U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission File Number 0-23235
-------
SUCCESS BANCSHARES, INC.
--------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-3497664
---------- ------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Marriott Drive, Lincolnshire, IL 60069
- ----------------------------------------------- ------
(Address of Principal Executive Offices) (Zip Code)
(847) 634-4200
---------------
(Registrant's Telephone Number, Including Area Code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock 2,916,624 shares $0.0001 per value, outstanding as of November 10,
1997.<PAGE>
FORM 10-Q
SUCCESS BANCSHARES, INC.
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets
Unaudited consolidated Statements of Operations
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated
Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6.
(a)Exhibits
11. Computation of Earnings Per Share
27. Financial Data Schedule
(b)Reports on Form 8-K
None
Form 10-Q Signature Page<PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
----------- ------------
(In Thousands, except share date)
ASSETS
Cash and equivalents $ 17,618 $ 13,833
Interest-bearing time deposits with
financial institutions 99 99
Securities available-for-sale 18,350 15,147
Securities held-to-maturity (fair value $32,313
and $33,060 in 1997 and 1996, respectively) 31,691 32,560
Real estate loans held-for-sale -- 117
Loans, less allowance for loan losses of $1,892
at 1997 and $1,425 at 1996 264,071 203,299
Premises and equipment, net 8,589 7,049
Interest receivable 2,631 1,761
Other assets 2,553 2,484
----------- ----------
TOTAL ASSETS $ 345,602 $ 276,349
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 41,721 $ 42,596
Interest bearing deposits 261,786 202,509
----------- -----------
Total deposits 303,507 245,105
Note payable 7,415 4,815
Federal Home Loan Bank advances 10,775 5,152
Securities sold under repurchase agreements 6,513 4,255
Demand notes payable to U.S. Government 545 1,586
Convertible subordinated debentures 3,167 3,167
Interest payable and other liabilities 2,132 1,645
---------- -----------
TOTAL LIABILITIES 334,054 265,725
---------- ----------
Minority Interest in Subsidiary Bank 557 524
Stock owned by Employee Stock Ownership Plan (ESOP)
participants; 91,104 common shares at 1997 and
54,789 Series B preferred shares at 1996, net of
ESOP loan of $187 and $137 in 1997 and 1996,
respectively 952 866
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 1,000,000
shares authorized, none issued -- --
Common stock. $0.001 par value at 197 and $1 at
1996, 7,500,000 shares authorized, 1,141,863
and 953,391 shares issued and outstanding at
1997 and 1996, respectively 1 955
Class A common stock, $1 par value, 1,000,000
shares authorized, 115,500 shares issued and<PAGE>
outstanding at 1996 -- 116
Additional Paid-in capital 5,684 4,372
Retained earnings 4,767 4,370
----------- -----------
10,452 9,813
Unrealized loss on securities, net of tax (413) (579)
---------- -----------
TOTAL SHAREHOLDERS' EQUITY 10,039 9,234
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 345,602 $ 276,349
=========== ===========
See notes to unaudited consolidated financial statements.<PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
1997 1996
----------- -----------
(In thousands, except share data)
Interest income:
Loans (including fee income) $ 5,611 $ 4,202
Investment securities 708 861
Other interest income 40 117
---------- -----------
6,359 5,180
Interest expense:
Deposits 2,843 2,162
Note payable 140 154
Convertible subordinated debentures 94 129
Other borrowings 317 202
---------- -----------
3,394 2,647
---------- -----------
Net interest income 2,965 2,533
Provision for loan losses 273 41
---------- -----------
Net interest income after provision
for loan losses 2,692 2,492
Other operating income:
Service charges on deposit accounts 480 360
Gain on sale of loans 26 18
Credit card processing income 1,501 1,329
Other noninterest income 38 29
---------- -----------
2,045 1,736
Other operating expenses:
Salaries and employee benefits 1,507 1,331
Occupancy and equipment expense 501 451
Data processing 232 151
Credit card processing expenses 1,373 1,277
Other noninterest expenses 746 682
---------- -----------
4,359 3,892
Minority interest in income of subsidiary bank 13 30
---------- ---------
Income before income taxes 365 306
Income tax expense 83 85
----------- -----------
Net income 282 221
Preferred stock dividends -- 27
----------- -----------
Net income applicable to common stock $ 282 $ 194
=========== ===========
Earnings per common and common equivalent share:
Primary earnings per share $ 0.22 $ 0.17<PAGE>
Weighted average common and common equivalent
shares outstanding 1,297,603 1,296,474
Fully diluted earnings per share $0.21 $0.17
Weighted average fully diluted shares outstanding 1,624,585 1,296,474
See notes to unaudited consolidated financial statements.<PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
1997 1996
----------- -----------
(In thousands, except share data)
Interest income:
Loans (including fee income) $ 15,299 $ 12,269
Investment securities 2,101 2,286
Other interest income 174 193
---------- -----------
17,574 14,748
Interest expense:
Deposits 7,770 6,341
Note payable 329 285
Convertible subordinated debentures 279 279
Other borrowings 741 548
---------- -----------
9,119 7,453
---------- -----------
Net interest income 8,455 7,295
Provision for loan losses 501 169
---------- -----------
Net interest income after provision
for loan losses 7,954 7,126
Other operating income:
Service charges on deposit accounts 1,397 1,044
Gain on sale of loans 54 100
Credit card processing income 4,346 3,717
Other noninterest income 161 174
---------- -----------
5,958 5,035
Other operating expenses:
Salaries and employee benefits 4,385 4,069
Occupancy and equipment expense 1,480 1,258
Data processing 720 442
Credit card processing expenses 4,138 3,490
Other noninterest expenses 2,256 2,114
---------- -----------
12,979 11,373
Minority interest in income of subsidiary bank 20 43
---------- ---------
Income before income taxes 913 745
Income tax expense 271 177
----------- -----------
Net income 642 568
Preferred stock dividends 40 54
----------- -----------
Net income applicable to common stock $ 602 $ 514
=========== ===========
Earnings per common and common equivalent share:
Primary earnings per share $ 0.50 $ 0.44<PAGE>
Weighted average common and common equivalent
shares outstanding 1,284,007 1,278,379
Fully diluted earnings per share $0.49 $0.44
Weighted average fully diluted shares outstanding 1,651,231 1,278,379
See notes to unaudited consolidated financial statements. <PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1997 1996
----------- -----------
(in thousands)
Net cash provided by operating activities $ 1,221 $ 3,643
----------- -----------
Cash Flows from Investing Activities:
Proceeds from maturities of available-for-
sale securities 3,495 1,570
Purchase of available-for-sale securities (6,479) (2,143)
Purchase of held-to-maturity securities -- (615)
Proceeds from maturities of held-to-maturity
securities 954 2,364
Loans made to customers, net (61,121) (17,592)
Premises and equipment expenditures (2,169) (2,060)
Purchase of subsidiary bank stock (1) (40)
----------- -----------
Net cash (used in) investing activities (65,321) (18,516)
----------- -----------
Cash Flows from Financing Activities:
Decrease in non-interest bearing deposits (875) (765)
Increase in interest bearing deposits 59,277 6,685
Increase (decrease) in demand notes payable
to U.S. Government (1,041) 513
Increase in securities sold under agreements
to repurchase 6,520 1,699
Repayments of notes payable (400) (1,415)
Proceeds from notes payable 3,000 3,000
Net increase in Federal Home Loan Bank advances 1,361 3,202
Issuance of convertible subordinated debentures -- 755
Issuance of common stock 133 1,160
Loan to ESOP (50) --
Dividends paid (40) (54)
----------- -----------
Net cash provided by financing activities 67,885 14,780
----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 3,785 (93)
Cash and equivalents at beginning of period 13,833 20,559
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 17,618 $ 20,466
=========== ===========
See notes to unaudited consolidated financial statements.<PAGE>
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 September 30, 1997 are not necessarily
indicative of the results expected for the year ended December 31, 1997.
NOTE 2 - 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.
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, convertible debentures and stock options to employees), 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:<PAGE>
Note 2 - Recent Accounting Developments, continued
For the three For the nine
months ended months ended
September 30 September 30
1997 1996 1997 1996
-------------------------------
Basic earnings per share $0.23 $0.16 $0.51 $0.44
Diluted earnings per share 0.21 0.15 0.47 0.42
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 3 - Subsequent Events
The Company completed a public offering of common stock in October 1997 in
which it sold 1,380,000 shares of $0.0001 par value common stock at $12.50 per
share. The net offering proceeds of this offering were approximately $15.7
million. The proceeds will be used to pay off the $7.4 million note payable
and to support the future growth of the Company.
Note 4 - 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 the assumed conversion of
the subordinated debt would have had an antidilutive effect.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's principal business is conducted by its majority owned subsidiary,
Success National Bank (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.
Operating Results
For the three months ended September 30, 1997, net income was $282,000 or $0.22
per share, an increase of 27.6% from the net income of $221,000 or $0.17 per
share for the same period in 1996. For the first nine months of 1997 net
income was $642,000 or $0.50 per share, an increase of $74,000 or 13.0% from
net income of $568,000 or $0.44 per share for the same period in 1996.
Net Interest Income
The major source of earnings for the Company is net interest income. The
related net interest margin represents the net interest income as a percentage
of average earning assets during the period. The following table sets forth
the average daily balances, net interest income and expenses 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.<PAGE>
Nine Months Ended September 30,
1997 1996
Average Average Average Average
Assets Balance Interest Rate Balance Interest Rate
------------------------------------------------
(Dollars in thousands)
Loans (1) $226,076 $15,308 9.03% $178,905$12,274 9.15%
Taxable investment securities 39,043 1,777 6.07 40,370 1,947 6.43
Investment securities exempt
from Federal income taxes 8,236 468 7.58 8,878 504 7.57
Interest bearing deposits with
financial institutions 1,803 79 5.84 1,970 85 5.75
Other interest earnings assets 2,343 95 5.41 2,770 108 5.2
-------- ------- ----- -------- ------ ------
Total interest earning assets $277,501 $17,727 8.52% 232,893$14,918 8.54%
Non-interest earning assets 24,426 18,685
-------- --------
Total assets $301,927 $251,578
======== ========
Liabilities & Shareholders' Equity
Deposits:
NOW & money market accounts $84,500 $2,162 3.41% $75,083 $1,672 2.97%
Savings deposits 19,647 487 3.3 18,249 437 3.19
Time deposits 118,067 5,121 5.78 94,268 4.23 5.99
Notes payable 5,137 329 8.54 3,894 285 9.76
Other borrowings 21,111 1,020 6.44 16,544 827 6.67
-------- ------- ----- -------- ------ ------
Total interest bearing
liabilities 248,462 9,119 4.89 208,038 7,453 4.78
Demand deposits - non-interest
bearing 40,336 32,768
Other non-interest bearing
liabilities 2,078 1,089
Minority interest in subsidiary
bank 539 512
Shareholder's equity (2) 10,512 9,171
-------- --------
Total liabilities &
shareholders' equity $301,927 $251,578
======== ========
Net Interest Income $8,608 $7,465
====== ======
Net Interest Margin (annualized) 4.14% 4.27%
===== =====
(1) Non-accrual loans are included in average loans.
(2) Includes stock owned by Employee Stock Ownership Plan ("ESOP")
participants, net of ESOP loan.
The decline in annualized net interest margin for the nine months ended
September 30, 1997 compared with the same period of 1996, is primarily
attributable to a decline in the rate earned on loans as market pressures
forced the Bank to be more competitive in commercial loan pricing as well as<PAGE>
the effect of promotional rate home equity products. The situation was further
impacted by promotional deposit programs to fund the substantial growth
experienced by the Company. To the extent the Company continues to grow
utilizing promotional products, the net interest margin could experience
further compression.
The following table represents a reconciliation of fully tax equivalent net
interest income:
(thousands)
Fully tax equivalent net interest income for the
nine months ended September 30, 1996 $7,465
Change due to average earnings assets fluctuations 1,474
Change due to interest rate fluctuations (331)
------
Fully tax equivalent net interest income for the
nine months ended September 30, 1997 $8,608
======
Provision for Loan Losses
The provision for loan losses increased to $273,000 for the quarter ended
September 30, 1997 versus $41,000 for the comparable period for the prior year.
For the nine months ended September 30, 1997 the provision for loan losses was
$501,000, compared with $169,000 in the preceding year. These increased
provisions were required to support the growth of the Company's loan portfolio,
as more fully discussed below.
Other Operating Income
Other operating income for the three and nine months ended September 30, 1997
was $2.0 million and $6.0 million, respectively. These figures for the three
and nine months ended September 30, 1996 were $1.7 million and $5.0 million,
respectively. The increase in other operating income for these periods
resulted primarily from increased service charges on deposit accounts directly
attributable to the $70.3 million (30.1%) increase in deposit accounts from
September 30, 1996 to September 30, 1997, and an increase in credit card
processing income due primarily to a 15.2% increase in the amount of credit
card sales processed through the nine months ended September 30, 1997, when
compared with the same period in the prior year.
Other Operating Expenses
In the third quarter of 1997 other operating expenses increased $467,000 and
represented a 12.0% increase from the comparable period in 1996 of $3.9
million. This increase reflects the higher level of expenditures required to
support the Company's growth. Salaries and employee benefits increased to $1.5
million for the three months ended September 30, 1997 versus $1.3 million for
the same period for the prior year. This increase of $176,000 reflects
increased staff to support the growth of deposit and loan accounts at existing
banking locations, which are required to maintain high levels of customer
service as well as the staffing requirements of two new locations opened in
1997 (downtown Deerfield and Arlington Heights).
Other operating expenses for the nine months ended September 30, 1997 were
$13.0 million and represented a $1.6 million or 14.1% increase from the same
period in 1996. Salaries and employee benefits were $4.4 million and were
$316,000 higher than the same period in 1996 for the reasons previously stated.<PAGE>
Data processing expenses increased $278,000 for the nine months ended September
30, 1997, compared with the same period in 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. Additionally, credit card
processing expenses of $4.1 million for the nine months ended September 30,
1997 were $648,000 higher than the prior year due to the increase in the amount
of credit card sales processed.
Income Taxes
The Company recorded income tax expense of $83,000 for the three months ended
September 30, 1997 compared to income tax expense of approximately $85,000 in
the same period of 1996. For the nine months ended September 30, 1997 and
1996, income tax expense was $271,000 and $177,000, respectively which increase
is attributed to an increase in earnings before taxes.
Financial Condition
Loans
The loan portfolio is the largest category of the Company's interest earnings
assets. Since December 31, 1996 total loans as a percentage of total assets
have increased to 77.1 % at September 30, 1997, from 74.3 %.
The increase in loans outstanding has been a result of the Bank's active
solicitation of new lending relationships in the commercial area and through
the utilization of a 7.5% three year fixed rate home equity loan promotion
during 1997.
The following table sets for the composition of the loan portfolio:
September 30, 1997 December 31, 1996
Percent of Percent of
Amount Portfolio Amount Portfolio
------------------------------------------
(Dollars in thousands)
Commercial $80,784 30.31% $58,912 28.68%
Real estate - construction 13,573 5.09 12,282 5.98
Real estate - mortgage 99,547 37.36 84,920 41.34
Home equity 62,955 23.62 43,193 21.03
Installment 9,286 3.46 5,615 2.73
Credit Cards 401 0.15 503 0.24
------- ------- ------- -------
Total gross loans 266,546 100.00% 205,425 100.00%
======= =======
Unearned discount - (2)
Net deferred loan fees (204) (261)
Unaccreted discount resulting
from loss on transfer of loans
held for sale to portfolio (379) (438)
-------- --------
Loans net of unearned discount
and net deferred loan fees 265,900 204,724
Allowance for loan losses (1,892) (1,425)
-------- --------
Net loans $264,071 $203,299
======== ========<PAGE>
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 Company has a reporting and control system to monitor non-performing loans.
The following table provides certain information on the Company's
non-performing loans at the dates indicated.
September 30, December 31,
1997 1996
------------- -------------
(Dollars in thousands)
Non-accrual $1,109 $ -
90 days or more past due, still accruing 660 118
Restructured - -
------ -------
Total non-performing loans $1,769 $118
====== ======
Non-performing loans to total loans, net of
unearned discount and net deferred loan fees 0.67% 0.06%
===== ======
Non-performing loans to allowance for
loan losses 108.59% 8.28%
======= =====
The increase in non-performing loans of $1.7 million from December 31, 1996 to
September 30, 1997 is primarily attributable to ten loans. Of these, 3 loans
(totaling $642,000) are 90 days or more past due but still accruing interest.
Two of these loans, totaling $303,000 are secured by a first lien on
residential real estate or a second lien where the Bank also holds the first
lien. The remaining loan, for $339,000, is a construction loan on residential
units on which the Company holds a partial first lien and second lien. Should
management's view of the collectibility of these loans change, they may be
transferred to non-accrual status. The other seven large non-performing loans
are comprised of two residential mortgages totaling $386,000, and five
commercial loans (totaling $643,000) which are classified as non-accrual. 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
non-accrual 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 non-accrual 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<PAGE>
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 to 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 September 30, 1997 and December 31, 1996
were approximately $474,000 and $983,000, respectively. Loans in this category
generally include loans that were classified for regulatory purposes. The
decrease in this category is attributed to the migration of some loans into the
more serious "non-performing" category. At September 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 September 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 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.
The following table summarizes transactions in the allowance for loan losses:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------- ------ ------- -------
(Dollars in thousands)
Allowance at beginning of period $1,629 $1,266 $1,425 $1,189
Charge-offs 19 11 74 65
Recoveries (9) (1) (40) (4)
------ ------ ------ ------
Net charge-offs 10 10 34 61
------ ------ ------ ------
Provision for loan losses 273 41 501 169
------ ------ ------ ------
Allowance at end of period $1,892 $1,297 $1,892 $1,297
====== ====== ====== ======
Allowance to total loans, net of
unearned discount and net
deferred loan fees 0.71% 0.72% 0.71% 0.72%<PAGE>
===== ===== ===== =====
Net charge-offs to average
loans outstanding
(annualized) 0.01% 0.01% 0.02% 0.05%
===== ===== ===== ======
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 a consultant
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.
Deposits
The following table sets forth deposits at the periods indicated:
September 30, December 31,
1997 1996
------------ ----------
(Dollars in thousands)
NOW and money market accounts $92,796 $82,106
Savings deposits 18,260 19,022
Time deposits 150,730 101,381
Demand deposits - non-interest bearing 41,721 42,596
------- --------
Total $303,507 $245,105
======== ========
The increase in NOW and money market accounts is a result of a 5.12 % APY NOW
account promotion run during 1997. The increase in time deposits occurred
through promotional pricing and was to fund the additional increase in the
Bank's loan portfolio.
Liquidity and Capital Resources
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 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.<PAGE>
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 1 capital (as defined in the regulations) to total average
assets (as defined) ("leverage ratio") and minimum ratios of Tier 1 capital and
total capital (as defined) to risk-weighted assets (as defined). As of
September 30, 1997, the Company's actual total capital to risk-weighted assets
ratio of 6.52% 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 September 30, 1997, the most recent notification from
the corresponding regulatory agency categorized the Bank as adequately
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.
The required ratios and the Company's and Bank's actual ratios at September 30,
1997, are presented below:
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
As of September 30, 1997 Actual Ratio Actual Ratio Actual Ratio
------------ -------------- -------- ------
Total Capital (to Risk Weighted Assets):
Company $15,700 6.52% $19,275 8.0% N/A
Bank 23,993 9.98 19,238 8.0 $24,048 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Company 11,961 4.96 9,637 N/A
Bank 22,101 9.19 9,619 4.0 14,429 6.0
Tier 1 Capital (to Total Average Assets):
Company 11,961 3.96 12,077 4.0 N/A
Bank $22,101 7.33% $12,059 4.0% $15,074 5.0%
Operating Investing and Financing Activities
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 consists
primarily of earnings. Net cash used in investing activities, consisting
primarily of loan and investment funding, was $65.3 million and $18.5 million
for the nine months ended September 30, 1997 and 1996, respectively. The
increased usage is attributed to a much greater volume of loan closings as a
result of the Company's growth strategy. Net cash provided by financing
activities, consisting principally of deposit growth, was $67.9 million and
$14.8 million for the nine months ended September 30, 1997 and 1996,
respectively.
Forward Looking Statements<PAGE>
Statements made about the Company's future economic performance, strategic
plans or objectives, revenues or earnings projections, or other financial items
and similar statements are not guarantees of future performance, but are
forward looking statements. By their nature, these statements are subject to
numerous uncertainties that could cause actual results to differ materially
from those in the statements. Important factors that might cause the Company's
actual results to differ materially include, but are not limited to, the
following:
. Federal and state legislative and regulatory developments;
. The impact of continued loan and deposit promotions on the Company's net
interest margin;
. The impact of opening, staffing and operating new branch facilities;
. Changes in management's estimate of the adequacy of the allowance for loan
losses;
. Changes in the level and direction of loan delinquencies and write-offs;
. Interest rate movements and their impact on customer behavior and (the
Company's) net interest margin;
. The impact of repricing and competitors' pricing initiatives on loan and
deposit products;
. The Company's ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace;
. The Company's ability to access cost effective funding; and
. Economic conditions<PAGE>
PART II OTHER INFORMATION
Item 2(d). Changes in Securities and use of Proceeds
Effective Date of the Company's Registration Statement: September 19, 1997
Commission File Number: 333-32561
Date the offering commenced: September 19, 1997
Names of Managing Underwriters: EVEREN Securities, Inc.
Class of Securities Registered: Common Stock
Amount Registered and Sold: 1,380,000 Shares
Aggregate Price of Offering Amount Registered and Sold: $17,250,000
Underwriter's discounts and commissions 905,625
Finders fees -
Expenses paid to or for underwriters 100,000
Other expenses 550,000
-----------
Total expenses 650,000
-----------
Net offering proceeds $15,694,375
===========
Use of net offering proceeds:
Repayment of principal on the amount outstanding under the
Company's $8 million revolving line of credit $7,415,000
Contributed to the Bank to support continued growth of the
Bank's loan portfolio 6,000,000
Maintained at Company for cash flow 2,279,375
-----------
$15,694,375
===========
Item 4. Matters Submitted to a Vote of Security Holders
(a). The annual meeting of shareholders was held on July 23, 1997.
(c). At the annual meeting of shareholders the following matters were submitted
to a vote of the shareholders:
1. Proposal to approve an Amendment to the Company's Restated Certificate
of Incorporation that permitted the conversion of each share of Class A Common
Stock, $1.00 par value per share, into 0.8749 shares of Common Stock, $1.00 par
value per share. Only holders of Class A Common Stock were allowed to vote on
this matter.
Votes for: Votes Against: Abstained:
73,900 None None <PAGE>
2. Proposal to approve an Amendment to the Company's Restated Certificate of
Incorporation that permitted the conversion, at the option of the Company, of
each share of Series B Preferred Stock, $1.00 par value per share, into (1)
share of Common Stock, $1.00 par value per share. Only holders of the Series B
Preferred Stock were allowed to vote on this matter.
Votes for: Votes Against: Abstained:
44,784 448 119
3. Proposal to approve an Amendment to the Company's Restated Certificate of
Incorporation that (i) eliminated the existing class of Perpetual Cumulative
Non-Voting Preferred Stock, $25.00 par value per share, and (ii) created a new
class of "Blank Check" Preferred Stock.
Votes for: Votes Against: Abstained:
528,113 1,605 1,796
4. Proposal to approve an Amendment to the Company's Restated Certificate of
Incorporation that (i) increased to 7,500,000 the authorized number of shares
of Common Stock available for issuance, and (ii) changed the par value of each
share of Common Stock from $1.00 to $0.001.
Votes for: Votes Against: Abstained:
526,036 2,078 3,401
5. Proposal to approve an Amendment of the Company's Restated Certificate of
Incorporation to provide for a staggered Board of Directors.
Votes for: Votes Against: Abstained:
506,626 23,353 1,535
6. Proposal to approve the Company's Second Restated Certificate of
Incorporation.
Votes for: Votes Against: Abstained:
528,408 1,448 1,658
7. The election of seven directors to the Board of Directors to hold office for
terms as indicated:
Term Votes Votes
Director: Class: Ends: For: Against: Abstained:
Saul D. Binder III 2,000 531,266 248 -
Charles G. Freund I 1,998 530,912 602 -
Avrom H. Goldfeder II 1,999 531,266 248 -
Samuel Kahan I 1,998 531,266 248 -
Sherwin Koopmans II 1,999 531,266 248 -
George M. Ohlhausen III 2,000 531,266 248 -
Norman Rich III 2,000 530,912 602 - <PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUCCESS BANCSHARES, INC.
--------------------------
Registrant
DATE: November 14, 1997 /s/Saul D. Binder
---------------------------
Saul D. Binder
President and Chief Executive Officer
DATE: November 14, 1997 /s/Steven A. Covert
------------------------------
Steven A. Covert
Executive Vice President
and Chief Financial Officer<PAGE>
Exhibit 11.1
Computation of Earnings Per Common Share
(In thousands, except share amounts)
Three Months Nine Months
Ended Ended
September 30, September 30
1997 1996 1997 1996
---------------------------------------
Primary Earnings
Net income applicable to common stock $282 $194 $602 $514
Dividends on convertible preferred stock - 27 40 54
------ ----- ----- -----
Net income $282 $221 $642 $568
====== ===== ===== =====
Shares:
Weighted average number of common
and common equivalent shares
outstanding 1,297,603 1,296,474 1,284,007 1,278,379
Primary earnings per common and
common equivalent share $0.22 $0.17 $0.50 $0.44
===== ===== ===== =====
Fully Diluted Earnings
Net income applicable to common stock $282 $194 $602 $514
Dividends on convertible preferred stock - 27 40 -
Net interest expense related to
convertible debt 58 - 171 -
----- ----- ----- -----
Net income as adjusted $340 $221 $813 $568
===== ===== =====
Shares:
Weighted average number of common
and common equivalents shares
outstanding 1,297,603 1,296,474 1,284,008 1,278,379
Assuming conversion of convertible
debt 326,982 - 367,224 -
--------- --------- --------- ---------
Weighted average number of common
and common equivalents shares
outstanding as adjusted 1,624,585 1,296,474 1,651,231 1,278,379
Fully diluted earnings per common and
common equivalent share $0.21 $0.17 $0.49 $0.44
===== ===== ===== =====<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly unaudited financial statements of Success Bancsharees, Inc. for the
nine months ended September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,353
<INT-BEARING-DEPOSITS> 265
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,350
<INVESTMENTS-CARRYING> 31,691
<INVESTMENTS-MARKET> 32,313
<LOANS> 265,900
<ALLOWANCE> 1,892
<TOTAL-ASSETS> 345,602
<DEPOSITS> 303,507
<SHORT-TERM> 18,473
<LIABILITIES-OTHER> 2,132
<LONG-TERM> 9,942
0
0
<COMMON> 5,685
<OTHER-SE> 4,354
<TOTAL-LIABILITIES-AND-EQUITY> 345,602
<INTEREST-LOAN> 15,299
<INTEREST-INVEST> 2,101
<INTEREST-OTHER> 174
<INTEREST-TOTAL> 17,574
<INTEREST-DEPOSIT> 7,770
<INTEREST-EXPENSE> 9,119
<INTEREST-INCOME-NET> 8,455
<LOAN-LOSSES> 501
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,979
<INCOME-PRETAX> 913
<INCOME-PRE-EXTRAORDINARY> 913
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 642
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
<YIELD-ACTUAL> 4.14
<LOANS-NON> 1,109
<LOANS-PAST> 660
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 474
<ALLOWANCE-OPEN> 1,425
<CHARGE-OFFS> 74
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 1,892
<ALLOWANCE-DOMESTIC> 1,892
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 661
</TABLE>
