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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, 1998
OR
[_]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.)
5000 Rogers Avenue, Fort Smith, Arkansas 72903
(Address of principal executive offices)
(501) 484-4305
(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 [_] No [X]
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 24, 1999 based on the average bid and ask prices of
$10.125 per share for Common Stock was $65,698,634. (For purposes of
calculating this amount, all directors, officers and principal shareholders of
the registrant are treated as affiliates).
Shares of Common Stock outstanding at March 24, 1999 were 10,080,503.
DOCUMENTS INCORPORATED BY REFERENCE
Part of
Form 10-
Document K
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Portions of Definitive Proxy Statement for 1999 Annual Meeting as
specifically referred to herein .................................... Part III
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PART I
Item 1. Business
General
The Registrant, Superior Financial Corp. is hereinafter referred to as "the
Company".
The Company is a unitary thrift holding company organized under the laws of
Delaware and headquartered in Ft. Smith, 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. The acquisition of the Bank was completed on April 1, 1998
and was financed through the private placement of $97.5 million of Common
Stock and $60.0 million of Senior Notes and a $20.0 million loan. 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 50 branches concentrated in Ft. Smith, Little Rock, and
eastern Oklahoma. At December 31, 1998 the Company had consolidated assets of
$1.38 billion, and shareholders equity of $102 million. At December 31, 1998
the Bank had deposits of $974.7 million and gross loans of $825.6 million.
Financial Products and Services
The Company provides a wide range of retail and small business services
including non-interest 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 been effective in establishing primary banking relationships
with lower to middle income market segments through the successful execution
of its "totally free checking" programs. This has resulted in the Company
having over 160,000 checking customers with average non-interest revenue of
approximately $115 per account annually. Much of this success can be
attributed to the customer-oriented service environment created by the Bank's
personnel.
Business Objectives
The Company's business strategy is based on a series of initiatives, both
short- and long-term, to achieve its goal of maximizing shareholder value.
These initiatives are designed to unleash the inherent strength of the
franchise which has not been fully realized. These initiatives combine the
following elements:
. short-term and intermediate-term initiatives designed to increase
revenue and enhance operating efficiency of the Bank;
. expanding the loan portfolio and transaction deposit accounts through
market-share growth and selective de novo branching, specifically targeting
the account relocation expected to take place as a result of merger-related
customer dislocation in the Bank's markets;
. expanding the Bank's product offerings to encompass a wider range of
products and services which will be offered by a locally owned and operated
financial company with motivated employees;
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. expanding ATM, telephone, and personal computer based banking services;
and
. maintaining financial safety and soundness.
Short-Term Initiatives
Management has begun a campaign of near-term initiatives designed to enhance
revenue and improve operating efficiency. These initiatives include the
following:
Branch Rationalization: As of January 1999, the Bank completed the sale of
ten branch facilities located in Oklahoma and Arkansas. These branches were
determined to be either unprofitable, or not in geographic or demographic
locations deemed to fit the strategic direction of the Bank.
Expense Reduction: Expense reductions relating to contract renewals and
renegotiations were completed in early 1998. Furthermore, certain unnecessary
inter-company expenses have been eliminated.
Revenue Enhancements: The opportunity to realize revenue enhancements
through the optimal use of uninvested cash, Federal Home Loan Bank FHLB
funding and reserve levels has already been addressed and is anticipated to
contribute to the Bank's reported income in the current and future years.
Currently under review is the potential to implement ATM surcharges and to
begin assessing fees to certain types of deposit products.
Balance Sheet Optimization: The Bank has undertaken steps to enhance the
earnings contribution of its balance sheet through the redeployment of cash
and overnight investments into higher-yielding securities and loans, growth of
transaction deposit accounts, use of FHLB borrowing capabilities and an
increased loan-to-deposit ratio.
Growth Strategy
The Company's growth strategy focuses on attracting customers displaced and
disenchanted as a result of industry consolidation in the Company's immediate
and contiguous markets. Management believes that ongoing consolidation in the
financial services industry provides significant opportunities for local,
community-oriented financial institutions to capitalize on the resulting
merger dislocation of many customers. The Company is positioned to exploit
these opportunities as a newly independent organization. Furthermore, its
reputation in its market for strong service and its "totally free checking"
product should help it to cultivate these customers.
The Company plans to attract these customers through promotion in its
existing markets and by tapping new markets through de novo branching and
acquisitions. The Bank has begun building four branches, two in Little Rock
and one each in Conway and Ft. Smith. These locations will introduce a branch
design that emphasizes speed of service and convenience. The Bank opened a
loan production office in the Tulsa market in October, 1998.
In 1998, management implemented certain initiatives designed to improve the
franchise through enhancing the menu of financial products and services it
offers. These initiatives allow the Bank to target additional customers as
well as cross-market to its existing, loyal customer base. For example,
management has introduced a comprehensive sales training and a performance
based incentive plan for all branch personnel. Furthermore, the Company is
currently establishing the means to offer a full array of consumer investment
and insurance products through a dedicated, branch-based sales force. The
addition of these services makes it possible for the Company's customers to
take care of essentially all of their financial needs in one place. Moreover,
crucial to the success of these related initiatives is the addition of key
leadership in the areas of mortgage and small business lending. These
additions, in concert with an expanded presence in metropolitan markets,
should position the Company to provide the locally approved lending
relationship desired by small business owners and individual consumers.
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Delivery Systems
Management has enhanced the Bank's existing delivery network through various
initiatives designed to make banking with the Company more attractive to new
and existing customers. Essential to the successful growth of the Company is
the recognition and fulfillment of its customers' desires to use a variety of
delivery channels to satisfy their financial needs. In this context, the
Company added six new ATM locations in 1998 to its network of 53 ATMs. In
addition, significant progress has been made in establishing a telephone sales
and service function that no only provides routine customer information, but
also allows customers to pay bills, transfer money, order checks, and apply
for loans 24 hours a day, seven days a week. The Company is providing similar
capability to those customers who prefer to use personal computers to transact
banking business and manage their finances.
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, 1998, the Company's allowance for loan losses is
approximately 1.27% 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 principal subsidiary is the Bank. The Bank owns a subsidiary,
SFS Corporation, and 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 and savings and loan
associations, 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.
A substantial number of the banks operating in the Company's market area are
branches or subsidiaries of much larger regional or national banking
companies. While these organizations may have greater resources, Management
believes their customers are experiencing disruption in services as a result
of merger and consolidation activities. Management believes that this merger-
related dislocation creates significant marketing and growth opportunities for
a locally based institution like the Bank, which is committed to quality
customer service, competitive fees and interest rates, and active community
involvement.
Employees
As of December 31, 1998, the Company had 637 full-time employees, and 154
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.
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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 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
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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.
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.
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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 4.0%.
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 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
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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
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.
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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.
At December 31, 1998, 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,
8
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
meets 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 may, 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 may 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 meets
its minimum capital requirement both before and after a proposed distribution
but does not meet its capital requirement (a "Tier 2 institution") is
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 must be approved in
advance by the OTS. A savings institution that does not meet its minimum
capital requirement (a "Tier 3 institution") cannot make any capital
distribution without prior approval from the OTS, unless the capital
distribution is 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.
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
9
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, 1998, 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.
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
10
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, 1998 equaled $554,771.
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.
11
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 can
acquire control of a savings association without the prior approval of the
OTS, and no person may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires control of a savings
association becomes a savings and loan holding company subject to extensive
registration, examination and regulation by the OTS. Conclusive control
exists, among other ways, when an acquiring party acquires more than 25% of
any class of voting stock of a savings association or savings and loan holding
company, or controls in any manner the election of a majority of the directors
of the company. In addition, a rebuttable presumption of control exists if,
among other things, a person acquires more than 10% of any class of a savings
association or savings and loan holding company's voting stock (or 25% of any
class of stock) and, in either case, any of certain additional control factors
exist.
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 50 branch offices located in central and northwestern Arkansas and
eastern Oklahoma as follows:
No. of Square
Market Area Locations Footage
----------- --------- -------
Fayetteville/Springdale MSA............................... 4 10,831
Ft. Smith/Van Buren MSA................................... 7 127,230
Little Rock MSA........................................... 11 74,010
Hot Springs MSA........................................... 4 16,690
Eastern Oklahoma.......................................... 13 57,942
North and Central Arkansas................................ 11 37,209
12
The Company owns 35 offices and leases the remaining 15 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 63% occupied by the Company. The other
facility located in downtown Little Rock contains 45,000 square feet and is
53% occupied by the Company.
The Company is expanding its branch network through the addition of four
locations in Little Rock, Conway, and Ft. Smith. Three of these offices are
being constructed on land currently owned by the Company.
Item 3. Legal Proceedings
As a result of the acquisition of the Bank from NationsBank, the Company
succeeded to NationsBank'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 Stock Purchase
Agreement with NationsBank, the Company has agreed to pay NationsBank 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
13
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
As of December 31, 1998, there was no established trading market for the
Common Stock, and there were approximately 896 record holders of 10,080,503
shares of Common Stock. The Company was formed in December 1997 and, since
that time, has not paid cash or other dividends. The Company has no plans to
pay cash dividends in the near future.
On April 1, 1998, the Company sold in a private placement 10,079,703 shares
of Common Stock and $60,000,000 of 8.65% Senior Notes due April 1, 2003, to
persons the Company reasonably believed were "qualified institutional buyers"
as defined in Rule 144A of the Securities Act of 1933 (the "1933 Act") or
other "accredited investors" under Rule 501(a) of Regulation D of the 1933
Act. Keefe, Bruyette & Woods, Inc. served as the Placement Agent for the
transactions. The Company received aggregate consideration of $97.5 million
from the sale of the Common Stock and $60.0 million from the sale of the
Senior Notes. The Company paid Keefe, Bruyette and Woods, Inc. approximately
$7.28 million in transaction and placement agent fees. In completing the
private placement, the Company relied on the exemption provided under
Section 4(2) of the 1933 Act, Rule 506 of Regulation D thereunder and Rule
144A thereunder.
Item 6. Selected Financial Data
FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
Company Bank
----------- ----------------------------------------------------------
Year Ended
December 31 Years Ended December 31,
----------- ----------------------------------------------------------
1998 (1) 1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Income statement data:
Net interest income.... $ 24,362 $ 38,979 $ 38,305 $ 36,676 $ 34,113 $ 33,217
Provision for loan
losses................ 1,021 8,786 2,155 1,125 1,050 300
---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 23,341 30,193 36,150 35,551 33,063 32,917
Non-interest income.... 19,195 24,711 23,280 23,370 20,572 17,389
Non-interest expense... 31,616 42,242 39,316 46,362 36,527 33,641
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes.... 10,920 12,662 20,114 12,559 17,108 16,665
Net income............. 6,675 6,409 10,922 7,634 10,397 10,125
Balance sheet data at
period end:
Total assets........... $1,378,716 $1,368,171 $1,256,153 $1,206,235 $1,294,575 $1,252,203
Securities............. 375,011 369,827 382,211 449,006 534,709 618,952
Loans.................. 825,633 825,633 697,869 674,861 639,880 528,901
Allowance for loan
losses................ 10,472 10,472 4,660 5,058 4,930 4,686
Total deposits......... 970,821 974,669 982,442 990,203 1,084,582 1,060,886
Total shareholders'
equity................ 101,812 168,968 161,832 84,521 84,279 76,928
Average balance sheet
data:
Total assets........... $1,292,196 $1,287,756 $1,291,295 $1,252,641 $1,272,514 $1,229,178
Securities............. 334,321 339,384 410,876 480,728 578,879 668,610
Loans.................. 711,798 706,700 684,379 652,172 589,020 460,313
Allowance for loan
losses................ 10,465 9,055 4,886 5,003 4,841 4,770
Total deposits......... 984,443 991,311 995,237 1,041,920 1,064,880 1,007,654
Total shareholders'
equity................ 88,410 167,296 156,432 85,556 83,041 78,791
Performance Ratios:
Return on average
assets................ .52% 0.50% 0.85% 0.61% 0.82% 0.82%
Return on average
common equity......... 7.55 3.83 6.98 8.92 12.52 12.85
Net interest margin.... 2.83 3.42 3.44 3.15 2.88 2.89
Efficiency ratio....... 72.61 66.34 63.84 77.21 66.80 66.48
Asset Quality Ratios:
Nonperforming assets to
total loans and other
real estate........... .48 0.48 .82 .79 .73 1.59
Net charge-offs to
average loans......... 1.48 1.48 .37 .15 .14 .11
Allowance for loan
losses to total
loans................. 1.27 1.27 .67 .75 .77 .89
Allowance for loan
losses to
nonperforming loans... 313 313 91 107 112 59
Capital Ratios:
Tangible capital
ratio................. 2.85 7.99 7.40 6.60 5.97 5.31
Average shareholders'
equity to average
total assets.......... 6.84 12.99 12.11 6.83 6.53 6.41
Core capital ratio..... 2.85 7.99 7.40 6.60 5.97 5.31
Risk-based capital
ratio................. 5.50 16.70 15.69 15.06 14.86 14.84
- -------
(1) The results of operations of the Bank were consolidated with those of the
Company from April 1, 1998, the date of the acquisition.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the 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 of common stock and debt. The
Bank is a federally chartered savings bank. The following Management's
Discussion and Analysis of Financial Condition and Results of Operations
analyzes the major elements of the Bank's balance sheets and statements of
operations. This section should be read in conjunction with the Company's and
the Bank's financial statements and accompanying notes and other detailed
information contained in this Annual Report.
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, 1998 AND 1997
Results of Operations
Company
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 transaction and
the private placement offering of the Company's common stock and debt. The
Company's primary asset is its investment in 100% of the common stock of the
Bank and the Company's operations are funded solely from the operations of the
Bank.
Total assets and total stockholders' equity at December 31, 1998 were $1.4
billion and $102 million, respectively. 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.
Net income for the twelve months ended December 31, 1998 was $6.675 million.
Net income per share-basic and diluted for the twelve months ended December
31, 1998 were $0.88. The interest expense on the Note Payable and the Senior
Notes is recorded by the Company and was $5.757 million for the twelve months
ended December 31, 1998. This represents the primary difference between the
operations of the Company and that of the Bank. The Company had return on
average assets of .52% and return of average common equity of 7.55% for the
twelve months ended December 31, 1998.
The following table presents the following:
A) 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.
B) 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. for the three months ended March 31, 1998.
C) Operating results of Superior Federal Bank, F.S.B. on a stand alone basis
for the period from January 1, 1998 through December 31, 1998.
D) Historical results of Superior Federal Bank, F.S.B. for the period from
January 7, 1997 to December 31, 1997.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Superior Financial Superior Financial Superior Federal Superior Federal
Corp.-Historical Corp.-Pro Forma Bank, F.S.B Bank, F.S.B.
Twelve Months Twelve Months Twelve Months Twelve Months
Ended Ended Ended Ended
December 31, 1998 December 31, 1998 December 31, 1998 December 31, 1997
(A) (B) (C) (D)
------------------ ------------------ ----------------- -----------------
(Dollars in thousands)
Interest income......... $63,094 $83,836 $83,660 $83,664
Interest expense........ 38,732 50,438 44,681 45,359
------- ------- ------- -------
Net interest income..... 24,362 33,398 38,979 38,305
Provision for loan
losses................. 1,021 8,786 8,786 2,155
------- ------- ------- -------
Net interest income
after provision........ 23,341 24,612 30,193 36,150
Noninterest income...... 19,195 24,711 24,711 23,280
Noninterest expenses.... 31,616 42,462 42,242 39,316
------- ------- ------- -------
Income before income
taxes.................. 10,920 6,681 12,662 20,114
Income tax expense...... 4,245 3,963 6,253 9,192
------- ------- ------- -------
Net income.............. $ 6,675 $ 2,898 $ 6,409 $10,922
======= ======= ======= =======
The following discussion on the Bank compares the results of operations for
the Bank on a stand alone basis for the twelve months ended December 31, 1998
(Column C above) to that of the Bank for the period from January 7, 1997 to
December 31, 1997. For the twelve months ended December 31, 1998, the primary
difference between the results of operations for the Company and the Bank was
the $5.76 million interest expense on the Note Payable and the Senior Notes
which are obligations of the Company.
Bank
For the twelve months ended December 31, 1998, the Bank had net income of
$6.4 million, a decrease of $4.5 million or 41.3% from 1997. The primary
reason for this decrease was an increase in the provision for loan losses
which is more fully discussed under the section--"Allowance for Loan Losses"--
below. This resulted in a return on average assets of .50% and a return on
average common equity of 3.83% for the twelve months ended December 31, 1998
compared to .85% and 6.98%, respectively for the same time period in 1997.
Total assets increased to $1.369 billion at December 31, 1998, from $1.256
billion, an increase of $113 million or 9%. This increase was primarily the
result of loan growth in the third and fourth quarters of 1998. Deposits
decreased to $970 million at December 31, 1998 from $982 million at December
31, 1997, a decrease of $12 million or 1.2%. Total stockholders' equity was
$169 million at December 31, 1998, representing an increase of $7 million or
4.3% over total stockholders' equity of $162 million at December 31, 1997.
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 earnings 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, 1998 was $39.0
million, an increase of $.7 million or 1.8% from $38.3 million for the twelve
months ended December 31, 1997. This resulted in a net
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
interest margin of 3.42% and 3.44%, and a net interest spread of 3.02% and
3.16% for the twelve months ended December 31, 1998 and December 31, 1997,
respectively. The decrease in the net interest margin and net interest spread
was primarily the result of a lower yield on the investment portfolio caused
by a general decrease in interest rates, resulting in excess principal
payments.
Interest income was flat at $83.7 million for the twelve months ended
December 31, 1998 compared to the twelve months ended December 31, 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.
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
Results of Operations
Bank
Net Interest Income
Net interest income totaled $38.3 million in 1997 compared to $36.7 million
in 1996, an increase of $1.6 million or 4.4%. This resulted in net interest
margins of 3.44% and 3.15% and net interest spreads of 3.16% and 2.90% for
1997 and 1996, respectively.
The primary reason for higher net interest income was growth in loans
coupled with higher yields on the loan portfolio which increased to 8.02% from
7.94%. In addition, the securities portfolio yield increased 12 basis points
to 6.76% for the year ended 1997, while the yield on deposits and other
borrowed funds decreased 9 basis points to 4.35%.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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. No tax equivalent adjustments were made as the Bank
does not have any tax-exempt investments and all average balances are monthly
average balances. Nonaccruing loans have been included in the table as loans
carrying a zero yield.
Year Ended December 31
-----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
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.................. $ 706,700 $56,536 8.00% $ 684,379 $54,870 8.02% $ 652,172 $51,800 7.94%
Securities............. 339,384 21,487 6.33 410,876 27,765 6.76 480,728 31,902 6.64
Federal funds sold and
other earning assets.. 92,815 5,638 6.07 18,650 1,029 5.52 30,728 1,706 5.55
---------- ------- ---------- ------- ---------- -------
Total interest-earning
assets................ 1,138,899 83,661 7.35 1,113,905 83,664 7.51 1,163,628 85,408 7.34
Less allowance for loan
losses................ 9,055 -- 4,886 -- 5,003 --
---------- ------- ---------- ------- ---------- -------
Total earning assets,
net of allowance....... 1,129,845 83,661 1,109,019 83,664 1,158,625 85,408
Nonearning assets....... 157,912 182,276 94,016
---------- ---------- ----------
Total assets........... $1,287,756 $1,291,295 $1,252,641
========== ========== ==========
Liabilities and stockholders' equity
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 197,182 $ 3,787 1.92% $ 188,646 $ 3,925 2.08 $ 178,044 $ 3,770 2.12
Savings and money
market accounts....... 164,012 4,573 2.79 161,815 4,240 2.62 165,169 4,081 2.47
Certificates of
deposit............... 556,699 29,551 5.31 577,141 30,269 5.24 636,585 33,817 5.31
Borrowed funds......... 114,463 6,795 5.94 114,408 6,925 6.05 117,253 7,064 6.02
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities........... 1,032,356 44,706 4.33 1,042,010 45,359 4.35 1,097,051 48,732 4.44
Noninterest-bearing
liabilities:
Noninterest-bearing
demand deposits....... 73,418 67,635 62,122
Other liabilities...... 14,687 6,987 7,912
---------- ---------- ----------
Total liabilities...... 1,120,461 1,116,632 1,167,085
Stockholders' equity.... 167,296 174,663 85,556
---------- ---------- ----------
Total liabilities and
stockholders' equity.. $1,287,756 $1,291,295 $1,252,641
========== ========== ==========
Net interest income..... $38,955 $38,305 $36,676
======= ======= =======
Net interest spread..... 3.02% 3.16% 2.90%
==== ==== ====
Net interest margin..... 3.42% 3.44% 3.15%
==== ==== ====
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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Year Ended December 31
------------------------------------------------
1998 versus 1997 1997 versus 1996
------------------------- ---------------------
Increase Increase
(Decrease) (Decrease)
---------------- Due to ------------- Due to
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ---- -------
(Dollars in thousands)
Interest-earning assets:
Loans....................... $ 1,790 $ (124) $ 1,666 $ 2,566 $504 $ 3,070
Securities.................. (4,831) (1,447) (6,278) (4,137) -- (4,137)
Federal funds sold and other
earnings assets............ 4,092 517 4,609 (677) -- (677)
------- ------- ------- ------- ---- -------
Total increase in interest
income.................... 1,051 (1,054) (3) (2,248) 504 (1,744)
------- ------- ------- ------- ---- -------
Interest-bearing liabilities:
Interest-bearing demand
deposits................... 178 (316) (138) 155 -- 155
Savings and money market
accounts................... 58 275 333 (84) 243 159
Certificates of deposits.... (1,072) 354 (718) (3,548) -- (3,548)
Borrowed funds.............. 3 (133) (130) (139) -- (139)
------- ------- ------- ------- ---- -------
Total increase in interest
expense................... (833) 180 (653) (3,616) 243 (3,373)
------- ------- ------- ------- ---- -------
Increase (decrease) in net
interest income............. $ 1,884 $(1,234) $ 650 $ 1,368 $261 $ 1,629
======= ======= ======= ======= ==== =======
Noninterest Income
Non interest income for the year ended December 31, 1998 was $24.5 million,
an increase of $1.2 million or 5.12% over the same period in 1997. Noninterest
income for the year ended December 31, 1997 was $23.3 million, a decrease of
$.1 million or .43% over the same period in 1996.
The following table presents for the periods indicated the major components
of noninterest income.
Year Ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Service charges on deposit accounts................. $20,575 $20,241 $18,683
Mortgage operations, net............................ 2,201 1,796 1,330
Other noninterest income............................ 1,695 1,243 3,357
------- ------- -------
Total noninterest income.......................... $24,471 $23,280 $23,370
======= ======= =======
Service charges were $20.6 million for the year ended December 31, 1998,
compared to $20.2 million for the year ended December 31, 1997, an increase of
$.4 million or 1.98%.The growth in service charges slowed in 1998 primarily
due to the sale of nine brances in the third quarter.
Service charges were $20.2 million for the year ended December 31, 1997,
compared to $18.7 million for the year ended December 31, 1996, an increase of
$1.5 million or 8.0%. This increase is attributed to the growth in the number
of deposit accounts from 263,904 at December 31, 1996 to 280,328.
Service charges on deposit accounts consist primarily of insufficient funds
fees charged to customers. As demonstrated by the trend from 1996 through
1998, management of the Company believes the growth will be sustained as the
number of transaction accounts (checking and savings accounts) increase. This
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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Noninterest Expenses
For the year ended December 31, 1998, noninterest expenses totaled $42.0
million, an increase of $2.7 million, or 6.8%, from $39.3 million during 1997.
The efficiency ratio for the year ended December 31, 1998, was 66.34%,
compared to 63.84% in 1997. For the year ended December 31, 1997, noninterest
expenses totaled $39.3 million, a decrease of $7.1 million, or 15.3%, from
$46.4 million during 1996. For the same time periods the efficiency ratio was
63.84% in 1997 and 77.21% in 1996.
Salary and benefit expense for year ended December 31, 1998, was $18.2
million, compared to $16.3 million for the year ended December 31, 1997, an
increase of $1.9 million or 11.4%. Salary and benefit expense for the year
ended December 31, 1997 was $16.3 million, compared with $16.3 million for the
year ended December 31, 1996. This increase was due primarily to the hiring of
additional personnel required to accommodate the Bank's growth and expanded
products and services.
Occupancy decreased $588,000, or 32.9% during 1998 due to the sale of the
nine branches during the third quarter. Occupancy expense rose $151,000 (5%)
and $69,000 (2%) in 1997 and 1996, respectively. Major categories included
within occupancy expense are building lease expense, depreciation expense, and
maintenance contract 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 amounts of taxable
income, tax-exempt income, nondeductible interest expense, and other
nondeductible expenses. For the twelve months ended December 31, 1998, income
tax expense was $6.2 million, a decrease of $3.0 million or 32% from the $9.2
million of income tax expense for the same period in 1997. The lower income
tax expense in 1998 compared to 1997 is due to the decrease in taxable income,
offset by an increase in the effective tax rate from 45.7% in 1997 to 49.4% in
1998. The higher effective tax rate in 1998 is due to the nondeductibility of
the provision for loan losses, which increased in the first quarter of 1998 of
$7.7 million. See discussion under "Allowance for Loan Losses".
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 were $826 million at December 31, 1998, an increase of $128 million or
18.3% from $698 million at December 31, 1997. 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.
At December 31, 1998, total loans represented 85% of deposits and 60% of
total assets. At December 31, 1997, total loans represented 71% of deposits
and 56% of total assets.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The following table summarizes the loan portfolio of the Company by major
category of loans as of the dates indicated:
December 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Commercial.............. $ 10,800 1.31% $ 4,403 .63% $ 2,704 .40% $ 2,931 .46% $ 3,496 .66%
Consumer
Direct................. 99,704 12.08 75,268 10.79 70,179 10.40 39,612 6.19 39,292 7.43
Indirect............... 174,316 21.11 156,073 22.36 145,059 21.49 131,121 20.49 78,583 14.86
Real Estate:
Construction & land
development........... 15,920 1.93 12,734 1.82 13,304 1.97 24,285 3.80 23,780 4.50
1-4 family
residential........... 484,324 58.66 409,135 58.63 416,668 61.74 419,870 65.62 316,485 68.35
Commercial owner
occupied.............. 40,569 4.91 40,257 5.77 26,947 4.00 22,061 3.44 22,265 4.20
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............. $825,633 100.00% $697,870 100.00% $674,861 100.00% $639,880 100.00% $528,901 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
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, are made available to
businesses 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
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 loan.
Effective January 1, 1995, the Bank 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 Bank 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.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Maturity and Interest Rate Sensitivity of Loans
Loans at December 31, 1998, maturing in:
----------------------------------------------
Over One
One Year Through Over Five
or Less Five Years Years Total
---------- ----------------------- ----------
(Dollars in thousands)
Commercial, financial and
agricultural.................. $ 557 $ 204 $ 10,039 $ 10,800
Real estate-construction....... 15,920 -- -- 15,920
---------- ------- ---------- ----------
Total........................ $ 16,477 $ 204 $ 10,039 $ 26,720
========== ======= ========== ==========
Predetermined rates............ $ 16,477 $ 204 $ 10,039 $ 26,720
Variable rates................. -- -- -- --
Nonperforming Assets
The Company's conservative lending approach has resulted in strong asset
quality. Nonperforming assets at December 31, 1998 were $3.9 million, compared
with $5.8 million at December 31, 1997 and $5.3 million at December 31, 1996.
The decrease in nonperforming assets from 1997 to 1998 was primarily the
result of the charge-off of consumer loans during the first quarter of 1998.
This resulted in a ratio of nonperforming assets to loans plus other real
estate of .48%, .82% and .79% as of year end 1998, 1997 and 1996,
respectively.
The following table presents information regarding nonperforming assets as
of the dates indicated:
December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Nonaccrual loans................... $3,348 $5,098 $4,715 $4,407 $7,972
Other real estate and repossessed
assets............................ 594 662 600 242 457
------ ------ ------ ------ ------
Total nonperforming assets....... $3,942 $5,760 $5,315 $4,649 $8,429
====== ====== ====== ====== ======
Nonperforming assets to total loans
and other real estate............. .48% .82% .79% .73% 1.59%
====== ====== ====== ====== ======
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 has consistently identified and analyzed weaknesses in the
portfolio and reports credit risk grade changes on a quarterly basis to Bank
management and directors. The Bank also maintains a well developed monitoring
process for credit extensions in excess of $100,000. The Bank has established
underwriting guidelines to be followed by its officers. The Company also
monitors its delinquency levels for any negative or adverse trends, and
collection efforts are done on a centralized basis. The Company also has
procedures to bring rapid resolution of nonperforming loans and prompt and
orderly liquidation of real estate, automobiles and other forms of collateral.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans
past due 90 days, however, are placed on nonaccrual status, unless the loan is
both well collateralized and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction
of principal as long as doubt exists as to collection. The Company is
sometimes required to revise a loan's interest rate or repayment terms in a
troubled debt restructuring. The Company regularly updates appraisals on loans
collateralized by real estate, particularly those categorized as nonperforming
loans and potential problem loans. In instances where updated appraisals
reflect
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
reduced collateral values, an evaluation of the borrower's overall financial
condition is made to determine the need, if any, for possible writedowns or
appropriate additions to the allowance for loan losses.
The Company records real estate acquired by foreclosure at the lesser of the
outstanding loan balance, net of any reduction in basis, or the fair value at
the time of foreclosure, less estimated costs to sell.
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
-----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
(Dollars in thousands)
Allowance for loan losses at
January 1...................... $ 4,660 $ 5,058 $ 4,930 $4,686 $4,884
Provision for loan losses....... 8,786 2,115 1,125 1,050 300
Charge-offs..................... (4,351) (2,969) (1,322) (911) (542)
Recoveries...................... 1,377 416 325 105 44
------- ------- ------- ------ ------
Allowance for loan losses at
December 31.................... $10,472 $ 4,660 $ 5,058 $4,930 $4,686
======= ======= ======= ====== ======
Allowance to period-end loans... 1.27% .67% .75% .77% .89%
Net charge-offs to average
loans.......................... 1.48 .37 .15 .14 .11
Allowance to period-end
nonperforming loans............ 312.00 91.00 107.00 112.00 59.00
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 1994-1998 have primarily
been in the indirect consumer loan portfolio.
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 auto loan paper, and
reductions in mortgage origination staff. As a result the Bank experienced
significant growth in consumer loan balances, particularly indirect auto
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
----------- ------------ ------------
1994................................. $21,967,000 $ 78,583,000 $100,550,000
1995................................. 22,969,000 131,121,000 154,090,000
1996................................. 22,038,000 145,059,000 167,097,000
1997................................. 27,321,000 156,073,000 183,394,000
1998................................. 25,308,000 174,316,000 199,624,000
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
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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.
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.
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 category of
loans.
December 31, 1998
-----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
Balance of allowance loan losses applicable to:
Commercial..................................... $ 165 2% 1.31%
Real Estate:
Construction and land development............ -- -- 1.93
1-4 family residential....................... 1,466 14 58.66
Commercial owner occupied.................... 638 6 4.91
Consumer....................................... 6,527 62 33.19
Unallocated.................................... 1,676 16 --
------- --- ------
Total allowance for loan losses.............. $10,472 100% 100.00%
======= === ======
December 31, 1997
-----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------- ---------- ----------
(Dollars in thousands)
Balance of allowance loan losses applicable to:
Commercial..................................... $ -- 0% 0.63%
Real Estate:
Construction and land development............ -- 0 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 0.00
------- --- ------
Total allowance for loan losses.............. $ 4,660 100% 100.00%
======= === ======
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
December 31, 1996
----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------ ---------- ----------
(Dollars in thousands)
Balance of allowance loan losses applicable to:
Commercial...................................... $ 0 0% 0.40%
Real Estate:
Construction and land development............. 0 0 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 0.00
------ --- ------
Total allowance for loan losses............... $5,058 100% 100.00%
====== === ======
December 31, 1995
----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------ ---------- ----------
(Dollars in thousands)
Balance of allowance loan losses applicable to:
Commercial...................................... $ 0 0% 0.46%
Real Estate:
Construction and land development............. 0 0 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 0.00
------ --- ------
Total allowance for loan losses............... $4,930 100% 100.00%
====== === ======
December 31, 1994
----------------------------
Percent of Percent of
Allowance Loans to
to Total Total
Amount Allowance Loans
------ ---------- ----------
(Dollars in thousands)
Balance of allowance loan losses applicable to:
Commercial...................................... $ 0 0% .66%
Real Estate:
Construction and land development............. 0 0 4.50
1-4 family residential........................ 2,628 56 68.35
Commercial owner occupied..................... 524 11 4.20
Consumer........................................ 1,150 25 22.29
Unallocated..................................... 384 8 0.00
------ --- ------
Total allowance for loan losses............... $4,686 100% 100.00%
====== === ======
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
allowance for loan losses to the Board of Directors, indicating any changes in
the allowance since the last review and any recommendations as to adjustments
in the allowance. In making its evaluation, management considers the
diversification by industry of the Bank's commercial loan portfolio, the
effect of changes in the local real estate market on collateral values, the
results of recent regulatory examinations, the effects on the loan portfolio
of current economic indicators and their probable impact on borrowers, the
amount of charge-offs for the period, the amount of nonperforming loans and
related collateral security, the evaluation of its loan portfolio by the loan
review function and the annual examination of the Bank's financial statements
by its independent auditors. Charge-offs occur when loans are deemed to be
uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans
and other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Bank's historical charge-off experience. The Bank then charges to operations a
provision for loan losses determined on an annualized basis to maintain the
allowance for loan losses at an adequate level determined according to the
foregoing methodology.
Management believes that the allowance for loan losses at December 31, 1998
is adequate to cover losses inherent in the portfolio as of such date. 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 automobile loans within the Bank's loan portfolio,
which experienced an increased level of losses in the first quarter of 1998.
The components of the provision for loan losses in the period January 1,
1998 through March 31, 1998 is as follows:
. To restore charge-offs on direct and indirect automobile
loans...................................................... $1,925,000(A)
. To provide quarterly provision on the loan portfolio....... 750,000(B)
. To provide an allowance for increased inherent risk in the
automobile loan portfolio.................................. 4,500,000(C)
. To provide additional unallocated allowance................ 590,000(D)
----------
Total provision for loan losses for three months ended March
31, 1998................................................... $7,765,000
==========
- --------
(A) The higher level of delinquencies and charge-offs noted above for 1997 on
automobile loans, particularly the indirect automobile loans, continued
into the first quarter of 1998 and the losses in this portion of the
portfolio were determined to be significantly more than previously
estimated. Additionally, in the first quarter of 1998, the Bank
experienced increased historical losses attributed to a higher level of
repossessed automobiles and their associated liquidation losses. The Bank
charged-off additional problem automobile loans and took liquidation
losses on the repossessed automobiles during the first quarter, and made a
provision to restore the allowance for these charge-offs and losses.
(B) Represents the quarterly provision to the allowance for loan losses for
the remainder of the loan portfolio.
(C) In light of the trend of problems that began to surface during 1997 and
continued into the first quarter of 1998 in the automobile loan portfolio,
the allowance was increased to reflect management's assessment of
increased risk of loan losses due to the higher historical loss being
experienced by the Bank in the automobile portion of the loan portfolio.
Due to the problems discussed above in the direct and indirect automobile
loan portfolio, the actual losses the Bank was experiencing were running
at approximately 3.5% of the total automobile loan portfolio. The Bank had
been providing for historical losses using a 1% historical loss factor.
Since the Bank had more information on what actual losses on the
automobile portfolio
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
were running, a change of estimate was made in the first quarter as more
experience and additional information on the historical loss rate was
obtained. The following table provides a detail of the gross charge-offs
for direct and indirect loans for the years ended December 31, 1996 and
1997 and the three months ended March 31, 1998.
Total Direct Total
and Charge-
Direct Loan Indirect Loan Indirect Loan offs for
Charge-offs Charge-offs Charge-offs All Loans
----------- ------------- ------------- ----------
December 31, 1996........ $226,000 $1,067,000 $1,293,000 $1,322,000
December 31, 1997........ 340,000 2,629,000 2,969,000 2,969,000
March 31, 1998........... 307,000 1,626,000 1,933,000 2,034,000
-------- ---------- ---------- ----------
Total.................. $873,000 $5,322,000 $6,195,000 $6,325,000
======== ========== ========== ==========
(D) During the first quarter of 1998, the Bank began shifting its management
philosophy and strategic direction more toward that of a commercial bank
rather than a thrift and began to make more commercial loans which have a
greater inherent risk of loss than the mortgage loans the Bank had
traditionally made. Commercial loans increased $7,387,000 or 21.68% during
the first quarter and continued to increase during the second quarter. An
additional general allowance in the first quarter of 1998 was provided due
to the shift to more commercial lending.
The sequence of events which lead to the $7,765,000 provision for loan
losses for the three months ended March 31, 1998 detailed above is as follows.
In October 1997 management of the Company was allowed five days to perform
due diligence on the Bank. During the due diligence review, rapid growth of
the indirect automobile loan portfolio was noted from 1993 to the date of the
review coupled with a deterioration in the credit quality of the portfolio as
shown by past due indirect automobile loans running at 3-4% of total indirect
consumer loans beginning in mid 1996 and a repossessed inventory of
automobiles exceeding 100 units (approximately 3-4 months inventory). Early
estimates of the potential loss based on the limited information and time for
review was $2 million, which was reflected in the 1998 pro-forma financial
data prepared by the Company and included in the private placement memorandum
provided to prospective investors.
On December 3, 1997, the Company entered into an agreement with NationsBank
to acquire the Bank. In January 1998 Messrs. C. Stanley Bailey and C. Marvin
Scott arrived at the Bank to assist in the transition process towards
acquisition and to more fully assess the potential loss in the indirect
automobile loan portfolio. Both of these gentlemen have had considerable
experience with indirect loan portfolio management at other regional banks.
When Messrs. Bailey and Scott began reviewing the indirect automobile loan
portfolio it was determined that the problems were worse than was earlier
estimated in October 1997. Based upon their experience, typical problem
indirect loan portfolios take two years from origination to become evident and
an additional two years to clean up.
Throughout February and March of 1998 further assimilation of indirect
automobile portfolio aging information was performed and a careful analysis of
loans originated by the terminated loan officer noted above was conducted.
Based upon the results of these procedures, Messrs. Bailey and Scott suggested
that the Bank's and NationsBank's management take actions to remedy the
indirect automobile loan quality as follows:
1. Liquidate all repossessed automobiles at auction and maintain no more
than one months inventory (25-35 automobiles). Anticipated liquidation
losses estimated at $3-$5 thousand per unit ($400-$500 thousand.)
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
2. Charge-off all delinquent indirect loans exceeding 120 days past due and
all bankruptcies. Estimated losses at $1.5 million.
3. Enhance credit scoring to originate "A" quality indirect loans only,
thus causing indirect automobile loan portfolio to shrink over time.
4. Eliminate dealers generating indirect paper with high delinquency
levels.
5. Increase the allowance for loan losses $4.5 million to provide an
adequate reserve for the risk of loss in the settling out process of the
remaining automobile loan portfolio over the next 12-18 months.
These suggestions were presented to Bank management and NationsBank
management during the first quarter 1998. All suggestions were accepted for
implementation during first quarter 1998.
By March 31, 1998, these initiatives resulted in the following:
. Indirect automobile loan delinquencies declined from 3.3% of total
indirect automobile loans at December 31, 1997 to 1.89% at March 31,
1998.
. Repossessed automobile inventory declined from 123 units at December 31,
1997 to 69 units at March 31, 1998.
. Allocated allowance for loan losses for indirect automobile loans was
increased from $1.2 million at December 31, 1997 to $4.5 million at
March 31, 1998.
. Unallocated allowance for loan losses was increased from $44,000 at
December 31, 1997 to $1.6 million at March 31, 1998.
Investments
The Company's investments 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 Bank 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 Bank 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 recorded as accumulated other
comprehensive income in stockholders' equity.
The following table summarizes the amortized cost of investments held by the
Company as of the dates shown:
December 31
--------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage-backed securities........ $297,359 $369,555 $437,076 $524,410 $608,553
CMOs.............................. 59,139
Trust preferred stock............. 7,563
-------- -------- -------- -------- --------
Total investments............... $364,061 $369,555 $437,076 $524,410 $608,553
======== ======== ======== ======== ========
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The decrease in the investments portfolio is the result of the Company's
strategy of increasing its net interest margin by growing the loan portfolio.
Mortgage-backed securities declined from $608.5 million in 1994 to $297.4
million in 1998, a $311.1 million decrease, while for the same period, total
loans rose from $528.9 million in 1994 to $825.6 million in 1998, a $296.7
million increase. With the anticipated growth in deposits and loans,
management of the Company believes the investments portfolio will remain at
approximately the December 31, 1998 balance.
All investments held by the Company as of December 31, 1998 and 1997 are
classified as available-for-sale. The following table presents the amortized
cost and estimated market values for investments as of the dates shown.
Gross Estimated Amortized Unrealized Market
-------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
--------------------------------------------- ---------------------------------------------
Unrealized Unrealized Estimated Fair Unrealized Unrealized Estimated Fair
Cost Gains Losses Value Cost Gains Losses Value
-------- ---------- ---------- -------------- -------- ---------- ---------- --------------
(Dollars in thousands)
Mortgage-backed
securities............. $296,895 $1,814 $(1,350) $297,359 $369,555 $4,098 $(323) $373,330
CMOs.................... 59,130 56 (47) 59,139
Trust preferred stock... 7,563 -- -- 7,563
-------- ------ ------- -------- -------- ------ ----- --------
Total investments...... $363,588 $1,870 $(1,397) $364,061 $369,555 $4,098 $(323) $373,330
======== ====== ======= ======== ======== ====== ===== ========
At December 31, 1998, investments totaled $364 million, a decrease of $9
million from 1997. This decrease occurred in mortgage-backed securities. At
December 31, 1997, investments totaled $373 million, a decrease of $76 million
from $449 million at December 31, 1996. The decrease occurred in mortgage-
backed securities. The yield on the investments portfolio for 1998 was 6.33%
while the yield was 6.76% in 1997 and 6.64% in 1996.
The Company has no mortgage-backed securities that have been issued by non-
agency entities.
At December 31, 1998, 84% of investments available for sale held by the
Company had final maturities of more than 10 years. At December 31, 1998,
approximately $182 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 at times of declining
interest rates.
The following table summarizes the contractual maturity of investments
(including investments available-for-sale, federal funds sold and interest-
bearing deposits) and their weighted average yields at December 31, 1998:
December 31, 1998
--------------------------------------------------------------------------------------
After One Year After Five Years
but Within but Within
Within One Year Five Years Ten Years After Ten Years
----------------- --------------- ----------------- ------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
--------- ------- -------- ------ --------- ------- -------- ----- -------- -----
(Dollars in thousands)
Mortgage-backed
securities............. $ $ 3,209 6.74% $ 55,485 5.97% $238,201 6.14% $296,895 6.17%
CMOs.................... 59,130 6.44 59,130 6.44
Trust preferred stock... 7,563 7.36 7,563 7.36
--------- ------ -------- ------ --------- ------ -------- ---- -------- ----
Total investments
available for sale.... $ -- 0% $ 3,209 6.74% $ 55,485 5.97% $304,894 6.23 $363,588 6.66
Federal Home Loan Bank
stock.................. 10,950 6.24 10,950 6.24
Interest-bearing
deposits............... 40,514 5.80 40,514 5.80
--------- ------ -------- ------ --------- ------ -------- ---- -------- ----
Total.................. $ 40,514 5.80% $ 3,209 6.74% $ 55,485 5.97% $315,844 6.23% $415,052 6.19%
========= ====== ======== ====== ========= ====== ======== ==== ======== ====
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Deposits
The Company's ratio of average demand deposits to average total deposits for
years ended December 31, 1998, 1997 and 1996 were 27%, 26%, and 23%,
respectively.
Average total deposits during 1998 decreased to $991 million from $995
million in 1997, a decrease of $4 million or .40%. In addition, average
noninterest-bearing deposits increased to $73 million in 1998 from $68 million
in 1997. Average deposits in 1997 decreased to $995 million from $1,042
million in 1996, a decrease of $47 million or 4.5%.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1998, 1997 and 1996 are presented below:
Year Ended December 31
---------------------------------------------
1998 1997 1996
------------- ------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- ---------- ----
(Dollars in thousands)
NOW accounts.................... $197,182 1.92% $188,646 2.08% $ 178,044 2.12%
Regular savings................. 105,400 2.33 104,787 2.37 106,476 2.37
Money market.................... 58,612 3.61 57,028 3.08 58,693 2.65
CD's............................ 556,699 5.31 577,141 5.24 636,585 5.31
-------- -------- ----------
Total interest-bearing
deposits..................... 917,893 4.13 927,602 4.35 979,798 4.44
Noninterest-bearing deposits.... 73,418 67,635 62,122
-------- -------- ----------
Total deposits................ $991,311 $995,237 $1,041,920
======== ======== ==========
The decrease in daily average balance for deposits from $1,041.9 million in
1996 to $991.3 million in 1998 is 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 two branches in 1996 and nine branches in
1998. 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 non-interest bearing checking accounts and NOW accounts.
Maturity Distribution of Time Deposits $100,000 and Over
December 31
-----------------------
Certificates
of Deposit Other Time
------------ ----------
(Dollars in thousands)
Three months or less.................................... $19,060 $ --
Over three months to six months......................... 25,279 --
Over six months to twelve months........................ 8,732 --
Over twelve months...................................... 7,492 --
------- -----
Total................................................. $60,563 $ --
======= =====
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:
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
December 31
------------------------
1998 1997 1996
-------- --------------
(Dollars in thousands)
Other short-term borrowings:
Average............................................. $ 12,213 $ -- $ 4,317
Year-end............................................ 12,040 -- 8,000
Maximum month-end balance during year................. 162,217 -- 8,000
Interest rate:
Average............................................. 3.83% 0.00% 5.80%
Year-end............................................ 3.83 0.00 5.80
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 Bank'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, 1998, this ratio was a positive 10.5%. The
Company estimates that a 100 basis point change in interest rates would have
no significant impact on its net interest income over a twelve-month period.
The Committee regularly reviews interest rate risk exposure by forecasting the
impact of alternative interest rate environments on net interest income. The
interest rate sensitivity ("GAP") is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A GAP is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A GAP is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period
of rising interest rates, a negative GAP would tend to adversely affect net
interest income, while a positive GAP would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive
GAP would tend to affect net interest income adversely. While the interest
rate sensitivity GAP is a useful measurement and contributes toward effective
asset and liability management, it is difficult to predict the effect of
changing interest rates solely on this 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
Bank's management has increased monitoring its net interest rate sensitivity
position and the effect of various interest rate environments on earnings.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Interest Rate Sensitivity and Liquidity
U.S. money market interest rate market presents the primary risk exposure to
the Company. In measuring and managing interest rate risk, the Company uses
gap analysis, net interest income simulation, and economic value equity
modeling. The following table sets forth a gap interest rate sensitivity
analysis for the Bank as of December 31, 1998:
Period/Cumulative GAP Analysis
-------------------------------------------------------------
0-90 days 91-180 days 181-360 days After One Year Total
--------- ----------- ------------ -------------- ----------
(Dollars in thousands)
Interest-earning assets:
Short term
investments.......... $ 51,464 $ $ $ $ 51,464
Investments available-
for-sale............. 48,734 46,459 42,356 226,512 364,061
Loans................. 44,669 47,639 94,846 638,479 825,633
--------- --------- --------- -------- ----------
Total interest-
earning assets..... $ 144,867 $ 94,098 $ 137,202 $864,991 $1,241,158
========= ========= ========= ======== ==========
Interest-bearing
liabilities:
Demand, money market
and savings
deposits............. $ 368,742 $ $ $ $ 368,742
Certificates of
deposit and other
time deposits........ 143,457 127,850 165,742 89,179 526,228
Borrowings............ 12,000 204,500 216,500
--------- --------- --------- -------- ----------
Total interest-
bearing
liabilities........ $ 524,199 $ 127,850 $ 165,742 $293,679 $1,111,470
========= ========= ========= ======== ==========
Period GAP............ $(379,332) $ (33,752) $ (28,540) $571,312
Cumulative GAP........ (379,332) (413,084) (441,624) 129,688 $ 129,688
Period GAP to earning
assets............... (30.1)% (2.7)% (2.3)% 46.0% 10.5%
Cumulative GAP to
earning assets....... (30.1)% (33.3)% (35.6)% 10.5%
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.
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 2% for the next 12 months while a 100 basis point decrease
would raise net interest income by 3%. The model includes balances, asset
prepayment speeds, and interest rate relationships among the balances that
management judges to be reasonable for the various interest rate environments.
Differences in actual occurrences from these assumptions, as well as non-
parallel changes in the yield curve, may change the Company's market risk
exposure. Among the interest rate relationships, there are caps and floors on
the Company's portfolios of adjustable rate mortgage loans and mortgage backed
securities. Additionally, Arkansas usury statutes impose interest rate caps on
certain commercial and consumer loans.
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 Company does not use off-balance sheet instruments.
As of December 31, 1998, the Company's net interest income exposure has
decreased slightly and has remained slightly liability sensitive. The
simulation model indicates that a parallel 100 basis point increase in
interest rates would leave net interest income about unchanged, while a 100
basis point decrease would raise net
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
interest income by 1%. Intermediate and longer term interest rates have
declined moderately since year end. These lower rates may continue due to low
inflation, reduced borrowings by the U.S. Treasury from an anticipated federal
budget surplus, and preference for U.S. Dollar assets by worldwide investors.
The Federal Reserve may maintain low short term domestic interest rates to
help ameliorate any adverse effect of turmoil in international financial
markets.
Management of the Company does not believe the $20 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 $20
million Note Payable has a two year maturity and a floating interest rate
based upon LIBOR. The Senior Notes have a term of five years with 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.
The Company did not hold any securities classified as trading securities
during 1998.
Capital Resources
Shareholders' equity increased to $169 million at December 31, 1998 from
$162 million at December 31, 1997, an increase of $7 million, or 4%. This
increase was primarily the result of net income of $6.4 million. Shareholders'
equity increased to $162 million at December 31, 1997 from $84.5 million at
December 31, 1996, an increase of $77.5 million, or 92%. This increase was
primarily the result of net income of $10.9 million and creation of purchase
accounting goodwill of $67 million from the purchase of Superior Federal Bank
by NationsBank. During 1996, shareholders' equity increased by $.2 million, or
.24%, from $84.3 million at December 31, 1995.
The following table provides a comparison of the Bank's leverage and risk-
weighted capital ratios as of December 31, 1998 to the minimum regulatory
standards:
Well-Capitalized
Minimum Minimum
Bank Ratio Required 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
Year 2000 Readiness Disclosure
Like most other financial institutions, the operations of the Bank are
particularly sensitive to potential problems arising form the inability of
many existing computer hardware and software systems and associated
applications to process accurately information relating to any two-digit "date
field" entries referring to the year 2000 and beyond. Many existing systems
are constructed to read such entries as referring to dates beginning with
"19", rather than "20". This set of issues is generally referred to as the
"Year 2000" problem.
The Federal Financial Institutions Examination Council (the "FFIEC"),
through bank regulatory agencies including the OTS and the FDIC, has issued
mandatory compliance guidelines requiring financial institutions to develop
and implement plans for addressing Year 2000 issues relevant to their
operations. The Company and the Bank have developed a plan as required under
the guidelines. The Company and its major third-party providers have completed
the awareness, assessment and renovation phases for all "mission critical"
deposit, loan and electronic services systems. The testing phase for these
system is well underway, and the Company expects that
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
such testing will be completed in the second quarter of 1999. In addition, the
Company is actively engaged in the testing phase of in-house supported
microcomputers, telecommunications, and other electronic/mechanical devices.
These tests are scheduled for completion during the second quarter of 1999.
The Company is also actively engaged, in concert with its third party
providers, in the development of its "business continuity plan". The Company
expects that the plan will be completed and validated by June 30, 1999. As of
December 31, 1998, the Company has spent $50,000 and expects to incur
additional internal and third-party costs totaling approximately $150,000
related to assessing the status of the Company's systems (including non-
information technology systems), defining its strategy to bring all systems in
to Year 2000 compliance, and implementing this strategy. These costs have been
and will continue to be expensed as incurred and are not expected to be
material to the Company's on-going operating costs.
The Company anticipates that all "mission critical" systems (as defined by
the FFIEC) will be Year 2000 compliant and fully tested within the schedule
set forth in the guidelines. However, the Company and the Bank depend upon
data processing and other services provided by third-party vendors. These
vendors have provided assurances that their systems will also be Year 2000
compliant by year-end 1999. The Company is actively engaged with its third
party providers in the test phase for all "mission critical" deposit, loan,
and electronic services. Testing of the century date rollover from December
31, 1999, to January 3, 2000, has been completed for all deposit and loan host
applications. Initial testing for leap year, year-end 2000, and 2001 rollover
is scheduled for completion in the first quarter of 1999. Third-party
interface testing with item processors, coupon vendors, credit bureaus, check
printers and other vendors is underway and is expected to continue throughout
the first quarter of 1999. Major vendors have also provided assurances that
their business continuity plans will be available in early 1999 for validation
by mid-year. Nevertheless, the Company could experience material disruptions
in its operations if the systems of such vendors are not Year 2000 compliant
as scheduled. The Company is unable to quantify at this time the cost to the
Company if such vendors fail to achieve Year 2000 compliance. Moreover, to the
extent that the risks posed by the Year 2000 problem are pervasive in data
processing and transmission and communications services worldwide, the Company
cannot predict with any certainty that its operations will remain materially
unaffected after January 1, 2000 or on dates preceding this date at which time
post-January 1, 2000 dates become significant within the Company's systems.
Under a hypothetical "worst case scenario", neither the Company's mission
critical systems, nor those of its material third vendors, would be Year 2000
compliant on schedule. In that event, the Company could experience material
disruptions in its ability to process customer accounts and otherwise conduct
its business in the ordinary course. However, based on the current status of
its testing program, the Company does not anticipate material disruptions to
arise as a result of the readiness of its hardware and software systems.
Assuming that (i) the Company's completed testing has provided an accurate
assessment of the readiness of the systems tested and (ii) remaining testing
is completed on schedule and provides positive indications of system
readiness, the Company's operations could still be materially disrupted by
local or regional power and communications failures. The Company is developing
a contingency plan to address the challenges presented by such a worst case
scenario.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS--BANK
1998--Three Months Ended For the
------------------------------------------- year ended
Mar. 31 (1) June 30 Sept. 30 Dec. 31 12/31/98
------------ --------- --------- --------- -----------
(Dollars in thousands, except per share amounts)
Net interest income..... $ 9,035 $ 9,937 $ 9,819 $ 10,164 $ 38,955
Provision for loan
losses................. 7,765 290 426 305 8,786
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 1,270 9,647 9,393 9,859 30,169
Non-interest income..... 5,516 6,173 6,469 6,313 24,471
Non-interest expense.... 10,833 10,171 10,451 10,529 41,984
--------- --------- --------- --------- ---------
Income (loss) before
income taxes........... (4,047) 5,649 5,411 5,643 12,656
Income taxes (benefit).. (282) 2,216 2,117 2,196 6,247
--------- --------- --------- --------- ---------
Net income (loss)....... $ (3,765) $ 3,433 $ 3,294 $ 3,447 $ 6,409
========= ========= ========= ========= =========
- --------
1. 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.
1997--Three Months Ended For the
------------------------------------------- year ended
Mar. 31 June 30 Sept. 30 Dec. 31 12/31/97
------------ --------- --------- --------- -----------
(Dollars in thousands, except per share amounts)
Net interest income..... $ 9,471 $ 9,566 $ 9,613 $ 9,655 $ 38,305
Provision for loan
losses................. 375 680 450 650 2,155
--------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 9,096 8,886 9,163 9,005 36,150
Non-interest income..... 5,664 5,966 5,805 5,844 23,279
Non-interest expense.... 10,259 9,975 10,358 8,724 39,316
--------- --------- --------- --------- ---------
Income before income
taxes.................. 4,051 4,877 4,610 6,125 20,113
Income taxes............ 2,156 2,424 2,319 2,292 9,191
--------- --------- --------- --------- ---------
Net income.............. $ 2,345 $ 2,453 $ 2,291 $ 3,833 $ 10,922
========= ========= ========= ========= =========
35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 32 through 33 herein.
Item 8. Financial Statements and Supplementary Data
36
CONSOLIDATED FINANCIAL STATEMENTS
SUPERIOR FINANCIAL CORP.
Year ended December 31, 1998 and for the
Period from November 12, 1997 (date of
inception) to December 31, 1997 with
Report of Independent Auditors
37
SUPERIOR FINANCIAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1998 and for the period from
November 12, 1997 (date of inception) to December 31, 1997
Contents
Report of Independent Auditors.............................................. 39
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................. 40
Consolidated Statements of Operations....................................... 41
Consolidated Statements of Changes in Stockholders' Equity.................. 42
Consolidated Statements of Cash Flows....................................... 43
Notes to Consolidated Financial Statements.................................. 44
38
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Superior Financial Corp.
We have audited the accompanying consolidated balance sheet of Superior
Financial Corp. (the "Company") and its wholly owned subsidiary, Superior
Federal Bank, F.S.B. (the "Bank") as of December 31, 1998 and the related
statements of operations, stockholders' equity and cash flows for the year
then ended and the accompanying balance sheet of the Company as of December
31, 1997 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998 and 1997 and the consolidated results of
its operations and its cash flows for the year ended December 31, 1998 and for
the period from November 12, 1997 (date of inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
February 3, 1999
39
SUPERIOR FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 1997
-------------- ------------
Assets
Cash and cash equivalents.......................... $ 81,425,010 $ 94,072
Loans receivable................................... 825,632,882
Less: allowance for loan losses.................... 10,471,770
--------------
Loans receivable, net.............................. 815,161,112
Investments available-for-sale, net................ 364,061,312
Accrued interest receivable........................ 7,525,559
Federal Home Loan Bank stock....................... 10,949,600
Premises and equipment, net........................ 26,213,466
Mortgage servicing rights, net..................... 2,198,260
Prepaid expenses and other assets.................. 4,198,856
Goodwill........................................... 64,129,701
Real estate acquired in settlement of loans, net... 331,496
Deferred acquisition costs and other assets........ 2,521,769 328,520
-------------- --------
Total assets................................... $1,378,716,141 $422,592
============== ========
Liabilities and stockholders' equity
Liabilities:
Deposits.......................................... $ 970,821,417 $
Federal Home Loan Bank borrowings................. 216,500,000
Note payable...................................... 20,000,000
Senior notes...................................... 60,000,000
Custodial escrow balances......................... 4,010,366
Other liabilities................................. 5,572,079 182,549
-------------- --------
Total liabilities.............................. 1,276,903,862
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, 10,080,503 issued and outstanding.... 100,805 --
Capital in excess of par value.................... 94,748,872 260,000
Retained earnings (deficit)....................... 6,655,064 (19,957)
Accumulated other comprehensive income............ 307,538 --
-------------- --------
Total stockholders' equity..................... 101,812,279 240,043
-------------- --------
Total liabilities and stockholders' equity..... $1,378,716,141 $422,592
============== ========
See accompanying notes.
40
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
Period from
November 12,
1997 (date of
Year ended inception) to
December 31 December 31
1998 1997
----------- -------------
Interest income:
Loans................... $42,807,953 $
Investments............. 15,702,142
Interest-bearing
deposits............... 4,210,897
Other................... 373,440
-----------
Total interest income..... 63,094,432
Interest expense:
Deposits................ 28,229,805
Short-term borrowings... 1,886,745
Long-term borrowings.... 8,615,682
-----------
Total interest expense.... 38,732,232
-----------
Net interest income....... 24,362,200
Provision for loan
losses................... 1,021,000
-----------
Net interest income after
provision for loan
losses................... 23,341,200
Noninterest income
Service charges on
deposit accounts....... 15,792,664
Mortgage operations,
net.................... 1,758,089
Income from real estate
operations, net........ 374,318
Other................... 1,270,121
-----------
Total noninterest income.. 19,195,192
Noninterest expense:
Salaries and employee
benefits............... 13,689,847
Occupancy expense....... 2,135,500
Deposit insurance
premium................ 594,969
Data processing......... 1,814,420
Advertising and
promotion.............. 1,411,189
Amortization of
goodwill............... 2,715,172
Postage and supplies.... 2,199,977
Equipment expense....... 1,052,741
Other................... 6,002,704 19,957
----------- --------
Total noninterest
expense.................. 31,616,519 19,957
----------- --------
Income (loss) before
income taxes............. 10,919,873 (19,957)
Income taxes.............. 4,244,852
----------- --------
Net income (loss)......... $ 6,675,021 $(19,957)
=========== ========
Basic and diluted earnings
per common share......... $ 0.88 --
See accompanying notes.
41
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year ended December 31, 1998 and for the period from
November 12, 1997 (date of inception) to December 31, 1997
Accumulated
Capital in Other Retained Total
Preferred Common Excess of Comprehensive Earnings Stockholders'
Stock Stock Par Value Income (Deficit) Equity
--------- -------- ----------- ------------- ---------- -------------
Balance, November 12,
1997 (inception date).. $ -- $ -- $ -- $ -- $ -- $ --
Contribution from
investors.............. -- -- 260,000 -- -- 260,000
Net loss and
comprehensive loss..... -- -- -- -- (19,957) (19,957)
----- -------- ----------- -------- ---------- ------------
Balance, December 31,
1997................... -- -- 260,000 -- (19,957) 240,043
Original issuance of
common stock,
10,079,703 shares,
(less cost of issuance
of $3,429,417)......... -- 100,797 94,481,180 -- -- 94,581,977
Issuance of common stock
to employees, 800
shares................. -- 8 7,692 -- -- 7,700
Comprehensive income:
Net income............ -- -- -- -- 6,675,021 6,675,021
Other comprehensive
income, net of tax:
Net change in
unrealized gains on
investments available
for sale, net of
taxes of $165,598.... -- -- -- 307,538 -- 307,538
------------
Total comprehensive
income................. 6,982,559
----- -------- ----------- -------- ---------- ------------
Balance, December 31,
1998................... $ -- $100,805 $94,748,872 $307,538 $6,655,064 $101,812,279
===== ======== =========== ======== ========== ============
See accompanying notes.
42
SUPERIOR FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
period from
November 12,
1997 (date of
Year ended inception) to
December 31 December 31
1998 1997
------------- -------------
Operating activities
Net income (loss)................................. $ 6,675,021 $ (19,957)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for loan losses........................ 1,021,000
Deferred income taxes............................ 375,413
Depreciation..................................... 1,027,264
Amortization of mortgage servicing rights........ 144,979
Amortization of premiums on mortgage-backed
securities, net................................. 1,458,467
Amortization of goodwill......................... 2,715,172
Amortization of debt issuance costs.............. 769,500
Gain on sale of real estate...................... (9,115)
Mortgage loans originated for sale............... (39,016,175)
Proceeds from sale of mortgage loans held for
sale............................................ 30,750,271
Gain on sale of loans............................ (162,312)
Gain on sale of investments...................... (12,089)
Increase in accrued interest receivable.......... (1,465,756)
Increase in prepaid expenses and other assets.... (4,657,658)
Increase in other liabilities.................... 2,210,547
------------- ---------
Net cash provided by (used in) operating
activities....................................... 1,824,529 (19,957)
Investing Activities
Increase in loans receivable, net................ (128,032,122)
Principal payments on mortgage-backed
securities...................................... 68,765,626
Proceeds from sale of nine branches.............. (79,044,057)
Proceeds from sale or maturity of available-for-
sale investments................................ 15,903,093
Purchases of available-for-sale investment
securities...................................... (103,086,125)
Purchase of FHLB stock........................... (2,675,700)
Proceeds from sale of FHLB stock................. 4,381,100
Proceeds from sale of real estate................ 371,194
Purchases of premises and equipment.............. (3,923,015)
Purchase of Superior Federal Bank, F.S.B., net of
cash acquired................................... 127,575,515
Deferred acquisition costs....................... -- (145,971)
------------- ---------
Net cash used in investing activities............. (99,764,491) (145,971)
Financing Activities
Net increase in deposits......................... 38,534,397
Proceeds from FHLB borrowings.................... 126,500,000
Proceeds from borrowings under bank debt......... 20,000,000
Proceeds from borrowings under senior notes...... 60,000,000
Proceeds from common stock issued, net........... 94,589,677
Reduction in FHLB borrowings..................... (162,198,000)
Contribution from investors...................... -- 260,000
Net increase in advance payments by borrowers for
taxes and insurance............................. 1,844,826
------------- ---------
Net cash provided by financing activities......... 179,270,900 260,000
------------- ---------
Net increase in cash.............................. 81,330,938 94,072
Cash and cash equivalents at beginning of period.. 94,072 --
------------- ---------
Cash and cash equivalents at end of period........ $ 81,425,010 $ 94,072
============= =========
See accompanying notes.
43
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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 Fort Smith,
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 and 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 Company,
the Bank, and the Bank's 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 interest bearing deposits in other depository institutions.
Interest bearing deposits were $40,514,000 at December 31, 1998.
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.
44
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.
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 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 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, 1998 and 1997.
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.
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.
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.
45
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allowance is maintained at a level that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, historical loan loss experience and
current economic and business conditions that may affect the borrowers'
ability to pay or the value of the 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 statement
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 credited in income. Other
loan fees, such as prepayment penalties, late charges, and release fees are
recorded as income when collected.
46
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage Servicing Rights
Purchased mortgage 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 mortgage 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 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 purchased mortgage servicing rights do not
purport to represent the amount that would be realized by a sale of these
assets in the open market. Mortgage 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.
Comprehensive Income
As of January 1, 1998, 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 Statement of Changes in Stockholders' Equity.
Segment Disclosures
On December 31, 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS 131 established
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
As the Company operates in only one segment--community banking--the adoption
of SFAS 131 did not have a material effect on the financial statements or the
disclosure of segment information. 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, "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, 1999. SFAS 133
permits early adoption as of the beginning of any fiscal quarter that begins
after June 1998. The Company expects to adopt FAS 133 effective January 1,
2000. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives are either offset against the change
in fair value of the assets, liabilities, or firm commitments through
operating results or recognized in other comprehensive income until the hedged
item is recognized in operating results. The ineffective portions of a
derivative's change in fair value will be immediately recognized in operating
results. The Company has not yet determined what effect the adoption of this
statement will have on its results of operations or financial positions.
47
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
----------- -----------
(dollars in thousands)
Total revenue....................................... $ 108,547 $ 106,944
Income before income taxes.......................... 6,681 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.
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.
48
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of financial instruments at December 31, 1998,
consist of the following:
Carrying Estimated Fair
Value Value
----------- --------------
Financial assets:
Cash and cash equivalents....................... $81,425,010 $81,425,010
Loans receivable, net........................... 815,161,112 820,691,833
Investments available-for-sale, net............. 364,061,312 364,061,312
Accrued interest receivable..................... 7,525,559 7,525,559
Federal Home Loan Bank stock.................... 10,949,600 10,949,600
Financial liabilities:
Demand deposits................................. 444,593,896 444,593,896
Time deposits................................... 526,227,521 527,730,970
Federal Home Loan Bank borrowings............... 216,500,000 216,500,000
Notes payable................................... 80,000,000 80,755,886
Off-balance sheet financial instruments......... 3,348,000 3,348,000
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 $3.2 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 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 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, 1998. 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.
49
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Loans Receivable and Financial Instruments with Off-Balance Sheet Risk
Loans receivable consisted of approximately the following at December 31,
1998:
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences................ $484,324,000
Collateralized by other properties............................. 40,569,000
Construction loans............................................. 21,610,000
Other.......................................................... 2,753,000
------------
549,256,000
------------
Undisbursed portion of construction loans...................... (8,443,000)
------------
Total first mortgage loans..................................... 540,813,000
Consumer and other loans:
Automobile..................................................... 174,316,000
Savings........................................................ 6,624,000
Home equity and second mortgage................................ 29,494,000
Commercial, financial, and agricultural........................ 10,800,000
Other.......................................................... 63,365,000
------------
Total consumer and other loans................................. 284,599,000
Deferred loan costs, net....................................... 220,882
Allowance for loan losses...................................... (10,471,770)
------------
Loans receivable, net.......................................... $815,161,112
============
Loans to directors and executive officers totaled $1,988,330 at December 31,
1998. 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 released. Loans held for sale at December 31,
1998, 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 consolidated balance
sheet. 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.
50
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $38,581,000 and
standby letters of credit of approximately $3,348,000 at December 31, 1998.
5. Mortgage Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of these loans at
December 31, 1998 are summarized as follows:
FHLMC........................................................... $ 59,069,544
GNMA............................................................ 109,088,314
Private investors............................................... 21,906,354
------------
$190,064,212
============
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
$3,047,000 at December 31, 1998. Of the loans serviced by the Bank at December
31, 1998, approximately $3,675,000 were sold with recourse.
Errors and omissions and fidelity bond insurance coverage under the
Company's loan servicing bond was $2,000,000 at December 31, 1998.
Additionally, at December 31, 1998, the Company was covered by an excess
liability umbrella policy in the amount of $20 million.
6. Investments Available-for-Sale
The amortized cost and estimated fair value of investments available-for-
sale are summarized as follows at December 31, 1998:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- ------------
GNMA....................... $ 75,818,061 $ 103,255 $ (621,059) $ 75,300,257
FNMA....................... 165,168,316 1,161,525 (242,869) 166,086,972
FHLMC...................... 55,908,327 549,249 (486,105) 55,971,471
CMOs....................... 59,130,262 56,325 (47,185) 59,139,402
Trust Preferred Stock...... 7,563,210 -- -- 7,563,210
------------ ---------- ----------- ------------
$363,588,176 $1,870,354 $(1,397,218) $364,061,312
============ ========== =========== ============
51
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and estimated fair value by contractual maturity of
investments available-for-sale at December 31, 1998 are as follows:
Estimated
Amortized Fair
Cost Value
------------ ------------
Due in one year or less........................... $ -- $ --
Due from one year to five years................... 3,209,000 3,209,000
Due from five years to ten years.................. 55,485,000 55,930,000
Due after ten years............................... 304,894,000 304,922,000
------------ ------------
Totals.......................................... $363,588,000 $364,061,000
============ ============
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
$182,456,000 at December 31, 1998 were subject to adjustable rates.
The carrying value of mortgage-backed securities pledged for letters of
credit, treasury, tax and loan accounts, and public fund deposits at December
31, 1998 was approximately $13,356,000.
7. Allowance for Loan Losses
A summary of the activity in the allowance for loan losses follows:
Balance, January 1, 1998...................................... $ --
Allowance resulting from acquisition of Bank on April 1,
1998....................................................... 10,592,718
Provision for loan losses................................... 1,021,000
Charge-offs, net of recoveries.............................. (1,141,948)
-----------
Balance, December 31, 1998.................................. $10,471,770
===========
8. Premises and Equipment
Premises and equipment consisted of the following at December 31, 1998:
Land............................................................ $ 6,114,646
Buildings and improvements.................................... 15,217,095
Furniture and equipment....................................... 5,067,859
Construction in progress...................................... 841,130
-----------
27,240,730
Accumulated depreciation...................................... (1,027,264)
-----------
Premises and equipment, net................................... $26,213,466
===========
52
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Debt Issuance Costs
At December 31, 1998, debt issuance costs, which are included in prepaid
expenses and other assets in the consolidated balance sheet, consisted of the
following:
$20
Million
Colonial $60 Million
Bank Note 8.65% Senior
Payable Notes
--------- ---------------
Capitalized debt issuance costs................... $ 404,742 $2,465,272
Amortization...................................... (404,742) (364,758)
--------- ----------
Net debt issuance costs........................... $ -- $2,100,514
========= ==========
10. Deposits
Deposits consisted of the following at December 31, 1998:
Demand and NOW accounts, including noninterest-bearing
deposits of $75,851,452..................................... $283,030,331
Money market................................................. 60,391,549
Statement and passbook savings............................... 101,172,016
Certificates of deposit...................................... 526,227,521
------------
$970,821,417
============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $60,562,838 at December 31, 1998.
At December 31, 1998, the scheduled maturities of certificates of deposit are
as follows:
1999......................................................... $433,928,544
2000......................................................... 54,242,175
2001......................................................... 22,376,735
2002......................................................... 9,111,111
2003......................................................... 5,200,087
Thereafter................................................... 1,368,869
------------
$526,227,521
============
11. Federal Home Loan Bank ("FHLB") Borrowings
The Bank had borrowings from the FHLB as follows at December 31, 1998:
Weighted Average
Interest Rate Borrowings
---------------- ------------
Maturing in year ending December 31:
1999........................................ 4.95% $ 12,000,000
2000........................................ 4.95 31,500,000
2001........................................ 4.94 18,000,000
2002........................................ -- --
Thereafter.................................. 5.17% 155,000,000
------------
$216,500,000
============
53
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998, the Bank has unused commitments totaling
$50 million which expire on March 31, 1999. There is no commitment fee to
maintain this credit line.
12. Long Term Debt
At December 31, 1998, long term debt consisted of a $20 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 $20 million Colonial Note bears interest at LIBOR plus 1.75% (6.81% at
December 31, 1998) and requires quarterly interest payments. In January 1999,
the interest rate was reduced to LIBOR plus 1.25%. The entire principal
balance is due April 1, 2000. 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, 1998, the Company was not in
violation of 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, 1998, 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, 1998, the
Company was not in violation of these covenants.
13. 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.
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, 1998, that the Bank meets all capital adequacy requirements to which it is
subject.
54
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Bank's actual capital amounts and ratios as of December
31, 1998 are presented below (amounts in thousands):
Required to be
Categorized as
Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Company Bank Purposes Provisions
------------- -------------- ------------------ -------------------
Actual Actual
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- ---------- ------- ---------- --------
As of December 31, 1998:
Tangible capital to
adjusted total
assets................ $37,389 2.85% $104,324 7.99% $ 19,589 1.5% N/A N/A
Core capital to
adjusted total
assets................ 37,389 2.85 104,324 7.99 39,178 4.0 $ 65,296 5.0%
Total capital to risk
weighted assets....... 47,861 5.50 114,770 16.70 54,975 8.0 68,719 10.0
Tier I capital to risk
weighted assets....... 37,389 4.30 104,324 15.18 N/A N/A 59,231 6.0
14. 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, 1998 are as follows:
Deferred tax liabilities:
Prepaid assets................................................... $261,299
Goodwill amortization............................................ 517,698
Unrealized gain on investments available-for-sale................ 165,598
Premises and equipment........................................... 7,396
--------
Total deferred liabilities..................................... 951,991
Deferred tax assets:
Accrued bonuses.................................................. 9,190
Allowance for loan losses........................................ 390,941
Mortgage servicing rights........................................ 10,659
Other............................................................ 190
--------
Total deferred tax assets...................................... 410,980
--------
Net deferred tax liabilities....................................... $541,011
========
55
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the provision for income taxes for the year ended
December 31, 1998 are as follows:
Current:
Federal......................................................... $3,242,030
State........................................................... 627,409
----------
Total current................................................. 3,869,439
Deferred:
Federal 295,110
State........................................................... 80,303
----------
375,413
----------
$4,244,852
==========
The reconciliation of income tax attributable to continuing operations
computed at the U.S. Federal statutory tax rates to income tax expense for the
year ended December 31, 1998 is:
Tax at U.S. statutory rate............................................. 35.0%
State income tax expense, net of Federal income tax benefit............ 3.9
----
38.9%
====
The Company files a consolidated federal income tax return with the Bank.
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. 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 is computed as follows (in
thousands, except per share amounts):
Year ended
December 31,
1998
------------
Common shares--weighted averages (basic)........................ 7,594,520
Common share equivalents--weighted averages..................... --
Common shares weighted average (diluted)........................ 7,594,520
Net income...................................................... $6,675,021
Basic and diluted earnings per common share..................... $ 0.88
==========
16. Mortgage Servicing Rights
Following is a summary of the changes in purchased mortgage servicing rights
follows:
Balance, January 1, 1998......................................... $ --
Acquired in Bank acquisition on April 1, 1998.................. 2,343,239
Amortization................................................... (144,979)
----------
Balance, December 31, 1998..................................... $2,198,260
==========
56
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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, 1998 follows:
1999.............................................................. $ 527,102
2000.............................................................. 431,340
2001.............................................................. 415,480
2002.............................................................. 258,457
2003.............................................................. 197,237
Thereafter........................................................ 1,589,391
----------
$3,419,007
==========
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.
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 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.
57
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. 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:
Fair value of noncash assets acquired...................... $1,081,435,551
Cash acquired.............................................. 288,692,364
Cash paid for the capital stock............................ (162,500,000)
Transaction costs.......................................... (8,757,618)
Excess of investment over fair value of net assets
acquired.................................................. 76,426,482
--------------
Liabilities assumed........................................ $1,275,296,779
==============
Cash paid during the period for:
Interest................................................. $ 37,727,773
Taxes.................................................... $ 4,199,000
Costs paid from the proceeds of the issuance of common
stock and borrowings under the bank debt and senior notes:
Debt issuance costs...................................... $ 2,870,014
Stock issuance costs..................................... $ 3,429,417
Noncash Activity:
Additions to other real estate from settlement of loans.. $ 343,968
Repayment of funds advanced by the Placement Agent and
Lead Investor to pay transaction costs through issuance
of 200,000 shares of common stock....................... $ 1,000,000
Deferred acquisition costs incurred but not paid......... $ 182,549
19. Employee Benefit Plan
In April 1998 the Company established a qualified retirement plan, with a
salary deferral feature designed to qualify under Section 401 of the Internal
Revenue Code (the "401(k) Plan"). The 401(k) Plan permits the employees of the
Company to defer a portion of their compensation in accordance with the
provisions of Section 401(k) of the Code. Matching contributions may be made
in amounts and at times determined by the Company. Certain other statutory
limitations with respect to the Company's contribution under the 401(k) Plan
also apply. Amounts contributed by the Company for a participant will vest
over four years and will be held in trust until distributed pursuant to the
terms of the 401(k) Plan.
Employees of the Company are eligible to participate in the 401(k) Plan when
they meet certain requirements concerning minimum age and period of credited
service. All contributions to the 401(k) Plan will be invested in accordance
with participant elections among certain investment options. Distributions
from participant accounts will not be permitted before age 59 1/2, except in
the event of death, permanent disability, certain financial hardships or
termination of employment. The Company made matching contributions to the
401(k) Plan during 1998 of $203,863.
20. Stock Option Plan
On June 17, 1998, the Company adopted the 1998 Long-Term Incentive Plan (the
"LTIP"). The LTIP is an omnibus plan administered by the Company's
Compensation Committee to provide equity-based incentive compensation for the
Company's key employees. It provides for issuance of incentive stock options,
qualified under Section 422 of the 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
58
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
separately, and awards of restricted shares subject to time-based restrictions
and/or performance goals. The portion of the LTIP applicable to incentive
stock options is subject to shareholder approval by June 17, 1999.
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). As
of December 31, 1998 there were no shares granted or exercisable under the
LTIP.
As of December 31, 1998, 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, 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. The exercise price of these
options is $10.00 per share. These stock options are not exercisable unless
the following occurs:
Number of
Shares
Exercisable
-----------
Successful acquisition of the Bank and consummation of public
offering of equity securities................................ 292,500
Company's stock reaches price of $15 per share................ 146,250
Company's stock reaches price of $20 per share................ 146,250
Company's stock reaches price of $25 per shares............... 146,250
These stock options have a term of 10 years. As of December 31, 1998,
292,500 stock options were exercisable.
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 year ended December 31, 1998 assuming the Company had elected to
account for its stock option grants in accordance with SFAS No. 123 would have
been net income of $6,441,509 or $0.85 basic and diluted earnings per share.
Such pro forma effects are not necessarily indicative of the effect on future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for the 731,250 options granted in 1998: dividend yield
of 0%; expected volatility of 0%; risk-free interest rate of 6.73% and
expected life of 10 years.
59
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. 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, 1998 and 1997 and for the year ended December 31, 1998 and for
the period from November 12, 1997 (date of inception) to December 31, 1997.
1998 1997
--------- -------
(In Thousands)
Balance Sheets
Assets
Cash and cash equivalents................................. $ 3,848 $ 94
Investment in subsidiary.................................. 168,968 --
Investment securities..................................... 5,330 --
Other..................................................... 5,160 329
--------- -----
Total assets............................................ $ 183,306 $ 423
========= =====
Liabilities and Stockholders' Equity
Notes payable............................................. $ 80,000 $ --
Accrued interest and other liabilities.................... 1,494 183
--------- -----
Total liabilities....................................... 81,494 183
Stockholders' equity........................................ 101,812 240
--------- -----
Total liabilities and stockholders' equity.................. $ 183,306 $ 423
========= =====
1998 1997
--------- -------
(In thousands)
Statements of Operations
Income
Dividends from subsidiary................................. $ 4,000 $ --
Expenses
Interest, net............................................. 5,582 --
Other..................................................... 194 20
--------- -----
Total expenses.......................................... 5,776 20
Income (loss) before income tax benefit and equity in
undistributed earnings of subsidiary....................... (1,776) (20)
Income tax benefit.......................................... 2,291 --
Equity in undistributed earnings of subsidiary.............. 6,160 --
--------- -----
Net income (loss)........................................... $ 6,675 $ (20)
========= =====
60
SUPERIOR FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 1997
-------- -----
(In thousands)
Statements of Cash Flows
Operating Activities
Net income (loss)............................................ $ 6,675 $ (20)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Undistributed earnings of subsidiary........................ (6,160) --
Increase in other assets.................................... (4,831) --
Increase in accrued interest and other liabilities.......... 1,311 --
-------- -----
Net cash used in operating activities....................... (3,005) (20)
Investing Activities
Deferred acquisition costs.................................. -- (146)
Purchase of investment securities........................... (5,330) --
Purchase of Superior Federal Bank, F.S.B.................... (162,500) --
-------- -----
Net cash used in investing activities....................... (167,830) (146)
Financing Activities
Contribution from investors................................. -- 260
Proceeds from common stock issued, net...................... 94,589 --
Proceeds from notes payable................................. 80,000 --
Net cash provided by financing activities................... 174,589 260
Net increase in cash........................................ 3,754 94
Cash and cash equivalents at beginning of period............ 94 --
-------- -----
Cash and cash equivalents at end of period.................. $ 3,848 $ 94
-------- -----
Supplemental disclosures of noncash activity:
Deferred acquisition costs incurred but not paid............ $ -- $ 183
======== =====
61
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 either of 1996 or 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.
62
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 12, 1999, 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 Present and Principal
Year with the Company and Occupation
Became Director Superior Federal Bank, F.S.B. for the Last Five Years
--------------- ---------------------------- ------------------------------
C. Stanley Bailey Chairman of the Board, Chief Chief Executive Officer and
49, 1998........ Executive Officer of both Chairman of the Board of the
Superior and Superior Company and the Bank, Fort
Federal Bank, F.S.B. Smith, 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 and Director, of President and Director of the
49, 1998........ both Superior and Superior Company and the Bank, Fort
Federal Bank, F.S.B. 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 and
39, 1998........ Treasurer of Superior and Treasurer of the Company and
Superior Federal Bank, the Bank, Fort Smith,
F.S.B. 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 12, 1999 under the caption "Executive Compensation" and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained in the Company's proxy
statement dated April 12, 1999, 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 12, 1999, under the captions "Compensation committee
Interlocks and Insider Participation" and "Executive Compensation" and is
incorporated herein by reference.
63
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) costs or difficulties related to the separation of the
business of the Bank from the business of NationsBank are greater than
expected and 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);
(viii) changes in the securities markets and (ix) contingencies and losses
specifically related to Year 2000 readiness. 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.
64
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, 1998
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for year ended December 31, 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 year
ended December 31, 1998 and for the period from November 12, 1997 (date
of inception) to December 31, 1997
Consolidated Statement of Cash Flows for the year ended December 31, 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
December 31, 1996 and 1995
Independent Auditors' Report
Consolidated Statement of Financial Condition as of December 31, 1996
Consolidated Statements of Income for the years ended December 31, 1996
and 1995
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995
Notes to Consolidated Financial Statements for the years ended December
31, 1996 and 1995
65
EXHIBIT INDEX
Exhibits Description
-------- -----------
Exhibit 3 -- Articles of Incorporation and Bylaws:
-- Restated and Amended Certificate of Incorporation of
3.1 Superior Financial Corp. ("Superior")
3.2 -- Bylaws of Superior
Exhibit 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
4.2 -- Form of Registration Rights Agreement between Superior, KBW
and various investors named therein, dated April 1, 1998
4.3 -- Form of Common Stock Certificate of Superior
4.4 -- Article 4 of Superior's Amended amd Restated Certficate of
Incorporation (included in Exhibit 3.1)
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
Exhibit 10 -- Material Contracts:
10.1 -- Custody and Security Agreement between Superior and Bank of
New York ("BONY"), as Trustee, dated April 1, 1998
10.2 -- Securities Account Control Agreement between Superior,
Trustee and BONY, dated April 1, 1998
10.3 -- Founders Agreement between Superior and C. Stanley Bailey,
dated December 2, 1997
10.4 -- Founders Agreement between Superior and KBW, dated December
2, 1997
10.5 -- Founders Agreement between Superior and Financial Stocks,
Inc., dated December 2, 1997
10.6 -- Agreement between C. Marvin Scott and Superior, dated
January 1, 1998
10.7 -- 1998 Long Term Incentive Plan
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
10.9 -- Agreement between Rick D. Gardner and Superior dated
September 21, 1998
Statement Regarding Computation of Ratio of Earnings to
Exhibit 12 -- Fixed Charges
Exhibit 16 -- Letter regarding change in certifying accountant
16.1 -- Letter of Deloitte & Touche LLP
Exhibit 21 -- List of subsidiaries of the Registrant.
Exhibit 24 -- Power of Attorney.
Exhibit 27 -- Financial Data Schedules
66
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, 1999.
SUPERIOR FINANCIAL CORP.
/s/ C. Stanley Bailey
By: _________________________________
C. Stanley Bailey
Its Chairman of the Board of
Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ C. Stanley Bailey Chairman of the Board of **
____________________________________ Directors and Chief
C. Stanley Bailey Executive Officer
/s/ C. Marvin Scott President and Director **
____________________________________
C. Marvin Scott
/s/ Rick D. Gardner Chief Financial Officer and **
____________________________________ Treasurer (Principal
Rick D. Gardner Financial Officer and
Principal Accounting
Officer)
* Director **
____________________________________
Boyd W. Hendrickson
* Director **
____________________________________
John M. Stein
* Director **
____________________________________
David E. Stubblefield
* 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, 1999
67
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998
Commission File No. 0-25239
----------------
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX TO 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
December 31, 1996 and 1995
Independent Auditors' Report
Consolidated Statement of Financial Condition as of December 31, 1996
Consolidated Statements of Income for the years ended December 31, 1996
and 1995
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995
Notes to Consolidated Financial Statements for the years ended December
31, 1996 and 1995
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
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
Boatmen's Bancshares, Inc.) and subsidiary (the "Bank") as of December 31,
1996, and the related consolidated statements of income, stockholder's equity
and cash flows for each of the two years in the period ended December 31,
1996. 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 audits.
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 audits 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, 1996, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Little Rock, Arkansas
January 13, 1997
S-25
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1996
1996
--------------
ASSETS
Cash and cash equivalents................. $ 50,239,427
Loans receivable, net (Notes 3, 7, 10 and
18)...................................... 669,802,624
Mortgage-backed securities available for
sale (Notes 3, 6 and 9).................. 437,076,510
Accrued interest receivable (Note 5)...... 7,111,339
Federal Home Loan Bank stock (Note 10).... 11,929,000
Office properties and equipment, net
(Notes 8 and 18)............................ 19,061,546
Purchased loan servicing rights (Note
16)...................................... 2,268,197
Core deposit premium, net................. 4,564,110
Prepaid expenses and other assets (Note
14)...................................... 3,539,067
Real estate acquired in settlement of
loans, net............................... 643,354
--------------
TOTAL..................................... $1,206,235,174
==============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Deposits (Notes 9 and 18)................ $ 990,202,926
Federal Home Loan Bank borrowings (Note
10)..................................... 123,000,000
Advance payments by borrowers for taxes
and insurance........................... 3,722,438
Other liabilities (Note 13).............. 4,788,955
--------------
Total liabilities....................... 1,121,714,319
COMMITMENTS AND CONTINGENCIES (Notes 3, 15
and 17)
STOCKHOLDER'S EQUITY (Note 11):
Common stock--$1 par value; 1,000 shares
authorized, issued and outstanding...... 1,000
Capital in excess of par value........... 65,499,000
Retained earnings........................ 19,481,705
Net unrealized depreciation on securities
available for sale, net of taxes of
$297,501................................ (460,850)
--------------
Total stockholder's equity............... 84,520,855
--------------
TOTAL..................................... $1,206,235,174
==============
See notes to consolidated financial statements.
S-26
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996 and 1995
1996 1995
----------- -----------
INTEREST INCOME:
Loans:
First mortgage loans................................. $33,163,113 $32,174,581
Consumer and other loans............................. 18,633,674 12,941,766
Mortgage-backed securities............................ 31,222,981 36,448,476
Interest-bearing deposits............................. 1,709,997 1,126,836
Other................................................. 679,003 746,956
----------- -----------
Total interest income............................... 85,408,768 83,438,615
INTEREST EXPENSE:
Deposits (Note 9)..................................... 41,668,588 42,578,339
Other................................................. 7,063,851 6,747,362
----------- -----------
Total interest expense.............................. 48,732,439 49,325,701
----------- -----------
NET INTEREST INCOME.................................... 36,676,329 34,112,914
PROVISION FOR LOAN LOSSES (Note 7)..................... 1,125,000 1,050,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 35,551,329 33,062,914
OTHER INCOME:
Loan servicing fees, net (Notes 4 and 16)............. 1,330,380 1,241,647
Deposit accounts and other fees....................... 18,682,978 17,235,829
Income from real estate operations, net (Note 12)..... 650,156 933,049
Other................................................. 2,706,256 1,161,052
----------- -----------
Total other income.................................. 23,369,770 20,571,577
OTHER EXPENSES:
Salaries and employee benefits (Note 13).............. 16,352,091 14,721,125
Net occupancy expense of premises (Note 15)........... 2,889,919 2,821,510
Deposit insurance premium (Note 9).................... 8,910,747 2,420,738
Data processing....................................... 3,113,584 2,462,056
Advertising and promotion............................. 2,388,023 2,290,647
Amortization of core deposit premium.................. 1,530,376 1,713,200
Postage and supplies.................................. 2,700,683 2,384,162
Equipment expense..................................... 2,254,945 2,071,203
Other................................................. 6,221,271 5,642,409
----------- -----------
Total other expenses................................ 46,361,639 36,527,050
----------- -----------
INCOME BEFORE INCOME TAX PROVISION..................... 12,559,460 17,107,441
INCOME TAX PROVISION (Note 14)......................... 4,925,537 6,710,394
----------- -----------
NET INCOME............................................. $ 7,633,923 $10,397,047
=========== ===========
See notes to consolidated financial statements.
S-27
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
for the years ended December 31, 1996 and 1995
Net Unrealized
Depreciation on
Capital in Securities Total
Common Excess of Retained Available Stockholder's
Stock Par Value Earnings For Sale Equity
------ ----------- ----------- --------------- -------------
BALANCE, JANUARY 1,
1995................... $1,000 $65,499,000 $11,427,685 $76,927,685
Dividends............. (2,467,600) (2,467,600)
Net income............ 10,397,047 10,397,047
Effect of adoption of
A Guide to
Implementation of
Statement 115 on
Accounting for
Certain Debt and
Equity Securities
(Note 6)............. $(578,073) (578,073)
------ ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1995................... 1,000 65,499,000 19,357,132 (578,073) 84,279,059
------ ----------- ----------- --------- -----------
Dividends............. (7,509,350) (7,509,350)
Net income............ 7,633,923 7,633,923
Net change in
unrealized
depreciation on
securities available
for sale............. 117,223 117,223
------ ----------- ----------- --------- -----------
BALANCE, DECEMBER 31,
1996................... $1,000 $65,499,000 $19,481,705 $(460,850) $84,520,855
====== =========== =========== ========= ===========
See notes to consolidated financial statements.
S-28
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
1996 1995
----------- ------------
OPERATING ACTIVITIES:
Net income........................................ $ 7,633,923 $ 10,397,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses....................... 1,125,000 1,050,000
Depreciation.................................... 2,319,756 2,079,620
Accretion of valuation accounts from
acquisition.................................... 562,260 600,933
Amortization of purchased loan servicing
rights......................................... 789,958 1,008,429
Amortization of core deposit premium............ 1,530,376 1,713,200
Amortization of premiums on mortgage-backed
securities, net................................ 1,923,480 2,104,156
Gains on sales of real estate................... (26,227) (296,723)
Gain on sale of branch operations............... (1,284,259)
Proceeds from sales of loans held for sale...... 24,216,422 19,129,332
Decrease (increase) in accrued interest
receivable..................................... 612,269 (711,326)
Decrease in prepaid expenses and other assets... (861,859) 155,381
Decrease (increase) in other liabilities........ (750,163) 468,941
----------- ------------
Net cash provided by operating activities..... 37,790,936 37,698,990
INVESTING ACTIVITIES:
Increase in loans receivable, net................. (68,514,103) (131,942,911)
Principal payments on mortgage-backed securities.. 84,651,744 82,039,226
Purchase of Federal Home Loan Bank stock.......... (678,800) (851,600)
Proceeds from sales of real estate................ 346,573 1,203,365
Purchase of property and equipment................ (3,300,307) (3,262,880)
----------- ------------
Net cash provided (used) in investing
activities................................... 12,505,107 (52,814,800)
FINANCING ACTIVITIES:
Net change in deposits, net of the effect of the
sale of branch operations........................ (83,165,279) 23,695,823
Proceeds of Federal Home Loan Bank advances....... 8,000,000 90,000,000
Repayments of securities sold under agreements to
repurchase....................................... (80,000,000)
Payments of dividends............................. (7,509,350) (2,167,600)
Net (decrease) increase in advance payments by
borrowers for taxes and insurance................ (1,452,502) 1,229,595
----------- ------------
Net cash provided (used) by financing
activities................................... (84,127,131) 32,457,818
NET INCREASE (DECREASE) IN CASH..................... (33,831,088) 17,342,008
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 84,070,515 66,728,507
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $50,239,427 $ 84,070,515
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $48,761,199 $ 49,235,429
=========== ============
Cash paid during the period for income taxes...... $ 5,384,437 $ 8,157,440
=========== ============
SUPPLEMENTAL NONCASH ACTIVITIES:
Additions to other real estate from settlement of
loans............................................ $ 625,615 $ 539,237
=========== ============
Transfer of securities to available for sale
portfolio........................................ $523,458,838
============
Transfer of assets in settlement of sale of branch
operations....................................... $ 9,929,516
===========
See notes to consolidated financial statements.
S-29
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 1996 and 1995
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Superior Federal Bank, F.S.B. (the "Bank") is a
wholly-owned subsidiary of Boatmen's Bancshares, Inc. ("Boatmen's"). 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 Corporation ("NationsBank") completed acquisition
of Boatmen's. NationsBank has not informed Bank management of planned changes,
if any, in the operations of the Bank.
Basis of Presentation--The accounting and reporting policies of the Bank
conform to generally accepted accounting principles 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 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.
S-30
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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 trading securities during
1996 or 1995.
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 the lower of cost or 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.
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.
S-31
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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 seven 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.
Purchased 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.
Reclassification--Certain 1995 amounts have been reclassified to conform to
the 1996 presentation.
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-32
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
The estimated fair values of financial instruments at December 31, 1996,
consist of the following:
1996
-------------------------
Carrying Estimated
Value Fair Value
------------ ------------
Financial assets:
Cash and cash equivalents....................... $ 50,239,427 $ 50,239,427
Loans receivable................................ 669,802,624 650,471,000
Mortgage-backed securities...................... 437,076,510 437,076,510
Accrued interest receivable..................... 7,111,339 7,111,339
Federal Home Loan Bank stock.................... 11,929,000 11,929,000
Financial liabilities:
Demand deposits................................. 396,160,737 396,160,737
Time deposits................................... 594,042,189 591,862,000
Federal Home Loan Bank borrowings............... 123,000,000 122,934,000
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 $5.0 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 stock is considered to be 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, 1996. 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-33
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
3. LOANS RECEIVABLE AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Loans receivable consisted of the following at December 31, 1996:
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences.............. $410,653,231
Collateralized by other properties........................... 25,696,981
Construction loans........................................... 21,735,107
Other........................................................ 1,248,474
------------
459,333,793
Undisbursed portion of construction loans.................... (8,430,519)
------------
Total first mortgage loans.................................. 450,903,274
Consumer and other loans:
Automobile................................................... 167,097,018
Savings...................................................... 8,601,720
Home equity and second mortgage.............................. 10,967,267
Commercial................................................... 2,703,746
Other........................................................ 28,572,622
------------
Total consumer and other loans.............................. 217,942,373
Acquisition premium........................................... 7,004,946
Deferred loan fees, net....................................... (989,687)
Allowance for loan losses..................................... (5,058,282)
------------
Loans receivable, net....................................... $669,802,624
============
Loans to directors and executive officers totaled $216,665 at December 31,
1996. 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,
1996, 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
S-34
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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 $9,867,000 at December 31, 1996. At December 31, 1996, the Bank
had an outstanding letter of credit to secure the payment of principal and
interest on a $1,005,000 municipal bond issue to finance the construction of a
nursing home. The letter is collateralized by the Bank's mortgage-backed
securities with an amortized cost of approximately $829,000 and a market value
of approximately $886,000 at December 31, 1996.
4. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these
loans at December 31, 1996, are summarized as follows:
Mortgage loans underlying pass-through securities:
FHLMC.......................................................... $ 78,838,130
GNMA........................................................... 172,587,628
Mortgage loan portfolios serviced for other investors.......... 20,469,512
------------
Total........................................................ $271,895,270
============
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
$3,975,000 at December 31, 1996. Of the loans serviced by the Bank at December
31, 1996, approximately $6,549,000 were sold with recourse.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31, 1996:
Loans receivable................................................. $4,050,560
Mortgage-backed securities....................................... 3,060,779
----------
Total.......................................................... $7,111,339
==========
S-35
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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, 1996:
Principal Unamortized Unearned Amortized
Balance Premiums Discounts Cost
------------ ----------- ----------- ------------
GNMA..................... $127,161,269 $1,937,786 $ (138,184) $128,960,871
FNMA..................... 204,217,707 4,731,922 208,949,629
FHLMC.................... 98,468,815 1,888,985 (433,439) 99,924,361
------------ ---------- ----------- ------------
Total.................. $429,847,791 $8,558,693 $ (571,623) $437,834,861
============ ========== =========== ============
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
GNMA..................... $128,960,871 $1,841,090 $ (349,284) $130,452,677
FNMA..................... 208,949,629 193,778 (2,968,764) 206,174,643
FHLMC.................... 99,924,361 1,351,208 (826,379) 100,449,190
------------ ---------- ----------- ------------
Total.................. $437,834,861 $3,386,076 $(4,144,427) $437,076,510
============ ========== =========== ============
Mortgage-backed securities with carrying values of approximately
$288,957,000 at December 31, 1996, had adjustable rates.
The amortized cost of mortgage-backed securities pledged was approximately
$829,000 for letters of credit, $8,080,000 for treasury, tax and loan
accounts, and $11,665,000 for public fund deposits at December 31, 1996.
In November 1995, the FASB issued a Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities (the "Guide"). The Guide provides that an enterprise
may, concurrent with initial adoption of the Guide but no later than December
31, 1995, reassess the appropriateness of the classification of all securities
held at that time and account for any resulting reclassification from the
held-to-maturity category at fair value in accordance with SFAS 115, paragraph
15. Such reclassifications resulting from this one-time reassessment do not
call into question the intent of an enterprise to hold other debt securities
to maturity in the future. The Bank adopted the implementation guidance during
December 1995 and reclassified all mortgage-backed securities from held-to-
maturity to available-for-sale.
7. ALLOWANCE FOR LOAN LOSSES
Following is a summary of the activity in the allowance for losses on loans:
BALANCE, JANUARY 1, 1995......................................... $4,685,869
Provision for losses............................................ 1,050,000
Charge-offs, net of recoveries.................................. (805,711)
----------
BALANCE, DECEMBER 31, 1995....................................... 4,930,158
Provision for losses............................................ 1,125,000
Charge-offs, net of recoveries.................................. (996,876)
----------
BALANCE, DECEMBER 31, 1996....................................... $5,058,282
==========
S-36
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following at December 31,
1996:
Land............................................................ $ 4,455,671
Buildings and improvements...................................... 14,464,347
Furniture and equipment......................................... 8,639,929
-----------
Total.......................................................... 27,559,947
Accumulated depreciation........................................ (8,498,401)
-----------
Office properties and equipment, net........................... $19,061,546
===========
9. DEPOSITS
Deposits consisted of the following at December 31, 1996:
Demand and NOW accounts, including noninterest-bearing depos-
its of $58,684,705 in 1996.................................. $235,695,222
Money market................................................. 58,664,450
Statement and passbook savings............................... 101,801,065
Certificates of deposit...................................... 594,042,189
------------
Total deposits.............................................. $990,202,926
============
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $24,852,000 at December 31, 1996.
At December 31, 1996, the scheduled maturities of certificates of deposit
are as follows:
Year ending December 31:
1997........................................................... $476,934,190
1998........................................................... 64,948,594
1999........................................................... 39,587,131
2000........................................................... 3,767,901
2001........................................................... 2,258,185
Thereafter..................................................... 6,546,188
------------
Total......................................................... $594,042,189
============
Interest expense on deposits for the years ended December 31, 1996 and 1995,
is summarized below:
1996 1995
----------- -----------
Demand, NOW, money market and statement and
passbook savings............................... $ 7,850,965 $ 7,962,556
Certificates accounts........................... 34,063,456 34,864,165
Early withdrawal penalties...................... (245,833) (248,382)
----------- -----------
Total interest expense on deposits............. $41,668,588 $42,578,339
=========== ===========
At December 31, 1996, the Bank had pledged mortgage-backed securities of
approximately $11,665,000, as collateral for public fund deposits.
S-37
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
Eligible deposits of the Bank are insured up to $100,000 by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Both the SAIF and the Bank Insurance Fund ("BIF"), the
federal deposit insurance fund that covers commercial bank deposits, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits.
Legislation, passed by the U. S. House of Representatives and the Senate,
was signed into law by the President on September 30, 1996, to recapitalize
the SAIF. The special assessment was fully anticipated by the Bank because
legislation had been close to enactment on several occasions over the past
year. As a result of such legislation, the Bank was required to pay a one-time
special assessment of 65.7 cents for every $100 of deposits which amounted to
$6.7 million pre-tax with a $4.4 million after-tax effect.
The legislation also mandated that SAIF-insured institutions' (such as the
Bank) deposit insurance premiums decline to approximately 6.4 basis points,
effective January 1, 1997. The mandated decline in the premium rate is
expected to reduce the Bank's pre-tax annual SAIF premiums by approximately
$1,600,000 (based on current deposit levels).
10. FEDERAL HOME LOAN BANK BORROWINGS
The Bank had advances from the FHLB as follows at December 31, 1996:
Weighted
Average
Interest
Rate Advances
-------- ------------
Maturing during year ending December 31:
1997................................................. 5.80% $ 8,000,000
1997................................................. 4.93% 10,000,000
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............................................... $123,000,000
============
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.
S-38
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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 and Tier I capital (as
defined) to risk weighted assets (as defined). Management believes, as of
December 31, 1996 that the Bank meets all capital adequacy requirements to
which it is subject.
Prior to December 31, 1996, 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 as of December 31, 1996 are
presented in the following table (amounts in thousands):
Required
To Be Well
Capitalized
Required Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
Tangible capital to adjusted total
assets $80,191 6.60% $18,228 1.50% N/A N/A
Core capital to adjusted total
assets........................... $80,191 6.60% $36,456 3.00% $60,761 5.00%
Total capital to risk weighted
assets........................... $85,140 15.06% $45,230 8.00% $56,537 10.00%
Tier I capital to risk weighted
assets........................... $80,191 14.18% $22,615 4.00% $33,922 6.00%
12. REAL ESTATE OPERATIONS
Income from real estate operations consisted of the following for the years
ended December 31, 1996 and 1995:
1996 1995
-------- --------
Rental income, net........................................ $623,929 $643,933
Recognized gross profit on sales of real estate........... 26,227 289,116
-------- --------
Total income............................................ $650,156 $933,049
======== ========
13. RETIREMENT BENEFITS
Boatmen's provides a noncontributory defined benefit pension plan which
covers substantially all employees of Boatmen's and its subsidiaries. Pension
benefits are based upon the employee's length of service and compensation
during the final years of employment. During the years ended December 31, 1996
and 1995, the Bank recognized $486,000 and $224,400, respectively, of cost
under the Boatmen's plan. Boatmen's also provides postemployment life and
contributory medical benefits to retired employees of Boatmen's and its
subsidiaries including the Bank. Boatmen's includes Bank employees in its
recorded liability. Amounts paid to Boatmen's and costs recognized by the Bank
related to these benefits during 1996 and 1995 were not significant.
S-39
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
14. INCOME TAXES
Income tax provision for the years ended December 31, 1996 and 1995,
consists of the following:
1996 1995
---------- ----------
Current:
Federal............................................. $4,636,123 $6,366,091
State............................................... 961,278 1,151,635
---------- ----------
Total current provision............................ 5,597,401 7,517,726
Deferred tax benefit................................. (671,864) (807,332)
---------- ----------
Income tax provision............................... $4,925,537 $6,710,394
========== ==========
A reconciliation of federal income tax expense on pre-tax income at the
statutory rate with income tax expense reported is as follows:
1996 1995
---------- ----------
Tax at the statutory rate............................ $4,395,811 $5,987,604
State income taxes, net of federal benefit........... 531,265 723,645
Other, net........................................... (1,539) (855)
---------- ----------
Income tax provision................................ $4,925,537 $6,710,394
========== ==========
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.
As of December 31, 1996, the Bank's deferred tax asset account was comprised
of the following:
Deferred tax assets:
Reserve for loan losses........................................ $ 270,388
Intangible assets.............................................. 2,397,881
Investment securities.......................................... 297,501
Other, net..................................................... 656,252
----------
Total deferred tax assets..................................... 3,622,022
Deferred tax liabilities:
Loans.......................................................... (312,856)
Mortgage-backed securities..................................... (410,135)
FHLB stock..................................................... (974,923)
Reserve for loan losses........................................ --
Other, net..................................................... (19,420)
----------
Total deferred tax liabilities................................ (1,717,334)
----------
Net deferred tax asset........................................ $1,904,688
==========
The Bank files a consolidated federal income tax return with Boatmen's.
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.
S-40
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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 $490,025 and
$551,282 for the years ended December 31, 1996 and 1995, respectively. A
schedule of future minimum rental payments under operating leases, as of
December 31, 1996, follows:
Year ending December 31:
1997............................................................ $ 416,558
1998............................................................ 326,017
1999............................................................ 262,074
2000............................................................ 183,181
2001............................................................ 166,037
Thereafter...................................................... 673,814
----------
Total.......................................................... $2,027,681
==========
16. PURCHASED LOAN SERVICING RIGHTS
Following is a summary of the changes in purchased loan servicing rights:
BALANCE, JANUARY 1, 1995....................................... $4,066,584
Amortization.................................................. (1,008,429)
----------
BALANCE, DECEMBER 31, 1995..................................... 3,058,155
Amortization.................................................. (789,958)
----------
BALANCE, DECEMBER 31, 1996..................................... $2,268,197
==========
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 all three FIRREA 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 1996
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 1996 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
S-41
SUPERIOR FEDERAL BANK, F.S.B. AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF BOATMEN'S BANCSHARES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the years ended December 31, 1996 and 1995
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, 1996, 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.
18. SALE OF BRANCH OPERATIONS
In June of 1996, the Bank sold two branches located in Oklahoma in order to
comply with federal regulatory requirements relating to the concentration of
deposits. Deposits of approximately $53,388,000 were assumed by the purchaser,
and cash and other assets with carrying values of approximately $42,180,000
and $9,930,000, respectively, were transferred to the purchaser. This resulted
in a gain of $1,284,000 recorded by the Bank.
* * * * * *
S-42
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998
Commission File No. 0-25239
----------------
SUPERIOR FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Sequentially
Numbered
Exhibits Description Page
-------- ----------- ------------
Exhibit 3 -- Articles of Incorporation and Bylaws:
3.1 -- Restated and Amended Certificate of
Incorporation of Superior Financial Corp.
("Superior")................................
3.2 -- Bylaws of Superior...........................
-- Instruments defining the rights of security
Exhibit 4 holders:
4.1 -- Form of Equity Subscription Agreement among
Superior, Keefe, Bruyette & Woods, Inc.
("KBW") and various investors named therein,
dated April 1, 1998.........................
4.2 -- Form of Registration Rights Agreement between
Superior, KBW and various investors named
therein, dated April 1, 1998................
4.3 -- Form of Common Stock Certificate of
Superior....................................
4.4 -- Article 4 of Superior's Amended and Restated
Certificate of Incorporation (included in
Exhibit 3.1)................................
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..................................
Exhibit 10 -- Material Contracts:
10.1 -- Custody and Security Agreement between
Superior and Bank of New York ("BONY"), as
Trustee, dated April 1, 1998................
10.2 -- Securities Account Control Agreement between
Superior, Trustee and BONY, dated April 1,
1998........................................
10.3 -- Founders Agreement between Superior and C.
Stanley Bailey, dated December 2, 1997......
10.4 -- Founders Agreement between Superior and KBW,
dated December 2, 1997......................
10.5 -- Founders Agreement between Superior and
Financial Stocks, Inc., dated December 2,
1997........................................
10.6 -- Agreement between C. Marvin Scott and
Superior, dated January 1, 1998.............
10.7 -- 1998 Long Term Incentive Plan................
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.........................
10.9 -- Agreement between Rick D. Gardner and
Superior dated September 21, 1998...........
-- Statement Regarding Computation of Ratio of
Exhibit 12 Earnings to Fixed Charges...................
-- Letter regarding change in certifying
Exhibit 16 accountant
16.1 -- Letter of Deloitte & Touche LLP
Exhibit 21 -- List of subsidiaries of the Registrant.......
Exhibit 24 -- Power of Attorney............................
Exhibit 27 -- Financial Data Schedules.....................
(b) Reports on Form 8-K. None.