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, 2001
COMMISSION FILE NUMBER #0-25239
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0379417
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16101 LaGrande Drive, Suite 103, Little Rock, Arkansas 72223
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(Address of principle executive offices)
(501) 324-7282
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(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 April 30, 2001
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Common Stock, $0.01 Par Value 9,050,921
SUPERIOR FINANCIAL CORP.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets,
March 31, 2001 (unaudited) and December 31, 2000.................... 3
Consolidated statements of income,
Three months ended March 31, 2001 (unaudited)
and March 31, 2000 (unaudited)...................................... 4
Consolidated statements of cash flows,
Three months ended March 31, 2001 (unaudited)
and March 31, 2000 (unaudited)...................................... 5
Notes to consolidated financial statements
(unaudited)........................................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 2. Changes in Securities and Use of Proceeds........................... 15
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
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 92,404 $ 55,321
Loans available for sale 26,022 27,226
Loans 1,063,183 1,068,943
Less: allowance for loan losses 12,126 12,086
----------- ----------
Loans, net 1,051,057 1,056,857
Investments available for sale, net 347,025 363,008
Accrued interest receivable 16,588 17,515
Federal Home Loan Bank stock 19,022 23,713
Premises and equipment, net 36,290 35,407
Mortgage servicing rights, net 6,516 6,630
Prepaid expenses and other assets 12,526 13,392
Goodwill 58,868 59,653
Real estate acquired in settlement of loans, net 597 324
Deferred acquisition costs 2,370 2,419
----------- ----------
Total assets $1,669,285 $1,661,465
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,114,592 $1,078,508
Federal Home Loan Bank borrowings 271,000 330,000
Other borrowed funds 68,893 53,628
Note payable 7,000 11,500
Senior notes 60,000 60,000
Custodial escrow balances 14,925 8,114
Other liabilities 13,582 8,398
----------- ----------
Total liabilities 1,549,992 1,550,148
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,764 94,764
Retained earnings 33,463 30,356
Accumulated other comprehensive income (loss) 2,092 (2,777)
----------- ----------
130,420 122,444
Treasury stock at cost, 1,031,000 and 1,031,000 shares, respectively (11,127) (11,127)
----------- ----------
Total stockholders' equity 119,293 111,317
----------- ----------
Total liabilities and stockholders' equity $1,669,285 $1,661,465
=========== ==========
See accompanying notes.
3
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, dollars in thousands, except per share amounts)
Three Months Ended March 31,
2001 2000
-------- --------
Interest income:
Loans $22,417 $20,424
Investments 5,751 6,125
Interest-bearing deposits 37 71
Other 310 334
-------- --------
Total interest income 28,515 26,954
Interest expense:
Deposits 10,941 9,172
Short-term borrowings 1,955 2,781
Long-term borrowings 4,524 4,237
-------- --------
Total interest expense 17,420 16,190
-------- --------
Net interest income 11,095 10,764
Provision for loan losses 750 550
-------- --------
Net interest income after
provision for loan losses 10,345 10,214
Noninterest income:
Service charges on deposit accounts 6,868 5,811
Mortgage operations, net 818 660
Income from real estate operations, net 119 125
Other 665 257
-------- --------
Total noninterest income 8,470 6,853
Noninterest expense:
Salaries and employee benefits 6,883 5,894
Occupancy expense 1,037 841
Deposit insurance premium 52 51
Data and item processing 1,519 1,223
Advertising and promotion 395 441
Amortization of goodwill 867 861
Postage and supplies 832 815
Equipment expense 677 503
Other 1,986 1,818
-------- --------
Total noninterest expense 14,248 12,447
Income before income taxes 4,567 4,620
Income taxes 1,460 1,548
-------- --------
Net income $ 3,107 $ 3,072
======== ========
Basic and diluted earnings per share $ 0.34 $ 0.31
======== ========
See accompanying notes.
4
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, unaudited)
Three Months Ended
March 31,
------------------------------------
2001 2000
-------------- ----------------
Operating activities
Net income $ 3,107 $ 3,072
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 750 550
Depreciation 668 537
Additions to mortgage servicing rights (169) (170)
Amortization of mortgage servicing rights 283 119
Amortization of premiums on investments, net 47 397
Amortization of goodwill 867 861
Amortization of other intangibles 173 179
(Gain) loss on sale of real estate (14) 6
Gain on sale of loans (99) (102)
Gain on sale of investments (123) -
Mortgage loans originated for sale (33,110) (23,941)
Proceeds from sale of mortgage loans held for sale 32,023 52,889
Decrease (increase) in accrued interest receivable 927 (1,413)
Decrease (increase) in prepaid expenses and other assets 659 (1,375)
Net increase in custodial escrow balances 6,811 1,699
Increase in other liabilities 2,562 3,148
-------- --------
Net cash provided by operating activities 15,362 36,456
Investing activities
Decrease (increase) in loans, net 6,818 (16,764)
Purchase of investments (8,753) (36,107)
Proceeds from sale of investments 22,707 500
Purchase FHLB stock (309) (335)
Proceeds from sale of FHLB stock 5,000 -
Proceeds from sale of real estate 364 142
Principal payments on mortgage-backed securities 9,597 8,309
Purchase of premises and equipment (1,552) (1,225)
-------- --------
Net cash provided by (used in) investing activities 33,872 (45,480)
Financing activities
Net increase in deposits 36,084 47,217
Net decrease in FHLB borrowings (59,000) (45,000)
Net increase in other borrowings 15,265 1,012
Principal payment on note payable (4,500) -
Proceeds from common stock issued, net - 8
Purchase of treasury stock - (1,650)
-------- --------
Net cash (used in) provided by financing activities (12,151) 1,587
-------- --------
Net increase (decrease) in cash 37,083 (7,437)
Cash and cash equivalents, beginning of period 55,321 48,241
-------- --------
Cash and cash equivalents, end of period $ 92,404 $ 40,804
======== ========
See accompanying notes.
5
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2001
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.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
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 accounting principles generally accepted
in the United States 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, 2001 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, 2000.
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 outstanding options to
purchase shares that were not included in the dilutive EPS calculation for 2000
because they would have been antidilutive.
6
Basic and diluted earnings per common share are computed as follows:
Three Months Ended March 31,
2001 2000
------------------ -------------------
(In thousands, except per share amounts)
Common shares-weighted average (basic) 9,051 9,886
Common share equivalents-weighted average 145 22
---------- ---------
Common share weighted average (diluted) 9,196 9,908
========== =========
Net income $ 3,107 $ 3,072
========== =========
Basic and diluted earnings per common share $ 0.34 $ 0.31
========== =========
3. Recent Accounting Standards
In June 1998, The Financial Accounting Standards Board ("FASB") 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 adopted 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 adoption of this statement did not have a material impact on its
operations or financial position.
4. Acquisition
In November 2000, the Bank's wholly-owned subsidiary, Superior Finance Company,
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 approximately $6.5 million. The acquisition was accounted
for under the purchase method of accounting.
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. 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.
7
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations analyzes the major elements of the Company'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 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 execution of its
"totally free checking" programs. This has resulted in the Company serving over
184,000 households with average noninterest revenue of approximately $155 per
account annually. The Bank attracts primary banking relationships in part
through 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 March 31, 2001 and 2000
For the three months ended March 31, 2001 the Company had net income of $3.1
million, an increase of $35,000 from the comparable period in 2000. The primary
reason for this increase was an increase in net interest income and noninterest
income as discussed under the headings Net Interest Income and Noninterest
Income below. For the Company, this resulted in a return on average assets of
0.77% and a return on average common equity of 10.99% for the three months ended
March 31, 2001 compared to 0.78% and 11.10%, respectively, for the same time
period in 2000. The Bank had a return on average assets of 1.03% and 9.78%
return on average common equity for the three months ended March 31, 2001
compared to 1.06% and 10.26%, respectively, for the three months ended March 31,
2000.
Total assets increased to $1.669 billion at March 31, 2001, from $1.661 billion
at December 31, 2000, an increase of $8 million or 0.5%. Loans decreased from
$1.069 billion at December 31, 2000 to $1.063 billion at March 31, 2001, a
8
decrease of $6 million, or 0.6% due to mortgage loan securitizations offsetting
increases in commercial and consumer loans. Investments decreased $16 million,
or 4.4% to $347.0 million at March 31, 2001 from $363.0 million at December 31,
2000. Cash and cash equivalents increased from $55.3 million at December 31,
2000 to $92.4 million at March 31, 2001, an increase or $37.1 million, or 67.1%.
Included in cash and cash equivalents, interest-earning deposits were $39.0
million and $.4 million at March 31, 2001 and December 31, 2000, respectively.
The increase in cash and cash equivalents resulted from the decreases in
investments and loans. Deposits increased $36.1 million, or 3.3%, to $1.115
billion at March 31, 2001. The increase in deposits was also used to reduce FHLB
borrowings, which declined $59 million from $330 million to $271 million at
March 31, 2001. Other borrowed funds, which consist mainly of repurchase
agreements and treasury, tax and loan balances, increased $15.3 million to $68.9
million at March 31, 2001 from $53.6 million at December 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, 2001 was $11.1
million, an increase of $0.3 million, or 3.1% from $10.8 million for March 31,
2000. The net interest margin was 3.10% and 3.03% for the three months ended
March 31, 2001 and 2000, respectively. The increase in net interest income was
due to higher yields earned over rates paid on interest-bearing liabilities. The
yield on earning assets increased from 7.49% for the first quarter of 2000 to
7.85% in the first quarter of 2001, an increase of 0.36%. The rate paid on
average interest-bearing liabilities increased to 4.96% in the first quarter of
2001 compared to 4.66% in the first quarter of 2000, an increase of 0.30%.
Average interest-earning assets increased $25.1 million, or 1.7%, from $1.453
billion for the quarter ended March 31, 2000 to $1.478 billion for March 31,
2001. Loans were the principal contributor of this increase in earning assets as
average loans were $1.072 billion for the period ended March 31, 2001, an
increase of $77 million, or 7.7% from the quarter ended March 31, 2000. The
increase in loans offset decreases in investments and loans available for sale.
Average interest-bearing liabilities averaged $1.417 billion during the first
quarter of 2001, an increase of $29 million, or 2.1% from the $1.388 billion in
the first quarter of 2000.
9
Provision for Loan Losses
The provision for loan losses increased $200,000, or 36.4%, from $550,000 for
the three months ended March 31, 2000 to $750,000 for the three months ended
March 31, 2001. Loan loss reserves were 1.14% and 1.13% of loans at March 31,
2001 and December 31, 2000, respectively.
Nonperforming loans and real estate owned and foreclosed property were $5.2
million and $5.3 million at March 31, 2001 and December 31, 2000, representing
0.31% and 0.32% of total assets at the respective balance sheet dates. The
allowance for loan losses totaled $12.1 million at March 31, 2001, an increase
of $40,000, or 0.3% from December 31, 2000. The allowance for loan losses
represented 293% and 269% of nonperforming loans at March 31, 2001 and December
31, 2000, respectively.
Noninterest Income
Noninterest income for the three months ended March 31, 2001 was $8.5 million,
an increase of $1.6 million, or 23.6%, over the same period in 2000. The
following table presents for the periods indicated the major components of
noninterest income:
Three Months Ended March 31,
2001 2000
------------ ------------
(Dollars in thousands)
Service charges on deposit accounts $6,868 $5,811
Mortgage operations, net 818 660
Other noninterest income 784 382
------------ ------------
Total noninterest income $8,470 $6,853
============ ============
Service charges were $6.9 million for the three months ended March 31, 2001,
compared to $5.8 million for the same period in 2000, an increase of $1.1
million or 18.2%.
Service charges on deposit accounts consist primarily of insufficient funds fees
charged to customers. The increase in the number of transaction accounts and the
related service fee generation due to higher item charges are the primary
reasons for growth in service charges and is largely due to the Company's
successful execution of its "Totally Free Checking" program to the lower to
middle income customers in the markets in which the Company operates.
Noninterest Expense
For the three months ended March 31, 2001, noninterest expense totaled $14.2
million, an increase of $1.8 million, or 14.4%, from $12.4 million for the three
months ended March 31, 2000. The efficiency ratio for the quarter ended March
31, 2001 was 67.7%, compared to 65.1% for the three months ended March 31, 2000.
The efficiency ratio is calculated by dividing total noninterest expense,
excluding goodwill amortization and investment gains and losses, by net tax
equivalent interest income plus noninterest income.
10
Salaries and employee benefits expense for the three months ended March 31, 2001
was $6.9 million compared to $5.9 million for the three months ended March 31,
2000, an increase of $1.0 million, or 16.8%. This increase was due primarily to
the additional personnel in the Bank's subsidiary, Superior Finance Company,
which initiated operations in the second quarter of 2000, and incentive and
commission payments due to the Bank's loan, deposit and noninterest income
growth.
Occupancy expense increased $0.2 million, or 23.3%, from $0.84 million for the
three months ended March 31, 2000 to $1.04 million for the three months ended
March 31, 2001, due to the opening of a new retail banking branch and the
addition of seven locations for Superior Finance Company. Major categories
included in occupancy expense are building lease, depreciation, and utilities
expenses.
Data and item processing increased $.3 million, or 24.3%, from $1.2 million for
the three months ended March 31, 2000, to $1.5 million for the three months
ended March 31, 2001, due to loan and deposit growth, increased number of
transactions, and new systems.
Income Taxes
For the three months ended March 31, 2001, income tax expense was $1.46 million,
a decrease of $88,000 from $1.55 million at March 31, 2000. The effective tax
rate for the three months ended March 31, 2001 was 32.0% compared to 33.5% for
the three months ended March 31, 2000. The decrease in the effective tax rate is
due to an increase in tax exempt interest income.
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, 2001 and December 31, 2000.
11
March 31, December 31,
2001 2000
------------ ------------
(Dollars in thousands)
Demand and NOW accounts, including noninterest-bearing
deposits of $93,288 and $92,879 at March 31, 2001 and
December 31, 2000, respectively $ 417,644 $ 398,150
Money market 29,929 30,781
Statement and passbook savings 95,808 87,120
Certificates of deposit 571,211 562,457
---------- ----------
Total deposits $1,114,592 $1,078,508
========== ==========
Capital Resources
Stockholders' equity increased to $119.3 million at March 31, 2001 from $111.3
million at December 31, 2000, an increase of $8.0 million, or 7.2%. This
increase was due to the net change in the unrealized loss on investments
available for sale of $4.9 million from a net loss of $2.8 million at December
2000 to a net gain of $2.1 million at March 31, 2001 and net income of $3.1
million for the quarter ended March 31, 2001. Comprehensive income for the
quarter ended March 31, 2001 was $8.0 million and a loss of $0.5 million for the
quarter ended March 31, 2000. No additional treasury stock was acquired in the
Company's stock repurchase program during the quarter ended March 31, 2001. No
dividends were paid on common stock during the quarter ended March 31, 2001.
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, 2001, that
the Bank meets all capital adequacy requirements to which it is subject.
12
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 March 31,
2001 and December 31, 2000 are presented below (amounts in thousands):
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
---------------------------------------------------------------------------------------
As of December 31, 2000
Tangible capital to
adjusted total assets $53,778 3.35% $115,924 7.25% $23,987 1.50% $ N/A N/A
Core capital to adjusted
total assets 53,778 3.35% 115,924 7.25% 63,967 4.00% 79,958 5.00%
Total capital to risk
weighted assets 65,864 6.46% 128,010 12.62% 81,134 8.00% 101,418 10.00%
Tier I capital to risk weighted
assets 53,778 5.27% 115,924 11.43% N/A N/A 60,851 6.00%
As of March 31, 2001
Tangible capital to
adjusted total assets $57,680 3.59% $117,380 7.34% $23,982 1.50% $ N/A N/A
Core capital to adjusted
total assets 57,680 3.59% 117,380 7.34% 63,953 4.00% 79,941 5.00%
Total capital to risk
weighted assets 69,806 6.92% 129,506 12.90% 80,303 8.00% 100,379 10.00%
Tier I capital to risk weighted
assets 57,680 5.72% 117,380 11.69% N/A N/A 60,227 6.00%
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.
13
Three Months Twelve Months
ended 3/31/01 ended 12/31/00
------------- --------------
(Dollars in thousands)
Allowance for loan losses, beginning of period $12,086 $11,346
Provision for loan losses 750 2,300
Charge-offs (1,080) (3,095)
Recoveries 370 1,535
----------- -----------
Allowance for loan losses, end of period $12,126 $12,086
=========== ===========
Allowance to period-end loans 1.14% 1.13%
Net charge-offs to average loans 0.26% 0.15%
Allowance to period-end nonperforming loans 293% 269%
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at March 31, 2001 were $5.2 million, compared to
$5.3 million at December 31, 2000. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.49% and 0.49% at March 31, 2001 and
December 31, 2000, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
March 31, December 31,
2001 2000
--------- ------------
(Dollars in thousands)
Nonaccrual loans $4,139 $4,495
Other real estate and repossessed assets 1,084 779
--------- ------------
Total nonperforming assets $5,223 $5,274
========= ============
Nonperforming assets to total loans and
other real estate owned 0.49% 0.49%
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.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans past
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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, 2001, the Company had $71,000 in non-government accruing loans that
were contractually past due 90 days or more. At December 31, 2000, 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 $16.3
million and $16.0 million as of March 31, 2001 and December 31, 2000,
respectively. Of the 90 or more days past due and still accruing balances as of
March 31, 2001, $11.3 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 and Use of Proceeds
None
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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, 2001.
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 May 14, 2001
- ------------------------------------------ ------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner May 14, 2001
- ---------------------------------------- ------------
Rick D. Gardner, Chief Financial Officer Date
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