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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

For the Fiscal Year Ended December 31, 2002

Commission File #0-25239

SUPERIOR FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

16101 LaGrande Drive, Suite 103, Little Rock, Arkansas 72223

(Address of principal executive offices)

(501) 324-7282

(Telephone No.)

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)

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 5,771,876 shares of voting stock of the registrant held by non-affiliates as of February 28, 2003 based on the average bid and ask prices of $18.06 per share for Common Stock was approximately $104,240,081. (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 February 28, 2003 were 8,416,209.

DOCUMENTS INCORPORATED BY REFERENCE

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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:

This report contains “forward-looking statements” within the meaning of the federal securities laws. The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among other things, the following possibilities: (i) deposit attrition, customer loss, or revenue loss in the ordinary course of business; (ii) increases in competitive pressure in the banking industry; (iii) the Company’s ability to attract new business through merger related customer dislocation is less than expected; (iv) changes in the interest rate environment which reduce margins; (v) general economic conditions, either nationally or regionally, that are less favorable than expected, resulting in, among other things, a deterioration in credit quality, vendor representations, technological advancements, and economic factors including liquidity availability; (vi) changes which may occur in the regulatory environment; (vii) a significant rate of inflation (deflation); (viii) changes in the value of the Company’s purchased mortgage portfolio; (ix) adverse developments in litigation pending against the Company; (x) impairment of goodwill under applicable accounting principles; and (xi) changes in the securities markets. When used in this Report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “may,” “might,” “outlook,” and “anticipates,” and similar expressions as they relate to the Company (including its subsidiaries), or its management are intended to identify forward-looking statements.

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PART I

Item 1.    Business

General

The Registrant, Superior Financial Corp. (“the Company”) is a unitary savings and loan holding company organized under the laws of Delaware and headquartered in Little Rock, Arkansas. The Company was organized in 1997 as SFC Acquisition Corp. for the purpose of acquiring Superior Bank (formerly Superior Federal Bank, F.S.B., the “Bank”), a federally chartered thrift institution, from NationsBank, N.A. (now Bank of America). The acquisition was consummated on April 1, 1998. The Bank was founded in 1934 in Fort Smith, Arkansas. In 1992, the Bank was acquired by Boatmen’s Bancshares, Inc. (“Boatmen’s”). In turn, Boatmen’s was acquired by NationsBank in 1997. The Bank has expanded through de novo growth and acquisitions to 68 full service branch and loan production offices concentrated in Fort Smith and Little Rock, Arkansas, eastern Oklahoma and Alabama. At December 31, 2002, the Company had consolidated assets of $1.73 billion, stockholders’ equity of $132.9 million, deposits of $1.21 billion and gross loans of $1.09 billion.

Financial Products and Services

The Company provides a wide range of retail and small business services including noninterest bearing and interest bearing checking, savings and money market accounts, certificates of deposit and individual retirement accounts. In addition, the Company offers an extensive array of real estate, consumer, small business and commercial real estate loan products. Other financial services include investment services, automated teller machines, debit card, credit related life and disability insurance, safety deposit boxes, internet banking, bill payment and telephone banking. The Company serves approximately 190,000 households with average noninterest revenue of approximately $150 per household annually. The Bank attracts primary banking relationships through the customer-oriented service environment created by the Bank’s personnel combined with competitive financial products.

Asset Quality

The successful implementation of the Company’s business strategy requires an emphasis on maintaining asset quality. The Board of Directors and senior management regularly monitor asset quality with staff support provided by a dedicated loan review function. In addition, lending units are supported by credit scoring models and centralized review.

As of December 31, 2002, the Company’s allowance for loan losses was approximately 1.28% of total loans. The Company has procedures designed to achieve rapid resolution of nonperforming loans and prompt and efficient liquidation of real estate, automobiles and other forms of collateral.

Subsidiaries

The Company’s only subsidiaries are the Bank and Superior Financial Statutory Trust I (the “Superior Statutory Trust”), a Connecticut business trust. The Superior Statutory Trust was formed for the purpose of issuing trust preferred securities. This transaction is described on page 31 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Guaranteed Preferred Beneficial Interest in the Company’s Subordinated Debentures.” The Bank owns several subsidiaries, including Superior Financial Services, Inc., an Arkansas corporation, which acts as an investment advisor and sells certain investment products, as well as owning a second-tier subsidiary, Southwest Protective Life Insurance Company, which sells consumer loan credit life and disability insurance to consumer loan borrowers of the Bank and Superior Finance Company, a consumer finance company.

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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.

The competitive environment for both the Company and the Bank may be materially affected by the enactment of the Gramm-Leach-Bliley Financial Services Modernization Act (the “GLB Act”). This law modifies or eliminates many barriers between investment banking, commercial banking and insurance underwriting and sales. See “—Certain Regulatory Considerations.” These changes in the law may create greater competition for the Company and its subsidiaries, including the Bank, by increasing the number and types of competitors and by encouraging increased consolidation within the financial services industry.

Employees

As of December 31, 2002, the Company had 779 full-time employees and 111 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.

Company website

The Company has a website address, www.superiorfinancialcorp.com, which provides the following information free of charge to stockholders and the public as soon as reasonably practicable after the materials are filed electronically with the Securities and Exchange Commission:

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.

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Regulation of Savings and Loan Holding Companies

Holding Company Activities.    The Company currently operates as a unitary savings and loan holding company by virtue of its direct ownership of the Bank and the Bank’s status as a qualified thrift lender. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions under the Home Owners Loan Act (the “HOLA”). If the Company acquires control of another savings association as a separate subsidiary other than in a supervisory acquisition, it would become a multiple savings and loan holding company. There generally are more restrictions on the activities of a multiple savings and loan holding company than on those of a unitary savings and loan holding company. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not an insured association shall commence or continue for more than two years after becoming a multiple savings and loan holding company or subsidiary thereof any business activity other than: (i) furnishing or performing management services for a savings association subsidiary, (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a savings association subsidiary, (iv) holding or managing properties used or occupied by a savings association subsidiary, (v) acting as trustee under deeds of trust, (vi) conducting 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) conducting those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the OTS by regulation, prohibits or limits such activities for savings and loan holding companies. A savings and loan holding company must obtain approval of the OTS before engaging in the activities described in (vii) above.

Affiliate Restrictions.    Transactions between a savings association and its “affiliates” are subject to quantitative and qualitative restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association’s holding company and companies that are under common control with the savings association. The Federal Reserve has adopted a regulation (Regulation W) that combines the Federal Reserve’s interpretations relating to sections 23A and 23B. Regulation W becomes effective on April 1, 2003. The OTS has adopted an interim final rule on December 20, 2002, that makes Regulation W applicable to savings institutions, subject to certain exceptions.

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 stock and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital stock 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; an 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 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, nor purchase or invest in securities of an affiliate other than shares of a subsidiary; nor purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings association or its subsidiary to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit.

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

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records that reflect affiliate transactions in reasonable detail and provide that certain classes of savings associations may be required to give the OTS prior notice of affiliate transactions.

Regulation of Federal Savings Institutions

Regulatory System.    The activities of federal savings institutions are governed by the HOLA and, in certain respects, the Federal Deposit Insurance Act (the “FDIA”) and the regulations issued by the OTS and the FDIC to implement these statutes. These laws and regulations delineate the nature and extent of the activities in which federal savings associations may engage. Lending activities and other investments must comply with various statutory and regulatory capital requirements. In addition, the Bank’s relationship with its depositors and borrowers is also regulated to a great extent, especially in such matters as the ownership of deposit accounts and the form and content of the Bank’s mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the OTS and the FDIC to review the Bank’s compliance with various regulatory requirements. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.

Regulatory Capital Requirements.    OTS capital regulations require savings institutions to satisfy minimum capital standards: risk-based capital requirements, a leverage requirement and a tangible capital requirement. Savings institutions must meet each of these standards in order to comply 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, the most highly-rated savings institutions are required to maintain core capital equal to a minimum of 3% of adjusted total assets. All other savings institutions are required to maintain core capital equal to a minimum of 4% of adjusted total assets. (In addition, under the prompt corrective action provisions of the OTS regulations, all but the most highly-rated institutions must maintain a minimum leverage ratio of 4% in order to be adequately capitalized. See “—Prompt Corrective Action.”) A savings institution is also required to maintain tangible capital in an amount at least equal to 1.5% of its adjusted total assets.

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, OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings institutions, upon a determination that the savings institution’s capital is or may become inadequate in view of its circumstances. The Bank is not currently subject to any such individual minimum regulatory capital requirement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Liquidity, and Capital Resources.”

Certain Consequences of Failure to Comply with Regulatory Capital Requirements.    A savings institution’s failure to maintain capital at or above the minimum capital requirements may be deemed an unsafe and unsound practice and may subject the savings institution to enforcement actions and other proceedings. Any savings institution not in compliance with all of its capital requirements is required to submit a capital plan that addresses the institution’s need for additional capital and meets certain additional requirements. The savings institution must certify that, among other things, while the capital plan is being reviewed by the OTS, the savings institution 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

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Director’s notice of disapproval. In addition, the OTS, through a capital directive or otherwise, may restrict the ability of a savings institution not in compliance with the capital requirements to pay dividends and may require such a bank to take one or more of certain corrective actions, including, without limitation: (i) increasing its capital to specified levels, (ii) reducing the rate of interest that may be paid on savings accounts, (iii) limiting receipt of deposits to those made to existing accounts, (iv) ceasing issuance of new accounts of any or all classes or categories except in exchange for existing accounts, (v) ceasing or limiting the purchase of loans or the making of other specified investments, and (vi) limiting operational expenditures to specified levels.

Prompt Corrective Action.    Under Section 38 of the FDIA, as added by the FDIC Improvement Act of 1991 (“FDICIA”), each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The prompt corrective action regulations of the OTS require certain mandatory actions and authorize certain other discretionary actions to be taken by the OTS against a savings institution that falls within certain undercapitalized capital categories specified in the regulation.

The regulations establish five categories of capital classification: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the regulations, the ratio of total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and the leverage ratio are used to determine an institution’s capital classification. Under the prompt corrective action regulations of the OTS, an institution shall be deemed to be (i) “well-capitalized” if it has total risk-based capital ratio 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 capital directive requiring it 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%. Under certain circumstances, the OTS may reclassify a “well-capitalized” institution as “adequately-capitalized” and may require, under certain circumstances, an “adequately-capitalized” institution or an “undercapitalized” institution to comply with certain supervisory actions as if it were in the next lower category (except that the OTS may not reclassify a “significantly-undercapitalized” institution as “critically undercapitalized”).

At December 31, 2002, 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, the ability to: (i) terminate a savings institution’s deposit insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension, removal, prohibition and criminal proceedings against institution-affiliated parties and (iv) assess substantial civil money penalties. As part of a cease-and-desist order, the agencies may require a savings institution or an institution-affiliated party to take affirmative action to correct conditions resulting from that party’s actions, including, for example, to make restitution or provide reimbursement, indemnification or guarantee against loss; to restrict the growth of the institution; and to rescind agreements and contracts.

Capital Distribution Regulation.    In addition to the prompt corrective action restriction on paying dividends, OTS regulations limit certain “capital distributions” by OTS-regulated savings institutions. Capital distributions are defined to include, in part, certain distributions of cash or other property to the owners of such

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institution, payments for stock repurchases and redemptions, and other distributions charged against the capital accounts of a savings institution.

Under OTS regulations, an institution must file an application with the OTS in order to obtain OTS approval of a proposed capital distribution under the following circumstances: (i) the institution is not eligible for expedited treatment under applicable OTS regulations, (ii) the total amount of the institution’s capital distributions, including the proposed capital distribution, for the applicable calendar year exceeds its net income for that year to date plus its retained net income for the preceding two years, (iii) the institution would not be at least adequately capitalized following the distribution, or (iv) the proposed capital distribution would violate a prohibition contained in any applicable statute, regulation or agreement between the institution and the OTS or the FDIC or violate a condition imposed on it in an OTS-approved application or notice. If an institution is not required to file an application prior to a capital distribution, but one of the following conditions is met, the institution must file a notice with the OTS prior to the proposed capital distribution: (i) the institution would not be well capitalized following the distribution, (ii) the proposed capital distribution would reduce the amount of or retire any part of the institution’s common or preferred stock or certain debt instruments such as notes or debentures included in capital, or (iii) the institution is a subsidiary of a savings and loan holding company. If none of the application requirements are met and none of the notice requirements are met, the institution is not required to file a notice or an application with the OTS before making a capital distribution.

Qualified Thrift Lender Test.    All savings associations are required to meet a qualified thrift lender (“QTL”) test to avoid certain restrictions on their operations. A savings institution that fails to become or remain a QTL shall either become one or more banks or be subject to the following restrictions on its operations: (i) the association may not make any new investment or engage in new activities that would not be permissible for national banks; (ii) the association may not establish any new branch office where a national bank located in the savings institution’s home state would not be able to establish a branch office; and (iii) the payment of dividends by the association shall be subject to the statutory and regulatory dividend restrictions applicable to national banks. Beginning three years after the date on which the savings institution ceases to be a QTL, the savings institution would also be prohibited from retaining any investment or engaging in any activity not permissible for a national bank. In addition, within one year of the date on which a savings association controlled by a company ceases to be a QTL, the company must register as a bank holding company and become subject to the rules applicable to such companies. A savings institution may re-qualify as a QTL if it thereafter complies with the QTL test.

The QTL test currently requires that either an institution qualify as a domestic building and loan association under the Internal Revenue Code or that at least 65% of its “portfolio assets” (as defined) consist of certain housing and consumer-related assets on a monthly basis in nine out of every 12 months. Assets that qualify without limit for inclusion as part of the 65% requirement are loans made to purchase, refinance, construct, improve or repair domestic residential housing and manufactured housing; home equity loans; mortgage-backed securities (where the mortgages are secured by domestic residential housing or manufactured housing); Federal Home Loan Bank stock; direct or indirect obligations of the FDIC; and loans for educational purposes, loans to small businesses and loans made through credit cards or credit card accounts. In addition, the following assets, among others, may be included in meeting the test subject to an overall limit of 20% of the savings institution’s portfolio assets: 50% of residential mortgage loans originated and sold within 90 days of origination, 100% of consumer loans and 100% of stock issued by the Federal Home Loan Mortgage Corporation or FNMA. “Portfolio assets” consist of total assets minus the sum of (i) goodwill and other intangible assets, (ii) property used by the savings institution to conduct its business and (iii) liquid assets up to 20% of the institution’s total assets. At December 31, 2002, 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

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provide the information each agency may, by regulation, require. In certain circumstances, written approval of the OTS must be obtained prior to acquiring or establishing a subsidiary or engaging in a new activity in an existing subsidiary. Savings associations also must conduct the activities of subsidiaries in accordance with existing regulations and orders.

The OTS may determine that the continuation by a savings association of its ownership control of, or its relationship to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the association or is inconsistent with sound banking practices or with the purposes of the FDIA. Based upon that determination, the FDIC or the OTS has the authority to order the savings association to divest itself of control of the subsidiary. The FDIC also may determine by regulation or order that any specific activity poses a serious threat to the Savings Association Insurance Fund (the “SAIF”). If so, it may require that no SAIF member engage in that activity directly.

FDIC Assessments.    The FDIC is an independent federal agency established originally to insure the deposits of federally insured banks, up to prescribed statutory limits, and to preserve the safety and soundness of the banking industry. The FDIC maintains two separate insurance funds: the Bank Insurance Fund (the “BIF”) and the SAIF. As insurer of the Bank’s deposits, the FDIC has examination, supervisory and enforcement authority over all savings associations. The Bank’s deposit accounts are insured by the FDIC under the SAIF to the maximum extent permitted by law. The Bank pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions.

Under FDIC regulations, institutions are assigned to one of three capital groups for insurance premium purposes—“well capitalized,” “adequately capitalized” and “undercapitalized.” 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. Assessment rates vary depending upon the assessment classification. In addition, regardless of the potential risk to the insurance fund, federal law requires the FDIC to establish assessment rates that will maintain each insurance funds’ ratio of reserves to insured deposits at 1.25%. During 2002 and for the first semiannual assessment period of 2003, assessment rates for both SAIF-insured institutions and BIF-insured institutions ranged from 0 cents per $100 of assessable deposits for well-capitalized institutions with minor supervisory concerns to 27 cents per $100 of assessable deposits for undercapitalized institutions with substantial supervisory concerns.

In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured deposits to be paid to the Finance Corporation (“FICO”) to service FICO debt incurred in the 1980s. The FICO assessment rate is adjusted quarterly. Before 2000, the FICO assessment rate for SAIF-insured deposits was five times higher than the rate for BIF-insured deposits. The average annual assessment rate in 2002 was 1.75 cents per $100 of assessable deposits for both SAIF-insured deposits and BIF-insured deposits. For the first quarter of 2003, the FICO assessment rate for such deposits will be 1.68 cents per $100 of assessable deposits.

The Bank’s assessment expense for the year ended December 31, 2002 equaled $216,000.

Community Reinvestment Act and the Fair Lending Laws.    Savings institutions have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OTS to help meet the credit needs of their communities, including low-and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the “Fair Lending Laws”) prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities, and failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS as well as other federal regulatory agencies and the Department of Justice.

Safety and Soundness Guidelines.    The OTS and other federal banking agencies have established guidelines for safety and soundness, addressing operational and managerial as well as compensation matters for

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insured financial institutions. Institutions failing to meet these standards are required to submit compliance plans to their appropriate federal regulators. The OTS and the other agencies have also established guidelines regarding asset quality and earnings standards for insured institutions.

Change of Control.    Subject to certain limited exceptions, no company or person may acquire control of a savings association without the prior approval of the OTS. Any company that acquires control of a savings association becomes a savings and loan holding company subject to extensive registration, examination and regulation by the OTS. Conclusive control exists, among other ways, when an acquiring party acquires more than 25% of any class of voting stock of a savings association or savings and loan holding company or controls in any manner the election of a majority of the directors of the company. In addition, a rebuttable presumption of control exists if, among other things, a person acquires more than 10% of any class of a savings association’s voting stock (or 25% of any class of stock) and, in either case, any of certain additional control factors exist.

Privacy.    In 2000, the federal banking regulators issued final regulations implementing certain provisions of the GLB Act governing the privacy of consumer financial information. The regulations, which were effective November 13, 2000, but were not mandatory until July 1, 2001, limit the disclosure by financial institutions such as the Bank of nonpublic personal information about individuals who obtain financial products or services for personal, family or household purposes. Subject to certain exceptions allowed by law, the regulations cover information sharing between financial institutions and nonaffiliated third parties. More specifically, the regulations require financial institutions to (i) provide initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal financial information to nonaffiliated third parties and affiliates; (ii) provide annual notices of their privacy policies to their current customers; and (iii) provide a reasonable method for consumers to “opt out” of disclosures to nonaffiliated third parties.

GLB Act.    On November 12, 1999, the GLB Act was signed into law. The primary purpose of the GLB Act is to eliminate barriers between investment banking and commercial banking, permitting, with certain limitations, the affiliation of banks, securities firms, insurance companies and other financial service providers. Generally, the GLB Act: (i) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (ii) provides a uniform framework for the activities of banks, savings institutions and their holding companies, (iii) broadens the activities that may be conducted by and through banks and bank holding companies, (iv) provides an enhanced framework for protecting the privacy of consumers’ information, (v) adopts a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB System, (vi) modifies the laws governing the implementation of the Community Reinvestment Act, and (vii) addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

In particular, the GLB Act places restrictions on the activities of certain savings and loan holding companies. More specifically, unitary savings and loan holding companies in existence on May 4, 1999, or which became unitary savings and loan holding companies pursuant to an application filed with the OTS on or before May 4, 1999, are unaffected by the activities restrictions contained in the GLB Act as long as such savings and loan holding companies continue to meet the definition of a unitary savings and loan holding company. See “—Holding Company Activities.” All other savings and loan holding companies (“Restricted Holding Companies”) are permitted to engage only in certain financially-related activities including, but not limited to, activities permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, as amended, and activities permitted for financial holding companies as defined under the GLB Act. The Company has been a unitary savings and loan holding company since its acquisition of the Bank on April 1, 1998.

In addition to imposing the foregoing activities restrictions on Restricted Holding Companies, the GLB Act also prohibits a company from acquiring control after May 4, 1999 of a savings association, such as the Bank, unless such company engages only in activities that are permitted for Restricted Holding Companies.

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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 55 branch banks and 13 loan production offices located in central and northwestern Arkansas, Oklahoma and Alabama as follows:

The Company owns 45 offices and leases the remaining 23 locations. The leases have a range of terms and renewal options. Two of these facilities are multi-story, multi-tenant offices. The Superior Tower located in Fort Smith consists of 95,000 square feet and is 50% occupied by the Company. The other facility located in downtown Little Rock contains 45,000 square feet and is 53% occupied by the Company.

Item 3.    Legal Proceedings

Bauman Litigation

In August 2001, the Company began an investigation of an apparent defalcation. As a result of the investigation, a mid-level manager of the Bank was terminated. The results of the investigation also implicated the Bank’s controller. On November 2, 2001, the controller delivered to a director of the Company a letter in which he alleged that management had intentionally misstated the Company’s financial statements and proposed to file with the Securities and Exchange Commission materially inaccurate financial information with regard to a technology conversion then in progress and a purchased mortgage portfolio.

Also on November 2, 2001, the terminated mid-level manager filed a suit styled Bauman, et al v. Superior Financial Corporation, et al., Civ. No. 4-01-CV-00756G8; U.S. District Court, Eastern District of Arkansas, Western Division (the “Bauman Suit”). The suit, which names the Company, two of its executive officers and the Company’s independent auditors as defendants, alleges that, in 2000 and 2001, the Company had overstated income in press releases and financial reports, and thus improperly inflated its stock price. The complaint seeks undetermined damages for shareholders who purchased stock in that period.

On November 5, 2001, the Board of Directors created a Special Committee to investigate the allegations contained in the controller’s letter. The Special Committee was comprised of two outside directors who were not also members of the Audit Committee and was authorized to conduct a thorough investigation with the assistance of independent outside counsel. The Special Committee promptly conducted its investigation, which included,

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among other things, extensive interviews with management, the Company’s independent auditors and the controller. On November 14, 2001, the Special Committee reported to the full Board and the independent auditors its conclusion that the controller’s allegations were not supported by the facts established during the investigation.

As a result of the continued investigation into the apparent defalcation, the Bank terminated the employment of the controller on December 3, 2001. Thereafter, on December 20, 2001, the Bank filed suit in the action styled, Superior Bank v. Bauman, et al., Case No. CV-2001-1089 in the Circuit Court for Sebastian County, Arkansas, Fort Smith Division (the “Superior Bank Suit”). The complaint alleges that the mid-level manager had embezzled from the Bank and that the controller had, among other things, breached his fiduciary duties by permitting the embezzlement to occur. On December 28, 2001, the defendants filed answers and counterclaims against the Bank alleging defamation and seeking damages in unstated amounts.

On January 4, 2002, the same attorney who filed the Bauman Suit filed in the same court a case styled Kashima v. Superior Financial Corp., et al., Cir. No. 4-02-CV-007SWW (the “Kashima Suit”). The complaint sets forth essentially the same allegations and seeks the same relief against the same defendants as those set forth and sought in the Bauman Suit. On February 4, 2002, the plaintiffs’ attorney filed a suit styled Cottrell v. Gardner, et al., Case No. CV-2002-121(I) in the Circuit Court for Sebastian County, Arkansas, Fort Smith Division. The case purports to be a shareholders’ derivative action and seeks recovery on behalf of the Company against the members of the Board of Directors for damages arising from alleged falsification of the Company’s financial statements. The allegations essentially repeat those advanced in the Bauman Suit and the Kashima Suit.

In February 2002, the Special Committee obtained access to additional information and renewed its investigation. On February 13, 2002, the Special Committee delivered to the full Board of Directors a supplemental report in which the Special Committee concluded that its original conclusions remained unchanged and that it found no evidence of any illegal activity, conspiracy, or bad faith on the part of management of the Company with respect to the matters subject to the investigation.

On March 4, 2002, the federal district court for the Eastern Division of Arkansas consolidated Bauman et al v. Superior Financial Corp., et al., Civ No. 4-01-CV-0075668 and Kashima v. Superior Financial Corp., et al., Civ No. 4-02-CV007SWW into a single action encaptioned Teresa Bauman et al. v. Superior Financial et al., Civ No. 4-01-CV756GH (the “Consolidated Suit”). On April 18, 2002, the Plaintiffs in the Consolidated suit filed a Consolidated Complaint, which added several individual defendants. On July 10, 2002, the Plaintiffs in the Consolidated Suit filed a second Consolidated Complaint, which added five state law claims against the Company and the individual defendants, consisting of two claims under the Arkansas Deceptive Trade Practice Act and claims for common law fraud, constructive fraud and breach of fiduciary duty. It is not expected that the Company’s liability, if any, would increase as a result of the newly added claims. On August 9, 2002, the Company filed a motion to dismiss the Consolidated Suit in its entirety.

On December 19, 2002, the court entered an order staying the action until March 20, 2003, to provide the parties time to discuss a possible settlement of the Consolidated Action. A mediation was held on January 29, 2003 and another mediation is scheduled for March, 2003. It is not currently known whether efforts to settle the Consolidated Action will be successful.

The Bank intends to pursue its claims vigorously, and the Company intends to defend the claims against it with equal vigor. At this early stage of litigation, the Bank and the Company are unable to predict the outcome of the litigation and its effect, if any, on the financial condition of the Company or Bank.

The Company’s Certificate of Incorporation and Bylaws contain provisions for the indemnification of officers and directors under certain circumstances. Claims arising under the litigation described above may entitle officers and directors to indemnification under those provisions.

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Mackey Litigation

On May 1, 2000, George S. Mackey and Jones & Mackey Construction Company, LLC filed a Complaint in the Circuit Court of Pulaski County, Arkansas against Superior Bank, a wholly owned subsidiary of the Company. The Complaint alleges a breach of a commitment to lend and related claims, including defamation. On May 20, 2002, after the conclusion of the trial and jury deliberation, the jury returned a verdict in favor of Jones & Mackey Construction Company, LLC in the amount of $5,796,000. The damages were specified as $410,000 for breach of contract, $211,000 for detrimental reliance, $175,000 for defamation and $5,000,000 in punitive damages related to the claim of defamation.

Superior Bank filed an appropriate post-trial motion seeking to set aside or reduce the amount of the verdict. The Bank maintained, among other things, that a single verdict imposing liability for both breach of contract and detrimental reliance was fatally inconsistent and that there was insufficient evidence in the record at trial to support a finding of defamation underlying the award of punitive damages. The Bank also maintained that the punitive damages award was excessive.

On July 22, 2002, the trial court ruled on the motion and overturned the verdict imposing liability for detrimental reliance. The Bank has appealed the remainder of the verdict. On appeal, the Bank raised the issues presented in its post-trial motion as well as numerous additional errors the Bank contends the trial court committed.

The outcome of the appeal is too uncertain to predict with any assurance. If the judgment as entered is affirmed on appeal, discharge of a judgment of $5,585,000, plus judicial interest, could have a materially adverse effect on the Company’s financial condition and operating results. However, the Bank has entered into discussions with its insurance carrier to determine the extent of coverage available in the event the verdict is affirmed on appeal. As of September 30, 2002, the Bank had paid $276,000 and accrued an additional $250,000 in professional fees and costs for a total of $526,000, which exceeds the Company’s $500,000 insurance deductible. The Bank has not recorded additional liability for the damages awarded in the initial jury verdict.

The Goodwill Litigation

As a result of the acquisition of the Bank from Bank of America (formerly NationsBank), the Company succeeded to Bank of America’s right and interest in the proceedings brought under the caption Superior Federal Bank, F.S.B. vs. United States (No. 95-769C) (the “Goodwill Litigation”). The Goodwill Litigation relates to claims for damages by the Bank against the United States. Under the terms of the acquisition, the Company 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). On January 3, 2003, the parties agreed to a stipulation of “Dismissed with Prejudice,” with each party agreeing to bear its own legal costs.

General Litigation

The Company is involved in various lawsuits and litigation matters on an ongoing basis as a result of its day-to-day operations. However, the Company does not believe that any of these or any threatened lawsuits and litigation matters will have a materially adverse affect on the Company or its business.

Item 4.    Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of 2002 to a vote of the stockholders, through solicitation of proxies or otherwise.

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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 December 31, 2002, the Company had outstanding 8,420,444 shares of Common Stock with 1,156 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 and dividends paid per share for each quarter of 2002 and 2001 In 2002, the Company declared cash dividends of $0.10 per share on March 20, June 28, and September 26, and $0.125 on December 16. In 2001, the Company declared a dividend of $0.10 per share on November 14, payable in cash or Common Stock.

Equity compensation plan information is provided in the following table:

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Item 6.    Selected Consolidated Financial Data

FINANCIAL INFORMATION

SELECTED CONSOLIDATED FINANCIAL DATA

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Superior Financial Corp. (the “Company” or “Superior”) is a unitary savings and loan holding company offering full service banking primarily in Arkansas and Oklahoma. The Company was organized in 1997 as SFC Acquisition Corp. for the purpose of acquiring Superior Bank (formerly Superior Federal Bank, F.S.B., the “Bank”). On April 1, 1998 the Company completed a private placement, and the proceeds were used to acquire, in a purchase transaction, 100% of the common stock of the Bank. Prior to the acquisition of the Bank on April 1, 1998, the Company did not have any operations, other than the costs associated with the private placement offering. The Bank is a federally chartered savings association. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company’s consolidated balance sheets and statements of operations. This section should be read in conjunction with the Company’s consolidated financial statements and accompanying notes and other detailed information contained in this Annual Report.

The Company’s primary asset is its investment in 100% of the common stock of the Bank and the Company’s operations are funded primarily from the operations of the Bank. The Bank’s operating subsidiaries include Superior Finance Company (“Superior Finance”), a consumer finance company, Superior Financial Services, Inc., a discount brokerage, investment advisory and insurance company, Superior Title Services, and Superior Real Estate Holdings, Inc., a real estate investment trust holding company.

In November 2000, Superior Finance completed the acquisition of four consumer finance offices in north Alabama for approximately $6.6 million in cash, including a premium of approximately $125,000, from Southern Financial, Inc., a Nashville, Tennessee based finance company. The four offices had net loans outstanding of approximately $6.5 million. The acquisition was accounted for under the purchase method of accounting.

In December 2002, the Bank sold its Malvern and Arkadelphia, Arkansas bank branches to Elk Horn Bank and Trust Company. The sale consisted of deposits totaling approximately $30.7 million and associated loans and other assets of an immaterial amount.

Critical Accounting Policies

The significant accounting policies of Superior Financial Corp. and its subsidiaries are provided in Note 1 of the consolidated financial statements. These policies in conjunction with the disclosures presented in the other notes, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. The accounting policies of the Company involving significant estimates or assumptions by management, which have or could potentially have, a material impact on the carrying value of certain assets and liabilities, and also an impact on comprehensive income, are considered critical accounting policies. The Company recognizes that the accounting treatment for loan losses, goodwill impairment, amortization/accretion of premiums/discounts on investments, and accounting for income taxes are considered critical accounting policies.

Accounting for the allowance for loan losses.    Management frequently evaluates the adequacy of the allowance for loan losses and takes into consideration the following factors: the Bank’s past loan loss experience, inherent risks in the loan portfolio, specific problem loans, the ability of the borrower to repay the loan, the estimated value of the collateral securing the loan, and the current local and regional economic and business conditions. Management believes that the current estimates and assumptions have resulted in an allowance that is presented in accordance with accounting principles generally accepted in the United States and reasonably reflects the inherent risk level of the loan portfolio. However, given changes in the economy, increased

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nonperforming loans, changes to the borrowers financial condition, and other factors that impact credit quality, there are no assurances that further increases to the allowance for loan losses might be required.

Accounting for goodwill impairment.    The Company recently enacted SFAS 142, which no longer allows the amortization of goodwill, but requires that goodwill be tested annually for impairment and any resulting impairment be charged to net income in the year of the impairment test. The test used to determine the existence of impairment requires estimates in the resulting calculation of impairment. Since the Company currently has approximately $56.3 million of goodwill on the consolidated balance sheet, any resulting impairment based upon estimates used by management could have a significant impact on the Company’s financial results.

Accounting for the amortization/accretion of premiums/discounts on investments.    The overall return or yield earned on investments depends on the amount of interest collected over the amortization of any premiums or discounts. The premiums and discounts are recognized in income using the level-yield method over the assets remaining lives adjusted for anticipated prepayments. Since these prepayments are frequently impacted by changes in interest rates, the amortization schedule is periodically adjusted for the existing as well as anticipated prepayment activity. This adjustment can result in potential changes to interest earned on this component of the investment portfolio and the resulting interest earned on replacement investment securities, which can potentially have a significant impact on the future financial results of the Company.

Accounting for income taxes.    The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon 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. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax liabilities and the judgments and estimates required for the evaluation are periodically updated based upon changes in business factors and the tax laws.

For the years ended December 31, 2002, 2001 and 2000

Results of Operations

Net income for the year ended December 31, 2002 amounted to $16.0 million resulting in an increase of $3.7 million from $12.3 million reported in 2001. The increase of 30.0% was primarily attributable to an improved net interest margin, growth in the level of interest-earning assets, and growth in the insurance and investment fee-based products offered by the Company. In addition, the Bank recorded a gain on the sale of two retail branches which was partially offset by an increased provision in the fourth quarter. For the year ended December 31, 2002, diluted earnings per share were $1.80, an increase of $0.46 or 34.3% above the level of $1.34 per diluted earnings per share for the year ended December 31, 2001. Return on average assets of 0.93% and return on average equity of 12.91% for the year ended December 31, 2002 improved from the full year 2001 results of 0.74% and 10.45%.

Total assets increased $12.8 million to $1.73 billion at December 31, 2002 from $1.72 billion at December 31, 2001. Investments increased $39.1 million to $413.9 million at December 31, 2002 from $374.8 million at December 31, 2001, while net loans receivable increased by $11.7 million to $1.07 billion at December 31, 2002 from $1.06 billion at December 31, 2001. Within the loan portfolio, commercial loans increased by $17.3 million, or 30.1%, year-over-year due to the Company’s strategic focus, while consumer loans decreased $35.9 million, or 9.7%, year-over-year due to the mild economic recession and the Company’s desire to be less dependent upon the indirect lending market. Also, 1-4 family residential loans increased by $34.0 million, or 8.2%, year-over-year. These changes in the loan portfolio are consistent with the strategic goals of the Company in creating a more balanced and “bank-like” loan portfolio.

Total deposits of $1.2 billion at December 31, 2002 declined by $3.8 million from December 31, 2001. After adjusting for the deposits of $30.0 million associated with the sale of two branches during the fourth

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quarter of 2002, total adjusted deposits of $1.2 billion increased by $26.2 million, or 2.2%, above the level at December 31, 2001. However, the mix of deposits changed during the year as time deposits of $609.7 million at December 31, 2002 declined by $39.0 million, or 6.0%, during 2002, while demand and savings deposits of $601.6 million at December 31, 2002 increased by $35.2 million, or 6.2%, from the level at December 31, 2001. The shift reflects the desire of some of the Bank’s retail customers to retain a higher balance of their deposits in more liquid funds in the event that interest rates rise in the near future, as well as the Company’s targeted emphasis on transaction accounts and less aggressive pricing of certificates of deposit.

The table below presents the historical results of the Company for the years ended December 31, 2002, 2001 and 2000.

The following discussion compares the results of operations for the Company for the years ended December 31, 2002, 2001 and 2000 unless otherwise indicated.

Net Interest Income

Net interest income represents the amount by which interest income on interest-earning assets, primarily loans and investments, exceeds interest expense incurred on interest-bearing liabilities, primarily related to deposits and other borrowed funds. Net interest income is the principal source of revenue and 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 nonearning assets and the amount of noninterest-bearing liabilities supporting earning assets.

Net interest income after provision of $47.9 million for the year ended December 31, 2002 amounted to an increase of $4.0 million, or 9.0 %, from the level of $43.9 million for the year ended December 31, 2001. The net interest margin for the Company for the year ended December 31, 2002 was 3.70% reflecting an improvement of 35 basis points from 3.35% for the year ended December 31, 2001. For the year ended December 31, 2002, the Bank’s net interest margin of 4.12% represented an increase of 38 basis points above the level recorded for the year ended December 31, 2001 of 3.74%. The difference in the net interest margins for the Company and the Bank is attributable to the note payable and Senior Notes of the Company, which lower the net interest margin relative to that of the Bank. For the year ended December 31, 2000, net interest income for the Company was $41.6 million and the net interest margins for the Company and the Bank were 2.92% and 3.37%, respectively.

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The increase in net interest income in 2002 above the level of 2001 was primarily due to the decline in the average rates paid on interest-bearing liabilities during this currently low interest rate environment, which more than offset the decline on average yields of interest-earning assets. The average rate paid on interest-bearing liabilities in 2002 of 3.06% reflected a decrease of 122 basis points from the average rate paid in 2001 of 4.28%. This decrease occurred on all deposit products provided by the Bank including certificates of deposit, savings accounts, money market accounts and interest-bearing demand deposits. The average yield on interest-earning assets of 6.89% in 2002, however, only declined by 77 basis points from the average yield of 7.66% in 2001. The average yield on interest-earning assets and the average rates paid on interest-bearing liabilities for the year ended December 31, 2000 were 7.67% and 4.74%, respectively.

The following table presents the Bank’s total dollar amount of average balances, interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, expressed both in tax-equivalent dollars and rates using a federal marginal rate of 35%. The tax-equivalent adjustments for loans and investments included in interest income are $1.517 million, $1.387 million and $995 thousand for 2002, 2001 and 2000, respectively. Nonaccruing loans have been included in the tables as loans carrying a zero yield. See Note 1 of Notes to Consolidated Financial Statements for a description of the income recognition policy. Assets and liabilities of the Company have been excluded.

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The following table presents the dollar amount of changes in tax-equivalent interest income and interest expense, using a federal marginal rate of 35%, for the major components of the Bank’s interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) related to higher outstanding balances and the volatility of interest rates. Nonaccruing loans have been included in the table as loans carrying a zero yield. See Note 1 to Notes to Consolidated Financial Statements for a description of income recognition policy. For purposes of this table, changes attributable to both rate and volume, which can be segregated, have been allocated. Changes not solely due to volume or rate changes are allocated to rate.