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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File #0-25239
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SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 51-0379417
(State of incorporation) (IRS
Employer Identification
No.)
16101 LaGrande Drive, Suite 103, Little Rock, Arkansas 72223
(Address of principal executive offices)
(501) 324-7282
(Telephone No.)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01
(Title of Class)
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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 (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [_]
The aggregate market value of the 6,312,057 shares of voting stock of the
registrant held by non-affiliates as of March 15, 2002 based on the average bid
and ask prices of $15.55 per share for Common Stock was approximately
$98,152,486. (For purposes of calculating this amount, all directors, officers
and principal shareholders of record of the registrant are treated as
affiliates).
Shares of Common Stock outstanding at March 15, 2002 were 8,574,748.
DOCUMENTS INCORPORATED BY REFERENCE
Part of
Document Form 10-K
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Portions of Definitive Proxy Statement for the 2002 Annual Meeting
as specifically referred to herein.............................. Part III
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NOTE: Restated Consolidated Financial Statements.
Superior Financial Corp. (the "Company" or "Superior") has conducted a
review of its accounting for the cost of a technology conversion commenced in
December, 2000 and completed in November, 2001. As a result of this review, in
consultation with the Company's independent auditors and the Audit Committee of
the Board of Directors, management has restated the Company's financial
statements for year end 2000 and the first, second and third quarters of 2001.
This report contains restated financial information for all of the above fiscal
periods. A tabular comparison of restated financial information to the same
information as originally reported is set forth on page 35 of this report. The
reasons for, and the financial impact of, the restatements are described in
Note 2 of the Notes to Consolidated Financial Statements set forth herein and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations--Restatement beginning on page 15. Previously issued financial
statements for the periods restated should not be relied upon.
CAUTIONARY STATEMENT 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) the Company's ability to attract new business through
merger related customer dislocation is less 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,
vendor representations, technological advancements, and economic factors
including liquidity availability; (vi) changes which may occur in the
regulatory environment; (vii) a significant rate of inflation (deflation);
(viii) changes in the value of the Company's purchased mortgage portfolio; (ix)
adverse developments in litigation pending against the Company; and (x)
impairment of goodwill under applicable accounting principles. (xi) changes in
the 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 the Company (including
its subsidiaries), or its management are intended to identify forward-looking
statements.
PART I
Item 1. Business
General
The Registrant, Superior Financial Corp. ("the Company") is a unitary thrift
holding company organized under the laws of Delaware and headquartered in
Little Rock, Arkansas. The Company was organized in 1997 as SFC Acquisition
Corp. for the purpose of acquiring Superior Bank (formerly Superior Federal
Bank, F.S.B., the "Bank"), a federally chartered thrift institution, from
NationsBank, N.A. (now Bank of America). The acquisition was consummated on
April 1, 1998. The Bank was founded in 1934 in Fort Smith, Arkansas. In 1992,
the Bank was acquired by Boatmen's Bancshares, Inc. ("Boatmen's"). In turn,
Boatmen's was acquired by NationsBank in 1997. The Bank has expanded through de
novo growth and acquisitions to 57 branches and 11 loan production offices
concentrated in Ft. Smith, Little Rock, eastern Oklahoma and Alabama. At
December 31, 2001 the Company had consolidated assets of $1.72 billion,
shareholders equity of $119.4 million, deposits of $1.22 billion and gross
loans of $1.07 billion.
Financial Products and Services
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 investment services, automated teller machines, debit card, credit
related life and disability insurance, safety deposit boxes, internet banking,
bill payment, and telephone banking. The Company serves approximately 189,000
households with average noninterest revenue of approximately $150 per account
annually. The Bank attracts primary banking relationships through the
customer-oriented service environment created by the Bank's personnel combined
with competitive financial products.
Asset Quality
The successful implementation of the Company's business strategy requires an
emphasis on maintaining asset quality. The Board of Directors and senior
management regularly monitor asset quality with staff support provided by a
dedicated loan review function. In addition, lending units are supported by
credit scoring models and centralized review.
As of December 31, 2001, the Company's allowance for loan losses is
approximately 1.13% of total loans. The Company has procedures designed to
achieve rapid resolution of nonperforming loans and prompt and efficient
liquidation of real estate, automobiles and other forms of collateral.
Subsidiaries
The Company's only subsidiaries are the Bank and Superior Financial
Statutory Trust I (the "Superior Statutory Trust"), a Connecticut business
trust. The Superior Statutory Trust was formed for the purpose of issuing trust
preferred securities. This transaction is described on page 30 in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Guaranteed Preferred Beneficial Interest in the Company's
Subordinated Debentures." The Bank owns several subsidiaries, including
Superior Financial Services, Inc., an Arkansas corporation, which acts as an
investment advisor and sells certain investment products, as well as owning a
second-tier subsidiary, Southwest Protective Life Insurance Company, which
sells consumer loan credit life and disability insurance to consumer loan
borrowers of the Bank, and Superior Finance Company, a consumer finance company.
Competition
The banking industry in the Company's market area is highly competitive. In
addition to competing with commercial and savings banks, the Company competes
with credit unions, finance companies, mortgage companies, brokerage and
investment banking firms, asset-based non-bank lenders and other non-financial
institutions. The Company has been able to compete effectively through use of
its "totally free checking" program, strong community reputation and excellent
customer service.
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The competitive environment for both the Company and the Bank may be
materially affected by the enactment of the Gramm-Leach-Bliley Financial
Services Modernization Act (the "GLB Act"). This law modifies or eliminates
many barriers between investment banking, commercial banking and insurance
underwriting and sales. See "--Certain Regulatory Considerations." These
changes in the law may create greater competition for the Company and its
subsidiaries, including the Bank, by increasing the number and types of
competitors and by encouraging increased consolidation within the financial
services industry.
Employees
As of December 31, 2001, the Company had 779 full-time employees, and 87
part-time employees. None of the employees were represented by any union or
similar group, and the Company has not experienced any labor disputes arising
from any such organized labor group. The Company provides medical,
hospitalization and group life insurance to eligible employees. In addition,
the Company provides a competitive 401(k) plan to which it contributes up to 3%
of employee salaries on a matching basis with customary vesting requirements.
CERTAIN REGULATORY CONSIDERATIONS
General
The Bank is a federally chartered and insured stock 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 federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings institutions and savings and
loan holding companies. The following description of statutory and regulatory
provisions and proposals, which is not intended to be a complete description of
these provisions or their effects on the Company or the Bank, is qualified in
its entirety by reference to the particular statutory or regulatory provisions
or proposals.
Regulation of Savings and Loan Holding Companies
Holding Company Activities. The Company currently operates as a unitary
savings and loan holding company by virtue of its direct ownership of the Bank.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions under the Home Owners Loan Act (the "HOLA").
If the Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof
which is not an insured association shall commence or continue for more than
two years after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple savings and loan holding companies, or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities
for savings and loan holding companies. A multiple savings and loan holding
company must obtain approval of the OTS before engaging in the activities
described in (vii) above.
Affiliate Restrictions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
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In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction"
is defined to include a loan or extension of credit to an affiliate; a purchase
of investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under the OTS regulations, a savings association may not make a
loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe
and sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association or its subsidiary to an affiliate must be
secured by collateral with a market value ranging from 100% to 130% (depending
on the type of collateral) of the amount of the loan or extension of credit.
The OTS regulations generally exclude all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulations also require savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provide that certain classes of savings associations may
be required to give the OTS prior notice of affiliate transactions.
Regulation of Federal Savings Institutions
Regulatory System. The activities of federal savings institutions are
governed by the HOLA and, in certain respects, the Federal Deposit Insurance
Act (the "FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in
such matters as the ownership of deposit accounts and the form and content of
the Bank's mortgage documents. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Bank's compliance
with various regulatory requirements. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement.
Savings institutions must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require
savings institutions to maintain capital above the minimum capital levels.
All savings institutions are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based
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requirement, supplementary capital may not exceed 100% of core capital. Under
the leverage requirement, the most highly-rated savings institutions are
required to maintain core capital equal to a minimum of 3% of adjusted total
assets. All other savings institutions are required to maintain core capital
equal to a minimum of 4% of adjusted total assets. (In addition, under the
prompt corrective action provisions of the OTS regulations, all but the most
highly-rated institutions must maintain a minimum leverage ratio of 4% in order
to be adequately capitalized. See "--Prompt Corrective Action.") A savings
institution is also required to maintain tangible capital in an amount at least
equal to 1.5% of its adjusted total assets.
Under current OTS regulations, a savings institution with a greater than
"normal" level of interest rate exposure must deduct an interest rate risk
("IRR") component in calculating its total capital for purposes of determining
whether it meets its risk-based capital requirement. These capital requirements
are viewed as minimum standards by the OTS, and most institutions are expected
to maintain capital levels well above the minimum. In addition, the OTS
regulations provide that minimum capital levels higher than those provided in
the regulations may be established by the OTS for individual savings
institutions, upon a determination that the savings institution's capital is or
may become inadequate in view of its circumstances. The Bank is not currently
subject to any such individual minimum regulatory capital requirement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Sensitivity and Liquidity, and Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings institution's failure to maintain capital at or above
the minimum capital requirements may be deemed an unsafe and unsound practice
and may subject the savings institution to enforcement actions and other
proceedings. Any savings institution not in compliance with all of its capital
requirements is required to submit a capital plan that addresses the
institution's need for additional capital and meets certain additional
requirements. The savings institution must certify that, among other things,
while the capital plan is being reviewed by the OTS, the savings association
will not, without the approval of the appropriate OTS Regional Director, grow
beyond net interest credited or make any capital distributions. If a savings
institution's capital plan is not approved, the institution will become subject
to asset growth restrictions and other restrictions or limitations set forth in
the OTS Regional Director's notice of disapproval. In addition, the OTS,
through a capital directive or otherwise, may restrict the ability of a savings
institution not in compliance with the capital requirements to pay dividends,
and may require such a bank to take one or more of certain corrective actions,
including, without limitation: (i) increasing its capital to specified levels,
(ii) reducing the rate of interest that may be paid on savings accounts, (iii)
limiting receipt of deposits to those made to existing accounts, (iv) ceasing
issuance of new accounts of any or all classes or categories except in exchange
for existing accounts, (v) ceasing or limiting the purchase of loans or the
making of other specified investments, and (vi) limiting operational
expenditures to specified levels.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDIC Improvement Act of 1991 ("FDICIA"), each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The prompt corrective action regulation of the OTS requires
certain mandatory actions and authorizes certain other discretionary actions to
be taken by the OTS against a savings institution that falls within certain
undercapitalized capital categories specified in the regulation.
The regulations establish five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulations,
the ratio of total capital to risk-weighted assets, Tier 1 capital to
risk-weighted assets and the leverage ratio are used to determine an
institution's capital classification. Under the prompt corrective action
regulations of the OTS, an institution shall be deemed to be (i)
"well-capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier 1 risk-based capital ratio of 6.0% or more, has a leverage capital ratio
of 5.0% or more and is not subject to any written agreement, order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and a
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of "well capitalized," (iii) "undercapitalized" if
it
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has a total risk-based capital ratio that is less than 8.0%, a Tier 1
risk-based capital ratio that is less than 4.0% or a leverage capital ratio
that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage
capital ratio that is less than 3.0% and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%. Federal law authorizes the OTS to reclassify a "well-capitalized"
institution as "adequately-capitalized" and may require, under certain
circumstances, an "adequately-capitalized" institution or an "undercapitalized"
institution to comply with supervisory actions as if it were in the next lower
category (except that the OTS may not reclassify a
"significantly-undercapitalized" institution as "critically undercapitalized").
At December 31, 2001, the Bank met the capital requirements of a
"well-capitalized" institution under applicable OTS regulations.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC have
substantial enforcement authority with respect to savings institutions,
including authority to bring various enforcement actions against a savings
institution and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings institution's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings institution or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including, for example, to make
restitution or provide reimbursement, indemnification or guarantee against
loss; to restrict the growth of the institution; and to rescind agreements and
contracts.
Capital Distribution Regulation. In addition to the prompt corrective
action restriction on paying dividends, OTS regulations limit certain "capital
distributions" by OTS-regulated savings institutions. Capital distributions are
defined to include, in part, certain distributions of cash or other property to
the owners of such institution, payments for stock repurchases and redemptions,
and other distributions charged against the capital accounts of a savings
institution.
Under OTS regulations, an institution must file an application with the OTS
in order to obtain OTS approval of a proposed capital distribution under the
following circumstances: (i) the institution is not eligible for expedited
treatment under applicable OTS regulations; (ii) the total amount of the
institution's capital distributions, including the proposed capital
distribution, for the applicable calendar year exceeds its net income for that
year to date plus its retained net income for the preceding two years; (iii)
the institution would not be at least adequately capitalized following the
distribution; or (iv) the proposed capital distribution would violate a
prohibition contained in any applicable statute, regulation, or agreement
between the institution and the OTS or the FDIC, or violate a condition imposed
on it in an OTS-approved application or notice. If an institution is not
required to file an application prior to a capital distribution, but one of the
following conditions is met, the institution must file a notice with the OTS
prior to the proposed capital distribution: (i) the institution would not be
well capitalized following the distribution; (ii) the proposed capital
distribution would reduce the amount of or retire any part of the institution's
common or preferred stock or certain debt instruments such as notes or
debentures included in capital; or (iii) the institution is a subsidiary of a
savings and loan holding company. If none of the application requirements are
met, and none of the notice requirements are met, the institution is not
required to file either a notice or an application with the OTS before making a
capital distribution.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either become one or more banks or be subject to the following restrictions on
its operations: (i) the association may not make any new investment or engage
in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish
a branch office; and (iii) the payment of dividends by the
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association shall be subject to the statutory and regulatory dividend
restrictions applicable to national banks. Also, beginning three years after
the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in
any activity not permissible for a national bank. In addition, within one year
of the date on which a savings association controlled by a company ceases to be
a QTL, the company must register as a bank holding company and become subject
to the rules applicable to such companies. A savings institution may re-qualify
as a QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
at least 65% of its "portfolio assets" (as defined) consist of certain housing
and consumer-related assets on a monthly basis in nine out of every 12 months.
Assets that qualify without limit for inclusion as part of the 65% requirement
are loans made to purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); Federal Home Loan Bank stock;
direct or indirect obligations of the FDIC; and loans for educational purposes,
loans to small businesses and loans made through credit cards or credit card
accounts. In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated
and sold within 90 days of origination; 100% of consumer loans; and 100% of
stock issued by the Federal Home Loan Mortgage Corporation or FNMA. "Portfolio
assets" consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total assets.
At December 31, 2001, the Bank met the QTL test.
Activities of Associations and Their Subsidiaries. Subject to a number of
restrictions and limitations, savings associations are permitted to establish
or acquire subsidiaries that engage in various activities. Pursuant to the FDIA
and OTS regulations, at least 30 days prior to establishing or acquiring such a
subsidiary, or conducting any new activity through a subsidiary, the savings
association must notify the FDIC and the OTS and provide the information each
agency may, by regulation, require. In certain circumstances, written approval
of the OTS must be obtained prior to acquiring or establishing a subsidiary or
engaging in a new activity in an existing subsidiary. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the Savings Association Insurance Fund (the "SAIF"). If so,
it may require that no SAIF member engage in that activity directly.
FDIC Assessments. The FDIC is an independent federal agency established
originally to insure the deposits, up to prescribed statutory limits, of
federally insured banks and to preserve the safety and soundness of the banking
industry. The FDIC maintains two separate insurance funds: the Bank Insurance
Fund (the "BIF") and the SAIF. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations. The Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Bank pays deposit insurance
premiums to the FDIC based on a risk-based assessment system established by the
FDIC for all SAIF-member institutions.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes--"well capitalized," "adequately
capitalized" and "undercapitalized." "Well capitalized" and "adequately
capitalized" institutions are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed previously.
"Undercapitalized" institutions are those that do not qualify as either "well
capitalized" or "adequately capitalized." These three groups are then divided
into subgroups which are based on supervisory evaluations by the institution's
primary federal regulator, resulting in nine assessment
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classifications. Assessment rates vary depending upon the assessment
classification. In addition, regardless of the potential risk to the insurance
fund, federal law requires the FDIC to establish assessment rates that will
maintain each insurance funds' ratio of reserves to insured deposits at 1.25%.
During 2001 and for the first semiannual assessment period of 2002, assessment
rates for both SAIF-insured institutions and BIF-insured institutions ranged
from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns.
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Finance
Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO
assessment rate is adjusted quarterly. Before 2000, the FICO assessment rate
for SAIF-insured deposits was five times higher than the rate for BIF-insured
deposits. The average annual assessment rate in 2001 was 1.90 cents per $100 of
assessable deposits for both SAIF-insured deposits and BIF-insured deposits.
For the first quarter of 2002, the FICO assessment rate for such deposits will
be 1.82 cents per $100.
The Bank's assessment expense for the year ended December 31, 2001 equaled
$212,000.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions
have a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low-and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to comply with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice.
Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators.
The OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company or
person may acquire control of a savings association without the prior approval
of the OTS. Any company that acquires control of a savings association becomes
a savings and loan holding company subject to extensive registration,
examination and regulation by the OTS. Conclusive control exists, among other
ways, when an acquiring party acquires more than 25% of any class of voting
stock of a savings association or savings and loan holding company, or controls
in any manner the election of a majority of the directors of the company. In
addition, a rebuttable presumption of control exists if, among other things, a
person acquires more than 10% of any class of a savings association or savings
and loan holding company's voting stock (or 25% of any class of stock) and, in
either case, any of certain additional control factors exist.
Privacy. In 2000, the federal banking regulators issued final regulations
implementing certain provisions of the GLB Act governing the privacy of
consumer financial information. The regulations, which were effective November
13, 2000 but were not mandatory until July 1, 2001, limit the disclosure by
financial institutions such as the Bank of nonpublic personal information about
individuals who obtain financial products or services for personal, family, or
household purposes. Subject to certain exceptions allowed by law, the
regulations cover information sharing between financial institutions and
nonaffiliated third parties. More specifically, the regulations require
financial institutions to (i) provide initial notices to customers about their
privacy policies, describing the conditions under which they may disclose
nonpublic personal financial information to nonaffiliated third parties and
affiliates; (ii) provide annual notices of their privacy policies to their
current customers; and (iii) provide a reasonable method for consumers to "opt
out" of disclosures to nonaffiliated third parties.
9
Legislation. On November 12, 1999, the GLB Act was signed into law. The
primary purpose of the GLB Act is to eliminate barriers between investment
banking and commercial banking, permitting, with certain limitations, the
affiliation of banks, securities firms, insurance companies, and other
financial service providers. Generally, the GLB Act: (i) repeals the historical
restrictions and eliminates many federal and state law barriers to affiliations
among banks and securities firms, insurance companies and other financial
service providers, (ii) provides a uniform framework for the activities of
banks, savings institutions and their holding companies, (iii) broadens the
activities that may be conducted by and through banks and bank holding
companies, (iv) provides an enhanced framework for protecting the privacy of
consumers' information, (v) adopts a number of provisions related to the
capitalization, membership, corporate governance and other measures designed to
modernize the FHLB System, (vi) modifies the laws governing the implementation
of the Community Reinvestment Act, and (vii) addresses a variety of other legal
and regulatory issues affecting both day-to-day operations and long-term
activities of financial institutions.
In particular, the GLB Act places restrictions on the activities of certain
savings and loan holding companies. More specifically, unitary savings and loan
holding companies in existence on May 4, 1999, or which became unitary savings
and loan holding companies pursuant to an application filed with the OTS before
May 4, 1999, are unaffected by the activities restrictions contained in the GLB
Act as long as such savings and loan holding companies continue to meet the
definition of a unitary savings and loan holding company. See "--Holding
Company Activities." All other savings and loan holding companies ("Restricted
Holding Companies") are permitted to engage only in certain financially-related
activities including, but not limited to, activities permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act of 1956,
as amended, and activities permitted for financial holding companies as defined
under the GLB Act. The Company has been a unitary savings and loan holding
company since its acquisition of the Bank on April 1, 1998.
In addition to imposing the foregoing activities restrictions on Restricted
Holding Companies, the GLB Act also prohibits a company from acquiring control,
after May 4, 1999, of a savings association, such as the Bank, unless such
company engages only in activities that are permitted for Restricted Holding
Companies.
Additional Information
Additional information, including statistical information concerning the
business of the Company, is contained herein at Items 6 and 7 under the
captions "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Executive Officers and Directors
Pursuant to general instruction G, information regarding executive officers
of the Company is contained herein at Item 10.
Item 2. Properties
The Company currently offers a broad range of banking services through a
total of 57 branch banks and 11 loan production offices located in central and
northwestern Arkansas, Oklahoma, and Alabama as follows:
No. of Square
Market Area Locations Footage
----------- --------- -------
Ft. Smith/Van Buren MSA......... 9 130,630
Little Rock MSA................. 21 127,072
North and Central Arkansas...... 12 38,699
Oklahoma........................ 15 65,819
Fayetteville/Springdale MSA..... 3 8,553
Tulsa MSA....................... 4 10,831
Alabama......................... 4 5,720
10
The Company owns 45 offices and leases the remaining 23 locations. The
leases have a range of terms and renewal options. Two of these facilities are
multi-story, multi-tenant offices. The Superior Tower located in Ft. Smith
consists of 95,000 square feet and is 50% occupied by the Company. The other
facility located in downtown Little Rock contains 45,000 square feet and is 53%
occupied by the Company.
Item 3. Legal Proceedings
Recent Litigation. In August 2001, the Company began an investigation of an
apparent defalcation. As a result of the investigation, a mid-level manager of
the Bank was terminated. The results of the investigation also implicated the
Bank's controller. On November 2, 2001, the controller delivered to a director
of the Company a letter in which he alleged that management had intentionally
misstated the Company's financial statements and proposed to file with the
Securities and Exchange Commission materially inaccurate financial information
with regard to a technology conversion then in progress and a purchased
mortgage portfolio.
Also on November 2, 2001, the terminated mid-level manager filed a suit
styled Bauman, et al v. Superior Financial Corporation, et al., Civ. No.
4-01-CV-00756G8; U.S. District Court, Eastern District of Arkansas, Western
Division (the "Bauman Suit"). The suit, which names the Company, two of its
executive officers and the Company's independent auditors as defendants,
alleges that, for the past two years, the Company had overstated income in
press releases and financial reports, and thus improperly inflated its stock
price. The complaint seeks undetermined damages for shareholders who purchased
stock in that period.
On November 5, 2001, the Board of Directors created a Special Committee to
investigate the allegations contained in the controller's letter. The Special
Committee is comprised of two outside directors who are not also members of the
Audit Committee and is authorized to conduct a thorough investigation with the
assistance of independent outside counsel. The Special Committee promptly
conducted its investigation which included, among other things, extensive
interviews with management, the Company's independent auditors and the
controller. On November 14, 2001, the Special Committee reported to the full
Board and the independent auditors its conclusion that the controller's
allegations were not supported by the facts established during the
investigation.
As a result of the continued investigation into the apparent defalcation,
the Bank terminated the controller on December 3, 2001. Thereafter, on December
20, 2001, the Bank filed suit in the action styled, Superior Bank v. Bauman, et
al., Case No. CV-2001-1089 in the Circuit Court for Sebastian County, Arkansas,
Fort Smith Division (the "Superior Bank Suit"). The complaint alleges that the
mid-level manager had embezzled from the Bank and that the controller had,
among other things, breached his fiduciary duties by permitting the
embezzlement to occur. On December 28, 2001, the defendants filed answers and
counterclaims against the Bank alleging defamation and seeking damages in
unstated amounts.
On January 4, 2002, the same attorney who filed the Bauman Suit filed in the
same court a case styled Kashima v. Superior Financial Corp., et al., Cir. No.
4-02-CV-007SWW (the "Kashima Suit"). The complaint sets forth essentially the
same allegations and seeks the same relief against the same defendants as those
set forth and sought in the Bauman Suit. On February 4, the plaintiffs'
attorney filed a suit styled Cottrell v. Gardner, et al., Case No.
CV-2002-121(I) in the Circuit Court for Sebastian County, Arkansas, Fort Smith
Division. The case purports to be a shareholders' derivative action and seeks
recovery on behalf of the Company against the members of the Board of Directors
for damages arising from alleged falsification of the Company's financial
statements. The allegations essentially repeat those advanced in the Bauman
Suit and the Kashima Suit.
In February 2002, the Special Committee obtained access to additional
information and renewed its investigation. On February 13, 2002 the Special
Committee delivered to the full Board of Directors a supplemental report in
which the Special Committee concluded that its original conclusions remained
unchanged and that it found no evidence of any illegal activity, conspiracy, or
bad faith on the part of management of the Company with respect to the matters
subject to the investigation.
11
All of the cases outlined above are in the earliest stages of litigation. In
the Kashima Suit, the plaintiff has moved to consolidate the suit with the
Bauman suit and to name lead plaintiffs. The motion is pending. In the Superior
Bank suit, the court recently granted the Bank's motion to dismiss the
counterclaim for lack of specificity. The plaintiffs will have an opportunity
to amend their counterclaims.
The Bank intends to pursue its claims vigorously, and the Company intends to
defend the claims against it with equal vigor. At this early stage of
litigation, the Bank and the Company are unable to predict the outcome of the
litigation and its effect, if any, on the financial condition of the the
Company or Bank.
The Company's Certificate of Incorporation and Bylaws contain provisions for
the indemnification of officers and directors under certain circumstances.
Claims arising under the litigation described above may entitle officers and
directors to indemnification under those provisions.
The Goodwill Litigation. As a result of the acquisition of the Bank from
Bank of America (formerly NationsBank), the Company succeeded to Bank of
America's right and interest in the proceedings brought under the caption
Superior Federal Bank, F.S.B. vs. United States (No. 95-769C) (the "Goodwill
Litigation"). The Goodwill Litigation relates to claims for damages by the Bank
against the United States. Under the terms of the acquisition, the Company has
agreed to pay Bank of America 50% of any net recovery (total recovery obtained
in a judgment or settlement of the claims less litigation expenses). The
Company is unable to estimate the likelihood or amount of any judgment or
settlement.
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 affect on the Company or its business.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 2001 to a vote of the
shareholders, through solicitation of proxies or otherwise.
12
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "SUFI". As of March 15, 2002, the Company had outstanding
8,574,748 shares of Common Stock, with 1,163 shareholders of record. Prior to
February 4, 1999, there was no established trading market for the Common Stock.
On February 4, 1999, the Common Stock began trading on the NASDAQ bulletin
board. On November 11, 1999, the Common Stock began trading on the NASDAQ
National Market System.
The following table indicates the high and low bid prices for the Common
Stock for each quarter of 2001 and 2000. The Company paid no dividends on the
Common Stock in 2000 or 2001, but declared a dividend of $.10 per share on
November 14, 2001, payable in cash or Common Stock on January 23, 2002.
Bid Price of
Common Stock
---------------
2001 High Low
---- ------- -------
1st Quarter $14.750 $11.250
2nd Quarter 15.850 12.625
3rd Quarter 17.625 13.500
4th Quarter 16.250 13.950
Bid Price of
Common Stock
---------------
2000 High Low
---- ------- -------
1st Quarter $11.750 $ 7.937
2nd Quarter 10.625 8.937
3rd Quarter 11.250 10.062
4th Quarter 12.812 10.750
13
Item 6. Selected Financial Data
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
Superior Financial Corp. Superior Bank(3)
------------------------------------ ----------------------------------
Year Ended December 31 Year Ended December 31
------------------------------------ ----------------------------------
(As Restated)
2001 2000(1) 1999 1998(2) 1998 1997
---------- ------------- ---------- ---------- ---------- ----------
(Dollars in thousands except ratio amounts)
Income statement data:
Net interest income...................... $ 48,447 $ 41,620 $ 41,263 $ 24,282 $ 38,899 $ 38,305
Provision for loan losses................ 4,500 2,300 2,270 1,021 8,786 2,155
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses............................. 43,947 39,320 38,993 23,261 30,113 36,150
Noninterest income....................... 36,635 31,028 26,926 18,712 24,228 23,280
Noninterest expense...................... 62,841 52,739 48,086 31,053 41,679 39,316
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes...................... 17,741 17,609 17,833 10,920 12,662 20,114
Net income............................... 12,291 11,815 11,386 6,675 6,409 10,922
Balance sheet data at December 31:
Total assets............................. 1,720,618 1,661,465 1,591,945 1,378,716 1,368,171 1,256,153
Investments.............................. 374,819 363,008 354,915 364,061 358,877 382,211
Loans.................................... 1,072,846 1,068,943 1,004,961 818,371 818,371 697,869
Allowance for loan losses................ 12,109 12,086 11,346 10,472 10,472 4,660
Deposits................................. 1,215,034 1,078,508 977,936 967,743 971,590 982,442
Total stockholders' equity............... 119,410 110,817 105,586 101,812 168,968 161,832
Average balance sheet data:
Total assets............................. 1,663,769 1,615,841 1,516,603 1,292,196 1,287,756 1,291,295
Investments.............................. 354,719 360,681 357,318 334,321 339,384 410,876
Loans.................................... 1,076,376 1,024,549 971,640 711,798 706,700 684,379
Allowance for loan losses................ 12,047 11,874 11,041 10,465 9,055 4,886
Deposits................................. 1,125,410 1,037,496 978,503 981,987 991,311 995,237
Total stockholders' equity............... 117,607 111,714 106,309 88,410 167,296 156,432
Performance Ratios:
Return on average assets................. 0.74% 0.73% .75% .69% .50% .85%
Return on average common equity.......... 10.45 10.58 10.71 10.05 3.83 6.98
Net interest margin...................... 3.35 2.92 3.06 2.83 3.42 3.44
Efficiency ratio......................... 70.2 67.0 70.32 72.25 66.34 63.84
Asset Quality Ratios:
Nonperforming assets to total loans and
other real estate....................... .99 .49 .24 .48 .48 .82
Net charge-offs to average loans......... .42 .15 .15 .20 .42 .37
Allowance for loan losses to total loans. 1.13 1.13 1.13 1.27 1.27 .67
Allowance for loan losses to
nonperforming loans..................... 151 269 579 313 313 91
Capital Ratios:
Tangible capital ratio................... 5.17 3.32 3.16 2.85 7.99 7.40
Average stockholders' equity to average
total assets............................ 7.08 6.91 7.00 6.84 12.99 12.11
Core capital ratio....................... 5.17 3.32 3.16 2.85 7.99 7.40
Risk-based capital ratio................. 8.99 6.42 6.19 5.50 16.70 15.69
- --------
(1) The December 31, 2000 financial data has been restated to reflect the
adjustments related to the technology conversion. For further information,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Restatement" beginning on page 15 and Note 2 to the
Notes to Consolidated Financial Statements.
(2) Superior Financial Corp. (the "Company") was organized on November 12, 1997
for the purpose of acquiring Superior Bank, (the "Bank"). The Company had
no operations in 1997 other than the costs associated with the private
placement offering. The results of operations of the Bank were consolidated
with those of the Company from April 1, 1998, the date of the acquisition.
(3) The results of operations of the Bank are presented for the years ended
December 31, 1998 and 1997 as the Company was not organized until 1997 and
had no significant operations until the Bank was acquired on April 1, 1998.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Superior Financial Corp. (the "Company" or "Superior") is a unitary thrift
holding company offering full service banking primarily in Arkansas and
Oklahoma. The Company was organized in 1997 as SFC Acquisition Corp. for the
purpose of acquiring Superior Bank (formerly Superior Federal Bank, F.S.B., the
"Bank"). On April 1, 1998 the Company completed a private placement, and the
proceeds were used to acquire, in a purchase transaction, 100% of the common
stock of the Bank. 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. The Bank is a federally chartered savings
association. 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 operations. This
section should be read in conjunction with the Company's consolidated financial
statements and accompanying notes and other detailed information contained in
this Annual Report.
The Company's primary asset is its investment in 100% of the common stock of
the Bank and the Company's operations are funded primarily from the operations
of the Bank. The Bank's operating subsidiaries include Superior Finance Company
("Superior Finance"), a consumer finance company, Superior Financial Services,
Inc., a discount brokerage, investment advisory and insurance company, Superior
Title Services, and Superior Real Estate Holdings, Inc., a real estate
investment trust holding company.
In November 2000, Superior Finance completed the acquisition of four
consumer finance offices in north Alabama for approximately $125,000 in cash
from Southern Financial, Inc., a Nashville, Tennessee based 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.
Restatement
In the first quarter of 2000, management of Superior began evaluating the
Company's present and anticipated data processing needs. As a part of this
process, management entered into discussions with several vendors, including
BISYS, Inc., the Company's data processor at that time. After consideration of
the options available to the Company, management decided to terminate its
Services Agreement with BISYS and so notified BISYS on December 28, 2000.
On January 5, 2001, BISYS acknowledged receipt of the termination notice and
provided Superior with estimates of early termination costs based on an
estimated date of deconversion from the BISYS system at the end of July 2001.
Subsequently, BISYS and Superior agreed to set the deconversion on August 10,
2001. However, the size of the project and the technical challenges of the
deconversion prompted Superior in July 2001 to request a further extension to
September 21, 2001. Thereafter, a dispute arose between Superior and BISYS
regarding Superior's right to terminate the Services Agreement under the early
termination provisions therein and Superior's right to require that BISYS
release Superior's customer data. This dispute resulted in litigation between
Superior and BISYS, which commenced in August 2001.
In September 2001, management of Superior and representatives of BISYS began
to negotiate the timing, manner and cost of completing the deconversion, as
well as the issues presented in the litigation. On September 14, 2001
representatives of both companies scheduled face-to-face negotiations and
agreed to delay the deconversion until October 19, 2001. The further delay of
deconversion was required by the complexities of the deconversion process and
by the uncertainties created by disruptions resulting from the events of
September 11, 2001.
15
On September 28, 2001, Superior and BISYS entered into a written agreement
that fixed the date of deconversion at October 19, 2001, established a rate
schedule for processing and deconversion if deconversion were not completed by
November 20, 2001, and settled the issues under litigation. Pursuant to this
agreement, Superior paid BISYS a lump-sum amount of $3.7 million, which
represented payment for past processing charges, future processing through
deconversion and termination and deconversion charges contractually due at the
time of deconversion.
The deconversion project was completed in the fourth quarter of 2001. Upon
subsequent completion of its accounting analysis, Superior restated prior
periods financial statements to reflect adjustments for cumulative processing
costs in accordance with the Services Agreement and to recognize the expenses
of the project over the entire period in which deconversion took place,
beginning with Superior's notice of termination in December 2000 and ending
with the completion of deconversion in November 2001. Therefore, Superior has
restated its prior periods financial statements to reflect recognition of
after-tax expense of $1.4 million in addition to after-tax expense of $458
thousand previously recognized in third quarter 2001 and after-tax expense of
$643 thousand recognized in fourth quarter 2001. The $1.4 million of after-tax
expense restated has been allocated as follows:
. Early termination fees of $454 thousand have been expensed in the fourth
quarter of 2000 based on a formula contained in the Services Agreement,
assuming that the termination had occurred as originally scheduled in
July 2001. Superior has concluded that this expense was reasonably
estimable at the time of the December 28, 2000 termination notice.
However, since the deconversion did not occur until the fourth quarter of
2001, additional early termination fees of $41 thousand, calculated with
reference to the formula, have been expensed in each of the first, second
and third quarters of 2001.
. Deconversion fees of $366 thousand have been expensed over the
eight-month early termination period measured from the notice of
termination in December 2000 through the proposed deconversion date in
July 2001. Of this total, $46 thousand has been expensed in each of the
fourth quarter 2000 and the third quarter 2001, and $137 thousand has
been expensed in each of the first and second quarters of 2001. The
company allocated the deconversion fees over the early termination period
because the amounts paid were attributable to additional processing costs
related to deconversion and incurred throughout the deconversion process.
. Additional processing costs of $478 thousand have been expensed in the
third quarter of 2001. These amounts represent the rate called for under
the Services Agreement for processing services performed beyond the early
termination period.
In addition to the conversion costs described above, Superior incurred
certain conversion costs of $156 thousand after tax, related primarily to
training provided by the new data processor. The restatement reflects
allocation of these costs in the amounts of $40 thousand, $32 thousand and $84
thousand in first, second and third quarters 2001, respectively.
For the years ended December 31, 2001, 2000, and 1999
Results of Operations
Net income for the year ended December 31, 2001 was $12.3 million, an
increase of $.5 million from $11.8 million in 2000. The primary reason for this
difference was an increase in net interest income which offset increased
noninterest expense. For the year ended December 31, 2001, basic earnings per
share were $1.37 per share, a 9.6% increase over basic earnings per share of
$1.25 for the year ended December 31, 2000. For the year ended December 31,
2001, diluted earnings per share were $1.34 per share, an 8.1% increase over
diluted earnings per share of $1.24 for the year ended December 31, 2000.
Return on average assets was .74% and return on average common equity was
10.45% for the year ended December 31, 2001 compared to .73% and 10.58%,
respectively, for the same time period in 2000. For the year ended December 31,
1999, net income was $11.4 million or $1.13 per share--basic and diluted.
Returns on average assets and common equity were .75% and 10.71%, respectively.
Total assets increased $60.0 million to $1.721 billion at December 31, 2001
from $1.661 billion at December 31, 2000. Cash and cash equivalents and
investments were the principal contributors to this increase in total assets.
Cash and cash equivalents increased $42.3 million from $55.3 million at
December 31, 2000 to
16
$97.6 million at December 31, 2001. Investments increased $11.8 million from
$363.0 million at December 31, 2000 to $374.8 million at December 31, 2001.
Deposits increased $137.0 million to $1.215 billion at December 31, 2001 from
$1.078 billion at December 31, 2000. At December 31, 1999, total assets were
$1.592 billion, loans were $1.005 billion, and deposits were $978 million.
The table below presents the following:
Historical results of Superior Financial Corp. for the year ended December 31,
2001, 2000, and 1999.
Superior Financial Corp.
------------------------------
Year Ended December 31,
------------------------------
(As Restated)
2001 2000 1999
-------- ------------- -------
(Dollars in thousands)
Interest income.................... $112,384 $111,816 $99,776
Interest expense................... 63,937 70,196 58,513
-------- -------- -------
Net interest income................ 48,447 41,620 41,263
Provision for loan losses.......... 4,500 2,300 2,270
-------- -------- -------
Net interest income after provision 43,947 39,320 38,993
Noninterest income................. 36,635 31,028 26,926
Noninterest expense................ 62,841 52,739 48,086
-------- -------- -------
Income before income taxes......... 17,741 17,609 17,833
Income tax expense................. 5,450 5,794 6,447
-------- -------- -------
Net income......................... $ 12,291 $ 11,815 $11,386
======== ======== =======
The following discussion compares the results of operations for the Company
for the years ended December 31, 2001, 2000, and 1999 unless otherwise
indicated. Any tables with data from 1997 or prior years represent amounts of
the Bank prior to being acquired by the Company.
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including investments and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of earnings.
Interest rate fluctuations, as well as changes in the amount and type of
earning assets and liabilities, combine to affect net interest income.
Factors that determine the level of net interest income include the volume
of earning assets and interest-bearing liabilities, yields earned and rates
paid, fee income from portfolio loans, the level of nonperforming loans and
other non-earning assets and the amount of noninterest bearing liabilities
supporting earning assets.
Net interest income for the year ended December 31, 2001 was $48.4 million,
an increase of $6.8 million or 16.4% from the $41.6 million for the year ended
December 31, 2000. The net interest margin was 3.35% and 2.92% for the year
ended December 31, 2001 and 2000, respectively. For the Bank, the net interest
margins were 3.74% and 3.37% for the year ended December 31, 2001 and 2000,
respectively. The primary difference in the net interest margin for the Company
and the Bank is the note payable and Senior Notes of the Company, which lowers
the net interest margin from that of the Bank. For the year ended December 31,
1999, net interest income was $41.3 million and the net interest margins for
the Company and the Bank were 3.06% and 3.53%, respectively.
The increase in net interest income for 2001 over 2000 was primarily the
result of lower rates paid on interest-bearing deposits as a result of the
falling rate environment in 2001. The Bank's rate paid on interest-bearing
liabilities decreased to 4.28% in 2001 from 4.74% in 2000, a decrease of 46
basis points due to lower borrowing costs and deposit costs, for
interest-bearing demand deposits and for certificates of deposit. The yield on
assets remained fairly constant for 2001 at 7.66% compared to 7.67% in 2000.
The yield on earning assets for the year ended 1999 and the rate paid on
interest-bearing liabilities were 7.30% and 4.16%, respectively.
17
The following table presents the Bank's total dollar amount of average
balances, interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, expressed both in
tax-equivalent dollars and rates using a federal marginal rate of 35%. The
tax-equivalent adjustments for loans and investments included in interest
income are $1.387 million, $995 thousand and $351 thousand for 2001, 2000 and
1999, respectively. Nonaccruing loans have been included in the table as loans
carrying a zero yield. See Note 1 of Notes to Consolidated Financial Statements
for a description of the income recognition policy. Assets and liabilities of
the Company have been excluded.
Year Ended December 31,
----------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------------- --------------------------
Average Interest Avg. Average Interest Avg. Average Interest Avg.
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- - ----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Assets
Interest-earning assets:
Loans.............................. $1,101,721 $ 88,934 8.07% $1,062,358 $ 85,465 8.04% $ 971,602 $75,388 7.79%
Investments........................ 349,573 23,322 6.67 378,405 25,057 6.62 375,112 23,199 6.20
Other earning assets............... 31,118 1,254 4.03 25,363 1,974 7.78 22,580 1,227 5.41
---------- -------- ---------- -------- ---------- -------
Total interest-earning assets...... 1,482,412 113,510 7.66 1,466,126 112,496 7.67 1,369,294 99,814 7.30
Less allowance for loan losses..... 12,047 11,874 11,041
---------- ---------- ----------
Total earning assets, net of
allowance......................... 1,470,365 1,454,252 1,358,253
Nonearning assets.................. 181,791 152,127 146,623
---------- ---------- ----------
Total assets....................... $1,652,156 $1,606,379 $1,504,876
========== ========== ==========
Liabilities and stockholder's
equity
Interest-bearing liabilities:
Interest-bearing demand
deposits.......................... $ 313,017 $ 6,849 2.19% $ 265,509 $ 7,493 2.82% $ 205,444 $ 3,552 1.73%
Savings and money market
accounts.......................... 128,095 2,935 2.29 138,524 3,311 2.39 171,752 4,290 2.50
Certificates of deposit............ 591,939 30,591 5.17 547,755 30,628 5.59 522,262 26,128 5.01
Borrowed funds..................... 323,398 17,629 5.45 387,992 22,047 5.68 344,682 17,953 5.14
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
liabilities....................... 1,356,449 58,004 4.28 1,339,780 63,479 4.74 1,244,140 51,923 4.16
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits.......................... 93,673 88,655 80,578
Other liabilities.................. 26,703 14,331 13,880
---------- ---------- ----------
Total liabilities.................. 1,476,825 1,442,766 1,338,598
Stockholder's equity............... 175,331 163,613 166,278
---------- ---------- ----------
Total liabilities and stockholder's
equity............................ $1,652,156 $1,606,379 $1,504,876
========== ========== ==========
Net interest income................ $ 55,506 $ 49,017 $47,891
======== ======== =======
Net interest spread................ 3.38% 2.93% 3.14%
==== ==== ====
Net interest margin................ 3.74% 3.37% 3.53%
==== ==== ====
18
The following table presents the dollar amount of changes in tax-equivalent
interest income and interest expense, using a federal marginal rate of 35%, for
the major components of the Bank's interest-earning assets and interest-bearing
liabilities and distinguishes between the increase (decrease) related to higher
outstanding balances and the volatility of interest rates. Nonaccruing loans
have been included in the table as loans carrying a zero yield. See Note 1 to
Notes to Consolidated Financial Statements for a description of income
recognition policy. For purposes of this table, changes attributable to both
rate and volume, which can be segregated, have been allocated. Changes not
solely due to volume or rate changes are allocated to rate.
Year Ended December 31,
--------------------------------------------------------
2001 versus 2000 2000 versus 1999
--------------------------- ---------------------------
Increase (decrease) Increase (decrease)
------------------ ------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------ ------- -------
(Dollars in thousands)
Interest-earning assets:
Loans........................................ $ 3,167 $ 302 $ 3,469 $7,070 $ 3,007 $10,077
Investments.................................. (1,909) 174 (1,735) 204 1,654 1,858
Other earning assets......................... 448 (1,168) (720) 151 596 747
------- ------- ------- ------ ------- -------
Total increase (decrease) in interest income. 1,706 (692) 1,014 7,425 5,257 12,682
Interest-bearing liabilities:
Interest-bearing demand deposits............. 1,341 (1,985) (644) 1,038 2,903 3,941
Savings and money market accounts............ (249) (127) (376) (830) (149) (979)
Certificates of deposit...................... 2,471 (2,508) (37) 1,277 3,223 4,500
Borrowed funds............................... (3,670) (748) (4,418) 2,226 1,868 4,094
------- ------- ------- ------ ------- -------
Total increase (decrease) in interest expense (107) (5,368) (5,475) 3,711 7,845 11,556
------- ------- ------- ------ ------- -------
Increase (decrease) in net interest income.... $ 1,813 $ 4,676 $ 6,489 $3,714 $(2,588) $ 1,126
======= ======= ======= ====== ======= =======
Noninterest Income
Noninterest income for the year ended December 31, 2001 was $36.6 million,
an increase of $5.6 million, or 18.1%, over $31.0 million for 2000. For the
year ended December 31, 1999, noninterest income was $26.7 million.
The following table presents for the periods indicated the major components
of noninterest income:
Year Ended December 31,
-----------------------
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Service charges on deposit accounts $28,396 $25,666 $22,062
Mortgage operations, net........... 3,670 2,663 2,428
Other noninterest income........... 4,569 2,699 2,436
------- ------- -------
Total noninterest income.......... $36,635 $31,028 $26,926
======= ======= =======
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. Service charges were $28.4 million for the year
ended December 31, 2001, compared to $25.7 million for the year ended December
31, 2000, an increase of $2.7 million, or 10.5%. Service charges on deposit
accounts were $22.1 million for the year ended December 31, 1999. The increase
in the number of transaction accounts and the related service fee generation is
the primary reason for the growth in service charges and is largely due to the
Company's successful execution of its "Totally Free Checking" program to
customers in the markets in which the Company operates. As demonstrated by the
trend from 1999 through 2001, management believes growth will continue as the
number of transaction accounts increase and the rate charged per item is
increased.
19
Noninterest Expense
For the year ended December 31, 2001, noninterest expense totaled $62.8
million, an increase of $10.1 million, or 19.2%, from $52.7 million in 2000.
The efficiency ratio is equal to noninterest expense, excluding goodwill
amortization, divided by the sum of noninterest income, excluding gain or loss
on sale of investments, and net interest income. For the year ended December
31, 2001, the efficiency ratio was 70.2% compared to 67.0% in 2000. For the
year ended December 31, 1999, noninterest expense was $48.1 million and the
efficiency ratio was 70.32%.
Salary and benefit expense for the year ended December 31, 2001 was $28.5
million, an increase of $3.9 million, or 15.8%, from $24.6 million for the year
ended December 31, 2000. The increases during 2001 were due primarily to the
hiring of additional personnel required to accommodate loan growth, expanded
products and services, additional branch offices, and temporary staff and
overtime to assist in the systems conversion.
Occupancy expense for the year ended December 31, 2001 was $4.5 million, an
increase of $900 thousand, or 25.0%, from $3.6 million for the year ended
December 31, 2000. This increase was due to the opening of two new retail
banking branches, relocation of three retail banking facilities, two new
finance company offices and the opening of an operations center. Major
categories included in occupancy expense are building lease expense,
depreciation expense, and utilities.
Data and item processing expense for the year ended December 31, 2001 was
$8.7 million, an increase of $2.9 million, or 49.6%, from $5.8 million for the
year ended December 31, 2000. This increase was due to non-recurring technology
conversion costs, implementation of image statement processing and growth of
loan, deposit and ATM accounts.
Other expense for the year ended December 31, 2001 was $10.1 million, an
increase of $2.1 million, or 26.3%, from $8.0 million. The increases in other
expense were primarily due to the purchased mortgage valuation adjustment, and
higher professional fees and communication expenses.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate plus the income tax component of the applicable franchise taxes. The
amount of federal income tax expense is influenced by the amount of taxable
income, the amount of tax-exempt income, the amount of nondeductible interest
expense and the amount of other nondeductible expenses. For the year ended
December 31, 2001, income tax expense was $5.5 million, a decrease of $300
thousand or 5.2% from $5.8 million, as restated, for the year ended
December 31, 2000. This decrease was primarily due to higher levels of
tax-exempt income. The effective tax rate for 2001 was 30.7% compared to 32.9%
in 2000, due primarily to increased income exempt from federal and state income
taxes. For the year ended December 31, 1999, income tax expense was $6.4
million and the effective tax rate was 36.1%.
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 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
rate sensitive assets and liabilities. See "Financial Condition-Interest Rate
Sensitivity and Liquidity" below.
20
Financial Condition
Loan Portfolio
Loans were $1.073 billion at December 31, 2001, an increase of $4.0 million,
or .4%, from $1.069 billion at December 31, 2000. The Company continues to
focus on diversification of the loan portfolio, with primary emphasis on
commercial and consumer direct loans. The commercial loan portfolio, consisting
of commercial and commercial owner occupied, grew 23% during 2001 and the
consumer direct portfolio grew 15%. The indirect loan portfolio declined 4% and
the 1-4 family residential loan portfolio decreased 12.0%. Contributing to the
1-4 family residential loan portfolio decrease was the Company's sale of
approximately $29.9 million of mortgages from the portfolio during the year.
The following table summarizes the loan portfolio by loan type:
December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- -------- ------- -------- -------
(Dollars in thousands)
Commercial............... $ 57,337 5.3% $ 41,920 3.9% $ 24,166 2.4% $ 10,800 1.3% $ 4,403 0.6%
Consumer:
Direct................. 189,293 17.6 163,956 15.4 127,056 12.7 99,704 12.2 75,269 10.8
Indirect............... 180,104 16.8 188,416 17.6 196,988 19.6 174,316 21.3 156,072 22.4
Real Estate:
Construction and land
development........... 55,650 5.2 56,876 5.3 36,395 3.6 15,920 1.9 12,734 1.8
1-4 family residential. 411,757 38.4 468,144 43.8 520,871 51.8 477,062 58.3 409,135 58.6
Commercial owner
occupied.............. 178,705 16.7 149,631 14.0 99,485 9.9 40,569 5.0 40,257 5.8
---------- ----- ---------- ----- ---------- ----- -------- ----- -------- -----
$1,072,846 100.0% $1,068,943 100.0% $1,004,961 100.0% $818,371 100.0% $697,870 100.0%
========== ===== ========== ===== ========== ===== ======== ===== ======== =====
The primary lending focus of the Company is on small and medium sized
commercial, residential mortgage and consumer loans. The Company offers a
variety of commercial lending products including term loans, lines of credit
and equipment financing. A broad range of short-to-medium-term commercial
loans, both secured and unsecured, is made available to business for working
capital (including inventory and receivables), business expansion (including
acquisitions of real estate and improvements) and the purchase of equipment.
The purpose of a particular loan determines its structure.
Generally, the Company's commercial loans are underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets.
A substantial portion of the Company's real estate loans consists of
single-family residential mortgage loans collateralized by owner-occupied
properties located in the Company's primary market area. The Company offers a
variety of mortgage loan products, which generally are amortized over 3 to 30
years. Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 90% of appraised value. The
Company requires mortgage title insurance and hazard insurance in the amount of
the loan.
Consumer loans made by the Company include automobile loans, recreational
vehicle loans, boat loans, home improvement loans, personal loans (secured and
unsecured) and deposit account collateralized loans. The terms of these loans
typically range from 12 to 60 months and vary based upon the nature of
collateral and size of the loan.
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. The measurement of impaired loans is based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or the loan's observable market price or based on the fair value
of the collateral if the loan is collateral-dependent.
21
Maturity and Interest Rate Sensitivity of Loans
The following table reflects commercial and construction loans by remaining
maturity and by predetermined or variable rate:
At December 31, 2001, maturing in:
----------------------------------
Over One
One Through Over
Year or Five Five
Less Years Years Total
------- -------- ------ --------
(Dollars in thousands)
Commercial.............. $16,061 $33,751 $7,525 $ 57,337
Real estate-construction 55,650 -- -- 55,650
------- ------- ------ --------
Total.................. $71,711 $33,751 $7,525 $112,987
======= ======= ====== ========
Predetermined rates..... $66,252 $18,005 $7,391 $ 91,448
Variable rates.......... 5,459 15,746 134 21,339
Nonperforming Assets
The Company's asset quality remains within management's expectations,
although the slowdown in the economy has contributed to the increase in
nonaccrual loans. Nonperforming assets at December 31, 2001 were $10.7 million,
compared with $5.3 million at December 31, 2000. The increase is primarily
driven by the mortgage loan and consumer loan sector. The increase in other
real estate owned ("OREO") and foreclosed property is due to 1-4 residential
mortgages and one commercial real estate credit. This resulted in a ratio of
nonperforming assets to loans plus other real estate of .99%, and .49% as of
year-end 2001 and 2000, respectively. The nonperforming assets to total assets
ratio was .62% and .32% as of year-end 2001 and 2000, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
December 31,
---------------------------------------
2001 2000 1999 1998 1997
------- ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans......................................... $ 8,022 $4,495 $1,959 $3,348 $5,098
Other real estate and foreclosed property................ 2,646 779 437 594 662
------- ------ ------ ------ ------
Total nonperforming assets.............................. $10,668 $5,274 $2,396 $3,942 $5,760
======= ====== ====== ====== ======
Nonperforming assets to total loans and other real estate .99% .49% .24% .48% .82%
======= ====== ====== ====== ======
The Company has well developed procedures in place 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 quality 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 Company also maintains a well-developed monitoring process for
credit extensions. The Company 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 done on a
centralized basis. The Company also has procedures to bring rapid resolution of
non-performing 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
22
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 write-downs or appropriate additions to the allowance for
loan losses.
As of December 31, 2001, the Company had no non-government sponsored
accruing loans that were contractually past due 90 days or more. However, the
Company continues to accrue interest for government-sponsored loans such as FHA
insurance and VA guaranteed loans which are past due 90 or more days, as the
interest on these loans is insured by the federal government. The aggregate
unpaid principal balance of accruing loans past due 90 days or more was $12.5
million and $16.0 million as of December 31, 2001 and 2000, respectively.
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.
Purchased Mortgage Valuation
In the second quarter of 1999, Superior purchased from a secondary servicer
an assignment of an approximately $52.0 million portfolio of FHA insured and VA
guaranteed mortgages on a servicing-retained basis. The purchase contract
provided that Superior would receive a pass through net yield of 7.13% and that
the loans would be paid off upon foreclosure and the servicer's receipt of the
individual claims from either FHA or VA.
In the third quarter of 1999, the primary seller/servicer filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. The bankruptcy was
subsequently converted to a Chapter 7 proceeding in which Superior has filed a
$3.7 million proof of claim. Superior then entered into a fee-based
sub-servicing agreement with the secondary servicer.
In the fourth quarter of 2000, Superior's management became aware of, and
brought to the secondary servicer's attention, increasing discrepancies in the
two companies' respective net valuations of the portfolio. At this time,
management also notified the secondary servicer that Superior regarded the
secondary servicer as in breach of certain representations and warranties made
in connection with the assignment. The two companies entered into ongoing
discussions to resolve these differences.
Although the secondary servicer continues to remit principal and interest
collections to Superior, in the first quarter of 2001 Superior decided to
recognize any interest income on the portfolio only after it had received
payments sufficient to recover remaining current portfolio balances.
Consequently, no net interest income was recognized in 2001 on the portfolio.
At year end 2001, management reviewed Superior's net valuation of the portfolio
and, based on ordinary contingencies of recovery in the bankruptcy of the
primary seller/servicer and claims against the secondary servicer, management
has further reduced its valuation of the portfolio by an additional $400
thousand after tax, or $0.05 earnings per diluted share. The remaining balance
of the portfolio is currently $20.0 million. Superior will continue to apply
the cost recovery method in accounting for these assets during 2002.
23
Allowance for Loan Losses
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
Years Ended December 31,
-------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Allowance for loan losses at January 1..... $12,086 $11,346 $10,472 $ 4,660 $ 5,058
Provision for loan losses.................. 4,500 2,300 2,270 8,786 2,115
Charge-offs:
Commercial................................ (776) (316) (107) -- --
Real estate-construction.................. (43) (74) -- (43) --
Real estate-mortgage...................... (71) (81) (104) -- --
Consumer.................................. (5,238) (2,624) (2,684) (4,308) (2,969)
------- ------- ------- ------- -------
Total charge-offs....................... (6,128) (3,095) (2,895) (4,351) (2,969)
Recoveries:
Commercial................................ -- 54 27 -- --
Real estate-construction.................. -- 2 -- 58 --
Real estate-mortgage...................... 8 9 52 -- --
Consumer.................................. 1,643 1,470 1,420 1,319 456
------- ------- ------- ------- -------
Total recoveries........................ 1,651 1,535 1,499 1,377 456
------- ------- ------- ------- -------
Net charge-offs............................ (4,477) (1,560) (1,396) (2,974) (2,513)
------- ------- ------- ------- -------
Allowance for loan losses at December 31... $12,109 $12,086 $11,346 $10,472 $ 4,660
======= ======= ======= ======= =======
Allowance to period-end loans.............. 1.13% 1.13% 1.13% 1.27% 0.67%
Net charge-offs to average loans........... 0.42 0.15 0.15 0.20 0.37
Allowance to period-end nonperforming loans 151 269 579 313 91
The Company continuously monitors its underwriting procedures in an attempt
to maintain loan quality. Additionally, the Company is executing a strategy of
achieving more balance between the amount of commercial, mortgage, and consumer
loans outstanding. This strategy has resulted in growth of commercial,
construction, commercial real estate, and consumer direct loans while mortgage
loans and indirect consumer loans have declined.
The provisions to the allowance for loan losses are based on management's
judgment and evaluation of the loan portfolio using both objective and
subjective criteria. The objective criteria used by the Company to assess the
adequacy of its allowance for loan losses and required additions to such
allowance are (i) an internal grading system, (ii) a peer group analysis, and
(iii) a historical analysis. In addition to these objective criteria, the
Company subjectively assesses adequacy of the allowance for loan losses and the
need for additions thereto, with consideration given to the nature and volume
of the portfolio, overall portfolio quality, review of specific problem loans,
national, regional and local business and economic conditions that may affect
the borrowers' ability to pay or the value of collateral securing the loans,
and other relevant factors. The Company's allowance for loan losses was $12.1
million at December 31, 2001 and December 31, 2000, or 1.13% of total loans.
While management believes the current allowance is adequate, changing economic
and other conditions may require future adjustments to the allowance for loan
losses.
The Company uses an internal credit grading system in determining the
adequacy of the allowance for loan losses. This analysis assigns grades to all
loans except owner-occupied 1-4 family residential loans and consumer loans.
Graded loans are assigned to one of nine risk reserve allocation percentages.
The loan grade for each individual loan is determined by the loan officer at
the time it is made and changed from time to time to reflect an ongoing
assessment of loan risk. Loan grades are reviewed on specific loans from time
to time by senior management and as part of the Company's internal loan review
process. Owner-occupied 1-4 family residential and consumer loans are assigned
a reserve allocation percentage based on past due status and the level of
cumulative gross charge-offs for the five preceding calendar years.
24
The sum of all reserve amounts determined by this methodology is used by
management as the primary indicator of the appropriate allowance level. During
2001, the Company reassigned the unallocated portion of the allowance for loan
losses among the various loan types in the total loan portfolio. This
reassignment of the unallocated portion of the allowance for loan losses was
done to coincide with the shift in the mix and the risk profile of the overall
loan portfolio. Given this shift in the mix of the overall loan portfolio and
the fact that the economy was slowing, management wanted an unallocated
allowance for loan losses responsive to this change. Therefore, the percentage
of the allowance for loan losses allocated to the commercial, construction and
land development and commercial owner occupied portfolio increased from 21% of
the total allowance for loan losses at December 31, 2000 to 37% at December 31,
2001, while the unallocated portion of the allowance for loan losses decreased
from 20% to 1% for the same period.
The unallocated allowance compensates for the uncertainty in estimating loan
losses including factors and conditions that may not be fully reflected in the
determination of the allowance allocation percentages. The factors and
conditions evaluated in determining the appropriate unallocated allowance may
include the following: (i) general economic and business conditions affecting
key lending areas, (ii) credit quality trends (including trends in
nonperforming loans expected to result from existing conditions), (iii) trends
that could affect collateral values, (iv) loan volumes and concentrations, (v)
seasoning of the loan portfolio, (vi) specific industry conditions affecting
portfolio segments, (vii) recent loss experience in particular segments of the
portfolio, (viii) duration of the current business cycle, (ix) bank regulatory
examination results and (x) findings of internal loan review department.
The Company subjectively assesses the adequacy of the allowance for loan
losses by considering the nature and volume of the portfolio, overall portfolio
quality, review of specific problem loans, national, regional and local
business and economic conditions that may affect the borrowers' ability to pay
or the value of collateral securing the loans, and other relevant factors.
Although the Company does not determine the overall allowance based upon the
amount of loans in a particular type or category (except in the case of
owner-occupied 1-4 family residential and consumer installment loans), risk
elements attributable to particular loan types or categories are considered in
assigning loan grades to individual loans. These risk elements include the
following: (i) for non-farm/non-residential loans and multifamily residential
loans, the debt service coverage ratio (income from the property in excess of
operating expenses compared to loan payment requirements), operating results of
the owner in the case of owner-occupied properties, the loan to value ratio,
the age and condition of the collateral and the volatility of income, property
value and future operating results typical of properties of that type; (ii) for
construction and land development loans, the perceived feasibility of the
project including the ability to sell developed lots or improvements
constructed for resale or ability to lease property constructed for lease, the
quality and nature of contracts for presale or preleasing if any, experience
and ability of the developer and loan to value ratios; (iii) for commercial and
industrial loans, the operating results of the commercial, industrial or
professional enterprise, the borrower's business, professional and financial
ability and expertise, the specific risks and volatility of income and
operating results typical for businesses in that category and the value, nature
and marketability of collateral. In addition, for each category the Company
considers secondary sources of income and the financial strength of the
borrower and any guarantors.
Management reviews the allowance on a quarterly basis to determine whether
the amount of regular monthly provision should be increased or decreased or
whether additional provisions should be made to the allowance. The allowance is
determined by management's assessment and grading of individual loans in the
case of loans other than owner-occupied 1-4 family residential and consumer
loans and specific reserves made for other categories of loans. The total
allowance amount is available to absorb losses across the Company's entire
portfolio.
25
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information as of
the dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future loan losses may occur.
The total allowance is available to absorb losses from any segment of loans.
Percent of Percent of
Allowance Loans
to Total to Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
December 31, 2001
Balance of allowance for loan losses applicable to:
Commercial........................................ $ 1,122 9% 5.3%
Real estate:
Construction and land development............... 1,285 11 5.2
1-4 family residential.......................... 1,836 15 38.4
Commercial owner occupied....................... 2,054 17 16.7
Consumer.......................................... 5,733 47 34.4
Unallocated....................................... 79 1 --
------- --- -----
Total allowance for loan losses................... $12,109 100% 100.0%
======= === =====
December 31, 2000
Balance of allowance for loan losses applicable to:
Commercial........................................ $ 314 3% 3.9%
Real estate:
Construction and land development............... 1,677 14 5.3
1-4 family residential.......................... 1,615 13 43.8
Commercial owner occupied....................... 1,646 14 14.0
Consumer.......................................... 4,388 36 33.0
Unallocated....................................... 2,446 20 --
------- --- -----
Total allowance for loan losses................... $12,086 100% 100.0%
======= === =====
December 31, 1999
Balance of allowance for loan losses applicable to:
Commercial........................................ $ 299 3% 2.4%
Real estate:
Construction and land development............... 618 6 3.6
1-4 family residential.......................... 1,575 14 51.8
Commercial owner occupied....................... 1,059 9 9.9
Consumer.......................................... 4,618 40 32.3
Unallocated....................................... 3,177 28 --
------- --- -----
Total allowance for loan losses.................... $11,346 100% 100.0%
======= === =====
26
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
December 31, 1998
Balance of allowance for loan losses applicable to:
Commercial........................................ $ 165 2% 1.3%
Real estate:......................................
Construction and land development............... -- -- 1.9
1-4 family residential.......................... 1,466 14 58.3
Commercial owner occupied....................... 638 6 5.0
Consumer.......................................... 6,527 62 33.5
Unallocated....................................... 1,676 16 --
------- --- -----
Total allowance for loan losses.................... $10,472 100% 100.0%
======= === =====
December 31, 1997
Balance of allowance for loan losses applicable to:
Commercial........................................ $ -- -- % 0.6%
Real estate:
Construction and land development............... -- -- 1.8
1-4 family residential.......................... 694 15 58.6
Commercial owner occupied....................... 319 7 5.8
Consumer.......................................... 3,603 77 33.2
Unallocated....................................... 44 1 --
------- --- -----
Total allowance for loan losses.................... $ 4,660 100% 100.0%
======= === =====
The principal area of risk continues to be in the indirect consumer loan
portfolio, as this category has experienced the highest level of charge-offs
during the past five years. Charge-offs for the years 1997-2001 have primarily
been in the indirect consumer loan portfolio.
Investments
The Company's investment portfolio is the second largest component of
earning assets. It provides a significant source of revenue for the Company and
acts as a source of funding should the Company experience unanticipated deposit
withdrawals or loan demand. At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories: held to
maturity, trading or available for sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held to maturity and measured at amortized cost in
the financial statements only if management has the positive intent and ability
to hold those securities to maturity. Securities that the Company does not have
the positive intent and ability to hold to maturity and all marketable equity
securities are classified as available for sale or trading and carried at fair
value. Unrealized holding gains and losses on securities classified as
available for sale are carried as a separate component of stockholders' equity.
All investments held by the Company as of December 31, 2001, 2000 and 1999 are
classified as available for sale.
27
The following table presents the amortized cost and estimated market values
for investments as of the dates shown.
December 31, 2001 December 31, 2000
----------------------------------------- -----------------------------------------
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Cost Gain Losses Fair Value Cost Gains Losses Fair Value
-------- ---------- ---------- ---------- -------- ---------- ---------- ----------
(Dollars in thousands)
Mortgage-backed
Securities...... $123,676 $1,692 $ -- $125,368 $176,401 $ -- $(1,591) $174,810
CMOs.............. 88,110 596 -- 88,706 87,729 -- (1,744) 85,985
Corporates........ 62,235 -- (454) 61,781 45,813 -- (1,807) 44,006
Agency notes/bonds 61,810 683 -- 62,493 32,001 388 -- 32,389
Municipals........ 36,562 -- (91) 36,471 25,337 481 -- 25,818
-------- ------ ------- -------- -------- ---- ------- --------
Total investments. $372,393 $2,971 $ (545) $374,819 $367,281 $869 $(5,142) $363,008
======== ====== ======= ======== ======== ==== ======= ========
December 31, 1999
-----------------------------------------
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
(Dollars in thousands)
Mortgage-backed
Securities...... $180,394 $ 12 $(3,305) $177,101
CMOs.............. 96,074 -- (3,078) 92,996
Corporates........ 45,652 -- (1,831) 43,821
Agency notes/bonds 32,165 -- (488) 31,677
Municipals........ 10,087 -- (767) 9,320
-------- ------ ------- --------
Total investments. $364,372 $ 12 $(9,469) $354,915
======== ====== ======= ========
At December 31, 2001, investments totaled $374.8 million, an increase of
$11.8 million, or 3.3%, from December 31, 2000. This increase was due to a
decrease in unrealized holding losses on available for sale investments of
approximately $6.7 million and purchases of municipal, agency and corporate
securities. The weighted average yield on investments was 6.67% in 2001, 6.62%
in 2000, and 6.20% in 1999. During 2001, the Company purchased $11.6 million of
federal tax-exempt municipal bonds, $55.5 million of agency bonds and $38.0
million of corporate securities. With the anticipated growth in deposits and
loans, management expects that the investment portfolio will remain at
approximately the December 31, 2001 level during 2002.
The Company did not hold any investments classified as trading securities
during 2001, 2000 or 1999.
The Company has no mortgage-backed securities that have been issued by
non-agency entities.
At December 31, 2001, 66% of investments available for sale held by the
Company had final maturities of more than 10 years. At December 31, 2001,
approximately $36.3 million of the Company's mortgage-backed securities earned
interest at floating rates and repriced within one year, and accordingly were
less susceptible to declines in value should interest rates increase, but
benefit less than fixed rate securities in value changes during a time of
declining interest rates.
28
The following table summarizes the amortized cost, by contractual maturity,
of investments (including Federal Home Loan Bank stock and interest-bearing
deposits) and their weighted average tax-equivalent yields. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
December 31, 2001
---------------------------------------------------------------------------
After One Year After Five Years
Within but within but within
One Year Five Years Ten Years After Ten Years Total
------------ ------------- --------------- -------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Mortgage-backed securities.......... $ 7 5.43% -- -- $ 34,340 6.31% $ 89,329 6.10% $123,676 6.16%
CMOs................................ -- -- -- -- -- -- 88,110 5.99 88,110 5.99
Corporates.......................... -- -- 7,106 4.63 26,217 6.85 28,912 7.04 62,235 6.70
Agency notes/bonds.................. -- -- 4,756 4.37 48,078 6.48 8,976 6.30 61,810 6.29
Municipals.......................... -- -- 190 8.64 2,272 8.08 34,100 8.03 36,562 8.04
------- ---- ------- ---- -------- ---- -------- ---- -------- ----
Total investments available for sale $ 7 5.43% $12,052 4.59% $110,907 6.56% $249,427 6.45% $372,393 6.42%
Federal Home Loan Bank stock........ -- -- -- -- -- -- 17,330 3.00 17,330 3.00
Interest-bearing deposits........... 40,971 1.99 -- -- -- -- -- -- 40,971 1.99
------- ---- ------- ---- -------- ---- -------- ---- -------- ----
Total............................... $40,978 1.99% $12,052 4.59% $110,907 6.56% $266,757 6.22% $430,694 6.09%
======= ==== ======= ==== ======== ==== ======== ==== ======== ====
Deposits
The Company's ratio of average demand deposits to average total deposits for
years ended December 31, 2001, 2000, and 1999 were 36%, 34%, and 29%,
respectively.
Average total deposits during 2001 increased to $1.125 billion from $1.037
million in 2000, an increase of $88.0 million or 8.5%. Average
noninterest-bearing deposits increased to $92.3 million in 2001 from $85.7
million in 2000 due to the increase in the number of deposit accounts. During
the first quarter of 1999, the Company completed the sale of one branch
facility located in Oklahoma. The total deposits for the sold branch were
approximately $10.7 million.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 2001, 2000, and 1999 are presented below:
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
--------------- --------------- -------------
Amount Rate Amount Rate Amount Rate
---------- ---- ---------- ---- -------- ----
(Dollars in thousands)
NOW accounts................... $ 313,017 2.19% $ 265,509 2.82% $205,444 1.73%
Regular savings................ 94,820 2.05 96,979 2.11 107,297 2.13
Money market................... 33,275 2.98 41,546 3.05 64,455 3.12
CDs............................ 591,939 5.17 547,755 5.59 522,221 5.01
---------- ---- ---------- ---- --------
Total interest-bearing deposits 1,033,051 3.91 951,789 4.35 899,417 3.78
Noninterest-bearing deposits... 92,258 85,707 79,086
---------- ---------- --------
Total deposits................. $1,125,309 $1,037,496 $978,503
========== ========== ========
The Company's strategy is focused on the growth of transaction accounts
(checking and savings accounts) through the "Totally Free Checking" product.
Additionally, the Company introduced a new product in late 1999, "Treasury
Checking", an interest-bearing demand account which was designed to attract
higher balance accounts. These transaction accounts have lower interest rates
than certificates of deposit, which will tend to increase the Company's net
interest margin, and generate service charge income. The Company continues to
experience growth in the noninterest-bearing checking accounts and NOW accounts.
29
Maturity Distribution of Time Deposits $100,000 and Over
December 31,
2001
------------
Certificates
of Deposit
------------
(Dollars in
thousands)
Three months or less........... $ 78,842
Over three months to six months 63,603
Over six months to year........ 16,864
Over year...................... 25,143
--------
Total.......................... $184,452
========
Borrowings
Other short-term borrowings, consisting of Federal Home Loan Bank Advances;
Treasury, Tax and Loan deposits; and repurchase agreements, generally represent
borrowings with maturities under one year. Information relating to these
borrowings at December 31 is summarized as follows:
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Other short-term borrowings:
Average daily outstanding........... $100,349 $170,888 $126,474
Year-end............................ 63,615 160,628 205,500
Maximum month-end balance during year 158,142 195,061 205,500
Interest rate:
Average............................. 5.02% 5.83% 5.29%
Year-end............................ 4.63% 6.11% 5.78%
Guaranteed Preferred Beneficial Interest in the Company's Subordinated
Debentures
On December 18, 2001, Superior Statutory Trust, sold to investors $25.0
million of trust preferred securities. The proceeds were used to purchase
$25.774 million in principal amount of floating rate junior subordinated
debentures of the Company. The Company has, through various contractual
arrangements, fully and unconditionally guaranteed all obligations of Superior
Statutory Trust on a subordinated basis with respect to the preferred
securities. Subject to certain limitations, the preferred securities qualify as
Tier I capital and are presented in the consolidated balance sheets as
"Guaranteed preferred beneficial interest in the Company's subordinated
debentures." The sole asset of Superior Statutory Trust is the subordinated
debentures issued by the Company. Both the preferred securities of Superior
Statutory Trust and the subordinated debentures of the Company will mature on
December 18, 2031; however, they may be prepaid, subject to regulatory
approval, prior to maturity at any time on or after December 18, 2006, or
earlier upon certain changes in tax or investment company laws or regulatory
capital requirements.
The interest rate on the Company's subordinated debentures is LIBOR plus
3.60% adjusted quarterly, which was 5.60% at December 31, 2001. This interest
rate is subject to a cap of 12.5% annually. Distributions are paid quarterly.
Interest Rate Sensitivity and Liquidity
Asset and liability management is concerned with the timing and magnitude of
repricing assets compared to liabilities. It is the objective of the Company to
generate stable growth in net interest income and to attempt to control risks
associated with interest rate movements. In general, management's strategy is
to reduce the impact of changes in interest rates on its net interest income by
maintaining a favorable match between the maturities or repricing dates of its
interest-earning assets and interest-bearing liabilities. The Company's asset
and liability management strategy is formulated and monitored by the Asset
Liability Committee, which is composed of
30
senior officers of the Company, in accordance with policies approved by the
Company's Board of Directors. This committee meets regularly to review, among
other things, the sensitivity of the Company's assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activity, and maturities of
investments and borrowings. The Asset Liability Committee also approves and
establishes pricing and funding decisions with respect to the Company's overall
asset and liability composition. The Committee reviews the Company's liquidity,
cash flow flexibility, maturities of investments, deposits and borrowings,
retail and institutional deposit activity, current market conditions, and
interest rates on both a local and national level. See "--Investments."
The Company reports to the Board of Directors rate sensitive assets minus
rate sensitive liabilities divided by total earning assets on a cumulative
basis quarterly. At December 31, 2001, this ratio was a positive 8.1%. The
Company estimates that a 100- basis-point change in interest rates would have
no significant impact on its net interest income over a twelve-month period.
The Committee regularly reviews interest rate risk exposure by forecasting the
impact of alternative interest rate environments on net interest income. The
interest rate sensitivity ("GAP") is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A GAP is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A GAP is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period
of rising interest rates, a negative GAP would tend to adversely affect net
interest income, while a positive GAP would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive
GAP would tend to affect net interest income adversely. While the interest rate
sensitivity GAP is a useful measurement and contributes toward effective asset
and liability management, it is difficult to predict the effect of changing
interest rates solely on the measure. Because different types of assets and
liabilities with the same or similar maturities may react differently to
changes in overall market rates or conditions, changes in interest rates may
affect net interest income positively or negatively even if an institution were
perfectly matched in each maturity category.
Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not move proportionally as interest rates change. Consequently,
as the interest rate environment has become more volatile, the Company's
management has increased monitoring its net interest rate sensitivity position
and the effect of various interest rate environments on earnings.
U.S. money market interest rate market presents the primary risk exposure to
the Company. In measuring and managing interest rate risk, the Company uses GAP
analysis, net interest income simulation, and economic value equity modeling.
The following table sets forth a GAP interest rate sensitivity analysis for the
Bank as of December 31, 2001. Assets and liabilities of the Company have been
excluded.
31
Period/Cumulative GAP Analysis
----------------------------------------------------------
91-180 181-360 After One
0-90 Days Days Days Year Total
--------- --------- --------- ---------- ----------
(Dollars in thousands)
Interest-earning assets:
Money market funds.................... $ 40,851 $ -- $ -- $ -- $ 40,851
Investments........................... 41,146 8,163 25,571 305,255 380,135
Loans................................. 62,137 74,432 155,357 810,545 1,102,471
--------- --------- --------- ---------- ----------
Total interest-earning assets....... $ 144,134 $ 82,595 $ 180,928 $1,115,800 $1,523,457
========= ========= ========= ========== ==========
Interest-bearing liabilities:
Demand, money market and savings
deposits............................ $ 456,045 $ -- $ -- $ -- $ 456,045
Certificates of deposit and other time
deposits............................ 233,445 182,251 84,990 148,007 648,693
Borrowings............................ 22,007 -- -- 273,050 295,057
--------- --------- --------- ---------- ----------
Total interest-bearing liabilities.. $ 711,497 $ 182,251 $ 84,990 $ 421,057 $1,399,795
========= ========= ========= ========== ==========
Period GAP............................. $(567,363) $ (99,656) $ 95,938 $ 694,743 $ 123,662
Cumulative GAP......................... (567,363) (667,019) (571,081) 123,662 --
Period GAP to earning assets........... (37.24)% (6.54)% 6.30 % 45.60% 8.12%
Cumulative GAP to earning assets....... (37.24)% (43.78)% (37.49)% 8.12% --
The GAP sensitivity analysis shows when balances may be repriced. Net
interest income, however, is also affected by how much the interest rates
change for each of the balances. For example, when national money market rates
change, interest rates on the Company's savings accounts may not change as much
as interest rates on its commercial loans. This is a limiting factor for the
GAP analysis. Management does not believe that the $20.0 million Note and the
line of credit into which it was converted on April 1, 2000, and the $60.0
million of Senior Notes used to finance the acquisition of the Bank have a
significant impact on the Company's interest rate exposure. The Note had, and
the line of credit has a floating interest rate based upon LIBOR. The Senior
Notes mature on April 1, 2003 and have a fixed interest rate. The combination
of these two financing options minimize the impact of the interest rate changes
of the risk profile of the Company.
As of December 31, 2001, the Company's net interest income simulation model
indicates that a parallel 100 basis point increase in interest rates along the
yield curve would lower net interest income by up to 4% for the next 12 months,
while a 100 basis-point decrease would raise net interest income by up to 4%.
The model includes balances, asset prepayment speeds, and the interest rate
relationships among balances that management judges to be reasonable for the
various interest rate environments. Differences in actual occurrences from
these assumptions, as well as non-parallel changes in the yield curve, may
change the Company's market risk exposure. Among the interest rate
relationships, there are caps and floors on the Bank's portfolio of adjustable
rate mortgage loans and mortgage backed securities.
The Company manages its interest rate risk through investment in appropriate
fixed and variable rate assets, acquisition of non-rate sensitive core
deposits, and adjustments in maturities of Federal Home Loan Bank advances. The
Bank does not use off-balance sheet instruments.
Since year-end, short term interest rates are essentially unchanged.
However, intermediate and longer term interest rates have risen .25%-.50%, so
that there is a sharply positive yield curve through five years with a more
normal positive slope thereafter. Employment, production, and gross domestic
product data indicate that the recession may have ended. The Federal Reserve's
Open Market Committee has changed its monetary posture from "risk of economic
weakness" to a "balanced risk", and Federal Reserve governors have spoken of
potential increases in short term rates as the year progresses.
32
Capital Resources
Stockholders' equity increased $8.6 million, or 7.8%, to $119.4 million at
December 31, 2001 from $110.8 million at December 31, 2000. This increase was
the result of the $12.3 million in net income for 2001, $4.4 million
improvement in the net equity adjustment from the unrealized gain on
available-for-sale investments, a $7.2 million reduction for treasury stock and
a dividend declared of $857 thousand. The Company declared a $.10 per share
dividend on November 14, 2001, payable on January 23, 2002 in cash or common
stock. The Company paid no dividends in 2000 or 1999.
The following table provides a comparison of the Bank's leverage and
risk-weighted capital ratios to the minimum regulatory standards:
December 31, 2001
-------------------------------
Well-Capitalized
Bank Minimum Minimum
Ratio Required Required
----- -------- ----------------
Tangible capital ratio................ 7.33% 1.50% N/A
Core capital ratio.................... 7.33% 4.00% 5.00%
Total capital to risk weighted assets. 12.26% 8.00% 10.00%
Tier 1 capital to risk weighted assets 11.14% N/A 6.00%
December 31, 2000
-------------------------------
Well-Capitalized
Bank Minimum Minimum
Ratio Required Required
----- -------- ----------------
Tangible capital ratio................ 7.22% 1.50% N/A
Core capital ratio.................... 7.22% 4.00% 5.00%
Total capital to risk weighted assets. 12.57% 8.00% 10.00%
Tier 1 capital to risk weighted assets 11.38% N/A 6.00%
Recent Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141") and No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 eliminated the pooling of interests method of accounting for business
combinations and provided new definitions for intangible assets that must be
recognized apart from goodwill. SFAS 141 was adopted on July 1, 2001. SFAS 142
established new rules of accounting for intangible assets. Under these new
rules, intangible assets with indefinite lives such as goodwill will no longer
be amortized over their useful lives. Subsequent to the issuance of SFAS 142,
the FASB issued an interpretation that the unidentifiable intangible asset that
results from certain business combinations, such as branch acquisitions, must
continue to be amortized over periods determined by the expected lives of the
acquired assets and deposits. The FASB is currently reconsidering this
interpretation.
The Company has adopted SFAS 142 as of January 1, 2002. Net income and
earnings per diluted share for 2001 and 2000 would have been $14.7 million or
$1.60 diluted earnings per share and $14.1 million, as restated, or $1.49
diluted earnings per share, as restated, respectively, if SFAS 142 had been
effective for those years. During 2002, the Company will perform the first of
the required impairment tests of goodwill. The effect of these tests on
earnings and financial position has not yet been determined.
On October 3, 2001, the FASB issued Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 144 supersedes Statement
121. The Statement was effective for the Company on January 1, 2002. The impact
on the Company's financial statements and related disclosures of the adoption
of Statement 144 is not expected to be material.
33
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS-COMPANY
2001--Three Months Ended Year
------------------------------------------------ Ended
Mar. 31 (1) June 30 (1) Sept. 30 (1) Dec. 31 12/31/01
----------- ----------- ------------ ----------- ---------
(As (As (As
Restated) Restated) Restated)
(Dollars in thousands except per share amounts)
Interest Income.................................... $28,515 $28,520 $28,091 $27,258 $112,384
Interest Expense................................... 17,420 16,529 15,814 14,174 63,937
------- ------- ------- ------- --------
Net interest income................................ 11,095 11,991 12,277 13,084 48,447
Provision for loan losses.......................... 750 1,000 1,200 1,550 4,500
------- ------- ------- ------- --------
Net interest income after provision for loan losses 10,345 10,991 11,077 11,534 43,947
Noninterest income................................. 8,470 8,648 8,723 10,794 36,635
Noninterest expense................................ 14,570 15,059 15,726 17,486 62,841
------- ------- ------- ------- --------
Income before income taxes......................... 4,245 4,580 4,074 4,842 17,741
Income taxes....................................... 1,357 1,499 1,304 1,290 5,450
------- ------- ------- ------- --------
Net income......................................... $ 2,888 $ 3,081 $ 2,770 $ 3,552 $ 12,291
======= ======= ======= ======= ========
Diluted earnings per common share.................. $ 0.31 $ 0.33 $ 0.30 $ 0.40 $ 1.34
======= ======= ======= ======= ========
Bid price per common share:
Low............................................... $ 11.25 $12.625 $ 13.50 $ 13.90 $ 11.25
======= ======= ======= ======= ========
High.............................................. $ 14.75 $ 15.85 $ 17.62 $ 16.25 $ 17.62
======= ======= ======= ======= ========
2000--Three Months Ended
------------------------------------------------
Year
Ended
Mar. 31 June 30 Sept. 30 Dec. 31 (1) 12/31/00
----------- ----------- ------------ ----------- ---------
(As (As
Restated) Restated)
(Dollars in thousands except per share amounts)
Interest Income.................................... $26,954 $27,712 $28,253 $28,897 $111,816
Interest Expense................................... 16,190 17,138 18,231 18,637 70,196
------- ------- ------- ------- --------
Net interest income................................ 10,764 10,574 10,022 10,260 41,620
Provision for loan losses.......................... 550 750 500 500 2,300
------- ------- ------- ------- --------
Net interest income after provision for loan losses 10,214 9,824 9,522 9,760 39,320
Noninterest income................................. 6,853 7,964 7,961 8,250 31,028
Noninterest expense................................ 12,447 13,107 12,962 14,223 52,739
------- ------- ------- ------- --------
Income before income taxes......................... 4,620 4,681 4,521 3,787 17,609
Income taxes....................................... 1,548 1,569 1,465 1,212 5,794
------- ------- ------- ------- --------
Net income......................................... $ 3,072 $ 3,112 $ 3,056 $ 2,575 $ 11,815
======= ======= ======= ======= ========
Diluted earnings per common share.................. $ 0.31 $ 0.32 $ 0.33 $ 0.28 $ 1.24
======= ======= ======= ======= ========
Bid price per common share:........................
Low............................................... $ 7.94 $ 8.94 $ 10.06 $ 10.75 $ 7.94
======= ======= ======= ======= ========
High.............................................. $ 11.75 $ 10.63 $ 11.25 $ 12.81 $ 12.81
======= ======= ======= ======= ========
- --------
(1) The fourth quarter of 2000 and the first, second and third quarters of 2001
have been restated to reflect the adjustments related to the technology
conversion. For further information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Restatement"
beginning on page 15, and Note 2 of Notes to Consolidated Financial
Statements.
34
The following table sets forth the summary of results of operations for the
periods restated herein and compares them to the results as originally reported
for those periods. The restatement of the periods affected is discussed in this
Report at "Management's Discussion and Analysis of Financial
Condition--Restatement" beginning on page 15 and Note 2 of Notes to the Audited
Consolidated Financial Statements.
Summary of Restated Quarterly Results of Operations--Company Compared to
Results of Operations as Originally Reported
2001--Three Months Ended
-----------------------------------------------------------------------------------
Mar. 31 Mar. 31 June 30 June 30 Sept. 30 Sept. 30
- - ------------- ------------- ------------- ------------- ------------- -------------
(As Reported) (As Restated) (As Reported) (As Restated) (As Reported) (As Restated)
(Dollars in thousands except per share amounts)
Interest Income............ $28,515 $28,515 $28,520 $28,520 $28,091 $28,091
Interest Expense........... 17,420 17,420 16,529 16,529 15,814 15,814
------- ------- ------- ------- ------- -------
Net interest income........ 11,095 11,095 11,991 11,991 12,277 12,277
Provision for loan losses.. 750 750 1,000 1,000 1,200 1,200
------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses. 10,345 10,345 10,991 10,991 11,077 11,077
Noninterest income......... 8,470 8,470 8,648 8,648 8,723 8,723
Noninterest expense (1).... 14,248 14,570 14,749 15,059 14,771 15,726
------- ------- ------- ------- ------- -------
Income before income taxes. 4,567 4,245 4,890 4,580 5,029 4,074
Income taxes............... 1,460 1,357 1,600 1,499 1,610 1,304
------- ------- ------- ------- ------- -------
Net income................. $ 3,107 $ 2,888 $ 3,290 $ 3,081 $ 3,419 $ 2,770
======= ======= ======= ======= ======= =======
Diluted earnings per common
share..................... $ 0.34 $ 0.31 $ 0.36 $ 0.33 $ 0.37 $ 0.30
======= ======= ======= ======= ======= =======
Bid price per common share:
Low...................... $ 11.25 $ 11.25 $ 12.63 $12.625 $ 13.50 $ 13.50
======= ======= ======= ======= ======= =======
High..................... $ 14.75 $ 14.75 $ 15.85 $ 15.85 $ 17.62 $ 17.62
======= ======= ======= ======= ======= =======
2000--Three Months Ended
--------------------------- Year Ended Year Ended
Dec. 31 Dec. 31 12/31/00 12/31/00
- - ------------- ------------- ------------- -------------
(As Reported) (As Restated) (As Reported) (As Restated)
(Dollars in thousands except per share amounts)
Interest Income.................................... $28,897 $28,897 $111,816 $111,816
Interest Expense................................... 18,637 18,637 70,196 70,196
------- ------- -------- --------
Net interest income................................ 10,260 10,260 41,620 41,620
Provision for loan losses.......................... 500 500 2,300 2,300
------- ------- -------- --------
Net interest income after provision for loan losses 9,760 9,760 39,320 39,320
Noninterest income................................. 8,250 8,250 31,028 31,028
Noninterest expense (1)............................ 13,488 14,223 52,004 52,739
------- ------- -------- --------
Income before income taxes......................... 4,522 3,787 18,344 17,609
Income taxes....................................... 1,447 1,212 6,029 5,794
------- ------- -------- --------
Net income......................................... $ 3,075 $ 2,575 $ 12,315 $ 11,815
======= ======= ======== ========
Diluted earnings per common share.................. $ 0.34 $ 0.28 $ 1.30 $ 1.24
======= ======= ======== ========
Bid price per common share:
Low.............................................. $ 10.75 $ 10.75 $ 7.94 $ 7.94
======= ======= ======== ========
High............................................. $ 12.81 $ 12.81 $ 12.81 $ 12.81
======= ======= ======== ========
- --------
(1) For further information regarding this adjustment, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Restatement" beginning on page 15 and Note 2 of Notes to
Consolidated Financial Statements.
35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 15 through 35 herein.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements and Other Financial Information
Superior Financial Corp.
Years ended December 31, 2001 and 2000 and 1999 with Report of Independent
Auditors
36
SUPERIOR FINANCIAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000, and 1999
Contents
Report of Independent Auditors............................. 38
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................... 39
Consolidated Statements of Income......................... 40
Consolidated Statements of Changes in Stockholders' Equity 41
Consolidated Statements of Cash Flows..................... 42
Notes to Consolidated Financial Statements................ 44
37
Report of Independent Auditors
The Board of Directors
Superior Financial Corp.
We have audited the accompanying consolidated balance sheets of Superior
Financial Corp. and its wholly owned subsidiary, Superior Bank, as of December
31, 2001 and 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Superior
Financial Corp. at December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Little Rock, Arkansas
March 29, 2002
38
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31
-----------------------
2001 2000
---------- ------------
(As Restated
Note 2)
Assets
Cash and cash equivalents......................................................... $ 97,561 $ 55,321
Loans available for sale.......................................................... 27,573 27,226
Loans............................................................................. 1,072,846 1,068,943
Less allowance for loan losses.................................................... 12,109 12,086
---------- ----------
Loans, net........................................................................ 1,060,737 1,056,857
Investments available for sale, net............................................... 374,819 363,008
Accrued interest receivable....................................................... 14,132 17,515
Federal Home Loan Bank stock...................................................... 17,330 23,713
Premises and equipment, net....................................................... 45,263 35,407
Mortgage servicing rights, net.................................................... 7,024 6,630
Prepaid expenses and other assets................................................. 18,135 15,811
Goodwill, net..................................................................... 56,260 59,653
Real estate acquired in settlement of loans, net.................................. 1,784 324
---------- ----------
Total assets..................................................................... $1,720,618 $1,661,465
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits......................................................................... $1,215,034 $1,078,508
Federal Home Loan Bank borrowings................................................ 230,000 330,000
Other borrowed funds............................................................. 65,057 53,628
Note payable..................................................................... 500 11,500
Senior notes..................................................................... 51,500 60,000
Guaranteed preferred beneficial interest in the Company's subordinated debentures 25,000 --
Custodial escrow balances........................................................ 5,025 8,114
Other liabilities................................................................ 9,092 8,898
---------- ----------
Total liabilities................................................................. 1,601,208 1,550,648
Commitments and contingencies.....................................................
Stockholders' equity:
Preferred stock--$0.01 par value; 1 million shares authorized at December 31,
2001 and 2000, none issued and outstanding..................................... -- --
Common stock--$0.01 par value; 20 million shares authorized, 10,081,892 issued
at December 31, 2001 and 2000.................................................. 101 101
Capital in excess of par value................................................... 94,764 94,764
Retained earnings................................................................ 41,290 29,856
Accumulated other comprehensive income (loss).................................... 1,577 (2,777)
---------- ----------
137,732 121,944
Treasury stock at cost--1,516,170 and 1,031,000 shares at December 31, 2001 and
2000, respectively............................................................. (18,322) (11,127)
---------- ----------
Total stockholders' equity........................................................ 119,410 110,817
---------- ----------
Total liabilities and stockholders' equity....................................... $1,720,618 $1,661,465
========== ==========
See accompanying notes.
39
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Year ended December 31
-------------------------
2001 2000 1999
-------- -------- -------
(As
Restated
Note 2)
Interest Income
Loans............................................. $ 88,659 $ 85,138 $75,153
Investments....................................... 22,469 24,695 23,349
Interest-bearing deposits......................... 501 177 281
Other............................................. 755 1,806 993
-------- -------- -------
Total interest income.............................. 112,384 111,816 99,776
Interest Expense
Deposits.......................................... 40,375 41,449 33,971
Federal Home Loan Bank borrowings................. 17,629 21,884 17,952
Other borrowings.................................. 5,933 6,863 6,590
-------- -------- -------
Total interest expense............................. 63,937 70,196 58,513
-------- -------- -------
Net interest income................................ 48,447 41,620 41,263
Provision for loan losses.......................... 4,500 2,300 2,270
-------- -------- -------
Net interest income after provision for loan losses 43,947 39,320 38,993
Noninterest Income
Service charges on deposit accounts............... 28,396 25,666 22,062
Mortgage operations, net.......................... 3,670 2,663 2,428
Income from real estate operations, net........... 433 493 480
Gain (loss) on sale of investments................ 1,874 90 (197)
Other............................................. 2,262 2,116 2,153
-------- -------- -------
Total noninterest income........................... 36,635 31,028 26,926
Noninterest Expense
Salaries and employee benefits.................... 28,504 24,647 21,527
Occupancy expense................................. 4,475 3,633 3,098
Data and item processing.......................... 8,726 5,832 4,463
Advertising and promotion......................... 1,439 1,765 1,993
Amortization of goodwill.......................... 3,476 3,448 3,405
Postage and supplies.............................. 3,281 3,026 3,389
Equipment expense................................. 2,851 2,416 1,914
Other............................................. 10,089 7,972 8,297
-------- -------- -------
Total noninterest expense.......................... 62,841 52,739 48,086
-------- -------- -------
Income before income taxes......................... 17,741 17,609 17,833
Income taxes....................................... 5,450 5,794 6,447
-------- -------- -------
Net Income......................................... $ 12,291 $ 11,815 $11,386
======== ======== =======
Basic earnings per share........................... $ 1.37 $ 1.25 $ 1.13
======== ======== =======
Diluted earnings per share......................... $ 1.34 $ 1.24 $ 1.13
======== ======== =======
See accompanying notes.
40
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000, and 1999
(Dollars in thousands)
Accumulated
Capital in Other Total
Preferred Common Excess of Retained Comprehensive Treasury Stockholders'
Stock Stock Par Value Earnings Income (Loss) Stock Equity
--------- ------ ---------- -------- ------------- -------- -------------
Balance at January 1, 1999............ $-- $101 $94,749 $ 6,655 $ 307 $ -- $101,812
Issuance of common stock to
employees, 649 shares.............. -- -- 6 -- -- -- 6
Purchase of treasury stock, 96,000
shares............................. -- -- -- -- -- (1,164) (1,164)
Comprehensive income:
Net income......................... -- -- -- 11,386 -- -- 11,386
Other comprehensive income
(loss):
Change in unrealized (gain)
loss on investments available
for sale, net of deferred tax
expense of $3,310................ -- -- -- -- (6,740) -- (6,740)
Reclassification adjustment for
losses included in income,
net of taxes of $154............. -- -- -- -- 286 -- 286
--------
Total comprehensive income............ 4,932
--- ---- ------- ------- ------- -------- --------
Balance at December 31, 1999.......... -- 101 94,755 18,041 (6,147) (1,164) 105,586
Issuance of common stock to
employees, 769 shares.............. -- -- 9 -- -- -- 9
Purchase of treasury stock, 935,000
shares............................. -- -- -- -- -- (9,963) (9,963)
Comprehensive income:
Net income (as restated)........... -- -- -- 11,815 -- -- 11,815
Other comprehensive income
(loss):
Change in unrealized (gain)
loss on investments available
for sale, net of deferred tax
expense of $1,815................ -- -- -- -- 3,312 -- 3,312
Reclassification adjustment for
gain included in income, net
of tax of $32.................... -- -- -- -- 58 -- 58
--------
Total comprehensive income............ 15,185
--- ---- ------- ------- ------- -------- --------
Balance at December 31, 2000
(as restated)........................ -- 101 94,764 29,856 (2,777) (11,127) 110,817
Purchase of treasury stock, 485,170
shares............................. -- -- -- -- -- (7,195) (7,195)
Dividends........................... -- -- -- (857) -- -- (857)
Comprehensive income:
Net income......................... -- -- -- 12,291 -- -- 12,291
Other comprehensive income
(loss):
Change in unrealized (gain)
loss on investments available
for sale, net of deferred tax
expense of $1,770................ -- -- -- -- 3,055 -- 3,055
Reclassification adjustment for
gain included in income, net
of tax of $575................... -- -- -- -- 1,299 -- 1,299
--------
Total comprehensive income............ 16,645
--- ---- ------- ------- ------- -------- --------
Balance at December 31, 2001.......... $-- $101 $94,764 $41,290 $ 1,577 $(18,322) $119,410
=== ==== ======= ======= ======= ======== ========
See accompanying notes.
41
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31
-----------------------------------
2001 2000 1999
--------- ------------- ---------
(As Restated
Note 2)
Operating Activities
Net income............................................................ $ 12,291 $ 11,815 $ 11,386
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses............................................ 4,500 2,300 2,270
Deferred income taxes................................................ (400) 564 756
Depreciation......................................................... 2,957 2,388 1,961
Amortization of mortgage servicing rights............................ 1,144 869 307
Amortization of premiums on investments.............................. 382 546 1,377
Amortization of goodwill............................................. 3,476 3,448 3,405
Amortization of other intangibles.................................... 909 697 682
(Gain) loss on sale of real estate................................... (3) 25 5
Mortgage loans originated for sale................................... (86,700) (104,863) (43,767)
Mortgage loans purchased and held for sale........................... -- -- (55,427)
Proceeds from sale of mortgage loans held for sale................... 117,360 102,227 55,050
Gain on sale of loans................................................ (788) (569) (94)
(Gain) loss on sale of investments................................... (1,874) (90) 197
Net (decrease) increase in custodial escrow balances................. (3,089) 694 331
Decrease (increase) in accrued interest receivable................... 3,383 (1,985) (8,004)
Increase in prepaid expenses and other assets........................ (3,316) (10,305) (1,424)
(Decrease) increase in other liabilities............................. (2,607) 2,515 (5)
--------- ------------- ---------
Net cash provided by (used in) operating activities................... 47,625 10,276 (30,994)
Investing Activities
Increase in loans, net................................................ (41,588) (38,446) (187,921)
Additions to mortgage servicing rights................................ (1,538) (3,189) (2,419)
Principal payments on investments..................................... 57,320 39,551 64,645
Settlement of retail branch sales..................................... -- -- (10,123)
Proceeds from sale or maturity of available-for-sale investments...... 102,089 11,012 63,195
Purchases of available-for-sale investments........................... (163,030) (53,918) (130,197)
Purchase of FHLB stock................................................ (3,489) (1,806) (10,957)
Proceeds from sale of FHLB stock...................................... 9,872 -- --
Proceeds from sale of real estate acquired in settlement of loans..... 1,532 142 1,122
Purchases of premises and equipment................................... (12,813) (5,288) (9,783)
--------- ------------- ---------
Net cash used in investing activities................................. (51,645) (51,942) (222,438)
42
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
Year ended December 31
----------------------------------
2001 2000 1999
--------- ------------- --------
(As Restated
Note 2)
Financing Activities
Net increase in deposits................................................. $ 136,526 $ 100,572 $ 20,906
Net FHLB (repayments) borrowings......................................... (100,000) (94,000) 207,500
Retirement of long-term debt............................................. (8,500) -- --
Proceeds from other borrowed funds....................................... 11,429 53,628 --
Principal payments on note payable....................................... (11,000) (1,500) (7,000)
Proceeds from issuance of guaranteed preferred beneficial interest in the
Company's subordinated debentures...................................... 25,000 -- --
Proceeds from common stock issued, net................................... -- 9 6
Purchases of treasury stock.............................................. (7,195) (9,963) (1,164)
--------- ------------- --------
Net cash provided by financing activities................................ 46,260 48,746 220,248
--------- ------------- --------
Net increase (decrease) in cash and cash equivalents..................... 42,240 7,080 (33,184)
Cash and cash equivalents at beginning of year........................... 55,321 48,241 81,425
--------- ------------- --------
Cash and cash equivalents at end of year................................. $ 97,561 $ 55,321 $ 48,241
========= ============= ========
See accompanying notes.
43
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. Summary of Significant Accounting Policies
Nature of Operations
Superior Financial Corp. (the "Company" or "Superior") 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, for the
purpose of acquiring Superior Bank (formerly Superior Federal Bank, F.S.B., the
"Bank"), and a federally chartered savings institution. The Bank provides a
broad line of financial products to small and medium-size businesses and to
consumers, primarily in Arkansas and Oklahoma. On April 1, 1998, the Company
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.
Restatement
The financial statements as of December 31, 2000 and for the year ended
December 31, 2000 and for each of the three fiscal quarters in the period ended
September 30, 2001 have been restated to reflect adjustments to prior periods.
See Note 2.
Basis of Presentation
The accounting and reporting policies of the Company conform to generally
accepted accounting principles (GAAP) and general practices within the thrift
and mortgage banking industries. The following summarizes the more significant
of these policies.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results may differ from
those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
the Company's wholly owned subsidiary, Superior Financial Statutory Trust I
("Superior Statutory Trust"), the Bank, and the Bank's wholly owned
subsidiaries, Superior Finance Company, Superior Financial Services, Inc.,
Superior Title Services, and Superior Real Estate Holdings, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and interest-bearing deposits in other
depository institutions, as well as purchases of investments with original
maturities of three months or less. Interest-bearing deposits were
approximately $40.971 million and $670,000 at December 31, 2001 and 2000,
respectively.
Investments
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Investments that the Company has the positive intent and ability to hold
to maturity are classified as held to maturity and recorded at cost, adjusted
for the amortization of premiums and the accretion of discounts, which are
recognized in interest income using the interest method over the period to
maturity.
44
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments that the Company intends to hold for indefinite periods of time
are classified as available for sale and are recorded at fair value. Unrealized
holding gains and losses are excluded from operating results until realized,
and are reported net of tax as other comprehensive income (loss) in
stockholders' equity. Investments in the available-for-sale portfolio may be
used as part of the Bank's asset and liability management practices and may be
sold in response to changes in interest rate risk, prepayment risk, or other
economic factors.
The overall return or yield earned on mortgage-backed securities included in
investments depends on the amount of interest collected over the amortization
of any premium or discount. Premiums and discounts are recognized in income
using the level-yield method over the assets' remaining lives adjusted for
anticipated prepayments. Although the Bank receives the full amount of
principal if prepaid, the interest income that would have been collected during
the remaining period to maturity, net of any discount or premium amortization,
is lost. Accordingly, the actual yields and maturities of mortgage-backed
securities included in investments depend on when the underlying mortgage
principal and interest are repaid. Prepayments primarily result when market
interest rates fall below a mortgage's contractual interest rate and it is to
the borrower's advantage to prepay the existing loan and obtain new, lower-rate
financing. In addition to changes in interest rates, mortgage prepayments are
affected by other factors, such as loan types and the geographic location of
the related properties.
If the fair value of an investment classified as available for sale declines
for reasons other than temporary market conditions, the carrying value of such
an investment would be written down to current value by a charge to operations.
Gains and losses on the sale of investments classified as available for sale
are determined using the specific-identification method.
The Company did not hold any investments classified as held to maturity or
as trading securities at December 31, 2001 and 2000.
Loans Available for Sale
Loans available for sale are carried at amortized cost or fair value.
Management estimates the fair value based upon current market interest rates
and maturities. See Note 6.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, deferred fees or costs on
originated loans, and unamortized premiums or discounts on purchased loans.
Interest on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loan origination fees and direct
origination costs are capitalized and recognized as adjustments to yields on
the related loans.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged against income. Loans deemed to be uncollectible are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
The allowance is maintained at a level that management believes will be
adequate to absorb expected losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, historical loan loss experience, and
current economic and business conditions that may affect the borrowers' ability
to pay or the value of the
45
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
collateral securing the loans. The Company's policy generally is to place a
loan on nonaccrual status when payment of principal or interest is
contractually past due 90 days, or earlier when concern exists as to the
ultimate collection of principal and interest. The Company continues to accrue
interest on certain loans contractually past due 90 days if such loans are both
well secured and in the process of collection.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms thereof. The Company
applies this policy even if delays or shortfalls in payment are expected to be
insignificant. All nonaccrual loans and all loans that have been restructured
from their original contractual terms are considered impaired loans. The
aggregate amount of impairment of loans is utilized in evaluating the adequacy
of the allowance for loan losses and amount of provisions thereto. Losses on
impaired loans are charged against the allowances for loan losses when in the
process of collection it appears likely that such losses will be realized. The
accrual of interest on impaired loans is discontinued, when in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line and accelerated methods over
the respective estimated useful lives of the assets of approximately 3 to 30
years. Depreciation expense on building and leasehold improvements is included
in occupancy expense in the consolidated statements of income. Depreciation
expense on furniture and equipment is included in equipment expense in the
consolidated statements of income.
Impairment of Assets
The Company accounts for any impairment of its long-lived assets using SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Under SFAS No. 121, impairment losses are recognized
when information indicates the carrying amount of long-lived assets,
identifiable intangibles and goodwill related to those assets will not be
recovered through future operations.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans is initially recorded at
estimated fair value, less estimated selling costs, and is subsequently carried
at the lower of cost or fair value, less estimated selling costs. Valuations
are periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a property
exceeds its estimated fair value. The ability of the Bank to recover the
carrying value of real estate is based upon future sales of the land and the
projects. The ability to affect such sales is subject to market conditions and
other factors, many of which are beyond the Bank's control.
Goodwill
Goodwill (excess of purchase price of the Bank over the fair value of net
assets acquired) was amortized on a straight-line basis over 20 years. The
carrying value of goodwill was reviewed if the facts and circumstances
46
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
suggested that it might be impaired. If this review indicates that intangibles
have diminished in fair value based on the undiscounted cash flows produced by
the intangibles over the remaining amortization period, the Company's carrying
value will be reduced accordingly. See Recent Accounting Standards.
Prepaid Expenses and Other Assets
Foreclosure receivables from FHA insured and VA guaranteed mortgages that
are being serviced for the Company by a third party approximated $5.1 million
and $6.5 million at December 31, 2001 and 2000, respectively and are included
in prepaid expenses and other assets on the consolidated balance sheet.
Additionally, $1.9 million and $2.3 million at December 31, 2001 and 2000,
respectively, represent funds that have been advanced to the servicer on these
loans and are also included in prepaid expenses and other assets. These are
non-earning assets to the Bank.
Debt Issuance Costs
Costs associated with the issuance of the $20.0 million Note, the $60.0
million Senior Notes, and the $25.0 million of trust preferred securities have
been capitalized and are being amortized over the life of the debt. These costs
are included in prepaid expenses and other assets on the consolidated balance
sheets.
Mortgage Servicing Rights
Mortgage servicing rights represent the cost of acquiring or originating the
rights to service mortgage loans owned by others, and such cost is capitalized
and amortized in proportion to, and over the period of, estimated net servicing
income. The Bank's carrying value of mortgage servicing rights and the
amortization thereon is periodically evaluated in relation to estimated future
net servicing income to be received, and such carrying values are adjusted for
indicated impairments based on management's best estimate of remaining cash
flows, using the disaggregated method. Such estimates may vary from the actual
remaining cash flows due to prepayments of the underlying mortgage loans,
increases in servicing costs, and changes in other factors. The Bank's carrying
values of mortgage servicing rights are based upon estimated fair value and are
not necessarily indicative of the amount that would be realized by a sale of
these assets in the open market.
Comprehensive Income (Loss)
The Company reports the classification components of other comprehensive
income by their nature in the financial statements and displays the accumulated
balance of other comprehensive income (loss) separately from retained earnings
and additional paid-in capital in the consolidated statements of stockholders'
equity. Comprehensive income (loss) refers to revenues, expenses, gains, and
losses that are included in comprehensive income (loss) but excluded from net
income. At December 31, 2001, other comprehensive income (loss) consists of
unrealized gains or losses on available-for-sale investments.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Stock-based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on
47
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the date of grant, no compensation expense is recorded. The Company has adopted
the disclosure-only provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation".
Segment Disclosures
The Company operates in only one segment--community banking. All 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.
Recent Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), effective for fiscal years beginning after
December 15, 2001. SFAS 142 established new rules of accounting for intangible
assets. Under these new rules, goodwill and indefinite lived intangible assets
will no longer be amortized but will be subject to annual review for impairment
testing. Other intangible assets will continue to be amortized over their
useful lives. Subsequent to the issuance of SFAS 142, the FASB issued an
interpretation that the unidentifiable intangible asset that results from
certain business combinations, such as branch acquisitions, must continue to be
amortized over periods determined by the expected lives of the acquired assets
and deposits. The FASB is currently reconsidering this interpretation.
The Company has adopted SFAS 142 as of January 1, 2002. At December 31,
2001, the Company's assets included goodwill of approximately $56.26 million,
which is primarily from the acquisition of the Bank. The Company's annual
goodwill amortization expense for 2001 was approximately $3.476 million. Net
income and earnings per diluted share for 2001 and 2000 would have been $14.7
million or $1.60 diluted earnings per share and $14.1 million, as restated, or
$1.49 diluted earnings per share, as restated, respectively. During 2002, the
Company will perform the first required impairment tests of goodwill as of
January 1, 2002. The effect of these tests on earnings and financial position
has not yet been determined.
On October 3, 2001, the FASB issued Statement 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement 144 supersedes Statement
121. The Statement was effective for the Company on January 1, 2002. The impact
on the Company's financial statements and related disclosures of the adoption
of Statement 144 is not expected to be material.
2. Restatement
In the first quarter of 2000, management of Superior began evaluating the
Company's present and anticipated data processing needs. As a part of this
process, management entered into discussions with several vendors, including
BISYS, Inc., the Company's data processor at that time. After consideration of
the options available to the Company, management decided to terminate its
Services Agreement with BISYS and so notified BISYS on December 28, 2000.
On January 5, 2001, BISYS acknowledged receipt of the termination notice and
provided Superior with estimates of early termination costs based on an
estimated date of deconversion from the BISYS system at the end of July 2001.
Subsequently, BISYS and Superior agreed to set the deconversion on August 10,
2001. However, the size of the project and the technical challenges of the
deconversion prompted Superior in July 2001 to request a further extension to
September 21, 2001. Thereafter, a dispute arose between Superior and BISYS
regarding Superior's right to terminate the Services Agreement under the early
termination provisions therein and Superior's right to require that BISYS
release Superior's customer data. This dispute resulted in litigation between
Superior and BISYS, which commenced in August 2001.
48
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 2001, management of Superior and representatives of BISYS began
to negotiate the timing, manner and cost of completing the deconversion, as
well as the issues presented in the litigation. On September 14, 2001,
representatives of both companies scheduled face-to-face negotiations and
agreed to delay the deconversion until October 19, 2001. The further delay of
deconversion was required by the complexities of the deconversion process and
by the uncertainties created by disruptions resulting from the events of
September 11, 2001.
On September 28, 2001, Superior and BISYS entered into a written agreement
that fixed the date of deconversion at October 19, 2001, established a rate
schedule for processing and deconversion if deconversion were not completed by
November 20, 2001, and settled the issues under litigation. Pursuant to this
agreement, Superior paid BISYS a lump-sum amount of $3.7 million, which
represented payment for past processing charges, future processing through
deconversion and termination and deconversion charges contractually due at the
time of deconversion.
The deconversion project was completed in the fourth quarter of 2001. Upon
subsequent completion of its accounting analysis, the Company restated prior
periods' financial statements to reflect adjustments for cumulative processing
costs in accordance with the Services Agreement and to recognize the expenses
of the project over the entire period in which deconversion took place,
beginning with the Company's notice of termination in December 2000 and ending
with the completion of deconversion in November 2001. Therefore, the Company
has restated its prior periods' financial statements to reflect recognition of
after-tax expense of $1.4 million in addition to after-tax expense of $458,000
previously recognized in the third quarter 2001 and after-tax expense of
$643,000 recognized in the fourth quarter of 2001. The $1.4 million of
after-tax expense restated has been allocated as follows:
. Early termination fees of $454,000 have been expensed in the fourth
quarter of 2000 based on a formula contained in the Services Agreement,
assuming that the termination had occurred as originally scheduled in
July 2001. The Company has concluded that this expense was reasonably
estimable at the time of the December 28, 2000 termination notice.
However, since the deconversion did not occur until the fourth quarter of
2001, additional early termination fees of $41,000 calculated with
reference to the formula have been expensed in each of the first, second,
and third quarters of 2001.
. Deconversion fees of $366,000 have been expensed over the eight-month
early termination period measured from the notice of termination in
December 2000 through the proposed deconversion date in July 2001. Of
this total, $46,000 has been expensed in each of the fourth quarter 2000
and the third quarter of 2001, and $137,000 has been was expensed in each
of the first and second quarters of 2001. The Company allocated the
deconversion fees over the early termination period because the amounts
paid were attributable to additional processing costs related to
deconversion and incurred throughout the deconversion process.
. Additional processing costs of $478,000 have been expensed in the third
quarter of 2001. These amounts represent the rate called for under the
Services Agreement for processing services performed beyond the early
termination period.
In addition to the conversion costs described above, the Company incurred
certain conversion costs of $156,000 after tax, related primarily to training
provided by the new data processor. The restatement reflects allocation of
these costs in the amounts of $40,000, $32,000 and $84,000 in first, second and
third quarters 2001, respectively.
3. 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 northern Alabama for approximately $125,000 in
49
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
4. Fair Value of Financial Instruments
The estimated fair values have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. The basis for market information and other valuation
methodologies are significantly affected by assumptions used, including the
timing of future cash flows, discount rates, judgments regarding economic
conditions, risk characteristics and other factors. Because assumptions are
inherently subjective in nature, the estimated fair values of certain financial
instruments cannot be substantiated by comparison to independent market quotes
and, in many cases, the estimated fair values could not necessarily be realized
in an immediate sale or settlement of the instrument. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange, and the use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. Potential tax ramifications related to the
realization of unrealized gains and losses that would be incurred in an actual
sale and/or settlement have not been taken into consideration.
The estimated fair values of financial instruments consist of the following:
December 31, 2001
----------------------
Carrying Estimated
Value Fair Value
======== ----------
(Dollars in thousands)
Financial Assets
Cash and cash equivalents........................................................ $ 97,561 $ 97,561
Loans available for sale......................................................... 27,573 27,573
Loans, net....................................................................... 1,060,737 1,060,049
Investments available for sale, net.............................................. 374,819 374,819
Accrued interest receivable...................................................... 14,132 14,132
Federal Home Loan Bank stock..................................................... 17,330 17,330
Financial Liabilities
Demand and savings deposits...................................................... 566,341 566,341
Time deposits.................................................................... 648,693 655,499
Federal Home Loan Bank borrowings................................................ 230,000 227,735
Other borrowed funds............................................................. 65,057 67,588
Notes payable and senior notes................................................... 52,000 53,846
Guaranteed preferred beneficial interest in the Company's subordinated debentures 25,000 25,000
50
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
----------------------
Estimated
Carrying Fair
Value Value
---------- ----------
(Dollars in thousands)
Financial Assets
Cash and cash equivalents.......... $ 55,321 $ 55,321
Loans, net......................... 1,056,857 1,055,257
Loans available for sale........... 27,226 27,226
Investments available for sale, net 363,008 363,008
Accrued interest receivable........ 17,515 17,515
Federal Home Loan Bank stock....... 23,713 23,713
Financial Liabilities
Demand and savings deposits........ 516,051 516,051
Time deposits...................... 562,457 563,702
Federal Home Loan Bank borrowings.. 330,000 322,855
Other borrowed funds............... 53,628 53,628
Notes payable and senior notes..... 71,500 73,143
The fair value of loans is estimated based on present values using
applicable risk-adjusted spreads to the U.S. Treasury curve to approximate
current entry-level interest rates considering anticipated prepayment speeds.
The fair value of nonperforming loans with a recorded book value of $8.0
million and $4.5 million at December 31, 2001 and 2000, respectively, was not
estimated, and therefore is included in estimated fair value at the carrying
amount because it is not practicable to reasonably assess the credit adjustment
that would be applied in the marketplace for such loss.
The fair value of investments available for sale is based on quoted market
prices, dealer quotes and prices obtained from independent pricing services.
The fair value of accrued interest receivable and Federal Home Loan Bank
("FHLB") stock is considered to be carrying value.
The fair value of cash and cash equivalents is considered the same as its
carrying value. The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit, FHLB borrowings and
notes payable is estimated using the rates currently offered for liabilities of
similar remaining maturities.
The fair value of off-balance sheet financial instruments is estimated using
the fees currently charged to enter into similar agreements taking into account
the remaining terms of the agreements and the present creditworthiness of the
counter parties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counter parties at the reporting date. The fair
values of these off-balance-sheet financial instruments were not significant at
December 31, 2001 and 2000.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2001. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since the reporting date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
51
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Loans and Financial Instruments with Off-Balance Sheet Risk
Loans consisted of approximately the following at December 31:
2001 2000
---------- ----------
(Dollars in thousands)
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences..... $ 411,233 $ 467,583
Collateralized by other properties.................. 178,705 149,631
Construction loans.................................. 79,867 87,714
---------- ----------
669,805 704,928
Undisbursed portion of construction loans........... (24,217) (30,838)
---------- ----------
Total first mortgage loans........................... 645,588 674,090
Consumer and other loans:
Automobile........................................... 245,695 238,916
Savings.............................................. 8,207 8,465
Home equity and second mortgage...................... 81,525 28,184
Commercial........................................... 57,337 41,920
Other................................................ 33,970 76,807
---------- ----------
Total consumer and other loans....................... 426,734 394,292
Deferred loan costs, net of deferred origination fees 524 561
Allowance for loan losses............................ (12,109) (12,086)
---------- ----------
Loans, net........................................... $1,060,737 $1,056,857
========== ==========
Impairment of loans having carrying values of $8.02 million and $4.495
million at December 31, 2001 and 2000, respectively, has been recognized in
conformity with Statement of Financial Accounting Standards No. 114 ("SFAS
114"), as amended by Statement of Financial Accounting Standards No. 118 ("SFAS
118"). The average carrying value of impaired loans was $6.334 million and
$3.127 million for the years ended December 31, 2001 and 2000, respectively.
The total allowance for credit losses related to these impaired loans was
$1.885 million and $803,000 at December 31, 2001 and 2000, respectively. The
Company does not segregate income recognized on a cash basis in its financial
records, and thus, such disclosure is not practicable. For impairment
recognized in conformity with SFAS 114, as amended, the entire change in
present value of expected cash flows is reported as provision for loan losses
in the same manner in which impairment initially was recognized or as a
reduction in the amount of provision for loan losses that otherwise would be
reported.
Loans to directors and executive officers totaled $696,000 at December 31,
2001 and $747,000 at December 31, 2000. Such loans are made on substantially
the same terms as those for other loan customers. New loans and advances on
prior commitments made to such related parties totaled $24,000 for the year
ended December 31, 2000. No new loans and advances on prior commitments were
made to related parties for the year ended December 31, 2001. Repayments of
loans made by such related parties were $17,000, and $11,000 for the years
ended December 31, 2001 and 2000, respectively. Loans to directors who retired
from the Board during 2001 and 2000 totaled $34,000 and $372,000, respectively.
The Company, through its normal lending activity, originates and maintains
loans, which are substantially concentrated in its lending territory (primarily
Arkansas and Oklahoma). The Company's policy calls for collateral or other
forms of repayment assurance to be received from the borrower at the time of
loan origination. Such collateral or other form of repayment assurance is
subject to changes in economic value due to various factors beyond the control
of the Company and such changes could be significant.
52
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company originates and purchases adjustable rate mortgage loans to hold
for investment. The Company also originates 15-year and 30-year fixed rate
mortgage loans and sells substantially all new originations of 30-year and
15-year loans to outside investors with servicing released. Loans available for
sale totaled approximately $27.6 million and $27.2 million at December 31, 2001
and 2000, respectively.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets. The Company does not use financial instruments with off-balance sheet
risk as part of its own asset/liability management program or for trading
purposes.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterpart. Such
collateral consists primarily of residential and commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank had outstanding loan
commitments and lines of credit aggregating approximately $60.943 million and
$55.747 million at December 31, 2001 and 2000, respectively. There were no
standby letters of credit outstanding at December 31, 2001 or 2000.
6. Mortgage Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
December 31, 2001 and 2000 are summarized as follows:
2001 2000
-------- --------
(Dollars in thousands)
FHLMC............ $212,900 $217,046
FNMA............. 208,799 269,294
GNMA............. 68,757 84,471
Private investors 7,510 9,344
-------- --------
$497,966 $580,155
======== ========
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors, and
foreclosure processing. Loan servicing income is recorded on the cash basis and
includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. In connection with these loans serviced
for others, the Company held borrowers' escrow balances of approximately $5.025
million and $8.114 million at December 31, 2001 and 2000, respectively. Of the
loans serviced by the Bank, approximately $1.271 million and $1.817 million
were sold with recourse at December 31, 2001 and 2000, respectively.
At December 31, 2001 and 2000, the Company's loan servicing bond included
errors and omissions coverage of $5 million and fidelity bond insurance
coverage of $10.0 million. Additionally, at December 31, 2001 and 2000, the
Company was covered by an excess liability umbrella policy in the amount of
$20.0 million.
53
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Following is a summary of the changes in purchased mortgage servicing rights:
2001 2000 1999
------ ------ ------
(Dollars in thousands)
Balance, beginning of year $6,154 $4,085 $2,198
Additions................ 1,083 2,812 2,127
Amortization............. (970) (743) (240)
------ ------ ------
Balance, end of year...... $6,267 $6,154 $4,085
====== ====== ======
Following is a summary of the changes in originated mortgage servicing
rights:
2001 2000 1999
----- ----- ----
(Dollars in thousands)
Balance, beginning of year $ 476 $ 225 $ --
Additions................ 455 377 292
Amortization............. (174) (126) (67)
----- ----- ----
Balance, end of year...... $ 757 $ 476 $225
===== ===== ====
Under Office of Thrift Supervision ("OTS") regulations, the lower of the
amortized carrying value, 90% of the fair market value, or 90% of the original
cost of mortgage servicing rights may be included in calculating capital
standards. The amount to be included as regulatory capital cannot exceed 50% of
tangible capital.
In the second quarter of 1999, Superior purchased from a secondary servicer
an assignment of an approximately $52.0 million portfolio of FHA insured and VA
guaranteed mortgages on a servicing-retained basis. The purchase contract
provided that Superior would receive a pass through net yield of 7.13% and that
the loans would be paid off upon foreclosure and the servicer's receipt of the
individual claims from either FHA or VA.
In the third quarter of 1999, the primary seller/servicer filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. The bankruptcy was
subsequently converted to a Chapter 7 proceeding in which Superior has filed a
$3.7 million proof of claim. Superior then entered into a fee-based
sub-servicing agreement with the secondary servicer.
In the fourth quarter of 2000, Superior's management became aware of, and
brought to the secondary servicer's attention, increasing discrepancies in the
two companies' respective net valuations of the portfolio. At this time,
management also notified the secondary servicer that Superior regarded the
secondary servicer as in breach of certain representations and warranties made
in connection with the assignment. The two companies entered into ongoing
discussions to resolve these differences.
Although the secondary servicer continues to remit principal and interest
collections to Superior, in the first quarter of 2001 Superior decided to
recognize any interest income on the portfolio only after it had received
payments sufficient to recover remaining portfolio balances. Consequently, no
net interest income was recognized in 2001 on the portfolio. At year-end 2001,
management reviewed Superior's net valuation of the portfolio and, based on
ordinary contingencies of recovery in the bankruptcy of the primary
seller/servicer and claims against the secondary servicer, management has
further reduced its valuation of the portfolio by an additional $400,000 after
tax or $0.05 earnings per diluted share. The remaining balance of the portfolio
is currently $20.0 million. Superior will continue to apply this cost recovery
method in accounting for these assets during 2002.
54
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Investments Available for Sale
The amortized cost and estimated fair value of investments available for
sale are summarized as follows:
December 31, 2001
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Dollars in thousands)
Agencies.. $ 61,810 $ 683 $ -- $ 62,493
Municipals 36,562 -- (91) 36,471
GNMA...... 14,549 290 -- 14,839
FNMA...... 60,395 719 -- 61,114
FHLMC..... 48,732 683 -- 49,415
CMOs...... 88,110 596 -- 88,706
Corporates 62,235 -- (454) 61,781
-------- ------ ----- --------
$372,393 $2,971 $(545) $374,819
======== ====== ===== ========
December 31, 2001
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(Dollars in thousands)
Agencies.. $ 32,001 $388 $ -- $ 32,389
Municipals 25,337 481 -- 25,818
GNMA...... 20,159 -- (54) 20,105
FNMA...... 99,820 -- (1,032) 98,788
FHLMC..... 56,422 -- (505) 55,917
CMOs...... 87,729 -- (1,744) 85,985
Corporates 45,813 -- (1,807) 44,006
-------- ---- ------- --------
$367,281 $869 $(5,142) $363,008
======== ==== ======= ========
The amortized cost and estimated fair value by contractual maturity of
available-for-sale investments at December 31, 2001 are as follows:
Amortized Estimated
Cost Fair Value
--------- ----------
(Dollars in thousands)
Due in one year or less......... $ 7 $ 7
Due from one year to five years. 12,052 12,056
Due from five years to ten years 110,907 112,890
Due after ten years............. 249,427 249,866
-------- --------
Totals....................... $372,393 $374,819
======== ========
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
For purposes of the maturity table, investments which are not due at a
single maturity date have been allocated over maturity groupings based on
anticipated maturities. The investments may mature earlier than their weighted
average contractual maturities because of principal prepayments.
55
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage-backed securities with carrying values of approximately $36.339
million and $80.821 million at December 31, 2001 and 2000, respectively were
subject to adjustable rates.
During the years ended December 31, 2001 and 2000, investments available for
sale with a fair value at the date of sale of $87.501 million and $5.502
million respectively, were sold. The gross realized gains on such sales totaled
$1.951 million, and $139,000, at December 31, 2001 and 2000, respectively. The
gross realized losses totaled $77,000, and $49,000, respectively. The income
tax expense related to net security gains in 2001 and 2000 were $656,000 and
$31,000 respectively.
The carrying value of investments pledged for letters of credit, treasury,
tax and loan note accounts, public fund deposits, and repurchase agreements
were approximately $185.130 million and $133.492 million at December 31, 2001
and 2000, respectively.
8. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses follows:
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Balance, beginning of year..... $12,086 $11,346 $10,472
Provision for loan losses..... 4,500 2,300 2,270
Charge-offs, net of recoveries (4,477) (1,560) (1,396)
------- ------- -------
Balance, end of year........... $12,109 $12,086 $11,346
======= ======= =======
9. Premises and Equipment
Premises and equipment consisted of the following at December 31:
2001 2000
------- -------
(Dollars in thousands)
Land....................... $ 9,200 $ 8,959
Buildings and improvements. 23,197 19,467
Furniture and equipment.... 17,425 9,537
Construction in progress... 3,696 2,763
------- -------
53,518 40,726
Accumulated depreciation... (8,255) (5,319)
------- -------
Premises and equipment, net $45,263 $35,407
======= =======
10. Deposits
Deposits consisted of the following at December 31:
2001 2000
---------- ----------
(Dollars in thousands)
Demand and NOW accounts, including noninterest-bearing deposits of
$115,484 and $92,879 at December 31, 2001 and 2000, respectively $ 431,170 $ 398,150
Money market...................................................... 36,721 30,781
Statement and passbook savings.................................... 98,450 87,120
Certificates of deposit........................................... 648,693 562,457
---------- ----------
$1,215,034 $1,078,508
========== ==========
56
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $184.452 million and $82.359 million at December
31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of certificates of deposit
are as follows:
(Dollars in
thousands)
-----------
2002...... $500,687
2003...... 81,704
2004...... 57,622
2005...... 6,780
2006...... 1,477
Thereafter 423
--------
$648,693
========
Interest expense on deposits for the years ended December 31 was as follows:
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Demand and NOW accounts....... $ 6,849 $ 7,509 $ 3,535
Money market.................. 991 1,269 2,001
Statement and passbook savings 1,944 2,042 2,281
Certificates of deposit....... 30,591 30,629 26,154
------- ------- -------
$40,375 $41,449 $33,971
======= ======= =======
11. Federal Home Loan Bank (FHLB) Borrowings
At December 31, 2001 and 2000, the Company had long-term FHLB borrowings of
$223.0 million with interest rates ranging from 4.65% to 6.49% and maturity
dates ranging from September 2, 2003 to May 10, 2010. Of this total, $65.0
million maturing in 2003 and $68.0 million maturing in 2010, with interest
rates ranging from 4.65% to 6.49%, are callable on a quarterly basis and may be
refinanced on a long-term basis. FHLB advances of $30.0 million, $30.0 million
and $30.0 million, all maturing in 2008, with interest rates of 5.35%, 5.47%
and 5.59%, respectively, are callable in 2002, 2003 and 2004, respectively, and
may be refinanced on a long-term basis.
The Bank had short-term FHLB borrowings of $7.0 million and $107.0 million
at December 31, 2001 and 2000, respectively. The weighted average interest rate
on short-term borrowings was 1.98% at December 31, 2001, and 6.11% at December
31, 2000.
As a member of the FHLB, the Bank is required to maintain an investment in
capital stock of the FHLB of Dallas in an amount equal to the greater of 1% of
its outstanding home loans or 1/20 of its outstanding advances from the FHLB of
Dallas. No ready market exists for such stock and it has no quoted market
value. Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage loans.
Additionally, at December 31, 2001, the Bank has a $50.0 million line of
credit, which expires on September 19, 2002. The Bank had no outstanding
borrowings under the line of credit at December 31, 2001. There is no
commitment fee to maintain this credit line.
57
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bank had long-term borrowings from the FHLB with maturities as follows
at December 31, 2001:
FHLB
Long-Term
Borrowings
------------
(Dollars in
thousands)
Maturing in the year ending December 31:
2003................................. $ 65,000
2004................................. --
2005................................. --
2006................................. --
Thereafter........................... 158,000
------------
$ 223,000
============
12. Other Borrowings
At December 31, 2001, borrowings included a $500,000 advance under a $20.0
million line of credit (the "LOC") and $51.5 million of the $60.0 million
Senior Notes. At December 31, 2000 borrowings included an $11.5 million advance
under the LOC and the $60.0 million of Senior Notes. These are obligations of
the parent, Superior Financial Corp. At December 31, 2001 and 2000 other
borrowings for the Bank consisted of $15.0 million and $3.5 million,
respectively in Treasury, Tax and Loan deposits received through the Direct
Investment Program with the Federal Reserve Bank of St. Louis and $50.1 million
and $50.1 million, respectively, in repurchase agreements.
On April 1, 2000, Superior converted the $20.0 million Note into the LOC,
which matures April 1, 2003. At December 31, 2001, $19.5 million was available
under the LOC. The LOC bears interest at LIBOR plus l.50% (3.69% at December
31, 2001) and requires quarterly interest payments. The LOC is secured by
shares of the Bank in such an amount that the book value of pledged stock will
be equal to at least two times the outstanding balance of the loan. The LOC
contains certain covenants of which the most restrictive includes a minimum
total capital, minimum return on assets and maximum nonperforming assets to
total loans and other real estate ratio. At December 31, 2001, the Company was
in compliance with the covenants.
The $51.5 million Senior Notes bear interest at 8.65% and require semiannual
interest payments that began October 1, 1998. The entire principal balance is
due April 1, 2003. The agreement requires the Company to maintain an interest
reserve account with cash or permitted investments sufficient to pay interest
due on the next two succeeding interest payment dates. At December 31, 2001,
the interest reserve account held a mortgage-backed security with a carrying
value of approximately $4.8 million. This account is classified in investments
available for sale on the balance sheet. The loan agreement contains certain
covenants of which the most restrictive include minimum total capital and
minimum liquidity maintenance. Additionally, the agreement restricts certain
payments of dividends. At December 31, 2001, the Company was in compliance with
these covenants. Debt issuance costs of $2.465 million were incurred with the
offering, and the remaining unamortized balance of $535,000 is included in
prepaid expenses and other assets at December 31, 2001.
As of December 31, 2001, the Bank may receive up to $20.0 million in
Treasury, Tax and Loan deposits. The interest rate on these deposits is the
Federal Funds rate less 25 basis points (1.50% at December 31, 2001).
In December 2000, the Bank entered into an agreement with Salomon Smith
Barney to sell $50.0 million of securities under an agreement to repurchase.
The Bank is obligated (i) to repurchase these securities at maturity in 2010
or, at the issuer's option, after two years or any quarterly interest payment
date following, (ii) pay
58
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
quarterly interest at 5.22% and (iii) maintain collateral of 110% of the
Agreement. The Bank had $50.0 million of these securities outstanding at
December 31, 2001 and 2000.
13. Guaranteed Preferred Beneficial Interest in the Company's Subordinated
Debentures
On December 18, 2001, Superior Statutory Trust, a Connecticut statutory
trust wholly owned by the Company, sold to investors $25.0 million of trust
preferred securities. The proceeds were used to purchase $25.774 million in
principal amount of floating rate junior subordinated debentures of the
Company. The Company has, through various contractual arrangements, fully and
unconditionally guaranteed all obligations of Superior Statutory Trust on a
subordinated basis with respect to the preferred securities. Subject to certain
limitations, the preferred securities qualify as Tier 1 capital and are
presented in the consolidated balance sheets as "Guaranteed preferred
beneficial interest in the Company's subordinated debentures." The sole asset
of Superior Statutory Trust is the subordinated debentures issued by the
Company. Both the preferred securities of Superior Statutory Trust and the
subordinated debentures of the Company will mature on December 18, 2031;
however, they may be prepaid, subject to regulatory approval, prior to maturity
at any time on or after December 18, 2006, or earlier upon certain changes in
tax or investment company laws or regulatory capital requirements.
The interest rate on the Company's subordinated debentures is LIBOR plus
3.60% adjusted quarterly, which was 5.60% at December 31, 2001. This interest
rate is subject to a cap of 12.5% annually. Distributions are paid quarterly.
14. Regulatory Matters
The Company is a unitary thrift holding company and, as such, is subject to
regulation, examination and supervision by the 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 December 31, 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.
59
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's and the Bank's actual capital amounts and ratios as of
December 31, 2001 and 2000 are presented below (dollars in thousands):
Required to be
Categorized as Well
Company Bank Required for Capitalized Under
----------- ------------- Capital Adequacy Prompt Corrective
Actual Actual Purposes Action Provisions
------------ -------------- --------------- ------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- ------- ----- -------- -----
As of December 31, 2001
Tangible Capital to adjusted
total assets.................... $85,872 5.17% $120,801 7.33% $24,725 1.50% N/A N/A
Core capital to adjusted total
assets.......................... 85,872 5.17 120,801 7.33 65,935 4.00 $ 82,418 5.00%
Total capital to risk weighted
assets.......................... 97,981 8.99 132,910 12.26 86,715 8.00 108,394 10.00
Tier I capital to risk weighted
assets.......................... 85,872 7.88 120,801 11.14 N/A N/A 65,037 6.00
As of December 31, 2000, as
restated
Tangible capital to adjusted total
assets.......................... $53,278 3.32% $115,424 7.22% $23,987 1.50% N/A N/A
Core capital to adjusted total
assets.......................... 53,278 3.32 115,424 7.22 63,967 4.00 $ 79,958 5.00%
Total capital to risk weighted
assets.......................... 65,364 6.42 127,510 12.57 81,134 8.00 101,418 10.00
Tier I capital to risk weighted
assets.......................... 53,278 5.23 115,424 11.38 N/A N/A 60,851 6.00
60
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Income Taxes
Included in other liabilities are deferred income taxes, which reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax
liabilities and assets as of December 31 are as follows:
2001 2000
------- ------------
(Dollars in thousands)
(As Restated
Note 2)
Deferred tax liabilities:
Prepaid assets................................... $ 83 $ 264
Goodwill amortization............................ 473 374
FHLB dividends................................... 1,540 1,244
Premises and equipment........................... 257 297
Unrealized gain on investments available for sale 849 --
Other............................................ 236 247
------- ------
Total deferred liabilities........................ 3,438 2,426
Deferred tax assets:
Allowance for loan losses........................ 1,125 622
Mortgage servicing rights........................ 169 110
Unrealized loss on investments available for sale -- 1,495
------- ------
Total deferred assets............................. 1,294 2,227
------- ------
Net deferred tax liability........................ $(2,144) $ (199)
======= ======
Significant components of the provision for income taxes for the years ended
December 31 are as follows:
2001 2000 1999
------ ------------ ------
(Dollars in thousands)
(As Restated
Note 2)
Current:
Federal...... $5,850 $5,230 $5,218
State........ -- -- 473
------ ------ ------
Total current. 5,850 5,230 5,691
Deferred:
Federal...... (400) 564 713
State........ -- -- 43
------ ------ ------
Total deferred (400) 564 756
------ ------ ------
$5,450 $5,794 $6,447
====== ====== ======
61
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense for the
years ended December 31 are as follows:
2001 2000 1999
---- ---- ----
(As Restated
Note 2)
Tax at U.S. statutory rate................................. 35.0% 35.0% 35.0%
State income tax expense, net of federal income tax benefit -- -- 1.7
Tax exempt interest income................................. (4.3) (2.9) (1.1)
Other...................................................... -- 0.8 0.5
---- ---- ----
30.7% 32.9% 36.1%
==== ==== ====
The Bank files a consolidated federal income tax return with the Company.
Income tax expense is allocated to the Bank and recorded in the Bank's
consolidated financial statements, generally on the basis of the tax, which
would be payable if the Bank had filed a separate return.
16. Earnings Per Common Share and Dividends
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.
Basic and diluted earnings per common share at December 31 is computed as
follows:
2001 2000 1999
------- ------------- -------
(In thousands, except
per share amounts)
(As Restated
Note 2)
Common shares--weighted average (basic)... 8,963 9,475 10,073
Common share equivalents--weighted average 194 30 47
------- ------------- -------
Common shares--weighted average (diluted). 9,157 9,505 10,120
======= ============= =======
Net income................................ $12,291 $ 11,815 $11,386
======= ============= =======
Basic earnings per common share........... $ 1.37 $ 1.25 $ 1.13
======= ============= =======
Diluted earnings per common share......... $ 1.34 $ 1.24 $ 1.13
======= ============= =======
On November 14, 2001, the Company declared a $0.10 per common share dividend
to stockholders of record as of December 31, 2001 that was paid on January 23,
2002. The Company has not previously paid dividends.
62
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Commitments and Contingencies
The Bank leases branch locations under operating leases with remaining terms
ranging from two to 20 years. These leases generally all contain renewal
options with varying periods. A schedule of future minimum rental payments
under operating leases, as of December 31, 2001 follows:
(Dollars in
thousands)
-----------
2002...... $ 781
2003...... 655
2004...... 587
2005...... 464
2006...... 337
Thereafter 1,620
------
$4,444
======
Rental expense was $1.284 million, $925,000, and $786,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.
On April 1, 1998, the Company became the legal successor to NationsBank's
right and interest in the related proceedings brought under the action Superior
Federal Bank, F.S.B. vs. United States (No. 95-769C) (the "Goodwill
Litigation"). Within five (5) business days following the Company's receipt of
payment pursuant to irrevocable settlement or other resolution of the Goodwill
Litigation by final judgment subject to no further appeal, and, as further
consideration for the sale of the Bank to the Company, the Company shall pay
NationsBank 50% of the "net recovery" from the Goodwill Litigation. "Net
recovery" shall be the gross aggregate amount the Company receives from such
settlement or resolution, net of the total litigation expenses incurred and
paid by the Company after the Closing Date. "Total litigation expense" shall
include, without limitation, attorneys' fees, court costs, expenses, fees of
experts and consultants, filing fees and all other costs reasonably incurred in
prosecution of the Goodwill Litigation.
The Company and its legal counsel are unable to estimate the amount or
likelihood of any potential settlement, if any that may result from the
Goodwill Litigation. Although the outcome of the Goodwill Litigation cannot be
determined, the Company's legal counsel and management are of the opinion that
such final outcome should not have a material adverse effect on the Company's
results of operations or financial condition.
Since December 31, 2000, the Company has become involved in the following
litigation:
In August 2001, the Company began an investigation of an apparent
defalcation. As a result of the investigation, a mid-level manager of the Bank
was terminated. The results of the investigation also implicated the Bank's
controller. On November 2, 2001, the controller delivered to a director of the
Company a letter in which he alleged that management had intentionally
misstated the Company's financial statements and proposed to file with the
Commission materially inaccurate financial information with regard to a
technology conversion then in progress and a purchased mortgage portfolio.
Also on November 2, 2001, the terminated mid-level manager filed a suit
styled Bauman, et al v. Superior Financial Corporation, et al., Civ. No.
4-01-CV-00756G8; U.S. District Court, Eastern District of Arkansas, Western
Division (the "Bauman Suit"). The suit, which names the Company, two of its
executive officers and the Company's independent auditors as defendants,
alleges that, for the past two years, the Company had overstated income in
press releases and financial reports, and thus improperly inflated its stock
price. The complaint seeks undetermined damages for shareholders who purchased
stock in that period.
63
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 5, 2001, the Board of Directors created a Special Committee to
investigate the allegations contained in the controller's letter. The Special
Committee is comprised of two outside directors who are not also members of the
Audit Committee and is authorized to conduct a thorough investigation with the
assistance of independent outside counsel. The Special Committee promptly
conducted its investigation which included, among other things, extensive
interviews with management, the Company's independent auditors and the
controller. On November 14, 2001, the Special Committee reported to the full
Board and the independent auditors its conclusion that the controller's
allegations were not supported by the facts established during the
investigation.
As a result of the continued investigation into the apparent defalcation,
the Bank terminated the controller on December 3, 2001. Thereafter, on December
20, 2001, the Bank filed suit in the action styled, Superior Bank v. Bauman, et
al., Case No. CV-2001-1089 in the Circuit Court for Sebastian County, Arkansas,
Fort Smith Division (the "Superior Bank Suit"). The complaint alleges that the
mid-level manager had embezzled from the Bank and that the controller had,
among other things, breached his fiduciary duties by permitting the
embezzlement to occur. On December 28, 2001, the defendants filed answers and
counterclaims against the Bank alleging defamation and seeking damages in
unstated amounts.
On January 4, 2002, the same attorney who filed the Bauman Suit filed in the
same court a case styled Kashima v. Superior Financial Corp., et al., Cir. No.
4-02-CV-007SWW (the "Kashima Suit"). The complaint sets forth essentially the
same allegations and seeks the same relief against the same defendants as those
set forth and sought in the Bauman Suit. On February 4, the plaintiffs'
attorney, filed a suit styled Cottrell v. Gardner, et al., Case No.
CV-2002-121(I) in the Circuit Court for Sebastian County, Arkansas, Fort Smith
Division. The case purports to be a shareholders' derivative action and seeks
recovery on behalf of the Company against the members of the Board of Directors
for damages arising from alleged falsification of the Company's financial
statements. The allegations essentially repeat those advanced in the Bauman
Suit and the Kashima Suit.
In February 2002, the Special Committee obtained access to additional
information and renewed its investigation. On February 13, 2002 the Special
Committee delivered to the full Board of Directors a supplemental report in
which the Special Committee concluded that its original conclusions remained
unchanged and that it found no evidence of any illegal activity, conspiracy or
bad faith on the part of management of the Company with respect to the matters
subject to the investigation.
All of the cases outlined above are in the earliest stages of litigation. In
the Kashima Suit, the plaintiff has moved to consolidate the suit with the
Bauman suit and to name lead plaintiffs. The motion is pending. In the Superior
Bank suit, the court recently granted the Bank's motion to dismiss the
counterclaim for lack of specificity. The plaintiffs will have an opportunity
to amend their counterclaims.
The Bank intends to pursue its claims vigorously and the Company intends to
defend the claims against it with equal vigor. At this early stage of
litigation, the Bank and the Company are unable to predict the outcome of the
litigation and its effect, if any, on the financial condition of the the
Company or Bank.
The Company's Certificate of Incorporation and Bylaws contain provisions for
the indemnification of officers and directors under certain circumstances.
Claims arising under the litigation described above may entitle officers and
directors to indemnification under those provisions.
64
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 affect on the Company or its business.
18. Supplemental Disclosure of Cash Flow Information and Noncash Activity
Cash Flow Information
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Cash paid for the years ending December 31:
Interest............................................................... $62,981 $69,170 $57,247
Taxes.................................................................. 5,550 5,145 6,325
Costs paid from the proceeds of the issuance Trust Preferred securities: 738 -- --
Noncash activities:
Additions to other real estate from settlement of loans................ 2,989 1,287 998
Dividends declared..................................................... 857 -- --
Acquisition and purchase accounting adjustments:.......................
Goodwill, net........................................................ 83 250 2,576
Premises and equipment, net.......................................... -- 98 (1,412)
Other liabilities.................................................... -- -- (1,164)
19. Employee Benefit Plan
In April 1998 the Company established a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Internal
Revenue Code of 1986, as amended (the "Code") (the "401(k) Plan"). The 401(k)
Plan permits the employees of the Company to defer a portion of their
compensation in accordance with the provisions of Section 401(k) of the Code.
Matching contributions may be made in amounts and at times determined by the
Company. Certain other statutory limitations with respect to the Company's
contribution under the 401(k) Plan also apply. Amounts contributed by the
Company for a participant will vest over four years and will be held in trust
until distributed pursuant to the terms of the 401(k) Plan.
Employees of the Company are eligible to participate in the 401(k) Plan when
they meet certain requirements concerning minimum age and period of credited
service. All contributions to the 401(k) Plan will be invested in accordance
with participant elections among certain investment options. Distributions from
participant accounts will not be permitted before age 591/2, except in the
event of death, permanent disability, certain financial hardships or
termination of employment. The Company made matching contributions of $366,000,
$333,000, and $258,000 to the 401(k) Plan in 2001, 2000, and 1999, respectively.
20. Stock Option Plan
On June 17, 1998, the Company adopted the 1998 Long-Term Incentive Plan (the
"LTIP"). The LTIP is an omnibus plan administered by the Company's Compensation
Committee to provide equity-based incentive compensation for the Company's key
employees. It provides for issuance of incentive stock options, qualified under
Section 422 of the Code, as amended and non-qualified stock options. The LTIP
also provides for issuance of stock appreciation rights, whether in tandem with
options or separately, and awards of restricted shares subject to time-based
restrictions and/or performance goals.
65
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The LTIP imposes a limit on the total number of shares that may be issued
during the ten-year term of the LTIP equal to 10% of the number of shares
outstanding as of December 31, 1998 (1,008,000 total shares limit). It imposes
a limit on the number of awards that may be granted to all employees in any one
calendar year equal to 1% of the number of shares outstanding on December 31,
1998 (100,800 annual shares limit). Any unused portion of the annual shares
limit is carried forward and available for awards in future years. Finally, the
LTIP limits the number of restricted stock awards that may be granted each
year, which are time-based restricted only (i.e., without regard to any
performance goals), to a number of shares equal to .33% (1/3 of 1%) of the
number of shares outstanding on December 31, 1998 (33,932 annual restricted
shares limit). For the years ended December 31, 2001, 2000, and 1999, the
Company granted, 120,870, 113,500, and 95,645 options, respectively, under the
LTIP.
A total of 487,500 options were granted to the Chairman and Chief Executive
Officer of the Company and 243,750 options were granted to the President of the
Company pursuant to their Founder's Agreements and Employment Agreements
(collectively referred to as the "Agreements"), respectively. Those options
were issued before the adoption of the LTIP by the Company's Board and,
therefore, are non-qualified stock options. They have not been issued pursuant
to the LTIP. Under the Agreements, 292,500 options vested upon the successful
completion of the acquisition of the Bank and consummation of public offering
of equity securities. The remaining options granted under the Agreements vested
upon achieving certain performance targets.
The following summarizes the stock option activity:
2001 2000 1999
------------------- ----------------- -----------------
Weighted Weighted Weighted
Average- Average- Average-
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- ------- --------- ------- ---------
Outstanding--beginning of year 975,944 $ 10.07 862,444 $ 10.08 766,799 $ 10.04
Granted....................... 120,870 13.05 113,500 10.00 95,645 10.38
Exercised..................... 2,000 10.09 -- -- -- --
Canceled...................... 23,370 10.31 -- -- -- --
--------- --------- ------- --------- ------- ---------
Outstanding--end of year...... 1,071,444 $ 10.40 975,944 $ 10.07 862,444 $ 10.08
========= ========= ======= ========= ======= =========
Exercisable at end of year.... 849,649 $ 10.17 738,752 $ 10.01 738,752 $ 10.01
========= ========= ======= ========= ======= =========
Exercise prices for options outstanding as of December 31, 2001 ranged from
$10.00 to $13.05. The weighted-average remaining contractual life of the
outstanding options is 6.7 years. All stock options issued by the Company have
an original contractual life of 10 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The fair value of the options
granted and the respective weighted-average assumptions are as follows:
2001 2000 1999
--------- --------- ---------
Weighted-average fair value of options granted $ 4.37 $ 5.53 $ 5.15
Risk-free interest rate....................... 5.33% 6.13% 6.46%
Dividend yield................................ 2.55% 0.00 0.00
Expected stock volatility..................... .29 .30 .21
Weighted average expected life................ 10 years 10 years 10 years
66
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Under the provisions of SFAS No.
123, companies can elect to account for stock-based compensation plans using a
fair value based method or continue measuring compensation expense for those
plans using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123
requires that companies electing to continue using the intrinsic value method
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied. The Company elected to
account for its stock-based compensation plans using the intrinsic value
method. Accordingly, no compensation cost has been recognized for the stock
option plans. The pro forma effects on reported net income and earnings per
share for the years ended December 31, 2001, 2000, and 1999, assuming the
Company had elected to account for its stock option grants in accordance with
SFAS No. 123, would have resulted in net income of approximately $11.851
million, $11.447 million, as restated, and $11.116 million, respectively, or
$1.32 and $1.29 basic and diluted, respectively, earnings per share for 2001,
$1.21 basic and $1.20 diluted, respectively earnings per share for 2000, as
restated, and $1.10 basic and diluted earnings per share for 1999. Such pro
forma effects are not necessarily indicative of the effect on future years.
21. Parent Company Financial Information
Presented below are the condensed balance sheets, and statements of income
and cash flows for the parent company, Superior Financial Corp., as of December
31, 2001 and 2000 and for the years ended December 31, 2001, 2000, and 1999.
Balance Sheets
(Dollars in thousands)
December 31
----------------------
2001 2000
-------- -------------
(As Restated
Note 2)
Assets
Cash and cash equivalents................. $ 5,309 $ 2,204
Investment in subsidiary.................. 180,117 172,983
Investments............................... 9,895 5,191
Other..................................... 3,690 3,606
-------- -------------
Total assets.............................. $199,011 $ 183,984
======== =============
Liabilities and Stockholders' Equity
Notes payable............................. $ 77,774 $ 71,500
Accrued interest and other liabilities.... 1,827 1,667
-------- -------------
Total liabilities......................... 79,601 73,167
Stockholders' equity...................... 119,410 110,817
-------- -------------
Total liabilities and stockholders' equity $199,011 $ 183,984
======== =============
67
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Income
(Dollars in thousands)
Year ended December 31
------------------------
2001 2000 1999
------- -------- -------
(As
Restated
Note 2)
Income
Dividends from subsidiary............................................... $14,500 $14,000 $11,000
Expenses
Interest, net........................................................... 5,997 6,393 6,278
Other................................................................... 947 788 533
------- ------- -------
Total expenses.......................................................... 6,944 7,181 6,811
------- ------- -------
Income before income tax benefit and equity in undistributed earnings of
subsidiary............................................................ 7,556 6,819 4,189
Income tax benefit...................................................... 2,683 2,611 2,503
Equity in undistributed earnings of subsidiary.......................... 2,052 2,385 4,694
------- ------- -------
Net income.............................................................. $12,291 $11,815 $11,386
======= ======= =======
Statements of Cash Flows
(Dollars in thousands)
Year ended December 31
---------------------------
2001 2000 1999
-------- -------- -------
(As
Restated
Note 2)
Operating Activities
Net income....................................................................... $ 12,291 $ 11,815 $11,386
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed earnings of subsidiary............................................ (2,052) (2,385) (4,694)
Depreciation and amortization................................................... 826 726 712
(Increase) decrease in other assets............................................. 887 183 (73)
(Decrease) increase in accrued interest and other liabilities................... (711) 1,033 (860)
-------- -------- -------
Net cash provided by operating activities........................................ 9,466 11,372 6,471
Investing Activities
Purchase of investments.......................................................... (10,316) -- (5,206)
Sale of investments.............................................................. 5,650 -- 5,333
Gain on sale of investments...................................................... -- -- (3)
-------- -------- -------
Net cash (used in) provided by investing activities.............................. (4,666) -- 124
Financing Activities
Proceeds from common stock issued, net........................................... -- 9 7
Purchase of treasury stock....................................................... (7,195) (9,963) (1,164)
Proceeds from trust preferred securities......................................... 25,000 -- --
Principal payments on notes payable.............................................. (19,500) (1,500) (7,000)
-------- -------- -------
Net cash (used in) financing activities.......................................... (1,695) (11,454) (8,157)
Net increase (decrease) in cash and cash equivalents............................. 3,105 (82) (1,562)
Cash and cash equivalents at beginning of year................................... 2,204 2,286 3,848
-------- -------- -------
Cash and cash equivalents at end of year......................................... $ 5,309 $ 2,204 $ 2,286
======== ======== =======
68
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item as to the Company directors will be
contained in the Company's proxy statement that will be prepared for the
Company's 2002 annual meeting of stockholders under the captions "Election of
Directors" and "Section 16 (a) Beneficial Ownership Reporting Compliance," and
is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name, Age and
Year Became Position and Office Held with the Present and Principal Occupation
Executive Officer Company and Superior Bank for the Last Five Years
- ----------------- --------------------------------- ------------------------------------------------------------
C. Stanley Bailey Chairman of the Board, Chief Executive Officer and Chairman of the Board of the
53, 1998....... Chief Executive Officer Company and the Bank, Little Rock, Arkansas, 1998-
of both Superior and present, Chief Financial Officer and Executive Vice
Superior Bank President of Hancock Holding Company and Hancock
Bank, Gulfport, Mississippi, 1995-1998, Vice Chairman
of the Board of Directors, AmSouth Bancorporation and
AmSouth Bank, Birmingham, Alabama 1971-1994.
C. Marvin Scott President, Chief Operating President, Chief Operating Officer and Director of the
52, 1998....... Officer and Director, of Company and the Bank, Fort Smith, Arkansas, 1998-
both Superior and present, Chief Retail Officer and Senior Vice President,
Superior Bank Hancock Holding Company and Hancock Bank, Gulfport
Mississippi, 1996-1998; Executive Vice President--
Consumer Banking, AmSouth Bank Birmingham,
Alabama 1988-1996.
Rick D. Gardner Chief Financial Officer, Chief Financial Officer and Treasurer of the Company and
42, 1998....... Treasurer and Director of the Bank, Little Rock, Arkansas, 1998-present, Director of
Superior and Superior the Company and the Bank 2000-present, Chief Executive
Bank Officer, First Commercial Mortgage Company Little
Rock, Arkansas 1997-1998; Chief Financial Officer, First
Commercial Mortgage Company, Little Rock, Arkansas,
1996-1997; Chief Financial Officer, Metmor Financial
Inc., Kansas City, Missouri, 1990-1995.
Item 11. Executive Compensation
The information required by this item will be contained in the Company's
proxy statement that will be prepared for the Company's 2002 annual meeting of
stockholders under the caption "Executive Compensation" and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the Company's
proxy statement that will be prepared for the Company's 2002 annual meeting of
stockholders under the caption "Voting Securities and Principal Stockholders"
and is incorporated herein by reference.
69
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the Company's
proxy statement that will be prepared for the Company's 2002 annual meeting of
stockholders under the captions "Compensation Committee Interlocks and Insider
Participation" and "Executive Compensation" and is incorporated herein by
reference.
70
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Superior Financial Corp.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for years ended December 31, 2001, 2000
and 1999
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statements Schedule
The financial statements schedules required to be included pursuant to this
Item are not included herein because they are not applicable or the required
information is shown in the financial statements or notes thereto which are
incorporated by reference at subsection 1 of this Item above.
3. Exhibits
Exhibits Description
-------- -----------
3 -- Articles of Incorporation and Bylaws:
3.1 -- Restated and Amended Certificate of Incorporation of Superior Financial Corp. ("Superior"), filed
as Exhibit 3.1 to Superior's Annual Report on Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference.
3.2 -- Bylaws of Superior, filed as Exhibit 3.2 to Superior's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference.
4 -- Instruments defining the rights of security holders:
4.1 -- Form of Equity Subscription Agreement among Superior, Keefe, Bruyette & Woods, Inc.
("KBW") and various investors named therein, dated April 1, 1998, filed as Exhibit 4.1 to
Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.
4.2 -- Form of Registration Rights Agreement between Superior, KBW and various investors named
therein, dated April 1, 1998, filed as Exhibit 4.2 to Superior's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by reference.
4.3 -- Form of Common Stock Certificate of Superior, filed as Exhibit 4.3 to Superior's Annual Report
on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
4.4 -- Article 4 of Superior's Amended and Restated Certificate of Incorporation (included in
Exhibit 3.1), filed as part of Exhibit 3.1 to Superior's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference.
4.5 -- All instruments defining the rights of holders of long-term debt of Superior and its subsidiaries.
Not filed pursuant to clause 4 (iii) of Item 601(b) of Regulation S-K; to be furnished upon request
of the Commission.
71
Exhibits Description
-------- -----------
10 -- Material Contracts:
10.1.... -- Custody and Security Agreement between Superior and Bank of New York ("BONY"), as Trustee,
dated April 1, 1998, filed as Exhibit 10.1 to Superior's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference.
10.2.... -- Securities Account Control Agreement between Superior, Trustee and BONY, dated April 1, 1998,
filed as Exhibit 10.2 to Superior's Annual Report on Form 10-K for the year ended December 31,
1998, and incorporated herein by reference.
10.3 -- Founders Agreement between Superior and C. Stanley Bailey, dated December 2, 1997, filed as
Exhibit 10.3 to Superior's Annual Report on Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference.
10.4.... -- Founders Agreement between Superior and KBW, dated December 2, 1997, filed as Exhibit 10.4
to Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference.
10.5.... -- Founders Agreement between Superior and Financial Stocks, Inc., dated December 2, 1997, filed
as Exhibit 10.5 to Superior's Annual Report on Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference.
10.6.... -- Agreement between C. Marvin Scott and Superior, dated January 1, 1998, filed as Exhibit 10.6 to
Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.
10.7 -- 1998 Long Term Incentive Plan, filed as Exhibit 10.7 to Superior's Annual Report on Form 10-K
for the year ended December 31, 1998, and incorporated herein by reference.
10.8 -- Stock Purchase Agreement by and among Superior, NB Holdings Corporation and Superior
Federal Bank, F.S.B. providing for the acquisition of the stock of Superior Federal Bank, F.S.B.
by Superior, dated as of December 3, 1997, filed as Exhibit 10.8 to Superior's Annual Report on
Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
10.9 -- Agreement between Rick D. Gardner and Superior dated September 21, 1998, filed as Exhibit 10.9
to Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference.
11 -- Statement Regarding Computation of Earnings Per Share is included in the Annual Report on
Form 10-K at footnote 16 to the financial statements at Item 8.
12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21 -- List of subsidiaries of the Registrant.
23 -- Consents of Experts and Counsel.
23.1 -- Consent of Ernst & Young LLP.
24 -- Power of Attorney.
(b) Reports on Form 8-K. The Company filed no current reports on Form 8-K
during the fourth quarter of 2001.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Little Rock, Arkansas on the 29th day of March, 2002.
SUPERIOR FINANCIAL CORP.
/s/ C. STANLEY BAILEY
By: _________________________________
C. Stanley Bailey
Its Chairman of the Board
of Directors
and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ C. STANLEY BAILEY Chairman of the Board of **
- ----------------------------- Directors and Chief
C. Stanley Bailey Executive Officer
/s/ C. MARVIN SCOTT President, Chief Operating **
- ----------------------------- Officer and Director
C. Marvin Scott
/S/ RICK D. GARDNER Chief Financial Officer and **
- ----------------------------- Treasurer (Principal
Rick D. Gardner Financial Officer and
Principal Accounting
Officer and Director)
* Director **
- -----------------------------
John M. Stein
* Director **
- -----------------------------
David E. Stubblefield
* Director **
- -----------------------------
John E. Steuri
* Director **
- -----------------------------
Howard B. McMahon
* Director **
- -----------------------------
Brian A. Gahr
* The undersigned, acting pursuant to a power of attorney, has signed this
Annual Report on Form 10-K for and on behalf of the persons indicated above
as such persons' true and lawful attorney-in-fact and in their names, places
and stead, in the capacities indicated above and on the date indicated below.
/s/ C. STANLEY BAILEY
*By: ________________________
C. Stanley Bailey
Attorney-in-Fact
**Dated: March 29, 2002
73
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
EXHIBITS
to
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File No. 0-25239
-----------------
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in the charter)
================================================================================
EXHIBIT INDEX
Exhibits Description
- -------- -----------
3 -- Articles of Incorporation and Bylaws:
3.1 -- Restated and Amended Certificate of Incorporation of Superior Financial Corp. ("Superior"), filed as
Exhibit 3.1 to Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference.
3.2 -- Bylaws of Superior, filed as Exhibit 3.2 to Superior's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference.
4 -- Instruments defining the rights of security holders:
4.1 -- Form of Equity Subscription Agreement among Superior, Keefe, Bruyette & Woods, Inc. ("KBW")
and various investors named therein, dated April 1, 1998, filed as Exhibit 4.1 to Superior's Annual
Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
4.2 -- Form of Registration Rights Agreement between Superior, KBW and various investors named
therein, dated April 1, 1998, filed as Exhibit 4.2 to Superior's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by reference.
4.3 -- Form of Common Stock Certificate of Superior, filed as Exhibit 4.3 to Superior's Annual Report on
Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
4.4 -- Article 4 of Superior's Amended and Restated Certificate of Incorporation (included in Exhibit 3.1),
filed as part of Exhibit 3.1 to Superior's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.
4.5 -- All instruments defining the rights of holders of long-term debt of Superior and its subsidiaries. Not
filed pursuant to clause 4 (iii) of Item 601(b) of Regulation S-K; to be furnished upon request of the
Commission.
10 -- Material Contracts:
10.1 -- Custody and Security Agreement between Superior and Bank of New York ("BONY"), as Trustee,
dated April 1, 1998, filed as Exhibit 10.1 to Superior's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by reference.
10.2 -- Securities Account Control Agreement between Superior, Trustee and BONY, dated April 1, 1998,
filed as Exhibit 10.2 to Superior's Annual Report on Form 10-K for the year ended December 31,
1998, and incorporated herein by reference.
10.3 -- Founders Agreement between Superior and C. Stanley Bailey, dated December 2, 1997, filed as
Exhibit 10.3 to Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference.
10.4 -- Founders Agreement between Superior and KBW, dated December 2, 1997, filed as Exhibit 10.4 to
Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.
10.5 -- Founders Agreement between Superior and Financial Stocks, Inc., dated December 2, 1997, filed as
Exhibit 10.5 to Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and
incorporated herein by reference.
10.6 -- Agreement between C. Marvin Scott and Superior, dated January 1, 1998, filed as Exhibit 10.6 to
Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.
10.7 -- 1998 Long Term Incentive Plan, filed as Exhibit 10.7 to Superior's Annual Report on Form 10-K for
the year ended December 31, 1998, and incorporated herein by reference.
Exhibits Description
- -------- -----------
10.8 -- Stock Purchase Agreement by and among Superior, NB Holdings Corporation and Superior Federal
Bank, F.S.B. providing for the acquisition of the stock of Superior Federal Bank, F.S.B. by Superior,
dated as of December 3, 1997, filed as Exhibit 10.8 to Superior's Annual Report on Form 10-K for
the year ended December 31, 1998, and incorporated herein by reference.
10.9.. -- Agreement between Rick D. Gardner and Superior dated September 21, 1998, filed as Exhibit 10.9
to Superior's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.
11 -- Statement Regarding Computation of Earnings Per Share is included in the Annual Report on Form
10-K at footnote 16 to the financial statements at Item 8.
12 -- Statement Regarding Computation of Ratio of Earnings to Fixed Charges.
21 -- List of subsidiaries of the Registrant.
23 -- Consents of Experts and Counsel.
23.1 -- Consent of Ernst & Young LLP.
24 -- Power of Attorney.