 2000 the Company had net income of
$3.1 million, an increase of $.1 million from the comparable period in 1999.
The primary reason for this increase was an increase in noninterest income which
offset declines in net interest income and increased noninterest expense, as
discussed below. For the Company, this resulted in a return on average assets
of .75% and a return on average common equity of 10.90% for the three months
ended September 30, 2000 compared to .76% and 11.15%, respectively for the same
time period in 1999. The Bank had a return on average assets of 1.04% and
10.25% return on average common equity for the three months ended September 30,
2000 compared to 1.03% and 9.68%, respectively for the three months ended
September 30, 1999.
Total assets increased to $1.645 billion at September 30, 2000 from $1.592
billion at December 31, 1999, an increase of $53 million, or 3.3%. Net loans
receivable increased from $994 million at December 31, 1999 to $1.038 billion at
September 30, 2000, an increase of $44 million, or 4.4%. Cash and cash
equivalents increased from $48.2 million at December 31, 1999 to $50.7 million
at September 30, 2000, an increase of $2.5 million, or 5.1%. Deposits increased
$81 million, or 8.2%, to $1.059 billion at September 30, 2000. The increase in
deposits was used to reduce FHLB borrowings in addition to funding loan growth.
FHLB borrowings declined $33.5 million from $424 million to $390.5 million at
September 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 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 three months ending September 30, 2000 was
$10.0 million, a decrease of $.6 million, or 5.8% from $10.6 million for the
same period in 1999. The net interest margin was 2.84% and 3.04% for the three
months ended September 30, 2000 and 1999, respectively. The decrease in net
interest income was primarily due to a sharper increase in rates paid on
interest bearing liabilities over yields
9
<PAGE>
earned. The rate paid on average interest bearing liabilities increased to 5.09%
in the third quarter of 2000 compared to 4.38% in the third quarter of 1999, an
increase of .71%. During this same period, the yield on earning assets increased
from 7.25% in the third quarter of 1999 to 7.74% in the third quarter of 2000,
an increase of .49%. Average interest-earning assets increased $47 million, or
3.2%, from $1.428 billion for the three months ended September 30, 1999 to
$1.475 billion for the three months ended September 30, 2000. Loans accounted
for all of this increase in earning assets as average loans were $1.03 billion
for the period ended September 30, 2000, an increase of $52 million, or 5.3%
from the quarter ended September 30, 1999.
Provision for Loan Losses
The provision for loan losses was unchanged at $500,000 for the three
months ended September 30, 2000. Loan loss reserves were 1.17% and 1.13% of
gross loans at September 30, 2000 and December 31, 1999, respectively.
Nonperforming loans and real estate owned were $3.4 million and $2.4
million at September 30, 2000 and December 31, 1999, representing .21% and .15%
of total assets at the respective balance sheet dates. The allowance for loan
losses totaled $12.3 million at September 30, 2000, an increase of $907,000, or
8.0% from December 31, 1999. The allowance for loan losses represented 416% and
579% of nonperforming loans at September 30, 2000 and December 31, 1999,
respectively.
Noninterest Income
Noninterest income for the three months ended September 30, 2000 was $8.0
million, an increase of $1.2 million, or 17.5%, 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 Sept. 30,
------------------------------
2000 1999
------------------------------
(in thousands)
<S> <C> <C>
Service charges on deposit accounts $6,637 $5,663
Mortgage operations, net 603 354
Other noninterest income 721 757
------ ------
Total noninterest income $7,961 $6,774
====== ======
</TABLE>
Service charges were $6.6 million for the three months ended September 30,
2000, compared to $5.7 million for the same period in 1999, an increase of $.9
million, or 17.2%.
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)
and increased transaction charges. 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.
10
<PAGE>
Noninterest Expense
For the three months ended September 30, 2000, noninterest expense totaled
$13.0 million, an increase of $.6 million, or 4.7%, from $12.4 million for the
three months ended September 30, 1999. The efficiency ratio for the quarter
ended September 30, 2000 was 67.3%, compared to 65.5% for the three months ended
September 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 September
30, 2000 was $6.1 million compared to $5.6 million for the three months ended
September 30, 1999, an increase of $.5 million, or 9.6%. This increase was due
primarily to the hiring of additional personnel required to accommodate the
Bank's loan growth and expanded products, services, and new locations.
Occupancy expense increased $88,000, or 10.5%, from $838,000 for the three
months ended September 30, 1999 to $926,000 for the three months ended September
30, 2000, due to the opening of four new retail banking branches and two new
finance company offices. Major categories included in occupancy expense are
building lease, depreciation, and utilities expense.
Data and item processing increased $.2 million, or 16.1%, from $1.1 million
for the three months ended September 30, 1999, to $1.3 million for the three
months ended September 30, 2000, due to loan and deposit account growth,
increased number of transactions, and new systems.
Income Taxes
For the three months ended September 30, 2000 and 1999, income tax expense
was $1.5 million. The effective tax rate for the three months ended September
30, 2000 was 32.4% compared to 33.8% for the three months ended September 30,
1999.
For the nine months ended September 30, 2000 and 1999
For the nine months ended September 30, 2000, net income was $9.2 million,
an increase of $1.0 million from the nine month period ended September 30, 1999.
Increases in net interest income and noninterest income were the primary reasons
for the increase in net income. For the Company, this resulted in a return on
average assets of .77% and a return on average equity of 11.06% for the nine
months ended September 30, 2000 compared to .73% and 10.46%, respectively for
the same time period in 1999. The Bank had a return on average assets of 1.06%
and 10.41% return on average common equity for the nine months ended September
30, 2000 compared to 1.02% and 9.02%, respectively for the nine months ended
September 30, 1999.
Net Interest Income
Net interest income for the nine months ending September 30, 2000 was $31.4
million, an increase of $.6 million or 1.9% from $30.8 million for the nine
months ending September 30, 1999. Total interest income increased $9.4 million,
or 12.7% from $73.5 million for the nine months ended September 30, 1999 to
$82.9 million for the nine
11
<PAGE>
months ended September 30, 2000. Average interest-earning assets for the nine
months ended September 30, 2000 increased $121 million, or 8.9%, to $1.47
billion. Average loans receivable for the nine months ended September 30, 2000
were $1.0 billion, an increase of $87 million or 9.4% from the same period in
1999.
Provision for Loan Losses
The provision for loan losses increased $30,000, or 1.7%, from $1.77
million for the nine months ended September 30, 1999 to $1.8 million during the
nine month period ended September 30, 2000.
Noninterest Income
Noninterest income for the nine months ended September 30, 2000 was $22.8
million, an increase of $3.0 million, or 15.0%, from $19.8 million for the nine
month period ended September 30, 1999. The following table presents for the
periods indicated, the major components of noninterest income:
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
------------------------------
2000 1999
------------------------------
(in thousands)
<S> <C> <C>
Service charges on deposit $18,923 $15,894
accounts
Mortgage operations, net 2,083 1,794
Other noninterst income 1,772 2,127
------- -------
Total noninterest income $22,778 $19,815
======= =======
</TABLE>
Service charges, as shown above, increased from $15.9 million for the nine
months ended September 30, 1999 to $18.9 million for the same period in 2000, an
increase of $3.0 million or 19.1%. Insufficient funds fees account for the
majority of service charge income. 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 Expense
For the nine months ended September 30, 2000, noninterest expense totaled
$38.5 million, an increase of $2.8 million, or 7.8% for the nine months ended
September 30, 1999. The efficiency ratio for the nine months ended September
30, 2000 was 66.4% compared to 65.4% for the same period in 1999.
Salary and benefit expense for the nine months ended September 30, 2000 was
$18.1 million compared to $16.1 million for the nine months ended September 30,
1999, an increase of $2.0 million, or 12.8%. Additional staff to accommodate the
growth in loans, expanded services and new locations is the primary reason for
this increase.
Occupancy expense increased from $2.3 million during 1999 to $2.7 million
for the same nine month period ending September 30, 2000, an increase of $.4
million or 18.1% due to the opening of new offices in 1999 and 2000. Data and
item processing expense increased $.4 million from $3.3 million for the nine
months ended September 30, 1999 to $3.7 million for the nine months ended
September 30, 2000 due to increased number of transaction accounts and loans
originated and serviced.
12
<PAGE>
Income Taxes
For the nine months ended September 30, 2000, income tax expense was $4.6
million, a decrease of $.2 million from $4.8 million for the nine months ended
September 30, 2000. The effective tax rate was 37.0% for the nine months ended
September 30, 1999 compared to 33.2% during the same period in 2000. Increased
income exempt from federal and state income tax 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 September 30, 2000 and December 31,
1999.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------------------
(In thousands)
<S> <C> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $87,670 and $76,960 at September 30, 2000
and December 31, 1999, respectively $ 380,264 $280,587
Money market 33,738 61,619
Statement and passbook savings 92,068 99,797
Certificates of deposit 552,513 535,933
---------- --------
Total deposits $1,058,583 $977,936
========== ========
</TABLE>
Capital Resources
Stockholders' equity decreased to $104.1 million at September 30, 2000 from
$105.6 million at December 31, 1999, a decrease of $1.5 million, or 1.4%. This
decrease was due to the net increase in the unrealized loss on investments
available for sale of $1.4 million, net income of $9.2 million for the nine
months ended September 30, 2000, and $9.3 million in treasury stock acquired in
the Company's stock repurchase programs.
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").
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
13
<PAGE>
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 September 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
September 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 September 30, 2000
Tangible capital to adjusted total
assets $50,697 3.19% $114,596 7.25% $23,713 1.50% $ N/A N/A
Core capital to adjusted total assets 50,697 3.19% 114,596 7.25% 63,236 4.00% 79,045 5.00%
Total capital to risk weighted assets 62,950 6.36% 126,849 12.87% 78,822 8.00% 98,528 10.00%
Tier I capital to risk weighted
assets 50,697 5.12% 114,596 11.63% N/A N/A 59,117 6.00%
</TABLE>
Asset Quality
Management is aware of the risks inherent in lending and continually
monitors risk characteristics of the loan portfolio. The Company's policy is to
maintain the allowance for loan losses at a level believed adequate by
management to absorb potential loan losses within the portfolio. Management's
determination of the adequacy of the allowance is performed by an internal loan
review committee and is based on risk
14
<PAGE>
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>
Nine Twelve
Months Months
ended ended
9/30/00 12/31/99
----------- ----------
<S> <C> <C>
Allowance for loan losses, beginning of period $11,346 $10,472
Provision for loan losses 1,800 2,270
Charge-offs (2,038) (2,895)
Recoveries 1,145 1,499
------- -------
Allowance for loan losses, end of period $12,253 $11,346
======= =======
Allowance to period-end loans 1.17% 1.13%
Net charge-offs to average loans 0.12% 0.15%
Allowance to period-end nonperforming loans 416% 579%
</TABLE>
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at September 30, 2000 were $3.4 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 0.33% and 0.24% at September 30, 2000
and December 31, 1999, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- --------------
(in thousands)
<S> <C> <C>
Nonaccrual loans $2,945 $1,959
Other real estate and repossessed assets 492 437
------ ------
Total nonperforming assets $3,437 $2,396
====== ======
Nonperforming assets to total loans and
other real estate owned 0.33% 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 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
15
<PAGE>
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 September 30, 2000 and December 31, 1999, respectively, the Company had
no 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 $20.2
million and $48.2 million as of September 30, 2000 and December 31, 1999,
respectively. Of the $20.2 million in 90 or more days past due and still
accruing balances as of September 30, 2000, $15.3 million represent the
remaining principal balance of $46 million of FHA insured and VA guaranteed
mortgages purchased by the Bank in June, 1999. The contract called for the Bank
to receive a pass through net yield of 7.13% and the loans would be paid off
upon foreclosure and the servicer's receipt of the individual claims from either
FHA or VA. The servicing of these loans has been terminated upon the default of
the servicer, which subsequently filed for bankruptcy. Management believes that
the remaining principal balance and interest on these loans will be collected
with no material adverse impact to the Bank.
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
16
<PAGE>
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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 September 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.
Superior Financial Corp.
/s/ C. Stanley Bailey November 14, 2000
--------------------- -----------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner November 14, 2000
------------------- -----------------
Rick D. Gardner, Chief Financial Officer Date
17
