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, 2001
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
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(Address of principal 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 October 31, 2001
- ------------------------------- -----------------------------------------
Common Stock, $0.01 Par Value 8,863,452
SUPERIOR FINANCIAL CORP.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets,
September 30, 2001 (unaudited) and December 31, 2000................. 3
Consolidated statements of income, September 30, 2001 Three
months ended September 30, 2001 and September 30, 2000
(unaudited) and Nine months ended
September 30, 2001 and September 30, 2000 (unaudited)................ 4
Consolidated statements of cash flows,
Nine months ended September 30, 2001
and September 30, 2000 (unaudited)................................... 5
Notes to consolidated financial statements (unaudited)............... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 17
Item 2. Changes in Securities................................................ 18
Item 3. Defaults upon Senior Securities...................................... 18
Item 4. Submission of Matters to a Vote of
Security Holders..................................................... 18
Item 5. Other Information.................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................... 18
SIGNATURES.................................................................... 18
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); (viii) changes in securities markets,
and (ix) adjustment to or changes in anticipated accounting of contracts and
contingencies. 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
(Dollars in thousands, except share amounts)
September 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 52,609 $ 55,321
Loans available for sale 22,314 27,226
Loans receivable 1,086,609 1,068,943
Less: allowance for loan losses 12,036 12,086
----------- -----------
Loans receivable, net 1,074,573 1,056,857
Investments available for sale, net 359,341 363,008
Accrued interest receivable 16,823 17,515
Federal Home Loan Bank stock 17,065 23,713
Premises and equipment, net 45,990 35,407
Mortgage servicing rights, net 6,001 6,630
Prepaid expenses and other assets 12,598 13,392
Goodwill, net 57,129 59,653
Real estate acquired in settlement of loans, net 870 324
Deferred acquisition costs 2,271 2,419
----------- -----------
Total assets $1,667,584 $1,661,465
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $1,155,267 $1,078,508
Federal Home Loan Bank borrowings 228,500 330,000
Other borrowed funds 65,105 53,628
Note payable 9,200 11,500
Senior notes 54,700 60,000
Custodial escrow balances 13,526 8,114
Other liabilities 15,362 8,398
----------- -----------
Total liabilities 1,541,660 1,550,148
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,764 94,764
Retained earnings 40,172 30,356
Accumulated other comprehensive income (loss) 4,760 (2,777)
----------- -----------
139,797 122,444
Treasury stock at cost, 1,218,469 shares (13,873) (11,127)
----------- -----------
Total stockholders' equity 125,924 111,317
----------- -----------
Total liabilities and stockholders' equity $1,667,584 $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 Nine Months Ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- -------------- --------------
Interest income:
Loans $22,239 $21,380 $67,141 $62,768
Investments 5,511 6,189 16,880 18,576
Interest-bearing deposits 211 37 485 152
Other 130 647 620 1,423
------- ------- ------- -------
Total interest income 28,091 28,253 85,126 82,919
Interest expense:
Deposits 10,117 10,903 31,594 30,097
FHLB borrowings 3,572 5,571 11,501 16,314
Other borrowings 2,125 1,757 6,668 5,148
------- ------- ------- -------
Total interest expense 15,814 18,231 49,763 51,559
Net interest income 12,277 10,022 35,363 31,360
Provision for loan losses 1,200 500 2,950 1,800
------- ------- ------- -------
Net interest income after
provision for loan losses 11,077 9,522 32,413 29,560
Noninterest income:
Service charges on deposit accounts 6,834 6,637 20,724 18,923
Mortgage operations, net 874 603 2,453 2,083
Income from real estate operations, net 102 126 328 372
Other 913 595 2,336 1,400
------- ------- ------- -------
Total noninterest income 8,723 7,961 25,841 22,778
Noninterest expense:
Salaries and employee benefits 7,013 6,090 21,050 18,143
Occupancy expense 1,183 926 3,297 2,702
Data and item processing 1,654 1,306 4,752 3,746
Advertising and promotion 281 433 1,107 1,320
Amortization of goodwill 869 861 2,606 2,583
Postage and supplies 826 714 2,497 2,278
Equipment expense 705 628 2,018 1,729
Other 2,240 2,004 6,441 6,015
------- ------- ------- -------
Total noninterest expense 14,771 12,962 43,768 38,516
Income before income taxes 5,029 4,521 14,486 13,822
Income taxes 1,610 1,465 4,670 4,582
------- ------- ------- -------
Net income $ 3,419 $ 3,056 $ 9,816 $ 9,240
------- ------- ------- -------
Basic earnings per common share $ 0.38 $ 0.33 $ 1.08 $ 0.96
======= ======= ======= =======
Diluted earnings per common share $ 0.37 $ 0.33 $ 1.07 $ 0.96
======= ======= ======= =======
See accompanying notes.
4
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Nine Months Ended
September 30,
--------------------------------
2001 2000
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Operating activities
Net income $ 9,816 $ 9,240
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 2,950 1,800
Depreciation 2,083 1,737
Additions to mortgage servicing rights (230) (2,928)
Amortization of mortgage servicing rights 860 533
Amortization of premiums on investments, net 262 503
Amortization of goodwill 2,606 2,583
Amortization of other intangibles 508 524
(Gain) loss on sale of real estate (14) 20
Gain on sale of loans (515) (440)
Gain on sale of investments (579) 3
Loss on retired notes 216 -
Mortgage loans originated for sale (65,300) (81,410)
Proceeds from sale of mortgage loans held for sale 81,660 72,944
Decrease (increase) in accrued interest receivable 692 (1,810)
Increase in prepaid expenses and other assets 273 (2,742)
Net increase in custodial escrow balances 5,412 3,835
Increase in other liabilities 3,443 3,893
--------- --------
Net cash provided by operating activities 44,143 8,285
Investing activities
Increase in loans, net (32,475) (23,603)
Purchase of investments (84,102) (45,374)
Proceeds from sale of investments 61,282 760
Purchase FHLB stock (3,225) (1,423)
Proceeds from sale of FHLB stock 9,872 -
Proceeds from sale of real estate 364 142
Principal payments on investments 37,843 29,708
Purchases of premises and equipment (12,666) (3,840)
--------- --------
Net cash used in investing activities (23,107) (43,630)
Financing activities
Net increase in deposits 76,759 80,646
Net decrease in FHLB borrowings (101,500) (33,500)
Net increase in other borrowings 11,477 -
Principal payment on note payable (2,300) -
Retirement of senior notes (5,439) -
Proceeds from common stock issued, net - 8
Purchases of treasury stock (2,745) (9,346)
--------- --------
Net cash (used in) provided by financing activities (23,748) 37,808
--------- --------
Net (decrease) increase in cash (2,712) 2,463
Cash and cash equivalents, beginning of period 55,321 48,241
--------- --------
Cash and cash equivalents, end of period $ 52,609 $ 50,704
========= ========
See accompanying notes.
5
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
1. Summary of Significant Accounting Policies
Nature of Operations
Superior Financial Corp. ("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 and nine month periods ended September 30, 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. For the third quarter of 2001 and 2000, all outstanding
options to purchase shares were included in the dilutive EPS calculation.
6
Basic and diluted earnings per common share are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- --------- --------- ---------
(In thousands, except per share amounts)
Common shares-weighted averages (basic) $9,036 9,297 9,046 9,606
Common share equivalents-weighted averages 231 38 187 21
------ ------ ------ ------
Common share weighted average (diluted) 9,267 9,335 9,233 9,627
====== ====== ====== ======
Net Income $3,419 $3,056 $9,816 $9,240
====== ====== ====== ======
Basic and diluted earnings per common share $ 0.38 $ 0.33 $ 1.08 $ 0.96
====== ====== ====== ======
Diluted earnings per common share $ 0.37 $ 0.33 $ 1.07 $ 0.96
====== ====== ====== ======
3. Recently Issued Accounting Guidance
In September 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
September 15, 2000. SFAS 133 permits early adoption as of the beginning of any
fiscal quarter that begins after September 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.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS 141"), "Business Combinations", and
Statement of Financial Accounting Standards ("SFAS 142"), "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The company is currently
reviewing the impact of SFAS 141 and 142 and will be performing a fair-value
analysis at a later date in connection with the adoption of SFAS 142 on
January 1, 2002.
On July 2, 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB 102"), "Selected Loan Loss Allowance Methodology and
Documentation Issues". SAB 102 expresses the SEC's views on the development,
documentation and application of a systematic methodology for determining the
allowance for loan and lease losses in accordance with Generally Accepted
Accounting Principles. The Company is analyzing the impact of this statement.
4. Commitments
In April, 2001 the Bank entered into a five-year agreement with FiServ Solutions
Inc. ("FiServ") to provide the majority of the Bank's core application system
processing. Additionally, the agreement calls for FiServ to furnish project
management and implementation services to the Bank as the information systems
are deconverted from the current processor and converted to the new operating
system in mid fourth quarter, 2001. Upon completion of the project, all project
costs will be reviewed and allocated according to SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." Management
does not anticipate that its routine and ongoing data and item processing
expenses will change materially as a result of the agreement.
5. Subsequent Event
The Company has been notified that Teresa Bauman, a former, previously
terminated employee has filed a lawsuit against the Company, two of its senior
executive officers and its independent auditor. Ms. Bauman's complaint purports
to be on behalf of herself and other shareholders allegedly similarly situated.
The lawsuit alleges that the Company's stock has been overvalued because the
Company misstated its financial condition in quarterly and annual reports. In
the opinion of Management, the claims asserted are without merit. The Company
has referred the matter to legal counsel and expects to defend the action
vigorously. Management believes that the action will not have a material adverse
effect on the Company's financial condition or results of operation.
7
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 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. 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 successful execution of
its "totally free checking" programs. This has resulted in the Company serving
over 194,000 households with average noninterest revenue of approximately $160
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.
8
For the three months ended September 30, 2001 and 2000
For the three months ended September 30, 2001 the Company had net income of $3.4
million, an increase of $0.3 million 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 .82% and a return on average common equity of 11.18% for the quarter
ended September 30, 2001 compared to .75% and 10.9%, respectively, for the
same time period in 2000. The Bank had a return on average assets of 1.07% and
9.90% and return on average common equity for the quarter ended September 30,
2001 compared to 1.04% and 10.25%, respectively, for the quarter ended September
30, 2000.
Total assets increased to $1.668 billion at September 30, 2001 from $1.661
billion at December 31, 2000, an increase of $7 million, or 0.4%. Loans
increased from $1.069 billion at December 31, 2000 to $1.087 billion at
September 30, 2001, an increase of $18 million, or 1.7%. Cash and cash
equivalents decreased from $55.3 million at December 31, 2000 to $52.6 million
at September 30, 2001, a decrease of $2.7 million, or 4.9%. Deposits increased
$76.8 million, or 7.1%, to $1.155 billion at September 30, 2001. The increase in
deposits was used to reduce FHLB borrowings in addition to funding loan growth.
FHLB borrowings declined $101.5 million from $330 million to $228.5 million at
September 30, 2001.
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 September 30, 2001 was $12.3
million, an increase of $2.3 million, or 23.0% from $10 million for the same
period in 2000.
9
In the table below, the components of net interest income are detailed.
September 30, September 30,
2001 2000
------------- -------------
(Amounts in thousands)
Average interest-earning assets $1,488,006 $1,474,604
Yield on earning assets (tax-equivalent) 7.60% 7.70%
Average interest-bearing liabilities 1,417,879 1,419,306
Rate paid on interest-bearing liabilities 4.41% 5.06%
Net interest spread 3.19% 2.64%
Net interest margin 3.40% 2.83%
Average interest-earning assets increased $13 million from $1.475 billion in the
third quarter of 2000 to $1.488 billion in the third quarter of 2001. Loans were
the principal contributor to the increase in interest-earning assets as average
loans were $1.031 billion in the third quarter of 2000 and increased to $1.075
billion in the third quarter of 2001, an increase of $44 million. The increase
in loans offset decreases in investments and loans available for sale. Net
interest spread, the difference between the yield on earning assets and the rate
paid on interest-bearing liabilities, increased from 2.64% in the third quarter
of 2000 to 3.19% in the third quarter of 2001, an increase of 0.55%, due
primarily to lower rates on interest-bearing liabilities.
Provision for Loan Losses
The provision for loan losses increased $700,000, or 140.0%, from $500,000 for
the three months ended September 30, 2000 to $1,200,000 for the three months
ended September 30, 2001. Loan loss reserves were 1.11% and 1.13% of loans at
September 30, 2001 and December 31, 2000, respectively.
Nonperforming loans, real estate owned and foreclosed property were $8.6 million
and $5.3 million at September 30, 2001 and December 31, 2000, respectively. The
allowance for loan losses totaled $12.04 million at September 30, 2001, a
decrease of $50,000, or 0.4% from December 31, 2000. The allowance for loan
losses represented 174% and 269% of nonperforming loans at September 30, 2001
and December 31, 2000, respectively.
Noninterest Income
Noninterest income for the quarter ended September 30, 2001 was $8.7 million, an
increase of $762,000, or 9.6%, over the same period in 2000. Service charges are
the principal component of noninterest income. Service charges were $6.8 million
for the three months ended September 30, 2001, compared to $6.6 million for the
same period in 2000, an increase of $0.2 million or 3.0%. Service charges on
deposit accounts consist primarily of insufficient funds fees charged to
customers. Growth in the number of
10
transaction accounts and higher item charges are the primary reasons for growth
in service charges. The growth in transaction accounts 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 September 30, 2001, noninterest expense totaled $14.8
million, an increase of $1.8 million, or 13.8%, from $13 million for the three
months ended September 30, 2000. The Company's efficiency ratio for the quarter
ended September 30, 2001 was 65.71% compared to 66.28% for the three months
ended September 30, 2000. The efficiency ratio is calculated by dividing total
noninterest expense, excluding goodwill amortization, by net tax equivalent
interest income, plus noninterest income, excluding securities transactions. The
Bank's efficiency ratio for the quarter ended September 30, 2001 was 60.58%
compared to 60.72% for the three months ended September 30, 2000.
Salaries and employee benefits expense for the three months ended September 30,
2001 was $7.0 million compared to $6.1 million for the three months ended
September 30, 2000, an increase of $0.9 million, or 14.8%. This increase was
due primarily to incentive and commission payments due to the Bank's loan,
deposit and noninterest income growth and additional personnel in the Bank's
subsidiary, Superior Finance Company ("Superior Finance"), which initiated
operations in the second quarter of 2000.
Occupancy expense increased $257,000, or 27.8%, from $926,000 for the three
months ended September 30, 2000 to $1,183,000 for the three months ended
September 30, 2001, primarily due to the opening of one retail banking branch,
and the addition of eight Superior Finance offices and the opening of an
operations center in Fort Smith. Major categories included in occupancy expense
are building lease expense, depreciation expense, and utilities expense.
Data and item processing increased $0.4 million, or 26.7%, from $1.3 million for
the three months ended September 30, 2000, to $1.7 million for the three months
ended September 30, 2001, primarily due to loan and deposit growth, increased
number of transactions, and costs of new systems.
Income Taxes
For the three months ended September 30, 2001, income tax expense was $1.6
million, an increase of $145,000 from $1.465 million at September 30, 2000. The
effective tax rate for the three months ended September 30, 2001 was 32.0%
compared to 32.4% for the three months ended September 30, 2000. The decrease in
the effective tax rate is due to an increase in tax exempt interest income.
For the nine months ended September 30, 2001 and 2000
For the nine months ended September 30, 2001, net income was $9.8 million, an
increase of $0.6 million from the nine month period ended September 30, 2000.
Increases in net interest income and noninterest income offsetting increased
noninterest expense were the
11
primary reasons for the increase in net income. For the Company, this resulted
in a return on average assets of 0.79% and a return on average equity of 11.08%
for the nine months ended September 30, 2001 compared to 0.78% and 11.04%,
respectively, for the same time period in 2000. The Bank had a return on average
assets of 1.07% and 10.02% return on average common equity for the nine months
ended September 30, 2001 compared to 1.06% and 10.41%, respectively, for the
nine months ended September 30, 2000.
Net Interest Income
Net interest income for the nine months ending September 30, 2001 was $35.4
million, an increase of $4.0 million or 12.7% from $31.4 million for the nine
months ending September 30, 2000.
The table below summarizes the components of net interest income for the nine
months ended September 30, 2001 and 2000.
Nine months ended
September 30, September 30,
2001 2000
------------- -------------
(Amounts in thousands)
Average interest-earning assets $1,485,262 $1,465,306
Yield on earning assets (tax-equivalent) 7.73% 7.60%
Average interest-bearing liabilities 1,417,630 1,404,084
Rate paid on interest-bearing liabilities 4.68% 4.86%
Net interest spread 3.05% 2.74%
Net interest margin 3.27% 2.94%
Provision for Loan Losses
The provision for loan losses increased $1.15 million, or 63.9%, from $1.8
million for the nine months ended September 30, 2000 to $2.95 million during the
nine month period ended September 30, 2001.
Noninterest Income
Noninterest income for the nine months ended September 30, 2001 was $25.8
million, an increase of $3.0 million, or 13.2%, from $22.8 million for the nine
month period ended September 30, 2000.
Service charges increased from $18.9 million for the nine months ended September
30, 2000 to $20.7 million for the same period in 2001, an increase of $1.8
million or 9.5%. This increase is attributed to growth in the number of accounts
and higher transaction fees during 2001 compared to the same period in 2000.
12
Noninterest Expense
For the nine months ended September 30, 2001, noninterest expense totaled $43.8
million, an increase of $5.3 million, or 13.8% for the nine months ended
September 30, 2000. The Company's efficiency ratio for the nine months ended
September 30, 2001 was 66.79% compared to 65.52% for the same period in 2000.
The Bank's efficiency ratio for the nine months ended September 30, 2001 was
61.23% compared to 59.93% for the same period in 2000.
Salary and benefit expense for the nine months ended September 30, 2001 was
$21.1 million compared to $18.1 million for the nine months ended September 30,
2000, an increase of $3.0 million, or 16.6%. Incentive and commission payments
attributable to growth of deposits, loans, and noninterest income and additional
staff in Superior Finance are the primary reasons for this increase.
Occupancy expense increased from $2.7 million during 2000 to $3.3 million for
the same nine month period ending September 30, 2001, an increase of $0.6
million or 22.2% due to the opening of new offices in 2000 and 2001. Data and
item processing increased $1.1 million from $3.7 million for the nine months
ended 2000 compared to $4.8 million for the nine months ended September 30, 2001
due to increased number of accounts serviced and costs of new systems and
processes.
Income Taxes
For the nine months ended September 30, 2001, income tax expense was $4.7
million, an increase of $0.1 million from $4.6 million for the nine months ended
September 30, 2000. The effective tax rate was 32.2% for the nine months ended
September 30, 2001 compared to 33.2% during the same period in 2000. Increased
tax exempt income from investments 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, investments, 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.
13
Deposits
Deposits consisted of the following at September 30, 2001 and December
31, 2000.
September 30, December 31,
2001 2000
------------- ------------
(Dollars in thousands)
Demand and NOW accounts, including noninterest-bearing
deposits of $94,555 and $92,879 at September 30, 2001
and December 31, 2000, respectively $ 412,361 $ 398,150
Money market 31,849 30,781
Statement and passbook savings 97,464 87,120
Certificates of deposit 613,593 562,457
---------- ----------
Total deposits $1,155,267 $1,078,508
========== ==========
Capital Resources
Stockholders' equity increased to $125.9 million at September 30, 2001 from
$111.3 million at December 31, 2000, an increase of $14.6 million, or 13.1%.
This increase was due to the net change in the unrealized gain/loss on
investments available for sale of $7.5 million, net income of $9.8 million
for the nine months ended September 30, 2001 and $2.7 million in treasury stock
acquired in the Company's stock repurchase program. Comprehensive income was
$6.6 million and $5.2 million for the quarters ended September 30, 2001 and
2000, respectively and $17.3 million and $7.8 million for the nine months ended
September 30, 2001 and 2000, respectively. Additionally, no dividends were paid
on common stock during 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
14
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 September 30, 2001,
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, 2001 and December 31, 2000 are presented below (amounts in thousands):
Required to be
Categorized as
Well Capitalized
Required for Under Prompt
Company Bank Capital Adequancy 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 1 capital to risk weighted assets 53,778 5.27 115,924 11.43 N/A N/A 60,581 6.00
As of September 30, 2001
Tangible capital to adjusted total
assets $63,434 3.95% $121,151 7.58% $23,987 1.50% $ N/A N/A
Core capital to adjusted total assets 63,434 3.95 121,151 7.58 63,964 4.00 79,955 5.00%
Total capital to risk weighted assets 75,470 7.26 133,186 12.86 82,829 8.00 103,538 10.00
Tier 1 capital to risk weighted assets 63,434 6.10 121,151 11.70 N/A N/A 62,123 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
15
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.
Twelve
Months
Nine Months ended
ended 9/30/01 12/31/00
------------- ---------
(Dollars in thousands)
Allowance for loan losses, beginning of period $12,086 $11,346
Provision for loan losses 2,950 2,300
Charge-offs (4,170) (3,095)
Recoveries 1,170 1,535
------- -------
Allowance for loan losses, end of period $12,036 $12,086
======= =======
Allowance to period-end loans 1.11% 1.13%
Net charge-offs to average loans .37% 0.15%
Allowance to period-end nonperforming loans 174% 269%
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at September 30, 2001 were $8.6 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 0.79% and 0.49% at September 30, 2001
and December 31, 2000, respectively. Nonaccrual loans were $6.9 and $4.5
million, respectively, at September 30, 2001 and December 31, 2000. The $2.4
million increase in nonaccrual loans is primarily the result of the move of $.6
million in mortgage loans and two commercial loans totaling $1.5 million from
accrual to nonaccrual. The following table presents information regarding
nonperforming assets as of the dates indicated:
2001 2000
------ ------
(Dollars in thousands)
Nonaccrual loans $6,925 $4,495
Other real estate and repossessed assets 1,655 779
------ ------
Total nonperforming assets $8,580 $5,274
====== ======
Nonperforming assets to total loans and
other real estate owned 0.79% 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
16
procedures. The loan review department identifies and analyzes weaknesses in the
portfolio and reports credit risk grade changes on a quarterly basis to Bank
management and directors. The Bank also maintains a well-developed monitoring
process for credit extensions in excess of $100,000. The Bank has established
underwriting guidelines to be followed by its officers. The Company also
monitors its delinquency levels for any negative or adverse trends, and
collection efforts are centralized. The Company also has procedures to bring
rapid resolution of nonperforming loans and prompt and orderly liquidation of
real estate, automobiles and other forms of collateral.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans past
due 90 days, however, are placed on nonaccrual status, unless the loan is both
well collateralized and in the process of collection. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring. The Company regularly updates appraisals on loans collateralized
by real estate; particularly those categorized as nonperforming loans and
potential problem loans. In instances where updated appraisals reflect reduced
collateral values, an evaluation of the borrower's overall financial condition
is made to determine the need, if any, for possible writedowns or appropriate
additions to the allowance for loan losses.
The Company records real estate acquired by foreclosure at the lesser of the
outstanding loan balance, net of any reduction in basis, or the fair value at
the time of foreclosure, less estimated costs to sell.
At September 30, 2001 and December 31, 2000, respectively, the Company had
$219,000 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 $12.9 million and $16.0 million as of September 30, 2001 and December 31,
2000, respectively. Of the loan balances that are 90 or more days past due and
still accruing as of September 30, 2001, $8.7 million represent the remaining
principal balance of $46 million of FHA insured and VA guaranteed mortgages
purchased by the Bank in September, 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
17
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
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
None
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, 2001
- ------------------------------------------ -----------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner November 14, 2001
- ------------------------------------------ -----------------
Rick D. Gardner, Chief Financial Officer Date
18