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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, 1999
[_]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 voting stock of the registrant held by
non-affiliates as of March 15, 2000 based on the average bid and ask prices of
$8.50 per share for Common Stock was approximately $48,853,000. (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, 2000 were 9,832,108.
DOCUMENTS INCORPORATED BY REFERENCE
Part of
Document Form 10-K
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Portions of Definitive Proxy Statement for the 2000 Annual Meeting
as specifically referred to herein................................... Part III
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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 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 54 branches concentrated in Ft. Smith, Little Rock, and
eastern Oklahoma. At December 31, 1999 the Company had consolidated assets of
$1.6 billion, shareholders equity of $105.6 million, deposits of $977.9
million and gross loans of $1.0 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 automated teller machines, debit card, credit related life
and disability insurance, safety deposit boxes and telephone banking. The
Company has over 162,000 checking customers with average noninterest revenue
of approximately $115 per account annually. The Bank attracts primary banking
relationships in part through the customer-oriented service environment
created by the Bank's personnel.
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, 1999, the Company's allowance for loan losses is
approximately 1.13% of total loans. In addition, the Company has adopted
procedures to achieve rapid resolution of non-performing loans and prompt and
efficient liquidation of real estate, automobiles and other forms of
collateral.
Subsidiaries
The Company's only subsidiary is the Bank. 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 insurance to
consumer loan borrowers of the Bank.
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.
1
The competitive environment for both the Company and the Bank may be
materially affected by the recent enactment of the Gramm-Leach-Bliley
Financial Services Modernization 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, 1999, the Company had 721 full-time employees, and 161
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 Acquisitions. The Company is a registered savings and loan
holding company. The Home Owners Loan Act ("HOLA") and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring, directly or indirectly, the ownership or
control of any other savings association or savings and loan holding company,
or all, or substantially all, of the assets or more than 5% of the voting
shares thereof. These provisions also prohibit, among other things, any
director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of such holding
company, from acquiring control of any savings association not a subsidiary of
such savings and loan holding company, unless the acquisition is approved by
the OTS.
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 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
2
Reserve Board as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must be approved by the
OTS prior to being engaged in by a multiple savings and loan holding company.
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.
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 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.
3
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a
member of the FHLB System, is required to acquire and hold shares of capital
stock in an FHLB in an amount equal to the greater of: (i) 1% of its aggregate
outstanding principal amount of its residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each calendar year, or
(ii) 1/20 of its FHLB advances (borrowings). Among other benefits, FHLB
membership provides the Bank with a central credit facility.
Liquid Assets. Under OTS regulations, for each calendar quarter, a savings
institution is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) of
not less than a specified percentage of the average daily balance of its net
withdrawable accounts plus short-term borrowings (its liquidity base) during
the preceding calendar quarter. This liquidity requirement is currently 4%. In
addition to meeting the liquidity requirement, each savings association must
maintain sufficient liquidity to ensure its safe and sound operation.
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 requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% 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 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. Interest rate exposure is
measured, generally, as the decline in an institution's net portfolio value
that would result from a 200 basis point increase or decrease in market
interest rates (whichever would result in lower net portfolio value), divided
by the estimated economic value of the savings association's assets. The
interest rate risk component to be deducted from total capital is equal to
one-half of the difference between an institution's measured exposure and
"normal" IRR exposure (which is defined as 2%), multiplied by the estimated
economic value of the institution's assets. The OTS has postponed the date the
component will be deducted from an institution's total capital.
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 OTS regulations provide that higher individual minimum
regulatory capital requirements may be appropriate in circumstances where,
among others: (1) a savings institution has a high degree of exposure to
interest rate risk, prepayment risk, credit risk, concentration of credit
risk, certain risks arising from nontraditional activities, or similar risks
or a high proportion of off-balance sheet risk; (2) a savings institution is
growing, either internally or through acquisitions, at such a rate that
supervisory problems
4
are presented that are not dealt with adequately by other OTS regulations and
guidance; and (3) a savings institution may be adversely affected by
activities or condition of its holding company, affiliates, subsidiaries or
other persons or savings institutions with which it has significant business
relationships. The Bank is not subject to any such individual minimum
regulatory capital requirement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--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 compensation, 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 regulation,
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 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 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).
A savings institution is prohibited from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding
company if the institution would thereafter be undercapitalized. Institutions
that are classified as undercapitalized are subject to certain mandatory
supervisory actions, including: (i) increased monitoring by the appropriate
federal banking agency for the institution and periodic review of the
5
institution's efforts to restore its capital, (ii) a requirement that the
institution submit a capital restoration plan acceptable to the appropriate
federal banking agency and implement that plan, and that each company having
control of the institution guarantee compliance with the capital restoration
plan in an amount not exceeding the lesser of 5% of the institution's total
assets at the time the institution received notice of being undercapitalized,
or the amount necessary to bring the institution into compliance with
applicable capital standards at the time it fails to comply with the plan, and
(iii) a limitation on the institution's ability to make any acquisition, open
any new branch offices, or engage in any new line of business without the
prior approval of the appropriate federal banking agency for the institution
or the FDIC.
The regulations also provide that the OTS may take any of certain additional
supervisory actions against an undercapitalized institution if the agency
determines that such actions are necessary to resolve the problems of the
institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity deemed to pose excessive risk to the
institution, (vii) prohibiting capital distributions, (viii) requiring the
institution to divest certain subsidiaries, or requiring the institution's
holding company to divest the institution or certain affiliates of the
institution, and (ix) taking any other supervisory action that the agency
believes would better carry out the purposes of the prompt corrective action
provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor of
certain discretionary supervisory actions, and subjects significantly
undercapitalized institutions to additional restrictions, including a
prohibition on paying bonuses or raises to senior executive officers without
the prior written approval of the appropriate federal bank regulatory agency.
In addition, significantly undercapitalized institutions may be subjected to
certain of the restrictions applicable to critically undercapitalized
institutions.
The regulations require that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions
of FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution continues
to be critically undercapitalized on average during the calendar quarter
beginning 270 days after the date on which the institution initially became
critically undercapitalized, unless the institution's federal bank regulatory
agency, with concurrence of the FDIC, makes certain positive determinations
with respect to the institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of the FDIC. (However, the regulation does not prevent
unpaid interest from accruing on subordinated debt under the terms of the debt
instrument, to the extent otherwise permitted by law.) In addition, critically
undercapitalized institutions may be prohibited from engaging in a number of
activities, including entering into certain transactions or paying interest
above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
6
At December 31, 1999, 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 to make restitution
or provide reimbursement, indemnification or guarantee against loss; restrict
the growth of the institution; and 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, dividends and payments for stock repurchases
and other distributions charged against the capital accounts of a savings
institution.
Under OTS regulations effective through March 31, 1999, an institution that
met its capital requirement both before and after a proposed distribution (a
"Tier 1 institution") and which has not been notified by the OTS that it is in
need of more than normal supervision could, after prior notice to but without
the approval of the OTS, make capital distributions during a calendar year up
to the higher of: (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at the
beginning of the calendar year, or (ii) 75% of its net income over the most
recent four-quarter period. A Tier 1 institution could make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings institution that met
its minimum capital requirement both before and after a proposed distribution
but does not meet its capital requirement (a "Tier 2 institution") was
authorized after prior notice to the OTS but without OTS approval, to make
capital distributions in an amount up to 75% of its net income over the most
recent four-quarter period, taking into account all prior distributions during
the same period. Any distribution in excess of this amount had to be approved
in advance by the OTS. A savings institution that did not meet its minimum
capital requirement (a "Tier 3 institution") could not make any capital
distribution without prior approval from the OTS, unless the capital
distribution was consistent with the terms of a capital plan approved by the
OTS. The Bank has been classified as a Tier 1 institution.
Under OTS regulations effective April 1, 1999, 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
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.
7
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 a national bank 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; (iii) the association shall be ineligible to obtain new
advances from any FHLB; and (iv) the payment of dividends by the 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 and would be required to repay any
outstanding advances to any FHLB. 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 requalify 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 Code or that 65% of its
"portfolio assets" (as defined) consist of certain housing and consumer-
related assets on a monthly average 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); FHLB 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, 1999, 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 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 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.
8
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 classifications.
Effective January 1, 1997, 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, an assessment of 6.4 basis points and 1.3 basis points
is added to the regular SAIF-assessment and the regular BIF-assessment,
respectively, until the earlier of December 31, 1999 or the date upon which
the last savings association ceases to exist in order to cover Financing
Corporation debt service payments. The Bank's assessment expense for the year
ended December 31, 1999 equaled $549,593.
Conservatorship/Receivership. In addition to the grounds discussed under "--
Prompt Corrective Action," the OTS (and, under certain circumstances, the
FDIC) may appoint a conservator or receiver for a savings institution if any
one or more of a number of circumstances exist, including, without limitation,
the following: (i) the institution's assets are less than its obligations to
creditors and others, (ii) a substantial dissipation of assets or earnings due
to any violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books,
papers, records or assets or refusal to submit such items for inspection to
any examiner or lawful agent of the appropriate federal banking agency or
state bank or savings association supervisor, (vi) the institution is likely
to be unable to pay its obligations or meet its depositors' demands in the
normal course of business, (vii) the institution has incurred, or is likely to
incur, losses that will deplete all or substantially all of its capital, and
there is no reasonable prospect for the institution to become adequately
capitalized without federal assistance, (viii) any violation of law or unsafe
or unsound practice that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institution's condition, or
otherwise seriously prejudice the interests of the institution's depositors or
the federal deposit insurance fund, (ix) the institution is undercapitalized
and the institution has no reasonable prospect of becoming adequately
capitalized, fails to become adequately capitalized when required to do so,
fails to submit a timely and acceptable capital restoration plan, or
materially fails to implement an accepted capital restoration plan, (x) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital, or (xi) the institution is found guilty of certain
criminal offenses related to money laundering.
Cross-Guarantee Liability and Effect of a Resolution of the Bank. Depository
institutions insured by the FDIC, such as the Bank, can be held liable for any
loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled depository institution in danger of default. "Default" is
defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. Accordingly, to the extent that the FDIC incurs or anticipates
incurring any loss in connection with any other insured depository institution
owned by the Company, the Bank could be required to compensate the FDIC by
reimbursing it for the amount of such loss. Such cross-guarantee liability can
result in the ultimate failure or insolvency of all insured depository
institutions in a holding company structure. Any obligation or liability owed
by a banking subsidiary to its parent company, any other shareholder or any of
the banking subsidiary's other affiliates is subordinate to the banking
subsidiary's cross-guarantee liability.
Because the Company is a legal entity separate and distinct from the Bank,
the Company's right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of the Bank or any other insured depository
institution owned by the Company, the claims of depositors and other general
or subordinated creditors of such Bank would be entitled to a priority of
payment over the claims of holders of any obligation of the Bank to its
shareholders, including any depository institution holding company (such as
the Company) or any shareholder or creditor of such holding company.
9
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 can 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.
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 54 branch banks and 3 loan production offices located in central and
northwestern Arkansas and Oklahoma as follows:
No. of Square
Market Area Locations Footage
----------- --------- -------
Fayetteville/Springdale MSA................................ 4 10,831
Ft. Smith/Van Buren MSA.................................... 8 130,230
Little Rock MSA............................................ 16 91,134
Hot Springs MSA............................................ 4 14,234
North and Central Arkansas................................. 10 40,389
Oklahoma................................................... 15 63,100
The Company owns 39 offices and leases the remaining 18 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 75% occupied by the Company. The other
facility located in downtown Little Rock contains 45,000 square feet and is
53% occupied by the Company.
10
Item 3. Legal Proceedings
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.
Item 4. Submission of matters to a Vote of Security Holders
Not Applicable
11
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, 2000, the Company had outstanding
9,832,108 shares of Common Stock, with 1,239 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 1999. During the time that the Common Stock was
traded in the over-the-counter market, such quotations reflect interdealer
prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. The Company paid no dividends on
the Common Stock in 1998 or 1999.
Bid Price of
1999 Common Stock
---- ---------------
High Low
------- -------
1st Quarter ................................................. $11.250 $ 9.375
2nd Quarter ................................................. 11.000 9.500
3rd Quarter ................................................. 13.000 10.500
4th Quarter ................................................. 12.500 10.500
12
Item 6. Selected Financial Data
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
Company Bank
---------------------- ----------------------------------------------
Year Ended December
31 Year Ended December 31
---------------------- ----------------------------------------------
1999 1998(1) 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands except ratio amounts)
Income statement data:
Net interest income.... $ 41,263 $ 24,282 $ 38,979 $ 38,305 $ 36,676 $ 34,113
Provision for loan
losses................ 2,270 1,021 8,786 2,155 1,125 1,050
---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 38,993 23,261 30,193 36,150 35,551 33,063
Non-interest income.... 26,926 18,712 24,711 23,280 23,370 20,572
Non-interest expense... 48,086 31,053 42,242 39,316 46,362 36,527
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.... 17,833 10,920 12,662 20,114 12,559 17,108
Net income............. 11,386 6,675 6,409 10,922 7,634 10,397
Balance sheet data at period end:
Total assets........... 1,591,945 1,378,716 1,368,171 1,256,153 1,206,235 1,294,575
Investments............ 354,915 364,061 358,877 382,211 449,006 534,709
Loans.................. 1,004,961 818,371 818,371 697,869 674,861 639,880
Allowance for loan
losses................ 11,346 10,472 10,472 4,660 5,058 4,930
Total deposits......... 977,936 967,743 971,590 982,442 990,203 1,084,582
Total shareholders'
equity................ 105,586 101,812 168,968 161,832 84,521 84,279
Average balance sheet
data:
Total assets........... 1,516,603 1,292,196 1,287,756 1,291,295 1,252,641 1,272,514
Investments............ 379,571 334,321 339,384 410,876 480,728 578,879
Loans.................. 971,640 711,798 706,700 684,379 652,172 589,020
Allowance for loan
losses................ 11,041 10,465 9,055 4,886 5,003 4,841
Total deposits......... 978,503 981,987 991,311 995,237 1,041,920 1,064,880
Total shareholders'
equity................ 106,309 88,410 167,296 156,432 85,556 83,041
Performance Ratios:
Return on average
assets................ .75% .69% .50% .85% .61% .82%
Return on average
common equity......... 10.71 10.05 3.83 6.98 8.92 12.52
Net interest margin.... 3.06 2.83 3.42 3.44 3.15 2.88
Efficiency ratio....... 70.32 72.25 66.34 63.84 77.21 66.80
Asset Quality Ratios:
Nonperforming assets to
total loans and other
real estate........... .24 .48 .48 .82 .79 .73
Net charge-offs to
average loans......... .15 .20 .42 .37 .15 .14
Allowance for loan
losses to total
loans................. 1.13 1.27 1.27 .67 .75 .77
Allowance for loan
losses to
nonperforming loans... 579 313 313 91 107 112
Capital Ratios:
Tangible capital
ratio................. 3.16 2.85 7.99 7.40 6.66 5.97
Average shareholders'
equity to average
total assets.......... 7.00 6.84 12.99 12.11 6.83 6.53
Core capital ratio..... 3.16 2.85 7.99 7.40 6.60 5.97
Risk-based capital
ratio................. 6.19 5.50 16.70 15.69 15.06 14.86
- --------
(1) The results of operations of the Bank were consolidated with those of the
Company from April 1, 1998, the date of the acquisition.
13
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
Superior Financial Corp. (the "Company") is a unitary thrift holding
company. The Company was organized in 1997 as SFC Acquisition Corp. for the
purpose of acquiring 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 bank. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations analyzes the major elements of the Bank's balance sheets
and statements of income. 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 on Form 10-K.
On January 7, 1997 NationsBank, Inc. purchased the Bank from Boatmen's
Bancshares, Inc. in a transaction accounted for by the purchase method of
accounting for business combinations. The phrase "year ended December 31,
1997" in the remainder of this discussion and analysis refers to the period
from January 7, 1997 to December 31, 1997.
For the Twelve Months Ended December 31, 1999, 1998 and 1997
Results of Operations
Company
Total assets were $1,591.9 million at December 31, 1999, an increase of
$213.2 million, or 15.5%, from $1,378.7 million at December 31, 1998. Total
stockholders' equity at December 31, 1999 was $105.6 million, an increase of
$3.8 million or 3.7% from $101.8 million at December 31, 1998. The $20 million
Note Payable with Colonial Bank and the $60 million Senior Notes used to
finance the acquisition of the Bank are recorded as liabilities of the
Company. The Company made a $7 million principal payment on the Colonial Bank
note in February 1999, reducing the balance from $20 million to $13 million.
Net income for the twelve months ended December 31, 1999 was $11.4 million,
an increase of $4.7 million, or 70.1%, from $6.7 million for the twelve months
ended December 31, 1998. Net income per share-basic and diluted for the twelve
months ended December 31, 1999 was $1.13, a 28.4% increase over basic and
diluted earnings per share of $0.88 for the twelve months ended December 31,
1998. The interest expense on the Note Payable and the Senior Notes is
recorded by the Company and was $6.6 million and $4.3 million for the twelve
months ended December 31, 1999, and the twelve months ended December 31, 1998,
respectively. This represents the primary difference between the operations of
the Company and that of the Bank. The Company had return on average assets of
0.75% and return of average common equity of 10.71% for the twelve months
ended December 31, 1999, compared to 0.69% and 10.05% for the twelve months
ended December 31, 1998.
14
The table below presents the following:
(A) Historical results of Superior Financial Corp. for the twelve months
ended December 31, 1999.
(B) Historical results of Superior Financial Corp. for the twelve months
ended December 31, 1998, including the results of operations of
Superior Federal Bank, F.S.B. from April 1, 1998, the date of the
acquisition.
(C) Pro forma results of Superior Financial Corp. for the twelve months
ended December 31, 1998, including the results of operations of
Superior Federal Bank, F.S.B. from January 1, 1998.
(D) Operating results of Superior Federal Bank, F.S.B. on a stand-alone
basis for the twelve months ended December 31, 1999.
(E) Operating results of Superior Federal Bank, F.S.B. on a stand-alone
basis for the twelve months ended December 31, 1998 and 1997.
Superior Financial Corp.
--------------------------------------
Historical Historical Pro Forma Superior Federal Bank
------------ ------------ ------------ --------------------------------------
Twelve Twelve Twelve Twelve Twelve Twelve
Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1998 1999 1998 1997
(A) (B) (C) (D) (E) (E)
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Interest income......... $99,776 $63,015 $83,756 $99,465 $83,580 $83,664
Interest expense........ 58,513 38,733 50,438 51,923 44,681 45,359
------- ------- ------- ------- ------- -------
Net interest income..... 41,263 24,282 33,318 47,542 38,899 38,305
Provision for loan
losses................. 2,270 1,021 8,786 2,270 8,786 2,155
------- ------- ------- ------- ------- -------
Net interest income
after provision........ 38,993 23,261 24,532 45,272 30,113 36,150
Noninterest income...... 26,926 18,712 24,228 26,923 24,228 23,280
Noninterest expense..... 48,086 31,053 41,899 47,550 41,679 39,316
------- ------- ------- ------- ------- -------
Income before income
taxes.................. 17,833 10,920 6,861 24,645 12,662 20,114
Income tax expense...... 6,447 4,245 3,693 8,950 6,253 9,192
------- ------- ------- ------- ------- -------
Net income.............. $11,386 $ 6,675 $ 3,168 $15,695 $ 6,409 $10,922
======= ======= ======= ======= ======= =======
The following discussion of the Bank compares the results of operations for
the Bank for the twelve months ended December 31, 1999 to that of the Bank for
the twelve months ended December 31, 1998. For the twelve months ended
December 31, 1999 and 1998, the primary difference between the results of
operations for the Company and the Bank was the interest expense on the Note
Payable and the Senior Notes recorded by the Company. For the twelve months
ended December 31, 1999 and 1998, the Company recorded interest expense on the
Note Payable and the Senior Notes of $6.6 million and $4.3 million,
respectively.
Bank
For the twelve months ended December 31, 1999, the Bank had net income
available to common shareholders of $15.7 million, an increase of $9.3
million, or 144.9% from 1998. This resulted in a return on average assets of
1.04% and a return on average common equity of 9.44% for the twelve months
ended December 31, 1999 compared to 0.50% and 3.83%, respectively, for the
same time period in 1998. The primary reason for the increase in net income
was higher net interest income and a lower provision for loan losses in 1999,
which is more fully discussed under " Allowance for Loan Losses."
Total assets increased to $1,582 million from $1,368 million, an increase of
$214 million, or 15.6%, at December 31, 1999. This increase was primarily the
result of loan growth. Net loans receivable were
15
$993.6 million at December 31, 1999, an increase of $185.7 million, or 23%
from $807.9 million at December 31, 1998. Offsetting this increase was a
decrease in cash and cash equivalents from $81.2 million at December 31, 1998
to $47.8 million at December 31, 1999, a decrease of $33.4 million, or 41.2%.
This decrease in cash and cash equivalents resulted from the Bank utilizing
those funds in the origination of loans receivable. The increase in loans
receivable also resulted in an increase in accrued interest receivable to
$15.5 million at December 31, 1999 from $7.5 million at December 31, 1998, an
increase of $8.0 million, or 106.7%. Deposits increased to $979.8 million at
December 31, 1999 from $971.6 million at December 31, 1998, an increase of
$8.2 million or .8%. During 1999, the Bank sold one branch with deposits of
approximately $10.7 million. Total stockholder's equity was $167 million at
December 31, 1999, representing a decrease of $1.7 million or 1% from total
stockholder's equity of $169 million at December 31, 1998. The Bank paid
dividends to the Company totaling $11 million and $4 million in 1999 and 1998,
respectively.
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred on interest-bearing liabilities, including deposits and other
borrowed funds. Net interest income is the principal source of the Bank's
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 twelve months ended December 31, 1999 was $47.5
million, an increase of $8.6 million or 22% from $38.9 million for the twelve
months ended December 31, 1998. This resulted in a net interest margin of
3.53% and 3.42% and a net interest spread of 3.14% and 3.02% for the twelve
months ended December 31, 1999 and December 31, 1998, respectively. The
increases in the net interest margin and the net interest spread were
primarily due to a lower average rate incurred on liabilities. Average
interest-earning assets increased $230.4 million, or 20.2%, from $1,139
million for the twelve months ended December 31, 1998 to $1,369 million for
the same period in 1999. Average loans outstanding for the twelve months ended
December 31, 1999 were $971.6 million, an increase of $264.9 million, or
37.5%, compared to average loans outstanding of $706.7 million for the twelve
months ended December 31, 1998. Average interest-bearing liabilities were
$1,244 million at December 31, 1999, an increase of $212 million, or 20.5%,
over average interest-bearing liabilities of $1,032 million for the twelve
months ended December 31, 1998. The average rate paid on interest-bearing
liabilities was 4.16% and 4.33% for the years ended December 31, 1999 and
1998, respectively.
Net interest income totaled $38.9 million for the year ended December 31,
1998, an increase of $3.7 million, or 10.5%, from $35.2 million for the same
period in 1997. The net interest margin for the year ended December 31, 1998
was 3.42% compared to the 1997 net interest margin of 3.44%. Net interest
spread for the year ended December 31, 1998 was 3.02% compared to 3.16% for
the same period in 1997. Interest income was flat at $83.7 million for the
twelve months ended December 31, 1998 compared to the same period in 1997. The
overall growth in loans during the third and fourth quarters of 1998 increased
interest income, but this increase was offset by the net change in the asset
mix between investment securities and federal funds sold.
Net interest income for the twelve months ended December 31, 1999 in the
discussion and table below is on a fully taxable equivalent ("FTE") basis. The
adjustment to convert certain income to an FTE basis consists of dividing tax-
exempt income by one minus the statutory federal income tax rate (35%). The
Bank had no tax-exempt income for the twelve months ended December 31, 1998
and 1997.
16
The following table presents for the periods indicated the total dollar
amount of average balances, interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities, expressed
both in dollars and rates. Nonaccruing loans have been included in the table
as loans carrying a zero yield.
Year Ended December 31
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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................... $ 971,602 $75,388 7.79% $ 706,700 $56,536 8.00% $ 684,379 $54,870 8.02%
Investments............. 375,112 23,199 6.20 339,384 21,487 6.33 410,876 27,765 6.76
Federal funds sold and
other earning assets... 22,580 1,227 5.41 92,815 5,638 6.07 18,650 1,029 5.52
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................. 1,369,294 99,814 7.30 1,138,899 83,661 7.35 1,113,905 83,664 7.51
Less allowance for loan
losses................. 11,041 9,055 4,886
---------- ---------- ----------
Total earning assets,
net of allowance....... 1,358,253 1,129,845 1,109,019
Nonearning assets....... 146,623 157,912 182,276
---------- ---------- ----------
Total assets............ $1,504,876 $1,287,756 $1,291,295
========== ========== ==========
Liabilities and
stockholder's equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits............... $ 205,444 $ 3,552 1.73% $ 197,182 $ 3,787 1.92% $ 188,646 $ 3,925 2.08%
Savings and money market
accounts............... 171,752 4,290 2.50 164,012 4,573 2.79 161,815 4,240 2.62
Certificates of
deposit................ 522,262 26,128 5.01 556,699 29,551 5.31 577,141 30,269 5.24
Borrowed funds.......... 344,682 17,953 5.14 114,463 6,795 5.94 114,408 6,925 6.05
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities............ 1,244,140 51,923 4.16 1,032,356 44,706 4.33 1,042,010 45,359 4.35
Noninterest-bearing
liabilities
Noninterest-bearing
demand deposits........ 80,578 70,962 67,635
Other liabilities....... 13,880 17,143 6,987
---------- ---------- ----------
Total liabilities....... 1,338,598 1,120,461 1,116,632
Stockholder's equity.... 166,278 167,295 174,663
---------- ---------- ----------
Total liabilities and
stockholder's equity... $1,504,876 $1,287,756 $1,291,295
========== ========== ==========
Net interest income..... $47,891 $38,955 $38,305
======= ======= =======
Net interest spread..... 3.14% 3.02% 3.16%
==== ==== ====
Net interest margin..... 3.53% 3.42% 3.44%
==== ==== ====
17
The following table presents the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities and distinguishes between the increase (decrease)
related to higher outstanding balances and the volatility of interest rates.
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
----------------------------------------------------
1999 versus 1998 1998 versus 1997
------------------------- -------------------------
Increase (decrease) Increase (decrease)
------------------------- -------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest-earning assets:
Loans................... $20,503 $(1,866) $18,637 $ 1,790 $ (124) $ 1,666
Investments............. 2,204 (543) 1,661 (4,831) (1,447) (6,278)
Federal funds sold and
other earning assets... (3,800) (613) (4,413) 4,092 517 4,609
------- ------- ------- ------- ------- -------
Total increase
(decrease) in interest
income................. 18,907 (3,022) 15,885 1,051 (1,054) (3)
Interest-bearing
liabilities:
Interest-bearing demand
deposits............... 159 (394) (235) 178 (316) (138)
Savings and money market
accounts............... 216 (500) (284) 58 275 333
Certificates of
deposit................ (1,832) (1,565) (3,397) (1,072) 354 (718)
Borrowed funds.......... 13,663 (2,505) 11,158 3 (133) (130)
------- ------- ------- ------- ------- -------
Total increase
(decrease) in interest
expense................ 12,206 (4,964) 7,242 (833) 180 (653)
------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income.... $ 6,701 $ 1,942 $ 8,643 $ 1,884 $(1,234) $ 650
======= ======= ======= ======= ======= =======
Noninterest Income
Noninterest income for the year ended December 31, 1999 was $26.9 million,
an increase of $2.7 million, or 11.1%, over the same period in 1998.
Noninterest income for the year ended December 31, 1998 was $24.2 million, an
increase of $.9 million, or 4.1%, over the same period in 1997.
The following table presents for the periods indicated the major components
of noninterest income:
Year Ended December 31
-----------------------
1999 1998 1997
------- ------- -------
Service charges on deposit accounts................. $22,062 $20,012 $20,241
Mortgage operations, net............................ 2,428 2,317 1,796
Other noninterest income............................ 2,433 1,899 1,243
------- ------- -------
Total noninterest income........................... $26,923 $24,228 $23,280
======= ======= =======
Service charges were $22.1 million for the year ended December 31, 1999,
compared to $20 million for the year ended December 31, 1998, an increase of
$2.1 million, or 10.5%.
Service charges decreased $229,000, or 1.1%, in 1998 from $20.2 million for
the year ended December 31, 1997. The growth in service charges slowed in 1998
primarily due to the sale of nine retail branches in the third quarter.
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. As demonstrated by the trend from 1997 through
1999, management of the Company believes the growth will be sustained as the
number of transaction accounts (checking and savings accounts) increase. The
increase in the number of transactions and the related service fee generation
is largely due to the Company's successful execution of its "Totally Free
Checking" program to the lower to middle income customers in the markets in
which the Company operates.
18
Noninterest Expense
For the year ended December 31, 1999, noninterest expense totaled $47.6
million, an increase of $5.9 million, or 14.1%, from $41.7 million in 1998.
The efficiency ratio for the year ended December 31, 1999, was 63.86%,
compared to 66.34% in 1998. For the year ended December 31, 1998, noninterest
expense increased $2.4 million, or 6%, from $39.3 million for the year ended
December 31, 1997. The efficiency ratio for the year ended December 31, 1997,
was 63.84%.
Salary and benefit expense for the year ended December 31, 1999 was $21.5
million, an increase of $7.8 million, or 56.9%, from $13.7 million for the
twelve months ended December 31, 1998. Salary and benefit expense for 1998
increased $1.9 million, or 11.7%, from $16.3 million for the year ended
December 31, 1997. The increases during 1998 and 1999 were due primarily to
the hiring of additional personnel required to accommodate the Bank's loan
growth and expanded products and services.
Occupancy expense for the year ended December 31, 1999 was $3.1 million, an
increase of $1.0 million, or 47.6%, from $2.1 million for the year ended
December 31, 1998. This increase was due to the opening of a loan office in
Tulsa, Oklahoma, a mortgage production center in Little Rock, Arkansas, and
five new retail branches. Occupancy expense for 1998 decreased $90,000, or 3%,
from $3.1 million for the year ended December 31, 1997, due to sales of retail
branches in the third quarter of 1998. Major categories included in occupancy
expense are building lease expense, depreciation expense, and maintenance
expense.
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 twelve months
ended December 31, 1999, income tax expense was $9 million, an increase of
$2.7 million or 42.9% from $6.3 million for the twelve months ended December
31, 1998. This increase is due to the increase in taxable income. Income tax
expense in 1998 decreased $2.9 million, or 31.5%, for the same period in 1997.
The lower income tax expense in 1998 compared to 1997 is principally due to
the decrease in taxable income.
Impact of Inflation
The effects of inflation on the local economy and on the Bank's operating
results have been relatively modest for the past several years. Since
substantially all of the Bank's assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive
to the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates. The Bank 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.
Financial Condition
Loan Portfolio
Loans receivable were $1,005 million at December 31, 1999, an increase of
$187 million, or 22.9%, from $818 million at December 31, 1998. Consistent
with the Bank's historically high rate of growth, this increase is believed to
be the result of the Bank's style of relationship banking featuring
professional, attentive and responsive service to customers' needs, and
focusing on commercial lending to middle market companies and private banking
for individuals.
19
The following table summarizes the loan portfolio of the Bank by loan type:
December 31
------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial.............. $ 24,166 2.41% $ 10,800 1.32% $ 4,403 0.63% $ 2,704 0.40% $ 2,931 0.46%
Consumer:
Direct................. 127,056 12.64 99,704 12.18 75,268 10.79 70,179 10.40 39,612 6.19
Indirect............... 196,989 19.60 174,316 21.30 156,073 22.36 145,059 21.49 131,121 20.49
Real Estate:
Construction & land
development........... 50,069 4.98 15,920 1.95 12,734 1.82 13,304 1.97 24,285 3.80
1-4 family
residential........... 520,870 51.83 477,062 58.29 409,135 58.63 416,668 61.74 419,870 65.62
Commercial owner
occupied.............. 85,811 8.54 40,569 4.96 40,257 5.77 26,947 4.00 22,061 3.44
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............. $1,004,961 100.00% $818,371 100.00% $697,870 100.00% $674,861 100.00% $639,880 100.00%
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
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 collateralized and uncollateralized, 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 three 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
typically 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
(collateralized and uncollateralized) 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.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures".
Under SFAS No. 114, as amended, 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. The adoption of SFAS No. 114 did not result in any
additional provision for loan losses.
20
Maturity and Interest Rate Sensitivity of Loans
(Dollars in Thousands)
Loans at December 31, 1999,
maturing in:
-------------------------------
Over One
One Through Over
Year or Five Five
Less Years Years Total
------- -------- ------ -------
Commercial, financial and agricultural......... $ 9,454 $5,320 $9,392 $24,166
Real estate-construction....................... 36,395 -- -- 36,395
------- ------ ------ -------
Total......................................... $45,849 $5,320 $9,392 $60,561
======= ====== ====== =======
Predetermined rates............................ $44,558 $5,320 $9,392 $59,270
Variable rates................................. 1,291 -- -- 1,291
Nonperforming Assets
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at December 31, 1999 were $2.4 million, compared
with $3.9 million at December 31, 1998 and $5.8 million at December 31, 1997.
This resulted in a ratio of nonperforming assets to loans plus other real
estate of .24%, .48% and .82% as of year-end 1999, 1998 and 1997, respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
December 31
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in Thousands)
Nonaccrual loans...................... $1,959 $3,348 $5,098 $4,715 $4,407
Other real estate and foreclosed
property............................. 437 594 662 600 242
------ ------ ------ ------ ------
Total nonperforming assets........... $2,396 $3,942 $5,760 $5,315 $4,649
====== ====== ====== ====== ======
Nonperforming assets to total loans
and other real estate................ .24% .48% .82% .79% .73%
====== ====== ====== ====== ======
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 made on a
centralized basis. The Company also has procedures designed 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 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.
21
As of December 31, 1999, 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 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 $48.2
million and $15.6 million as of December 31, 1999 and 1998, 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.
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
------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
(Dollars in thousands)
Allowance for loan losses at
January 1........................ $10,472 $ 4,660 $ 5,058 $ 4,930 $4,686
Provision for loan losses......... 2,270 8,786 2,115 1,125 1,050
Charge-offs....................... (2,895) (4,351) (2,969) (1,322) (911)
Recoveries........................ 1,499 1,377 456 325 105
------- ------- ------- ------- ------
Allowance for loan losses at
December 31...................... $11,346 $10,472 $ 4,660 $ 5,058 $4,930
======= ======= ======= ======= ======
Allowance to period-end loans..... 1.13% 1.27% 0.67% 0.75% 0.77%
Net charge-offs to average loans.. 0.15 0.42 0.37 0.15 0.14
Allowance to period-end
nonperforming loans.............. 579 313 91 107 112
The Company continuously monitors its underwriting procedures in an attempt
to maintain loan quality. In early 1995 Bank management initiated a series of
actions designed to increase the institution's net interest margin. Among
these initiatives was the redeployment of resources to aggressively grow the
higher yielding, higher risk consumer and commercial loan components of the
balance sheet. This involved a substantial increase in the number of "dual
purpose" loan officers, i.e. lenders who handled consumer loan requests as
well as mortgage loan originations, aggressive solicitation of indirect
automobile loan paper, and reductions in mortgage origination staff. As a
result, the Bank experienced significant growth in consumer loan balances,
particularly indirect automobile paper, and a moderate decline in the mortgage
loan portfolio as normal amortization exceeded new mortgage loan production.
These actions resulted in an increase in the Bank's automobile loan portfolio
(direct and indirect) over the last five years as follows:
Direct Indirect Total
----------- ------------ ------------
1995................................... $22,969,000 $108,152,000 $131,121,000
1996................................... 22,038,000 145,059,000 167,097,000
1997................................... 27,321,000 156,072,000 183,393,000
1998................................... 25,308,000 174,316,000 199,624,000
1999................................... 39,875,000 196,988,000 236,863,000
In May 1996, the loan officer in charge of the indirect automobile loans
left the Bank. During the fall of 1996, the Bank began to experience an
increase in delinquencies and write-offs on indirect automobile loans. This
resulted in an increase in net charge-offs to $997,000 in 1996, from $806,000
in 1995, a 23.70% increase. During 1997, Bank management began to sense that
some higher risk automobile loans had been made and purchased by the Bank. In
April 1997 senior management of the Bank changed when the President and Chief
Executive Officer retired. The new President and Chief Executive Officer took
a more aggressive approach to dealing with problems in the automobile loan
portfolio, particularly the indirect, and implemented new controls and
procedures to provide earlier indications of problems and charge-offs of these
loans. These new controls and procedures indicated that the Bank had been
purchasing higher risk automobile loans. The Bank's net charge-offs increased
significantly in 1997 and 1998 as the result of the problems in the automobile
loan portfolio.
22
This shift in the mix of the loan portfolio to higher yielding, higher risk
consumer loans and the significant increase in indirect automobile loans
resulted in the increase in the level of charge-offs from 1995 to 1998. During
the first quarter of 1998, the Bank made certain changes in accounting
estimates totaling approximately $7.7 million, and the allowance for loan
losses was significantly increased in the first quarter of 1998 to reflect the
increased risk of losses in the automobile loans within the Bank's loan
portfolio, which experienced increased historical losses over historical
levels in the first quarter of 1998.
The amounts of provisions to the allowance for loan losses are based on
management's judgment and evaluation of the loan portfolio utilizing objective
and subjective criteria. The objective criteria utilized by the Company to
assess the adequacy of its allowance for loan losses and required additions to
such reserve are (1) an internal grading system, (2) a peer group analysis,
and (3) 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
$11.3 million at December 31, 1999, or 1.13% of total loans, compared with
$10.5 million, or 1.27% of total loans, at December 31, 1998. 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 one-to-four family residential loans and consumer
loans. Graded loans are assigned to one of nine risk reserve allocation
percentage. 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 one-to-four family residential and
consumer loans are assigned a reserve allocation percentage based on past due
status and the level of cumulative net charge-offs for the five preceding
calendar years.
The sum of all reserve amounts determined by this methodology is utilized by
management as the primary indicator of the appropriate reserve level. The
unallocated reserve generally serves to compensate for the uncertainty in
estimating loan losses, including the possibility of changing risk ratings or
specific reserve allocations.
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 one-to-four 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: (1) 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; (2) 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; (3) 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.
23
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 one-to-four 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.
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
to Total Total
Amount Allowance Loans
------- --------- ----------
December 31, 1999 (Dollars in thousands)
Balance of allowance for loan losses applicable
to:
Commercial...................................... $ 299 3% 2.41%
Real estate:
Construction and land development.............. 618 6 4.98
1-4 family residential......................... 1,575 14 51.83
Commercial owner occupied...................... 1,059 9 8.54
Consumer........................................ 4,618 40 32.24
Unallocated..................................... 3,177 28 --
------- --- ------
Total allowance for loan losses.................. $11,346 100% 100.00%
======= === ======
December 31, 1998
Balance of allowance for loan losses applicable
to:
Commercial...................................... $ 165 2% 1.32%
Real estate:
Construction and land development.............. -- -- 1.95
1-4 family residential......................... 1,466 14 58.29
Commercial owner occupied...................... 638 6 4.96
Consumer........................................ 6,527 62 33.48
Unallocated..................................... 1,676 16 --
------- --- ------
Total allowance for loan losses.................. $10,472 100% 100.00%
======= === ======
December 31, 1997
Balance of allowance for loan losses applicable
to:
Commercial...................................... $ -- -- % 0.63%
Real estate:
Construction and land development.............. -- -- 1.82
1-4 family residential......................... 694 15 58.63
Commercial owner occupied...................... 319 7 5.77
Consumer........................................ 3,603 77 33.15
Unallocated..................................... 44 1 --
------- --- ------
Total allowance for loan losses.................. $ 4,660 100% 100.00%
======= === ======
December 31, 1996
Balance of allowance for loan losses applicable
to:
Commercial...................................... $ -- -- % 0.40%
Real estate:
Construction and land development.............. -- -- 1.97
1-4 family residential......................... 678 13 61.74
Commercial owner occupied...................... 557 11 4.00
Consumer........................................ 3,641 72 31.89
Unallocated..................................... 182 4 --
------- --- ------
Total allowance for loan losses.................. $ 5,058 100% 100.00%
======= === ======
24
Percent
of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------ --------- ----------
(Dollars in thousands)
December 31, 1995
Balance of allowance for
loan losses applicable
to:
Commercial............... $ -- -- % 0.46
Real estate:
Construction and land
development............ -- -- 3.80
1-4 family residential.. 736 15 65.62
Commercial owner
occupied............... 561 11 3.44
Consumer................. 2,013 41 26.68
Unallocated.............. 1,620 33 --
------ --- ------
Total allowance for loan
losses................... $4,930 100% 100.00%
====== === ======
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 1995-1999 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. Trading account assets, which are held for the purpose
of selling at a profit, are carried at estimated market value. Gains and
losses on trading securities, both realized and unrealized, are included in
other income. The Company did not hold any investments classified as held-to-
maturity or as trading securities at December 31, 1999, 1998 and 1997.
The decrease in the securities portfolio from December 31, 1995 to December
31, 1999 is the result of the Company's strategy of increasing its net
interest margin by growing the loan portfolio. Total securities declined $160
million, 30.5%, from $524.4 million in 1995 to $364.4 million in 1999. For the
same period, total loans rose $365.1 million, or 57.1%, from $639.9 million in
1995 to $1,005 million in 1999. Total securities increased $0.8 million, or
0.2%, in 1999 from $363.6 million at December 31, 1998 to $364.4 million at
December 31, 1999. During 1999, the Company purchased $10.1 million of federal
tax-exempt municipal bonds. With the anticipated growth in deposits and loans,
management of the Company believes the securities portfolio will remain at
approximately the December 31, 1999 amount.
25
All securities held by the Company as of December 31, 1999, 1998 and 1997
are classified as available-for-sale. The following table presents the
amortized cost and estimated market values for securities as of the dates
shown.
December 31, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Estimated Estimated
Unrealized Unrealized Fair Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------- ---------- ---------- --------- -------- ---------- ---------- ---------
(Dollars in thousands)
Mortgage-backed
securities............. $180,394 $ 12 $(3,305) $177,101 $296,895 $1,814 $(1,350) $297,359
CMOs.................... 96,074 -- (3,078) 92,996 59,130 56 (47) 59,139
Corporate securities.... 45,652 -- (1,831) 43,821 7,563 -- -- 7,563
Agency notes/bonds...... 32,165 -- (488) 31,677 -- -- -- --
Municipal securities.... 10,087 -- (767) 9,320 -- -- -- --
-------- ------ ------- -------- -------- ------ ------- --------
Total investments....... $364,372 $ 12 $(9,469) $354,915 $363,588 $1,870 $(1,397) $364,061
======== ====== ======= ======== ======== ====== ======= ========
December 31, 1997
----------------------------------------
Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollars in thousands)
Mortgage-backed
securities............. $369,555 $4,098 $ (323) $373,330
-------- ------ ------- --------
Total investments....... $369,555 $4,098 $ (323) $373,330
======== ====== ======= ========
At December 31, 1999, investments totaled $354.9 million, a decrease of $9.2
million, or 2.5%, from December 31, 1998. This decrease was due to increased
unrealized holding losses on available-for-sale securities. At December 31,
1998, investments totaled $364.1 million, a decrease of $9.2 million, or 2.5%,
from $373.3 million at December 31, 1997. The weighted average yield on the
investment portfolio was 6.20% in 1999, 6.33% in 1998, and 6.76% in 1997.
The Company has no mortgage-backed securities that have been issued by non-
agency entities.
At December 31, 1999, 71% of investments available-for-sale held by the
Company had final maturities of more than ten years. At December 31, 1999,
approximately $97.2 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.
26
The following table summarizes the amortized cost, by contractual maturity,
of investments (including securities, federal funds sold and interest-bearing
deposits) and their nominal weighted average 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, 1999
---------------------------------------------------------------------------------------
After One Year After Five Years
but within but within
Within One Year Five Years Ten Years After Ten Years Total
---------------- --------------- ----------------- ----------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------ --------- ------- --------- ------- -------- -----
Mortgage-backed
securities............. $ 3 5.56% $ 69 6.62% $ 37,910 6.41% $ 142,412 6.04% $180,394 6.12%
CMOs.................... 96,074 6.39% 96,074 6.39%
Corporate securities.... 34,908 7.08% 10,744 7.35% 45,652 7.14%
Agency notes/bonds...... 5,206 5.75% 26,959 7.03% 32,165 6.82%
Municipal securities.... 10,087 5.31% 10,087 5.31%
-------- ------ -------- ------ --------- ------ --------- ----- -------- ----
Total investments
available-for-sale..... $ 3 5.56% $ 5,275 5.76% $ 99,777 6.81% $ 259,317 5.99% $364,372 6.36%
Federal Home Loan Bank
stock.................. 21,907 5.52% 21,907 5.52%
Interest-bearing
deposits............... 8,141 5.55% 8,141 5.55%
-------- ------ -------- ------ --------- ------ --------- ----- -------- ----
Total................... $ 8,141 5.55% $ 5,275 5.76% $ 99,777 6.81% $ 281,224 5.95% $394,420 6.29%
======== ====== ======== ====== ========= ====== ========= ===== ======== ====
Deposits
The Company's ratio of average demand deposits to average total deposits for
years ended December 31, 1999, 1998 and 1997 were 29%, 27%, and 26%,
respectively.
Average total deposits during 1999 decreased to $980.0 million from $988.9
million in 1998, a decrease of $8.9 million or 0.9%. Average noninterest-
bearing deposits increased to $80.6 million in 1999 from $71.0 million in 1998
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. Average deposits in 1998 decreased to $988.9 million from $995.2
million in 1997, a decrease of $6.3 million or 0.6%. In the third quarter of
1998, the Company sold nine branches located in Arkansas and Oklahoma.
Deposits for these branches totaled $84.5 million.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1999, 1998 and 1997 are presented below:
Year Ended December 31
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(Dollars in thousands)
NOW accounts...................... $205,444 1.73% $197,182 1.92% $188,646 2.08%
Regular savings................... 107,297 2.13 105,400 2.33 104,787 2.37
Money market...................... 64,455 3.12 58,612 3.61 57,028 3.08
CDs............................... 522,221 5.01 556,699 5.31 577,141 5.24
-------- -------- --------
Total interest-bearing deposits... 899,417 3.78% 917,893 4.13% 927,602 4.35%
Noninterest-bearing deposits...... 80,578 70,962 67,635
-------- -------- --------
Total deposits.................... $979,995 $988,855 $995,237
======== ======== ========
The decrease in total deposits from $995.2 million in 1997 to $980.0 million
in 1999 was primarily due to a planned strategy by the Company of not
aggressively pursuing the higher interest rate certificate of deposit market
and to the sale of ten branches in 1998 and 1999. The Company's strategy is
focused on the growth of transaction accounts (checking and savings accounts)
through the "Totally Free Checking" product. 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.
27
Maturity Distribution of Time Deposits $100,000 and Over
December 31, 1999
-----------------------
Certificates of Deposit
-----------------------
(Dollars in thousands)
Three months or less................................. $26,629
Over three months to six months...................... 8,047
Over six months to twelve months..................... 4,408
Over twelve months................................... --
-------
Total................................................ $39,084
=======
Borrowings
Other short-term borrowings, consisting of Federal Home Loan Bank Advances,
generally represent borrowings with maturities ranging from one to thirty
days. Information relating to these borrowings is summarized as follows:
December 31,
-------------------------
1999 1998 1997
-------- -------- -----
(Dollars in thousands)
Other short-term borrowings:
Average............................................. $126,474 $ 12,213 $ --
Year-end............................................ 205,500 12,040 --
Maximum month-end balance during year................ 205,500 162,217 --
Interest rate:
Average............................................. 5.29% 3.83% 0.00%
Year-end............................................ 5.78 4.95 0.00
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 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.
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, 1999, this ratio was a positive 8.2%. 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
28
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 rates present 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 Company as of December 31, 1999:
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..... $ 7,663 $ -- $ -- $ -- $ 7,663
Investments............ 32,472 10,087 18,833 296,238 357,630
Loans.................. 70,043 126,196 164,261 715,723 1,076,223
--------- --------- --------- ---------- ----------
Total interest-
earning assets...... $ 110,178 $ 136,283 $ 183,094 $1,011,961 $1,441,516
========= ========= ========= ========== ==========
Interest-bearing
liabilities:
Demand, money market
and savings deposits.. $ 363,843 $ -- $ -- $ -- $ 363,843
Certificates of deposit
and other time
deposits.............. 143,949 152,382 140,395 99,116 535,842
Borrowings............. 205,000 -- 87,000 131,500 424,000
--------- --------- --------- ---------- ----------
Total interest-
bearing
liabilities......... $ 713,292 $ 152,382 $ 227,395 $ 230,616 $1,323,685
========= ========= ========= ========== ==========
Period GAP.............. $(603,144) $ (16,099) $ (44,301) $ 781,345 $ 117,831
Cumulative GAP.......... (603,114) (619,213) (663,514) 117,831
Period GAP to earning
assets................. -41.8% -1.1% -3.1% 54.2% 8.2%
Cumulative GAP to
earning assets......... -41.8% -43.0% -46.0% 8.2%
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.
As of December 31, 1999, the Company's net interest income simulation model
shows that a parallel 100 basis point increase in interest rates along the
yield curve would lower net interest income by 7% for the next 12 months while
a 100 basis point decrease would raise net interest income by up to 7%. The
model includes balances, asset prepayment speeds, and interest rate
relationships among the balances that management judges to
29
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
portfolios 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.
Short and intermediate term interest rates have increased moderately since
year-end, while longer term interest rates have decreased moderately. This
yield curve inversion may continue, as the Federal Reserve System firms money
market conditions, while long term rates are influenced by the reduced
outstanding supply of longer term U.S. Treasury securities and only mild
inflation. Management believes that it can ameliorate the modest negative
effect of higher short term interest rates on net interest income through
administered interest rate pricing and adjustments of the mix of assets and
liabilities.
Management of the Company does not believe the $13 million Note Payable and
the $60 million Senior Notes used to finance the acquisition of the Bank will
have a significant impact on the Company's interest rate exposure. The $13
million Note Payable has a floating interest rate based upon LIBOR. The Senior
Notes mature on April 1, 2003 and have a fixed interest rate. Management of
the Company believes the combination of these two financing options minimizes
the impact of interest rate changes of the risk profile of the Company.
Capital Resources
Shareholder's equity decreased $1.8 million, or 1.1%, to $167.2 million at
December 31, 1999 from $169 million at December 31, 1998. This decrease was
the net effect of the Bank's 1999 net income of $15.7 million, dividends paid
to the Company of $11 million, and a $6.4 million increase in the net
unrealized loss on available-for-sale securities. Shareholder's equity
increased $7.2 million, or 4.4%, from $161.8 million at December 31, 1997 to
$169 million at December 31, 1998. This increase was primarily the result of
net income of $6.4 million.
The following table provides a comparison of the Bank's leverage and risk-
weighted capital ratios to the minimum regulatory standards:
December 31, 1999
--------------------------------
Bank Minimum Well-Capitalized
Ratio Required Minimum Required
------ -------- ----------------
Tangible capital ratio...................... 7.20% 1.50% 5.00%
Core capital ratio.......................... 7.20% 4.00% 6.00%
Risk-based capital ratio.................... 12.59% 8.00% 10.00%
December 31, 1998
--------------------------------
Bank Minimum Well-Capitalized
Ratio Required Minimum Required
------ -------- ----------------
Tangible capital ratio...................... 7.99% 1.50% 5.00%
Core capital ratio.......................... 7.99% 4.00% 6.00%
Risk-based capital ratio.................... 16.70% 8.00% 10.00%
30
Year 2000 Readiness Disclosure
The Company has substantially completed its Year 2000 Project as scheduled.
As of January 21, 2000, the Company's computer and other systems with imbedded
microchips have operated without Year 2000 related problems and appear to be
Year 2000 compliant. The Company is not aware that any of its software and
hardware vendors, major loan customers, correspondent banks or governmental
agencies with which the company interacts have experienced material Year 2000
related problems.
While the Company believes all of its critical systems are Year 2000 ready,
there can be no guarantee the Company has discovered all possible failure
points including all of its systems, non-ready third parties whose systems and
failures could impact the Company, or other uncertainties. Many experts
believe that the risk of potential Year 2000 related failures could continue
beyond January 1, 2000 as certain sensitive target dates occur. As a result,
the Company will continue to monitor its own systems (including new systems
brought into operation by the Company) and maintain contact with mission
critical third parties as these target dates approach. Additionally, the
Company will maintain its previously developed contingency plan for
implementation in the event that mission critical third party systems fail to
address remaining Year 2000 issues.
The Company's aggregate expenses incurred with respect to its Year 2000
Project were less than $250,000, all of which have been expensed through
December 31, 1999. A significant portion of these costs were represented by
the redeployment of existing staff to the Year 2000 Project. No projects under
consideration by the Company have been deferred because of Year 2000 efforts.
The Company does not anticipate any additional material costs relating to the
Year 2000 issue.
31
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS-COMPANY
1999--Three Months Ended For the year
-------------------------------------- ended
Mar. 31 June 30 Sept. 30 Dec. 31 12/31/99
------------- ------- -------- ------- ------------
(Dollars in thousands)
Interest income........... $23,253 $24,474 $25,818 $26,231 $99,776
Interest expense.......... 13,404 14,192 15,183 15,734 58,513
------- ------- ------- ------- -------
Net interest income....... 9,849 10,282 10,635 10,497 41,263
Provision for loan
losses................... 570 700 500 500 2,270
------- ------- ------- ------- -------
Net interest income after
provision for loan
losses................... 9,279 9,582 10,135 9,997 38,993
Noninterest income........ 6,118 6,923 6,774 7,111 26,926
Noninterest expense....... 11,300 12,051 12,376 12,359 48,086
------- ------- ------- ------- -------
Income before income
taxes.................... 4,097 4,454 4,533 4,749 17,833
Income taxes.............. 1,582 1,724 1,534 1,607 6,447
------- ------- ------- ------- -------
Net income................ $ 2,515 $ 2,730 $ 2,999 $ 3,142 $11,386
------- ------- ------- ------- -------
Basic and diluted earnings
per common share......... $ 0.25 $ 0.27 $ 0.30 $ 0.31 $ 1.13
------- ------- ------- ------- -------
Bid price per common
share:
Low...................... $ 9.375 $ 9.500 $10.500 $10.500 $ 9.375
======= ======= ======= ======= =======
High..................... $11.250 $11.000 $13.000 $12.500 $13.000
======= ======= ======= ======= =======
1998--Three Months Ended For the year
-------------------------------------- ended
Mar. 31(1)(2) June 30 Sept. 30 Dec. 31 12/31/99(3)
------------- ------- -------- ------- ------------
(Dollars in thousands)
Interest Income........... $20,758 $21,270 $20,956 $20,789 $63,015
Interest Expense.......... 11,723 13,250 13,016 12,467 38,733
------- ------- ------- ------- -------
Net interest income....... 9,035 8,020 7,940 8,322 24,282
Provision for loan
losses................... 7,765 290 426 305 1,021
------- ------- ------- ------- -------
Net interest income after
provision for loan
losses................... 1,270 7,730 7,514 8,017 23,261
Noninterest income........ 5,516 6,080 6,402 6,230 18,712
Noninterest expense....... 10,833 10,103 10,483 10,467 31,053
------- ------- ------- ------- -------
Income (loss) before
income taxes............. (4,047) 3,707 3,433 3,780 10,920
Income taxes (benefit).... (282) 1,453 1,347 1,445 4,245
------- ------- ------- ------- -------
Net income (loss)......... $(3,765) $ 2,254 $ 2,086 $ 2,335 $ 6,675
======= ======= ======= ======= =======
Basic and diluted earnings
per common share......... $ N/A $ 0.22 $ 0.21 $ .23 $ .88
======= ======= ======= ======= =======
Bid price per common
share:
Low...................... N/A N/A N/A N/A N/A
======= ======= ======= ======= =======
High..................... N/A N/A N/A N/A N/A
======= ======= ======= ======= =======
- --------
(1) Represents operations of Superior Federal Bank, F.S.B. for the three
months ended March 31, 1998.
(2) A provision of approximately $7.7 million was recorded for the three
months ended March 31, 1998 to increase the allowance for loan losses for
increased risk of losses in the automobile loans, primarily indirect
dealer loans, within the Bank's portfolio. See discussion under "Allowance
for Loan Losses" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(3) Includes operations of Superior Federal Bank, F.S.B., for the period from
April 1, 1998 to December 31, 1998.
32
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 14 through 31 herein.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements and Other Financial Information
Superior Financial Corp.
Years ended December 31, 1999 and 1998 and the period from November 12, 1997
(date of inception) to December 31, 1997 with Report of Independent Auditors
33
Report of Independent Auditors
The Board of Directors of
Superior Financial Corp.
We have audited the accompanying consolidated balance sheets of Superior
Financial Corp. (the "Company") and its wholly owned subsidiary, Superior
Federal Bank, F.S.B. (the "Bank") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended and the related statements of operations,
stockholders' equity and cash flows for the period from November 12, 1997
(date of inception) to December 31, 1997. 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, 1999 and 1998 and the consolidated results of
its operations and its cash flows for the years ended December 31, 1999 and
1998, and for the period from November 12, 1997 (date of inception) to
December 31, 1997, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Little Rock, Arkansas
January 21, 2000
34
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
December 31,
----------------------
1999 1998
---------- ----------
Assets
Cash and cash equivalents............................... $ 48,241 $ 81,425
Loans available for sale................................ 51,406 7,262
Loans receivable........................................ 1,004,961 818,371
Less: allowance for loan losses......................... 11,346 10,472
---------- ----------
Loans receivable, net................................... 993,615 807,899
Investments available-for-sale, net..................... 354,915 364,061
Accrued interest receivable............................. 15,530 7,526
Federal Home Loan Bank stock............................ 21,907 10,950
Premises and equipment, net............................. 32,507 26,213
Mortgage servicing rights, net.......................... 4,310 2,198
Prepaid expenses and other assets....................... 3,837 4,199
Goodwill, net........................................... 62,851 64,130
Real estate acquired in settlement of loans, net........ 202 331
Deferred acquisition costs.............................. 2,624 2,522
---------- ----------
Total assets........................................... $1,591,945 $1,378,716
========== ==========
Liabilities and stockholders' equity
Liabilities:
Deposits............................................... $ 977,936 $ 967,743
Federal Home Loan Bank borrowings...................... 424,000 216,500
Note payable........................................... 13,000 20,000
Senior notes........................................... 60,000 60,000
Custodial escrow balances.............................. 7,420 7,089
Other liabilities...................................... 4,003 5,572
---------- ----------
Total liabilities....................................... 1,486,359 1,276,904
Commitments and contingencies........................... -- --
Stockholders' equity:
Preferred stock--$0.01 par value; 10 million shares
authorized, none issued and outstanding............... -- --
Common stock--$0.01 par value; 20 million shares
authorized, 10,081,152 and 10,080,503 issued at
December 31, 1999 and 1998............................ 101 101
Capital in excess of par value......................... 94,755 94,749
Retained earnings...................................... 18,041 6,655
Accumulated other comprehensive (loss) income.......... (6,147) 307
---------- ----------
106,750 101,812
Treasury stock at cost, 96,000 shares................... (1,164) --
---------- ----------
Total stockholders' equity.............................. 105,586 101,812
---------- ----------
Total liabilities and stockholders' equity............. $1,591,945 $1,378,716
========== ==========
See accompanying notes.
35
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Period
from November 12,
Year Ended Year Ended 1997 (date of
December 31, December 31, inception) to
1999 1998 December 31, 1997
------------ ------------ -----------------
Interest income:
Loans............................ $75,153 $42,728 $--
Investments...................... 23,349 15,702 --
Interest-bearing deposits........ 281 4,211 --
Other............................ 993 374 --
------- ------- ----
Total interest income............. 99,776 63,015 --
Interest expense:
Deposits......................... 33,971 28,230 --
Federal Home Loan Bank
borrowings...................... 17,952 6,246 --
Other borrowings................. 6,590 4,257 --
------- ------- ----
Total interest expense............ 58,513 38,733 --
------- ------- ----
Net interest income............... 41,263 24,282 --
Provision for loan losses......... 2,270 1,021 --
------- ------- ----
Net interest income after
provision for loan losses........ 38,993 23,261 --
Noninterest income:
Service charges on deposit
accounts........................ 22,062 15,229 --
Mortgage operations, net......... 2,428 1,875 --
Income from real estate
operations, net................. 480 374 --
(Loss) gain on sale of
investments..................... (197) 12 --
Other............................ 2,153 1,222 --
------- ------- ----
Total noninterest income.......... 26,926 18,712 --
Noninterest expense:
Salaries and employee benefits... 21,527 13,690 --
Occupancy expense................ 3,098 2,135 --
Data and item processing......... 4,463 2,856 --
Advertising and promotion........ 1,993 1,411 --
Amortization of goodwill......... 3,405 2,715 --
Postage and supplies............. 3,389 2,200 --
Equipment expense................ 1,914 1,053 --
Other............................ 8,297 4,993 20
------- ------- ----
Total noninterest expense......... 48,086 31,053 20
------- ------- ----
Income (loss) before income
taxes............................ 17,833 10,920 (20)
Income taxes...................... 6,447 4,245 --
------- ------- ----
Net income (loss)................. $11,386 $ 6,675 $(20)
======= ======= ====
Earnings per share:
Basic............................ $ 1.13 $ 0.88 $--
Diluted.......................... $ 1.13 $ 0.88 $--
======= ======= ====
See accompanying notes.
36
Superior Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999 and 1998 and for the period from
November 12, 1997 (date of inception) to December 31, 1997
(In thousands, except share amounts)
Accumulated
Capital in Other Retained Total
Preferred Common Excess of Comprehensive Earnings Treasury Stockholders'
Stock Stock Par Value (Loss) Income (Deficit) Stock Equity
--------- ------ ---------- ------------- --------- -------- -------------
Balance, November 12,
1997
(inception date)....... $-- $-- $ -- $ -- $ -- $ -- $ --
Contributions from
investors............. -- -- 260 -- -- -- 260
Net loss and
comprehensive loss.... -- -- -- -- (20) -- 0)
---- ---- ------- ------- ------- ------- --------
Balance, December 31,
1997................... -- -- 260 -- (20) -- 240
Original issuance of
common stock,
10,079,703 shares,
(less cost of issuance
of $3,429)............ -- 101 94,481 -- -- -- 94,582
Issuance of common
stock to employees,
800 shares............ -- -- 8 -- -- -- 8
Comprehensive income:
Net income............. -- -- -- -- 6,675 -- 6,675
Other comprehensive
income, net of tax:
Net change in
unrealized gains on
investments available
for sale, net of taxes
of $166............... -- -- -- 307 -- -- 307
--------
Total comprehensive
income................. -- -- -- -- -- -- 6,982
---- ---- ------- ------- ------- ------- --------
Balance, December 31,
1998................... -- 101 94,749 307 6,655 -- 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
(loss):
Net income............. -- -- -- -- 11,386 -- 11,386
Other comprehensive
income, net of tax:
Net change in
unrealized
gains/losses on
investments available
for sale, net of
taxes of $3,310 (6,740) (6,740)
Add: reclassification
adjustment for losses
included in income,
net of taxes of
$154................. -- -- -- 286 -- -- 286
--------
Total comprehensive
income................. 4,932
---- ---- ------- ------- ------- ------- --------
Balance, December 31,
1999................... $-- $101 $94,755 $(6,147) $18,041 $(1,164) $105,586
==== ==== ======= ======= ======= ======= ========
See accompanying notes.
37
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the
Period from
November 12, 1997
Year Ended Year Ended (date of inception)
December 31, December 31, to December 31,
1999 1998 1997
------------ ------------ ------------------
Operating activities
Net income (loss)............... $ 11,386 $ 6,675 $ (20)
Adjustments to reconcile net
income (loss) to net cash (used
in) provided by operating
activities:
Provision for loan losses...... 2,270 1,021 --
Deferred income taxes.......... 756 375 --
Depreciation................... 1,961 1,027 --
Additions to mortgage servicing
rights........................ (2,419) -- --
Amortization of mortgage
servicing rights.............. 307 145 --
Amortization of premiums on
investments................... 1,377 1,458 --
Amortization of goodwill....... 3,405 2,715 --
Amortization of other
intangibles................... 682 770 --
Loss (gain) on sale of real
estate........................ 5 (9) --
Mortgage loans originated for
sale.......................... (43,767) (39,016) --
Mortgage loans purchased and
held for sale................. (55,427) -- --
Proceeds from sale of mortgage
loans held for sale........... 55,050 30,750 --
Gain on sale of loans.......... (94) (162) --
Loss (gain) on sale of
investments................... 197 (12) --
Net increase in custodial
escrow balances............... 331 1,845 --
Increase in accrued interest
receivable.................... (8,004) (1,466) --
Increase in prepaid expenses
and other assets.............. (1,424) (4,658) --
(Decrease) increase in other
liabilities................... (5) 2,211 --
--------- --------- -----
Net cash (used in) provided by
operating activities........... (33,413) 3,669 (20)
Investing Activities
Increase in loans receivable,
net............................ (187,921) (128,032) --
Principal payments on mortgage-
backed securities.............. 64,645 68,766 --
Settlement of retail branch
sales.......................... (10,123) (79,044) --
Proceeds from sale or maturity
of available-for-sale
investments.................... 63,195 15,903 --
Purchases of available-for-sale
investments.................... (130,197) (103,086) --
Purchase of FHLB stock.......... (10,957) (2,676) --
Proceeds from sale of FHLB
stock.......................... -- 4,381 --
Proceeds from sale of real
estate......................... 1,122 371 --
Purchases of premises and
equipment...................... (9,783) (3,923) --
Purchase of Superior Federal
Bank, F.S.B., net of cash
acquired....................... -- 127,576 --
Deferred acquisition costs...... -- -- (146)
--------- --------- -----
Net cash used in investing
activities..................... (220,019) (99,764) (146)
38
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
For the
Period from
November 12, 1997
Year Ended Year Ended (date of inception)
December 31, December 31, to December 31,
1999 1998 1997
------------ ------------ ------------------
Financing Activities:
Net increase in deposits........ $ 20,906 $ 38,534 $--
Net FHLB borrowings............. 207,500 (35,698) --
Proceeds from borrowings under
note payable................... -- 20,000 --
Principal payment on note
payable........................ (7,000) -- --
Proceeds from borrowings under
senior notes................... -- 60,000 --
Proceeds from common stock
issued, net.................... 6 94,590 --
Purchase treasury stock......... (1,164) -- --
Contribution from investors..... -- -- 260
-------- -------- ----
Net cash provided by financing
activities..................... 220,248 177,426 260
-------- -------- ----
Net (decrease) increase in
cash........................... (33,184) 81,331 94
Cash and cash equivalents at
beginning of period............ 81,425 94 --
-------- -------- ----
Cash and cash equivalents at end
of period...................... $ 48,241 $ 81,425 $ 94
======== ======== ====
See accompanying notes.
39
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. Summary of Significant Accounting Policies
Nature of Operations
Superior Financial Corp. ("SFC" or "Company") is a unitary thrift holding
company organized under the laws of Delaware and headquartered in Little Rock,
Arkansas. The Company was organized on November 12, 1997 as SFC Acquisition
Corporation for the purpose of acquiring Superior Federal Bank, F.S.B. (the
"Bank"), a federally chartered savings institution. The Bank provides a broad
line of financial products to small-and medium-sized businesses and to
consumers, primarily in Arkansas and Oklahoma. On April 1, 1998, SFC acquired
the Bank from NationsBank, Inc. for approximately $162.5 million. This
purchase was accounted for using the purchase method of accounting for
business combinations whereby the assets and liabilities of the Bank were
recorded at fair value at the date of acquisition and the difference between
the net book value of the Bank and the purchase price was recorded as goodwill
of approximately $76.4 million.
Basis of Presentation
The 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
the Bank, and the Bank's wholly owned subsidiaries, Superior Financial
Services, Inc., and SREH, 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 includes
cash on hand 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 $8,138,000 and $40,514,000
at December 31, 1999 and 1998, respectively.
Liquidity Requirements
Regulations require the Bank to maintain an amount equal to 4% of deposits
(net of loans on deposits) and short-term borrowings in cash and U.S.
Government and other approved securities.
Investments
Investments that the Bank 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.
40
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments that the Bank 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 reported net of tax as other comprehensive income 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.
Trading account assets, which are held for the purpose of selling at a
profit, are carried at estimated market value. Gains and losses, both realized
and unrealized, are include in other income.
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
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 Bank did not hold any investments classified as held-to-maturity or as
trading securities at December 31, 1999 and 1998.
Loans Receivable
Loans generally are stated at their unpaid principal balances plus premium
from acquisition less allowance for loan losses and deferred fees. The premium
arising from fair value adjustments of loans in business combinations is being
accreted over the remaining contractual lives of the loans using the level-
yield method adjusted for actual experience.
Uncollectible interest on loans that are contractually past due 90 days or
greater and is not probable of collection is charged off and the loan is
placed on nonaccrual status. Income is subsequently recognized when cash
payments for interests are received. When collectibility is determined to be
probable, the loan is returned to accrual status.
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, and subsequent recoveries, if
any, are credited to the allowance.
The allowance is maintained at a level that management believes will be
adequate to absorb 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
41
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 collateral
securing the loans.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
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 depreciated 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 effect such sales is subject to market conditions
and other factors, many of which are beyond the Bank's control.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using straight-line and accelerated methods over the
respective estimated useful lives of the assets of approximately 3 to 30
years. Depreciation expense is included in occupancy expense in the statements
of operations.
Goodwill
Goodwill (excess of purchase price of the Bank over the fair value of net
assets acquired) is being amortized on a straight-line basis over 20 years.
Debt Issuance Costs
Costs associated with the issuance of the $20 million Colonial Bank note
payable and the $60 million Senior Notes have been capitalized and are being
amortized over the life of the debt.
Loan Origination and Commitment Fees
The Bank defers loan fees received and certain incremental direct costs, and
recognizes them as adjustments to interest income over the estimated remaining
life of the related loans. When a loan is fully repaid or sold, the
unamortized portion of the deferred fee and cost is recognized in interest
income. Other loan fees, such as prepayment penalties, late charges, and
release fees are recorded as income when collected.
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 are
42
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 do not purport to represent the amount that would be
realized by a sale of these assets in the open market.
Comprehensive Income
As of January 1, 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however the adoption of this Statement had no impact on
the Company's net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on available-for-sale securities be included in other
comprehensive income. The components of comprehensive income are disclosed in
the Consolidated Statements of Changes in Stockholders' Equity.
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.
Effect of Pending Statements of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging
Activities. SFAS 133, which requires the Company to recognize all derivatives
on the balance sheet at fair value, is effective for years beginning after
June 15, 2000. SFAS 133 permits early adoption as of the beginning of any
fiscal quarter that begins after June 1998. The Company expects to adopt SFAS
133 effective January 1, 2001. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative qualifies for
"special accounting", depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in fair value
of the assets, liabilities, or firm commitments through operating results or
recognized in other comprehensive income until the hedged item is recognized
in operating results. The ineffective portions of a derivative's change in
fair value will be immediately recognized in operating results. The Company
has not yet determined what effect the adoption of this statement will have on
its results of operations or financial position.
2. Private Placement and Acquisition
On April 1, 1998, the Company completed a private placement offering
totaling $175 million, consisting of $95 million in common stock, $60 million
in 8.65% Senior Notes due 2003, and $20 million in LIBOR plus 1.75% bank debt
due 2000. The proceeds from the private placement offering were used to
acquire, in a purchase transaction, 100% of the common stock of the Bank. In
connection with the private placement offering, the Company entered into a
Registration Rights Agreement and completed a Shelf Registration Statement on
December 10, 1998 to register the common stock and senior notes with the
Securities and Exchange Commission.
On April 1, 1998, the Company acquired the Bank for a purchase price of
$162.5 million. The transaction was accounted for as a purchase and resulted
in the recording of goodwill in the amount of $76.4 million. The Bank's
results of operations since the purchase date are included in operations of
the Company.
43
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth selected unaudited financial information for
the Company as if the above described transaction had been consummated as of
January 1, 1997 and January 1, 1998, with adjustments primarily for interest
charges attributable to the financing of the purchase and amortization of
goodwill. The pro forma data is based on pre-acquisition earnings and is
therefore not necessarily indicative of future performance.
1998 1997
-------- --------
(In thousands,
except per share
amounts)
Total revenue............................................. $107,985 $106,944
Income before income taxes................................ 6,861 12,831
Net income................................................ 2,898 7,777
Earnings per common share--diluted........................ 0.29 0.77
During the third quarter of 1998, the Company completed the sale of nine (9)
branch facilities located in Oklahoma and Arkansas. The sale of these branches
resulted in a gain of $4.5 million, which was recorded as an adjustment to the
purchase price allocation for the acquisition of the Bank and resulted in a
related reduction in goodwill. The total deposits for the 9 branches sold were
approximately $84.5 million. These deposits were funded by the Company through
the reduction of interest bearing deposits held by the Company at the Federal
Home Loan Bank. In addition, after the completion of an appraisal in the third
quarter of 1998, the Company recorded an adjustment to the purchase price
allocation based on the fair value of the Bank's headquarters building in Ft.
Smith. This resulted in a $5.7 million increase to office premises and
equipment and an equal reduction to goodwill.
During the first quarter of 1999, the Company completed the sale of one
branch facility located in Oklahoma. The sale resulted in a gain of $450,000,
which was recorded as an adjustment to the purchase price allocation for the
acquisition of the Bank and resulted in a related reduction in goodwill. The
total deposits of the branch were approximately $10.7 million.
3. Fair Value of Financial Instruments
The estimated fair value amounts 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.
44
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of financial instruments consist of the following:
December 31, 1999
------------------
Estimated
Carrying Fair
Value Value
-------- ---------
(In thousands)
Financial assets
Cash and cash equivalents.................................... $ 48,241 $ 48,241
Loans receivable, net........................................ 993,615 980,744
Investments available-for-sale, net.......................... 354,915 354,915
Accrued interest receivable.................................. 15,530 15,530
Federal Home Loan Bank stock................................. 21,907 21,907
Financial liabilities
Demand deposits.............................................. 441,478 441,478
Time deposits................................................ 536,458 535,758
Federal Home Loan Bank borrowings............................ 424,000 401,300
Notes payable................................................ 73,000 59,011
Off-balance sheet financial instruments...................... 4,089 4,089
December 31, 1998
------------------
Estimated
Carrying Fair
Value Value
-------- ---------
(In thousands)
Financial assets
Cash and cash equivalents.................................... $ 81,425 $ 81,425
Loans receivable, net........................................ 807,899 813,430
Investments available-for-sale, net.......................... 364,061 364,061
Accrued interest receivable.................................. 7,526 7,526
Federal Home Loan Bank stock................................. 10,950 10,950
Financial liabilities
Demand deposits.............................................. 441,514 441,514
Time deposits................................................ 526,228 527,731
Federal Home Loan Bank borrowings............................ 216,500 207,589
Notes payable................................................ 80,000 80,756
Off-balance sheet financial instruments...................... 3,348 3,348
The fair value of loans receivable 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 net of allowance of approximately $2 million was not estimated, and
therefore is included in estimated fair value at 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 mortgage-backed securities, collateralized mortgage
obligations and trust preferred stock included in 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
45
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reporting date. The fair value of fixed-maturity certificates of deposit,
Federal Home Loan Bank 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 counterparties. 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 counterparties at the
reporting date
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1999. 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.
4. Loans Receivable and Financial Instruments with Off-Balance Sheet Risk
Loans receivable consisted of approximately the following at December 31,
1999 and 1998:
1999 1998
-------- --------
(In thousands)
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences............ $520,444 $477,062
Collateralized by other properties......................... 99,485 40,569
Construction loans......................................... 43,843 21,610
Other...................................................... -- 2,753
-------- --------
663,772 541,994
Undisbursed portion of construction loans.................. (7,448) (8,443)
-------- --------
Total first mortgage loans.................................. 656,324 533,551
Consumer and other loans:
Automobile................................................. 236,863 174,316
Savings.................................................... 7,620 6,624
Home equity and second mortgage............................ 19,394 29,494
Commercial, financial, and agricultural.................... 24,166 10,800
Other...................................................... 60,167 63,365
-------- --------
Total consumer and other loans.............................. 348,210 284,599
Deferred loan costs, net of deferred origination fees....... 427 221
Allowance for loan losses................................... (11,346) (10,472)
-------- --------
Loans receivable, net....................................... $993,615 $807,899
======== ========
Impairment of loans having carrying values of $1,959,000 and $3,348,000 at
December 31, 1999 and 1998, respectively, have 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 $2,556,000 and $3,213,000 for
the years ended December 31, 1999 and 1998, respectively, none of which, as a
result of write-downs, had an allowance for credit losses. The total allowance
for credit losses related to these loans was $309,000 and $360,000 at December
31, 1999 and 1998,
46
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1,106,000 at December 31,
1999, and $1,347,000 at December 31, 1998. 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 were $442,000, and
$1,153,000 for the years ended December 31, 1999 and 1998, respectively.
Repayments of loans made by such related parties were $878,000, and $88,000
for the years ended December 31, 1999 and 1998, respectively. Loans to
directors who retired from the Board during 1999 totaled $180,000.
The Bank, through its normal lending activity, originates and maintains
loans receivable which are substantially concentrated in its lending territory
(primarily Arkansas and Oklahoma). The Bank'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 Bank and such changes could be significant.
The Bank originates and purchases adjustable rate mortgage loans to hold for
investment. The Bank also originates 15-year and 30-year fixed rate mortgage
loans and sells substantially all new originations of 30-year loans to outside
investors with servicing released. Loans held for sale totaled approximately
$51.4 million and $7.3 million at December 31, 1999 and 1998, respectively.
The Bank 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 Bank does not use financial instruments with off-balance sheet
risk as part of its own asset/liability management program or for trading
purposes.
The Bank'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 Bank 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
counterparty. Such collateral consists primarily of residential 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 $43,096,000 and
$38,581,000 at December 31, 1999 and 1998, respectively. Standby letters of
credit outstanding totaled approximately $81,000 at December 31, 1999. There
were no standby letters of credit outstanding at December 31, 1998.
47
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. 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, 1999 and 1998 are summarized as follows:
1999 1998
-------- --------
(In thousands)
FHLMC...................................................... $ 92,359 $ 59,070
GNMA....................................................... 100,236 109,088
Private investors.......................................... 5,331 21,906
-------- --------
$197,926 $190,064
======== ========
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 Bank held borrowers' escrow balances of approximately
$7,420,000 and $7,089,000 at December 31, 1999 and 1998, respectively. Of the
loans serviced by the Bank, approximately $2,613,000 and $3,675,000 were sold
with recourse at December 31, 1999 and 1998, respectively.
At December 31, 1999, the Company's loan servicing bond included errors and
omissions coverage of $5 million and fidelity bond insurance coverage of $10
million. Additionally, at December 31, 1999, the Company was covered by an
excess liability umbrella policy in the amount of $20 million.
Following is a summary of the changes in purchased mortgage servicing
rights:
1999 1998
------ ------
(In
thousands)
Balance, beginning of year................................. $2,198 $ --
Acquired in Bank acquisition on April 1, 1998............. -- 2,343
Additions................................................. 2,127 --
Amortization.............................................. (240) (145)
------ ------
Balance, end of year....................................... $4,085 $2,198
====== ======
Following is a summary of the changes in originated
mortgage servicing rights:
1999 1998
------ ------
(In
thousands)
Balance, beginning of year................................. $ -- $ --
Acquired in Bank acquisition on April 1, 1998............. -- --
Additions................................................. 292 --
Amortization.............................................. (67) --
------ ------
Balance, end of year....................................... $ 225 $ --
====== ======
Under 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.
48
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Investments Available-for-Sale
The amortized cost and estimated fair value of available-for-sale
investments are summarized as follows:
December 31, 1999
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Agencies.............................. $ 32,165 $ -- $ (488) $ 31,677
Municipals............................ 10,087 -- (767) 9,320
GNMA.................................. 23,074 -- (322) 22,752
FNMA.................................. 117,607 12 (2,186) 115,433
FHLMC................................. 39,713 -- (797) 38,916
CMOs.................................. 96,074 -- (3,078) 92,996
Corporate securities.................. 45,652 -- (1,831) 43,821
-------- ------ ------- --------
$364,372 $ 12 $(9,469) $354,915
======== ====== ======= ========
December 31, 1998
-----------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Agencies.............................. $ -- $ -- $ -- $ --
Municipals............................ -- -- -- --
GNMA.................................. 75,818 103 (621) 75,300
FNMA.................................. 165,168 1,162 (243) 166,087
FHLMC................................. 55,909 549 (486) 55,972
CMOs.................................. 59,130 56 (47) 59,139
Corporate securities.................. 7,563 -- -- 7,563
-------- ------ ------- --------
$363,588 $1,870 $(1,397) $364,061
======== ====== ======= ========
The amortized cost and estimated fair value by contractual maturity of
available-for-sale investments at December 31, 1999 are as follows:
Estimated
Amortized Fair
Cost Value
--------- ---------
(In thousands)
Due in one year or less..................................... $ 3 $ 3
Due from one year to five years............................. 5,275 5,235
Due from five years to ten years............................ 99,777 97,966
Due after ten years......................................... 259,317 251,711
-------- --------
Totals..................................................... $364,372 $354,915
======== ========
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.
Mortgage-backed securities with carrying values of approximately $97,170,000
at December 31, 1999 were subject to adjustable rates.
49
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1999 and 1998, investment securities
available-for-sale with a fair value at the date of sale of $58,005,000 and
$15,903,000 respectively, were sold. The gross realized gains on such sales
totaled $73,535 and $90,056, respectively. The gross realized losses totaled
$270,320 and $77,967, respectively. The income tax benefit related to net
security losses in 1999 was $71,236. The income tax expense related to net
security gains was $4,703 in 1998.
The carrying value of mortgage-backed securities pledged for letters of
credit, treasury, tax and loan note accounts, and public fund deposits were
approximately $49,564,000 and $13,356,000 at December 31, 1999 and 1998,
respectively.
7. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses follows:
1999 1998
------- -------
(In thousands)
Balance, beginning of year............................... $10,472 $ --
Allowance resulting from acquisition of Bank on April 1,
1998................................................... -- 10,593
Provision for loan losses............................... 2,270 1,021
Charge-offs, net of recoveries.......................... (1,396) (1,142)
------- -------
Balance, end of year..................................... $11,346 $10,472
======= =======
8. Premises and Equipment
Premises and equipment consisted of the following at December 31, 1999 and
1998:
1999 1998
------- -------
(In thousands)
Land....................................................... $ 8,547 $ 6,114
Buildings and improvements................................. 17,437 15,217
Furniture and equipment.................................... 7,681 5,068
Construction in progress................................... 1,825 841
------- -------
35,490 27,240
Accumulated depreciation................................... (2,983) (1,027)
------- -------
Premises and equipment, net................................ $32,507 $26,213
======= =======
9. Deposits
Deposits consisted of the following at December 31, 1999 and 1998:
1999 1998
--------- --------
(In thousands)
Demand and NOW accounts, including noninterest-bearing
deposits of $76,960 and $72,772 at December 31, 1999
and December 31, 1998, respectively................... $ 280,587 $279,951
Money market........................................... 61,619 60,392
Statement and passbook savings......................... 99,797 101,172
Certificates of deposit................................ 535,933 526,228
--------- --------
$ 977,936 $967,743
========= ========
50
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $39,084,406 at December 31, 1999.
At December 31, 1999, the scheduled maturities of certificates of deposit
are as follows:
(In thousands)
2000.......................................................... $434,234
2001.......................................................... 66,823
2002.......................................................... 26,287
2003.......................................................... 4,828
2004.......................................................... 2,131
Thereafter.................................................... 1,630
--------
$535,933
========
Interest expense on deposits for the years ended December 31 was as follows:
1999 1998
------- -------
(In thousands)
Demand and NOW accounts..................................... $ 3,535 $ 2,782
Money market................................................ 2,001 1,634
Statement and passbook savings.............................. 2,281 1,839
Certificates of deposit..................................... 26,154 21,975
------- -------
$33,971 $28,230
======= =======
10. Federal Home Loan Bank ("FHLB") Borrowings
At December 31, 1999 the Bank had long-term FHLB borrowings of $218,500,000
with interest rates ranging from 4.65% to 5.59% and maturity dates ranging
from September 21, 2000 to March 31, 2008. FHLB advances of $65,000,000
maturing in 2003 with interest rates ranging from 4.65% to 4.94% are callable
in 2001 on a quarterly basis and may be refinanced on a long-term basis. FHLB
advances of $30,000,000, $30,000,000 and $30,000,000, 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 $205,500,000 and $12,000,000 at
December 31, 1999 and 1998, respectively. The weighted average interest rate
on short-term borrowings was 5.78% at December 31, 1999, and 4.95% at December
31, 1998.
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, 1999, the Bank has a $50 million line of
credit which expires on March 31, 2000. The Bank had no outstanding borrowings
under the line of credit at December 31, 1999. There is no commitment fee to
maintain this credit line.
51
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, 1999:
Borrowings
--------------
(In thousands)
Maturing in the year ending December 31:
2000.......................................................... $ 31,500
2001.......................................................... 32,000
2002.......................................................... --
2003.......................................................... 65,000
2004.......................................................... --
Thereafter.................................................... 90,000
--------
$218,500
========
11. Other Borrowings
At December 31, 1999, other borrowings consisted of a $13 million note
payable to Colonial Bank ("Colonial Note") and $60 million of Senior Notes
("Senior Notes"). These notes are obligations of the parent company, Superior
Financial Corp.
The $13 million Colonial Note bears interest at LIBOR plus 1.25% (7.73% at
December 31, 1999) and requires quarterly interest payments. The entire
principal balance is due April 1, 2000. The Company intends to refinance with
similar terms and interest rates. The note 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 note contains certain
covenants of which the most restrictive includes a minimum total capital,
minimum return on assets and a maximum nonperforming assets to total loans and
other real estate ratio. At December 31, 1999, the Company was in compliance
with these covenants.
The $60 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
rate reserve account with cash or permitted investments sufficient to pay
interest due on the next two succeeding interest payment dates. At December
31, 1999, the interest rate reserve account held a mortgage-backed security
with a carrying value of approximately $5.2 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 for dividends. At December 31, 1999, the
Company was in compliance with these covenants. Debt issuance costs of
$2,465,000 were incurred with the offering and are included in prepaid
expenses and other assets, and are being amortized over the life of the notes.
12. Regulatory Matters
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.
52
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 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
December 31, 1999 and 1998 are presented below (amounts in thousands):
Required to be
Categorized as
Well Capitalized
Company Bank Required for Under Prompt
------------- -------------- Capital Adequacy Corrective Action
Actual Actual Purposes Provisions
------------- -------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- --------- ------- --------- --------
As of December 31, 1999
Tangible capital to
adjusted total assets.. $48,451 3.16% $110,086 7.20% $ 22,939 1.50% $ N/A N/A
Core capital to adjusted
total assets........... 48,451 3.16 110,086 7.20 61,171 4.00 76,464 5.00%
Total capital to risk
weighted assets........ 59,797 6.19 121,432 12.59 77,178 8.00 96,473 10.00
Tier I capital to risk
weighted assets........ 48,451 4.75 110,086 11.41 N/A N/A 57,884 6.00
As of December 31, 1998
Tangible capital to
adjusted total assets.. 37,389 2.85 104,324 7.99 19,589 1.50 N/A N/A
Core capital to adjusted
total assets........... 37,389 2.85 104,324 7.99 39,178 4.00 65,296 5.00
Total capital to risk
weighted assets........ 47,861 5.50 114,770 16.70 54,975 8.00 68,719 10.00
Tier I capital to risk
weighted assets........ 37,389 4.30 104,324 15.18 N/A N/A 59,231 6.00
53
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. 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:
1999 1998
------ -----
(In
thousands)
Deferred tax liabilities:
Prepaid assets............................................... $ 482 $ 261
Goodwill amortization......................................... 226 518
FHLB dividends............................................... 536 --
Unrealized gain on investments available-for-sale............. -- 166
Premises and equipment....................................... 306 7
Other........................................................ 25 --
------ -----
Total deferred liabilities.................................... 1,575 952
Deferred tax assets:
Allowance for loan losses.................................... 332 391
Mortgage servicing rights.................................... 32 11
Accrued bonuses and other.................................... 80 9
Unrealized loss on investments available-for-sale............ 3,310 --
------ -----
Total deferred assets......................................... 3,754 411
------ -----
Net deferred tax asset (liability)............................ $2,179 $(541)
====== =====
Significant components of the provision for income taxes for the years ended
December 31 are as follows:
1999 1998
------ ------
(In
thousands)
Current:
Federal....................................................... $5,218 $3,242
State......................................................... 473 628
------ ------
Total current.................................................. 5,691 3,870
Deferred:
Federal....................................................... 713 295
State......................................................... 43 80
------ ------
Total deferred................................................. 756 375
------ ------
$6,447 $4,245
====== ======
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:
1999 1998
----- ----
Tax at U.S. statutory rate..................................... 35.0% 35.0%
State income tax expense, net of Federal income tax benefit.... 1.7 3.9
Tax exempt interest income..................................... (1.1) --
Other.......................................................... .5 --
----- ----
36.1% 38.9%
===== ====
54
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
14. Earnings Per Common Share
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:
1999 1998
----------- ----------
(In thousands, except
per share amounts)
Common shares--weighted average (basic).............. 10,073 7,595
Common share equivalents--weighted average........... 47 --
----------- ----------
Common shares--weighted average (diluted)............ 10,120 7,595
=========== ==========
Net income........................................... $ 11,386 $ 6,675
=========== ==========
Basic and diluted earnings per common share.......... $ 1.13 $ 0.88
=========== ==========
15. Commitments and Contingencies
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. A schedule of future minimum rental payments under operating
leases, as of December 31, 1999 follows:
(In thousands)
2000.......................................................... $ 525
2001.......................................................... 449
2002.......................................................... 281
2003.......................................................... 201
2004.......................................................... 121
Thereafter.................................................... 61
------
$1,638
======
Rental expense was $786,000 and $420,000 for the years ended December 31,
1999 and 1998, 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 fifty percent (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.
55
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
16. Supplemental Disclosure of Cash Flow Information and Noncash Activity
Cash Flow Information
The Company purchased all of the capital stock of Superior Federal Bank,
F.S.B. on April 1, 1998. In conjunction with the acquisition, liabilities were
assumed as follows:
(In thousands)
Fair value of noncash
assets acquired........ $1,081,436
Cash acquired........... 288,692
Cash paid for the
capital stock.......... (162,500)
Transaction costs....... (8,757)
Excess of investment
over fair value of net
assets acquired........ 76,426
----------
Liabilities assumed..... $1,275,297
==========
1999 1998
------- -------
Cash paid for the years ending December 31:
Interest................................................. $57,247 $37,728
Taxes.................................................... 6,325 4,199
Costs paid from the proceeds of the issuance of common
stock and borrowings under the bank debt and senior
notes:
Debt issuance costs..................................... -- 2,870
Stock issuance costs.................................... -- 3,429
Noncash Activity:
Additions to other real estate from settlement of loans.. 998 344
Repayment of funds advanced by the Placement Agent and
Lead Investor to pay transaction costs through issuance
of 200,000 shares of common stock....................... 1,000
Deferred acquisition costs incurred but not paid......... -- 183
Purchase accounting adjustments:
Goodwill, net........................................... 2,576 --
Premises and equipment, net............................. (1,412) --
Other liabilities....................................... (1,164) --
17. 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 (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
56
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 59 , except in the
event of death, permanent disability, certain financial hardships or
termination of employment. The Company made matching contributions of $257,868
to the 401(k) Plan in 1999, and $203,863 in 1998.
18. 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 Internal Revenue Code of 1986, as amended
(the "Code"), 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.
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). 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% (one-third of one percent) of the number of
shares outstanding on December 31, 1998 (33,932 annual restricted shares
limit). For the years ended December 31, 1999 and 1998 the Company granted
95,645 and 35,549 options, respectively, under the LTIP.
As of December 31, 1999, 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. On July 23,
1999, the Company modified the terms of the options granted under the
Agreements to allow for immediate vesting of the remaining options. This
modification of the Agreements did not require the Company to record any
compensation expense associated with the remaining options. In addition, the
modification to the Agreements did not result in a material adjustment of the
fair value of these options.
57
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes the stock option activity:
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average- Average- Average-
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
Outstanding--beginning of
year...................... 766,799 $10.04 731,250 $10.00 $ -- $ --
Granted.................... 95,645 10.38 35,549 10.83 731,250 10.00
Exercised.................. -- -- -- -- -- --
Canceled................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Outstanding--end of year... 862,444 $10.08 766,799 $10.04 731,250 $10.00
======= ====== ======= ====== ======= ======
Exercisable at end of
year...................... 738,752 $10.01 292,500 $10.00 $ -- $ --
======= ====== ======= ====== ======= ======
Exercise prices for options outstanding as of December 31, 1999 ranged from
$10.00 to $10.83. The weighted-average remaining contractual life of the
outstanding options is 8.0 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:
1999 1998
-------- --------
Weighted-average fair value of options granted........... $ 5.15 $ 4.81
Risk-free interest rate.................................. 6.46% 6.73%
Dividend yield........................................... 0.00 0.00
Expected stock volatility................................ 21.40 0.00
Weighted average expected life........................... 10 years 10 years
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, 1999 and 1998, 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 $11,116,126 and $6,441,509,
respectively, or $1.10 basic and diluted earnings per share for 1999 and $0.85
basic and diluted earnings per share for 1998. Such pro forma effects are not
necessarily indicative of the effect on future years.
58
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. Parent Company Financial Information
Presented below are the condensed balance sheets, statements of operations
and cash flows for the parent company, Superior Financial Corp., as of
December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998
and for the period from November 12, 1997 (date of inception) to December 31,
1998.
Balance Sheets
(In thousands)
December 31,
-----------------
1999 1998
-------- --------
Assets
Cash and cash equivalents.................................... $ 2,286 $ 3,848
Investment in subsidiary..................................... 167,247 168,968
Investment securities........................................ 5,166 5,330
Other........................................................ 4,521 5,160
-------- --------
Total assets................................................. $179,220 $183,306
======== ========
Liabilities and Stockholders' Equity
Notes payable................................................ $ 73,000 $ 80,000
Accrued interest and other liabilities....................... 634 1,494
-------- --------
Total liabilities............................................ 73,634 81,494
Stockholders' equity......................................... 105,586 101,812
-------- --------
Total liabilities and stockholders' equity................... $179,220 $183,306
======== ========
Statements of Operations
(In thousands)
For the
Period from
November 12,
1997 (date of
Year Ended Year Ended inception) to
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ -------------
Income
Dividends from subsidiary.............. $11,000 $4,000 $--
Expenses
Interest, net.......................... 6,278 5,582 --
Other.................................. 533 194 20
------- ------ ----
Total expenses......................... 6,811 5,776 20
------- ------ ----
Income (loss) before income tax benefit
and equity in
undistributed earnings of subsidiary.. 4,189 (1,776) (20)
Income tax benefit..................... 2,503 2,291 --
Equity in undistributed earnings of
subsidiary............................ 4,694 6,160 --
------- ------ ----
Net income (loss)...................... $11,386 $6,675 $(20)
======= ====== ====
59
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statements of Cash Flows
(In thousands)
For the
Period from
November 12,
1997 (date of
Year Ended Year Ended inception) to
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ -------------
Operating Activities
Net income (loss)..................... $11,386 $ 6,675 $(20)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Undistributed earnings of subsidiary.. (4,694) (6,160) --
(Increase) decrease in other assets... 639 (4,831) --
Increase (decrease) in accrued
interest and other liabilities....... (860) 1,311 --
------- --------- ----
Net cash provided by (used in)
operating activities................. 6,471 (3,005) (20)
Investing Activities
Deferred acquisition costs............ -- -- (146)
Purchase of investment securities..... (5,206) (5,330) --
Sale of investments................... 5,333 -- --
Gain on sale of investments........... (3) -- --
Purchase of Superior Federal Bank,
F.S.B................................ -- (162,500) --
Purchase treasury stock............... (1,164) -- --
------- --------- ----
Net cash used in investing
activities........................... (1,040) (167,830) (146)
Financing Activities
Contribution from investors........... -- -- 260
Proceeds from common stock issued,
net.................................. 7 94,589 --
Proceeds from notes payable........... -- 80,000 --
Payments on notes payable............. (7,000) -- --
------- --------- ----
Net cash (used in) provided by
financing activities................. (6,993) 174,589 260
Net (decrease) increase in cash....... (1,562) 3,754 94
Cash and cash equivalents at beginning
of period............................ 3,848 94 --
------- --------- ----
Cash and cash equivalents at end of
period............................... $ 2,286 $ 3,848 $ 94
======= ========= ====
Supplemental disclosures of noncash
activity:
Deferred acquisition costs incurred by
not paid............................. $ -- $ -- $183
======= ========= ====
60
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
In April, 1998, Management of the Company recommended that Ernst & Young LLP
serve as the Company's independent auditor and replace Deloitte & Touche LLP
as the Bank's independent auditor. The Board of Directors approved retaining
Ernst & Young LLP in March, 1998. No report by Deloitte & Touche LLP on the
Bank's financial statements for 1997 contained an adverse opinion, disclaimer
of opinion, modification or qualification. During the last two fiscal years
there were no disagreements between the Company and Deloitte & Touch LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item as to the Company directors is
contained in the Company's proxy statement dated April 14, 2000, 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 Position and Office Held with the Present and Principal
Year Company and Superior Federal Bank, Occupation
Became Executive Officer F.S.B. for the Last Five Years
------------------------ ---------------------------------- -----------------------
C. Stanley Bailey Chairman of the Board, Chief Chief Executive Officer
50, 1998.......... Executive Officer of both and Chairman of the
Superior and Superior Board of the Company
Federal Bank, F.S.B. and the Bank, Little
Rock, Arkansas, 1998-
present, Chief
Financial Officer and
Executive Vice
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
50, 1998.......... Officer and Director, of both Operating Officer and
Superior and Superior Director of the
Federal Bank, F.S.B. Company and the Bank,
Fort Smith, Arkansas,
1998-present, Chief
Retail Officer and
Senior Vice President,
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 and Chief Financial Officer
40, 1998.......... Treasurer of Superior and and Treasurer of the
Superior Federal Bank, F.S.B. Company and the Bank,
Little Rock, Arkansas,
1998-present, Chief
Executive 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 is contained in the Company's proxy
statement dated April 14, 2000 under the caption "Executive Compensation" and
is incorporated herein by reference.
61
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the Company's proxy
statement dated April 14, 2000, under the caption "Voting Securities and
Principal Stockholders" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is contained in the Company's proxy
statement dated April 14, 2000, under the captions "Compensation committee
Interlocks and Insider Participation" and "Executive Compensation" and is
incorporated herein by reference.
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 then
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); and
(viii) changes in the securities markets and. 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.
62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
Superior Financial Corp.
Audited Financial Statements December 31, 1999
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for years ended December 31, 1999 and
1998 and for the period from November 12, 1997 (date of inception) to
December 31, 1997
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999 and 1998 and for the period from November 12,
1997 (date of inception) to December 31, 1997
Consolidated Statement of Cash Flows for the years ended December 31, 1999
and 1998 and for the period from November 12, 1997 (date of inception)
to December 31, 1997
Notes to Consolidated Financial Statements, including parent company only
information.
2. Financial Statements Schedules
Superior Federal Bank, F.S.B.
Audited Financial Statements March 31, 1998
Report of Independent Auditors
Consolidated Statement of Operations for the three months ended March 31,
1998
Consolidated Statement of Changes in Stockholder's Equity for the three
months ended March 31, 1998
Consolidated Statement of Cash Flows for the three months ended March 31,
1998
Notes to Consolidated Statements of Operations, Changes in Stockholder's
Equity and Cash Flows for the three months ended March 31, 1998.
December 31, 1997
Independent Auditors' Report
Consolidated Statement of Financial Condition as of December 31, 1997
Consolidated Statement of Income for the period from January 7, 1997 to
December 31, 1997
Consolidated Statement of Stockholder's Equity for the period from
January 7, 1997 to December 31, 1997
Consolidated Statement of Cash Flows for the period from January 7, 1997 to
December 31, 1997
Notes to Consolidated Financial Statements for the period from January 7,
1997 to December 31, 1997
63
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.
64
Exhibits Description
-------- -----------
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 14 to
the financial statements on 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.
27 -- Financial Data Schedules
(b) Reports on Form 8-K. Registrant's Current Reports on Form 8-K dated
November 3, 1999 and November 22, 1999, and incorporated herein by reference.
65
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
Fort Smith, Arkansas on the 30th day of March, 2000.
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 Executive
C. Stanley Bailey Officer
/s/ C. Marvin Scott President, Chief Operating **
_________________________________ Officer and Director
C. Marvin Scott
/s/ Rick D. Gardner Chief Financial Officer and **
_________________________________ Treasurer (Principal
Richard D. Gardner Financial Officer and
Principal Accounting Officer)
* Director **
_________________________________
Boyd W. Hendrickson
* Director **
_________________________________
John M. Stein
* Director **
_________________________________
David E. Stubblefield
* Director **
_________________________________
John M. Steuri
* Director **
_________________________________
Howard "Buddy" 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 30, 2000
66
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FINANCIAL STATEMENT SCHEDULES
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, 1999
Commission File No. 0-25239
----------------
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Audit Committee
of the Board of Directors
Superior Federal Bank, F.S.B.
We have audited the accompanying consolidated statement of operations of
Superior Federal Bank, F.S.B. and Subsidiary (the "Bank") and the related
consolidated statements of changes in stockholder's equity and cash flows for
the three months ended March 31, 1998. These consolidated financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and changes in stockholder's equity of Superior Federal Bank,
F.S.B. and Subsidiary and their cash flows for the three months ended March
31, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
July 22, 1998
S-1
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Three months ended March 31, 1998
Interest income:
Loans:
First mortgage loans............................................ $ 8,194,236
Consumer and other loans........................................ 5,534,227
Mortgage-backed securities....................................... 5,959,658
Interest-bearing deposits........................................ 831,649
Other............................................................ 221,463
-----------
Total interest income........................................... 20,741,233
Interest expense:
Deposits......................................................... 9,657,058
Short-term borrowings............................................ 230,363
Long-term borrowings............................................. 1,818,863
-----------
Total interest expense.......................................... 11,706,284
-----------
Net interest income............................................... 9,034,949
Provision for loan losses (Note 2)................................ 7,765,000
-----------
Net interest income after provision for loan losses............... 1,269,949
Other income:
Deposit account and other fees................................... 4,781,705
Loan servicing fees, net......................................... 443,145
Income from real estate operations, net.......................... 22,345
Other............................................................ 268,861
-----------
5,516,056
Other expense:
Salaries and employee benefits................................... 4,528,829
Net occupancy expense of premises................................ 817,487
Deposit insurance premium........................................ 151,683
Data processing.................................................. 784,126
Advertising and promotion........................................ 499,597
Amortization of core deposit premium............................. 217,519
Amortization of goodwill......................................... 938,551
Postage and supplies............................................. 683,608
Equipment expense................................................ 500,348
Other............................................................ 1,711,196
-----------
Total other expenses............................................ 10,832,944
-----------
Loss before income taxes benefit.................................. (4,046,939)
Income taxes benefit.............................................. 281,794
-----------
Net loss.......................................................... $(3,765,145)
===========
See accompanying notes.
S-2
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
Three months ended March 31, 1998
Capital in Accumulated
Excess of Other Total
Common Par Comprehensive Retained Stockholders'
Stock Value Income (loss) Earnings Equity
------ ------------ ------------- ---------- -------------
Balance, December 31,
1997................... $1,000 $150,603,054 $1,887,334 $9,340,588 $161,831,976
Comprehensive income
(loss):
Net loss.............. (3,765,145) (3,765,145)
Other comprehensive
income (loss), net of
tax:.................
Net change in
unrealized gains on
securities available
for sale............. 931,022 931,022
------------
Total comprehensive
income (loss).......... (2,834,123)
------ ------------ ---------- ---------- ------------
Balance, March 31,
1998................... $1,000 $150,603,054 $2,818,356 $5,575,443 $158,997,853
====== ============ ========== ========== ============
See accompanying notes.
S-3
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Three months ended March 31, 1998
Operating activities
Net loss........................................................ $ (3,765,145)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for loan losses..................................... 7,765,000
Depreciation.................................................. 504,676
Amortization of loan servicing rights......................... 108,001
Amortization of core deposit premium.......................... 217,519
Amortization of premiums on mortgage-backed securities, net... 499,361
Amortization of goodwill...................................... 938,551
Loss on sales of real estate.................................. 14,433
Gain on sales of loans........................................ (34,176)
Mortgage loans originated for resale.......................... 6,956,469
Proceeds from sale of mortgage loans held for sale............ (5,456,725)
Decrease in accrued interest receivable....................... 178,881
Decrease in prepaid expenses and other assets................. 6,308,423
Increase in other liabilities................................. 221,375
------------
Net cash provided by operating activities................... 14,456,643
Investing activities
Decrease in loans receivable, net............................... $ (2,407,484)
Principal payments on mortgage-backed securities................ 18,605,494
Proceeds from sales of loans.................................... 5,490,901
Proceeds from sales of property and equipment................... 56,084
Proceeds from sales of real estate.............................. 76,115
Purchases of office property and equipment...................... (672,179)
------------
Net cash provided by investing activities................... 21,148,931
Financing activities
Net change in deposits.......................................... 34,332,698
Borrowings of Federal Home Loan Bank Advances................... 147,198,000
Net decrease in advance payments by borrowers for taxes and
insurance...................................................... (1,764,266)
------------
Net cash provided by financing activities................... 179,766,432
------------
Net increase in cash............................................ 215,372,006
Cash and cash equivalents at December 31, 1997.................. 73,320,358
------------
Cash and cash equivalents at March 31, 1998..................... $288,692,364
============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest...................... $ 11,648,661
============
Cash paid during the period for income taxes.................. 1,407,681
============
See accompanying notes.
S-4
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH FLOWS
Three months ended March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Superior Federal Bank, F.S.B. (the "Bank") is a wholly owned subsidiary of
NationsBank, Inc. ("NationsBank"). The Bank is a federally chartered savings
association which provides a broad line of financial products to small to
medium sized businesses and consumers.
On December 3, 1997, NationsBank entered into an agreement with SFC
Acquisition Corporation ("SFC") whereby SFC acquired 100% of the issued and
outstanding shares of common stock of the Bank. The transaction closed on
April 1, 1998. The transaction was accounted for using the purchase method of
accounting for business combinations.
Basis of Presentation
The accounting and reporting policies of the Bank 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bank and
its wholly owned subsidiary, SFS Corporation. 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 includes
cash on hand and amounts due from depository institutions.
Interest Revenue Recognition
Loans generally are stated at their unpaid principal balances plus premium
from acquisition less allowance for loan losses and deferred fees. The premium
arising from fair value adjustments of loans in business combinations is being
accreted over the remaining contractual lives of the loans using the level-
yield method adjusted for actual experience.
The Bank defers loan fees received and certain incremental direct costs, and
recognizes them as adjustments to interest income over the estimated remaining
life of the related loans. When a loan is fully repaid or sold, the
unamortized portion of the deferred fee and cost is credited in income. Other
loan fees, such as prepayment penalties, late charges, and release fees are
recorded as income when collected.
S-5
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH FLOWS--(Continued)
Three months ended March 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Uncollectible interest on loans that are contractually past due 90 days or
greater or not probable of collection is charged off. Income is subsequently
recognized when cash payments are received and collectibility is probable, in
which case the loan is returned to accrual status.
Provision for Losses
Provisions for losses on loans have been provided based on amounts
outstanding and historical experience. Provisions for losses include charges
to reduce the recorded balance of mortgage loans and real estate to their
estimated net realizable value or fair value less estimated selling costs, as
applicable. Such provisions are based on management's estimate of the net
realizable value or fair value of the collateral or real estate, as
applicable, considering current and currently anticipated future operating or
sales information which may be affected by changing economic and/or operating
conditions beyond the Bank's control, thereby causing these estimates to be
particularly susceptible to changes that could result in a material adjustment
to their carrying value in the future.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.
Goodwill
Goodwill is being amortized on a straight-line basis over 25 years.
Pension Plan
Pension expense is computed on the basis of accepted actuarial methods and
pension costs are funded as incurred.
Income Taxes
The Bank is a member of a consolidated group of corporations as defined by
the Internal Revenue Code and the Bank files its federal income tax return as
part of a consolidated tax return. For financial reporting purposes, however,
the Bank computes its tax on a separate company basis. Deferred tax assets and
liabilities are recognized for the estimated tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
Core Deposit Premium
The premium resulting from the valuation of core deposits acquired in the
purchase of the deposits of other financial institutions is amortized over a
period (generally ten years) not exceeding the estimated average remaining
life of the existing customer deposit base acquired. Such amortization is
provided at the same rate the related deposits are expected to be withdrawn.
The amortization period is periodically evaluated to determine if events and
circumstances require the period to be reduced.
2. ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for losses on loans:
Balance, January 1, 1998...................................... $ 4,659,949
Provision for losses........................................ 7,765,000
Charge-offs, net of recoveries.............................. (1,924,949)
-----------
Balance, March 31, 1998....................................... $10,500,000
===========
S-6
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS OF
OPERATIONS, CHANGES IN STOCKHOLDER'S EQUITY AND CASH FLOWS--(Continued)
Three months ended March 31, 1998
2. ALLOWANCE FOR LOAN LOSSES--(continued)
During the first quarter of 1998, the Bank made certain changes in
accounting estimates totaling approximately $7.7 million due to the rapid
deterioration of the performance of automobile loans. The changes included
increasing the provision for loan losses for the charge-off of problem
automobile loans and liquidation losses of repossessed automobiles of
approximately $1.9 million following a change in management's approach to
handling delinquencies. This change resulted in expedited repossession and
rapid wholesaling of collateral. Management also increased the provision for
loan losses by $4.5 million to reflect management's assessment of the
increasing risk of loan losses due to the greater losses experienced by the
Bank in the automobile portion of the loan portfolio during the first three
months of 1998.
3. INCOME TAXES
The income tax benefit for the period from January 1, 1998 to March 31,
1998, consists of the following:
Current:
Federal......................................................... $239,525
State........................................................... 42,269
--------
$281,794
========
The Bank files a consolidated federal income tax return with NationsBank.
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.
4. COMMITMENTS
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. Rental expense amounted to approximately $139,574 for the
three month period ended March 31, 1998.
S-7
Independent Auditors' Report
The Board of Directors of
Superior Federal Bank, F.S.B.:
We have audited the accompanying consolidated statement of financial
condition of Superior Federal Bank, F.S.B. (a wholly owned subsidiary of
NationsBank, Inc.) and subsidiary (the "Bank") as of December 31, 1997, and
the related consolidated statements of income, stockholder's equity and cash
flows for the period from January 7, 1997 to December 31, 1997. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Bank at
December 31, 1997, and the results of its operations and its cash flows for
the period from January 7, 1997 to December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
January 16, 1998
S-8
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1997
ASSETS
Cash and cash equivalents....................................... $ 73,320,358
Loans receivable, net........................................... 693,208,982
Mortgage-backed securities available-for-sale................... 369,555,494
Accrued interest receivable..................................... 6,257,386
Federal Home Loan Bank stock.................................... 12,655,000
Office properties and equipment, net............................ 17,981,830
Loan servicing rights........................................... 1,991,230
Core deposit premium, net....................................... 7,802,695
Prepaid expenses and other assets............................... 8,661,420
Goodwill........................................................ 64,056,164
Real estate acquired in settlement of loans, net................ 662,085
--------------
TOTAL........................................................... $1,256,152,644
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits....................................................... $ 982,442,127
Federal Home Loan Bank borrowings.............................. 105,000,000
Advance payments by borrowers for taxes and insurance.......... 3,929,806
Other liabilities.............................................. 2,948,735
--------------
Total liabilities............................................. 1,094,320,668
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock--$1 par value; 1,000 shares authorized, issued and
outstanding................................................... 1,000
Capital in excess of par value................................. 150,603,054
Retained earnings.............................................. 9,340,588
Net unrealized gains on securities available-for-sale, net of
taxes......................................................... 1,887,334
--------------
Total stockholder's equity.................................... 161,831,976
--------------
TOTAL........................................................... $1,256,152,644
==============
See notes to consolidated financial statements.
S-9
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF INCOME
for the period from January 7, 1997 to December 31, 1997
INTEREST INCOME:
Loans:
First mortgage loans............................................. $33,626,800
Consumer and other loans......................................... 21,242,845
Mortgage-backed securities........................................ 27,036,633
Interest-bearing deposits......................................... 1,029,018
Other............................................................. 728,293
-----------
Total interest income............................................ 83,663,589
INTEREST EXPENSE:
Deposits.......................................................... 38,433,919
Other............................................................. 6,924,999
-----------
Total interest expense........................................... 45,358,918
-----------
NET INTEREST INCOME................................................ 38,304,671
PROVISION FOR LOAN LOSSES.......................................... 2,154,998
-----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................ 36,149,673
OTHER INCOME:
Deposit account and other fees.................................... 20,241,242
Loan servicing fees, net.......................................... 1,796,431
Income from real estate operations, net........................... 261,760
Other............................................................. 980,265
-----------
Total other income............................................... 23,279,698
OTHER EXPENSES:
Salaries and employee benefits.................................... 16,340,929
Net occupancy expense of premises................................. 3,041,154
Deposit insurance premium......................................... 635,843
Data processing................................................... 2,867,346
Advertising and promotion......................................... 2,314,908
Amortization of core deposit premium.............................. 797,571
Amortization of goodwill.......................................... 2,556,359
Postage and supplies.............................................. 2,522,934
Equipment expense................................................. 1,906,656
Other............................................................. 6,332,547
-----------
Total other expenses............................................. 39,316,247
-----------
INCOME BEFORE INCOME TAX PROVISION................................. 20,113,124
INCOME TAX PROVISION............................................... 9,191,236
-----------
NET INCOME......................................................... $10,921,888
===========
See notes to consolidated financial statements.
S-10
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
for the period from January 7, 1997 to December 31, 1997
Net Unrealized
Gains on
Capital in Securities Total
Common Excess of Retained Available Stockholder's
stock Par Value Earnings For Sale Equity
------ ------------ ------------ -------------- -------------
BALANCE, JANUARY 7,
1997................... $1,000 $150,603,054 $150,604,054
Dividends............. $ (1,581,300) (1,581,300)
Net income............ 10,921,888 10,921,888
Net change in
unrealized gains in
securities
available for
sale............... $1,887,334 1,887,334
------ ------------ ------------ ---------- ------------
BALANCE, DECEMBER 31,
1997................... $1,000 $150,603,054 $ 9,340,588 $1,887,334 $161,831,976
====== ============ ============ ========== ============
See notes to consolidated financial statements.
S-11
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
for the period from January 7, 1997 to December 31, 1997
OPERATING ACTIVITIES:
Net income...................................................... $10,921,888
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses..................................... 2,154,998
Depreciation.................................................. 2,068,445
Amortization of loan servicing rights......................... 276,968
Amortization of core deposit premium.......................... 797,571
Amortization of premiums on mortgage-backed securities, net... 3,156,936
Amortization of goodwill...................................... 2,556,359
Loss on sales oF real estate.................................. 138,715
Gain on sales of Loans........................................ (66,946)
Proceeds from sales of loans held for sale.................... 11,610,425
Decrease in accrued interest receivable....................... 853,953
Increase in prepaid expenses and other assets................. (7,027,047)
Decrease in other liabilities................................. (3,727,554)
-----------
Net cash provided by operating activities................... 23,714,741
INVESTING ACTIVITIES:
Increase in loans receivable, net............................... (40,979,885)
Principal payments on mortgage-backed securities................ 68,138,748
Purchase of Federal Home Loan Bank stock........................ (726,000)
Proceeds from sales of real estate.............................. 1,056,787
Purchase of office property and equipment....................... (988,729)
-----------
Net cash provided by investing activities................... 26,500,921
FINANCING ACTIVITIES:
Net change in deposits.......................................... (7,760,799)
Payments of Federal Home Loan Bank advances..................... (18,000,000)
Payment of dividends............................................ (1,581,300)
Net increase in advance payments by borrowers for taxes and
insurance...................................................... 207,368
-----------
Net cash used by financing activities....................... (27,134,731)
-----------
NET INCREASE IN CASH.............................................. 23,080,931
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 50,239,427
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $73,320,358
===========
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................ $45,364,061
===========
Cash paid during the period for income taxes.................... $ 7,108,479
===========
SUPPLEMENT NONCASH ACTIVITIES:
Additions to other real estate from settlement of loans......... $ 1,214,263
===========
See notes to consolidated financial statements.
S-12
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the period from January 7, 1997 to December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Superior Federal Bank, F.S.B. (the "Bank") is a
wholly-owned subsidiary of NationsBank, Inc. ("NationsBank"). The Bank is a
federally chartered savings association which provides a broad line of
financial products to small to medium sized businesses and consumers. On
January 7, 1997, NationsBank acquired the Bank through its acquisition of
Boatmen's Bankshares, Inc. (the former sole shareholder of the Bank's common
stock). This purchase was accounted for under the purchase (pushdown) method
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 allocated purchase price was recorded as goodwill of
approximately $66,600,000.
On December 3, 1997, NationsBank entered into an agreement with SFC
Acquisition Corporation ("SFC") whereby SFC will purchase 100% of the issued
and outstanding shares of common stock of the Bank. While the terms of the
agreement have been established, the agreement is subject to regulatory
approval. Pending such approval, the deal is expected to close in the second
quarter of 1998.
Basis of Presentation--The accounting and reporting policies of the Bank
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
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Bank and its wholly-owned subsidiary, SFS Corporation. 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 includes cash on hand and amounts due from depository
institutions.
Liquidity Requirements--Regulations require the Bank to maintain an amount
equal to 5% of deposits (net of loans on deposits) and short-term borrowings
in cash and U. S. Government and other approved securities.
Mortgage-backed Securities--Mortgage-backed securities ("MBSs") that the
Bank 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.
MBSs that the Bank 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 earnings and reported net of tax as
a separate component of stockholder's equity until realized. MBSs 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 MBSs depends on the amount of interest
collected over the life of the security and 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
S-13
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
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 MBSs 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 geographic location of the related
properties.
If the fair value of a MBS for sale declines for reasons other than
temporary market conditions, the carrying value of such a MBS would be written
down to current value by a charge to operations. Gains and losses on the sale
of MBSs available-for-sale are determined using the specific-identification
method. The Bank did not hold any MBSs classified as held-to-maturity or as
trading securities during 1997.
Loans Receivable--Loans receivable are stated at unpaid principal balances
plus premium from acquisition less allowance for loan losses and deferred
fees. The premium arising from fair value adjustments of the loans in business
combinations is being accreted over the remaining contractual lives of the
loans using the level-yield method adjusted for actual experience. Loans held
for sale are carried at the lower of book value or fair value as determined by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources.
Uncollectible interest on loans that are contractually past due 90 days or
greater or not probable of collection is charged off. Income is subsequently
recognized when cash payments are received and collectibility is probable, in
which case the loan is returned to accrual status.
Provision for Losses--Provisions for losses on loans have been provided
based on amounts outstanding and historical experience. Provisions for losses
include charges to reduce the recorded balance of mortgage loans and real
estate to their estimated net realizable value or fair value less estimated
selling costs, as applicable. Such provisions are based on management's
estimate of the net realizable value or fair value of the collateral or real
estate, as applicable, considering current and currently anticipated future
operating or sales information which may be affected by changing economic
and/or operating conditions beyond the Bank's control, thereby causing these
estimates to be particularly susceptible to changes that could result in a
material adjustment to their carrying value in the future.
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
depreciated 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 effect such sales is subject to market conditions and
other factors, many of which are beyond the Bank's control.
Office Properties and Equipment--Office properties and equipment are stated
at cost less accumulated depreciation. Depreciation is computed using
straight-line and accelerated methods over the respective estimated useful
lives of the assets of approximately 3 to 30 years.
Accretion and Amortization of Valuation Accounts from Acquisition--Discounts
and premiums arising from fair value adjustments of assets and liabilities in
business combinations are being amortized over the remaining contractual lives
of the related assets or liabilities, using a method which approximates the
level-yield method adjusted for actual experience.
S-14
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
Goodwill--Goodwill is being amortized on a straight-line basis over 25
years.
Loan Origination and Commitment Fees--The Bank defers loan fees received and
certain incremental direct costs, and recognizes them as adjustments to
interest income over the estimated remaining life of the related loans. When a
loan is fully repaid or sold, the unamortized portion of the deferred fee and
cost is credited in income. Other loan fees, such as prepayment penalties,
late charges, and release fees are recorded as income when collected.
Pension Plan--Pension expense is computed on the basis of accepted actuarial
methods and pension costs are funded as incurred.
Income Taxes--The Bank is a member of a consolidated group of corporations
as defined by the Internal Revenue Code and the Bank files its federal income
tax return as part of a consolidated tax return. For financial reporting
purposes, however, the Bank computes its tax on a separate company basis.
Deferred tax assets and liabilities are recognized for the estimated tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Core Deposit Premium--The premium resulting from the valuation of core
deposits acquired in the purchase of the deposits of other financial
institutions is amortized over a period (generally ten years) not exceeding
the estimated average remaining life of the existing customer deposit base
acquired. Such amortization is provided at the same rate the related deposits
are expected to be withdrawn. The amortization period is periodically
evaluated to determine if events and circumstances require the period to be
reduced.
Loan Servicing Rights--Purchased loan servicing rights represent the cost of
acquiring 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 values of purchased loan
servicing rights and the amortization thereon are 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 a pool-by-pool 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 purchased loan servicing rights
do not purport to represent the amount that would be realized by a sale of
these assets in the open market. Loan servicing rights earned by the Bank
through the origination and subsequent sale of mortgages while retaining the
right to service those mortgages are considered by management to be
insignificant.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily 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 Bank 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.
S-15
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
The estimated fair values of financial instruments at December 31, 1997,
consist of the following:
Estimated
Carrying Fair
Value Value
------------ ------------
Financial assets:
Cash and cash equivalents........................... $ 73,320,358 $ 73,320,358
Loans receivable, net............................... 693,208,982 697,912,280
Mortgage-backed securities.......................... 369,555,494 369,555,494
Accrued interest receivable......................... 6,257,386 6,257,386
Federal Home Loan Bank stock........................ 12,655,000 12,655,000
Financial liabilities:
Demand deposits..................................... 413,521,512 413,521,512
Time deposits....................................... 568,920,615 570,546,040
Federal Home Loan Bank borrowings................... 105,000,000 105,880,000
Off-balance sheet financial instruments.............. -- --
The fair value of loans receivable 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 net of allowance of approximately $4.7 million was not estimated, and
therefore is included in estimated fair value at carrying amount because it is
not practicable to reasonably assess the credit adjustment that would be
applied in the marketplace for such loans. The fair value of mortgage-backed
securities 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 and Federal Home Loan Bank
borrowings 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 counterparties. 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 counterparties at the
reporting date. The unrealized gain or loss for off-balance sheet items is not
significant.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997. 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.
S-16
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
3. LOANS RECEIVABLE AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loans receivable consisted of the following at December 31, 1997:
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences.................. $409,009,512
Collateralized by other properties............................... 38,749,475
Construction loans............................................... 18,927,643
Other............................................................ 1,507,524
------------
468,194,154
Undisbursed portion of construction loans........................ (6,194,146)
------------
Total first mortgage loans...................................... 462,000,008
Consumer and other loans:
Automobile....................................................... 183,393,741
Savings.......................................................... 7,305,044
Home equity and second mortgage.................................. 10,967,267
Commercial....................................................... 4,403,379
Other............................................................ 29,675,377
------------
Total consumer and other loans.................................. 235,744,808
Deferred loan costs, net.......................................... 124,115
Allowance for loan losses......................................... (4,659,949)
------------
Loans receivable, net........................................... $693,208,982
============
Loans to directors and executive officers totaled $281,929 at December 31,
1997. Such loans are made on substantially the same terms as those for other
loan customers.
The Bank, through its normal lending activity, originates and maintains
loans receivable which are substantially concentrated in its lending territory
(primarily Arkansas and Oklahoma). The Bank'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 Bank and such changes could be significant.
The Bank originates and purchases adjustable rate mortgage loans to hold for
investment. The Bank also originates 15 year and 30 year fixed rate mortgage
loans and sells substantially all new originations of the 30 year loans to
outside investors with servicing retained. Loans held for sale at December 31,
1997, are considered by management to be immaterial. Such loans bear interest
substantially equal to market rates.
The Bank 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 statement of financial
condition. The Bank does not use financial instruments with off-balance sheet
risk as part of its own asset/liability management program or for trading
purposes.
The Bank'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 Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
S-17
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
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
counterparty. Such collateral consists primarily of residential 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 $9,814,300 at December 31, 1997. At December 31, 1997, the Bank
had an outstanding letter of credit to secure the payment of principal and
interest on a $970,000 municipal bond issue to finance the construction of a
nursing home. The letter is collateralized by the Bank's mortgage-backed
securities with an carrying value of approximately $801,000 at December 31,
1997.
4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statement of financial condition. The unpaid principal balances of these loans
at December 31, 1997, are summarized as follows:
Mortgage loans underlying pass-through securities:
FHLMC......................................................... $ 71,297,152
Ginnie Mae.................................................... 150,605,837
Mortgage loan portfolios serviced for other investors......... 17,304,803
------------
Total........................................................ $239,207,792
============
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
processing foreclosures. Loan servicing income is recorded on the accrual
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 Bank held borrowers' escrow balances of approximately
$3,500,000 at December 31, 1997. Of the loans serviced by the Bank at December
31, 1997, approximately $4,834,000 were sold with recourse.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable on loans and mortgage-backed securities
consisted of the following at December 31, 1997:
Loans receivable................................................ $4,095,312
Mortgage-backed securities...................................... 2,162,074
----------
Total.......................................................... $6,257,386
==========
S-18
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
6. MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE
The amortized cost and estimated fair value of pass-through mortgage-backed
securities are summarized as follows at December 31, 1997:
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
------------ ----------- ----------- ------------
Ginnie Mae................... $105,944,794 $2,120,140 $ (1,356) $108,063,578
Fannie Mae................... 174,888,901 1,658,955 (633,797) 175,914,059
FHLMC........................ 80,875,349 1,527,681 (599,841) 81,803,189
------------ ---------- ----------- ------------
Total....................... $361,709,044 $5,306,776 $(1,234,994) $365,780,826
============ ========== =========== ============
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
Ginnie Mae................... $108,063,578 $1,267,022 $ 0 $109,330,600
Fannie Mae................... 175,914,059 1,511,514 (320,863) 177,104,710
FHLMC........................ 81,803,189 1,319,115 (2,120) 83,120,184
------------ ---------- ----------- ------------
Total....................... $365,780,826 $4,097,651 $ (322,983) $369,555,494
============ ========== =========== ============
Mortgage-backed securities with carrying values of approximately
$239,443,000 at December 31, 1997, had adjustable rates.
The carrying value of mortgage-backed securities pledged was approximately
$775,000 for letters of credit, $6,699,000 for treasury, tax and loan
accounts, and $9,544,000 for public fund deposits at December 31, 1997.
7. ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for losses on loans:
BALANCE, JANUARY 7, 1997......................................... $5,058,282
Provision for losses............................................ 2,154,998
Charge-offs, net of recoveries.................................. (2,553,331)
----------
BALANCE, DECEMBER 31, 1997....................................... $4,659,949
==========
8.OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following at December 31,
1997:
Land............................................................ $ 4,897,408
Buildings and improvements...................................... 11,301,694
Furniture and equipment......................................... 3,851,173
-----------
Total.......................................................... 20,050,275
Accumulated depreciation........................................ (2,068,445)
-----------
Office properties and equipment, net........................... $17,981,830
===========
S-19
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
9.DEPOSITS
Deposits consisted of the following at December 31, 1997:
Demand and NOW accounts, including noninterest-bearing
deposits of $70,473,551 in 1997............................. $255,092,537
Money market................................................. 56,981,819
Statement and passbook savings............................... 101,447,156
Certificates of deposit...................................... 568,920,615
------------
Total deposits........................................... $982,442,127
============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $22,873,000 at December 31, 1997.
At December 31, 1997, the scheduled maturities of certificates of deposit are
as follows:
Year ending December 31:
1998........................................................... $426,615,681
1999........................................................... 109,051,452
2000........................................................... 19,395,789
2001........................................................... 3,268,776
2002........................................................... 9,928,328
Thereafter..................................................... 660,589
------------
Total....................................................... $568,920,615
============
Interest expense on deposits for the period ended December 31, 1997, is
summarized below:
Demand, NOW, money market and statement and passbook savings.... $ 8,135,897
Certificates accounts........................................... 30,543,295
Early withdrawal penalties...................................... (245,273)
-----------
Total interest expense on deposits.......................... $38,433,919
===========
At December 31, 1997, the Bank had pledged mortgage-backed securities with a
carrying value of approximately $9,544,000 as collateral for public fund
deposits.
10.FEDERAL HOME LOAN BANK BORROWINGS
The Bank had advances from the FHLB as follows at December 31, 1997:
Weighted
Average
Interest
Rate Advances
-------- ------------
Maturing during year ending December 31:
1998................................................. 5.19% $ 15,000,000
1999................................................. 6.28% 30,000,000
2000................................................. 6.33% 30,000,000
2001................................................. 6.39% 30,000,000
------------
Total............................................. $105,000,000
============
S-20
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
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.
11.REGULATORY MATTERS
The Bank is subject to various regulatory requirements administered by the
federal banking agencies. 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) to risk
weighted assets (as defined). Management believes, as of December 31, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
The most recent notification from the Office of Thrift Supervision ("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 Bank's actual capital amounts and ratios are also presented in the table
(amounts in thousands):
Required To
Be
Categorized
As Well
Capitalized
Required For Under Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 1997:
Tangible capital to adjusted total
assets........................... $87,861 7.40% $17,805 1.50% N/A N/A
Core capital to adjusted total
assets........................... $87,861 7.40% $35,609 3.00% $59,349 5.00%
Total capital to risk weighted
assets........................... $92,424 15.69% $47,119 8.00% $58,899 10.00%
Tier I capital to risk weighted
assets........................... $87,861 14.92% N/A N/A $35,340 6.00%
S-21
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
12.REAL ESTATE OPERATIONS
Income from real estate operations consisted of the following for the period
from January 7, 1997 to December 31, 1997:
Rental income, net................................................. $400,505
Recognized net loss on sales of real estate........................ (138,745)
--------
Income from real estate operations, net........................ $261,760
========
13.RETIREMENT BENEFITS
NationsBank provides a noncontributory defined benefit pension plan which
covers substantially all employees of NationsBank and its subsidiaries.
Pension benefits are based upon the employee's length of service and
compensation during the final years of employment. During the period from
January 7, 1997 to December 31, 1997, the Bank recognized $114,480 of cost
under the NationsBank plan. NationsBank also provides postemployment life and
contributory medical benefits to retired employees of NationsBank and its
subsidiaries including the Bank. NationsBank includes Bank employees in its
recorded liability. Amounts paid to NationsBank and costs recognized by the
Bank related to these benefits during 1997 were not significant.
14.INCOME TAXES
The income tax provision for the period from January 7, 1997 to December 31,
1997, consists of the following:
Current:
Federal....................................................... $ 9,984,211
State......................................................... 995,148
-----------
Total current provision.................................... 10,979,359
Deferred tax benefit........................................... (1,788,123)
-----------
Income tax provision....................................... $ 9,191,236
===========
A reconciliation of federal income tax expense on pre-tax income at the
statutory rate with income tax expense reported is as follows:
Tax at the statutory rate....................................... $7,039,593
State income taxes, net of federal benefit...................... 991,484
Non-deductible goodwill......................................... 1,173,876
Other, net...................................................... (13,717)
----------
Income tax provision........................................ $9,191,236
==========
The Bank is permitted under the Internal Revenue Code to deduct an annual
addition to a reserve for bad debts in determining taxable income, subject to
certain limitations. This addition differs from the bad debt expense used for
financial reporting purposes.
S-22
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
As of December 31, 1997, the Bank's deferred tax asset account was comprised
of the following:
Deferred tax assets:
Intangible assets............................................... $4,258,626
Investment securities........................................... 1,047,905
Fixed assets.................................................... 342,595
Other, net...................................................... 7,157
----------
Total deferred tax assets.................................... 5,656,283
Deferred tax liabilities:
Mortgage-backed securities...................................... 1,887,334
Reserve for loan losses......................................... 1,589,812
Other, net...................................................... 373,660
----------
Total deferred tax liabilities............................... 3,850,806
----------
Net deferred tax asset....................................... $1,805,477
==========
The Bank files a consolidated federal income tax return with NationsBank.
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.
15.COMMITMENTS
The Bank leases branch locations under operating leases with remaining terms
ranging from 2 to 12 years. These leases all contain renewal options with
varying periods. Rental expense amounted to approximately $546,442 for the
period from January 7, 1997 to December 31, 1997. A schedule of future minimum
rental payments under operating leases, as of December 31, 1997, follows:
Year ending December 31:
1998............................................................. $ 525,037
1999............................................................. 432,834
2000............................................................. 353,791
2001............................................................. 328,947
2002............................................................. 160,381
Thereafter....................................................... 567,503
----------
Total......................................................... $2,368,493
==========
16.LOAN SERVICING RIGHTS
Following is a summary of the changes in purchased loan servicing rights:
BALANCE, JANUARY 7, 1997......................................... $2,268,198
Amortization.................................................... 276,968
----------
BALANCE, DECEMBER 31, 1997....................................... $1,991,230
==========
S-23
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the period from January 7, 1997 to December 31, 1997
Under OTS regulations, the lower of the amortized carrying value, 90% of the
fair market value or 90% of the original cost of purchased mortgage servicing
rights may be included in calculating capital standards. The amount to be
included as regulatory capital cannot exceed 50% of tangible capital.
17.CONTINGENCIES
In the normal course of the banking business, there are various commitments,
legal proceedings and contingencies which are not reflected in the
accompanying consolidated financial statements. In the opinion of management,
no material losses are expected to result from any such commitments, legal
proceedings or contingencies.
At periodic intervals, both the OTS and the FDIC routinely examine the
Bank's financial statements as part of their legally prescribed oversight of
the savings and loan industry. Based on these examinations, the regulators can
direct that the Bank's financial statements be adjusted in accordance with
their findings. A future examination by the OTS or the FDIC could include a
review of certain transactions or other amounts reported in the Bank's 1997
financial statements. In view of the uncertain regulatory environment in which
the Bank operates, the extent, if any, to which a forthcoming regulatory
examination may ultimately result in adjustments to the 1997 consolidated
financial statements cannot presently be determined.
The Bank's asset base is exposed to risk including the risk resulting from
changes in interest rates, market values of collateral for borrowings and
changes in the timing of cash flows. The Bank analyzes the effect of such
risks by considering the mismatch of the maturities of its assets and
liabilities in the current interest rate environment and the sensitivity of
assets and liabilities to changes in interest rates. Based on such analyses at
December 31, 1997, the Bank's management has considered the effect of
significant increases and decreases in interest rates and believes such
changes, if they occurred, would be manageable and would not affect the
ability of the Bank to hold its assets to maturity. However, the Bank is
exposed to significant market risk in the event of significant and prolonged
interest rate increases because certain fixed rate assets and certain variable
rate assets that are capped are funded with short-term liabilities.
* * * * * *
S-24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999
Commission File No. 0-25239
----------------
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Sequentially
Numbered
Exhibits Description Page
-------- ----------- ------------
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.
EXHIBIT INDEX
Sequentially
Numbered
Exhibits Description Page
-------- ----------- ------------
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 14 to the financial statements
on 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.
27 -- Financial Data Schedules
(b) Reports on Form 8-K. Registrant's Current Reports on Form 8-K dated
November 3, 1999 and November 22, 1999, and incorporated herein by reference.