<PAGE>
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 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 Identification No.)
incorporation or organization)
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 March 31, 2000
- -------------------------------------------------------------------------------
Common Stock, $0.01 Par Value 9,832,108
<PAGE>
SUPERIOR FINANCIAL CORP.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets,
March 31, 2000 (unaudited) and December 31, 1999 3
Consolidated statements of income,
Three months ended March 31,2000 (unaudited)
and March 31, 1999 (unaudited) 4
Consolidated statements of cash flows,
Three months ended March 31, 2000 (unaudited)
and March 31, 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 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
<PAGE>
CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities; (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the operation of the
businesses of Superior 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>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 40,804 $ 48,241
Loans available for sale 44,353 51,406
Loans receivable 999,442 1,004,961
Less: allowance for loan losses 11,583 11,346
---------- ----------
Loans receivable, net 987,859 993,615
Investments available for sale, net 376,341 354,915
Accrued interest receivable 16,943 15,530
Federal Home Loan Bank stock 22,241 21,907
Premises and equipment, net 33,195 32,507
Mortgage servicing rights, net 4,361 4,310
Prepaid expenses and other assets 5,090 3,837
Goodwill 61,990 62,851
Real estate acquired in settlement of loans, net 232 202
Deferred acquisition costs 2,568 2,624
---------- ----------
Total assets $1,595,977 $1,591,945
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,025,153 $ 977,936
Federal Home Loan Bank borrowings 379,000 424,000
Note payable 13,000 13,000
Senior notes 60,000 60,000
Custodial escrow balances 9,119 7,420
Other liabilities 6,246 4,003
---------- ----------
Total liabilities 1,492,518 1,486,359
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,764 94,755
Retained earnings 21,114 18,041
Accumulated other comprehensive loss (9,706) (6,147)
---------- ----------
106,273 106,750
Treasury stock at cost, 249,800 and 96,000 shares (2,814) (1,164)
---------- ----------
Total stockholders' equity 103,459 105,586
---------- ----------
Total liabilities & stockholders' equity $1,595,977 $1,591,945
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended March 31, Ended March 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Interest income:
Loans $20,424 $17,012
Investments 6,125 6,107
Interest-bearing deposits 71 42
Other 334 92
------- -------
Total interest income 26,954 23,253
Interest expense:
Deposits 9,172 8,395
Short-term borrowings 2,781 544
Long-term borrowings 4,237 4,465
------- -------
Total interest expense 16,190 13,404
------- -------
Net interest income 10,764 9,849
Provision for loan losses 550 570
------- -------
Net interest income after provision for loan losses 10,214 9,279
Noninterest income:
Service charges on deposit accounts 5,811 4,791
Mortgage operations, net 660
Income from real estate operations, net 125 116
Other 257 517
------- -------
Total noninterest income 6,853 6,118
Noninterest expense:
Salaries and employee benefits 5,894 5,144
Occupancy expense 841 744
Deposit insurance premium 51 130
Data and item processing 1,223 1,047
Advertising and promotion 441 491
Amortization of goodwill 861 822
Postage and supplies 815 782
Equipment expense 503 378
Other 1,818 1,762
------- -------
Total noninterest expense 12,447 11,300
Income before income taxes 4,620 4,097
Income taxes 1,548 1,582
------- -------
Net income $ 3,072 $ 2,515
======= =======
Basic and diluted earnings
per common share $ 0.31 $ 0.25
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 3,072 $ 2,515
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 550 570
Depreciation 537 353
Deferred income taxes - 545
Additions to mortgage servicing rights (170) -
Amortization of mortgage servicing rights 119 60
Amortization of premiums on investments, net 397 384
Amortization of goodwill 861 822
Amortization of other intangibles 179 166
Loss on sale of real estate 6 -
Gain on sale of loans (102) (57)
Mortgage loans originated for sale (23,941) (11,479)
Proceeds from sale of mortgage loans held for sale 52,889 14,685
Increase in accrued interest receivable (1,413) (1,028)
Increase in prepaid expenses and other assets (1,375) (2,895)
Net increase in custodial escrow balances 1,699 2,727
Increase in other liabilities 4,160 1,536
-------- ---------
Net cash provided by operating activities 37,468 8,904
Investing activities
Increase in loans receivable, net (16,764) (88,811)
Purchase of investments (36,107) (49,712)
Proceeds from sale of investments 500 -
Purchase FHLB stock (335) (4,208)
Proceeds from sale of real estate 142 174
Principal payments on investments 8,309 21,511
Purchase of premises and equipment (1,225) (538)
-------- ---------
Net cash used in investing activities (45,480) (121,584)
Financing activities
Net increase in deposits 47,217 1,804
Net increase (decrease) in FHLB borrowings (45,000) 78,019
Principal payment on note payable - (7,000)
Proceeds from common stock issued, net 8 -
Purchase of treasury stock (1,650) -
-------- ---------
Net cash provided by financing activities 575 72,823
-------- ---------
Net decrease in cash (7,437) (39,857)
Cash and cash equivalents, beginning of period 48,241 81,425
-------- ---------
Cash and cash equivalents, end of period $ 40,804 $ 41,568
======== =========
</TABLE>
See accompanying notes.
5
<PAGE>
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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 period ended March 31,
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 131,000 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 Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Common shares-weighted averages (basic) 9,886 10,080
Common share equivalents-weighted averages 22 -
Common share weighted averaged (diluted) 9,908 10,080
Net income $3,072 $ 2,515
Basic and diluted earnings per common share $ 0.31 $ 0.25
</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 ("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. 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 ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). 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. 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 consequence 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>
4. Branch Sale
During the first quarter of 1999, the Company completed the sale of one
branch facility located in Oklahoma. The sale of this branch resulted in a gain
of $450,000, which was recorded as an adjustment to the purchase price
allocation for the acquisition of the Bank and resulted in a related reduction
in goodwill. The total deposits for the sold branch were approximately $10.7
million.
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.
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 165,000 checking customers with average non-interest revenue of
approximately $140 per account annually. Much of this success can be attributed
to the customer-oriented service environment created by the Bank's personnel.
8
<PAGE>
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 March 31, 2000 and 1999
For the three months ended March 31, 2000 the Company had net income of $3.1
million, an increase of $0.6 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 11.10% for the three
months ended March 31, 2000 compared to .72% and 9.97%, respectively for the
same time period in 1999. The Bank had a return on average assets of 1.06% and
10.26% return on average common equity for the three months ended March 31, 2000
compared to 1.00% and 8.33%, respectively for the three months ended March 31,
1999.
Total assets increased to $1.596 billion at March 31, 2000, from $1.592
billion at December 31, 1999, an increase of $4 million or .3%. Net loans
receivable decreased from $994 million at December 31, 1999 to $988 million at
March 31, 2000, a decrease of $6 million, or .6% due to the securitization of
$26.9 million of mortgage loans. Offsetting this decrease was an increase in
investments of $21 million, or 6%. Cash and cash equivalents decreased from $48
million at December 31, 1999 to $41 million at March 31, 2000, a decrease or $7
million, or 15%. The decrease in cash and cash equivalents resulted from the
Company utilizing these funds to reduce Federal Home Loan Bank borrowings.
Deposits increased $48 million, or 5%, to $1.03 billion at March 31, 2000. The
increase in deposits was also used to reduce FHLB borrowings, which declined $45
million from $424 million to $379 million at March 31, 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.
Net interest income for the three months ending March 31, 2000 was $10.8
million, an increase of $1.0 million, or 9.3% from $9.8 million for March 31,
1999. The net interest margin was 3.03% and 3.08% for the three months ended
March 31, 2000 and 1999, respectively. The increase in net interest income was
primarily due to an increase in total interest income of $3.7 million, or 15.9%,
from $23.3 million for the three months ended
9
<PAGE>
March 31, 1999 to $27.0 million for the three months ended March 31, 2000.
Average interest-earning assets increased $177.4 million, or 13.9%, from $1.28
billion for the three months ended March 31, 1999. Loans were the principal
contributor of this increase in earning assets as average loans were $995.2
million for the period ended March 31, 2000, an increase of $132.4 million, or
15.3% from the quarter ended March 31, 1999.
Provision for Loan Losses
The provision for loan losses decreased $20,000, or 3.5%, from $570,000 for
the three months ended March 31, 1999 to $550,000 for the three months ended
March 31, 2000. Loan loss reserves were 1.16% and 1.13% of gross loans at March
31, 2000 and December 31, 1999, respectively.
Nonperforming loans and real estate owned were $2.8 million and $2.4 million
at March 31, 2000 and December 31, 1999, representing .18% and .15% of total
assets at the respective balance sheet dates. The allowance for loan losses
totaled $11.6 million at March 31, 2000, an increase of $237,000, or 2.1% from
December 31, 1999. The allowance for loan losses represented 472% and 579% of
nonperforming loans at March 31, 2000 and December 31, 1999, respectively.
Noninterest Income
Noninterest income for the three months ended March 31, 2000 was $6.9
million, an increase of $.8 million, or 12.0%, over the same period in 1999.
The following table presents for the periods indicated the major components of
noninterest income:
Three Months Ended March 31,
2000 1999
------ -------
(in thousands)
Service charges on deposit accounts $5,811 $4,791
Mortgage operations, net 660 694
Other noninterest income 382 633
------ ------
Total noninterest income $6,853 $6,118
====== ======
Service charges were $5.8 million for the three months ended March 31, 2000,
compared to $4.8 million for the same period in 1999, an increase of $1.0
million or 21.3%.
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. Management of the Company believes the growth in
service charges will be sustained as the number of transaction accounts
(checking and savings accounts) increases. The increase in the number of
transaction accounts and the related service fee generation is due largely to
the Company's successful execution of its "Totally Free Checking" program to the
lower to middle income customers in the markets in which the Company operates.
Noninterest Expense
For the three months ended March 31, 2000, noninterest expense totaled $12.4
million, an increase of $1.1 million, or 10.2%, from $11.3 million for the three
months ended March 31, 1999. The efficiency ratio for the quarter ended March
31, 2000 was
10
<PAGE>
65.77%, compared to 65.62% for the three months ended March 31, 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 March 31,
2000 was $5.9 million compared to $5.1 million for the three months ended March
31, 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 $97,000, or 13.0%, from $744,000 for the three
months ended March 31, 1999 to $841,000 for the three months ended March 31,
2000, due to the opening of a loan office in Tulsa, Oklahoma, a mortgage
production center in Little Rock, Arkansas, and five new retail banking
branches. Major categories included in occupancy expense are building lease
expense, depreciation expense, and utilities expense.
Data and item processing increased $.2 million, or 16.8%, from $1.0 million
for the three months ended March 31, 1999, to $1.2 million for the three months
ended March 31, 2000, due to loan and deposit growth, increased number of
transactions, and new systems.
Income Taxes
For the three months ended March 31, 2000, income tax expense was $1.5
million, a decrease of $34,000 from $1.6 million at March 31, 1999. The
effective tax rate for the three months ended March 31, 2000 was 33.5% compared
to 38.6% for the three months ended March 31, 1999.
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 March 31, 2000 and December 31, 1999.
11
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(In thousands)
<S> <C> <C>
Demand and NOW accounts, including noninterest-bearing
deposits of $86,795 and $76,960 at March 31, 2000 and
December 31, 1999, respectively $ 336,428 $280,587
Money market 49,075 61,619
Statement and passbook savings 104,977 99,797
Certificates of deposit 534,673 535,933
---------- --------
Total deposits $1,025,153 $977,936
========== ========
</TABLE>
Capital Resources
Stockholders' equity decreased to $103.5 million at March 31, 2000 from
$105.6 million at December 31, 1999, a decrease of $2.1 million, or 2.0%. This
decrease was due to the net change in the unrealized loss on investments
available for sale of $3.6 million, net income of $3.1 million for the three
months ended March 31, 2000, and $1.7 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").
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 March 31, 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.
12
<PAGE>
The Company's and the Bank's actual capital amounts and ratios as of March
31, 2000 and December 31, 1999 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Required to be
Categorized as
Well Capitalized
Company Bank Required for Under Prompt
---------------------------------- 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 I capital to risk weighted
assets 48,451 4.75% 110,086 11.41% N/A N/A 57,884 6.00%
As of March 31, 2000
Tangible capital to adjusted total
assets $50,738 3.29% $111,620 7.25% $23,005 1.50% $ N/A N/A
Core capital to adjusted total
assets 50,738 3.29% 111,620 7.25% 61,347 4.00% 77,004 5.00%
Total capital to risk weighted
assets 62,302 6.73% 123,046 13.38% 73,572 8.00% 91,965 10.00%
Tier I capital to risk weighted
assets 50,738 5.49% 111,620 12.14% N/A N/A 55,179 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 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).
13
<PAGE>
<TABLE>
<CAPTION>
Three Months Twelve Months
ended 3/31/00 ended 12/31/99
------------- --------------
<S> <C> <C>
Allowance for loan losses, beginning of period $11,346 $10,472
Provision for loan losses 550 2,270
Charge-offs (678) (2,895)
Recoveries 365 1,499
------- -------
Allowance for loan losses, end of period $11,583 $11,346
======= =======
Allowance to period-end loans 1.16% 1.13%
Net charge-offs to average loans 0.13% 0.15%
Allowance to period-end nonperforming loans 472% 579%
</TABLE>
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at March 31, 2000 were $2.8 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 0.28% and 0.24% at March 31, 2000 and
December 31, 1999, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
(in thousands)
<S> <C> <C>
Nonaccrual loans $2,455 $1,959
Other real estate and repossessed assets 346 437
------ ------
Total nonperforming assets $2,801 $2,396
====== ======
Nonperforming assets to total loans and
other real estate owned 0.28% 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 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.
14
<PAGE>
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 March 31, 2000 and December 31, 1999, respectively, the Company had
$439,000 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 $25.7 million and $48.2 million as of March 31, 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 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 approach. 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.
15
<PAGE>
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 March
31, 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
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 March 31, 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 5/15/00
- ------------------------------------------ -----------------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner 5/15/00
- ------------------------------------------ -----------------------
Rick D. Gardner, Chief Financial Officer Date
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 40,260
<INT-BEARING-DEPOSITS> 544
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 376,341
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 999,442
<ALLOWANCE> 11,583
<TOTAL-ASSETS> 1,595,977
<DEPOSITS> 1,025,153
<SHORT-TERM> 219,000
<LIABILITIES-OTHER> 15,365
<LONG-TERM> 233,000
0
0
<COMMON> 101
<OTHER-SE> 103,358
<TOTAL-LIABILITIES-AND-EQUITY> 1,595,977
<INTEREST-LOAN> 20,424
<INTEREST-INVEST> 6,125
<INTEREST-OTHER> 405
<INTEREST-TOTAL> 26,954
<INTEREST-DEPOSIT> 9,172
<INTEREST-EXPENSE> 16,190
<INTEREST-INCOME-NET> 10,764
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,447
<INCOME-PRETAX> 4,620
<INCOME-PRE-EXTRAORDINARY> 4,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,072
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 3.03
<LOANS-NON> 2,455
<LOANS-PAST> 25,660
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,346
<CHARGE-OFFS> 678
<RECOVERIES> 365
<ALLOWANCE-CLOSE> 11,583
<ALLOWANCE-DOMESTIC> 11,583
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
