<PAGE> 1
PROSPECTUS
1,200,000 SHARES
SUCCESS BANCSHARES, INC.
[LOGO]
COMMON STOCK
Success Bancshares, Inc. (the "Company") is offering for sale, on a "best
efforts" basis, up to 1,200,000 shares of its Common Stock, $0.001 par value per
share (the "Common Stock"), at a price of $12.50 per share. Of these shares,
600,000 shares are being offered by the Company, on a "best efforts" basis, with
the assistance of EVEREN Securities, Inc. (the "Selling Agent") in a
Subscription and Community Offering (as defined herein) and 600,000 shares are
being offered concurrently by the Selling Agent, on a "best efforts" basis, in a
Public Offering (as defined herein). The shares being offered by the Company in
the Subscription and Community Offering are being offered on a priority basis to
shareholders of record of the Company as of September 15, 1997 ("Record Date
Shareholders"), and to certain customers of Success National Bank, a majority
owned subsidiary of the Company (the "Bank"), as of September 15, 1997 ("Record
Date Customers"), in a subscription offering (the "Subscription Offering"). The
highest priority will be given in the Subscription Offering to Record Date
Shareholders placing purchase orders for shares of Common Stock offered hereby
prior to Noon, Central Time, on October 15, 1997. While shares are being offered
on a priority basis to eligible subscribers in the Subscription Offering, the
Company is also concurrently offering Common Stock for sale to the general
public in a direct community offering (the "Community Offering") with preference
given to residents of the communities served by the Bank. The Subscription
Offering and Community Offering are collectively referred to herein as the
"Subscription and Community Offering." The Company reserves the right in its
sole discretion, regardless of any priorities or preferences, to accept or
reject orders in whole or in part in the Subscription and Community Offering,
which will expire at Noon, Central Time, on October 28, 1997 (the "Expiration
Date"), and to terminate the Subscription and Community Offering prior to the
Expiration Date. The Agency Agreement provides that the Subscription and
Community Offering and the Public Offering must be completed by December 1,
1997. The minimum subscription for any investor in the Subscription and
Community Offering is 200 shares, or $2,500. Subscription proceeds will be held
in a non-interest bearing escrow account at the Bank pending closing of the
Offering. ONCE MADE, SUBSCRIPTIONS ARE IRREVOCABLE. The shares being offered
concurrently by the Selling Agent in a Public Offering are being offered, on a
"best efforts" basis, to the general public in an underwritten public offering
(the "Public Offering") managed by the Selling Agent. The number of shares of
Common Stock to be offered in the Subscription and Community Offering and the
Public Offering is subject to adjustment as described herein. The Subscription
and Community Offering and the Public Offering are referred to collectively
herein as the "Offering." COMPLETION OF THE OFFERING IS NOT CONDITIONED UPON THE
SALE OF ANY MINIMUM NUMBER OF SHARES IN EITHER THE SUBSCRIPTION AND COMMUNITY
OFFERING OR THE PUBLIC OFFERING.
Prior to this Offering there has been no public market for the Common
Stock, and there can be no assurance that such a market will develop after
completion of the Offering or, if developed, that it will be sustained. For
information relating to the determination of the initial public offering price
of the Common Stock, see "Terms of the Offering." The Company has applied to
have its Common Stock approved for quotation on The Nasdaq National MarketK
UNDER THE SYMBOL "SXNB" SUBJECT TO THE COMPLETION OF THE OFFERING.
------------------
For information on how to subscribe for shares of common stock,
please call the stock information office at (800) 744-6248 and ask for
an Everen Securities, Inc. Representative.
------------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET
FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==============================================================================================================================
Selling Agent
Commissions and Proceeds to
Price To Public Underwritering Company (3)
Discount (1)(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $12.50 $0.6562 $11.8438
- ------------------------------------------------------------------------------------------------------------------------------
Total(4)................................... $15,000,000 $787,500 $14,212,500
==============================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Selling Agent against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Terms of the Offering."
(2) Of the up to 1,200,000 shares being offered, 600,000 shares are being
offered by the Company on a "best efforts" basis with the assistance of the
Selling Agent in a Subscription and Community Offering and 600,000 shares
are being offered concurrently by the Selling Agent in a Public Offering.
The number of shares of Common Stock to be offered in the Subscription and
Community Offering and the Public Offering is subject to adjustment as
described herein. Assumes all 1,200,000 shares are sold on this basis.
Based upon negotiations between the Company and the Selling Agent, the
Company has agreed to pay the Selling Agent a commission equal to 3.5% of
the aggregate price of the shares sold directly by the Company in the
Subscription and Community Offering and to allow the Selling Agent to
purchase the number of shares to be offered in the Public Offering at the
per share price to public less an underwriting discount of 7%.
(3) Before deducting expenses payable by the Company estimated to be
approximately $650,000, including a maximum of $100,000 reimbursable to the
Selling Agent for out-of-pocket expenses.
(4) Assumes no exercise of the additional subscription or over-allotment option
and the sale of 600,000 shares by the Company in the Subscription and
Community Offering and 600,000 shares by the Selling Agent in the Public
Offering (although there is no minimum number of shares required to be
sold). The Company may, in its sole discretion, increase the number of
shares of Common Stock sold by up to an additional 15% of the number of
shares sold in the Subscription and Community Offering to satisfy unfilled
purchase orders (the "additional subscription option") and has granted to
the Selling Agent an option, exercisable within 30 days of the completion
date of the Public Offering, to purchase up to an additional 15% of the
number of shares sold in the Public Offering at the price to public less
underwriting discount for the purpose of covering over-allotments, if any
(the "over-allotment option"). If the Company exercises the additional
subscription option in full and the Selling Agent exercises the
over-allotment option in full, the total price to public, Selling Agent
commissions and underwriting discount, and proceeds to the Company will be
$17,250,000, $905,625, and $16,344,375, respectively. See "Terms of the
Offering."
----------------
EVEREN SECURITIES, INC.
The date of this Prospectus is September 19, 1997
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE PUBLIC OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF
COMMON STOCK TO COVER THE SYNDICATE SHORT POSITIONS.
IN CONNECTION WITH THE PUBLIC OFFERING, CERTAIN PERSONS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Consolidated Financial Statements, including the
accompanying notes, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus (i) assumes no exercise of the
Company's additional subscription option or the Selling Agent's over-allotment
option and (ii) gives effect to a 1.7-for-1 stock split effected on July 30,
1997 (the "stock split"). Pro forma information gives effect to the
reorganization of the capital structure of the Company consisting of (a) the
increase in the authorized number of shares of Common Stock to 7,500,000, (b)
the changing of the par value of each share of Common Stock to $0.001, (c) the
conversion of all of the outstanding shares of the Company's Series B Preferred
Stock into 91,104 shares of Common Stock (post stock split), (d) the conversion
of all of the outstanding shares of the Company's Class A Common Stock into
171,745 shares of Common Stock (post stock split), (e) the conversion of the
aggregate outstanding principal amount of the Company's 1992 9% Convertible
Subordinated Debentures (the "1992 Debentures") into 234,582 shares of Common
Stock (post stock split), and (f) the conversion of the aggregate outstanding
principal amount of the Company's 1995 15% and 17% Convertible Subordinated
Notes (the "1995 Notes") into 92,400 shares of Common Stock (post stock split)
(collectively, the "Reorganization"). The Reorganization was completed in July,
1997, except for the conversion of the 1992 Debentures and 1995 Notes which
will be effected as of the closing date of the Offering. Prospective investors
should carefully consider the matters set forth in "Risk Factors."
THE COMPANY
Success Bancshares, Inc., a Delaware corporation (the "Company"), is a
bank holding company headquartered in Lincolnshire, Illinois with total assets
of over $300 million at June 30, 1997. Through its majority owned subsidiary,
Success National Bank (the "Bank"), the Company engages in full service
community banking. The Bank is also headquartered in Lincolnshire, Illinois,
located approximately 35 miles north of downtown Chicago, and has seven branch
offices serving individuals and small-to-medium- sized businesses in
communities in the north and northwest suburbs of Chicago and the north side of
Chicago. These banking facilities, all of which have been established since
1991, are located in Deerfield (2), Libertyville, Lincolnwood, Chicago (Lincoln
Park), Arlington Heights and Northbrook, Illinois.
The Bank was founded in 1973 with an initial equity investment of $3
million. In 1982, an investment group, including Saul D. Binder, the current
President and Chief Executive Officer of the Company and the Bank, purchased
majority control of the Bank, which at that time had one location and $10
million in total assets. In 1986, the Company was organized as a holding
company for the Bank and a majority of the Bank's shareholders exchanged their
shares of Bank capital stock for shares of Company capital stock. The Company
currently owns 100% of the Bank's outstanding preferred stock and 92% of the
Bank's outstanding common stock.
The Company provides community banking services to individuals,
small-to-medium-sized businesses, local governmental units and institutional
clients primarily in the Northern Chicagoland area. These services include
traditional checking, NOW, money market, savings and time deposit accounts, as
well as a number of innovative deposit products targeted to specific market
segments. The Bank offers home equity, home mortgage, commercial real estate,
commercial and consumer loans, safe deposit facilities and other innovative and
traditional services specially tailored to meet the needs of customers in its
target markets. The Company's goal is to continue to offer innovative,
attractive financial products to businesses and individuals in its market area.
In May, 1996, the Bank became one of the first banks in its market area to go
on-line with its own home page on the World Wide Web
(http://www.successbank.com). The Bank's home page enables consumers to access
information regarding branch locations, deposit and loan rates and economic
forecasts. The Bank recently introduced its Success for Seniors account to
compete with the high cost reverse mortgage products of its competitors. This
new product combines a high rate of interest NOW account with a 20 year home
equity line of credit and the added flexibility of a Visa Gold card.
As a community bank, the Bank stresses personalized service, local
decision making, quick customer response and strong relationships with
business, civic and community organizations. Management believes this marketing
and service approach enables the Bank to compete effectively with the money
center, super regional and regional banks that have a presence in its target
markets. By continuing to offer quality service, management expects to be
3
<PAGE> 4
able to expand the Bank's base of core deposits and to expand loan growth among
its commercial and retail customers.
The Company's goal is to continue to grow the assets of the Bank and
increase profitability while maintaining strong credit quality. To achieve this
goal, the Company's strategic plan is to continue to focus on providing a high
level of service to its core customers while expanding its market share in its
target markets. Key elements of the Company's strategic plan include:
- MAINTAINING STRONG LOCAL PRESENCE AND LOCAL DECISION MAKING
AUTHORITY. The Company believes that its local presence and focus on local
decision making provides the Bank with the competitive advantage of being able
to tailor products and services to meet the needs of the customers and
communities in its target markets, to make decisions for customers quickly, and
to enjoy the symbiotic benefits of investing and participating in its
community.
- PROVIDING A HIGH LEVEL OF SERVICE THROUGH QUALITY EMPLOYEES.
The Company intends to compete with larger institutions by providing a high
level of individualized service and responsiveness. To provide this
individualized personal service, the Company emphasizes the recruiting and
training of competent and highly motivated employees who are able to make
decisions and quickly respond to customers' needs.
- POSITIONED FOR CONTROLLED MARKET EXPANSION. The Company will
pursue disciplined growth in its target markets by opening branches in areas
where management believes local residents and small-to-medium-sized businesses
would benefit from a community banking alternative. The Company's strategic
plan also includes selectively acquiring other financial institutions in its
target markets.
- INCREASING ITS PORTFOLIO OF HIGH QUALITY LOANS. The Company is
committed to maintaining strong credit quality while increasing income as the
Company grows.
- FOCUSING ON CORE CUSTOMERS. The Company believes that focusing
on establishing and maintaining long-term relationships with individuals and
small-to-medium-sized businesses in its target markets will result in growth
and increased profitability.
- CREATING INNOVATIVE AND NICHE PRODUCTS. The Company intends to
continue developing innovative loan and deposit products. The Company also
intends to continue developing lending niches which generate loan growth and
service its target markets.
The Company's executive offices are located at One Marriott Drive,
Lincolnshire, Illinois 60069, and its telephone number is (847) 634-4200.
4
<PAGE> 5
THE OFFERING
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<CAPTION>
<S> <C>
COMMON STOCK OFFERED IN THE
OFFERING...................................... 1,200,000 shares
COMMON STOCK TO BE OUTSTANDING
AFTER THE OFFERING............................ 2,759,949 shares(1)
PRICE TO PUBLIC.................................... $12.50 per share
USE OF PROCEEDS.................................... The Company intends to use the net proceeds from the sale of shares
of Common Stock offered hereby to repay all or a portion of the
amount outstanding under the Company's $8 million revolving line of
credit. At July 30, 1997, approximately $7.4 million of
indebtedness was outstanding under the line of credit. The Company
intends to contribute any remaining net proceeds to the capital of
the Bank to support continued growth of the Bank's loan portfolio.
SUBSCRIPTION OFFERING............................. 600,000 shares of Common Stock are being offered by the
Company on a priority basis to shareholders of record of the
Company as of September 15, 1997, and to certain customers of
the Bank as of September 15, 1997. The highest priority will
be given to those Record Date Shareholders placing purchase
orders prior to Noon, Central Time, on October 15, 1997.
COMMUNITY OFFERING................................ While shares are being offered on a priority basis to
eligible subscribers in the Subscription Offering, the Common
Stock is also being concurrently offered by the Company for
sale to the general public in a direct community offering
with a preference given to residents of the communities
served by the Bank. For a description of the communities
served by the Bank, see "Business -- Market." The Public
Offering is being conducted concurrently with the S market
demand, the Company and the Selling Agent may determine to
increase or decrease the number of shares of Common Stock to
be offered in the Subscription and Community Offering
relative to the Public Offering. COMPLETION OF THE
SUBSCRIPTION AND COMMUNITY OFFERING IS NOT CONDITIONED UPON
THE SALE OF ANY MINIMUM NUMBER OF SHARES IN THE SUBSCRIPTION
AND COMMUNITY OFFERING OR THE PUBLIC OFFERING.
SUBSCRIPTION AND COMMUNITY
OFFERING PERIOD............................... The Subscription and Community Offering will terminate at
Noon, Central Time, on October 28, 1997, unless extended by
the Company. The Agency Agreement provides that the
Subscription and Community Offering and the Public Offering
must be completed by December 1, 1997. The Company reserves
the right in its sole discretion to terminate the
Subscription and Community Offering prior to the Expiration
Date.
PUBLIC OFFERING................................... 600,000 shares of Common Stock are being offered, on a "best
efforts" basis, concurrently with the Subscription and
Community Offering by the Selling Agent to the general public
in an underwritten Public Offering. Depending on market
demand, the Company and the Selling Agent may determine to
increase or decrease the number of shares of Common Stock to
be offered in the Public Offering relative to the
Subscription and Community Offering. Although 600,000
</TABLE>
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<TABLE>
<S> <C>
shares of Common Stock are being offered by the Selling Agent
to the general public in the Public Offering, the Selling
Agent is not obligated pursuant to the Agency Agreement to
purchase any of the shares of Common Stock offered in the
Public Offering. Completion of the Public Offering will be
subject to the execution of a public offering acknowledgment
(the "Public Offering Acknowledgment") pursuant to which the
Company and the Selling Agent agree t underwriting agreement
between the Company and the Selling Agent for purposes of the
Public Offering. Subject to the terms and conditions
contained in the Public Offering Acknowledgment, the Selling
Agent will agree to purchase from the Company and the Company
will agree to sell to the Selling Agent a specified number of
shares of Common Stock to be offered to the general public in
the Public Offering. The Company and the Selling Agent
currently antici executed within five business days following
the termination of the Subscription and Community Offering.
Whether the Public Offering Acknowledgment is executed and
the Public Offering is completed will depend upon, among
other factors, the market conditions then prevailing and the
then-current financial condition of the Company. The number
of shares of Common Stock to be sold in the Public Offering
will be determined by the Selling Agent and the Company
CONDITIONED UPON THE SALE OF ANY MINIMUM NUMBER OF SHARES IN
THE PUBLIC OFFERING OR THE SUBSCRIPTION AND COMMUNITY
OFFERING.
ADDITIONAL SUBSCRIPTION AND OVER-
ALLOTMENT OPTIONS.............................. The Company may, in its sole discretion, increase the number
of shares of Common Stock sold by up to an additional 15% of
the number of shares sold in the Subscription and Community
Offering to satisfy unfilled purchase orders (the "additional
subscription option"). In addition, the Company has granted
to the Selling Agent an option, exercisable within 30 days of
the completion date of the Public Offering, to purchase up to
an additional 15% of the num allotment option").
PROCEDURES FOR ORDERING SHARES OF
COMMON STOCK IN THE SUBSCRIPTION
AND COMMUNITY OFFERING......................... Record Date Shareholders, Record Date Customers and other
interested investors in the Subscription and Community
Offering must return to the Company the accompanying original
Stock Order Form (facsimile copies and photocopies will not
be accepted) and a fully executed Certification Form, along
with full payment (or appropriate instructions for
authorizing a withdrawal from a deposit account at the Bank)
at $12.50 per share for all shares subscribed for 28, 1997.
The minimum subscription for any investor is 200 shares, or
$2,500.
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To receive the highest priority in the Subscription Offering,
Record Date Shareholders must place purchase orders prior to
Noon, Central Time, on October 15, 1997. The Company reserves
the right in its sole discretion, regardless of priorities or
preferences, to accept or reject orders in whole or in part
in the Subscription and Community Offering and to terminate
the Subscription and Community Offering prior to the
Expiration Date. Subscription procee account at the Bank
pending closing of the Offering. At the closing of the
Subscription and Community Offering, if subscription orders
for more than 600,000 shares of Common Stock have been
received, the subscriptions will be filled based on the
established priorities. If subscription orders for less than
600,000 shares have been received, subscriptions will be
filled without regard to the priorities. ONCE MADE,
SUBSCRIPTIONS ARE IRREVOCABLE. COMPLETION CONDITIONED UPON
THE SALE OF ANY MINIMUM NUMBER OF SHARES IN THE OFFERING.
Delivery of certificates evidencing the shares will be made
either directly to purchasers of the shares or through the
facilities of the Depository Trust Company as soon as
practicable following completion of the Offering. See "Terms
of the Offering" for complete instructions for ordering
shares and terms and conditions of the Subscription and
Community Offering.
DIVIDEND POLICY................................... The Company intends to retain future earnings for the
operation and expansion of its business and does not
anticipate paying cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
PROPOSED NASDAQ NATINAL MARKET(SM)
SYMBOL........................................ SXNB
</TABLE>
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(1) Assuming 1,200,000 shares of Common Stock are sold in the Offering.
Excludes 170,000 shares of Common Stock reserved for issuance under the
Success Bancshares, Inc. 1995 Stock Option Plan (the "1995 Stock Option
Plan") and 115,090 shares reserved for issuance pursuant to options
granted prior to the implementation of the 1995 Stock Option Plan. There
are currently 153,340 options outstanding, including options outstanding
under the 1995 Stock Option Plan, each of which entitles the holder
thereof to purchase one share of Common Stock. See "Management -- Stock
Option Plans." The weighted average exercise price per share for all of
the currently outstanding options is $5.02. Of the currently outstanding
options, 127,840 are currently exercisable at a weighted average price of
$4.79 per share.
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<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated financial and other data should be read in
conjunction with the Company's Consolidated Financial Statements, including the
accompanying notes, appearing elsewhere in this Prospectus and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Results for interim periods are not necessarily indicative of
results to be expected during the remainder of the year or for any future
period.
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- --------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income............................. $ 11,215 $ 9,568 $ 19,850 $ 18,675 $ 14,619 $ 10,960 $ 9,952
Interest expense............................ 5,725 4,806 10,020 9,886 7,221 5,016 4,794
--------- --------- -------- --------- -------- -------- --------
Net interest income...................... 5,490 4,762 9,830 8,789 7,398 5,944 5,158
Provision for loan losses................... 228 128 310 207 250 220 315
--------- --------- -------- --------- -------- -------- --------
Net interest income after provision for
loan losses............................ 5,262 4,634 9,520 8,582 7,148 5,724 4,843
Other operating income...................... 3,913 3,299 7,149 6,004 5,007 5,501 4,561
Other operating expenses.................... 8,620 7,481 15,630 13,342 12,016 10,144 8,217
Minority interest in income of
subsidiary bank........................ 7 13 23 47 58 79 129
Income before taxes...................... 548 439 1,016 1,197 81 1,002 1,058
Income tax expense (benefit)................ 188 92 233 260 (182) 176 285
--------- --------- -------- --------- --------- -------- --------
Net income............................... $ 360 $ 347 $ 783 $ 937 $ 263 $ 826 $ 773
========= ========= ======== ========= ========= ======== ========
COMMON SHARE DATA(1):
Earnings per common and common
equivalent share
Primary.................................. $ 0.29 $ 0.30 $ 0.66 $ 0.89 $ 0.25 $ 0.87 $ 0.84
Fully diluted............................ 0.29 0.30 0.66 0.86 0.25 0.84 0.82
Book value(2)............................... 9.35 8.52 8.99 7.48 5.83 7.27 6.14
Weighted average common and common
equivalent shares outstanding.......... 1,239,388 1,150,971 1,182,286 1,057,461 1,032,253 952,441 923,812
PRO FORMA COMMON SHARE DATA(1)(3):
Earnings per common and common
equivalent share
Primary.................................. $ 0.29 $ 0.62
Fully diluted............................ 0.29 0.62
Book value.................................. 8.85 8.59
Weighted average common and common
equivalent shares outstanding.......... 1,622,615 1,585,837
</TABLE>
<TABLE>
<CAPTION>
June 30, DECEMBER 31,
------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- -------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans, net.................................. $230,075 $176,872 $203,299 $171,135 $139,491 $109,224 $ 88,072
Total assets................................ 305,955 253,031 276,349 251,338 222,809 190,677 143,695
Deposits.................................... 268,236 222,690 245,105 227,308 204,171 162,676 132,155
Borrowings, including repurchase agreements 24,386 19,261 18,975 14,395 11,174 19,644 4,319
Shareholders' equity(4)..................... 9,758 8,823 9,234 7,366 5,625 6,276 5,108
</TABLE>
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<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------------------------
Pro Forma Pro Forma
ACTUAL Pro Forma(3) As Adjusted(3)(5) As Adjusted(3)(6)
-------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Loans, net.................................. $ 230,075 $ 230,075 $ 230,075 $ 230,075
Total assets................................ 305,955 305,955 307,996 315,102
Deposits.................................... 268,236 268,236 268,236 268,236
Borrowings, including repurchase agreements 24,386 21,219 16,804 16,804
Shareholders' equity........................ 9,758 12,925 19,382 26,488
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,(10) Year Ended December 31,
------------------ --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE DATA:
Net interest margin(7)...................... 4.19% 4.26% 4.25% 4.14% 4.14% 4.38% 4.50%
Return on average assets.................... 0.25 0.28 0.31 0.40 0.13 0.53 0.59
Return on average equity(8)................. 7.58 8.52 9.09 15.78 4.58 14.97 15.35
Loans to deposits........................... 85.77 79.43 82.94 75.29 68.32 67.14 66.64
Average equity to average assets............ 3.28 3.30 3.36 2.54 2.81 3.53 3.87
ASSET QUALITY RATIOS:
Non-performing loans to total loans(9)...... 0.49% 0.22% 0.06% 0.37% 0.27% 1.25% 1.07%
Non-performing assets to total assets....... 0.37 0.16 0.04 0.25 0.17 0.72 0.88
Allowance for loan losses to total loans.... 0.70 0.70 0.70 0.70 0.71 0.78 0.73
Non-performing loans to
allowance for loan losses................ 70.10 31.75 8.28 53.74 38.10 160.35 146.37
Net loan charge-offs to average loans....... 0.02 0.06 0.04 0.01 0.08 0.01 0.24
OTHER:
Branch offices.............................. 7 7 7 7 5 4 2
Full-time equivalent employees.............. 143 139 144 150 120 114 73
</TABLE>
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NOTES TO SUMMARY CONSOLIDATED FINANCIAL DATA
(1) Common share data has been restated to reflect the stock split.
(2) Book value per share is calculated using total shareholders' equity plus
stock owned by Employee Stock Ownership Plan ("ESOP") participants, net
of ESOP loan, divided by shares outstanding at end of period.
(3) The pro forma information reflects the completion of the Reorganization.
(4) The decrease in shareholders' equity from $6,276 in 1993 to $5,625 in
1994 is primarily attributable to the implementation of SFAS 115
Accounting for Certain Investments in Debt and Equity Securities on
December 31, 1993. The unrealized net loss on securities
available-for-sale, net of tax declined $1.7 million during 1994, and was
recorded as a reduction in shareholders' equity.
(5) Adjusted to reflect the Offering (assuming the sale of 600,000 shares and
net proceeds of $6.5 million and assuming no exercise of the additional
subscription option or the over-allotment option) and the application of
$4.4 million of the net proceeds to repay the amount outstanding under
the Company's revolving line of credit. See "Use of Proceeds."
(6) Adjusted to reflect the Offering (assuming the sale of 1,200,000 shares
and net proceeds of $13.6 million and assuming no exercise of the
additional subscription option or the over-allotment option) and the
application of $4.4 million of the net proceeds to repay the amount
outstanding under the Company's revolving line of credit. See "Use of
Proceeds."
(7) Net interest income on a tax-equivalent basis divided by average interest
earning assets.
(8) Net income divided by average equity.
(9) Non-performing loans consist of non-accrual loans and loans contractually
past due 90 days or more and still accruing.
(10) All interim periods have been annualized.
9
<PAGE> 10
RISK FACTORS
Prospective investors should consider carefully the following factors
associated with the ownership of Common Stock together with the other
information contained in this Prospectus.
IMPACT OF BRANCH OPENINGS AND ACQUISITIONS ON PROFITABILITY
The Company's recent historical results have been impacted by the opening
of its branch banking facilities. Each of the various branch facilities was
newly opened by the Company within the past six years, including the Arlington
Heights branch which opened in September, 1997. While management believes that
the Company has demonstrated significant success to date in deposit generation
and will likely continue to increase its loans-to-deposits ratio as loan
origination activities increase, the level of reported net income and return on
average assets for the Company will in the near term continue to be impacted by
start-up costs associated with these branching operations. Management believes
that new branch facilities typically require 18 to 30 months of operation
before becoming profitable, due to the impact of organizational and overhead
expenses, the start-up phase of generating deposits and the time lag typically
involved in redeploying deposits into attractively priced loans and other
higher yielding assets. The Company intends to expand in its target markets by
establishing additional branches. To the extent the Company undertakes
additional branching, the Company is likely to continue to experience the
effects of higher operating expenses relative to operating income from the new
branches, which may limit increases in profitability. The Company's ability to
expand by establishing new branch offices is dependent on its ability to
identify advantageous branch office locations and generate new deposits and
loans from those locations that will create an acceptable level of net income
for the Company. There can be no assurance the Company will be able to
successfully establish additional branches.
Although the Company has expanded through establishing new branch offices
in the past, the Company's strategic plan also includes selectively acquiring
other financial institutions in its target markets. There can be no assurance
that potential acquisitions will be available on terms acceptable to the
Company or that the required regulatory approval of any proposed acquisitions
will be obtained. There can also be no assurance that the Company will be able
to successfully operate and manage any business that it does acquire so as to
maintain or increase profitability.
ADVERSE IMPACT OF ECONOMIC CONDITIONS
Economic conditions beyond the Company's control may have a significant
impact on the Company's operations, including changes in net interest income.
Examples of such conditions include: (i) the strength of credit demand by
customers; (ii) the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors; and (iii) changes in
the general levels of interest rates, including changes resulting from the
monetary activities of the Board of Governors of the Federal Reserve System
(the "Federal Reserve").
Economic growth in the Company's market area is dependent upon the local
economy. Adverse changes in the economy of the Chicago metropolitan area would
likely impair the Bank's ability to gather deposits and could otherwise have a
negative effect on its business, including the demand for new loans, the
ability of customers to repay loans and the value of the collateral pledged to
the Bank. See "Business of the Company - Competition" and "- Market."
CREDIT RISK; ALLOWANCE FOR LOAN LOSSES
There are risks inherent in making any loan, including risks with respect
to the period of time over which the loan may be repaid, risks resulting from
changes in economic and industry conditions including those in the Company's
local market area, risks inherent in dealing with individual borrowers and
risks resulting from uncertainties as to the future value of the collateral.
The Company's allowance for loan losses is established in consultation with
management of the Bank and is maintained at a level considered adequate by
management to absorb anticipated loan losses. The Company has not experienced
any significant charge-offs since 1992. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond the Company's control, and such
losses may exceed current estimates.
10
<PAGE> 11
Management uses the best information available to it and draws upon many years
of banking experience in establishing the allowance for loan losses. Although
management believes that the allowance for loan losses is adequate to absorb
losses on any existing loans that may become uncollectible, there can be no
assurance that the allowance will prove sufficient to cover actual loan losses
in the future.
EFFECT OF INTEREST RATES
Like most banks, the Bank realizes income primarily from the spread
between interest earned on loans and investments and the interest paid on
deposits and borrowings. It is expected that the Bank, from time to time, will
experience "gaps" in the interest rate sensitivities of its assets and
liabilities, meaning that either its interest bearing liabilities will be more
sensitive to changes in market interest rates than its interest-earning assets,
or vice versa. In either event, if market interest rates should move contrary
to the Bank's position, the "gap" will work against the Bank and its earnings
may be negatively affected. Management actively monitors the interest rate
sensitivities of the assets and liabilities of the Bank in an effort to prevent
any gaps from approaching imprudent levels.
COMPLIANCE WITH REGULATORY CAPITAL REQUIREMENTS; EFFECT ON GROWTH
The Federal Reserve has established certain minimum risk-based capital
standards that apply to bank holding companies and the Office of the
Comptroller of the Currency (the "OCC") has established certain minimum
risk-based capital standards for national banks. As of June 30, 1997, the
Company and the Bank equaled or exceeded all capital adequacy requirements
except that the Company's actual total capital to risk weighted assets ratio
("Tier 2 Ratio") was below the minimum ratio established by the Federal Reserve
of 8.0%. As of June 30, 1997, the Company's actual Tier 2 Ratio was 7.31% and
its total capital was $15.1 million which was $1.3 million less than the
minimum amount required by the Federal Reserve. The Company's pro forma Tier 2
Ratio, reflecting the completion of the Reorganization, is 7.95%. As of June
30, 1997, the most recent notification from the OCC categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective action.
The growth of the Company and the Bank in the past has been, and may in the
future be, constrained by these capital adequacy requirements. The Offering is
being undertaken in part to ensure that the Company and the Bank meet all
applicable capital requirements to enable the Company to continue its growth.
However, there can be no assurance that after the Offering, the Company and/or
the Bank will continue to be in compliance with all of the applicable
regulatory capital requirements. Bank holding companies and/or banks which are
not in compliance with the applicable capital requirements may be subject to
significant operating restrictions including, among other restrictions,
restrictions on the payment of dividends and incurring additional indebtedness.
Any imposition of such operating restrictions on the Company and/or the Bank
could have an adverse effect on the Company's growth and its financial results.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Supervision and Regulation."
RELIANCE ON KEY PERSONNEL
The Company's success to date has been influenced strongly by its ability
to attract and to retain senior management experienced in providing community
banking services. The Company's ability to retain the management team of the
Bank, and, as the Company grows, to attract and retain qualified additional
senior and middle management will continue to be important to successful
implementation of the Company's strategy. Currently, the Company is the
beneficiary under a key-man life insurance policy on Saul D. Binder, President
and Chief Executive Officer of the Company and the Bank, in the amount of $1.0
million. Mr. Binder has also entered into an employment agreement with the
Company. Steven A. Covert, Executive Vice President and Chief Financial Officer
of the Company, has entered into an Executive Severance Agreement with the
Company. The unexpected loss of services of any key management personnel, or
the inability to recruit and retain qualified personnel in the future, could
have an adverse effect on the Company's business and financial results.
NO ASSURANCE THAT THE OFFERING WILL BE COMPLETED
Of the up to 1,200,000 shares offered hereby, 600,000 shares are being
offered by the Company with the assistance of the Selling Agent on a "best
efforts" basis in a Subscription and Community Offering and 600,000 shares are
being offered concurrently by the Selling Agent on a "best efforts" basis in a
Public Offering. The number of shares of Common Stock to be offered in the
Subscription and Community Offering and the Public Offering is subject to
adjustment as described herein. Neither completion of the Subscription and
Community Offering nor the Public Offering is conditioned upon the sale of any
minimum number of shares, and the number of
11
<PAGE> 12
shares actually issued may be substantially less than the maximum 1,200,000
shares offered hereby. If the Company and the Selling Agent determine to
increase the number of shares of Common Stock to be sold in the Public
Offering, the Company would incur increased costs attributable to an increase
in the underwriting discount. See "Terms of the Offering -- Plan of
Distribution for the Subscription, Community and Public Offerings." If the
Offering is completed with a materially fewer number of shares of Common Stock
issued and/or the payment of additional selling costs, the net proceeds would
be reduced from the amounts set forth herein. A lower level of capitalization
may limit the Company's ability to implement elements of its strategic plan.
RISK OF DELAYED OFFERING
Once made, subscriptions are irrevocable. Though the Company anticipates
completing the Offering as soon as practicable following the Expiration Date,
the Company has reserved the right to extend the Offering until December 1,
1997. Accordingly, investors placing purchase orders in the Subscription and
Community Offering, including any extensions thereof, are placed at the risk of
(i) foregoing potential investment income and having subscription funds
unavailable as a result of subscription funds being placed in a non-interest
bearing escrow account, and/or (ii) having holds placed on deposit accounts at
the Bank as a result of account withdrawal authorizations used as payment for
shares subscribed.
COMPETITION
The Company is headquartered in Lincolnshire, Illinois, a suburb of
Chicago, which is located in Lake County. The Company currently conducts its
business from its main office and seven branch offices, all of which are
located in the north and northwest suburbs of Chicago and the north side of
Chicago. The Company faces significant competition both in making loans and in
attracting deposits. Most of the Company's mortgage loans are secured by
properties located in Cook and Lake Counties. The Chicago metropolitan area has
a high density of financial institutions, many of which have a state-wide or
regional presence, and, in some cases, a national presence, and all of which
are competitors of the Company to varying degrees. The Company's competition
for loans comes principally from commercial banks, savings banks, savings and
loan associations, credit unions, mortgage banking companies and insurance
companies. Many of the Company's non-bank competitors are not subject to the
same degree of regulation as that imposed on bank holding companies, federally
insured banks and national banks. As a result, such non-bank competitors have
advantages over the Company in providing certain services. The Company's most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions, many of which
are significantly larger than the Company and, therefore, have greater
financial and marketing resources than those of the Company. The Company faces
additional competition for deposits from short-term money market funds, other
corporate and government securities funds and from other financial institutions
such as brokerage firms and insurance companies. Such competition may limit the
growth and profitability of the Company in the future. See "Business -- Market
and Competition."
SUBSTANTIAL CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
After the Offering, assuming none of them purchase additional shares in
the Offering, the directors, executive officers and certain key employees of
the Company will in aggregate own approximately 18.2% of the issued and
outstanding shares of Common Stock (assuming 1,200,000 shares are sold in the
Offering) and are likely to continue to exercise substantial control over the
Company's affairs. See "Principal Shareholders."
SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offering will be subject to immediate dilution of $3.41 per
share in pro forma net tangible book value (assuming 600,000 shares are sold in
the Offering). See "Dilution."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sale of a substantial number of shares of Common Stock in the public
market, whether by purchasers in this Offering or other shareholders of the
Company, could adversely affect the prevailing market price of the Common
Stock, and could impair the Company's future ability to raise capital through
an offering of its equity securities. There will be 2,759,949 shares of Common
Stock outstanding immediately after completion of the Offering (assuming
1,200,000 shares are sold in the Offering), 2,749,619 of which will be freely
tradeable in the public
12
<PAGE> 13
market, subject in certain cases to the volume and other limitations set forth
in Rule 144 promulgated under Securities Act of 1933, as amended (the
"Securities Act"), and certain 180-day lock-up agreements with the Selling
Agent. See "Shares Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Certificate of Incorporation"), by-laws (the "By-Laws"), and the Delaware
General Corporation Law ("DGCL") may have the effect of impeding the
acquisition or control of the Company by means of a tender offer, a proxy
fight, open-market purchases or otherwise in a transaction not approved by the
board of directors of the Company (the "Board of Directors"). Certain
provisions will also render the removal of the current Board of Directors or
management of the Company more difficult. Among other provisions, the Company's
Certificate of Incorporation and By-Laws include the authorization of "blank
check" preferred stock, a staggered board of directors, limiting the filling of
Board of Directors vacancies to the Board of Directors, requiring advance
notice with respect to shareholder proposals and director nominations and
requiring an 80 percent vote of the shareholders to amend certain anti-takeover
provisions in the Certificate of Incorporation and By-Laws. See "Description of
Capital Stock."
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock to date
and does not intend to pay such cash dividends in the foreseeable future. The
Company intends to retain earnings to finance the development and expansion of
its business. The Company is also subject to restrictions on the payment of
dividends under its revolving line of credit agreement. In addition, the
Company's ability to pay dividends in the future is dependent upon its receipt
of dividends paid to it by the Bank. The Bank is subject to certain
restrictions on the amount of dividends that it may declare without prior
regulatory approval. See "Dividend Policy."
SUPERVISION AND REGULATION
Bank holding companies and national banks operate in a highly regulated
environment and are subject to supervision and examination by federal
regulatory agencies. The Company is subject to the Bank Holding Company Act of
1956, as amended (together with the regulations issued thereunder, the "BHC
Act"), and to regulation and supervision by the Federal Reserve. The Bank, as a
national bank that is a member of the Federal Reserve System and insured by the
Federal Deposit Insurance Corporation (the "FDIC"), is subject to the primary
regulation and supervision of the OCC, and secondarily, of the FDIC. Federal
laws and regulations govern numerous matters including changes in the ownership
or control of banks and bank holding companies, maintenance of adequate capital
and the financial condition of a financial institution, permissible types,
amounts and terms of extensions of credit and investments, permissible
non-banking activities, the level of reserves against deposits, and
restrictions on dividend payments. The OCC and the FDIC possess cease and
desist powers to prevent or remedy unsafe or unsound practices or violations of
law by national banks, and the Federal Reserve possesses similar powers with
respect to bank holding companies. These and other restrictions limit the
manner in which the Company and the Bank may conduct business and obtain
financing. Furthermore, the commercial banking business is affected not only by
general economic conditions, but also by the monetary policies of the Federal
Reserve. Changes in monetary or legislative policies may affect the interest
rates the Bank must offer to attract deposits and the interest rates it must
charge on its loans, as well as the manner in which it offers deposits and
makes loans. These monetary policies have had, and are expected to continue to
have, significant effects on the operating results of commercial banks,
including the Bank. See "Supervision and Regulation."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The Company has applied to have its Common Stock approved for quotation
on The Nasdaq National MarketSM, subject to the completion of the Offering.
There can be no assurance that an active trading market will develop or, if
developed, will be sustained upon completion of the Offering or that the market
price of the Common Stock will not decline below the initial public offering
price. The market price of the Common Stock may be subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant contracts, changes in management, announcements of new
products by the Company or its competitors, legislative or regulatory changes,
general trends in the industry and other events or factors. In addition, the
stock market has experienced extreme price and volume fluctuations which have
affected the market price of the common stock of many companies for reasons
13
<PAGE> 14
frequently unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the
Company's Common Stock. Securities recently issued in an initial public
offering are particularly susceptible to volatility based on the short term
trading strategies of certain investors. See "Terms of the Offering."
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,200,000 shares of
Common Stock in this Offering are estimated to be approximately $13.6 million
(assuming (i) 600,000 shares are sold in the Subscription and Community
Offering; (ii) 600,000 shares are sold in the Public Offering; and (iii) no
exercise of the additional subscription option or the over-allotment option)
after deducting estimated offering expenses and Selling Agent commissions and
underwriting discount of approximately $1.4 million. If the Company sells
600,000 shares of Common Stock in this Offering, the net proceeds to the
Company are estimated to be approximately $6.5 million (assuming (i) 300,000
shares are sold in the Subscription and Community Offering; (ii) 300,000 shares
are sold in the Public Offering; and (iii) no exercise of the additional
subscription option or the over-allotment option) after deducting estimated
offering expenses and Selling Agent commissions and underwriting discount of
approximately $1 million. The shares of Common Stock in both the Subscription
and Community Offering and the Public Offering are being offered on a "best
efforts" basis and, accordingly, there is no requirement or assurance that the
Company will sell a specified minimum number of shares of Common Stock in the
Offering.
The Company will use the net proceeds of the Offering to repay all or a
portion of the amount outstanding under the Company's $8 million revolving line
of credit. At July 30, 1997, approximately $7.4 million of indebtedness was
outstanding under the line of credit. Borrowings under the line of credit bear
interest at the lender's prime rate and interest is payable quarterly. The
lender's prime rate was 8.5% at July 30, 1997. The line of credit is secured by
a pledge of the common stock and preferred stock of the Bank owned by the
Company. Loans drawn on the line of credit mature on June 15, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company intends to
contribute any remaining net proceeds of the Offering to the capital of the
Bank to support continued growth of the Bank's loan portfolio.
Once repaid, the unused portion of the revolving line of credit will
remain available and the Company may use the line for future borrowings from
time to time for general corporate purposes, including continued growth of the
Bank, for future branch office openings and for potential future acquisitions
of other financial institutions; however, no general corporate purpose has been
specifically identified by the Company at this time and the Company has no
arrangements, agreements or understandings concerning specific acquisitions.
DIVIDEND POLICY
The Company has not previously paid any cash dividends on the Common
Stock. The Company intends to retain all future earnings for the operation and
expansion of its business, and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. The Company is also subject to
restrictions on the payment of dividends under its revolving line of credit
agreement. In the future, any declaration and payment of dividends on the
Common Stock will depend upon the Company's results of operations, general
financial condition, capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other factors which the Company's Board
of Directors may consider relevant. The Company's principal source of funds to
pay dividends on the Common Stock will be cash dividends the Company receives
from the Bank. Should the Bank declare a dividend on its common stock, a pro
rata portion of such dividend would be required to be paid to the Bank's
minority shareholders. The Bank has in the past and intends to continue to pay
dividends only on its preferred stock, all of which is owned by the Company.
The payment of dividends by the Bank to the Company is subject to certain
restrictions imposed by federal and state banking laws, regulations and
authorities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Supervision and Regulation."
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the Company's consolidated capitalization
as of June 30, 1997, (i) on a historical basis; (ii) on a pro forma basis,
giving effect to the Reorganization; (iii) on a pro forma basis, giving effect
to Offering (assuming the sale of 600,000 shares and net proceeds of $6.5
million and assuming no exercise of the additional subscription option or the
over-allotment option) and the application of the net proceeds therefrom as
described under "Use of Proceeds"; and (iv) on a pro forma basis, giving effect
to the Offering (assuming the sale of 1,200,000 shares and net proceeds of
$13.6 million and assuming no exercise of the additional subscription option or
the over-allotment option) and the application of the net proceeds therefrom as
described under "Use of Proceeds". THE SHARES OF COMMON STOCK IN BOTH THE
SUBSCRIPTION AND COMMUNITY OFFERING AND THE PUBLIC OFFERING ARE BEING OFFERED
ON A "BEST EFFORTS" BASIS AND, ACCORDINGLY, THERE IS NO REQUIREMENT OR
ASSURANCE THAT THE COMPANY WILL SELL A SPECIFIED MINIMUM NUMBER OF SHARES OF
COMMON STOCK IN THE OFFERING. This data should be read in conjunction with the
financial statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
Actual Pro Forma(1) (600,000 shares (1,200,000 shares)
------------ ---------- --------------- ------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Short-Term Debt.................................................... $ 18,140 $ 18,140 $ 13,725 $ 13,725
Long-Term Debt:
Federal Home Loan Bank advances................................ 3,079 3,079 3,079 3,079
9% Convertible Subordinated Debentures......................... 2,012 -- -- --
15% and 17% Convertible Subordinated Notes..................... 1,155 -- -- --
-------- -------- --------- ---------
Total Long-Term Debt........................................ 6,246 3,079 3,079 3,079
Minority interest in subsidiary bank............................... 538 538 538 538
Stock owned by Employee Stock Ownership Plan ("ESOP") participants,
net of ESOP loan, Series B Preferred Stock, $1.00 par value,
100,000 shares authorized, 53,918 shares issued and
outstanding actual; no shares of preferred stock issued and
outstanding pro forma and pro forma as adjusted; Common
Stock, $0.001 par value, no shares issued and outstanding
actual, 91,660 shares issued and outstanding pro forma
and pro forma as adjusted................................... 800 800 800 800
Shareholders' Equity:
Preferred stock, $25.00 par value, 14,774 shares authorized,
no shares issued and outstanding actual; $0.001 par value,
1,000,000 shares authorized; no shares issued and outstanding
pro forma and pro forma as adjusted......................... -- -- -- --
Common Stock, $1.00 par value, 1,000,000 shares authorized,
960,282 shares issued and outstanding actual; $0.001 par value,
7,500,000 shares authorized, 1,459,010 shares issued and
outstanding pro forma; 2,059,010 shares issued and outstanding
pro forma as adjusted (600,000 shares); 2,659,010 shares issued
and outstanding pro forma as adjusted
(1,200,000 shares)(2)....................................... 960 2 3 3
Class A Common Stock, $1 par value, 1,000,000 shares authorized,
115,500 shares issued and outstanding actual; no shares
issued and outstanding
pro forma and pro forma as adjusted......................... 116 -- -- --
Additional paid-in capital......................................... 4,869 9,110 15,566 22,672
Retained earnings.................................................. 4,298 4,298 4,298 4,298
-------- -------- --------- ---------
Total before unrealized loss on securities..................... 10,243 13,410 19,867 26,973
Unrealized loss on securities, net of tax.......................... (485) (485) (485) (485)
--------- -------- --------- ---------
Total shareholders' equity..................................... 9,758 12,925 19,382 26,488
-------- -------- --------- ---------
Total capitalization............................................... $ 17,342 $ 17,342 $ 23,799 $ 30,905
======== ======== ========= =========
Capital ratios:
Leverage (4.00% required minimum)(3)........................... 4.00% 5.09% 7.27% 9.48%
Risk-based capital(4)
Tier 1 (4.00% required minimum)............................. 5.62% 7.16% 10.23% 13.35%
Tier 2 (8.00% required minimum)............................. 7.31% 7.95% 11.01% 14.12%
</TABLE>
- ------------------
(1) The pro forma information reflects the completion of the Reorganization.
(2) Excludes 9,350 shares of Common Stock issued to Directors in July, 1997,
pursuant to the exercise of stock options granted as part of the
Company's Director Stock Option Program. Also excludes 170,000 shares of
Common Stock reserved for issuance under the 1995 Stock Option Plan and
115,090 shares reserved for issuance pursuant to options granted before
the implementation of the 1995 Stock Option Plan. There are currently
outstanding 153,340 options outstanding, including options outstanding
under the 1995 Stock Option Plan, each of which entitles the holder
thereof to purchase one share of Common Stock. See "Management -- Stock
Option Plans." The weighted average exercise price per share for all of
the currently outstanding options is $5.02. Of the currently outstanding
options, 127,840 are currently exercisable at a weighted average price of
$4.79.
(3) Leverage ratio is defined as Tier 1 capital (as defined in the
regulations) as a percent of total average assets. See "Supervision and
Regulation."
(4) The pro forma risk-based capital ratios have been computed assuming the
net proceeds of the Offering, after payment of the Company's
indebtedness, are invested in assets carrying a risk-weight that is
equivalent to the Company's average risk-weight at June 30, 1997. See
"Supervision and Regulation."
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<PAGE> 17
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
(after giving effect to the Reorganization and the exercise of outstanding
options to purchase 153,340 shares of Common Stock) was $13.7 million or
approximately $8.51 per pro forma share of Common Stock. "Pro forma net
tangible book value" is defined as the pro forma total shareholders' equity of
the Company less intangible assets. "Pro forma net tangible book value per
share" is determined by dividing the pro forma net tangible book value of the
Company by the number of outstanding pro forma shares of Common Stock.
Assuming, and after giving effect to, the sale of the 1,200,000 shares of
Common Stock offered hereby (after deducting the estimated Selling Agent
commissions and underwriting discount and offering expenses), the Company's pro
forma net tangible book value as of June 30, 1997, would have been $27.3
million or $9.66 per pro forma share of Common Stock. This represents an
immediate increase in pro forma net tangible book value of $1.15 per share to
the existing shareholders, and an immediate dilution of $2.84 per share to
investors who purchase shares of Common Stock in the Offering. "Dilution" is
the difference between the offering price per share and the pro forma net
tangible book value per share as adjusted for the Offering.
Assuming, and after giving effect to, the sale of the 600,000 shares of
Common Stock offered hereby (after deducting the estimated Selling Agent
commissions and underwriting discount and offering expenses), the Company's pro
forma net tangible book value as of June 30, 1997, would have been $20.2
million or $9.09 per pro forma share of Common Stock. This represents an
immediate increase in pro forma net tangible book value of $0.58 per share to
the existing shareholders, and an immediate dilution of $3.41 per share to
investors who purchase shares of Common Stock in the Offering.
The following table illustrates the per share dilution as of June 30,
1997 assuming, and giving effect to, the sale of 600,000 shares and 1,200,000
shares, respectively, which is determined by subtracting the pro forma net
tangible book value per share after the Offering from the price paid by a new
investor.
<TABLE>
<CAPTION>
600,000 SHARES 1,200,000 SHARES
------------------------ ----------------------
<S> <C> <C> <C> <C>
Initial public offering price per share (1)................ $ 12.50 12.50
Net tangible book value per share as of
June 30, 1997 (2)..................................... $ 8.83 $ 8.83
Reduction in net tangible book value per share
attributable to pro forma adjustments................. (0.32) (0.32)
-------- --------
Pro forma net tangible book value per share as of
June 30, 1997 (3)..................................... 8.51 8.51
Increase in pro forma net tangible book value per
share attributable to payments by new investors (4)... 0.58 1.15
-------- --------
Pro forma net tangible book value per share after
offering.............................................. 9.09 9.66
-------- --------
Dilution of pro forma net tangible book value per
share to new investors................................. $ 3.41 $ 2.84
========= =========
</TABLE>
- ------------------
(1) Before deducting the estimated Selling Agent commissions and underwriting
discount and offering expenses.
(2) After giving effect to the exercise of outstanding options to purchase
153,340 shares of Common Stock.
(3) Based on the number of pro forma shares of Common Stock outstanding as of
June 30, 1997.
(4) After deducting estimated Selling Agent commissions and underwriting
discount and offering expenses.
The following table sets forth on a pro forma basis as of June 30, 1997
(after giving effect to the Reorganization), the number of shares purchased
from the Company, the total consideration paid and the average price per share
paid by: (i) existing shareholders and (ii) investors in the Offering (before
deducting the estimated Selling Agent commissions and underwriting discount and
offering expenses):
17
<PAGE> 18
<TABLE>
<CAPTION>
Number of Shares Total Average Price Per
Purchased Consideration Share
---------------- ------------- -----------------
<S> <C> <C> <C>
Existing shareholders(1).............................. $ 1,550,670 $ 9,912,000 $ 6.39
New investors......................................... 1,200,000 15,000,000 12.50
</TABLE>
- ------------------
(1) Excludes 9,350 shares of Common Stock issued to Directors in July, 1997,
pursuant to the exercise of stock options granted as part of the
Company's Director Stock Option Program. Also excludes 170,000 shares of
Common Stock reserved for issuance under the 1995 Stock Option Plan and
115,090 shares reserved for issuance pursuant to options granted before
the implementation of the 1995 Stock Option Plan. There are currently
outstanding 153,340 options outstanding, including options outstanding
under th 1995 Stock Option Plan, each of which entitles the holder
thereof to purchase one share of Common Stock. See "Management -- Stock
Option Plans." The weighted average exercise price per share for all of
the currently outstanding options is $5.02. Of the currently outstanding
options, 127,840 are currently exercisable at a weighted average price of
$4.79.
18
<PAGE> 19
TERMS OF THE OFFERING
GENERAL
The Company is offering for sale on a "best efforts" basis up to
1,200,000 shares of its Common Stock at a price of $12.50 per share. Of these
shares, 600,000 shares are being offered by the Company on a "best efforts"
basis with the assistance of the Selling Agent in a Subscription and Community
Offering and 600,000 shares are being offered concurrently by the Selling Agent
on a "best efforts" basis in a Public Offering. The number of shares of Common
Stock to be offered in the Subscription and Community Offering and the Public
Offering is subject to adjustment as described herein. The Company has entered
into an agency agreement (the "Agency Agreement") with the Selling Agent.
Subject to the terms and conditions set forth in the Agency Agreement, the
Selling Agent has agreed to act as the Company's agent and, on a "best efforts"
basis, to assist the Company with the solicitation of purchase orders for
600,000 shares in the Subscription and Community Offering. The Selling Agent
has also agreed in the Agency Agreement to offer 600,000 shares on a "best
efforts" basis in the Public Offering.
SUBSCRIPTION AND COMMUNITY OFFERING
The Subscription Offering. Of the 1,200,000 shares offered, 600,000
shares are being offered on a priority basis to shareholders of the Company as
September 15, 1997 ("Record Date Shareholders"), and to certain customers of
the Bank as of September 15, 1997 ("Record Date Customers"). The highest
priority will be given to those Record Date Shareholders placing purchase
orders prior to Noon, Central Time, on October 15, 1997.
The Community Offering. While 600,000 shares are being offered on a
priority basis to eligible subscribers in the Subscription Offering, the Common
Stock is also being concurrently offered by the Company for sale to the general
public, with a preference being given to residents of the communities served by
the Bank.
Unless extended by the Company, the Subscription and Community Offering
will terminate at Noon, Central Time, on October 28, 1997. The Public Offering
is being conducted concurrently with the Subscription and Community Offering.
Depending on market demand, the Company and the Selling Agent may determine to
increase or decrease the number of shares of Common Stock to be offered in the
Subscription and Community Offering relative to the Public Offering. The
Company reserves the right in its sole discretion, notwithstanding the
priorities and preferences described above, to accept or reject in whole or in
part orders in the Subscription and Community Offering.
Procedures for Subscribing for Common Stock in the Subscription and
Community Offering. The Company will mail, hand deliver, or make available at
its offices Prospectuses and related subscription documents (the "Stock Order
Forms" and the "Certification Forms"). In accordance with Rule 15c2-8 of the
Exchange Act, to ensure that each purchaser receives a Prospectus at least 48
hours prior to the Expiration Date, no Prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date.
Record Date Shareholders, Record Date Customers, and other investors
interested in subscribing for shares of Common Stock in the Subscription and
Community Offering must return to the Company a properly completed original
Stock Order Form (facsimile copies and photocopies will not be accepted) and a
fully executed Certification Form along with full payment (or appropriate
instructions for authorizing a withdrawal from a deposit account at the Bank)
at $12.50 per share for all shares subscribed for or ordered prior to Noon,
Central Time, on October 28, 1997. To receive preference in the Subscription
Offering, Record Date Shareholders must place purchase orders prior to Noon,
Central Time, on October 15, 1997. Original Stock Order Forms and Certification
Forms accompany this Prospectus. In order to ensure that prospective investors
are properly identified as to their stock purchase priorities, Record Date
Shareholders and Record Date Customers must provide the identifying information
requested on the Stock Order Forms. The minimum subscription for any investor
is 200 shares, or $2,500.
Payment for shares of Common Stock must be made by check, bank draft or
money order drawn upon a United States bank payable to "Success Bancshares,
Inc." or by withdrawal authorization from a deposit account at the Bank. Wire
transfers will not be accepted. Payment by non-certified personal check will be
considered received only upon clearance, and the Company in its sole discretion
may reject subscriptions for which funds have not
19
<PAGE> 20
cleared at the Expiration Date. Payments made by check, bank draft, or money
order will be placed in a non-interest bearing escrow account at the Bank until
completion or termination of the Subscription and Community Offering. The Stock
Order Form contains blanks to authorize deposit withdrawals as payment for
shares subscribed, and such deposit accounts will be charged on the day the
order is received for the amount of the subscription and proceeds placed in a
non-interest bearing escrow account at the Bank until completion or termination
of the Subscription and Community Offering. To the extent subscription orders
are filled, the foregoing escrow account will be charged as of the closing date
of the Offering against issuance of certificates evidencing ownership of the
shares of Common Stock. In the event subscription orders are not filled, or are
accepted only in part, or if the Subscription and Community Offering is
terminated, unaccepted subscription funds placed in escrow will be returned to
subscribers without interest.
The methods of delivery of Stock Order Forms, Certification Forms and
payment for shares are at the election and risk of Record Date Shareholders,
Record Date Customers, and other prospective investors. The Company recommends
that such parties deliver in person to the Bank or its branch offices the
properly completed original Stock Order Form along with the fully executed
Certification Form and full payment in advance of the Expiration Date.
Alternatively, such parties may mail them in the pre-addressed, postage-prepaid
business reply envelope accompanying the Prospectus, allowing for sufficient
time for delivery of the mail to the Company and the clearance of any
non-certified personal checks prior to the Expiration Date.
Once made, subscriptions are irrevocable. Completion of the Subscription
and Community Offering is not conditioned upon the sale of any minimum number
of shares in either the Subscription and Community Offering or the Public
Offering. See "Risk Factors -- No Assurance that the Offering will be
Completed."
All questions concerning the timeliness, validity, form, and eligibility
of Stock Order Forms received will be determined by the Company in its sole
discretion, including the absolute right of the Company to reject any order in
whole or part in the Subscription and Community Offering without assigning any
reason therefor. The Company may, in its sole discretion, permit the correction
of incomplete or improperly executed Stock Order Forms or waive the Expiration
Date receipt deadline but does not represent that it will do so. The Company
assumes no responsibility to provide, nor will it incur any liability for
failure to give, notification of any defect or irregularity in connection with
the submission of Stock Order Forms. The Company also reserves the right in its
sole discretion to terminate the Subscription and Community Offering prior to
the Expiration Date.
Prospective investors with questions or needing assistance concerning the
procedures for subscribing for shares of Common Stock should call the Stock
Information Office at (800) 744-6248 and ask for an EVEREN Securities, Inc.
representative.
Limitations on Purchase of Shares. Record Date Shareholders, Record Date
Customers and other prospective investors in the Subscription and Community
Offering must subscribe for at least 200 shares. In addition, no subscription
orders will be accepted from parties or groups which, when combined with any
current holdings of Common Stock, would cause any undue concentration of
ownership control as determined by the Company in its sole discretion. There
can be no assurance that Common Stock will be available to satisfy all
subscription orders, and the Company reserves the absolute right to allocate
available shares in its sole discretion.
Delivery of Certificates. Purchasers may elect to receive certificates
evidencing ownership of shares purchased in the Subscription and Community
Offering or to have delivery of such shares made in book entry form through the
facilities of The Depository Trust Company ("DTC"), New York, New York. Share
certificates or confirmations of delivery to DTC will be delivered, along with
any refund due, by U.S. mail, postage-prepaid, directly to the purchasers at
the address indicated on the Stock Order Form as soon as practicable following
completion of the Offering. Until share certificates are available and
delivered to purchasers or the delivery to DTC is effected, purchasers may be
unable to sell the shares of Common Stock purchased by them.
THE PUBLIC OFFERING
Concurrently with the Subscription and Community Offering, 600,000 shares
are being offered on a "best efforts" basis to the general public in an
underwritten Public Offering managed by the Selling Agent. Depending on market
demand, the Company and the Selling Agent may determine to increase or decrease
the number of shares of Common Stock to be offered in the Public Offering
relative to the Subscription and Community Offering. Although
20
<PAGE> 21
600,000 shares of Common Stock are being offered by the Selling Agent to the
general public in the Public Offering, the Selling Agent is not obligated
pursuant to the Agency Agreement to purchase any of the shares of Common Stock
offered in the Public Offering. Completion of the Public Offering will be
subject to the execution of a public offering acknowledgement (the "Public
Offering Acknowledgement") pursuant to which the Company and the Selling Agent
agree that the Agency Agreement will constitute the underwriting agreement
between the Company and the Selling Agent for purposes of the Public Offering.
Subject to the terms and conditions contained in the Public Offering
Acknowledgment, the Selling Agent will agree to purchase from the Company and
the Company will agree to sell to the Selling Agent a specified number of shares
of Common Stock offered to the general public in the Public Offering. The
Company and the Selling Agent currently anticipate that the Public Offering
Acknowledgement will be executed within five business days following the
termination of the Subscription and Community Offering. Whether the Public
Offering Acknowledgement is executed and the Public Offering is completed will
depend upon, among other factors, the market conditions then prevailing and the
then-current financial condition of the Company. The number of shares of Common
Stock to be sold in the Public Offering will be determined by the Selling Agent
and the Company. Completion of the Public Offering is not conditioned upon the
sale of any minimum number of shares in the Public Offering or the Subscription
and Community Offering.
PLAN OF DISTRIBUTION
Subscription and Community Offering. The Company, pursuant to the terms
of the Agency Agreement, engaged the Selling Agent as a financial and marketing
adviser in connection with the Offering. The Selling Agent has agreed to use
its "best efforts" to assist the Company with the solicitation of subscriptions
and purchase orders for shares of Common Stock in the Subscription and
Community Offering. Pursuant to the Agency Agreement, the Selling Agent will
provide the Company certain financial and marketing advice regarding the
structure of the Offering and sale of the Common Stock; prepare certain
marketing documents ancillary to the Prospectus; establish, staff, and manage a
Stock Information Office to solicit purchase orders for the Common Stock and
provide technical and administrative support; and conduct informational
meetings for prospective investors. The Agency Agreement does not obligate the
Selling Agent to take or purchase any of the shares of Common Stock. As
compensation for the foregoing services, the Company will pay the Selling Agent
3.5% of the aggregate price of the shares of Common Stock sold directly by the
Company in the Subscription and Community Offering. The Company will also
reimburse the Selling Agent for certain out-of-pocket expenses (including fees
and expenses of the Selling Agent's counsel) up to a maximum of $100,000. The
Company has also agreed to indemnify the Selling Agent against certain
liabilities, including civil liabilities arising under the Securities Act, or
to contribute to certain payments made in respect thereof. The Company may, in
its sole discretion, increase the number of shares of Common Stock sold by up
to an additional 15% of the number of shares sold in the Subscription and
Community Offering to satisfy unfilled purchase orders.
Public Offering. The Company, pursuant to the terms of the Agency
Agreement, has also retained the Selling Agent to serve as the underwriter, on
a "best efforts" basis, of the Public Offering. Concurrently with the
Subscription and Community Offering, the Selling Agent will commence the Public
Offering. The Agency Agreement does not obligate the Selling Agent to purchase
any of the shares of Common Stock offered in the Public Offering. Completion of
the Public Offering will be subject to the execution of the Public Offering
Acknowledgement by the Company and the Selling Agent. The Company has also
agreed to indemnify the Selling Agent against certain liabilities, including
civil liabilities arising under the Securities Act, or to contribute to certain
payments made in respect thereof. The Public Offering Acknowledgement will
provide that the Selling Agent will offer a specified number of shares to the
general public at the offering price per share set forth on the cover page
hereof and purchase such shares from the Company at such price less an
underwriting discount of 7.0%. The number of shares to be purchased by the
Selling Agent from the Company in the Public Offering will be determined by the
Company and the Selling Agent on the date that the Public Offering
Acknowledgment is executed. In the Public Offering Acknowledgement, the Company
will also grant the Selling Agent an option, exercisable within 30 days of the
completion of the Public Offering, to purchase up to an additional 15% of the
shares sold in the Public Offering to cover over-allotments, if any, at the
same price as would be paid by the Selling Agent for the other shares purchased
pursuant to the Public Offering Acknowledgement. The Selling Agent will
exercise the option only for the purpose of covering over-allotments, if any,
made in connection with the distribution of the Common Stock offered in the
Public Offering. It is expected that delivery of the shares of Common Stock
purchased in the Public Offering will be made through the facilities of DTC
within four business days of the execution of the Public Offering
Acknowledgement.
21
<PAGE> 22
The Company has been advised by the Selling Agent that it may offer the
Common Stock to certain dealers at $12.50 per share, less a concession not in
excess of $0.53 per share of Common Stock. The Selling Agent may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share of
Common Stock to certain other brokers or dealers. After the Public Offering,
the price per share, concession and reallowance to brokers or dealers may be
changed by the Selling Agent. The Selling Agent has informed the Company that
it does not intend to confirm sales to accounts over which it exercises
discretionary authority.
Completion of the Public Offering of the Common Stock is subject to prior
sale, when, as and if issued by the Company and delivered to and accepted by
the Selling Agent and subject to withdrawal, cancellation or modification of
the offer without notice. The Selling Agent reserves the right to reject any
order for the purchase of the Common Stock.
DETERMINATION OF INITIAL OFFERING PRICE
The initial offering price of the Common Stock has been determined by the
Company and the Selling Agent based on a number of factors including prevailing
market and economic conditions, revenues and earnings of the Company, estimates
of the business potential and prospects of the Company, the present state of
the Company's business and operations, an assessment of the Company's
management, and the consideration of the foregoing factors in relation to
market valuations of generally comparable companies.
22
<PAGE> 23
BUSINESS
THE COMPANY
The Company provides community banking services to individuals,
small-to-medium-sized businesses, local governmental units and institutional
clients primarily in the Northern Chicagoland area. These services include
traditional checking, NOW, money market, savings and time deposit accounts, as
well as a number of innovative deposit products targeted to specific market
segments. The Bank offers home equity, home mortgage, commercial real estate,
commercial and consumer loans, safe deposit facilities and other innovative and
traditional services specially tailored to meet the needs of customers in its
target markets. The Company's goal is to continue to offer innovative,
attractive financial products to businesses and individuals in its market area.
In May, 1996, the Bank became one of the first banks in its market area to go
on-line with its own home page on the World Wide Web
(http://www.successbank.com). The Bank's home page enables consumers to access
information regarding branch locations, deposit and loan rates and economic
forecasts. The Bank recently introduced its Success for Seniors account to
compete with the high cost reverse mortgage products of its competitors. This
new product combines a high rate of interest NOW account with a 20 year home
equity line of credit and the added flexibility of a Visa Gold card.
As a community bank, the Bank stresses personalized service, local
decision making, quick customer response and strong relationships with
business, civic and community organizations. Management believes this marketing
and service approach enables the Bank to compete effectively with the money
center, super regional and regional banks that have a presence in its target
markets. By continuing to offer quality service, management expects to be able
to expand the Bank's base of core deposits and to expand loan growth among its
commercial and retail customers.
STRATEGY
The Company's goal is to continue to grow the assets of the Bank and
increase profitability while maintaining strong credit quality. To achieve this
goal, the Company's strategic plan is to continue to focus on providing a high
level of service to its core customers while expanding its market share in its
target markets of the north and northwest suburbs of Chicago and the north side
of Chicago. Key elements of the Company's strategic plan include:
- MAINTAIN STRONG LOCAL PRESENCE AND LOCAL DECISION MAKING AUTHORITY.
The Company intends to maintain its strong local presence in the communities it
serves through personal service, local decision making, quick consumer response
and strong relationships with local business, civic and community
organizations. This strong local presence combined with the Company's focus on
local decision making differentiates it from larger financial institutions with
national or regional markets that have branches in the Company's target
markets. The Company believes that its local presence and focus on local
decision making provide the Bank with the competitive advantage of being able
to tailor products and services to meet the needs of the customers and
communities within its target markets, to make decisions for customers quickly
and to enjoy the symbiotic benefits of investing and participating in its
community.
- PROVIDING A HIGH LEVEL OF SERVICE THROUGH QUALITY EMPLOYEES. A
cornerstone of the Company's strategy is to provide customers with quality
products and services delivered through traditional and state-of-the-art
systems, while making highly responsive and personalized attention to customer
service the priority in all of its operations. The rapid pace of consolidation
in the financial services industry has led to the disenchantment of many
individuals and small businesses with the perceived lower level of service
offered by the resulting larger institutions. The Company intends to capitalize
on this negative perception by providing a high level of individualized service
and responsiveness. The Company believes that providing this individualized
service depends on competent and highly motivated employees who are able to
make decisions and quickly respond to customers' needs. To ensure professional
servicing of commercial and retail customers of the Bank, the Company
emphasizes the recruiting and training of such employees at all levels of the
organization. The Company expects that a well-trained, motivated and loyal
staff will produce the maximum personal contact needed to understand and meet
customer needs and preferences.
- POSITIONED FOR CONTROLLED MARKET EXPANSION. The Company believes that
there are significant opportunities to grow its deposit and loan base in its
target markets. In anticipation of such opportunities, the
23
<PAGE> 24
Company has invested in structuring an organization that is capable of handling
a much larger scope of operations. New systems and quality personnel have been
put in place so that new branches may be opened in a cost effective manner.
Management believes that opening new branches is an efficient means for the
Company to gain market share. The Company will pursue disciplined growth in its
target markets by opening branches in areas where management believes local
residents and small-to-medium-sized businesses would benefit from a community
banking alternative. Following an industry trend, the Company will continue to
pursue branching opportunities at non-traditional outlets. The Company recently
entered into an agreement with Butera Finer Foods to establish a branch banking
facility in Butera's Golf/Mill store in Niles, Illinois. Although the Company
has expanded through establishing new branch offices in the past, the Company's
strategic plan also includes selectively acquiring other financial institutions
in its target markets.
- INCREASING ITS PORTFOLIO OF HIGH QUALITY LOANS. The Company's policy
is to respond to all creditworthy segments of its target markets as a key to
its long-term success. The Company makes an active effort to determine the
credit needs of the communities in its target markets, including low and
moderate income areas and individuals, and to evaluate the products it offers
and the design of those products to determine whether it is effectively
responding to such communities. The Bank adheres to strict underwriting
standards in its loan origination activities and loans in excess of certain
specified lending limits are subject to approval by the Bank's loan committee
or, in certain circumstances, by the full board of the Bank. The Board of
Directors and loan committee of the Bank, which include a number of persons who
also serve as directors of the Company, review the loan portfolio on a monthly
basis to assess loan quality. In addition to the internal review process,
independent external review of the loan portfolio is provided by the
examinations conducted by regulatory authorities, independent public
accountants in connection with their annual audit, and a loan review performed
by an independent consultant engaged by the audit committee of the Bank's Board
of Directors. The Company has historically had a high quality loan portfolio as
exhibited by a loan loss rate (net charge-offs to average total loans) of 0.04%
for the year ended December 31, 1996. The Company is committed to maintaining
strong credit quality while increasing income as the Company grows.
- FOCUSING ON CORE CUSTOMERS. The Company continues to focus on
establishing and maintaining long-term relationships with its core customers.
The Company emphasizes relationships with individuals and small-to-medium-sized
businesses in its target markets and believes that focusing on its core
customers will result in growth and increased profitability.
- CREATING INNOVATIVE AND NICHE PRODUCTS. The Company intends to
continue developing innovative loan and deposit products. The Company believes
that its local presence and focus on local decision making enables the Bank to
target and be more responsive to the needs of its customers by offering
customized products and services. For instance, the Company developed the SIGMA
account which combines a checking account and credit card with a home equity
loan. The Company also intends to continue to develop lending niches which
generate loan growth and service its target markets. The Company has developed
a strong expertise in real estate loans to small entrepreneurs and in loans to
the long-term health care industry. The Company is also one of the few sources
of loans for co-operative apartments in Chicagoland and provides unique and
flexible home equity loans. The Company intends to continue to market its
products aggressively through creative newspaper and other advertising, special
promotions and frequently sponsored community events. The Bank also emphasizes
business development calling programs and superior servicing of existing
commercial loan customers.
MARKET
The Bank is headquartered and has branch offices in the north and
northwest suburbs of Chicago and the north side of Chicago, including many
affluent communities in the Chicago area. The Company's target markets of Lake
County, and Lincolnwood, Arlington Heights and Lincoln Park in Cook County,
have a unique combination of affluence, population growth and strong overall
economy. Per capita income for the target markets is high compared to Illinois
and to the United States as a whole. In 1994, Lake County had the highest per
capita income in Illinois ($32,969), and Cook County ranked fourth in Illinois
($24,944). From 1984 to 1994, per capita income grew at an average annual rate
of 6.1% in Lake County and 5.1% in Cook County. (Source: Bureau of Economic
Analysis, U.S. Department of Commerce; "BEA Regional Facts."). In 1994, per
capita income for Lake County and Cook County was 152% and 115% of the national
average, respectively. (Source: USDOC/BEA, "Survey of Current Business, June,
1996"). From 1992 to 1994, total personal income increased 11.7% in Lake County
and 7.9% in Cook County. Earnings (wages and salaries, other labor income, and
proprietor's income) increased on
24
<PAGE> 25
average 8.2% per year in Lake County and 5.0% per year in Cook County for the
period 1984 to 1994. (Source: Bureau of Economic Analysis, U.S. Department of
Commerce; "BEA Regional Facts."). Total bank deposits as of June 30, 1994, were
over $5.2 billion in Lake County, and over $78.3 billion in Cook County.
Population in Lake County is steadily growing, increasing 17.27% from 1980 to
1990, and 10.8% from 1990 to 1995, for a total increase of 30% from 1980 to
1995. (Source: U.S. Bureau of the Census, U.S. Department of Commerce, USA
Counties 1996 CD-ROM). The economies of the target markets continue to thrive.
From 1995 to 1996, State Sales Tax receipts increased 8.44% for the communities
served in Lake County, and 2.89% for the communities served in Cook County
(note: specific data for Lincoln Park, Lakeview, West Rogers Park, and Peterson
Park unavailable). (Source: State of Illinois Department of Revenue). From 1990
to 1996, unemployment rates decreased in Lake County from 4.2% to 4.0%, and in
Cook County from 6.7% to 5.5% (Source: Illinois Department of Employment
Security, May, 1997).
Since 1991, the Bank has grown substantially through the addition of
seven branches, which have significantly increased the Bank's service area. The
table below sets forth certain information with respect to the Bank's target
markets and the amount of deposits, as of June 30, 1997, which have been
obtained through this expansion: Average
<TABLE>
<CAPTION>
AVERAGE
BANK OR COMMUNITIES HOUSEHOLD
BRANCH LOCATION DATE OPENED TOTAL DEPOSITS SERVED POPULATION(1) INCOME(2)
- -------------------------- -------------------- ---------------- ----------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Lincolnshire March, 1973 $133,134 Lincolnshire 3,955 $123,364
Vernon Hills 18,830 53,722
Lake Forest 18,771 142,688
Lincolnwood February, 1992 76,294 Lincolnwood 12,168 75,654
Skokie 58,980 53,390
Evanston 73,433 56,079
West Rogers Park 65,374 37,975
Peterson Park 16,236 41,463
Lincoln Park April, 1993 18,517 Lincoln Park 61,092 67,158
Lakeview 91,031 44,515
Libertyville March, 1994 14,848 Libertyville 19,757 72,815
Green Oaks 2,416 95,025
Mundelein 23,995 50,466
Mettawa 386 204,615
Northbrook March, 1995 13,604 Northbrook 33,476 107,350
Glencoe 8,705 164,254
Winnetka 12,899 174,957
Glenview 37,836 83,709
Deerfield/Riverwoods December, 1995 9,272 Riverwoods 3,049 169,359
Buffalo Grove 39,806 64,797
Wheeling 30,863 43,976
Deerfield/Downtown April, 1997 2,567 Deerfield 17,822 90,821
Highland Park 29,309 119,892
Bannockburn 1,495 139,510
Arlington Heights September, 1997 newly opened Arlington Heights 77,438 59,692
Mount Prospect 53,605 53,502
Prospect Heights 15,635 50,605
Palatine 39,985 56,951
--------
Total $268,236
========
</TABLE>
- ----------------------
(1) Reflects 1994 census estimates published by Bureau of the Census, U.S.
Department of Commerce.
(2) Provided by Northeastern Illinois Planning Commission derived from 1989
information reported in 1990 U.S. Census Data.
25
<PAGE> 26
The Company's expansion plans include opening branches in the Butera
Golf/Mill store in Niles (second half of 1997) and North Libertyville (1998).
SERVICES
The Company's strategy is to be the primary financial services provider
to its customers by emphasizing a high level of customer service and innovative
products. The Company's history of introducing innovative products has helped
it increase its competitive position within its target markets. The Company
continues to concentrate its efforts on building its business by offering its
customers the following services:
Deposit Services
The Bank offers a variety of traditional and innovative accounts for
depositors designed to attract both short-term and long-term deposits. The
Bank's deposit accounts include certificates of deposit, savings accounts,
checking and NOW accounts and money market accounts. In connection with its
opening of new banking facilities, the Bank has aggressively marketed
innovative deposit products at highly competitive rates to increase its market
share in its target markets. Innovative deposit products offered by the Bank
include:
(I) MORE ACCOUNT. Under its new management in 1982, the Bank
became one of the first financial institutions in the United States
to offer a tiered open time account. The More account is an open
time account with its interest rate tied directly to the 13-week
U.S. Treasury bill rate. The account is structured in such a way
that the larger the customer's balance, the higher the rate of
return on the customer's investment. In essence, the "more" money
in the account, the higher the interest rate on the account.
(II) BUSINESS MORE II ACCOUNT. The Business More II Account
features a high variable interest rate based on the 13-week U.S.
Treasury bill rate compounded monthly which is earned on open
accounts based on various levels of daily balances. The rate on
this money market account is subject to change weekly and the
depositor must maintain a minimum daily balance in the account each
day to earn interest. Like the More Account, the "more" money in
the account the higher the interest rate on the account.
(III) CIVIC PLUS ACCOUNT. In addition to providing commercial
and consumer banking services to its customers, the Company strives
to provide services and benefits to all persons, regardless of
race, creed, gender, sexual orientation or ethnic background. In
this spirit, the Company, continually looking for unique ways to
assist its not-for-profit customers, developed a special account
for not-for-profit organizations. The Civic Plus Account helps
not-for-profit organizations stretch their resources by paying them
5% interest on average outstanding monthly balances and by waiving
all monthly check processing fees and monthly minimum balance
requirements.
(IV) SURE PAY OVERDRAFT PROGRAM. Sure Pay is another unique
product offered by the Bank. The program insures the customer
against costly errors in check writing and allows the customer to
borrow funds quickly and easily. Basically, Sure Pay is a
pre-approved method of borrowing funds short-term through a line of
credit. Sure Pay covers accidental overdrafts and cash advances by
check and ATM withdrawals. For current customers, Sure Pay does not
require a new account. It is activated through an existing Bank
checking account. Sure Pay has no minimum usage requirement and is
a part of intelligent cash flow planning. The Company believes that
Sure Pay's annual percentage rate is significantly below the rate
of interest on most credit cards.
Lending Services
The Bank aggressively seeks quality loan relationships. The Bank's loan
portfolio consists of real estate (including residential and commercial),
commercial, home equity and consumer loans. The Bank's management
26
<PAGE> 27
emphasizes sound credit analysis and loan documentation. Management also seeks
to avoid undue concentration of loans in a single industry or secured by a
single type of collateral. The Bank has concentrated its efforts on building
its lending services in the following areas:
(I) COMMERCIAL AND INDUSTRIAL LOANS. These loans are made to
small-to-medium-sized businesses that are sole proprietorships,
partnerships, and corporations. Generally, these loans are secured
with collateral including accounts receivable, inventory and
equipment, and generally require personal guarantees of the
principals. The Bank has developed a niche making loans secured by
accounts receivable to health care providers and retailers.
(II) COMMERCIAL REAL ESTATE LOANS. The Bank offers loans for
acquisition, development, and construction of real estate secured
by the real estate involved, in addition to loans secured by
commercial real estate, multi-family residential properties, and
other non-farm, non-residential properties. The Bank also makes
loans to small-to-medium-sized real estate developers building 10
homes or less per year and rehabbers doing a small number of
projects per year. These loans typically have 20 to 30 year
amortization schedules with 5-year balloons and are personally
guaranteed by the borrowers.
(III) RESIDENTIAL REAL ESTATE LOANS. These are loans made to
finance residential units that house from one to four families. The
Company originates only fixed rate residential real estate loans
including 15 year, 30 year, 5/25, 7/23 and 5 year balloon
mortgages. A majority of loans originated pursuant to Fannie Mae
and FHLMC guidelines are sold in the secondary market with
servicing retained by the Company. The Bank is one of a limited
number of lending institutions in the Chicagoland area to offer
financing for co-operative apartments. In addition, the Bank makes
non-conforming loans which are held in its portfolio. See
"Management's Discussion and Analysis of Results of Operations and
Financial Condition - Financial Condition."
(IV) HOME EQUITY LINES OF CREDIT. The Bank has originated
many unique and flexible home equity lines of credit for its
customers. These lines of credit are secured by the borrower's home
and can be drawn on at the discretion of the borrower. These lines
of credit are at variable interest rates. When made, home equity
lines, combined with the outstanding loan balance of prior mortgage
loans, generally do not exceed 80% of the appraised value of the
underlying real estate collateral.
The following accounts demonstrate the Bank's determination to meet the
specific needs of its customer base:
1. SIGMA ACCOUNT. With a SIGMA account, an interest
bearing checking account, an equity line of credit
secured by a mortgage on the customer's primary
residence, and a Gold Visa/Mastercard are combined into
one convenient account that is available for a ten year
period. Deposits to the SIGMA checking account are
automatically applied against any amount outstanding
under the equity line of credit thus minimizing
interest charges. Where there is no outstanding balance
on the equity line of credit, the deposits
automatically earn interest at a premium over the rate
then being paid by the Bank on its NOW checking
accounts. The SIGMA equity line of credit is available
when the customer needs funds in excess of the
customer's balance in the SIGMA checking account. The
equity line of credit bears a variable interest rate
based upon the prime rate with a maximum rate below
current market rates. Interest charges incurred by the
customer on the equity line of credit are often tax
deductible. The Gold Visa/Mastercard provides the
customer with purchase flexibility and allows the
customer to avoid incurring any monthly credit card
interest
27
<PAGE> 28
charges by automatically transferring the full amount
of the outstanding balance on the SIGMA Gold card from
the customer's SIGMA checking account and, when
necessary, the customer's SIGMA line of credit. As a
way of thanking its customers for using their SIGMA
accounts, each year SIGMA Gold cardholders also receive
an annual rebate equal to 1% of the total amount of
purchases made with the SIGMA Gold card during the
prior year.
2. SUCCESS PLUS ACCOUNT. The Success Plus account is a
home equity loan which allows the customer to access
the line of credit by writing a check or using a
special Visa Gold Card that makes advances directly
from the line of credit. No minimum draw is required,
repayment is spread over ten years, and interest is
charged based upon the prime rate.
3. SUCCESS FOR SENIORS ACCOUNT. Success for Seniors is the
Bank's alternative to reverse mortgage products for
individuals over the age of 62. It combines a primary
checking account with a 20 year home equity line of
credit up to 75% of the home's appraised value which
converts into 30-year fixed rate mortgage at the end of
the 20-year term. The product also offers a Visa Gold
Card, and an attractive interest rate on the first
$1,000 in the NOW account. The total application fee is
substantially less than that charged on most
traditional reverse mortgages.
4. READY ACCESS PROGRAM. The Bank, in conjunction with the
Office of the Illinois State Treasurer, offers a unique
program which enables individuals with disabilities to
obtain low fixed rate financing in order to purchase
transportation modifications and technical devices to
achieve greater mobility and to enhance their quality
of life through a more independent lifestyle. Under
this program, the Treasurer's Office deposits state
funds with participating financial institutions, such
as the Bank, which then offer low interest Ready Access
loans to individuals with disabilities. The State's
funds earn interest for taxpayers and are fully
protected against loss.
Merchant Credit Card Processing Program
The Bank, through its Merchant Processing Program, provides direct Visa
and Mastercard processing services for its business customers. By eliminating
the middleman, the Bank believes that it not only provides more cost efficient
processing services, but that it also gives the merchant quicker access to
available funds by processing receipts the next business day. In 1996, the Bank
processed transactions for over 1,400 merchant customers throughout the United
States involving in excess of $263 million of transaction volume. In addition,
the Merchant Processing Program generates an additional $7-12 million of demand
deposits from participants in the program.
PROPERTIES
The Company and the Bank are headquartered in Lincolnshire, Illinois. The
Bank has seven branch banking facilities located in Deerfield(2), Libertyville,
Lincolnwood, Chicago (Lincoln Park), Arlington Heights and Northbrook,
Illinois.
The table below summarizes the Company's owned and leased facilities.
28
<PAGE> 29
<TABLE>
<CAPTION>
LOCATION Type of Facility Approx. Square Feet Expiration Date
- --------------------------- ------------------------------------ --------------------------- ---------------------
<S> <C> <C> <C>
Lincolnshire, IL Corporate headquarters and branch 11,760 Owned
Lincolnwood, IL Branch 8,760 Owned
Lincolnwood, IL Branch(1) 1,900 October 2001
Lincoln Park, IL Branch 1,967 April 2003
Libertyville, IL Operations center and branch 8,100 Owned
Northbrook, IL Branch 1,950 December 1997
Deerfield/Riverwoods, IL Commercial loan center and branch 4,100 September 1998
Deerfield/Downtown, IL Branch 2,200 Owned
Arlington Heights, IL Branch 1,300 Owned
</TABLE>
- ----------------------
(1) Currently not utilized. This facility may be used in the future as a
branch facility primarily to serve the Asian community.
COMPETITION
The Company competes in the commercial banking industry through its
subsidiary, Success National Bank, in the communities it serves. The commercial
banking industry is highly competitive, and the Bank faces strong direct
competition for deposits, loans, and other financial-related services. The Bank
competes directly in Cook and Lake counties with other commercial banks,
thrifts, credit unions, stockbrokers, and the finance divisions of automobile
companies. Some of these competitors are local, while others are statewide or
nationwide. The Bank has developed a community banking and marketing strategy.
In keeping with this strategy, the Bank provides highly personalized and
responsive service characteristic of locally-owned and managed institutions. As
such, the Bank competes for deposits principally by offering depositors a
variety of deposit programs, convenient office locations, hours and other
services. The Bank competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides to borrowers and the variety of its loan products. Some of the
financial institutions and financial services organizations with which the Bank
competes are not subject to the same degree of regulation as that imposed on
bank holding companies and national banking associations. In addition, the
larger banking organizations have significantly greater resources than those
that will be available to the Bank. As a result, such competitors have
advantages over the Bank in providing certain non-deposit services. Currently,
major competitors in certain of the Bank's markets include Harris Trust and
Savings Bank, The Northern Trust Company, LaSalle Bank, N.A., and American
National Bank and Trust Company of Chicago.
LEGAL PROCEEDINGS
The Company and the Bank are from time to time parties in various routine
legal actions arising in the normal course of business. Management believes
that there is no proceeding threatened or pending against the Company or the
Bank which, if determined adversely, would materially adversely affect the
consolidated financial position or operations of the Company.
EMPLOYEES
As of June 30, 1997, the Company had 143 full-time equivalent employees.
The employees are not represented by a collective bargaining unit. The Company
considers its relationship with its employees to be good.
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<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial and other
data of the Company. The selected statement of income and balance sheet data,
insofar as they relate to the five years in the five-year period ended December
31, 1996, have been derived from the Company's audited consolidated financial
statements. The consolidated financial statements for each of the three years
in the period ended December 31, 1996 and as of December 31, 1996 and 1995 are
included elsewhere herein. The selected financial data for the six month
periods ended June 30, 1997 and 1996 and as of June 30, 1997 and 1996, are
derived from the Company's unaudited interim financial statements. Such
unaudited interim financial statements include all adjustments (consisting only
of normal, recurring accruals) that the Company considers necessary for a fair
presentation of the financial position and the results of operation as of the
dates and for the periods indicated. Information for any interim period is not
necessarily indicative of results that may be anticipated for the full year.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income............................. $ 11,215 $ 9,568 $ 19,850 $ 18,675 $ 14,619 $10,960 $ 9,952
Interest expense............................ 5,725 4,806 10,020 9,886 7,221 5,016 4,794
--------- --------- --------- --------- --------- ------- -------
Net interest income..................... 5,490 4,762 9,830 8,789 7,398 5,944 5,158
Provision for loan losses................... 228 128 310 207 250 220 315
--------- --------- --------- --------- --------- ------- -------
Net interest income after provision
for loan losses........................ 5,262 4,634 9,520 8,582 7,148 5,724 4,843
Other operating income
Service charges on deposit accounts...... 917 624 1,402 1,134 865 687 680
Securities gains, net.................... -- -- -- 25 61 481 500
Gain on sales of loans, net.............. 28 82 109 84 94 1,077 555
Writedown of real estate loans
held-for-sale, transferred to portfolio -- -- (74) -- (572) -- --
Credit card processing income............ 2,845 2,388 5,334 4,389 4,071 2,960 2,293
Other fees and commissions............... 123 205 378 372 488 296 533
--------- --------- --------- --------- --------- ------- -------
Total other operating income........... 3,913 3,299 7,149 6,004 5,007 5,501 4,561
Other operating expenses
Salaries and employee benefits........... 2,878 2,738 5,513 4,729 3,986 2,755 2,331
Occupancy and equipment expenses......... 979 807 1,715 1,388 1,287 934 676
Credit card processing expenses.......... 2,765 2,213 5,013 3,879 3,756 3,290 2,525
Other non-interest expenses.............. 1,998 1,723 3,389 3,346 2,987 3,165 2,685
--------- --------- --------- --------- --------- ------- -------
Total other operating expenses......... 8,620 7,481 15,630 13,342 12,016 10,144 8,217
Minority interest in income of
subsidiary bank........................ 7 13 23 47 58 79 129
--------- --------- --------- --------- --------- ------- -------
Income before taxes...................... 548 439 1,016 1,197 81 1,002 1,058
Income tax expense (benefit)................ 188 92 233 260 (182) 176 285
--------- --------- --------- --------- --------- ------- -------
Net income............................... $ 360 $ 347 $ 783 $ 937 $ 263 $ 826 $ 773
========= ========= ========= ========= ========= ======= =======
COMMON SHARE DATA(1):
Earnings per common and common
equivalent share
Primary.................................. $ 0.29 $ 0.30 $ 0.66 $ 0.89 $ 0.25 $ 0.87 $ 0.84
Fully diluted............................ 0.29 0.30 0.66 0.86 0.25 0.84 0.82
Book value(2)............................... 9.35 8.52 8.99 7.48 5.83 7.27 6.14
Weighted average common and
common equivalent shares outstanding... 1,239,388 1,150,971 1,182,286 1,057,461 1,032,253 952,441 923,812
PRO FORMA COMMON SHARE DATA(1)(3):
Earnings per common and common
equivalent share
Primary.................................. $ 0.29 $ 0.62
Fully diluted............................ 0.29 0.62
Book value.................................. 8.85 8.59
Weighted average common and common
equivalent shares outstanding.......... 1,622,615 1,585,837
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
June 30, December 31,
------------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- --------- --------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 15,817 $ 15,285 $ 13,833 $ 20,559 $ 18,909 $ 8,190 $ 13,765
Securities.................................. 47,083 48,307 47,707 50,732 55,614 55,393 30,250
Real estate loans held for sale............. 291 2,880 117 203 40 11,021 5,760
Loans, net.................................. 230,075 176,872 203,299 171,135 139,491 109,224 88,072
Total assets................................ 305,955 253,031 276,349 251,338 222,809 190,677 143,695
Deposits.................................... 268,236 222,690 245,105 227,308 204,171 162,676 132,155
Borrowings, including repurchase agreements. 24,386 19,261 18,975 14,395 11,174 19,644 4,319
Shareholders' equity(4)..................... 9,758 8,823 9,234 7,366 5,625 6,276 5,108
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------------------------
Pro Forma Pro Forma
ACTUAL Pro Forma(3) As Adjusted(3)(5) As Adjusted(3)(6)
-------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Loans, net.................................. $ 230,075 $ 230,075 $ 230,075 $ 230,075
Total assets................................ 305,955 305,955 307,996 315,102
Deposits.................................... 268,236 268,236 268,236 268,236
Borrowings, including repurchase agreements. 24,386 21,219 16,804 16,804
Shareholders' equity........................ 9,758 12,925 19,382 26,488
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, (10) YEAR ENDED DECEMBER 31,
--------------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- --------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Performance Data:
Net interest margin(7)...................... 4.19% 4.26% 4.25% 4.14% 4.14% 4.38% 4.50%
Return on average assets.................... 0.25 0.28 0.31 0.40 0.13 0.53 0.59
Return on average equity(8)................. 7.58 8.52 9.09 15.78 4.58 14.97 15.35
Loans to deposits........................... 85.77 79.43 82.94 75.29 68.32 67.14 66.64
Average equity to average assets............ 3.28 3.30 3.36 2.54 2.81 3.53 3.87
ASSET QUALITY RATIOS:
Non-performing loans to total loans(9)...... 0.49% 0.22% 0.06% 0.37% 0.27% 1.25% 1.07%
Non-performing assets to total assets....... 0.37 0.16 0.04 0.25 0.17 0.72 0.88
Allowance for loan losses to total loans.... 0.70 0.70 0.70 0.70 0.71 0.78 0.73
Non-performing loans to allowance for
loan losses ............................. 70.10 31.75 8.28 53.74 38.10 160.35 146.37
Net loan charge-offs to average loans....... 0.02 0.06 0.04 0.01 0.08 0.01 0.24
CAPITAL RATIOS:
Tier 2(11).................................. 7.31% 8.24% 8.00% 7.53% 7.83% 8.35& 9.60%
Leverage(12)................................ 4.00 4.36 4.37 3.70 3.52 3.67 6.30
OTHER:
Branch offices.............................. 7 7 7 7 5 4 2
Full-time equivalent employees.............. 143 139 144 150 120 114 73
</TABLE>
(footnotes on following page)
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<PAGE> 32
- ------------------
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Common share data has been restated to reflect the stock split.
(2) Book value per share is calculated using total shareholders' equity plus
stock owned by Employee Stock Ownership Plan ("ESOP") participants, net
of ESOP loan, divided by shares outstanding at end of period.
(3) The pro forma information reflects the completion of the Reorganization
consisting of (a) the increase in the authorized number of shares of
Common Stock to 7,500,000, (b) the changing of the par value of each
share of Common Stock to $0.001, (c) the conversion of all of the
outstanding shares of the Company's Series B Preferred Stock into 91,104
shares of Common Stock (post stock split), (d) the conversion of all of
the outstanding shares of the Company's Class A Common Stock into 171,745
shares of Common Stock (post stock split), (e) the conversion of the
aggregate outstanding principal amount of the 1992 Debentures into
234,582 shares of Common Stock (post stock split), and (f) the conversion
of the aggregate outstanding principal amount of the 1995 Notes into
92,400 shares of Common Stock (post stock split).
(4) The decrease in shareholders' equity from $6,276 in 1993 to $5,625 in
1994 is primarily attributable to the implementation of SFAS 115
Accounting for Certain Investments in Debt and Equity Securities on
December 31, 1993. The unrealized net loss on securities
available-for-sale, net of tax declined $1.7 million during 1994, and was
recorded as a reduction in shareholders' equity.
(5) Adjusted to reflect the Offering (assuming the sale of 600,000 shares and
net proceeds of $6.5 million and assuming no exercise of the additional
subscription option or the over-allotment option) and the application of
$4.4 million of the net proceeds to repay the amount outstanding under
the Company's revolving line of credit. See "Use of Proceeds."
(6) Adjusted to reflect the Offering (assuming the sale of 1,200,000 shares
and net proceeds of $13.6 million and assuming no exercise of the
additional subscription option or the over-allotment option) and the
application of $4.4 million of the net proceeds to repay the amount
outstanding under the Company's revolving line of credit. See "Use of
Proceeds."
(7) Net interest income on a tax-equivalent basis divided by average interest
earning assets.
(8) Net income divided by average equity.
(9) Non-performing loans consist of non-accrual loans and loans contractually
past due 90 days or more and still accruing.
(10) All interim periods have been annualized.
(11) Total capital to risk weighted assets.
(12) Tier 1 capital to total average assets.
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<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial
Statements, including the accompanying notes, each appearing elsewhere in this
Prospectus. In addition to historical information, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ significantly from those anticipated in
these forward-looking statements as a result of certain factors, including
those discussed in "Risk Factors" contained elsewhere in this Prospectus.
GENERAL
The Company's principal business is conducted by the Bank and consists of
full service community banking. The profitability of the Company's operations
depends primarily on its net interest income, provision for loan losses, other
operating income, and other operating expenses. Net interest income is the
difference between the income the Company receives on its loan and investment
portfolios and its cost of funds, which consists of interest paid on deposits
and borrowings. The provision for loan losses reflects the cost of credit risk
in the Company's loan portfolio. Other operating income consists of service
charges on deposit accounts, securities gains, gains on sale of loans, credit
card processing income and fees and commissions. Other operating expenses
include salaries and employee benefits as well as occupancy and equipment
expenses, credit card processing expenses, and other non-interest expenses.
Net interest income is dependent on the amounts and yields of interest
earning assets as compared to the amounts of and rates on interest bearing
liabilities. Net interest income is sensitive to changes in market rates of
interest and the Company's asset/liability management procedures in coping with
such changes. The provision for loan losses is dependent on increases in the
loan portfolio, management's assessment of the collectibility of the loan
portfolio, as well as economic and market factors. Non- interest expenses are
heavily influenced by the growth of operations, with additional employees
necessary to staff and open new branch facilities and marketing expenses
necessary to promote them. Growth in the number of account relationships
directly affects such expenses as data processing costs, supplies, postage and
other miscellaneous expenses.
OVERVIEW
BACKGROUND
The Company's total assets and total deposits have increased to $306.0
million and $268.2 million, respectively, at June 30, 1997 from $143.7 million
and $132.2 million, respectively, at December 31, 1992 primarily as a result of
the Company's addition of seven branch banking facilities. The addition of
these seven branch facilities and corresponding growth in total assets and
total deposits has resulted in increased operating expenses reflected in the
increase in the Company's net operating expense (other operating expense net of
other operating income) to average assets from 2.81% in 1992 to 3.31% in 1996.
This increase is primarily attributable to the relatively young age of the
Bank's branches and an increase in staff levels to improve the Company's
operations. The increase in operating expenses resulted in a $154,000 decrease
in the Company's net income in 1996 to $783,000 from $937,000 in 1995. The
Company's return on average assets of 0.31% and return on average equity of
9.09% in 1996 were significantly less than a national peer group comprised of
bank holding companies with total assets of between $150 million and $300
million. This peer group's return on average assets and return on average
equity were 1.17% and 12.92%, respectively, in 1996. The Company's lower
returns are primarily attributable to the expense associated with the Company's
strategy of pursuing growth in its target markets by opening branches.
Beginning in 1995, the Company began to implement a number of measures to
control operating expenses and position the Company for future growth. These
measures included: (i) adding senior management personnel experienced in
managing growth, controlling operating expenses, improving net interest margin,
and managing mortgage banking operations through hedging strategies; (ii)
enhancing and improving the Company's policies and procedures in the areas of
asset liability management and mortgage banking operations; and (iii)
developing a comprehensive strategic plan to substantially increase core
deposits and loans using the Company's existing
33
<PAGE> 34
facilities, operational systems and personnel. The Company believes that the
improvement in operating results during the first six months of 1997 compared
to the same period in 1996 is a direct result of implementation of these
measures. Net income for the six months ended June 30, 1997, was $360,000,
compared with $347,000 for the same period in 1996.
CONSOLIDATED RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
JUNE 30, 1996
General. The Company's net income for the six months ended June 30, 1997,
was $360,000 compared to net income of $347,000 for the six months ended June
30, 1996. The $13,000 increase in net income was primarily attributable to an
increase in net interest income and other operating income, partially offset by
increased net operating expenses.
Net interest income. Net interest income increased to $5.5 million for
the six months ended June 30, 1997, from $4.8 million for the comparable period
of 1996. This increase in net interest income of $728,000, or 15.3%, was
attributable to a $1.6 million increase in interest income resulting from a
$37.8 million, or 16.5%, increase in average interest earning assets in the
first six months of 1997 compared to the same period in 1996. This increase in
average interest earning assets was primarily attributable to the continued
growth of the Company's loan portfolio. Partially offsetting this increase in
interest income was a $919,000 increase in interest expense for the first six
months of 1997, a 19.1% increase from the comparable period in 1996. The
Company's net interest margin decreased to 4.19% in the first six months of
1997 compared to 4.26% in the comparable period in 1996 as a result of
increased market interest rates in conjunction with the Company's liability
sensitivity.
Provision for loan losses. The provision for loan losses increased to
$228,000 in the six months ended June 30, 1997, from $128,000 in the prior year
period primarily due to the growth in the loan portfolio. At June 30, 1997, the
allowance for loan losses represented 0.70% of loans outstanding which
management believed was adequate to cover potential losses in the portfolio.
There can be no assurance that future losses will not exceed the amounts
provided for, thereby affecting future results of operations. The amount of
future additions to the allowance for loan losses will be dependent upon the
economy, changes in real estate values, interest rates, the view of regulatory
agencies toward adequate reserve levels, and past due and non-performing loan
levels.
Other operating income. Total other operating income increased
approximately $614,000, or 18.6%, to $3.9 million for the first six months of
1997, compared to $3.3 million in the same period in 1996. Service charges on
deposit accounts increased by 47.0% to $917,000 for the six months ended June
30, 1997, from $624,000 for the six months ended June 30, 1996. The increase is
primarily attributable to a 13.7% increase in the average balance of deposit
accounts subject to such service charges and 106.6% increase in average
overdrafts outstanding. The majority of service charges on deposit accounts
consist of fees charged for overdrafts and failure to maintain required
balances. Gains on sale of loans decreased to $28,000 for the first six months
of 1997 from $82,000 for the first six months of 1996 primarily due to a
decrease in the number of loans originated attributable to decreased market
demand in 1997. Credit card processing income increased to $2.8 million from
$2.4 million for the six months ended June 30, 1997 and 1996, respectively, due
primarily to a 16.9% increase in the amount of credit card sales processed.
Other operating expenses. Total other operating expenses increased $1.1
million, or 15.2%, to $8.6 million for the first six months of 1997, as
compared to $7.5 million in the same period of 1996. This increase reflects the
higher level of expenditures required to support the Company's growth. Salaries
and employee benefits increased to $2.9 million for the six months ended June
30, 1997, as compared to $2.7 million for the same period of the prior year.
The increase of $140,000 reflects increased staffing to support the growth in
deposit and loan accounts at existing banking locations which are required to
maintain high levels of customer service. Also contributing to the increase in
salaries were normal salary increases. Occupancy and equipment expenses
increased to $979,000 for the six months ended June 30, 1997, from $807,000 for
the first six months of 1996, primarily due to improvements in the Company's
computer systems and the costs associated with the April, 1997, opening of the
Deerfield/Downtown branch location and preparing the Arlington Heights branch
location for opening in September, 1997. Data
34
<PAGE> 35
processing expenses increased to $488,000, or 67.7%, for the six months ended
June 30, 1997, compared to $291,000 for the first six months of 1996, primarily
due to substantially higher volume levels and the costs associated with the
conversion of the Company's data processing provider in March, 1997. Credit
card processing expenses increased $552,000, or 24.9%, to $2.8 million for the
six months ended June 30, 1997, compared to $2.2 million for the first six
months of 1996, primarily due to the 16.9% increase in the amount of credit
card sales processed. Other non-interest expenses increased by $78,000, or
5.4%, to $1.5 million for the six months ended June 30, 1997, from $1.4 million
for the first six months of 1996, primarily due to a $157,000 increase in legal
fees attributable to increased collection costs and other matters.
Income taxes. The Company recorded income tax expense of $188,000 for the
first six months of 1997, compared to an income tax expense of approximately
$92,000 in the first six months of 1996.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
General. The Company's net income was $783,000 for the year ended
December 31, 1996, compared to net income of $937,000 for the year ended
December 31, 1995, a decrease of $154,000 or 16.4%. The decrease in net income
was primarily due to increases in interest expense of $134,000, the provision
for possible loan losses of $103,000 and other operating expenses of $2.3
million, offset by increases in interest income of $1.2 million and other
operating income of $1.1 million.
Net interest income. Net interest income increased by $1.0 million, or
11.8%, to $9.8 million in 1996 from $8.8 million in 1995. This increase was
attributable to a $17.8 million increase in average interest earning assets to
$236.4 million in 1996 from $218.6 million in 1995. The Company's net interest
margin in 1996 increased to 4.25% compared to 4.14% in 1995. This increase was
primarily due to the Company's ability to use the increase in demand deposits
and other borrowings to fund higher yielding commercial loans and real estate
mortgage loans.
Provision for loan losses. The provision for loan losses increased to
$310,000 in 1996 from $207,000 in 1995, to provide for the growth in the
Company's loan portfolio. Total loans increased $32.4 million, or 18.7% to
$205.4 million at December 31, 1996, from $173.0 million at December 31, 1995.
At December 31, 1996, the allowance for loan losses represented 0.70% of total
loans, which management believed was adequate to cover potential losses in the
loan portfolio.
Other operating income. Other operating income increased by $1.1 million,
or 19.1%, to $7.1 million in 1996 from $6.0 million in 1995. Contributing to
this increase was an increase in service charges on deposit accounts of
$268,000 to $1.4 million in 1996 and an increase in credit card processing
income of $945,000 to $5.3 million in 1996. The increase in service charges on
deposit accounts is directly attributable to the $17.8 million, or 7.8%,
increase in deposits to $245.1 million at December 31, 1996, from $227.3
million at December 31, 1995. The increase in credit card processing income is
primarily attributable to the increase in the number of participating merchants
and a corresponding processing volume increase to $263.2 million at December
31, 1996, from $214.7 million at December 31, 1995, a 22.6% increase.
Other operating expenses. Other operating expenses increased $2.3
million, or 17.1%, to $15.6 million in 1996 from $13.3 million in 1995,
primarily due to a $784,000 increase in salaries and employee benefits
primarily attributable to a full year of staffing of two additional branches,
adding a number of experienced senior personnel and additional staff to
position the Company for future growth and normal annual salary and wage
increases. Occupancy and equipment expenses increased $327,000, or 23.6%, to
$1.7 million in 1996 from $1.4 million in 1995 primarily due to a full year of
operation of two additional branch facilities in 1996, one of which was in
operation for 10 months in 1995 and the other for less than one month in 1995.
Credit card processing expenses increased by approximately $1.1 million, or
29.2%, to $5.0 million in 1996 from $3.9 million in 1995, primarily due to the
increase in the number of participating merchants and corresponding processing
volume increases.
Income taxes. The Company recorded an income tax expense of $233,000 in
1996 compared to $260,000 in 1995, reflecting the decrease in the Company's net
income before taxes in 1996.
35
<PAGE> 36
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
General. The Company's net income was $937,000 for the year ended
December 31, 1995, compared to net income of $263,000 for the year ended
December 31, 1994, an increase of $674,000 or 256.3%. The increase in net
income was primarily due to increases in net interest income of $1.4 million
and other operating income of $997,000, offset by a $1.3 million increase in
other operating expenses.
Net interest income. Net interest income increased by $1.4 million, or
18.8%, to $8.8 million in 1995 from $7.4 million in 1994. This increase was
attributable to a $31.9 million increase in average interest earning assets to
$218.6 million in 1995 from $186.7 million in 1994. The Company's net interest
margin in 1995 remained constant at 4.14% compared to 1994 primarily due to a
relatively balanced interest rate gap.
Provision for loan losses. The provision for loan losses decreased to
$207,000 in 1995 from $250,000 in 1994, due to fewer loan charge offs in 1995
compared to 1994. Total loans increased $31.9 million, or 22.6%, to $173.0
million at December 31, 1995, from $141.1 million at December 31, 1994. At
December 31, 1995, the allowance for loan losses represented 0.70% of total
loans, which management believed was adequate to cover potential losses in the
loan portfolio.
Other operating income. Other operating income increased by $997,000, or
19.9%, to $6.0 million in 1995 from $5.0 million in 1994. Contributing to this
increase was an increase in service charges on deposit accounts of $269,000 to
$1.1 million in 1995, an increase in credit card processing income of $318,000
to $4.4 million in 1995 and the writedown of real estate loans held-for-sale in
1994 which reduced other operating income by $572,000. The increase in service
charges on deposit accounts is directly attributable to the $23.1 million, or
11.3%, increase in deposits to $227.3 million at December 31, 1995, from $204.2
million at December 31, 1994. The increase in credit card processing income is
primarily attributable to the increase in the number of participating merchants
and corresponding processing volume increases. The Company took a $572,000
charge to income in 1994 which represented the writedown of real estate loans
which had previously been held for sale but were transferred to the loan
portfolio. The Company transferred these loans to the loan portfolio in an
effort to mitigate the effects of interest rate changes on the value of the
loans and the corresponding effect on earnings. This writedown is being
amortized as a yield adjustment on the loans and will be recovered as payments
are made on the loans.
Other operating expenses. Other operating expenses increased $1.3
million, or 11.0%, to $13.3 million in 1995 from $12.0 million in 1994,
primarily due to a $743,000 increase in salaries and employee benefits
primarily attributable to the initial staffing of the two branches opened in
1995 and normal annual salary and wage increases. Occupancy and equipment
expenses increased $101,000, or 7.8%, to $1.4 million in 1995 from $1.3 million
in 1994 primarily due to the opening of two branch facilities in 1995. Credit
card processing expenses increased by approximately $123,000, or 3.3%, to $3.9
million in 1995 from $3.8 million in 1994, primarily due to the increase in the
number of participating merchants and corresponding processing volume
increases.
Income taxes. The Company recorded an income tax expense of $260,000 in
1995 compared to an income tax benefit of $182,000 in 1994, reflecting the
increase in the Company's net income before taxes in 1995.
36
<PAGE> 37
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the average daily balances, net interest
income and expense and average yields and rates for the Company's earning
assets and interest bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------
AVERAGE Yield/ Average Yield/
BALANCE Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNINGS ASSETS:
Loans(1)(3) $214,432 $ 9,691 9.04% $176,506 $58,070 9.14%
Taxable investment securities 39,031 1,179 6.04 40,753 1,198 5.88
Investment securities exempt from federal
income taxes 8,252 312 7.56 8,898 337 7.57
Interest bearing deposits with financial
institutions 2,219 58 5.23 1,303 34 5.22
Federal funds sold 2,887 76 5.26 1,538 42 5.46
-------- -------- -------- -------- ------- ----
Total interest earnings assets 266,821 11,316 8.48% 228,998 9,681 8.46%
-------- -------
Non-interest earning assets 22,811 17,873
-------- --------
Total assets $289,632 $246,871
======== ========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market accounts $ 81,525 $ 1,367 3.35% $ 74,595 $ 1,249 3.35%
Savings deposits 19,408 325 3.35 18,096 291 3.22
Time deposits 113,437 3,235 5.70 93,149 2,639 5.67
Notes payable 4,477 189 8.44 3,125 131 8.38
Other borrowings 18,835 609 6.47 15,806 496 6.28
-------- -------- ---- -------- -------- ----
Total interest bearing liabilities 237,682 5,725 4.82 204,771 4,806 4.69
Demand deposits - non-interest bearing 39,209 -------- 31,613 --------
Other non-interest bearing liabilities 1,878 1,115
Minority interest in subsidiary bank 530 503
Shareholders' equity(2) 10,333 8,869
-------- --------
Total liabilities and shareholders' equity $289,632 $246,871
======== ========
Net interest income $ 5,591 $ 4,875
Net interest margin ======== ========
4.19% 4.26%
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995
---------------------------------- --------------------------------
AVERAGE Yield/ Average Yield/
BALANCE Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNINGS ASSETS:
Loans(1)(3) $182,453 $ 16,764 9.19% $156,896 $14,965 9.54%
Taxable investment securities 40,423 2,397 5.93 43,515 2,936 6.75
Investment securities exempt from federal
income taxes 8,824 671 7.60 11,895 825 6.94
Interest bearing deposits with financial
institutions 2,189 125 5.71 4,586 108 2.35
Federal funds sold 2,500 120 4.80 1,744 103 5.91
-------- -------- -------- -------- ------- ----
Total interest earnings assets 236,389 20,077 8.49% 218,636 18,937 8.66%
-------- -------
Non-interest earning assets 19,890 14,846
-------- --------
Total assets $256,279 $233,482
======== ========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market accounts $ 76,127 $ 2,557 3.36% $ 68,574 $ 2,534 3.70%
Savings deposits 18,329 606 3.31 18,293 589 3.22
Time deposits 96,308 5,469 5.68 96,020 5,648 5.88
Notes payable 4,237 355 8.38 5,190 449 8.65
Other borrowings 15,923 1,033 6.49 10,746 666 6.20
-------- -------- ---- -------- -------- ----
Total interest bearing liabilities 210,924 10,020 4.75 198,823 9,886 4.97
Demand deposits - non-interest bearing 33,922 -------- 26,884 --------
Other non-interest bearing liabilities 1,515 789
Minority interest in subsidiary bank 515 513
Shareholders' equity(2) 9,403 6,473
-------- --------
Total liabilities and shareholders' equity $256,279 $233,482
======== ========
Net interest income $ 10,057 $ 9,051
Net interest margin ======== ========
4.25% 4.14%
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994
----------------------------------
AVERAGE Yield/
BALANCE Interest Rate
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
INTEREST EARNINGS ASSETS:
Loans(1)(3) $125,607 $ 11,146 8.87%
Taxable investment securities 46,058 2,796 6.07
Investment securities exempt from federal
income taxes 13,663 945 6.92
Interest bearing deposits with financial
institutions 885 42 4.75
Federal funds sold 472 19 4.03
-------- -------- --------
Total interest earnings assets 186,685 14,948 8.01%
--------
Non-interest earning assets 17,488
--------
Total assets $204,173
========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market accounts $ 51,116 $ 1,519 2.97%
Savings deposits 22,339 689 3.08
Time deposits 84,168 4,224 5.02
Notes payable 5,335 421 7.89
Other borrowings 9,110 368 4.04
-------- -------- ----
Total interest bearing liabilities 172,068 7,221 4.20
Demand deposits - non-interest bearing 23,765 --------
Other non-interest bearing liabilities 1,697
Minority interest in subsidiary bank 514
Shareholders' equity(2) 6,129
--------
Total liabilities and shareholders' equity $204,173
========
Net interest income $ 7,727
Net interest margin ========
4.14%
</TABLE>
- ---------------
(1) Non-accrual loans are included in average loans.
(2) Includes stock owned by Employee Stock Ownership Plan ("ESOP")
participants, net of ESOP loan.
(3) Interest income on loans includes loan origination and other fees of
$386,000 and $370,000 for the six months ended June 30, 1997 and 1996,
respectively, and $817,000, $819,000 and $703,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
37
<PAGE> 38
CHANGES IN INTEREST INCOME AND EXPENSE
The following table shows the dollar amount of changes in interest income
and expense by major categories of interest earning assets and interest bearing
liabilities attributable to changes in volume or rate or both, for the periods
indicated.
38
<PAGE> 39
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- ---------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------- ---------------------------------
Change Change Change Change
Due to Due to Total Due to Due to Total
Volume Rate Change Volume Rate Change
---------- -------- --------- --------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Net loans (1)............................................... $ 1,715 $ (94) $ 1,621 $ 2,365 $(566) $ 1,799
Taxable investment securities............................... (51) 32 (19) (199) (340) (539)
Investment securities exempt from federal income taxes (1).. (24) (1) (25) (228) 74 (154)
Interest bearing deposits with financial institutions....... 24 -- 24 (78) 95 17
Federal funds sold.......................................... 36 (2) 34 39 (22) 17
------- ----- ------- ------- ----- -------
Total increase (decrease) in interest income............ 1,700 (65) 1,635 1,899 (759) 1,140
------- ----- ------- ------- ----- -------
INTEREST BEARING LIABILITIES:
NOW and money market accounts............................... 116 2 118 265 (242) 23
Savings deposits............................................ 22 12 34 1 16 17
Time deposits............................................... 578 18 596 17 (196) (179)
Notes payable............................................... 57 1 58 (80) (14) (94)
Other borrowings............................................ 98 15 113 335 32 367
------- ----- ------- ------- ----- -------
Total increase (decrease) in interest expense........... 871 48 919 538 (404) 134
------- ----- ------- ------- ----- -------
Increase (decrease) in net interest income.............. $ 829 $(113) $ 716 $ 1,361 $(355) $ 1,006
======= ===== ======= ======= ===== =======
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 COMPARED TO 1994
----------------------------------
Change Change
Due to Due to Total
Volume Rate Change
---------- -------- ---------
<S> <C> <C> <C>
Net loans (1)............................................... $ 2,936 $ 883 $ 3,819
Taxable investment securities............................... (160) 300 140
Investment securities exempt from federal income taxes (1).. (123) 3 (120)
Interest bearing deposits with financial institutions....... 97 (31) 66
Federal funds sold.......................................... 72 12 84
------- ------- -------
Total increase (decrease) in interest income............ 2,822 1,167 3,989
------- ------- -------
INTEREST BEARING LIABILITIES:
NOW and money market accounts............................... 593 422 1,015
Savings deposits............................................ (129) 29 (100)
Time deposits............................................... 641 783 1,424
Notes payable............................................... (12) 40 28
Other borrowings............................................ 75 223 298
------- ------- -------
Total increase (decrease) in interest expense........... 1,168 1,497 2,665
------- ------- -------
Increase (decrease) in net interest income.............. $ 1,654 $ (330) $ 1,324
======= ======= =======
</TABLE>
- --------------------
(1) Tax-exempt income is reflected on a fully tax equivalent basis utilizing
a 34% rate for all periods presented.
39
<PAGE> 40
Volume variances are computed using the change in volume multiplied by
the previous year's rate. Rate variances are computed using the changes in rate
multiplied by the previous year's volume. The change in interest due to both
rate and volume has been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each.
FINANCIAL CONDITION
Securities
The following table sets forth certain information with respect to the
Company's securities portfolio.
40
<PAGE> 41
<TABLE>
<CAPTION>
December 31
JUNE 30, --------------
1997 1996
-------------------------- --------------
AMORTIZED Fair Amortized
COST Value Cost
-------------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury........................................... $ 1,743 $ 1,757 $ 748
U.S. government sponsored entities...................... 5,096 4,997 5,846
States and political subdivisions....................... 1,566 1,569 1,565
Mortgage-backed securities.............................. 3,332 3,348 2,568
SBA guaranteed loan participation certificates.......... 4,052 4,033 4,337
Other securities........................................ 117 117 110
------- ------- -------
Total............................................. $15,906 $15,821 $15,174
======= ======= =======
SECURITIES HELD TO MATURITY:
U.S. Treasury........................................... $ 244 $ 246 $ 242
U.S. government sponsored entities...................... 14,933 14,921 15,368
States and political subdivisions....................... 8,484 8,771 8,751
Mortgage-backed securities.............................. 5,521 5,715 5,804
Other securities........................................ 2,080 2,080 2,395
------- ------- -------
Total............................................. $31,262 $31,733 $32,560
======= ======= =======
<CAPTION>
December 31,
----------------------------------------------------------------
1996 1995 1994
------------ --------------------------- ---------------------
Fair Amortized Fair Amortized Fair
value Cost Value Cost Value
------------ -------------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury.......................................... $ 754 $ 1,236 $ 1,250 $ 1,171 $ 1,053
U.S. government sponsored entities..................... 5,721 7,845 7,643 8,820 8,181
States and political subdivisions...................... 1,561 1,779 1,769 3,461 3,208
Mortgage-backed securities............................. 2,585 555 556 237 234
SBA guaranteed loan participation certificates......... 4,290 4,293 4,359 4,448 4,427
Other securities....................................... 236 14 99 14 49
------- ------- ------- ------- -------
Total............................................ $15,147 $15,722 $15,676 $18,151 $17,152
======= ======= ======= ======= =======
SECURITIES HELD TO MATURITY:
U.S. Treasury.......................................... $ 245 $ 238 $ 246 $ 235 $ 226
U.S. government sponsored entities..................... 15,403 17,719 17,907 18,965 17,668
States and political subdivisions...................... 8,980 9,019 9,333 10,599 9,954
Mortgage-backed securities............................. 6,037 6,384 6,768 7,020 6,884
Other securities....................................... 2,395 1,696 1,696 1,643 1,643
------- ------- ------- ------- -------
Total............................................ $33,060 $35,056 $35,950 $38,462 $36,375
======= ======= ======= ======= =======
</TABLE>
41
<PAGE> 42
The fair value of securities available for sale was $15.8 million at June
30, 1997, compared to $15.1 million at December 31, 1996, and $15.7 million at
December 31, 1995.
The book value of securities held to maturity was $31.3 million at June
30, 1997, compared to $32.6 million at December 31, 1996 and $35.1 million at
December 31, 1995.
The overall investment mix did not change significantly for the periods
presented.
The Company manages its investment portfolio to provide both a source of
liquidity and earnings. The Company follows an investment policy which
generally requires the securities in its investment portfolio to be rated, at
the date of purchase, investment grade by a nationally recognized rating
agency. In accordance with the Company's investment policy, no derivative
securities may be purchased without the prior approval of the Board of
Directors. As of June 30, 1997, the Company did not hold any derivatives or
off-balance sheet derivative financial instruments such as futures, forwards,
swaps or option contracts. As of June 30, 1997, the Company held no securities
with a book value exceeding 10% of shareholders' equity of a single issuer
other than the U.S. Treasury or other U.S. government sponsored entities
Securities Maturities and Yields
The following table sets forth maturities and the weighted average yields
of the securities at June 30, 1997.
42
<PAGE> 43
<TABLE>
<CAPTION>
MATURITY
------------------------------------------------------------------------------
Due after One Due After Five
DUE IN ONE Year through Years through Due after
YEAR OR LESS Five Years Ten Years Ten Years
------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
BALANCE Yield Balance Yield Balance Yield Balance Yield
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury ............................ $ -- --% $ 1,757 6.48% $ -- --% $ -- --%
U.S. government sponsored entities ....... 1,838 4.66 1,968 4.97 1,191 5.90 -- --
States and political subdivisions(1) ..... 355 6.68 1,129 6.83 85 7.57 -- --
Mortgage-backed securities(2) ............ -- -- 2,355 6.65 993 7.08 -- --
SBA guaranteed loan participation
certificates(2) ........................ -- -- 296 7.89 -- -- 3,737 7.02
Other securities ......................... -- -- -- -- -- -- 117 3.04
------- ------- ------- ------- ------- ------- ------- -------
Total .................................. $ 2,193 4.99% $ 7,505 6.25% $ 2,269 6.48% $ 3,854 6.90%
======= ======= ======= ======= ======= ======= ======= =======
SECURITIES HELD TO MATURITY:
U.S. Treasury ............................ $ -- --% $ 244 6.61% $ -- --% $ -- --%
U.S. government sponsored entities ....... 297 6.83 6,126 5.84 8,052 6.82 458 5.73
States and political subdivisions(1) ..... 185 7.07 3,270 7.39 2,103 7.93 2,926 8.41
Mortgage-backed securities(2) ............ -- -- 910 7.37 3,657 7.41 954 7.39
Other securities ......................... -- -- 150 8.25 300 7.32 1,630 7.02
------- ------- ------- ------- ------- ------- ------- -------
Total .................................. $ 482 6.92% $10,700 6.50% $14,112 7.15% $ 5,968 7.66%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ----------------------
(1) The yield is reflected on a fully tax equivalent basis utilizing a 34%
rate.
(2) These securities are presented based on contractual maturities.
Loan Portfolio
The loan portfolio is the largest category of the Company's interest
earning assets. Since December 31, 1992, total loans as a percentage of total
assets have increased to 75.9% at June 30, 1997, from 59.4%.
The following table sets forth the historical composition of the loan
portfolio.
43
<PAGE> 44
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------
1997 1996
----------------------- ------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial .................................... $ 65,474 28.18% $ 58,912 28.68%
Real estate - construction .................... 13,400 5.77 12,282 5.98
Real estate - mortgage ........................ 92,605 39.86 84,920 41.34
Home equity ................................... 51,920 22.35 43,193 21.03
Installment ................................... 8,475 3.65 5,615 2.73
Credit cards .................................. 446 0.19 503 0.24
--------- ------ --------- ------
Total gross loans ............................. 232,320 100.00% 205,425 100.0%
====== ======
Unearned discount ............................. -- (2)
Net deferred loan fees ........................ (225) (261)
Unaccreted discount from loss on
transfer of loans from held for sale to
portfolio .................................. (391) (438)
--------- ---------
Loans, net of unearned discount and net
deferred loan fees ......................... 231,704 204,724
Allowance for loan losses ..................... (1,629) (1,425)
--------- ---------
Net loans ................................. $ 230,075 $ 203,299
========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1995 1994
---------------------- -----------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
--------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial ............................... $ 45,217 26.14% $ 33,640 23.83%
Real estate - construction ............... 12,821 7.41 8,656 6.13
Real estate - mortgage ................... 68,227 39.44 63,533 45.01
Home equity .............................. 37,820 21.86 30,810 21.83
Installment .............................. 8,655 5.00 4,056 2.87
Credit cards ............................. 261 0.15 443 0.33
--------- --------- --------- ---------
Total gross loans ........................ 173,001 100.0% 141,138 100.0%
========= =========
Unearned discount ........................ (3) (8)
Net deferred loan fees ................... (223) (126)
Unaccreted discount from loss on
transfer of loans from held for sale to
portfolio ............................. (451) (513)
--------- ---------
Loans, net of unearned discount and net
deferred loan fees .................... 172,324 140,491
Allowance for loan losses ................ (1,189) (1,000)
--------- ---------
Net loans ............................ $ 171,135 $ 139,491
========= =========
</TABLE>
<TABLE>
<CAPTION> December 31,
-----------------------------------------------
1993 1992
---------------------- ----------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial ............................... $ 34,118 30.96% $ 32,132 36.17%
Real estate - construction ............... 6,697 6.08 2,321 2.61
Real estate - mortgage ................... 29,691 26.94 32,486 36.57
Home equity .............................. 36,36 33.00 19,067 21.46
Installment .............................. 2,771 2.51 2,332 2.63
Credit cards ............................. 562 0.51 499 0.56
--------- --------- --------- ---------
Total gross loans ........................ 110,205 100.00% 88,837 100.00%
========= =========
Unearned discount ........................ (18) (49)
Net deferred loan fees ................... (108) (69)
Unaccreted discount from loss on
transfer of loans from held for sale to
portfolio ............................. -- --
--------- ---------
Loans, net of unearned discount and net
deferred loan fees .................... 110,079 88,719
Allowance for loan losses ................ (855) (647)
--------- ---------
Net loans ............................ $ 109,224 $ 88,072
========= =========
</TABLE>
44
<PAGE> 45
Commercial Loans. Commercial loans are generally written with adjustable
interest rates to match variable rate funding sources. Such loans increased $6.6
million to $65.5 million at June 30, 1997, as the Company actively pursued more
commercial loan relationships. Commercial loans represented 28.2% of the total
loan portfolio at June 30, 1997, as compared to 28.7% of the total loan
portfolio at December 31, 1996.
Real Estate Mortgage Loans. Real estate mortgage loans, which consist of
residential and commercial loans secured by real estate, totaled $92.6 million
at June 30, 1997, compared to $84.9 million at December 31, 1996. This increase
is primarily related to an increased emphasis in commercial real estate lending.
Real estate mortgage loans are typically written with fixed rates of interest.
Home Equity Loans. Home equity loans increased $8.7 million, or 20.2%,
from December 31, 1996 and were $51.9 million at June 30, 1997. At June 30,
1997, home equity loans accounted for 22.4% of the total loan portfolio,
compared to 21.0% of the total loan portfolio at December 31, 1996. The increase
in home equity loans is primarily due to the success of the Company's prime
rate-based home equity products. Home equity lines of credit, in addition to
senior mortgage indebtedness, normally do not exceed 80% of the residential real
estate collateral value. These loan to value ratios help to limit the credit
risk associated with these loans.
The Bank has no concentrations to borrowers engaged in the same or similar
industries that exceed 10% of total loans. The Bank has developed a lending
niche in providing loans to the long-term health care industry. At December 31,
1996, the Bank had $10.2 million of commitments to customers in this industry,
with $2.9 million drawn and outstanding. The Company maintains a policy of
directing its lending activities to the target markets from which its deposits
are drawn.
Loan Maturities
The following table sets forth the maturities of commercial and real
estate construction loans outstanding at December 31, 1996. Also set forth are
the amounts of such loans due after one year, classified according to
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------------------------------
DUE IN ONE
YEAR OR DUE AFTER ONE YEAR DUE AFTER
LESS THROUGH FIVE YEARS FIVE YEARS TOTAL
----------- --------------------- -------------------- ------
(DOLLARS IN THOUSANDS)
FLOATING FLOATING
FIXED RATE FIXED RATE
------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and real estate
construction loans ...... $54,081 $3,516 $10,345 $2,336 $916 $71,194
======= ====== ======= ====== ==== =======
</TABLE>
Non-performing Loans
Non-performing loans include: (1) loans accounted for on a non-accrual
basis; (2) accruing loans contractually past due ninety days or more as to
interest or principal payment; and (3) loans whose terms have been renegotiated
to provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
The Bank has a reporting and control system to monitor non-performing
loans. The following table provides certain information on the Bank's
non-performing loans at the dates indicated.
45
<PAGE> 46
<TABLE>
<CAPTION>
JUNE 30, December 31,
--------- ----------------------------------------------
1997 1996 1995 1994 1993 1992
------ ------- ---- ---- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans ............................... $ 574 $ -- $ 13 $ 258 $ 852 $ 258
Restructured loans ............................. -- -- -- -- -- --
Loans 90 days or more past due, still accruing.. 568 118 626 123 519 689
------ ------- ------ ------ ------- ------
Total non-performing loans .................. $1,142 $ 118 $ 639 $ 381 $ 1,371 $ 947
====== ======= ====== ====== ======= ======
Non-performing loans to loans, net of unearned
discount and net deferred loan fees ......... 0.49% 0.06% 0.37% 0.27% 1.25% 1.07%
Non-performing loans to allowance
for loan losses ............................. 70.10% 8.28% 53.74% 38.10% 160.35% 146.37%
</TABLE>
The increase in non-performing loans of $1.0 million from December 31, 1996
to June 30, 1997 is primarily attributable to six loans. Of these loans, three
loans (totaling $509,000) are 90 days or more past due but still accruing
interest. Each of these loans is secured by a first lien on residential real
estate or a second lien where the Bank also holds the first lien. Should
management's view of the collectibility of these loans change, they may be
transferred to nonaccrual status. The other three large non-performing loans
are commercial loans (totaling $525,000) which are classified as nonaccrual.
One of these loans (totaling approximately $75,000) is guaranteed 82% by the
Small Business Administration. Management is aggressively pursuing collection
efforts with respect to each of these non-performing loans.
Loans with principal or interest payments contractually due but not yet paid
are reviewed by senior management on a weekly basis and are placed on nonaccrual
status when scheduled payments remain unpaid for 90 days or more, unless the
loan is both well-secured and in the process of collection. Interest income on
nonaccrual loans is recorded when actually received in contrast to the accrual
basis, which records income over the period in which it is earned, regardless of
when it is received.
Potential Problem Loans
In addition to those loans disclosed under "Non-performing Loans," there are
certain loans in the portfolio which management has identified, through its
problem loan identification system which exhibit a higher than normal credit
risk. However, these loans do not represent non-performing loans to the Company.
Management's review of the total loan portfolio to identify loans where there is
concern that the borrower will not be able to continue to satisfy present loan
repayment terms includes factors such as review of individual loans, recent loss
experience and current economic conditions. Loans in this category include those
with characteristics such as those that have recent adverse operating cash flow
or balance sheet trends, or have general risk characteristics that the loan
officer believes might jeopardize the future timely collection of principal and
interest payments. The principal amount of loans in this category as of June 30,
1997 and December 31, 1996 were approximately $484,000 and $983,000,
respectively. Loans in this category generally include loans that were
classified for regulatory purposes. At June 30, 1997, there were no significant
loans which were classified by any bank regulatory agency that are not included
above as non-performing or as a potential problem loan.
The Bank had no other real estate owned at December 31, 1996 or June 30,
1997.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate
to provide for potential future losses. The level of the allowance is based upon
management's periodic and comprehensive evaluation of the loan portfolio, as
well as current and projected economic conditions. Reports of examination
furnished by Federal banking authorities are also considered by management in
this regard. These evaluations by management in assessing the
46
<PAGE> 47
adequacy of the allowance include consideration of past loan loss experience,
changes in the composition of the loan portfolio, the volume and condition of
loans outstanding and current market and economic conditions.
Loans are charged to the allowance for loan losses when deemed uncollectible
by management, unless sufficient collateral exists to repay the loan.
47
<PAGE> 48
Set forth in the following table is an analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED Year ended December 31,
JUNE 30, --------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ------ ------ ------ ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allowance at beginning of
period ................................... $1,425 $1,189 $1,000 $ 855 $647 $531
Charge-offs:
Commercial ............................... -- 49 -- 88 26 179
Real estate - construction ............... -- -- -- -- -- --
Real estate - mortgage ................... -- -- -- -- -- --
Home equity .............................. -- -- -- -- -- --
Installment .............................. 2 20 4 1 7 6
Credit cards ............................. 53 9 15 50 19 47
------ ------ ------ ------ ---- ----
Total charge-offs ........................... 55 78 19 139 52 232
------ ------ ------ ------ ---- ----
Recoveries:
Commercial ............................... 22 -- -- 31 23 16
Real estate - construction ............... -- -- -- -- -- --
Real estate - mortgage ................... -- -- -- -- -- --
Home equity .............................. -- -- -- -- -- --
Installment .............................. 9 3 -- 1 -- --
Credit cards ............................. -- 1 1 2 17 17
------ ------ ------ ------ ---- ----
Total recoveries ............................ 31 4 1 34 40 33
------ ------ ------ ------ ---- ----
Net charge-offs ............................. 24 74 18 105 12 199
Provision for loan losses ................... 228 310 207 250 220 315
------ ------ ------ ------ ---- ----
Allowance at end of period .................. $1,629 $1,425 $1,189 $1,000 $855 $647
====== ====== ====== ====== ==== ====
Allowance to loans, net of
unearned discount and net deferred loan
fees ..................................... 0.70% 0.70% 0.70% 0.71% 0.78% 0.73%
Net charge-offs to average net loans
(annualized for interim period) .......... 0.02% 0.04% 0.01% 0.08% 0.01% 0.24%
</TABLE>
In 1996, the loan loss provision of $310,000 reflects an increase of
$103,660 from the 1995 provision. The increase was necessary to offset an
increase in net charge-offs, and to reflect the increase in commercial real
estate lending. The decline in the ratio of the allowance to loans, net of
unearned discount and net deferred loan fees has occurred as a result of the
increase in the loan portfolio. The decline is, however, mitigated by a decrease
in non-performing loans.
The following table presents the allocation of the allowance for loan
losses.
48
<PAGE> 49
<TABLE>
<CAPTION>
December 31,
JUNE 30 -------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ---------------------------- ------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS OF EACH LOANS OF EACH LOANS OF EACH LOANS OF EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- ------ ------------- ------ ------------- ------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .................. $ 722 28.18% $ 597 28.68% $ 5962 6.14% $ 550 23.83%
Real estate - construction .. -- 5.77 -- 5.98 -- 7.41 -- 6.13
Real estate - mortgage ...... 50 39.86 59 41.34 37 39.44 27 45.01
Installment ................. 47 3.65 34 2.73 36 5.00 35 2.87
Home Equity ................. 243 22.35 224 21.03 190 21.86 180 21.83
Credit cards ................ 5 0.19 12 0.24 7 0.15 9 0.33
Unallocated ................. 562 -- 499 -- 323 -- 199 --
------ ----- ------ ------ ------ ------ ------ ------
Total ....................... $1,629 100.0% $1,425 100.00% $1,189 100.00% $1,000 100.00%
====== ===== ====== ====== ====== ====== ====== ======
<CAPTION> December 31,
-----------------------------------------------
1993 1992
----------------------- ----------------------
PERCENT OF PERCENT OF
LOANS OF EACH LOANS OF EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- ------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial .................. $ 478 30.96% $ 437 36.1
Real estate - construction .. -- 6.08 -- 2.6
Real estate - mortgage ...... 20 26.94 15 36.5
Installment ................. 53 2.51 9 2.6
Home Equity ................. 163 33.00 71 21.4
Credit cards ................ 34 0.51 34 0.5
Unallocated ................. 107 -- 81 --
------ ------ ------ ------
Total ....................... $ 855 100.00% $ 647% 100.00
====== ====== ====== ======
</TABLE>
49
<PAGE> 50
Control of the Company's loan quality is continually monitored by management
and is reviewed by the board of directors and loan committee of the Bank on a
monthly basis, subject to the oversight by the Company's Board of Directors
through its members who serve on the loan committee. Independent external review
of the loan portfolio is provided by the examinations conducted by regulatory
authorities, independent public accountants in conjunction with their annual
audit, and an independent loan review performed by an entity engaged by the
Board of Directors. The amount of additions to the allowance for possible loan
losses which are charged to earnings through the provision for possible loan
losses are determined based on a variety of factors, including actual
charge-offs during the year, historical loss experience, delinquent loans, and
an evaluation of current and prospective economic conditions in the market area.
Management believes the allowance for possible loan losses is adequate to cover
any potential losses.
Asset Liability Management
As a continuing part of its financial strategy, the Company attempts to
manage the impact of fluctuations in market interest rates on its net interest
income. This effort entails providing a reasonable balance between interest rate
risk, credit risk, liquidity risk and maintenance of yield. Asset liability
management policies are established and monitored by management in conjunction
with the board of directors of the Bank, subject to general oversight by the
Company's Board of Directors. The policies establish guidelines for acceptable
limits on the sensitivity of the market value of assets and liabilities to
changes in interest rates.
The following table illustrates the Company's estimated interest rate
sensitivity and periodic and cumulative gap positions as calculated as of June
30, 1997. An institution with more assets than liabilities repricing over a
given time frame is considered asset sensitive and will generally benefit from
rising rates.
<TABLE>
<CAPTION>
Time to Maturity or Repricing
--------------------------------------------------------------------
0-90 91-365 1-5 Over 5
Days Days Years Years Total
-------- --------- --------- -------- --------
INTEREST EARNING ASSETS: (dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net loans(1) ........................................... $114,177 $ 12,775 $ 68,910 $ 34,504 $230,366
Taxable investment securities .......................... 13,607 1,470 13,654 18,352 47,083
Interest bearing deposits with financial institutions .. 778 99 -- -- 877
Federal funds sold ..................................... 3,200 -- -- -- 3,200
-------- --------- --------- -------- --------
Total earning assets ............................... 131,762 14,344 82,564 52,856 281,526
======== ========= ========= ======== ========
INTEREST BEARING LIABILITIES:
NOW and money market accounts .......................... $ 52,740 $ 5,067 $ 28,594 $ 2,338 $ 88,739
Savings deposits ....................................... 626 1,907 10,927 5,975 19,435
Time deposits .......................................... 42,140 50,428 24,362 559 117,489
Notes payable .......................................... 4,415 -- -- -- 4,415
Other borrowings ....................................... 11,765 2,123 2,084 3,999 19,971
-------- --------- --------- -------- --------
Total interest bearing liabilities ................. $111,686 $ 59,525 $ 65,967 $ 12,871 $250,049
======== ========= ========= ======== ========
Rate sensitive assets (RSA) ............................ 131,762 146,106 228,670 281,526 281,526
Rate sensitive liabilities (RSL) ....................... 111,686 171,211 237,178 250,049 250,049
Cumulative gap
(GAP = RSA - RSL) .................................. $ 20,076 $ (25,105) $ (8,508) $ 31,477 $ 31,477
RSA/Total assets ....................................... 43.07% 47.75% 74.74% 92.02% 92.02%
RSL/Total assets ....................................... 36.50% 55.96% 77.52% 81.73% 81.73%
GAP/Total assets ....................................... 6.56% (8.21%) (2.78%) 10.29% 10.29%
GAP/RSA ................................................ 15.24% (17.18%) (3.72%) 11.18% 11.18%
</TABLE>
- -----------------
(1) Includes loans held for sale.
50
<PAGE> 51
While the gap position illustrated above is a useful tool that management can
assess for general positioning of the Company's and the Bank's balance sheets,
management uses an additional measurement tool to evaluate its asset/liability
sensitivity which determines exposure to changes in interest rates by measuring
the percentage change in net interest income due to changes in rates over a
one-year time horizon. Management measures such percentage change assuming an
instantaneous permanent parallel shift in the yield curve of 200 basis points,
both upward and downward. Utilizing this measurement concept, the interest rate
risk of the Company, expressed as a percentage change in net interest income
over a one-year time horizon due to changes in interest rates, at May 31, 1997,
is as follows:
<TABLE>
<CAPTION>
+200 BASIS -200 Basis
POINTS Points
------------------------ ------------------------
<S> <C> <C>
Percentage change in net interest
income due to an immediate 200
basis point change in interest over a
one-year time horizon.............................. 0.12% (1.36)%
</TABLE>
Deposits
Average total deposits were $253.6 million for the six months ended June
30, 1997, an increase of 12.9% from 1996. The increase in deposits occurred as a
result of opening new branches, and continued emphasis on deposit growth through
marketing and rate promotions. The composition of deposits has not changed
significantly from 1996. The following table sets forth average deposits for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW and money market accounts ........... $ 81,525 $ 76,127 $ 68,574 $ 51,116
Savings deposits ........................ 19,408 18,329 18,293 22,339
Time deposits ........................... 113,437 96,308 96,020 84,168
Demand deposits - non-interest bearing .. 39,209 33,922 26,884 23,765
-------- -------- -------- --------
Total ................................ $253,579 $224,686 $209,771 $181,388
======== ======== ======== ========
</TABLE>
The following table sets forth the maturities of certificates of deposit and
other time deposits of $100,000 or more at December 31, 1996 and June 30, 1997.
<TABLE>
<CAPTION>
JUNE 30, December 31,
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maturing within three months ........ $ 9,231 $ 6,458
After three but within six months ... 4,821 7,590
After six but within twelve months .. 13,059 8,427
After twelve months ................. 8,439 7,411
------- -------
Total ............................ $35,550 $29,886
======= =======
</TABLE>
51
<PAGE> 52
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are overnight repurchase
agreements with customers of the Bank and consist of primarily U.S. government
sponsored entity obligations.
The securities underlying the agreements are book-entry securities. During
the period, the securities were delivered by appropriate entry into a
third-party custodian's account designated by the Bank under a written custodial
agreement that explicitly recognizes the customer's interest in the securities.
At December 31, 1996, no material amount of agreements to repurchase securities
sold were outstanding with any individual customer.
The following table sets forth categories of securities sold under agreements
to repurchase as of the indicated dates or for the indicated periods:
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS AT OR FOR THE YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, ------------------------------
1997 1996 1995 1994
------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance at end of period ......................... $4,996 $4,255 $1,868 $1,809
Weighted average interest rate at end of period .. 4.38% 4.23% 4.40% 4.50%
Maximum amount outstanding ....................... $5,689 $4,637 $5,330 $2,913
Average amount outstanding ....................... $5,165 $4,115 $3,182 $2,240
Weighted average interest rate during period ..... 4.30% 4.20% 4.99% 3.94%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements could result in certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial condition. The regulations
require the Company and the Bank to meet specific capital adequacy guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting principles.
The capital classifications are also subject to qualitative judgments by the
regulators about risk weightings and other factors.
Quantitative measures established by Federal Reserve, OCC and FDIC
regulations to ensure capital adequacy require the Company and the Bank to
maintain minimum ratios (set forth in the table below) of Tier 1 capital (as
defined in the regulations) to total average assets (as defined in the
regulations) ("leverage ratio") and minimum ratios of Tier 1 capital and total
capital (as defined in the regulations) to risk-weighted assets (as defined in
the regulations) ("Tier 1 Ratio" and "Tier 2 Ratio", respectively). As of June
30, 1997, the Company's actual total capital to risk-weighted assets ratio (Tier
2) of 7.31% was below the minimum ratio of 8.0% established by the Federal
Reserve. The Company's pro forma total capital to risk-weighted assets ratio
(Tier 2) which reflects the completion of the Reorganization was 7.95%. Failure
by the Company and/or the Bank to meet minimum capital requirements can result
in certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have an adverse effect on the Company's growth and
financial results. The Offering is being undertaken to increase the capital of
the Company and the Bank to enable the Company to continue its growth. As of
June 30, 1997, the most recent notification from the OCC categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective action.
To be considered well capitalized, under this framework, the Bank must maintain
minimum leverage, Tier 1 and Tier 2 ratios as set forth in the following table.
There are no conditions or events since the notification that management
believes has changed the Bank's category. However,
52
<PAGE> 53
there can be no assurance that after the Offering, the Company or the Bank will
continue to be in compliance with their regulatory capital requirements.
The required ratios and the Company's and Bank's actual and pro forma
ratios at June 30, 1997, are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Pro Adequacy Corrective Action
ACTUAL Forma(1) Purposes Provisions
------------------- ------------------- ------------------- -------------------
ACTUAL Ratio Actual Ratio Actual Ratio Actual Ratio
------- ------ ------- ----- ------- ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of June 30, 1997
Total Capital (to Risk Weighted Assets)
(Tier 2 ratio):
Company ............................... $15,056 7.31% $16,376 7.95% $16,481 8.0% N/A
Bank .................................. 20,546 10.00 20,546 10.00 16,441 8.0 $20,551 10.0%
Tier 1 Capital (to Risk Weighted Assets)
(Tier 1 ratio):
Company ............................... 11,580 5.62 14,747 7.16 8,241 4.0 N/A
Bank .................................. 18,917 9.20 18,917 9.20 8,221 4.0 12,331 6.0
Tier 1 Capital (to Total Average Assets)
(leverage ratio):
Company ............................... 11,580 4.00 14,747 5.09 11,585 4.0 N/A
Bank .................................. 18,917 6.54 18,917 6.54 11,571 4.0 14,464 5.0
</TABLE>
- -----------------
(1) The pro forma information reflects the completion of the Reorganization.
Banking regulations limit the amount of dividends that the Bank may pay
without the prior approval of regulatory authorities. As of June 30, 1997,
approximately $1,003,000 of the Bank's retained earnings were available for
dividends without prior regulatory approval. In addition, the Company's debt
agreement with its lending institution requires the Bank to maintain minimum
capital requirements which serve to limit dividends from the Bank. Under the
debt agreement, the Company and the Bank are required to maintain minimum
capital of $9.0 million and $17 million, respectively, and minimum Tier 1
capital to total average assets ratios of 3% and 6%, respectively. The Company's
and Bank's capital levels exceed these requirements. The debt agreement imposes
a more restrictive dividend limitation on the Bank than the banking regulations.
The debt agreement also requires the Bank to maintain an allowance for loan
losses of at least 7/10ths of 1% of total loans. Non-performing loans and other
real estate are also limited under the agreement to 20% of the Bank's capital.
The Bank may not declare a dividend, other than for the purpose of the Company's
debt service, without the written consent of its lender. The Company cannot
declare cash dividends or acquire any of its own stock without the written
consent of its lender.
Liquidity management at the Bank involves planning to meet anticipated
funding needs at a reasonable cost. Liquidity management is guided by policies
formulated and monitored by the Company's senior management and the Bank's
asset/liability committee, which take into account the marketability of assets,
the sources and stability of funding and the level of unfunded commitments. The
Banks' principal sources of funds are deposits, short-term borrowings and
capital contributions by the Company out of the proceeds of borrowings under the
revolving line of credit. At July 30, 1997, approximately $7.4 million of
indebtedness was outstanding under the Company's $8.0 million revolving line of
credit. Borrowings by the Bank from the Federal Reserve Bank of Chicago and
Federal Home Loan Bank of Chicago provide additional sources of short-term
liquidity.
The Bank's core deposits, the most stable source of liquidity for community
banks due to the nature of long-term relationships generally established with
depositors and the security of deposit insurance provided by the FDIC, are
available to provide long-term liquidity. At June 30, 1997, 68.9% of the
Company's total assets were funded by
53
<PAGE> 54
core deposits with balances less than $100,000, while remaining assets were
funded by other funding sources such as core deposits with balances in excess of
$100,000, public funds, purchased funds, and the capital of the Bank. At
December 31, 1996 and 1995, 69.8% and 71.3% of total assets were funded by core
deposits, respectively.
Liquid assets refer to money market assets such as Federal funds sold and
interest bearing time deposits with financial institutions, as well as
securities available-for-sale and securities held-to-maturity with a remaining
maturity less than one year. Net liquid assets represent the sum of the liquid
asset categories less the amount of assets pledged to secure public funds. At
June 30, 1997, net liquid assets totaled approximately $25.9 million, compared
to approximately $26.3 million at December 31, 1996 and $30.7 million at
December 31, 1995. The decrease in net liquid assets from December 31, 1995 to
June 30, 1997 is a result of the Company's efforts to shift assets from lower
yielding investments such as maintaining high balances with correspondent banks
to higher yielding investments such as loans. Cash and due from banks including
interest bearing demand balances with financial institutions, at December 31,
1995 was $19.1 million compared with $12.6 million at June 30, 1997.
The Bank routinely accepts deposits from a variety of municipal entities.
Typically, these municipal entities require that banks pledge marketable
securities to collateralize these public deposits. At June 30, 1997, December
31, 1996 and December 31, 1995, the Bank had approximately $11 million, $14
million and $13 million, respectively, of securities collateralizing such public
deposits. Deposits requiring pledged assets are not considered to be core
deposits, and the assets that are pledged as collateral for these deposits are
not deemed to be liquid assets.
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities, consisting
primarily of earnings, was $1.6 million for the six months ended June 30, 1997,
and $1.6 million for the year ended December 31, 1995. Net cash used in
operating activities for the six months ended June 30, 1996 was $2.2 million and
$266,000 for the year ended December 31, 1996. A significant component in the
fluctuation of net cash provided by or used in operating activities is the
timing of the transfer of loans held for sale to permanent investors. Net cash
used in investing activities, consisting primarily of loan and investment
funding, was $28.2 million and $4.6 million for the six months ended June 30,
1997 and 1996, respectively, and $29.9 million and $26.4 million for the years
ended December 31, 1996 and 1995, respectively. Net cash provided by financing
activities, consisting principally of deposit growth, was $28.5 million and $1.4
million for the six months ended June 30, 1997 and 1996, respectively, and $23.5
million and $26.9 million for the years ended December 31, 1996 and 1995,
respectively.
EFFECTS OF INFLATION
The financial statements and related financial data concerning the Company
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Inflation can
have a significant effect on the operating results of all industries. However,
the effects of inflation in the local economy and on the Company's operating
results have been relatively modest for the past several years. Since
substantially all of the Company'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 primary impact of inflation on the operations of the Company is
reflected in increased operating costs. Increases in interest rates affect the
ability of the Company's borrowers to service their variable rate debt.
Furthermore, inflation can directly affect the value of loan collateral in
general, and real estate collateral in particular. These factors are taken into
account in the initial underwriting process and over the life of the loans. The
Company believes that it has systems in place to continue to manage the rates,
liquidity and interest rate sensitivity of the Company's assets and liabilities.
See "Financial Condition - Asset Liability Management."
54
<PAGE> 55
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Such forward-looking statements may be
deemed to include, among other things, statements relating to anticipated growth
and increased profitability, as well as statements relating to the Company's
strategic plan, including plans to continue to develop lending niches, to open
new branch offices, and to selectively acquire other financial institutions.
Actual results could differ materially from those addressed in the
forward-looking statements as a result of the factors discussed in "Risk
Factors" and elsewhere in this Prospectus.
55
<PAGE> 56
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and certain other key employees of the
Company, and their respective ages and principal positions as of July 31, 1997,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Saul D. Binder(3)....................... 57 Director, President and Chief
Executive Officer of the Company
and President and Chief
Executive Officer of the Bank
Steven A. Covert........................ 35 Executive Vice President and
Chief Financial Officer of the
Company and the Bank
Craig R. Carpenter...................... 61 Senior Vice President and Chief
Credit Officer of the Bank
Ronald W. Tragasz....................... 48 Senior Vice President and
Cashier of the Bank
Christa N. Calabrese.................... 48 Senior Vice President and Chief
Lending Officer of the Bank
Sam Moraras............................. 46 Treasurer of the Company and
Vice President and Controller of
the Bank
George M. Ohlhausen(3)(4)............... 75 Chairman of the Board of
Directors of the Company
Charles G. Freund(1)(5)................. 73 Director
Avrom H. Goldfeder(2)(5)................ 38 Director
Samuel D. Kahan(1)(5)................... 50 Director
Sherwin Koopmans(2)(4).................. 55 Director
Norman D. Rich(3)(4).................... 62 Director
</TABLE>
-------------
(1) Class I Director
(2) Class II Director
(3) Class III Director
(4) Member of the Audit Committee
(5) Member of the Compensation Committee
Saul D. Binder has been President and Chief Executive Officer since
joining the Bank in 1982, and has been President and Chief Executive Officer of
the Company since 1992. Mr. Binder has been a Director of the Bank since 1982
and a Director of the Company since its incorporation in 1986. From March, 1985
to December, 1989, Mr. Binder served as President of the Bank of Bellwood. From
August, 1986 to December, 1989, he served as President of First National Bank of
Wheaton. From August, 1985 to December, 1989, Mr. Binder served as Secretary of
Bellwood Bancorp.
Steven A. Covert was named Executive Vice President and Chief Financial
Officer of the Company and the Bank in September, 1995. From July, 1993 to
December, 1994, Mr. Covert was Senior Vice President and Chief Financial Officer
of Ithaca Bancorp, Inc., a bank holding company located in Ithaca, New York.
From January, 1991 to July, 1993, Mr. Covert was Vice President and Chief
Financial Officer of Center Banks, Incorporated, a bank holding company located
in Skaneateles, New York. Prior to January, 1991, Mr. Covert was employed by
KPMG Peat Marwick LLP as an auditor, where he obtained his license as a
Certified Public Accountant.
56
<PAGE> 57
Craig R. Carpenter joined the Bank as Senior Vice President and Chief
Credit Officer in August, 1995. From 1961 to August, 1995, Mr. Carpenter was
employed by Continental Bank N.A. in various capacities, most recently as Vice
President and Departmental Credit Officer where he oversaw the pre-approval of
all credit relationships for the real estate department, including the energy
and mineral division.
Ronald W. Tragasz joined the Bank in September, 1991, and is currently
Senior Vice President and Cashier of the Bank and Assistant Vice President of
the Company. Prior to September, 1991, Mr. Tragasz was employed by the Bank of
Ravenswood as Cashier and by First National Bank of Chicago as Assistant Vice
President, where he was responsible for bank operating functions and various
branch operations.
Christa N. Calabrese has been Senior Vice President and Chief Lending
Officer of the Bank since 1992. Prior to joining the Bank, Ms. Calabrese was an
Asset Specialist with the Resolution Trust Corporation from 1990 to 1992. From
1969 through 1990, Ms. Calabrese held commercial lending positions with local
community banks.
Sam Moraras has been Treasurer of the Company and Vice President and
Controller of the Bank since August, 1996. From September, 1995, to July, 1996,
Mr. Moraras was employed by Siam Commercial Bank as the Manager of the
Operations Group where he oversaw the general operations of the bank. From
January, 1987, to September, 1995, Mr. Moraras was employed by Peterson Bank
with his last position being Senior Vice President and Controller where he was
in charge of the accounting and investment functions for the bank.
George M. Ohlhausen has been Chairman of the Board of Directors of the
Company since September, 1991. Mr. Ohlhausen was formerly President of George M.
Ohlhausen, Inc., through which he represented a variety of jewelry
manufacturers. He has served as a Director of the Bank since 1982 and of the
Company since 1989.
Charles G. Freund has been Chairman of the Board Emeritus of the Bank
since September, 1991. From August, 1989, to September, 1991, Mr. Freund was
Chairman of the Board of the Bank. Prior to his retirement in 1986, Mr. Freund
was Vice President, Secretary and Treasurer of Mid-Con Corp., a natural gas
transmission company. He currently serves as a Director of Lincoln National
Income Fund, Lincoln National Convertible Securities Fund and the Mathers Fund.
Mr. Freund has been a Director of the Bank since 1978 and of the Company since
1989.
Avrom H. Goldfeder has been a Director of the Company since 1997. Mr.
Goldfeder has been a member-trader of the Chicago Board of Trade (CBOT) since
1986. He is a member of the CBOT Business Conduct Committee and is Vice Chairman
of the CBOT Educational Research Foundation. Mr. Goldfeder was a founding
partner of the Financial Futures Interest Rate Group before joining ING Futures
and Options in October, 1990.
Samuel D. Kahan has been a Director of the Company since 1995. Mr. Kahan
is an economist and since October, 1995, has been President of A.S.K. Financial
Research Ltd., an economic research firm. From 1985 to 1995, Mr. Kahan was the
Chief Economist for Fuji Securities, Inc., a subsidiary of Fuji Bank, Ltd.
Sherwin Koopmans has been a Director of the Company since 1997. Prior to
his retirement in January, 1996, Mr. Koopmans was the Associate Director of the
Division of Depository and Asset Services for the Federal Deposit Insurance
Corporation ("FDIC") from July, 1994 to December, 1995. Prior to working for the
FDIC, Mr. Koopmans was the Regional Director and then the Vice President for
Resolution for the Resolution Trust Corporation from December, 1991, to July,
1994.
Norman D. Rich has been a Director of both the Company and the Bank since
1991. Mr. Rich is a principal of the accounting and consulting firm of Veatch,
Rich & Nadler, Chtd., and has been during the last five years. Mr. Rich is a
Certified Public Accountant.
The Company's Board of Directors consists of seven (7) members divided
into three classes of Directors who are elected to hold office for staggered
three-year terms as provided in the Company's By-Laws. Those persons currently
serving as Class I Directors will hold office until the Annual Stockholder
Meeting to be held in 1998;
57
<PAGE> 58
Class II Directors will hold office until the Annual Stockholder Meeting to be
held in 1999 and Class III Directors will hold office until the Annual
Stockholder Meeting to be held in 2000.
Executive officers are appointed annually by the Board of Directors and
serve at the Board's discretion, subject to any written employment agreements
with the Company. See "Management--Employment Agreements."
DIRECTORS' COMPENSATION
Prior to July, 1997, members of the Board of Directors of the Company did
not receive compensation for their services as directors but were compensated as
members of the Bank's Board of Directors. Beginning August, 1997, members of the
Company's Board of Directors other than executive officers will receive a fee of
$1,000 a month. The Company will reimburse all directors of the Company for all
travel-related expenses incurred in connection with their activities as
directors. George M. Ohlhausen receives an additional $32,500 annually for
serving as Chairman of the Board of Directors of the Company.
Prior to July, 1997, the same people were members of both of the Board of
Directors of the Company and the Bank. As of January 1 of each year, each
director of the Company and the Bank was granted an option to purchase up to
10,000 shares of Common Stock at the book value per share of Common Stock on the
last day of the month prior to the month in which such option was either fully
or partially exercised. Such options expire on December 31 of the year in which
the options were granted. In June, 1997, both the Board of Directors of the
Company and the Bank approved a resolution which reduced the number of shares
for which options granted in 1997 could be exercised to 1,000 shares and changed
the expiration date of the 1997 options to July 23, 1997. Between January 1,
1996 and July 30, 1997, nine Directors exercised options to purchase an
aggregate of 20,405 shares of Common Stock at a weighted average exercise price
of $8.34 per share.
COMMITTEES OF THE BOARD OF DIRECTORS
In connection with the Offering, the Company has formed two new committees
of the Board, the Audit Committee and the Compensation Committee. The members of
the Company's Audit Committee are Messrs. Norman D. Rich, George M. Ohlhausen
and Sherwin Koopmans. The Audit Committee's functions will include recommending
to the Board of Directors the engagement of the Company's independent certified
public accountants, reviewing with such accountants the plan and results of
their audit of the Company's financial statements and determining the
independence of such accountants. The members of the Company's Compensation
Committee are Messrs. Charles G. Freund, Avrom H. Goldfeder and Samuel D. Kahan.
The Compensation Committee will review and make recommendations with respect to
compensation of officers and key employees, including the grant of options under
the 1995 Stock Option Plan.
EXECUTIVE COMPENSATION
The following table shows certain information concerning the compensation
of the Chief Executive Officer during the year ended December 31, 1996. No other
executive officer of the Company had compensation during the year ended December
31, 1996, which exceeded $100,000.
58
<PAGE> 59
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
All Other
Name and Principal Position YEAR Salary Compensation(1)
----- --------- -----------------
<S> <C> <C> <C>
Saul D. Binder
President and Chief Executive Officer of the
Company and President and Chief Executive
Officer of the Bank................................ 1996 $175,000 $19,503
</TABLE>
- -------------------
(1) Includes $200 contributed by the Company for Mr. Binder under the
Company's 401(k) Plan and $19,303 allocated to Mr. Binder under the
Company's ESOP.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on option exercises in 1996 by
the Chief Executive Officer and the value of such officer's unexercised options
at December 31, 1996. The Company made no option grants in 1996 to the Chief
Executive Officer.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED Value of Unexercised in the
OPTIONS AT Money Options at
DECEMBER 31, 1996(1) December 31, 1996(2)
----------------------------- -------------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------- -------------- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Saul D. Binder(3) -- $0 113,390 -- $ 894,105 $0
</TABLE>
- ------------------
(1) Future exercisability is subject to vesting and the optionee remaining
employed by the Company.
(2) Based on the offering price of $12.50 per share. There is no guarantee
that if and when these options are exercised they will have this value.
(3) Of these options, options to purchase 28,390, 68,000 and 17,000 shares of
Common Stock were granted in February, 1990, April, 1992 and January,
1993, respectively, at exercise prices reflecting the fair market value as
of the dates of such option grants of $1.82, $5.41 and $6.09 per share,
respectively.
EMPLOYMENT AGREEMENTS
The Bank has entered into an Employment Agreement dated February 1, 1997,
with Mr. Binder. The Employment Agreement will remain in effect until Mr. Binder
reaches the age of sixty-five, or in the event his employment is terminated for
cause. The annual base salary for Mr. Binder as of the execution of the
Employment Agreement was $175,000. In addition to his salary, Mr. Binder is
entitled to participate in and receive benefits under any employee insurance and
fringe benefits programs that may be established by the Bank for its employees.
The Employment Agreement further provides that upon the sale, transfer or
disposition of the shares of stock or assets of the Bank, Mr. Binder will
receive a lump sum payment in the amount of $229,000.
The Company has entered into an Executive Severance Agreement dated August
21, 1995, with Steven A. Covert, Executive Vice President and Chief Financial
Officer of the Company and the Bank, whereby under certain circumstances Mr.
Covert will be paid a specified sum in the event his employment is terminated
except if such employment is terminated for cause.
STOCK OPTION PLANS
The Company adopted the 1995 Stock Option Plan for executive officers and
other key personnel of the Company and the Bank effective October 31, 1995.
Pursuant to the 1995 Stock Option Plan, vesting of the options
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<PAGE> 60
is determined by the Board of Directors and typically is over a period not
exceeding four years. Options must be exercised within ten years after the date
of grant. At July 31, 1997, there were 153,340 outstanding options to buy Common
Stock at a weighted average price of $5.02 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Historically, compensation of the Bank's executive officers has been
established at the Bank level by the Compensation Committee of the Bank's Board
of Directors. Saul D. Binder, President and Chief Executive Officer of the
Company and the Bank, participated in deliberations concerning compensation of
the executive officers during 1996. Mr. Binder's compensation has historically
been determined by the Compensation Committee of the Bank's Board of Directors.
The Company's Compensation Committee will determine the compensation of
executive officers of the Company on a going-forward basis.
CERTAIN TRANSACTIONS
From time to time, the Bank makes loans and extends credit to certain of
the Company's and/or the Bank's officers and directors and to certain companies
affiliated with such persons. In the opinion of the Company, all of such loans
and extensions of credit were made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other third parties, and
did not involve more than the normal risk of collectibility or present other
unfavorable features. At June 30, 1997, an aggregate of $2.5 million of loans
and extensions of credit were outstanding to certain officers and directors of
the Company and/or the Bank and to certain companies affiliated with such
persons.
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<PAGE> 61
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of July 31, 1997 after
giving effect to the Reorganization and the stock split, and as adjusted to
reflect the issuance by the Company of the shares of Common Stock offered in the
Offering (assuming 1,200,000 shares are sold in the Offering) by: (i) each
person or entity known to the Company to be the beneficial owner of more than 5%
of its outstanding Common Stock, (ii) each Named Executive Officer, (iii) each
director of the Company, and (iv) all directors, executive officers and certain
key employees of the Company as a group.
<TABLE>
<CAPTION>
Number of
Shares
NAME AND ADDRESS OF Beneficially Percentage of Outstanding
BENEFICIAL OWNER(1) Owned(2)(3) Shares Owned
- --------------------------------------------------- ------------- ------------------------------------
Before Offering After Offering
--------------- ----------------
<S> <C> <C> <C>
Saul D. Binder ......................................... 194,447 11.5% 6.7%
Charles G. Freund ...................................... 49,912 3.0 1.7
Avrom H. Goldfeder ..................................... -- -- --
Samuel D. Kahan ........................................ 1,700 * *
Sherwin Koopmans ....................................... -- -- --
George M. Ohlhausen .................................... 247,777 14.7 8.6
Norman D. Rich ......................................... 18,699 1.1 *
Naschon Draiman(4) ..................................... 155,674 9.2 5.4
All directors, executive
officers and key employees as a group (12 persons) .. 526,985 31.2 18.2
</TABLE>
- ----------------------
* Less than 1%
(1) The address of each of the executive officers and directors, unless noted
otherwise in the footnotes, is c/o success Bancshares, Inc. One Marriot
Drive, Lincolnshire, Illinois 60069.
(2) The number of shares listed includes 127,840 shares of Common Stock which
may be acquired through the exercise of stock options.
(3) Includes, when applicable, shares owned of record by such person's minor
children and spouse and by other related individuals and entities over
whose shares of Common Stock such person has custody, voting control, or
power of disposition.
(4) Mr. Draiman's address is 6134 North St. Louis Avenue, Chicago, Illinois
60659.
61
<PAGE> 62
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal
and state law. References under this heading to applicable statutes or
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to those
statutes and regulations. Any change in applicable laws or regulations may have
a material adverse effect on the business of commercial banks and bank holding
companies, including the Company and the Bank. However, management is not aware
of any current recommendations by any regulatory authority which, if
implemented, would have or would be reasonably likely to have a material effect
on liquidity, capital resources, or operations of the Company or the Bank.
BANK HOLDING COMPANY REGULATION
The Company is registered as a "bank holding company" with the Federal
Reserve and, accordingly, is subject to supervision by the Federal Reserve under
the BHC Act. The Company is required to file with the Federal Reserve periodic
reports and such additional information as the Federal Reserve may require
pursuant to the BHC Act. The Federal Reserve examines the Company and may
examine the Bank.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares or
substantially all the assets of any bank or bank holding company, or for a
merger or consolidation of a bank holding company with another bank holding
company. With certain exceptions, the BHC Act prohibits a bank holding company
from acquiring direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in any activity other than banking or managing or controlling
banks or performing services for its authorized subsidiaries. Under the BHC Act
and Federal Reserve regulations, the Company and the Bank are prohibited from
engaging in certain tie-in arrangements in connection with an extension of
credit, lease, sale of property, or furnishing of services.
Any person, including associates and affiliates of and groups acting in
concert with such person, who purchases or subscribes for five percent or more
of the Company's Common Stock may be required to obtain prior approval of the
Federal Reserve under the BHC Act. Under the Change in Bank Control Act, any
person who acquires stock of the Company such that its interest exceeds ten
percent of the Company, may be required to demonstrate that such person is not
in control of the Company. Prior regulatory approval will be required before
acquiring the power to directly or indirectly direct the management, operations
or policies of the Company or the Bank or before acquiring control of 25 percent
or more of any class of the Company's or Bank's outstanding voting stock. In
addition, any corporation, partnership, trust or organized group that acquires a
controlling interest in the Company or the Bank may have to obtain approval of
the Federal Reserve to become a bank holding company and thereafter be subject
to regulation as such.
It is the policy of the Federal Reserve that the Company is expected to
act as a source of financial strength to the Bank and to commit resources to
support the Bank. The Federal Reserve takes the position that in implementing
this policy, it may require the Company to provide such support when the Company
otherwise would not consider itself able to do so.
The Federal Reserve has adopted risk-based capital requirements for
assessing bank holding company capital adequacy. These standards define
regulatory capital and establish minimum capital standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risks. The Federal
Reserve's risk-based guidelines apply on a consolidated basis for bank holding
companies with consolidated assets of $150 million or more and on a "bank-only"
basis for bank holding companies with consolidated assets of less than $150
million, subject to certain terms and conditions. Under the Federal Reserve's
risk-based guidelines, capital is classified into two categories. For bank
holding companies, Tier 1 or "core" capital consists of common shareholders'
equity, perpetual preferred stock (subject to certain limitations) and minority
interests in the common equity accounts of consolidated subsidiaries, and is
reduced by goodwill, certain other intangible assets and certain investments in
other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance
for loan and lease losses (subject to certain conditions and
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<PAGE> 63
limitations), perpetual preferred stock (to the extent not included in Tier 1
capital), "hybrid capital instruments," perpetual debt and mandatory convertible
debt securities, and term subordinated debt and intermediate-term preferred
stock.
Under the Federal Reserve's capital guidelines, bank holding companies are
required to maintain a minimum ratio of qualifying capital to risk-weighted
assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 Capital.
The Federal Reserve also requires a minimum leverage ratio of Tier 1 Capital to
total average assets of 4.0%, except that bank holding companies not rated in
the highest category under the regulatory rating system are required to maintain
a leverage ratio of 1.0% to 2.0% above such minimum. The 4.0% Tier 1 Capital to
total average assets ratio constitutes the minimum leverage standard for bank
holding companies, and will be used in conjunction with the risk-based ratio in
determining the overall capital adequacy of banking organizations. In addition,
the Federal Reserve continues to consider the Tier 1 leverage ratio in
evaluating proposals for expansion or new activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that
the foregoing standards are supervisory minimums and that banking organizations
generally are expected to operate well above the minimum ratios. These
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels.
As of June 30, 1997, on a pro forma basis, the Company had a Tier 1
capital to risk-weighted assets ratio (Tier 1 Ratio) of 7.2%, total capital to
risk-weighted assets ratio (Tier 2 Ratio) of 7.95% and a Tier 1 capital to total
average assets ratio (leverage ratio) of 5.09%. The Company's actual Tier 2
Ratio as of June 30, 1997 was below the minimum ratio of 8.0% established by the
Federal Reserve. Failure by the Company to meet minimum capital requirements can
result in certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a adverse effect on the Company's
growth and financial results.
BANK REGULATION
The Bank is subject to supervision and examination by the OCC pursuant to
the National Bank Act and regulations promulgated thereunder. The Bank is a
member of the Federal Reserve and as such is also subject to examination by the
Federal Reserve.
The deposits of the Bank are insured by the Bank Insurance Fund under the
provisions of the Federal Deposit Insurance Act (the "FDIA"), and the Bank is,
therefore, also subject to supervision and examination by the FDIC. The FDIA
requires that the appropriate federal regulatory authority (the OCC, in the case
of the Bank) approve any merger and/or consolidation by or with an insured bank,
as well as the establishment or relocation of any bank or branch office. The
FDIC also supervises compliance with the provisions of federal law and
regulations which place restrictions on loans by FDIC-insured banks to their
directors, executive officers and other controlling persons.
Furthermore, banks are affected by the credit policies of other monetary
authorities, including the Federal Reserve, which regulate the national supply
of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The monetary policies of the Federal Reserve have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future.
All banks located in Illinois have traditionally been restricted as to the
number and geographic location of branches which they may establish. The
Illinois Banking Act was amended in June 1993, however, to eliminate such
branching restrictions. Accordingly, banks located in Illinois are now permitted
to establish branches anywhere in Illinois without regard to the location of
other banks' main offices or the number of branches previously maintained by the
bank establishing the branch. Under recently enacted federal legislation, banks
are also permitted to establish branches in other states, subject to certain
limitations. See "Interstate Banking and Branching Legislation."
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<PAGE> 64
FINANCIAL INSTITUTION REGULATION GENERALLY
Transactions with Affiliates. Transactions between a bank and its holding
company or other affiliates are subject to various restrictions imposed by state
and federal regulatory agencies. Such transactions include loans and other
extensions of credit, purchases of securities and other assets, and payments of
fees or other distributions. In general, these restrictions limit the amount of
transactions between an institution and an affiliate of such institution, as
well as the aggregate amount of transactions between an institution and all of
its affiliates, and require transactions with affiliates to be on terms
comparable to those for transactions with unaffiliated entities.
Dividend Limitations. As a holding company, the Company is primarily
dependent upon dividend distributions from the Bank for its income. Federal
statutes and regulations impose restrictions on the payment of dividends by the
Company and the Bank.
Federal Reserve policy provides that a bank holding company should not pay
dividends unless (i) the bank holding company's net income over the prior year
is sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the capital needs, asset quality and
overall financial condition of the bank holding company and its subsidiaries.
Delaware law also places certain limitations on the ability of the Company
to pay dividends. For example, the Company may not pay dividends to its
shareholders if, after giving effect to the dividend, the Company would not be
able to pay its debts as they become due. Since a major source of the Company's
revenue is dividends the Company receives and expects to receive from the Bank,
the Company's ability to pay dividends is likely to be dependent on the amount
of dividends paid by the Bank. No assurance can be given that the Bank will, in
any circumstances, pay dividends to the Company.
Pursuant to the National Bank Act, all dividends must be paid out of
undivided profits. Federal regulations prohibit any Federal Reserve member bank,
including the Bank, from declaring dividends in any calendar year in excess of
its net profit for the year plus the retained net profits for the preceding two
years without the prior approval of the Federal Reserve. Furthermore, the OCC
may, after notice and opportunity for hearing, prohibit the payment of a
dividend by a national bank if it determines that such payment would constitute
an unsafe or unsound practice.
In addition to the foregoing, the ability of the Company and the Bank to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under the Federal Deposit
Insurance Corporation Improvements Act of 1991 ("FDICIA"), as described below.
The right of the Company, its shareholders and its creditors to participate in
any distribution of the assets or earnings of its subsidiaries is further
subject to the prior claims of creditors of the respective subsidiaries.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the Federal Reserve, together with the other federal bank regulatory agencies,
to prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The Federal Reserve, the OCC and
the other federal bank regulatory agencies have adopted, effective August 9,
1995, a set of guidelines prescribing safety and soundness standards pursuant to
FDICIA, as amended. The guidelines establish general standards relating to
internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. In general, the guidelines require, among other
things, appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. In addition, each of the Federal Reserve and the OCC adopted
regulations that authorize, but do not require, the Federal Reserve or the OCC,
as the case may be, to order an institution that has been given notice by the
Federal Reserve or the OCC, as the case may be, that it is not satisfying any of
such safety and soundness standards to submit a compliance plan. If, after being
so notified, an institution fails to submit an acceptable compliance plan or
64
<PAGE> 65
fails in any material respect to implement an accepted compliance plan, the
Federal Reserve or the OCC, as the case may be, must issue an order directing
action to correct the deficiency and may issue an order directing other actions
of the types to which an undercapitalized association is subject under the
"prompt corrective action" provisions of FDICIA. If an institution fails to
comply with such an order, the Federal Reserve or the OCC, as the case may be,
may seek to enforce such order in judicial proceedings and to impose civil money
penalties. The Federal Reserve, the OCC and the other federal bank regulatory
agencies also proposed guidelines for asset quality and earnings standards.
A range of other provisions in FDICIA include requirements applicable to
closure of branches; additional disclosures to depositors with respect to terms
and interest rates applicable to deposit accounts; uniform regulations for
extensions of credit secured by real estate; restrictions on activities of and
investments by state-chartered banks; modification of accounting standards to
conform to generally accepted accounting principles including the reporting of
off-balance sheet items and supplemental disclosure of estimated fair market
value of assets and liabilities in financial statements filed with the banking
regulators; increased penalties in making or failing to file assessment reports
with the FDIC; greater restrictions on extensions of credit to directors,
officers and principal shareholders; and increased reporting requirements on
agricultural loans and loans to small businesses.
In August, 1995, the Federal Reserve, OCC, FDIC and other federal banking
agencies published a final rule modifying their existing risk-based capital
standards to provide for consideration of interest rate risk when assessing the
capital adequacy of a bank. Under the final rule, the Federal Reserve, the OCC
and the FDIC must explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor in
evaluating a bank's capital adequacy. The Federal Reserve, the FDIC, the OCC and
other federal banking agencies also have adopted a joint agency policy statement
providing guidance to banks for managing interest rate risk. The policy
statement emphasizes the importance of adequate oversight by management and a
sound risk management process. The assessment of interest rate risk management
made by the banks' examiners will be incorporated into the banks' overall risk
management rating and used to determine the effectiveness of management.
Prompt Corrective Action. FDICIA requires the federal banking regulators,
including the Federal Reserve, the OCC and the FDIC, to take prompt corrective
action with respect to depository institutions that fall below certain capital
standards and prohibits any depository institution from making any capital
distribution that would cause it to be undercapitalized. Institutions that are
not adequately capitalized may be subject to a variety of supervisory actions
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (such as the
Company). In other respects, FDICIA provides for enhanced supervisory authority,
including greater authority for the appointment of a conservator or receiver for
under capitalized institutions. The capital-based prompt corrective action
provisions of FDICIA and their implementing regulations apply to FDIC-insured
depository institutions. However, federal banking agencies have indicated that,
in regulating bank holding companies, the agencies may take appropriate action
at the holding company level based on their assessment of the effectiveness of
supervisory actions imposed upon subsidiary insured depository institutions
pursuant to the prompt corrective action provisions of FDICIA.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured
institution, the Bank is required to pay deposit insurance premiums based on the
risk it poses to the insurance fund. The FDIC has authority to raise or lower
assessment rates on insured deposits in order to achieve certain designated
reserve ratios in the insurance funds and to impose special additional
assessments. The FDIC recently amended the risk-based assessment system and on
December 11, 1995, adopted a new assessment rate schedule for BIF insured
deposits. The new assessment rate schedule, effective with respect to the
semiannual premium assessment beginning January 1, 1996, provides for an
assessment range of zero to 0.27% (subject to a $2,000 minimum) of insured
deposits depending on capital and supervisory factors. Each depository
institution is assigned to one of three capital groups: "well capitalized,"
"adequately capitalized" or "less than adequately capitalized." Within each
capital group, institutions are assigned to one of three supervisory subgroups:
"healthy," "supervisory concern" or "substantial supervisory concern."
Accordingly, there are nine combinations of capital groups and supervisory
subgroups to which varying assessment rates would be applicable. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned.
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During 1996, the Bank was assessed at an average annual rate of the
statutory minimum of $2,000. Deposit insurance may be terminated by the FDIC
upon a finding that an institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted
on September 30, 1996 provides that beginning with semi-annual periods after
December 31, 1996, deposits insured by the Bank Insurance Fund ("BIF") will also
be assessed to pay interest on the bonds (the "FICO Bonds") issued in the late
1980s by the Financing Corporation to recapitalize the now defunct Federal
Savings & Loan Insurance Corporation. For purposes of the assessments to pay
interest on the FICO Bonds, BIF deposits will be assessed at a rate of 20.0% of
the assessment rate applicable to SAIF deposits until December 31, 1999. After
the earlier of December 31, 1999 or the date on which the last savings
association ceases to exist, full pro rata sharing of FICO assessments will
begin. It has been estimated that the rates of assessment for the payment of
interest on the FICO Bonds will be approximately 1.3 basis points for
BIF-assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits. The payment of the assessment to pay interest on the FICO Bonds should
not materially affect the Bank.
Federal Reserve System. The Bank is subject to Federal Reserve regulations
requiring depository institutions to maintain non-interest-earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve regulations generally require 3.0% reserves must
be maintained against total transaction accounts of $52.0 million or less plus
10.0% on the remainder. The first $4.3 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve) are exempted from the reserve
requirements. The Bank is in compliance with the foregoing requirements.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"),
a financial institution has a continuing and affirmative obligation, consistent
with the safe and sound operation of such institution, to help meet the credit
needs of its entire community, including low- and moderate-income neighborhoods.
The CRA does not establish specific lending requirements or programs for
financial institutions nor does it limit an institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires each federal
banking agency, in connection with its examination of a financial institution,
to assess and assign one of four ratings to the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by the institution, including applications
for charters, branches and other deposit facilities, relocations, mergers,
consolidations, acquisitions of assets or assumptions of liabilities, and
savings and loan holding company acquisitions. The CRA also requires that all
institutions make public disclosure of their CRA ratings. The Bank received a
"satisfactory" rating from the OCC on its most recent CRA performance
evaluations.
In April 1995, the Federal Reserve, the OCC and other federal banking
agencies adopted amendments revising their CRA regulations. Among other things,
the amended CRA regulations substitute for the prior process-based assessment
factors a new evaluation system that would rate an institution based on its
actual performance in meeting community needs. In particular, the proposed
system would focus on three tests: (i) a lending test, to evaluate the
institution's record of making loans in its assessment areas; (ii) an investment
test, to evaluate the institution's record of investing in community development
projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (iii) a service test, to evaluate the
institution's delivery of services through its branches, ATMs and other offices.
The amended CRA regulations also clarify how an institution's CRA performance
would be considered in the application process.
Brokered Deposits. Well-capitalized institutions are not subject to
limitations on brokered deposits, while an adequately capitalized institution is
able to accept, renew or rollover brokered deposits only with a waiver from the
FDIC and subject to certain restrictions on the yield paid on such deposits.
Undercapitalized institutions are not permitted to accept brokered deposits. The
Bank is eligible under the statutory standard to accept brokered deposits and
may use this funding source from time to time when management deems it
appropriate from an asset/liability management perspective.
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Enforcement Actions. Federal and state statutes and regulations provide
financial institution regulatory agencies with great flexibility to undertake
enforcement action against an institution that fails to comply with regulatory
requirements, particularly capital requirements. Possible enforcement actions
range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance.
Interstate Banking and Branching Legislation. On September 29, 1994, the
Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the "Interstate
Banking Act") was enacted. Under the Interstate Banking Act, adequately
capitalized and adequately managed bank holding companies are allowed to acquire
banks across state lines subject to certain limitations. In addition, under the
Interstate Banking Act, beginning on June 1, 1997, banks are permitted to merge
with one another across state lines and thereby create a main bank with branches
in separate states. After establishing branches in a state through an interstate
merger transaction, a bank could establish and acquire additional branches at
any location in the state where any bank involved in the interstate merger could
have established or acquired branches under applicable federal and state law. It
is anticipated that this interstate merger and branching ability will increase
competition and further consolidate the financial institutions industry.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of banks and bank holding companies are affected by general
economic conditions and also by the fiscal and monetary policies of federal
regulatory agencies, including the Federal Reserve. Through open market
transactions, variations in the discount rate and the establishment of reserve
requirements, the Federal Reserve exerts considerable influence over the cost
and availability of funds obtainable for lending or investing.
The above monetary and fiscal policies and resulting changes in interest
rates have affected the operating results of all commercial banks in the past
and are expected to do so in the future. The Bank cannot fully predict the
nature or the extent of any effects which fiscal or monetary policies may have
on its business and earnings.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 7,500,000 shares, $0.001 par value per
share, of common stock (the "Common Stock") and 1,000,000 shares, $0.001 par
value per share, of preferred stock (the "Preferred Stock"). As of June 30,
1997, there were issued and outstanding 1,550,670 shares of Common Stock, on a
pro forma basis, and no shares of Preferred Stock, with 153,340 additional
shares of Common Stock reserved for issuance upon the exercise of currently
outstanding options, each of which represents the right to purchase one share of
Common Stock. Each share of Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Common Stock. Each share
offered hereby will be (when issued and delivered in accordance with the terms
and conditions of the Offering) duly authorized, fully paid and nonassessable.
COMMON STOCK
Dividends. The holders of Common Stock are entitled to receive and share
equally in such dividends, if any, declared by the Board of Directors out of
funds legally available therefor. The Company may pay dividends if, as and when
declared by its Board of Directors. The payment of dividends by the Company is
subject to limitations which are imposed by the DGCL. Under these restrictions,
dividends may be paid only out of "surplus" as defined by the DGCL, or, if there
should be no surplus, out of the corporation's net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year. See
"Dividend Policy". If the Company issues Preferred Stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
Voting Rights. The holders of Common Stock possess voting rights in the
Company. Shareholders elect the Company's Board of Directors and act on such
other matters as are required to be presented to them under the DGCL or the
Company's Certificate of Incorporation or as are otherwise presented to them by
the Board of Directors. Each holder of Common Stock will be entitled to one vote
per share and will not have any right to cumulate votes in the election of
directors. Accordingly, holders of more than fifty percent of the outstanding
shares of Common Stock will be able to elect all of the Directors to be elected
each year. Although there are no present plans to do so, if the Company issues
Preferred Stock, holders of the Preferred Stock may also possess voting rights.
See "Certain Anti-Takeover Effects of the Company's Certificate of Incorporation
and By-Laws and Delaware Law."
Liquidation. In the event of any liquidation, dissolution or winding up of
the Company, the holders of its Common Stock would be entitled to receive, after
payment or provision for payment of all debts and liabilities of the Company,
all assets of the Company available for distribution. If Preferred Stock is
issued, the holders thereof may have a priority over the holders of the Common
Stock in the event of any liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued by
the Company in the future. The Common Stock is not subject to mandatory
redemption by the Company.
PREFERRED STOCK
The Board of Directors is authorized, pursuant to the Company's
Certificate of Incorporation, to issue one or more series of Preferred Stock
with respect to which the Board, without stockholder approval, may determine
voting, conversion and other rights which could adversely affect the rights of
holders of Common Stock. The rights of the holders of the Common Stock would
generally be subject to the prior rights of the Preferred Stock with respect to
dividends, liquidation preferences and other matters. Among other things,
Preferred Stock could be issued by the Company to raise capital or to finance
acquisitions. The issuance of Preferred Stock under certain circumstances could
have the effect of delaying or preventing a change in control of the Company.
The Company has no present plans to issue any shares of Preferred Stock.
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CERTAIN ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
BY-LAWS AND DELAWARE LAW
General. Certain provisions of the Company's Certificate of Incorporation,
By-Laws and the DGCL may have the effect of impeding the acquisition of control
of the Company by means of a tender offer, a proxy fight, open-market purchases
or otherwise in a transaction not approved by the Board of Directors.
These provisions may have the effect of discouraging a future takeover
attempt which is not approved by the Board of Directors but which individual
shareholders may deem to be in their best interests or in which shareholders may
receive a substantial premium for their shares over then current market prices.
As a result, shareholders who might desire to participate in such a transaction
may not have an opportunity to do so. Such provisions will also render the
removal of the current Board of Directors or management of the Company more
difficult.
The provisions of the Certificate of Incorporation and By-Laws described
below are designed to reduce, or have the effect of reducing, the vulnerability
of the Company to an unsolicited proposal for the restructuring or sale of all
or substantially all of the assets of the Company or an unsolicited takeover
attempt which is unfair to shareholders.
The following description of certain of the provisions of the Certificate
of Incorporation and By-Laws of the Company is necessarily general and is
qualified in its entirety by reference to the Certificate of Incorporation and
By-Laws of the Company.
Authorized Shares. The Company's Certificate of Incorporation authorizes
the issuance of 7,500,000 shares of Common Stock and 1,000,000 shares of
Preferred Stock. The shares of Common Stock and Preferred Stock have been
authorized in an amount which provides the Board of Directors with as much
flexibility as possible to effect, among other things, transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
these authorized shares may also be used by the Board of Directors consistent
with its fiduciary duty to deter future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of any one
or more series of Preferred Stock, including voting rights, conversion rates,
and liquidation preferences. As a result of the ability to fix voting rights for
a series of Preferred Stock, the Board of Directors has the power to the extent
consistent with its fiduciary duty to issue a series of Preferred Stock to
persons friendly to management in order to attempt to block a merger or other
transaction by which a third party seeks control, and thereby assist the
incumbent Board of Directors and management to retain their respective
positions.
Classified Board of Directors; Filling of Board Vacancies. The Board of
Directors is divided into three classes, each of which contains approximately
one-third of the whole number of the members of the Board of Directors. Each
class serves a staggered three-year term, with approximately one-third of the
total number of Directors being elected each year. The Certificate of
Incorporation and By-Laws provide that the size of the Board of directors is
determined by a majority of the Directors. The Certificate of Incorporation and
By-Laws also provide that any vacancy occurring in the Board of Directors,
including a vacancy created by an increase in the number of Directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the Directors then in office. Shareholders may
elect Directors at either an annual or special meeting. Under the DGCL, members
of a staggered board may only be removed for cause unless the corporation's
certificate of incorporation provides otherwise. The Company's Certificate of
Incorporation does not provide for removal of directors without cause. The
staggered board is intended to provide for continuity of the Board of Directors
and to make it more difficult and time consuming for a stockholder group to
fully use its voting power to gain control of the Board of Directors without the
consent of the incumbent Board of Directors.
Cumulative Voting; Action by Written Consent and Stockholder Meetings. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. The Certificate of Incorporation and By-Laws also provide that any
action required or permitted to be taken by the shareholders at an annual or
special meeting may be effected by written consent in lieu of a meeting.
Directors also retain the right to postpone any previously scheduled stockholder
meeting and adjourn any stockholder meeting at any time, whether or not a quorum
is present.
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Delaware Business Combination Statute. Section 203 of the DGCL provides
that, subject to certain exceptions specified therein, an "interested
stockholder" of a Delaware corporation shall not engage in any business
combination, including mergers or consolidations or acquisitions of additional
shares of the corporation, with the corporation for a three-year period
following the time that such stockholder becomes an interested stockholder
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares), or (iii) at or subsequent to such time, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of shareholders by the affirmative
vote of at least 66b% of the outstanding voting stock which is not owned by the
interested stockholder. Except as otherwise specified in Section 203, an
interested stockholder is defined to include any person that is (x) the owner
of 15% or more of the outstanding voting stock of the corporation, or (y) is an
affiliate or associate of the corporation and was the owner of 15% or more of
the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date of determination; and the
affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. The
provisions of Section 203 may encourage persons interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company
since the stockholder approval requirement would be avoided if a majority of
the directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested
stockholder. Such provisions also may have the effect of preventing changes in
the management of the Company. It is possible that such provisions could make
it more difficult to accomplish transactions which the Company's shareholders
may otherwise deem to be in their best interests.
Amendment of the Certificate of Incorporation and By-Laws. The
Certificate of Incorporation provides that the affirmative vote of the holders
of at least 80% of the voting stock, voting together as a single class, is
required to amend provisions of the Certificate of Incorporation relating to
Board of Directors and stockholder amendment of the Certificate of
Incorporation and By-laws, limitation of Directors' liability for monetary
damages, stockholder action without a meeting and the number, election and term
of the Company's Directors. By-Laws may be amended only by the Board of
Directors of the Company or by the affirmative vote of the holders of at least
80% of the voting stock, voting together as a single class.
Certain By-Law Provisions. The By-Laws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at a stockholder meeting to provide advance
notice to the Secretary of the Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Company concerning the nature of the new business, the stockholder and such
stockholder's interest in the business matter. Similarly, a stockholder wishing
to nominate any person for election as a director must provide the Company with
certain information concerning the nominee and such proposing stockholder.
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
Attempts to take over corporations have recently become increasingly
common. An unsolicited non-negotiated proposal can seriously disrupt the
business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of the
Company and its shareholders to encourage potential acquirors to negotiate
directly with management and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price that reflects
the true value of the Company and that otherwise is in the best interest of all
shareholders.
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LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Certificate of Incorporation provides that a Director of the Company
will not be personally liable to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a Director, except, if required by the
DGCL as amended from time to time, for liability (i) for any breach of the
Director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, which concerns
unlawful payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the Director derived an improper personal benefit.
Neither the amendment nor repeal of such provision will eliminate or reduce the
effect of such provision in respect of any matter occurring, or any cause of
action, suit or claim that, but for such provision, would accrue or arise prior
to such amendment or repeal.
While the Certificate of Incorporation provides Directors with protection
from awards for monetary damages for breaches of their duty of care, it does
not eliminate such duty. Accordingly, the Certificate of Incorporation will
have no effect on the availability of equitable remedies such as an injunction
or recission based on a Director's breach of his or her duty of care.
The Certificate of Incorporation provides that each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of the
Company or is or was serving at the request of the Company as a Director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such proceeding is alleged action in
an official capacity as agent, will be indemnified and held harmless by the
Company to the fullest extent authorized by the DGCL, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such rights are not exclusive
of any other right which any person may have or thereafter acquire under any
statute, provision of the Certificate of Incorporation, By-Laws, agreement,
vote of shareholders or disinterested directors or otherwise. No repeal or
modification of such provision will in any way diminish or adversely affect the
rights of any Director, officer, employee or agent of the Company thereunder in
respect of any occurrence or matter arising prior to any such repeal or
modification. The Certificate of Incorporation also specifically authorizes
the Company to maintain insurance and to grant similar indemnification rights
to employees or agents of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Harris Trust and
Savings Bank.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of
the Company. As of September 15, 1997, the Company had 119 shareholders of
record. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Sales of substantial amounts of Common Stock of the Company in the public
market after various restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future. Upon completion of the Offering, the Company will have 2,759,949
shares of Common Stock issued and outstanding (2,939,949 if the additional
subscription option and the over-allotment option are exercised in full). The
1,200,000 shares of Common Stock sold in the Offering (plus any shares sold, as
a result of any exercise of the additional subscription option or
over-allotment option) will be freely tradeable without registration or other
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares held by an "affiliate" of the Company (as defined
in the Securities Act).
The remaining 1,559,949 shares of Common Stock outstanding upon completion
of the Offering are "restricted securities" as that term is defined in Rule
144. As described below, Rule 144 permits resales of restricted securities
subject to certain restrictions. On the date of this Prospectus, approximately
890,159 shares will be eligible for immediate sale without restriction pursuant
to Rule 144(k) and an additional 659,460 shares will be eligible for immediate
sale under Rule 144, subject to compliance with the provisions of Rule 144;
399,145 of such shares will, however, be subject to the Lock-up Agreements.
After 180 days from the closing date of the Company's Public Offering, these
shares will be eligible for sale in the public market, subject, in certain
cases, to compliance with Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year (including the holding period of any immediate prior owner,
except an affiliate), shares of Common Stock that have not been registered
under the Securities Act or that were acquired from an "affiliate" of the
Company (in a transaction or chain of transactions not involving a public
offering) is entitled to sell in "broker's transactions" or to market makers,
within any three month period commencing 90 days after the closing date of the
Company's Public Offering, a number of shares of Common Stock which does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately 27,400 shares immediately after the Offering)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during a 90-day period preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years (including the
holding period of any immediate prior owner, except an affiliate), is entitled
to sell such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Pursuant to lock-up agreements entered into between the Company and its
Directors and executive officers and the Selling Agent, the Directors,
executive officers and key employees, who own an aggregate of 399,145 shares as
of the date of this Prospectus, have agreed not to offer, sell or contract to
sell any Common Stock for a period of 180 days from the closing date of the
Public Offering without the prior written consent of the Selling Agent. Upon
expiration of this 180-day period, if applicable, all of these shares, except
restricted securities, could be resold by the Directors, executive officers and
other persons who are affiliates of the Company, subject to certain
requirements of Rule 144 under the Securities Act.
The Company intends to register 285,090 shares of Common Stock that are
reserved for issuance under its stock option plans. As of July 30, 1997,
options to purchase 153,340 shares were outstanding, each of which entitles the
holder thereof to purchase one share of Common Stock. Once registered, shares
issued upon exercise of options will be generally eligible for immediate resale
in the public market, subject to vesting under the applicable option
agreements.
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LEGAL MATTERS
Certain legal matters in connection with the Offering are being passed
upon for the Company by Much Shelist Freed Denenberg Ament Bell & Rubenstein,
P.C., Chicago, Illinois, and for the Selling Agent by Lord, Bissell & Brook,
Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996, and 1995 and for each of the years in the two year period ended December
31, 1996, included in this Prospectus and the Registration Statement of which
it is a part, have been so included in reliance on the report of McGladrey &
Pullen, LLP, independent certified public accountants, given on the authority
of said firm as experts in auditing and accounting. The consolidated financial
statements for the year ended December 31, 1994, included in this Prospectus
and the Registration Statement of which it is part, have been so included in
reliance on the report of Crowe, Chizek and Company LLP, independent certified
public accountants, given on the authority of said firm as experts in
accounting and auditing.
The Company dismissed Crowe, Chizek and Company LLP, its independent
certified public accountants, effective October, 1995. In connection with the
1993 and 1994 audits and during the interim period prior to the dismissal,
there were no disagreements with the former accountants on any matter or
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure. The former accountant's reports included in the 1993 and
1994 financial statements were unqualified. The Company engaged McGladrey &
Pullen, LLP as its new independent public accountants effective with the
dismissal of its former accountants. During the Company's 1993 and 1994 fiscal
years and during the interim period prior to engagement there were no
consultations with McGladrey & Pullen, LLP with regard to either the
application of accounting principles as to any specific transaction, either
completed or proposed; the type of audit opinion that would be rendered on the
Company's financial statements or any matter of disagreements with the former
accountants. The Board of Directors approved the Audit Committee's
recommendation to change accountants. In consideration of Crowe, Chizek and
Company LLP consenting to the inclusion of its report and to being named as
experts in the Registration Statement which includes this Prospectus, the
Company agreed to defend, indemnify and hold harmless to the extent permitted
by law Crowe, Chizek and Company LLP and its personnel from any claim which
arises as a result of the use of its report, including attorney's fees and
costs of defense. This indemnification is inoperable if Crowe, Chizek and
Company LLP is held liable for professional malpractice or pays any final or
non-appealable settlement.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission")
in connection with the Common Stock offered by this Prospectus. This Prospectus
omits certain information, exhibits and undertakings set forth in the
Registration Statement which the Company has filed with the Commission. Such
materials may be inspected and copied upon payment of prescribed rates, at the
public reference facilities of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Regional Office of the Commission at the
following locations: Seven World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. This
information is also available on the Internet at the Commission's web site. The
address for the web site is: http://www.sec.gov. For further information with
respect to the Company, reference is hereby made to the Registration Statement
and the exhibits thereto. Statements contained in this Prospectus concerning
the provisions of any contract, agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement
for a full statement of the provisions thereof. Each such statement in this
Prospectus is qualified in all respects by such reference.
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended. The Company
intends to furnish its shareholders with annual reports containing financial
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statements audited by its independent certified public accountants and may
furnish either quarterly or semi-annual reports containing unaudited financial
information.
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INDEX TO FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC.
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----
<S> <C>
Consolidated Balance Sheets at June 30, 1997 (unaudited) and December 31, 1996 ........................................ F-2
Consolidated Statements of Income for the six months ended June 30, 1997 and
June 30, 1996 (unaudited)............................................................................................ F-3
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and
June 30, 1996 (unaudited)............................................................................................ F-4
Notes to Unaudited Consolidated Financial Statements................................................................... F-5
Report of McGladrey & Pullen, LLP...................................................................................... F-12
Report of Crowe, Chizek & Company LLP.................................................................................. F-13
Consolidated Balance Sheets at December 31, 1996 and December 31, 1995................................................. F-14
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994................................. F-15
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994..................................................................................... F-16
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............................. F-17
Notes to Consolidated Financial Statements............................................................................. F-19
</TABLE>
F-1
<PAGE> 76
Success Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS (In thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 15,817 $ 13,833
Interest-bearing time deposits with financial institutions 99 99
Securities available-for-sale 15,821 15,147
Securities held-to-maturity (fair value $31,733 and $33,060 in
1997 and 1996, respectively) 31,262 32,560
Real estate loans held-for-sale 291 117
Loans, less allowance for loan losses of $1,629
at 1997 and $1,425 at 1996 230,075 203,299
Premises and equipment, net 8,317 7,049
Interest receivable 2,112 1,761
Other assets 2,161 2,484
- ----------------------------------------------------------------------------------------------------------------
$305,955 $276,349
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 42,573 $ 42,596
Interest bearing deposits 225,663 202,509
- ----------------------------------------------------------------------------------------------------------------
Total deposits 268,236 245,105
Note payable 4,415 4,815
Federal Home Loan Bank advances 9,079 5,152
Securities sold under repurchase agreements 4,996 4,255
Demand notes payable to U.S. Government 2,729 1,586
Convertible subordinated debentures 3,167 3,167
Interest payable and other liabilities 2,237 1,645
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 294,859 265,725
Minority interest in subsidiary bank 538 524
Stock owned by Employee Stock Ownership Plan (ESOP) participants;
53,918 and 54,789 Series B Preferred shares at 1997 and 1996,
respectively, net of ESOP loan of $137 in 1997 and 1996. 800 866
Shareholders' equity
Preferred stock, $25 par value, 14,774 shares authorized,
none issued 0 0
Common stock, $1 par value, 7,500,000 shares authorized, 960,282 and
953,391 shares issued and outstanding, at 1997 and 1996, respectively 960 955
Class A common stock, $1 par value, 1,000,000 shares authorized, 115,500
shares issued and outstanding, at 1997 and 1996. 116 116
Additional paid-in capital 4,869 4,372
Retained earnings 4,298 4,370
- ----------------------------------------------------------------------------------------------------------------
Total before unrealized loss on securities 10,243 9,813
Unrealized loss on securities, net of tax (485) (579)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,758 9,234
- ----------------------------------------------------------------------------------------------------------------
$305,955 $276,349
================================================================================================================
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements
F-2
<PAGE> 77
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------------------------------
(Unaudited)
(In thousands, except share data)
<S> <C> <C>
Interest income
Loans (including fee income) $ 9,688 $ 8,067
Investment securities 1,393 1,425
Other interest income 134 76
- -------------------------------------------------------------------------------------------------------------
11,215 9,568
Interest expense
Deposits 4,927 4,179
Note payable 189 131
Convertible subordinated debentures 185 150
Other borrowings 424 346
- -------------------------------------------------------------------------------------------------------------
5,725 4,806
- -------------------------------------------------------------------------------------------------------------
Net interest income 5,490 4,762
Provision for loan losses 228 128
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,262 4,634
Other operating income
Service charges on deposit accounts 917 624
Gain on sale of loans 28 82
Credit card processing income 2,845 2,388
Other noninterest income 123 205
- -------------------------------------------------------------------------------------------------------------
3,913 3,299
Other operating expenses
Salaries and employee benefits 2,878 2,738
Occupancy and equipment expense 979 807
Data processing 488 291
Credit card processing expenses 2,765 2,213
Other noninterest expenses 1,510 1,432
- -------------------------------------------------------------------------------------------------------------
8,620 7,481
Minority interest in income of subsidiary bank 7 13
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 548 439
Income tax expense 188 92
- -------------------------------------------------------------------------------------------------------------
Net income 360 347
Preferred stock dividends 40 27
- -------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 320 $ 320
=============================================================================================================
Earnings per common and common equivalent share
Primary (1,239,388 and 1,150,971 shares, respectively) $ 0.29 $ 0.30
Fully diluted (1,239,388 and 1,150,971 shares, respectively) $ 0.29 $ 0.30
Pro Forma earnings per common and common equivalent share
Primary (1,622,615 shares) $ 0.29
Fully diluted (1,622,615 shares) $ 0.29
</TABLE>
See accompanying notes to Unaudited Consolidated Financial Statements
F-3
<PAGE> 78
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
(In thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities $ 1,631 $ (2,238)
Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities 1,747 1,168
Purchase of available-for-sale securities (2,479) 0
Purchase of held-to-maturity securities 0 (615)
Proceeds from maturities of held-to-maturity securities 1,134 1,941
Loans made to customers, net (26,895) (5,779)
Premises and equipment expenditures (1,667) (1,283)
Purchase of subsidiary bank stock (1) (40)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (28,161) (4,608)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in non-interest bearing deposits (23) (294)
Increase (decrease) in interest bearing deposits 23,154 (4,324)
Increase (decrease) in demand notes payable to U.S. Government 1,143 (167)
Increase in securities sold under agreements to repurchase 741 1,423
Repayments of notes payable 0 (1,415)
Proceeds from notes payable (400) 3,000
Net increase in Federal Home Loan Bank advances 3,927 1,271
Issuance of convertible subordinated debentures 0 755
Issuance of common stock 62 1,151
Loan to ESOP (50) 0
Dividends paid (40) (27)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 28,514 1,373
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,984 (5,473)
Cash and cash equivalents at beginning of period 13,833 20,559
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,817 $ 15,086
===============================================================================================================
</TABLE>
See accompanying notes to the Unaudited Consolidated Financial Statements.
F-4
<PAGE> 79
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION
The financial information of Success Bancshares, Inc. and
subsidiaries included herein is unaudited; however, such
information reflects all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The results of the interim period ended June 30, 1997 are not
necessarily indicative of the results expected for the year ended
December 31, 1997.
NOTE 2. SECURITIES
Amortized costs and fair values of securities are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 1,743 $ 14 $ - $ 1,757
U.S. Government sponsored entities 5,096 1 100 4,997
States and political sub-divisions exempt
from Federal income taxes 1,566 6 3 1,569
Mortgage-backed securities 3,332 16 - 3,348
SBA guaranteed loan participation 4,052 17 36 4,033
certificates
Other securities 117 - - 117
--------------------------------------------------------------------------------------------------
$ 15,906 $ 54 $ 139 $ 15,821
==================================================================================================
Securities held-to-maturity
U.S. Treasury $ 244 $ 2 $ - $ 246
U.S. Government sponsored entities 14,933 251 263 14,921
States and political sub-divisions
Taxable 1,846 78 - 1,924
Exempt from Federal income taxes 6,638 216 7 6,847
Mortgage-backed securities 5,521 194 - 5,715
Other securities 2,080 - - 2,080
--------------------------------------------------------------------------------------------------
$ 31,262 $ 741 $ 270 $ 31,733
==================================================================================================
</TABLE>
F-5
<PAGE> 80
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 2. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 748 $ 6 $ - $ 754
U.S. Government sponsored entities 5,846 2 (127) 5,721
States and political sub-divisions exempt
from Federal income taxes 1,565 6 (10) 1,561
Mortgage-backed securities 2,568 17 - 2,585
SBA guaranteed loan participation 4,337 3 (50) 4,290
certificates
Other securities 110 126 - 236
--------------------------------------------------------------------------------------------------
$ 15,174 $ 160 $ (187) $ 15,147
==================================================================================================
Securities held-to-maturity
U.S. Treasury $ 242 $ 3 $ - $ 245
U.S. Government sponsored entities 15,368 279 (244) 15,403
States and political sub-divisions
Taxable 1,845 94 - 1,939
Exempt from Federal income taxes 6,906 147 (12) 7,041
Mortgage-backed securities 5,804 233 - 6,037
Other securities 2,395 - - 2,395
--------------------------------------------------------------------------------------------------
$ 32,560 $ 756 $ (256) $ 33,060
==================================================================================================
</TABLE>
The amortized cost and fair value of securities classified as
held-to-maturity and available-for-sale at June 30, 1997 and
December 31, 1996, by contractual maturity, are shown below.
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. Therefore, these securities
are not included in the maturity categories in the following
maturity summary.
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------
Available-for-sale Held-to-maturity
--------------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,205 $ 2,193 $ 482 $ 485
Due after one year through five years 4,869 4,854 9,790 9,655
Due after five years through ten years 1,331 1,276 10,455 10,305
Due after ten years 117 117 5,014 5,573
Mortgage-backed securities and SBA guar-
anteed loan participation certificates 7,384 7,381 5,521 5,715
--------------------------------------------------------------------------------------------------
$ 15,906 $ 15,821 $ 31,262 $ 31,733
==================================================================================================
</TABLE>
F-6
<PAGE> 81
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 2. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Available-for-sale Held-to-maturity
--------------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,965 $ 2,953 $ 702 $ 703
Due after one year through five years 3,783 3,728 9,987 10,001
Due after five years through ten years 1,411 1,355 10,444 10,605
Due after ten years 110 236 5,623 5,714
Mortgage-backed securities and SBA guar-
anteed loan participation certificates 6,905 6,875 5,804 6,037
--------------------------------------------------------------------------------------------------
$ 15,174 $ 15,147 $ 32,560 $ 33,060
==================================================================================================
</TABLE>
Securities with carrying values of approximately $23.3 million and
$24.2 million at June 30, 1997 and December 31, 1996,
respectively, were pledged to secure public deposits, to secure
securities sold under agreements to repurchase and for other
purposes as required or permitted by law.
NOTE 3. LOANS
The major classification of loans follow:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial $ 65,474 $ 58,912
Residential real estate - mortgage 42,074 41,586
Commercial real estate - mortgage 50,531 43,334
Real estate - construction 13,400 12,282
Home equity 51,920 43,193
Other loans 8,921 6,118
--------------------------------------------------------------------------------------------------
Total loans 232,320 205,425
Less
Unearned discount - (2)
Deferred loan fees (225) (261)
Unaccreted discount resulting from loss on
transfer of loans from held-for-sale to portfolio (391) (438)
Allowance for loan losses (1,629) (1,425)
--------------------------------------------------------------------------------------------------
Net loans $ 230,075 $ 203,299
==================================================================================================
</TABLE>
F-7
<PAGE> 82
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 4. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------
1997 1996
-------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Balance at beginning of period $ 1,425 $ 1,189
Provision for loan losses 228 128
Recoveries on loans previously charged-off 31 3
Loans charged-off (55) (54)
-------------------------------------------------------------------------------------------------
Balance at end of period $ 1,629 $ 1,266
=================================================================================================
</TABLE>
NOTE 5. CONTINGENT LIABILITIES
At June 30, 1997 and December 31, 1996, loan commitments,
including standby letters of credit, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit
risk
Unused home equity lines of credit $ 57,882 $ 45,195
Unused commercial and other consumer lines of credit 42,976 33,531
Standby letters of credit 2,825 1,808
Commitments to make loans 10,313 5,199
</TABLE>
NOTE 6. RECENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued
Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, which became
effective for transactions occurring after December 31, 1996,
except for transactions relating to secured borrowings and
collateral for which the effective date is December 31, 1997. The
Statement does not permit earlier or retroactive application. The
Statement distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that
consideration other than beneficial interest in the transferred
assets is received in exchange. The Statement also establishes
standards on the initial recognition and measurement of servicing
assets and other retained interest and servicing liabilities, and
their subsequent measurement. The Statement requires that debtors
reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them
in certain circumstances in which the secured party has taken
control of those assets. In addition, the Statement requires that
a liability be derecognized only if the debtor is relieved of its
obligation through payment to the creditor or by being legally
released from being the primary obligor under the liability either
judicially or by the creditors.
The Company adopted the applicable provisions of this Statement as
of January 1, 1997. Management does not believe the application of
the Statement to transactions of the Bank that have been typical
in the past will materially affect the Bank's financial position
and results of operations.
F-8
<PAGE> 83
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 6. RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
The FASB has issued Statement No. 128, Earnings per Share, which
supersedes APB Opinion No. 15. Statement No. 128 requires the
presentation of earnings per share by all entities that have
common stock or potential common stock, such as options, warrants
and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are
required to present basic earnings per share amounts. All other
entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise
or issuance of all potential common stock instruments unless the
effect is to reduce a loss or increase the income per common share
from continuing operations. All entities required to present per
share amounts must initially apply Statement No. 128 for annual
and interim periods ending after December 15, 1997. Earlier
application is not permitted.
Because the Company has potential common stock outstanding
(convertible preferred stock and convertible debentures, and stock
options to employees and directors), the Company will be required
to present basic and diluted earnings per share. If the Company
had applied Statement No. 128 in the accompanying financial
statements, the following per share information would have been
reported:
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, December 31,
--------------------------------------------------------------
1997 1996 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Basic earnings per share $ 0.33 $ 0.30 $ 0.74 $ 0.93 $ 0.27
Diluted earnings per share 0.31 0.29 0.70 0.86 0.26
</TABLE>
In June 1997, the FASB issued Statement 130, Reporting
Comprehensive Income. The Statement establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The
Statement does not address when transactions are recorded, how
they are measured in the financial statements, or whether they
should be included in net income or other comprehensive income.
The Statement is effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. Management
has not assessed the effect that this statement will have on its
financial statement presentation.
Also in June 1997, the FASB issued Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information. The
Statement establishes standards for the way that public companies
report information about operating segments in annual financial
statements and requires that those enterprises report selected
financial information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. Statement No. 131 is
effective for financial statements for fiscal years beginning
after December 15, 1997. In the initial year of application,
comparative information for earlier years is required to be
restated. Management has not assessed the effect that this
statement will have on its financial reporting practices.
NOTE 7. SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS
The Company and the Bank are subject to various regulatory capital
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
F-9
<PAGE> 84
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 7. SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS (CONTINUED)
a direct material effect on the Company's financial statements.
The regulations require the Company and the Bank to meet specific
capital adequacy guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting principles. The capital
classifications are also subject to qualitative judgments by the
regulators about risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum
ratios (set forth in the table below) of Tier I capital (as
defined in the regulations) to total average assets (as defined)
("leverage ratio") and minimum ratios of Tier I capital and total
capital (as defined) to risk-weighted assets (as defined). As of
June 30, 1997, the Company's actual total capital to risk-weighted
assets ratio of 7.31% is below the minimum ratio of 8.0%
established by the Federal Reserve. Failure to meet minimum
capital requirements could result in certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's
business and financial results. As of June 30, 1997, the most
recent notification from the corresponding regulatory agency
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be considered well
capitalized, under this framework, the Bank must maintain minimum
leverage, Tier I and Tier II ratios as set forth in the following
table. There are no conditions or events since the notification
that management believes has changed the Bank's category.
The required ratios and the Company's and Bank's actual ratios at
June 30, 1997, are presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------------------------
Actual Ratio Actual Ratio Actual Ratio
As of June 30, 1997 ------ ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets):
Company.......................... $15,056 7.3% $ 16,481 8.0% N/A
Bank............................. 20,546 10.0 16,441 8.0 $ 20,551 10.0%
Tier I Capital (to Risk Weighted
Assets):
Company.......................... 11,580 5.6 8,241 4.0 N/A
Bank............................. 18,917 9.2 8,221 4.0 12,331 6.0
Tier I Capital (to Average Assets):
Company.......................... 11,580 4.0 11,585 4.0 N/A
Bank............................. $18,917 6.5% $ 11,571 4.0% $ 14,464 5.0%
</TABLE>
NOTE 8. SUBSEQUENT EVENTS
In anticipation of a public offering, the following actions were
approved by the Company's Board of Directors and its shareholders
and became effective as indicated:
- All unexercised director stock options expired on July 18,
1997.
- The par value of the Common stock was changed from $1.00 per
share to $0.001 per share, effective July 24, 1997.
- The number of authorized shares of Common stock was increased
to 7.5 million shares, effective July 24, 1997.
- Each of the 115,500 shares of Class A Common stock was
converted into .8749 shares of Common stock, effective July
24, 1997.
F-10
<PAGE> 85
Success Bancshares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE 8. SUBSEQUENT EVENTS (CONTINUED)
- Each of the 53,918 shares of Series B Preferred stock was
converted into one share of Common stock, effective July 24,
1997.
- A 1.7 to one (1) stock split was effected on July 30, 1997.
All references in the accompanying financial statements to the
number of Common shares and per Common share amounts have been
retroactively restated to reflect this transaction.
NOTE 9. PRO FORMA EARNINGS PER SHARE CALCULATIONS (UNAUDITED)
As of the closing date of the Company's offering of up to
1,380,000 shares of Common Stock registered with the Securities
and Exchange Commission on a Form S-1 Registration Statement (File
No. 333-32561), substantially all of the aggregate outstanding
principal amount of the Company's 9% Convertible Subordinated
Debentures and 15% and 17% Convertible Subordinated Notes will be
converted into shares of Common Stock.
Accordingly, the Pro Forma Earnings Per Common Share calculations
reflect the effect of these transactions.
F-11
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Success Bancshares, Inc.
Lincolnshire, Illinois
We have audited the accompanying consolidated balance sheets of Success
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Success Bancshares,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
---------------------------
Schaumburg, Illinois McGladrey & Pullen, LLP
February 16, 1997 (except for
Note 19 for which the date is
July 23, 1997)
F-12
<PAGE> 87
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Success Bancshares, Inc.
Lincolnshire, Illinois
We have audited the accompanying consolidated statement of income, shareholders'
equity, and cash flows of Success Bancshares, Inc. and Subsidiaries for the year
ended December 31, 1994. 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 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, the consolidated financial statements referred to above present
fairly in all material respects, the financial position and the results of
operations and cash flows of Success Bancshares, Inc. and Subsidiaries for the
year ended December 31, 1994 in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company, LLP
----------------------------------
Oak Brook, Illinois Crowe, Chizek and Company, LLP
February 4, 1995
F-13
<PAGE> 88
Success Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,833 $ 20,559
Interest-bearing time deposits with financial institutions 99 199
Securities available-for-sale 15,147 15,676
Securities held-to-maturity (fair value $33,060 and $35,950
in 1996 and 1995, respectively) 32,560 35,056
Real estate loans held-for-sale 117 203
Loans, less allowances for loan losses of $1,425 and $1,189
at 1996 and 1995, respectively 203,299 171,135
Premises and equipment, net 7,049 4,783
Interest receivable 1,761 1,694
Other assets 2,484 2,033
- ------------------------------------------------------------------------------------------------------
$ 276,349 $ 251,338
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 42,596 $ 35,168
Interest bearing deposits 202,509 192,140
- ------------------------------------------------------------------------------------------------------
Total deposits 245,105 227,308
Note payable 4,815 3,830
Federal Home Loan Bank advances 5,152 5,950
Securities sold under repurchase agreements 4,255 1,868
Demand notes payable to U.S. Government 1,586 335
Convertible subordinated debentures 3,167 2,412
Interest payable and other liabilities 1,645 1,040
- ------------------------------------------------------------------------------------------------------
Total liabilities 265,725 242,743
Minority interest in subsidiary bank 524 510
Stock owned by Employee Stock Ownership Plan (ESOP)
participants; 54,789 Series B Preferred shares for 1996
and 93,154 common shares for 1995, net of ESOP loan
of $137 in 1996 and $183 in 1995 866 719
Shareholders' equity
Preferred stock, $25 par value, 14,774 shares authorized,
none issued - -
Common stock, $1 par value, 7,500,000 shares authorized,
953,391 and 947,733 shares issued and outstanding,
at 1996 and 1995, respectively, exclusive of shares
retained by ESOP participants 955 949
Class A common stock, $1 par value, 1,000,000 shares
authorized, 115,500 and 40,000 shares issued and
outstanding at 1996 and 1995, respectively 116 40
Additional paid-in capital 4,372 3,317
Retained earnings 4,370 3,769
- ------------------------------------------------------------------------------------------------------
Total before unrealized loss on securities 9,813 8,075
Unrealized loss on securities, net of tax (579) (709)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 9,234 7,366
- ------------------------------------------------------------------------------------------------------
$ 276,349 $ 251,338
======================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-14
<PAGE> 89
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C>
Interest income
Loans (including fee income) $ 16,757 $ 14,956 $ 11,136
Investment securities
Taxable 2,397 2,936 2,796
Exempt from federal income tax 451 572 626
Other interest income 245 211 61
- --------------------------------------------------------------------------------------------------------------------
Total interest income 19,850 18,675 14,619
Interest expense
Deposits 8,632 8,771 6,432
Note payable 355 449 242
Convertible subordinated debentures 339 185 179
Other borrowings 694 481 368
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 10,020 9,886 7,221
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 9,830 8,789 7,398
Provision for loan losses 310 207 250
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,520 8,582 7,148
Other operating income
Service charges on deposit accounts 1,402 1,134 865
Securities gains, net - 25 61
Gains on sales of loans, net 109 84 94
Writedown of real estate loans held-for-sale, transferred
to portfolio (74) - (572)
Credit card processing income 5,334 4,389 4,071
Other fees and commissions 378 372 488
- --------------------------------------------------------------------------------------------------------------------
Total other operating income 7,149 6,004 5,007
Other operating expenses
Salaries and employee benefits 5,513 4,729 3,986
Occupancy and equipment expenses 1,715 1,388 1,287
Federal deposit and other insurance 113 350 422
Data processing 633 501 461
Credit card processing expenses 5,013 3,879 3,756
Other noninterest expenses 2,643 2,495 2,104
- --------------------------------------------------------------------------------------------------------------------
Total other operating expenses 15,630 13,342 12,016
Minority interest in income of subsidiary bank 23 47 58
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,016 1,197 81
Income tax expense (benefit) 233 260 (182)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME 783 937 263
Preferred stock dividends 81 - -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK $ 702 $ 937 $ 263
====================================================================================================================
Earnings per common and common equivalent share
Primary (1,182,286, 1,057,461 and 1,032,253 shares, $ .66 $ .89 $ .25
respectively)
Fully diluted (1,182,286, 1,215,366 and 1,032,253 shares, $ .66 $ .86 $ .25
respectively)
Pro Forma earnings per common and common equivalent share
Primary (1,585,837 shares) $ .62
Fully diluted (1,585,837 shares) $ .62
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-15
<PAGE> 90
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements Of Shareholders' Equity
December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Class A Additional
Common Common Paid-in
Stock Stock Capital
-------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at January 1, 1994 $ 864 $ - $ 2,104
Net income - - -
Issuance of 102,413 shares of common stock 102 - 559
Increase in stock owned by ESOP participants, 9,478 shares (9) - -
Net change in the fair value of stock owned by ESOP participants - - -
Change in unrealized net gain(loss) on securities, net of taxes - - -
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 957 - 2,663
Net income - - -
Issuance of 16,186 shares of common stock 16 - 94
Issuance of 40,000 shares of Class A common - 40 560
Increase in stock owned by ESOP participants, 23,837 shares (24) - -
Net change in the fair value of stock owned by ESOP participants - - -
Change in unrealized net loss on securities, net of taxes - - -
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 949 40 3,317
Net income - - -
Issuance of 5,658 shares of common stock 6 - 39
Issuance of 75,500 shares of Class A common stock - 76 1,016
Series B Preferred stock dividends - - -
Net change in the fair value of stock owned by ESOP Participants - - -
Change in unrealized net loss on securities, net of taxes - - -
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 955 $ 116 $ 4,372
=================================================================================================================
<CAPTION>
Unrealized
Net Gain Total
Retained (Loss) on Shareholders's
Earnings Securities Equity
---------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at January 1, 1994 $ 2,982 $ 326 $ 6,276
Net income 263 - 263
Issuance of 102,413 shares of common stock - - 661
Increase in stock owned by ESOP participants, 9,478 shares (54) - (63)
Net change in the fair value of stock owned by ESOP participants 109 - 109
Change in unrealized net gain(loss) on securities, net of taxes - (1,621) (1,621)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3,300 (1,295) 5,625
Net income 937 - 937
Issuance of 16,186 shares of common stock - - 110
Issuance of 40,000 shares of Class A common - - 600
Increase in stock owned by ESOP participants, 23,837 shares (123) - (147)
Net change in the fair value of stock owned by ESOP participants (345) - (345)
Change in unrealized net loss on securities, net of taxes - 586 586
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,769 (709) 7,366
Net income 783 - 783
Issuance of 5,658 shares of common stock - - 45
Issuance of 75,500 shares of Class A common stock - - 1,092
Series B Preferred stock dividends (81) - (81)
Net change in the fair value of stock owned by ESOP Participants (101) - (101)
Change in unrealized net loss on securities, net of taxes - 130 130
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 4,370 $ (579) $ 9,234
====================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-16
<PAGE> 91
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 783 $ 937 $ 263
Adjustments to reconcile net income to net cash
provided by operating activities
Premium amortization on
securities, net of discount accretion (49) (44) (78)
Provision for loan losses 310 207 250
Depreciation and amortization 623 508 470
Provision for deferred taxes (88) (208) (6)
Minority interest in income of subsidiary bank 23 47 58
Net gains on sales of securities - (25) (61)
Loans originated for sale (5,453) (9,652) (4,173)
Proceeds from sales of loans 3,326 9,438 5,000
Net (gains) losses on sales of loans (109) 51 (94)
Writedown of loans held for sale, transferred to
portfolio 74 - 572
Accretion of loan discount (87) (62) (60)
Deferred loan fees 38 96 18
Net gain on sales of other real estate owned - - (21)
Change in interest receivables and other assets (518) 606 (551)
Change in interest payable and other liabilities 605 25 210
Other 256 (310) (15)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (266) 1,614 1,782
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities - 5,803 4,718
Proceeds from maturities of available-for-sale securities 3,828 1,231 2,573
Purchase of available-for-sale securities (3,906) (2,272) (3,639)
Proceeds from maturities of held-to-maturity securities 3,171 2,990 4,609
Purchases of held-to-maturity securities - (1,834) (11,061)
Changes in interest-bearing balances with
financial institutions 100 298 464
Loans made to customers, net (30,218) (32,112) (21,105)
Proceeds from sales of other real estate - 366 152
Premises and equipment expenditures (2,889) (800) (943)
Purchase of subsidiary bank common stock (25) (84) (17)
- ------------------------------------------------------------------------------- -----------------------------
Net cash used in investing activities (29,939) (26,414) (24,249)
</TABLE>
(Continued)
F-17
<PAGE> 92
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in non-interest bearing deposits $ 7,428 $ 5,916 $ 5,683
Increase in interest bearing deposits 10,369 17,222 35,812
Increase (decrease) in demand notes payable to US
Government 1,251 (249) (2,911)
Increase (decrease) in securities sold under agreements
to repurchase 2,387 59 (330)
Repayments of notes payable (2,015) (1,690) -
Proceeds from notes payable 3,000 1,000 2,000
Proceeds from Federal Home Loan Bank advances 4,000 6,000 5,000
Repayment of Federal Home Loan Bank advances (4,798) (2,300) (8,000)
Decrease in Federal funds purchased - - (4,000)
Issuance of convertible subordinated debentures 755 400 85
Repayment of subordinated debentures - - (315)
Issuance of common stock 1,137 710 661
ESOP loan for common shares purchased by ESOP - (147) (63)
Principal payment on ESOP loan 46 26 28
Dividends paid (81) - -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 23,479 26,947 33,650
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (6,726) 2,147 11,183
Cash and cash equivalents at beginning of year 20,559 18,412 7,229
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,833 $ 20,559 $ 18,412
==============================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest on deposits $ 8,647 $ 8,784 $ 6,337
Interest on borrowings 1,373 1,144 731
Income taxes 352 121 (10)
Selected noncash investing activities (see Notes 3 and 4)
Other real estate acquired in settlement of loans $ - $ 226 $ -
</TABLE>
See accompanying notes to Consolidated Financial Statements
F-18
<PAGE> 93
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Success Bancshares, Inc. (the Company), through its subsidiary, Success National
Bank (the Bank), provides a full range of financial services to customers
through eight locations in the Chicagoland metropolitan area.
(a) Basis of Presentation: The consolidated financial statements of Success
Bancshares, Inc. include the accounts of the Company and its majority-owned
subsidiary, Success National Bank, and its wholly-owned subsidiary, Success
Realty Ventures, Inc. ("Success"). The Company owns 100% of the Bank's
preferred stock and approximately 92% of the Bank's common stock.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
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. Significant estimates which are particularly
susceptible to change in a short period of time include the determination
of the allowance for possible loan losses. Actual results could differ from
those estimates.
(b) Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
noninterest-bearing amounts due from banks, interest-bearing demand
balances with banks, and federal funds sold. Generally, federal funds are
sold or purchased for one-day periods. Cash flows from loans originated by
the Bank and deposits are reported net.
(c) Securities: Securities classified as held-to-maturity are those debt
securities the Company has both the positive intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are carried at
cost adjusted for amortization of premium and accretion of discount which
are recognized in interest income using the interest method over the period
to maturity. Transfer of debt securities into the held-to-maturity
classification from the available-for-sale classification are made at fair
value on the date of transfer. The unrealized gain or loss on the date of
transfer is retained as a separate component of stockholders' equity and in
the carrying value of the held-to-maturity securities. Such amounts are
amortized over the remaining contractual lives of the securities by the
interest method.
Securities classified as available-for-sale are those debt securities that
the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are carried at
fair value. The difference between fair value and amortized cost results in
an unrealized gain or loss. Unrealized gains or losses are reported as
increases or decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of the cost
of specific securities sold, are included in earnings. Premiums and
discounts are recognized in interest income using the interest method over
their contractual lives.
(d) Real Estate Loans Held-for-Sale: Real estate loans held-for-sale are
carried at the lower of cost, net of loan fees collected, or fair value in
the aggregate. Loans are sold without recourse with servicing retained.
Gains and losses from the sale of loans are determined based upon the net
proceeds and the carrying value of the loans sold after allocating cost to
servicing rights retained. Net unrealized losses are recognized in a
valuation allowance by charges to income.
Transfer of loans held for sale to portfolio are accounted for at the lower
of cost or fair value at the date of transfer. The excess of the carrying
value over the fair value as of the transfer date is accreted into interest
income over the remaining estimated lives of the transferred loans. Cost
approximated fair value for loans held for sale as of December 31, 1996 and
1995.
F-19
<PAGE> 94
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff ("portfolio" loans) are
stated net of unearned income, deferred loan fees, unaccreted discounts and
the allowance for loan losses. Interest on loans is accrued over the term
of the loan based on the amount of principal outstanding. For impaired
loans, accrual of interest is discontinued on a loan when management
believes, after considering collection efforts and other factors, that the
borrower's financial condition is such that collection of interest is
doubtful. Interest income is subsequently recognized only to the extent
cash payments are received and the principal is considered fully
collectible. Discounts are accreted into income over the estimated lives of
the loans on a method that approximates the interest method. Loan
origination fees and costs are deferred and recognized over the life of the
loan as a yield adjustment.
Because some loans may not be paid in full, an allowance for loan losses is
recorded. Increases to the allowance are recorded by a provision for loan
losses charged to expense. Estimating the risk of loss and the amount of
loss on any loan is necessarily subjective. Accordingly, the allowance is
maintained at a level considered adequate to cover possible losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates
which are subject to change over time. A loan is charged-off by management
as a loss when deemed uncollectible, although collection efforts continue
and future recoveries may occur.
Commercial loans less than $100,000, residential real estate mortgages,
home equity loans, and installment loans are considered small balance
homogenous loan pools for purposes of impairment. All other loans are
specifically evaluated for impairment. Loans are considered impaired when,
based on current information and events, it is probable that the Company
will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The impairment is measured based on the
present value of expected future cash flows, or alternatively, the
observable market price of the loans or the fair value of the collateral.
However, for those loans that are collateral-dependent and for which
management has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of the
collateral. The amount of impairment, if any, and any subsequent changes
are included in the allowance for loan losses.
(f) Loan Servicing: The Bank generally retains the right to service mortgage
loans sold to others. The cost allocated to the mortgage servicing rights
retained has been recognized as a separate asset and is being amortized in
proportion to and over the period of estimated net servicing income.
Mortgage servicing rights are periodically evaluated for impairment based
on the fair value of those rights. Fair values are estimated using
discounted cash flows based on current market rates of interest. For
purposes of measuring impairment, the rights must be stratified by one or
more predominant risk characteristics of the underlying loans. The Bank
stratifies its capitalized mortgage servicing rights based on the
origination date and term of the underlying loans. The amount of impairment
recognized is the amount, if any, by which the amortized cost of the rights
for each stratum exceed their fair value.
(g) Premises and Equipment: Buildings, leasehold improvements, furniture, and
equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on the
straight-line method over estimated useful lives of the related assets.
Maintenance and repairs are expensed as incurred, while major improvements
are capitalized.
F-20
<PAGE> 95
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Income Taxes: The Company files a consolidated income tax return with its
subsidiaries. Its share of the consolidated income tax provision is
computed on a separate return basis.
Deferred taxes are provided using the liability method to recognize
deferred tax assets for deductible temporary differences and operating loss
and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
(i) Fair Value of Financial Instruments: The following methods and assumptions
were used by the Company in estimating the fair value of its financial
instruments. Cash and cash equivalents: The carrying amounts reported in
the balance sheet for cash and these short-term instruments approximate
their fair values.
Securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are determined using estimated
future cash flows, discounted at the interest rates currently being offered
for loans with similar terms to borrowers with similar credit quality.
Deposit liabilities: The fair value of deposits with no stated maturity,
such as noninterest bearing deposits, savings, NOW accounts, and money
market accounts, is equal to the amount payable on demand (i.e. the
carrying value.) Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Borrowed funds: The fair value is estimated using a discounted cash flow
calculation using the rate currently available for similar term borrowings.
Off-balance-sheet instruments: Fair values for the Company's
off-balance-sheet instruments are based on fees currently charged to enter
into similar agreements, taking into account the remaining term of the
agreements and the counterparties' credit standing. There is no material
difference between the notional amount and the estimated fair value of
off-balance sheet items which are primarily comprised of commitments to
extend credit which are generally priced at market at the time of funding.
(j) Earnings Per Common Share: Primary earnings per share are computed by
dividing net income, after deducting any dividends on preferred stock, by
the weighted average number of common shares outstanding. Stock options and
Series B Preferred Stock are regarded as common stock equivalents and are
considered in earnings per share calculations if dilutive. Fully diluted
earnings per share assume that the convertible subordinated debt is
converted into common stock upon issuance or at the beginning of the year,
as applicable, if the debt qualified as common stock equivalents. If the
result of the assumed conversion is dilutive, the interest expense on the
convertible subordinated debentures is eliminated while the number of
common stock shares is increased. In 1996 and 1994, the assumed conversion
of the subordinated debt would have had an antidilutive effect.
F-21
<PAGE> 96
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Current Accounting Development: The Financial Accounting Standards Board
has issued Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, which becomes effective
for transactions occurring after December 31, 1996, except for transactions
relating to secured borrowings and collateral for which the effective date
is December 31, 1997. The Statement does not permit earlier or retroactive
application. The Statement distinguishes transfers of financial assets that
are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those
assets is accounted for as a sale to the extent that consideration other
than beneficial interest in the transferred assets is received in exchange.
The Statement also establishes standards on the initial recognition and
measurement of servicing assets and other retained interests and servicing
liabilities, and their subsequent measurement. The statement requires that
debtors reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them in
certain circumstances in which the secured party has taken control of those
assets. In addition, the Statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through
payment to the creditor or by being legally released from being the primary
obligor under the liability either judicially or by the creditor.
Management does not believe the application of the Statement to
transactions of the Bank that have been typical in the past will materially
affect the Bank's financial position and results of operations.
(l) Prior Year Reclassifications: Certain reclassifications were made to make
the 1995 and 1994 financial statements comparable with the 1996
presentation.
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash and due from banks $ 13,780 $ 16,043
Interest-bearing demand balances with financial
institutions 53 3,016
Federal funds sold - 1,500
-------------------------------------------------------------------------------------------
$ 13,833 $ 20,559
===========================================================================================
</TABLE>
At December 31, 1996 and 1995, reserves of $2.5 million and $2.4 million,
respectively, were required to be held as cash or on deposit with the Federal
Reserve Bank of Chicago. These reserves do not earn interest.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of
securities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 748 $ 6 $ - $ 754
U.S. Government sponsored entities 5,846 2 (127) 5,721
States and political sub-divisions
exempt from Federal income taxes 1,565 6 (10) 1,561
Mortgage-backed securities 2,568 17 - 2,585
SBA guaranteed loan participation certificates 4,337 3 (50) 4,290
Other securities 110 126 - 236
- ------------------------------------------------------------------------------------------------------------
$ 15,174 $ 160 $ (187) $ 15,147
============================================================================================================
</TABLE>
F-22
<PAGE> 97
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 3 - SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities held-to-maturity
U.S. Treasury $ 242 $ 3 $ - $ 245
U.S. Government sponsored entities 15,368 279 (244) 15,403
States and political sub-divisions
Taxable 1,845 94 - 1,939
Exempt from Federal income taxes 6,906 147 (12) 7,041
Mortgage-backed securities 5,804 233 - 6,037
Other securities 2,395 - - 2,395
- ------------------------------------------------------------------------------------------------------------
$ 32,560 $ 756 $ (256) $ 33,060
============================================================================================================
</TABLE>
The amortized cost and fair value of securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities of mortgage backed
securities and SBA guaranteed loan participation certificates will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Therefore, these
securities are not included in the maturity categories in the following maturity
summary.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
--------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 2,965 $ 2,953 $ 702 $ 703
Due after one year through five years 3,783 3,728 9,987 10,001
Due after five years through ten years 1,411 1,355 10,444 10,605
Due after ten years 110 236 5,623 5,714
Mortgage-backed securities and SBA
guaranteed loan participation
certificates 6,905 6,875 5,804 6,037
- -----------------------------------------------------------------------------------------------------------
$ 15,174 $ 15,147 $ 32,560 $ 33,060
===========================================================================================================
</TABLE>
The amortized cost, gross unrealized gains and losses, and fair values of
securities at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 1,236 $ 15 $ (1) $ 1,250
U.S. Government sponsored entities 7,845 19 (221) 7,643
States and political sub-divisions
exempt from Federal income taxes 1,779 6 (16) 1,769
Mortgage-backed securities 555 1 - 556
SBA guaranteed loan participation certificates 4,293 66 - 4,359
Other securities 14 85 - 99
- -------------------------------------------------------------------------------------------------------------
$ 15,722 $ 192 $ (238) $ 15,676
=============================================================================================================
Securities held-to-maturity
U.S. Treasury $ 238 $ 8 $ - $ 246
U.S. Government sponsored entities 17,719 509 (321) 17,907
States and political sub-divisions
Taxable 1,845 161 - 2,006
Exempt from Federal income taxes 7,174 169 (16) 7,327
Mortgage-backed securities 6,384 384 - 6,768
Other securities 1,696 - - 1,696
- -------------------------------------------------------------------------------------------------------------
$ 35,056 $ 1,231 $ (337) $ 35,950
=============================================================================================================
</TABLE>
F-23
<PAGE> 98
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 3 - SECURITIES (CONTINUED)
Proceeds from sales of securities available-for-sale and realized gross gains
and losses in 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Securities available-for-sale
Proceeds from sales $ - $ 5,803 $ 4,718
Gross gains $ - $ 56 $ 61
Gross losses $ - $ 31 $ -
</TABLE>
Securities designated as held-to-maturity with an amortized cost of $2.3 million
and with net unrealized gains of $19,000 were transferred to available-for-sale
on December 13, 1995. This was a one-time transfer in accordance with the
transition provision of Statement 115.
During 1994, $32.7 million of securities available-for-sale were transferred to
the held-to-maturity portfolio at their fair value. The securities' amortized
cost exceeded fair value at the date of transfer by $1.5 million. Amortization
of this unrealized loss was $215,000, $223,000, and $91,000 for 1996, 1995, and
1994, respectively.
Securities with a carrying value of approximately $24.2 and $30.3 million at
December 31, 1996 and 1995, respectively, were pledged to secure public deposits
and for other purposes as required or permitted by law.
NOTE 4 - LOANS
Loans at December 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial $ 58,912 $ 45,217
Residential real estate - mortgage 41,586 32,880
Commercial real estate - mortgage 43,334 35,347
Real estate - construction 12,282 12,821
Home equity - first lien 21,975 21,485
Home equity - junior lien 21,218 16,335
Other loans 6,118 8,916
----------------------------------------------------------------------------------------------
Total loans 205,425 173,001
Less
Unearned discount (2) (3)
Deferred loan fees (261) (223)
Unaccreted discount resulting from loss on transfer of
loans from held for sale to portfolio (438) (451)
Allowance for loan losses (1,425) (1,189)
----------------------------------------------------------------------------------------------
Net loans $ 203,299 $ 171,135
==============================================================================================
</TABLE>
In 1996 and 1994, real estate loans held-for-sale with carrying value of
approximately $2.2 million and $9.7 million, respectively, were transferred to
portfolio. Losses of $74,000 and $572,000 were recognized for the difference
between fair value and cost basis on the transferred loans, in 1996 and 1994,
respectively.
F-24
<PAGE> 99
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 4 - LOANS (CONTINUED)
Activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,189 $ 1,000 $ 855
Provision for loan losses 310 207 250
Recoveries on loans previously charged-off 4 1 34
Loans charged-off (78) (19) (139)
- -------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,425 $ 1,189 $ 1,000
=============================================================================================================
</TABLE>
Impaired loan information as of and for the years ended December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Impaired loans for which an allowance has been provided $ 100 $ 795
Impaired loans for which no allowance has been provided 350 -
--------------------------------------------------------------------------------------------
Total loans determined to be impaired $ 450 $ 795
============================================================================================
Allowance provided for impaired loans, included in the
allowance for loan losses $ 3 $ 17
============================================================================================
Average recorded investment in impaired loans $ 694 $ 990
Interest income recognized from impaired loans $ 101 $ 118
Cash basis interest income recognized from impaired loans $ 94 $ 81
</TABLE>
As of December 31, 1994, the accrual of interest was discontinued on loans in
the amount of $258,000. If these loans had been current in accordance with their
original terms, additional gross income in the amount of $10,000 would have been
recorded in 1994.
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation by the
Company are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of these loans were approximately $53.4 and $55.2
million at December 31, 1996 and 1995, respectively.
Mortgage servicing rights in the amounts of $79,000 and $128,000 were
capitalized during the years ended December 31, 1996 and 1995, respectively.
Amortization of mortgage servicing rights was $101,000 and $21,000 in 1996 and
1995, respectively. As of December 31, 1996 and 1995 the valuation allowance for
mortgage servicing rights was none and $12,000, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land $ 2,454 $ 2,154
Building and leasehold improvements 4,458 2,916
Furniture and equipment 3,167 2,121
-----------------------------------------------------------------------------------------------
Total cost 10,079 7,191
Less accumulated depreciation and amortization 3,030 2,408
-----------------------------------------------------------------------------------------------
Net book value $ 7,049 $ 4,783
===============================================================================================
</TABLE>
The Company has agreed to acquire two branch buildings from another financial
institution in 1997 for $1.2 million.
F-25
<PAGE> 100
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 6 - DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Demand deposits:
Interest-bearing $ 47,620 $ 43,797
Non-interest-bearing 42,596 35,168
-----------------------------------------------------------------------------------------------
Total demand deposits 90,216 78,965
Savings 19,022 17,993
Money market 34,486 33,684
Other deposits 22,696 27,321
Time:
Due within one year 50,477 52,849
Due within one to two years 18,269 6,132
Due within two to three years 5,878 2,764
Due within three to four years 1,479 4,815
Due within four to five years 1,980 1,503
Due thereafter 602 1,282
-----------------------------------------------------------------------------------------------
Total time deposits 78,685 69,345
-----------------------------------------------------------------------------------------------
Total deposits $ 245,105 $ 227,308
===============================================================================================
</TABLE>
Time deposits in amounts of $100,000 or more were approximately $29.9 million
and $26.0 million at December 31, 1996 and 1995, respectively.
Interest expense on deposits for the years ending December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Interest-bearing demand $ 1,200 $ 1,062 $ 853
Savings 606 589 736
Money market 1,357 1,472 988
Other deposits 1,224 1,561 603
Time 4,245 4,087 3,252
------------------------------------------------------------------------------------------------
$ 8,632 $ 8,771 $ 6,432
================================================================================================
</TABLE>
NOTE 7 - BORROWING ARRANGEMENTS
Note payable at December 31, 1996 and 1995 is comprised of a $8.0 million
revolving line of credit with Cole Taylor Bank with interest at the prime rate
(8.25% at December 31, 1996) payable quarterly, maturing June 15, 1997.
Borrowings under the line of credit are limited to 50% of the Bank's
shareholders' equity. Proceeds of borrowings under the line of credit may only
be used to acquire or carry stock of one or more subsidiary banks. The revolving
line of credit is secured by the common and preferred stock of the Bank owned by
the Company.
The Bank can also borrow from the Federal Reserve Bank ("FRB") up to 75% of
loans pledged to the FRB. As of December 31, 1996 and 1995, there were no loans
pledged to the FRB and there were no borrowings outstanding at either date.
F-26
<PAGE> 101
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1996 and 1995, advances from the Federal Home Loan Bank of
Chicago ("FHLB") were as follows:
<TABLE>
<CAPTION>
Advance Amount
Maturity Interest Frequency of -----------------------------
Date Rate Rate Adjustment 1996 1995
---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
November, 1996 5.72% Fixed $ - $ 2,000
November, 1997 5.66% Fixed 2,000 2,000
May, 2002 (1) 6.83% Fixed 1,869 1,950
February, 2003 (1) 5.65% Fixed 1,283 -
---------------------------------------------------------------------------------------
$ 5,152 $ 5,950
=======================================================================================
</TABLE>
(1) This is a 15 year amortizing advance with a seven year balloon.
The Bank maintains a collateral pledge agreement with the FHLB covering secured
advances. Under this agreement, first mortgages on improved residential property
not more than 90 days delinquent are pledged as collateral. Total loans pledged
to secure advances at December 31, 1996 and 1995 were approximately $14.6
million and $17.8 million, respectively.
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are overnight repurchase
agreements with customers of the Bank and consist of primarily U.S. government
sponsored entity obligations.
The securities underlying the agreements are book-entry securities. During the
period, the securities were delivered by appropriate entry into a third-party
custodian's account designated by the Bank under a written custodial agreement
that explicitly recognizes the customer's interest in the securities. At
December 31, 1996, no material amount of agreements to repurchase securities
sold were outstanding with any individual customer. Securities sold under
agreements to repurchase averaged $4.1 million and $3.2 million during 1996 and
1995, respectively, and the maximum amounts outstanding at any month-end during
1996 and 1995 were $4.6 million and $5.3 million, respectively. The weighted
average rate paid during 1996 and 1995 was 4.20% and 4.99%, respectively, and
the weighted average rate at the end of 1996 and 1995 was 4.23% and 4.44%.
NOTE 10 - CONVERTIBLE SUBORDINATED DEBENTURES
In 1992, the Company issued $2.2 million of ten year 9% convertible subordinated
debentures (the debentures). The debentures pay interest semi-annually. The
debentures are convertible at any time prior to maturity into Class A common
stock at $12.75 per share. The Company can redeem the debentures (a) without
paying a premium if the book value per share of the Company's common stock
equals or exceeds the conversion price; or (b) with a premium of between 10% and
2% depending on the redemption date.
In November 1995, the Company began a private placement of units consisting of
$4,000 principal amount of ten year convertible subordinated notes (the Notes)
and 400 shares of Class A Common Stock. The interest on the notes is payable
semi-annually. The rate on the notes is 15% for notes in denominations less than
$100,000 and 17% for notes of $100,000 or more. The notes are convertible at any
time prior to maturity into Class A common stock at $23.50 per share. The
Company can redeem the notes (a) two years after issuance without paying a
premium if the book value per share of the Company's common stock equals or
exceeds the conversion price; or (b) with a premium of between 5% and 1%
depending on the redemption date.
F-27
<PAGE> 102
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10 - CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
The following table summarizes the debentures and notes outstanding at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
9% Debentures $ 2,012 $ 2,012
15% Notes 235 -
17% Notes 920 400
-----------------------------------------------------------------------------------------
$ 3,167 $ 2,412
=========================================================================================
</TABLE>
NOTE 11 - SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS
The preferred stock is cumulative and nonconvertible. Dividends are payable
quarterly based on the average prime rate in effect during the quarter. There
were no shares of preferred stock outstanding at December 31, 1996 or 1995.
The Series B preferred stock is noncumulative and each share is convertible into
one share of common stock. Dividends are payable quarterly at a rate established
by the Company's board of directors. All outstanding shares are held by the
Company's Employee Stock Ownership Plan.
Class A common stock carries a voting power of 1/20th of the original common
stock and requires a dividend of 115% of any dividend paid on the original
common stock.
The Company and the Bank are subject to various regulatory capital 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 Company's financial statements. The regulations require
the Company and the Bank to meet specific capital adequacy guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting principles.
The capital classifications are also subject to qualitative judgments by the
regulators about risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios (set forth in the
table below) of Tier I capital (as defined in the regulations) to total average
assets (as defined) ("leverage ratio") and minimum ratios of Tier I and total
capital (as defined) to risk-weighted assets (as defined). Management believes
that as of December 31, 1996 the Company and the Bank met all capital adequacy
requirements to which they were subject. As of December 31, 1996, the most
recent notification from the corresponding regulatory agency categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be considered well capitalized, under this framework, the Bank must
maintain minimum leverage, Tier I and Total Capital ratios as set forth in the
following table. There are no conditions or events since the notification that
management believes has changed the Bank's category.
F-28
<PAGE> 103
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 11 - SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS (CONTINUED)
The required ratios and the Company's actual ratios at December 31, 1996, are
presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital (to Risk Weighted Assets):
Consolidated $ 14,475 8.0% $ 14,481 8.0% N/A
Bank 20,207 11.2 14,471 8.0 $ 18,088 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 11,203 6.2 7,240 4.0 N/A
Bank 18,782 10.4 7,235 4.0 10,853 6.0%
Tier 1 Capital (to Average Assets):
Consolidated 11,203 4.4 7,688 4.0 N/A
Bank $ 18,782 7.3% $ 7,673 4.0% $ 12,788 5.0%
</TABLE>
Banking regulations limit the amount of dividends that the Bank may pay without
the prior approval of regulatory authorities. As of December 31, 1996,
approximately $1,003,000 of the Bank's retained earnings were available for
dividends without prior regulatory approval. In addition, the Company's debt
agreement with its lending institution requires the Bank to maintain minimum
capital requirements which serve to limit dividends from the Bank. Under the
debt agreement, the Company and the Bank are required to maintain minimum
capital of $7.5 million and $14 million, respectively, and minimum Tier I
capital to assets ratios of 3% and 6%, respectively. The Company's and Bank's
capital levels exceed these requirements. The debt agreement imposes a more
restrictive dividend limitation on the Bank than the banking regulations. The
debt agreement also requires the Bank to maintain an allowance for loan losses
of at least 7/10ths of 1% of total loans. In addition, the Bank's allowance for
loan losses must be at least 100% of the Bank's nonperforming loans.
Nonperforming loans and other real estate are also limited under the agreement
to 20% of the Bank's capital. The Bank may not declare a dividend, other than
for the purpose of the Company's debt service, without the written consent of
Cole Taylor Bank. The Company cannot declare cash dividends or acquire any of
its own stock without the written consent of Cole Taylor Bank.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan ("ESOP"), which also has
a 401(k) feature. The ESOP covers substantially all employees of the Bank. The
ESOP is internally leveraged. Loans from the Company to the ESOP to acquire
Company stock are recorded as a reduction of shareholders' equity. At December
31, 1996 and 1995, the fair value of unearned ("suspense") ESOP shares is not
materially different from the Company's loan to the ESOP. Suspense shares are
released and allocated to participants as the ESOP's debt to the Company is
repaid. Employer contributions, including any matching contribution for the
401(k) provision, are made at the discretion of the Bank's Board of Directors.
Contributions to the ESOP, which are not materially different from the fair
value of shares allocated to participants, were funded through dividends on the
Series B preferred stock during 1996. The fair value of dividends paid on
suspense shares was not material and was charged to retained earnings. Preferred
dividends of $81,000 were paid in 1996. During 1995 and 1994, contributions of
$72,000 and $50,000, respectively, were charged to compensation expense.
F-29
<PAGE> 104
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
Shares of the Company's stock held by the ESOP as of December 31, 1996 and 1995,
are shown in the following table. The allocated and unallocated shares as of
December 31, 1996 are approximations, as the 1996 participant allocation has not
yet been completed.
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C>
Shares allocated to participants 41,881 63,897
Suspense (unallocated) shares 12,908 29,257
----------------------------------------------------------------------------------------------
Total ESOP Shares 54,789 93,154
==============================================================================================
</TABLE>
A participant or beneficiary who receives a distribution of Company stock from
the ESOP has the right to require the Company, or the ESOP if the plan
administrator so elects, to purchase the shares at fair value within sixty days
of the distribution.
The Securities and Exchange Commission's Accounting Series No. 268 requires that
to the extent there are conditions (regardless of their probability of
occurrence) whereby holders of equity securities may demand cash in exchange for
their securities, the Company, must reflect the maximum possible cash
requirements related to those securities outside of stockholders' equity.
Accordingly, the Series B preferred stock and common stock owned by ESOP
participants is reflected on the accompanying balance sheet at its fair value.
NOTE 13 - STOCK OPTIONS
In the past, the Company's Board of Directors has granted nonqualified options
to various members of senior management. The outstanding stock options may be
exercised at any time by the respective officers through a period ending three
years after termination of employment with the Bank or the Company. There were
no such options granted during 1996 or 1995.
In 1995, the Company adopted a qualified incentive stock option plan for senior
officers of the Company with options to be granted at the fair value of the
stock as estimated by the Company's Board of Directors at the date of grant.
Under this plan, 170,000 shares of authorized but unissued common stock are
reserved for the granting of options. Vesting of the options is determined by
the Board of Directors and typically is over a period not exceeding four years.
Options must be exercised within ten years after the date of grant. The
following table summarizes data concerning stock options:
<TABLE>
<CAPTION>
Weighted
Common Shares Option Price Average
Under Option Per Share Exercise Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1993 & 1994 118,490 $1.82 - $6.09 $ 4.68
-----------------------------------------------------------------------------------------------------
Granted 38,250 $6.18 $ 6.18
-----------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 156,740 $1.82 - $6.18 $ 5.04
-----------------------------------------------------------------------------------------------------
Canceled (3,400) $6.09 $ 6.09
-----------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 153,340 $1.82 - $6.18 $ 5.02
=====================================================================================================
</TABLE>
At December 31, 1996, there are options exercisable for 127,840 shares at a
weighted average price of $4.79.
Grants under the plan are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
incentive stock option grants under the stock option plan. Had compensation cost
for the stock-based compensation plan been determined based on the grant date
fair values of awards, reported income and earnings per common share would have
been reduced to the pro forma amounts shown on the following page:
F-30
<PAGE> 105
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 13 - STOCK OPTIONS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock (In thousands):
As reported $ 702 $ 937 $ 263
Pro Forma $ 702 $ 904 $ 263
Primary earnings per common share:
As reported $ 0.66 $ 0.89 $ .25
Pro Forma $ 0.66 $ 0.86 $ .25
Fully diluted earnings per common share:
As reported $ 0.66 $ 0.86 $ .25
Pro Forma $ 0.66 $ 0.84 $ .25
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants during the year ended December 31, 1995; dividend yield of 0% for the
period; expected volatility of 0% for the period; risk free rate of return of
5.88%; and, expected life of 4 years.
Under the provisions of Statement No. 123, pro forma net income reflects only
options granted in 1995. Therefore, the full impact of calculating compensation
cost for stock options under Statement No. 123 is not reflected in the pro forma
net income amounts presented above because compensation cost for options granted
prior to January 1, 1995 is not considered.
The Company's Board of Directors has authorized each director to purchase up to
17,000 shares of the Company's $1 par value common stock per year. The purchase
price of the stock is its book value as of the end of the prior month. This
authorization must be renewed annually, and shares which are not purchased in
any year expire as of December 31 of that year.
NOTE 14 - INCOME TAXES
The deferred tax assets and liabilities consist of the following components as
of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 402 $ 311
Securities available for sale 398 488
Deferred loan fees 142 111
Premises and equipment 50 -
Stock options 12 12
Loans 170 175
Alternative minimum tax credit carryforward - 21
----------------------------------------------------------------------------------------------
1,174 1,118
----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment - 63
State income taxes 27 27
Loans - tax mark to market 159 40
Mortgage servicing rights 33 36
Other 21 16
----------------------------------------------------------------------------------------------
240 182
----------------------------------------------------------------------------------------------
Net deferred tax assets $ 934 $ 936
==============================================================================================
</TABLE>
F-31
<PAGE> 106
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 14 - INCOME TAXES (CONTINUED)
No valuation allowance was considered necessary.
Income tax expense (benefit) for the years ended December 31, 1996, 1995 and
1994, consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current $ 321 $ 468 $ (176)
Deferred (88) (208) (6)
- ----------------------------------------------------------------------------------------------------------
$ 233 $ 260 $ (182)
==========================================================================================================
</TABLE>
Reconciliations of income tax expense (benefit) computed at the statutory
federal income tax rate to the Company's income tax expense (benefit) for the
years ended December 31, 1996, 1995, and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 345 $ 407 $ 28
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 21 13 (37)
Nontaxable interest income (net of disallowed expenses) (141) (178) (197)
Other 8 18 24
- -----------------------------------------------------------------------------------------------------------
$ 233 $ 260 $ (182)
===========================================================================================================
</TABLE>
NOTE 15 - COMMITMENTS, CONTINGENCIES AND CREDIT RISK
Credit risk: The Company makes loans to, and obtains deposits from, customers
primarily in Lake County, Cook County, DuPage County, and McHenry County,
Illinois and surrounding areas. Most loans are secured by specific items of
collateral, including residential and commercial real estate and other business
and consumer assets. Collateral held varies but may include deposits held in
financial institutions; U.S. Treasury securities; other marketable securities;
income-producing commercial properties; residential real estate; accounts
receivable; and property, plant and equipment. The loan portfolio includes
concentration of loans for the long-term care industry. At December 31, 1996 the
Bank had $10.2 million of commitments to customers in the long-term care
industry, with $2.9 million drawn and outstanding. Credit losses arising from
these lending transactions compare favorably with the Bank's credit loss
experience on its portfolio as a whole.
Financial instruments with off-balance sheet risk: The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet financing needs of its customers. These financial instruments
include commitments to make loans, standby letters of credit, and unused lines
of credit. The Company's exposure to credit loss in the event of nonperformance
by the other parties is represented by the contractual amounts of the
instruments. The Company uses the same credit policy to make such commitments as
it uses for on-balance-sheet items.
At December 31, 1996 and 1995, the contract amount of these financial
instruments is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Financial instruments whose contract amount represents credit risk
Unused home equity lines of credit $ 45,195 $ 39,319
Unused commercial and other consumer lines of credit 33,531 25,780
Standby letters of credit 1,808 1,529
Commitments to make loans 5,199 10,258
</TABLE>
F-32
<PAGE> 107
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 15 - COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED)
Since many commitments to make loans expire without being used, the amounts
above do not necessarily represent future cash commitments. Collateral obtained
upon exercise of the commitment is determined using management's credit
evaluation of the borrower, and may include commercial and residential real
estate and other business and consumer assets.
Litigation: From time to time, the Company and the Bank are involved in
litigation, both as a defendant and as a plaintiff. Management believes that the
ultimate liability from such actions, if any, will not have a material effect on
the financial condition of the Company or the Bank.
Lease Commitments: The Bank leases branch facilities under noncancelable
operating lease agreements. Rent expense for branch facilities was $322,000,
$246,000, and $112,000 in 1996, 1995 and 1994, respectively, excluding taxes,
insurance and maintenance. The branch facilities are charged for their
proportionate share of taxes, insurance and maintenance costs plus monthly rent.
The minimum rental commitments, not including taxes, insurance and maintenance,
at December 31, 1996 under the leases are summarized below:
<TABLE>
<S> <C>
1997 $ 202,170
1998 144,540
1999 98,640
2000 98,640
2001 90,724
2002 and thereafter 59,668
-------------------------------------------------------------
Total $ 694,382
=============================================================
</TABLE>
NOTE 16 - RELATED PARTY TRANSACTIONS
In the normal course of business, certain executive officers, directors, and
companies with which they are affiliated have borrowed funds from the Bank. In
the opinion of management, these loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated parties. The activities in total
loans during 1996 is as follows (In thousands):
<TABLE>
<S> <C>
Balance as of January 1, 1996 $ 1,438
New loans 1,009
Repayments (394)
----------------------------------------------------------
Balance as of December 31, 1996 $ 2,053
==========================================================
</TABLE>
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of financial instruments at
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,833 $ 13,833 $ 20,559 $ 20,559
Investment securities 47,707 48,207 50,732 51,626
Loans held-for-sale 117 117 203 203
Loans 203,416 203,043 171,135 173,219
Financial liabilities:
Deposits $ 245,105 $ 245,865 $ 227,308 $ 228,127
Borrowed funds 18,975 19,719 14,395 14,087
</TABLE>
F-33
<PAGE> 108
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 17 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 1996.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are more likely to prepay in a falling rate
environment and less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION
Presented below are the condensed balance sheets as of December 31, 1996 and
1995 and statements of income and statements of cash flows for the years ended
December 31, 1996, 1995, and 1994 for Success Bancshares, Inc.:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary bank $ 388 $ 15
Investment in subsidiaries 17,496 14,052
Other assets 374 487
- ----------------------------------------------------------------------------------------------------------
$ 18,258 $ 14,554
==========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 4,815 $ 3,830
Note payable - Success Realty Ventures, Inc. 105 105
Subordinated convertible debt 3,167 2,412
Other liabilities 71 122
- ----------------------------------------------------------------------------------------------------------
Total liabilities 8,158 6,469
Stock owned by ESOP participants, net of ESOP loan 866 719
Shareholders' equity 9,234 7,366
- ----------------------------------------------------------------------------------------------------------
$ 18,258 $ 14,554
==========================================================================================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating income
Dividends from subsidiary bank $ 949 $ 830 $ 494
Interest and other income 32 47 33
- ------------------------------------------------------------------------------------------------------------
981 877 527
Operating expenses
Interest 695 640 424
Other expense 126 100 102
- ------------------------------------------------------------------------------------------------------------
821 740 526
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 160 137 1
Income tax benefit 319 263 189
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 479 400 190
Equity in undistributed income of subsidiaries 304 537 73
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 783 $ 937 $ 263
============================================================================================================
</TABLE>
F-34
<PAGE> 109
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 18 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 783 $ 937 $ 263
Adjustments to reconcile net income to net cash from
operating activities
Equity in undistributed income of subsidiaries (304) (537) (73)
Change in other assets and liabilities 62 (67) (116)
Other 15 - -
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 556 333 74
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of subsidiary bank stock (3,025) (1,084) (2,032)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,025) (1,084) (2,032)
CASH FLOWS FROM FINANCING ACTIVITIES Net change in:
Subordinated debt 755 400 (230)
Repayment of note payable (2,015) (1,690) -
Proceeds from note payable 3,000 1,000 -
Notes payable to subsidiary - 105 1,910
(Payment from) loan to ESOP 46 (122) (35)
Dividends on Series B preferred stock (81) - -
Issuance of common stock 1,137 710 661
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,842 404 2,306
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 373 (347) 348
Cash at beginning of year 15 362 14
- -----------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 388 $ 15 $ 362
===========================================================================================================
</TABLE>
NOTE 19 - SUBSEQUENT EVENTS
On July 23, 1997, the Company approved a 1.7 for 1 stock split effective July
30, 1997, on common shares. All references in the accompanying financial
statements to the number of common shares and per common share amounts have been
retroactively restated to reflect the stock split.
NOTE 20 - PRO FORMA EARNINGS PER SHARE CALCULATIONS (UNAUDITED)
As of the closing date of the Company's offering of up to 1,380,000 shares of
Common Stock registered with the Securities and Exchange Commission on a Form
S-1 Registration Statement (File No. 333-32561), substantially all of the
aggregate outstanding principal amount of the Company's 9% Convertible
Subordinated Debentures and 15% and 17% Convertible Subordinated Notes will be
converted into shares of Common Stock.
Accordingly, the Pro Forma Earnings Per Common Share calculations reflect the
effect of these transactions.
F-35
<PAGE> 110
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No person is authorized in connection with any offering made hereby to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or EVEREN Securities, Inc. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
security other than the Securities offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the securities offered
hereby to any person in any jurisdiction in which it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Company since the date of this Prospectus
or that the information contained herein is correct as of any date subsequent to
the date of this Prospectus.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary .......................... 3
Risk Factors ................................ 10
Use of Proceeds ............................. 15
Dividend Policy ............................. 15
Capitalization .............................. 16
Dilution .................................... 17
Terms of the Offering ....................... 19
Business .................................... 23
Selected Consolidated Financial Data ........ 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................. 33
Management .................................. 56
Certain Transactions ........................ 60
Principal Shareholders ...................... 61
Supervision and Regulation .................. 62
Description of Capital Stock ................ 68
Shares Eligible for Future Sale ............. 72
Legal Matters ............................... 73
Experts ..................................... 73
Available Information ....................... 73
Financial Statements ........................ F-1
</TABLE>
-------------
Until 25 days after the execution of the Public Offering Acknowledgment,
all dealers effecting transactions in the Securities, whether or not
participating in this Offering, may be required to deliver a Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
1,200,000 SHARES
[Logo]
COMMON STOCK
----------
PROSPECTUS
----------
EVEREN Securities, Inc.
September 19, 1997
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