UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED MARCH 31, 2002
COMMISSION FILE NUMBER #0-25239
SUPERIOR FINANCIAL CORP
(Exact name of registrant as specified in its charter)
DELAWARE 51-0379417
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16101 LaGrande Drive, Suite 103, Little Rock Arkansas 72223
-----------------------------------------------------------
(Address of principal executive offices)
(501) 324-7282
--------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
======= ======================================================================
Class Outstanding at April 30, 2002
----- -----------------------------
- ------- ----------------------------------------------------------------------
Common Stock, $0.01 Par Value 8,601,158
SUPERIOR FINANCIAL CORP.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets, March 31, 2002 (unaudited) and December 31, 2001 ........................ 3
Consolidated statements of income, three months ended March 31, 2002 and
March 31, 2001 (unaudited) ........................................................................... 4
Consolidated statements of cash flows, three months ended March 31, 2002
and March 31, 2001 (unaudited). ...................................................................... 5
Notes to consolidated financial statements (unaudited). .............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 9
PART II. OTHER INFORMATION .................................................................................... 15
Item 1. Legal Proceedings .................................................................................... 15
Item 2. Changes in Securities and Use of Proceeds............................................................. 15
Item 3. Defaults upon Senior Securities ...................................................................... 15
Item 4. Submission of Matters to a Vote of
Security Holders ..................................................................................... 15
Item 5. Other Information .................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K. .................................................................... 15
SIGNATURES ..................................................................................................... 16
CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. The forward-looking statements in this report are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed in or implied by the statements. Factors that
may cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) deposit attrition, customer loss, or revenue loss in the
ordinary course of business; (ii) increases in competitive pressure in the
banking industry; (iii) costs or difficulties related to the operation of the
businesses of Superior Financial Corp. ("Superior") are greater than expected;
(iv) changes in the interest rate environment which reduce margins; (v) general
economic conditions, either nationally or regionally, that are less favorable
than expected, resulting in, among other things, a deterioration in credit
quality; (vi) changes which may occur in the regulatory environment; (vii) a
significant rate of inflation (deflation); (viii) changes in securities markets,
and (ix) adjustment to or changes in anticipated accounting of contracts and
contingencies. When used in this Report, the words "believes", "estimates",
"plans", "expects", "should", "may", "might", "outlook", and "anticipates", and
similar expressions as they relate to Superior (including its subsidiaries), or
its management are intended to identify forward-looking statements.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
March 31, December 31,
2002 2001
-------------- -------------
(unaudited)
ASSETS
Cash and cash equivalents $ 147,555 $ 97,561
Loans available for sale 33,138 27,573
Loans receivable 1,047,310 1,072,846
Less allowance for loan losses 12,175 12,109
-------------- -------------
Loans receivable, net 1,035,135 1,060,737
Investments available for sale, net 378,254 374,819
Accrued interest receivable 13,844 14,132
Federal Home Loan Bank stock 17,458 17,330
Premises and equipment, net 46,925 45,263
Mortgage servicing rights, net 7,090 7,024
Prepaid expenses and other assets 14,537 18,135
Goodwill, net 56,260 56,260
Real estate acquired in settlement of loans, net 2,148 1,784
-------------- -------------
Total assets $ 1,752,344 $ 1,720,618
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,250,344 $ 1,215,034
Federal Home Loan Bank borrowings 223,000 230,000
Other borrowed funds 61,718 65,057
Note payable 500 500
Senior notes 51,500 51,500
Guaranteed preferred beneficial interest in the Company's
subordinated debentures 25,000 25,000
Custodial escrow balances 3,519 5,025
Other liabilities 15,806 9,092
-------------- -------------
Total liabilities 1,631,387 1,601,208
Stockholders' equity:
Common stock 101 101
Capital in excess of par value 94,764 94,764
Retained earnings 44,224 41,290
Accumulated other comprehensive (loss) income (309) 1,577
-------------- -------------
138,780 137,732
Treasury stock at cost, 1,481,266 shares and 1,516,170 shares at
March 31, 2002 and December 31, 2001, respectively (17,823) (18,322)
-------------- -------------
Total stockholders' equity 120,957 119,410
-------------- -------------
Total liabilities and stockholders' equity $ 1,752,344 $ 1,720,618
============== =============
See accompanying notes.
3
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, dollars in thousands, except per share amounts)
Three Months Ended
March 31, March 31,
2002 2001
----------- -----------
(as
restated
Note 4)
Interest income:
Loans $20,943 $22,417
Investments 5,560 5,751
Interest-bearing deposits 288 37
Other 128 310
----------- -----------
Total interest income 26,919 28,515
Interest expense:
Deposits 7,547 10,941
FHLB borrowings 3,103 4,903
Other borrowings 2,306 1,576
----------- -----------
Total interest expense 12,956 17,420
----------- -----------
Net interest income 13,963 11,095
Provision for loan losses 1,250 750
----------- -----------
Net interest income after
provision for loan losses 12,713 10,345
Noninterest income:
Service charges on deposit accounts 6,576 6,868
Mortgage operations, net 674 818
Income from real estate operations, net 100 119
Other 850 665
----------- -----------
Total noninterest income 8,200 8,470
Noninterest expense:
Salaries and employee benefits 7,501 6,883
Occupancy expense 1,174 1,037
Data and item processing 1,909 1,841
Advertising and promotion 345 395
Amortization of goodwill -- 867
Postage and supplies 794 832
Equipment expense 840 677
Other 2,744 2,038
----------- -----------
Total noninterest expense 15,307 14,570
----------- -----------
Income before income taxes 5,606 4,245
Income taxes 1,816 1,357
----------- -----------
Net income $ 3,790 $ 2,888
=========== ===========
Basic earnings per common share $ 0.44 $ 0.32
=========== ===========
Diluted earnings per common share $ 0.43 $ 0.31
=========== ===========
See accompanying notes
4
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months Ended
March 31,
---------
2002 2001
---- ----
(as restated
Note 4)
-----------
Operating activities
Net income $ 3,790 $ 2,888
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,250 750
Depreciation 1,135 668
Additions to mortgage servicing rights (353) (169)
Amortization of mortgage servicing rights 287 283
Amortization of premiums on investments, net 270 47
Amortization of goodwill -- 867
Loss (gain) on sale of real estate 8 (14)
Gain on sale of loans (168) (99)
Gain on sale of investments (211) (123)
Mortgage loans originated for sale (15,808) (33,110)
Proceeds from sale of mortgage loans held for sale 18,944 32,023
Decrease in accrued interest receivable 288 927
Decrease in prepaid expenses and other assets 3,598 832
Net (decrease) increase in custodial escrow balances (1,506) 6,811
Increase in other liabilities 7,354 2,781
--------- --------
Net cash provided by operating activities 18,878 15,362
Investing activities
Decrease in loans, net 15,000 6,818
Purchase of investments (45,464) (8,753)
Proceeds from sale of investments 10,842 22,707
Purchase FHLB stock (128) (309)
Proceeds from sale of FHLB stock -- 5,000
Proceeds from sale of real estate 445 364
Principal payments on investments 28,226 9,597
Purchases of premises and equipment (2,797) (1,552)
--------- --------
Net cash provided by investing activities 6,124 33,872
Financing activities
Net increase in deposits 35,310 36,084
Net decrease in FHLB borrowings (7,000) (59,000)
Net (decrease) increase in other borrowings (3,339) 15,265
Payment of dividend (478) --
Principal payment on note payable -- (4,500)
Proceeds from common stock issued, net 499 --
--------- --------
24,992 (12,151)
Net cash provided by (used in) financing activities --------- --------
49,994 37,083
Net increase in cash 97,561 55,321
Cash and cash equivalents, beginning of period --------- --------
$147,555 $ 92,404
Cash and cash equivalents, end of period ========= ========
See accompanying notes.
5
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
1. Summary of Significant Accounting Policies
Nature of Operations
Superior Financial Corp. ("Company") is a unitary thrift holding company
organized under the laws of Delaware and headquartered in Little Rock, Arkansas.
The Company was organized on November 12, 1997 as SFC Acquisition Corp. for the
purpose of acquiring Superior Bank, (formerly Superior Federal Bank, F.S.B. the
"Bank"), a federally chartered savings institution. The Bank provides a broad
line of financial products to small and medium-sized businesses and to
consumers, primarily in Arkansas and Oklahoma.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the entire year or for any other period. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2001.
Restatement
The financial statements for the three months ended March 31, 2001 have been
restated to reflect adjustments to prior periods. See Note 4.
Comprehensive Income
Total comprehensive income was $1.9 million for the three months ended March 31,
2002 and $7.8 million for the three months ended March 31, 2001, as restated.
Unrealized gains and losses on investments available for sale are the only items
included in other comprehensive income.
2. Per Share Data
The Company computes earnings per share ("EPS") in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128. Basic EPS is computed by
dividing reported earnings available to common stockholders by weighted average
shares outstanding. No dilution for any potentially dilutive securities is
included. Diluted EPS includes the dilutive effect of stock options. In
computing dilution for stock options, the average share price is used for the
period presented. For the first quarters of 2002 and 2001, all outstanding
options to purchase shares were included in the dilutive EPS calculation.
6
Basic and diluted earnings per common share are as follows:
Three Months Ended
March 31,
2002 2001
---- ----
(as restated)
-------------
(In thousands, except
per share amounts)
Common shares-weighted average (basic) 8,593 9,051
Common share equivalents-weighted average 228 145
------ ------
Common shares weighted average (diluted) 8,821 9,196
====== ======
Net income $3,790 $2,888
====== ======
Basic earnings per common share $ 0.44 $ 0.32
====== ======
Diluted earnings per common share $ 0.43 $ 0.31
====== ======
Dividend declared per common share $ 0.10 --
======
3. 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 March 31, 2002, the
Company's assets included goodwill of approximately $56.3 million, which is
primarily from the acquisition of the Bank. The Company did not record goodwill
amortization expense for the three months ended March 31, 2002. The Company
recorded goodwill amortization expense of $867,000 for the three months ended
March 31, 2001. If SFAS 142 had been effective for the three months ended March
31, 2001, net income would have been $3,478,000 or $.38 diluted earnings per
share, as restated. During the second quarter of 2002, the Company will perform
the first 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
of 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 material.
4. 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.
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.
7
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 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.
The impact of the above items on previously reported results for the first
quarter of 2001 is as follows:
Three months
ended
March 31, 2001
--------------
(in thousands)
Net income, as previously reported $3,107
Less additional costs allocated to the first quarter
of 2001 as a result of the Bisys deconversion 219
------
Net income, as restated $2,888
======
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF SUPERIOR FINANCIAL CORP.
The Company is a unitary thrift holding company. The Company was organized in
November 1997 as SFC Acquisition Corp. for the purpose of acquiring the Bank. On
April 1, 1998 the Company financed the acquisition of 100% of the common stock
of the Bank, in a purchase transaction, through a private placement of the
Company's common stock and debt. Prior to the acquisition of the Bank on April
1, 1998, the Company did not have any operations, other than the costs
associated with the private placement offering of common stock and debt. The
Bank is a federally chartered savings bank. The following Management's
Discussion and Analysis of Financial Condition and Results of Operations
analyzes the major elements of the Company's consolidated balance sheets as of
March 31, 2002 and December 31, 2001 and statements of income for the three
months ended March 31, 2002 and March 31, 2001. Readers of this report should
refer to the unaudited consolidated financial statements and other financial
data presented throughout this report to fully understand the following
discussion and analysis.
The Bank is a federally chartered and insured savings bank subject to extensive
regulation and supervision by the Office of Thrift Supervision ("OTS"), as its
chartering agency, and the Federal Deposit Insurance Corporation ("FDIC"), as
the insurer of its deposits. In addition, the Company is a registered savings
and loan holding company subject to OTS regulation, examination, supervision and
reporting.
The Company provides a wide range of retail and small business services
including noninterest bearing and interest bearing checking, savings and money
market accounts, certificates of deposit, and individual retirement accounts. In
addition, the Company offers an extensive array of real estate, consumer, small
business, and commercial real estate loan products. Other financial services
include automated teller machines, debit card, internet banking, bill payment,
credit-related life and disability insurance, safe deposit boxes, telephone
banking, discount investment brokerage, and full-service investment advisory
services.
The Company has been effective in establishing primary banking relationships
with lower to middle income market segments through the successful execution of
its "totally free checking" programs. This has resulted in the Company serving
over 189,000 households with average noninterest revenue of approximately $150
per account annually. The Bank attracts primary banking relationships in part
through the customer-oriented service environment created by the Bank's
personnel.
Results of Operations
The Company's primary asset is its investment in 100% of the common stock of the
Bank and the Company's operations are funded primarily from the operations of
the Bank. The March 31, 2001 operating results have been restated as described
in Note 4 to the interim financial statements included in Item 1 of the Form
10-Q.
For the three months ended March 31, 2002 and 2001
For the three months ended March 31, 2002, the Company had net income of $3.8
million, an increase of $0.9 million from the comparable period in 2001, as
restated. The primary reason for this increase was an increase in net interest
income as discussed under the heading Net Interest Income below. For the
Company, this resulted in a return on average assets of .90% and a return on
average common equity of 12.71% for the quarter ended March 31, 2002 compared to
...71% and 10.25%, respectively, for the same time period in 2001, as restated.
The Bank had a return on average assets of 1.19% and 11.43% return on average
common equity for the quarter ended March 31, 2002 compared to .98% and 9.29%,
respectively, for the quarter ended March 31, 2001, as restated.
Total assets increased to $1.752 billion at March 31, 2002 from $1.721 billion
at December 31, 2001, an increase of $31.7 million, or 1.8%. Loans decreased
from $1.073 billion at December 31, 2001 to $1.047 billion at March 31, 2002, a
decrease of $25.5 million, or 2.4%. Cash and cash equivalents increased from
$97.6 million at December 31, 2001 to $147.6 million at March 31, 2002, an
increase of $50 million, or 51%. Deposits increased $35.3 million, or 2.9%, to
$1.25 billion at March 31, 2002 from $1.215 billion at December 31, 2001. A
portion of the increase in deposits was used to reduce FHLB borrowings and fund
investment activity. FHLB borrowings declined $7 million from $230 million at
December 31, 2001 to $223 million at March 31, 2002. Investments increased to
$378.3 million from $374.8 million at December 31, 2001.
9
Net Interest Income
Net interest income represents the amount by which interest income on
interest-bearing assets, including investments and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of earnings.
Interest rate fluctuations, as well as changes in the amount and type of earning
assets and liabilities, combine to affect net interest income. Factors that
determine the level of net interest income include the volume of earning assets
and interest-bearing liabilities, yields and rates paid, fee income from
portfolio loans, the level of nonperforming loans and other non-earning assets,
and the amount of noninterest-bearing liabilities supporting earning assets.
Net interest income for the three months ended March 31, 2002 was $13.96
million, an increase of $2.87 million, or 25.8% from $11.09 million for the same
period in 2001.
In the table below, the components of net interest income are detailed.
March 31, March 31,
2002 2001
---- ----
(dollars in thousands)
Average interest-earning assets $1,545,722 $1,478,459
Average interest-bearing liabilities 1,449,994 1,417,135
Yield on earning assets (tax-equivalent) 7.09% 7.85%
Rate paid on interest-bearing liabilities 3.51% 4.96%
Net interest spread 3.58% 2.89%
Net interest margin 3.82% 3.10%
Average interest-earning assets increased $67 million from $1.478 billion in the
first quarter of 2001 to $1.546 billion in the first quarter of 2002. Cash
investments were the principal contributor to the increase in interest-earning
assets as the average balance for the three months ended March 31, 2002 was
$67.8 million as compared to $2.8 million at year-ended December 31, 2001. The
increase in cash investments helped offset decreases in net loans. Net interest
spread, the difference between the yield on earning assets and the rate paid on
interest-bearing liabilities, increased from 2.89% in the first quarter of 2001
to 3.58% in the first quarter of 2002, an increase of 69 basis points, due
primarily to lower rates on interest-bearing liabilities.
Provision for Loan Losses
The provision for loan losses increased $500,000, or 66.7%, from $750,000 for
the three months ended March 31, 2001 to $1,250,000 for the three months ended
March 31, 2002. Loan loss reserves were 1.16% and 1.13% of loans at March 31,
2002 and December 31, 2001, respectively.
Nonperforming loans, real estate owned and foreclosed property were $13.2
million and $10.7 million at March 31, 2002 and December 31, 2001, respectively.
The allowance for loan losses totaled $12.2 million at March 31, 2002, an
increase of $66,000, or 0.5% from December 31, 2001. The allowance for loan
losses represented 117% and 151% of nonperforming loans at March 31, 2002 and
December 31, 2001, respectively.
Noninterest Income
Noninterest income for the quarter ended March 31, 2002 was $8.2 million, a
decrease of $270,000, or 3.2%, over the same period in 2001. Service charges are
the principal component of noninterest income. Service charges were $6.6 million
for the three months ended March 31, 2002, compared to $6.9 million for the same
period in 2001, a decrease of $292,000 or 4.3%. Service charges on deposit
accounts consist primarily of insufficient funds fees charged to customers. This
decrease is due to the reduced number of NSF items processed and larger
transaction account deposit balances.
10
Noninterest Expense
For the three months ended March 31, 2002, noninterest expense totaled $15.3
million, an increase of $737,000, or 5.1%, from $14.6 million for the three
months ended March 31, 2001, as restated. The Company's efficiency ratio for the
quarter ended March 31, 2002 was 68.46% compared to 69.37% for the three months
ended March 31, 2001, as restated. The efficiency ratio is calculated by
dividing total noninterest expense, excluding goodwill amortization, by net tax
equivalent interest income, plus noninterest income, excluding securities
transactions.
Salaries and employee benefits expense for the three months ended March 31, 2002
was $7.5 million compared to $6.9 million for the three months ended March 31,
2001, an increase of $0.6 million, or 9.0%. This increase was due primarily to
incentive and commission payments, increases in payroll taxes and the opening of
two new retail branches.
Occupancy expense increased $137,000, or 13.2%, from $1.04 million for the three
months ended March 31, 2001 to $1.17 million for the three months ended March
31, 2002, primarily due to the opening of an operations center in Fort Smith and
two new retail branches. Major categories included in occupancy expense are
building lease expense, depreciation expense, and utilities expense.
Amortization of goodwill expense of $867,000 was recorded during the three
months ended March 31, 2001. Since the Company adopted SFAS 142 as of January 1,
2002, no goodwill amortization expense was recorded for the three months ended
March 31, 2002. See Note 3 to the interim financial statements included in
Item 1 of the Form 10-Q.
Other expenses increased approximately $705,000 or 35% from $2.0 million for the
three months ended March 31, 2001, as restated to $2.7 million for the three
months ended March 31, 2002, primarily due to increases in professional fees,
loan collection expenses, and returned item losses.
Income Taxes
For the three months ended March 31, 2002, income tax expense was $1.8 million,
an increase of $459,000 from $1.4 million at March 31, 2001. The effective tax
rate for the three months ended March 31, 2002 was 32.4% compared to 32.0% for
the three months ended March 31, 2001.
Impact of Inflation
The effects of inflation on the local economy and on the Company's operating
results have been relatively modest for the past several years. Since
substantially all of the Bank's assets and liabilities are monetary in nature,
such as cash, investments, loans and deposits, their values are less sensitive
to the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest sensitive assets and liabilities.
Deposits
Deposits consisted of the following at March 31, 2002 and December 31, 2001:
March 31 December 31,
2002 2001
---- ----
(Dollars in thousands)
Demand and NOW accounts, including noninterest-bearing deposits of $116,347 and
$115,484 at March 31, 2002 and December 31, 2001, respectively $ 442,819 $ 431,170
Money market 85,513 36,721
Statement and passbook savings 114,184 98,450
Certificates of deposit 607,828 648,693
---------- ----------
Total deposits $1,250,344 $1,215,034
========== ==========
11
Capital Resources
Stockholders' equity increased to $120.9 million at March 31, 2002 from $119.4
million at December 31, 2001, an increase of $1.5 million, or 1.3%. This
increase was due to net income of $3.8 million for the three months ended March
31, 2002 offset by the net decrease in the unrealized gain/loss on investments
available for sale of $1.9 million. Additionally, the Company declared a cash
dividend equal to $.10 per share or approximately $857,000. The dividend was
paid on April 24, 2002 to all stockholders of record as of March 28, 2002.
Capital
The Company is a unitary thrift holding company and, as such, is subject to
regulation, examination and supervision by the Office of Thrift Supervision
("OTS").
The Bank is also subject to various regulatory requirements administered by the
OTS. Failure to meet minimum capital requirements can initiate certain mandatory
- - and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible and core capital (as defined in the regulations) to adjusted
total assets (as defined), and of total capital (as defined) and tier 1 to risk
weighted assets (as defined). Management believes, as of March 31, 2002, that
the Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the OTS categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total, tangible,
and core capital ratios as set forth in the table below. There are no conditions
or events since that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual capital amounts and ratios as of March 31,
2002 and December 31, 2001 are presented below (amounts in thousands):
Required to be
Categorized as
Well Capitalized
Required for Under Prompt
Company Bank Capital Adequancy Corrective Action
Actual Actual Purposes Provisions
------ ------ -------- ----------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------ -----
As of March 31, 2002
Tangible capital to adjusted total
Assets $ 89,316 5.27% $121,860 7.22% $25,306 1.50% $ N/A N/A
Core capital to adjusted total assets 89,316 5.27 121,860 7.22 67,482 4.00 84,353 5.00%
Total capital to risk weighted assets 101,490 9.21 134,035 12.27 87,417 8.00 109,272 10.00
Tier 1 capital to risk weighted assets 89,316 8.10 121,860 11.15 N/A N/A 65,563 6.00
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 1 capital to risk weighted assets 85,872 7.88 120,801 11.14 N/A N/A 65,037 6.00
12
Asset Quality
Management is aware of the risks inherent in lending and continually monitors
risk characteristics of the loan portfolio. The Company's policy is to maintain
the allowance for loan losses at a level believed adequate by management to
absorb potential loan losses within the portfolio. Management's determination of
the adequacy of the allowance is performed by an internal loan review committee
and is based on risk characteristics of the loans, including loans deemed
impaired in accordance with Financial Accounting Standards Board (FASB)
Statement No. 114, past loss experience, economic conditions and such other
factors that deserve recognition. Additions to the allowance are charged to
operations.
The following table presents, for the periods indicated, an analysis of the
Company's allowance for loan losses and other related data.
Twelve
Months
Three Months ended
ended 3/31/02 12/31/01
------------- --------
(Dollars in thousands)
Allowance for loan losses, beginning of period $12,109 $12,086
Provision for loan losses 1,250 4,500
Charge-offs (1,866) (6,128)
Recoveries 682 1,651
------- -------
Allowance for loan losses, end of period $12,175 $12,109
======= -------
Allowance to period-end loans 1.16% 1.13%
Net charge-offs to average loans .45% 0.42%
Allowance to period-end nonperforming loans 117% 151%
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at March 31, 2002 were $13.2 million, compared to
$10.7 million at December 31, 2001. This resulted in a ratio of nonperforming
assets to loans plus other real estate of 1.26% and 0.99% at March 31, 2002 and
December 31, 2001, respectively. Nonaccrual loans were $10.4 million and $8.0
million, respectively, at March 31, 2002 and December 31, 2001. The $2.3 million
increase in nonaccrual loans is primarily the result of the move of three
commercial loans from accrual to nonaccrual. The Company believes these
additions do not present significant collectibility risk due to the collateral
position of the Company. The following table presents information regarding
nonperforming assets as of the dates indicated:
March 31, December 31,
2002 2001
--------- ------------
(Dollars in thousands)
Nonaccrual loans $10,369 $ 8,022
Other real estate and repossessed assets 2,879 2,646
------- -------
Total nonperforming assets $13,248 $10,668
======= =======
Nonperforming assets to total loans and other real estate owned 1.26% 0.99%
Nonperforming assets to total assets .76% .62%
The Company has developed procedures designed to maintain a high quality loan
portfolio. These procedures begin with approval of lending policies and
underwriting guidelines by the Board of Directors, low individual lending limits
for officers, Senior Loan Committee approval for large credit relationships and
effective loan documentation procedures. The loan review department identifies
and analyzes weaknesses in the portfolio and reports credit risk grade changes
on a quarterly basis to Bank management and directors. The Bank also maintains a
well-developed monitoring process for credit extensions in excess of $100,000.
The Bank has established underwriting guidelines to be followed by its officers.
The Company also monitors its delinquency levels for any negative or adverse
trends, and collection efforts are centralized. The Company also has procedures
to bring rapid resolution of nonperforming loans and prompt and orderly
liquidation of real estate, automobiles and other forms of collateral.
13
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans past
due 90 days, however, are placed on nonaccrual status, unless the loan is both
well collateralized and in the process of collection. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring. The Company regularly updates appraisals on loans collateralized
by real estate; particularly those categorized as nonperforming loans and
potential problem loans. In instances where updated appraisals reflect reduced
collateral values, an evaluation of the borrower's overall financial condition
is made to determine the need, if any, for possible writedowns or appropriate
additions to the allowance for loan losses.
The Company records real estate acquired by foreclosure at the lesser of the
outstanding loan balance, net of any reduction in basis, or the fair value at
the time of foreclosure, less estimated costs to sell.
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 have 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 on the portfolio in 2001 or in the three
months ended March 31, 2002. The remaining balance of the portfolio is currently
$18.9 million. Superior will continue to apply this cost recovery method in
accounting for these assets during 2002.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In its annual report on Form 10-K, the Company disclosed the nature and status
of several lawsuits relating to, among other things, the 2001 technology
conversion associated with the restatement of financial statements for prior
periods. See Note 4 to the interim financial statements included in Item 1 of
the Form 10-Q. There have been no material developments in this litigation since
the date of that disclosure.
The Company is involved in various lawsuits and litigation matters on an ongoing
basis as a result of its day-to-day operations. However, the Company does not
believe that any of these or any threatened lawsuits and litigation matters will
have a materially adverse effect on the Company or its business.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Superior Financial Corp.
/s/ C. Stanley Bailey May 14, 2002
- --------------------------------------------------------- -------------------------------
C. Stanley Bailey, Chief Executive Officer Date
/s/ Rick D. Gardner May 14, 2002
- --------------------------------------------------------- -------------------------------
Rick D. Gardner, Chief Financial Officer Date
16