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 June 30, 1998
[ ] 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 [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock 2,951,236 shares $0.001 per value, outstanding as of July 30,
1998.<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
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6.
(a)Exhibits
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
June 30, December 31,
1998 1997
----------- ------------
(In Thousands, except share date)
ASSETS
Cash and cash equivalents $ 37,037 $ 23,901
Securities available-for-sale 24,173 22,090
Securities held-to-maturity (fair value $33,593
and $32,439 in 1998 and 1997, respectively 32,949 31,664
Real estate loans held-for-sale - 65
Loans, less allowance for loan losses of $2,544
at 1998 and $2,079 at 1997 326,325 287,025
Premises and equipment, net 9,863 8,786
Interest receivable 2,595 2,507
Other real estate owned 671 290
Other assets 2,949 2,391
---------- ----------
TOTAL ASSETS $ 436,562 $ 378,719
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 49,550 $ 45,225
Interest bearing deposits 314,468 284,199
----------- -----------
Total deposits 364,018 329,424
Federal Home Loan Bank advances 14,606 10,720
Securities sold under repurchase agreements 5,704 3,814
Demand notes payable to U.S. Government 3,298 1,429
Convertible subordinated debentures -- 200
Interest payable and other liabilities 2,240 2,482
---------- -----------
TOTAL LIABILITIES 389,866 348,069
---------- ----------
Minority Interest in Subsidiary Bank 575 580
Company obligated mandatory redeemable
preferred securities of subsidiary trust
holding solely junior subordinated debentures 15,000 --
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 1,000,000
shares authorized, none issued -- --
Common stock. $0.001 par value;
7,500,000 shares authorized, 2,951,236 and
and 2,918,324 shares issued and outstanding at
1998 and 1997, respectively 3 3
Additional paid-in capital 24,402 24,151
Retained earnings 7,054 6,352
Loan to Employee Stock Ownership Plan (138) (158)
Accumulated other comprehensive income (200) (278)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 31,121 30,070 <PAGE>
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,562 $ 378,719
=========== ===========
See notes to unaudited consolidated financial statements.<PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
1998 1997
----------- -----------
(In thousands, except share data)
Interest income:
Loans (including fee income) $ 6,931 $ 4,729
Investment securities 813 646
Other interest income 207 90
---------- -----------
7,951 5,465
Interest expense:
Deposits 3,776 2,546
Note payable - 95
Convertible subordinated debentures 4 84
Other borrowings 456 225
---------- -----------
4,236 2,950
---------- -----------
Net interest income 3,715 2,515
Provision for loan losses 281 146
---------- -----------
Net interest income after provision
for loan losses 3,434 2,369
Other operating income:
Service charges on deposit accounts 536 766
Gain on sale of loans - 1
Gain on sale of securities 16 -
Credit card processing expense 1,484 1,478
Other noninterest income 64 105
---------- -----------
2,100 2,350
Other operating expenses:
Salaries and employee benefits 2,009 1,436
Occupancy and equipment expense 635 515
Data processing 178 243
Credit card processing expenses 1,493 1,447
Other noninterest expenses 874 709
---------- -----------
5,189 4,350
---------- ---------
Income before income taxes 345 369
Income tax expense 27 142
----------- -----------
Net income 318 227
Other comprehensive income
Unrealized securities gains, net of income taxes 3 78
----------- -----------
Comprehensive income $ 321 $ 305
=========== ===========<PAGE>
Basic earnings per share $0.11 $0.16
Diluted earnings per share $0.11 $0.15
See notes to unaudited consolidated financial statements.<PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
June 30,
1998 1997
----------- -----------
(In thousands, except share data)
Interest income:
Loans (including fee income) $ 13,469 $ 9,688
Investment securities 1,564 1,393
Other interest income 330 134
---------- -----------
15,363 11,215
Interest expense:
Deposits 7,375 4,927
Note payable - 189
Convertible subordinated debentures 8 185
Other borrowings 697 424
---------- -----------
8,080 5,725
---------- -----------
Net interest income 7,283 5,490
Provision for loan losses 477 228
---------- -----------
Net interest income after provision
for loan losses 6,806 5,262
Other operating income:
Service charges on deposit accounts 1,036 917
Gain on sale of loans 17 28
Gain on sale of securities 16 -
Credit card processing expense 2,799 2,845
Other noninterest income 120 123
---------- -----------
3,988 3,913
Other operating expenses:
Salaries and employee benefits 3,862 2,878
Occupancy and equipment expense 1,172 979
Data processing 369 488
Credit card processing expenses 2,780 2,765
Other noninterest expenses 1,708 1,517
---------- -----------
9,891 8,627
---------- ---------
Income before income taxes 903 548
Income tax expense 200 188
----------- -----------
Net income 703 360
Other comprehensive income
Unrealized securities gains, net of income taxes 78 94
----------- -----------
Comprehensive income $ 781 $ 454
=========== ===========<PAGE>
Basic earnings per share $ 0.24 $ 0.27
Diluted earnings per share $ 0.23 $ 0.25
See notes to unaudited consolidated financial statements. <PAGE>
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1998 1997
----------- -----------
(in thousands)
Net cash provided by operating activities $ 1,118 $ 1,812
----------- -----------
Cash Flows from Investing Activities:
Proceeds from maturities of available-for-
sale securities 5,333 1,752
Purchase of available-for-sale securities (7,461) (2,479)
Proceeds from maturities of held-to-maturity
securities 1,594 1,198
Purchase of held-to-maturity securities (3,000) -
Proceeds from sale of loans 65 -
Proceeds from sale of other real estate owned 246 -
Loans made to customers, net (40,448) (27,178)
Premises and equipment expenditures (1,620) (1,667)
----------- -----------
Net cash (used in) investing activities (45,291) (28,374)
----------- -----------
Cash Flows from Financing Activities:
Increase (decrease) in non-interest bearing
deposits 4,325 (23)
Increase in interest bearing deposits 30,269 23,154
Increase in demand notes payable
to U.S. Government 1,869 1,143
Increase in securities sold under agreements
to repurchase 1,890 741
Repayments of notes payable - (400)
Net increase in Federal Home Loan Bank advances 3,886 3,927
Repurchase of Series B Preferred - (94)
Repayment of convertible subordinated debentures (200) -
Issuance of Trust Preferred 15,000 -
Issuance of common stock 250 98
Repayment of loan to ESOP 20 --
----------- -----------
Net cash provided by financing activities 57,309 28,546
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 13,136 1,984
Cash and equivalents at beginning of period 23,901 13,932
----------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 37,037 $ 15,916
=========== ===========
See notes to unaudited consolidated financial statements.<PAGE>
NOTE 1 - Basis of Presentation
The financial information of Success Bancshares, Inc. and subsidiaries (the
Company) 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, 1998 are not
necessarily indicative of the results expected for the year ended December 31,
1998.
NOTE 2 - Recent Accounting Developments
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
was effective for fiscal years beginning after December 15, 1997 and has been
implemented by the Company.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Statement established
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 established 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 will implement this statement in its 1998 Annual Report.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" which establishes new standards for
reporting information about derivatives and hedging. It is effective for
periods beginning after June 15, 1999 and will be adopted by the Company as of
January 1, 2000. The Company expects that adoption of this Standard will have
no effect on its consolidated financial position, results of operations or on
disclosures within the financial statements as it currently does not engage in
the use of derivative instruments or other hedging activities.
Note 3 - 8.95% Cumulative Trust Preferred Securities
On May 19, 1998, the Company issued $15 million of Trust Preferred Securities
("Securities") through Success Capital Trust I ("Trust"), a statutory business
trust and wholly-owned subsidiary of the Company. The Securities pay
cumulative cash distributions quarterly at an annual rate of 8.95%. Proceeds
from the sale of the Securities were invested by the Trust in 8.95% Junior
Subordinated Deferrable Interest Debentures issued by the Company which
represents all of the assets of the Trust. The Securities are subject to
mandatory redemption, in whole or in part, upon repayment of the Junior
Subordinated Debentures at the stated maturity or their earlier redemption, in
each case at a redemption price equal to the aggregate liquidation preference
of the Securities plus any accumulated and unpaid distributions thereon to the
date of redemption. Prior redemption is permitted under certain circumstances
such as changes in tax and investment company regulations. The Company fully<PAGE>
and unconditionally guarantees the Securities through the combined operation of
the debentures and other related documents. The Company's obligations under
the guarantee are unsecured and subordinate to senior and subordinated
indebtedness of the Bank.
Note 4 - Earnings Per Common Share
Basic 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. Diluted earnings per share assumes the exercise of any
dilutive instruments, including stock options and convertible subordinated
debt.
The following tables summarize the computation of earnings per share for the
periods indicated:
Three Months Ended June 30,
1998 1997
Income Share Per Share Income Share PerShare
Numerator Denom. Amount Numerator Denom. Amount
- ------------------------------------------------
(Dollars in thousands)
Net income $318 $227
Less preferred stock dividends - 40
------ -----
Basic EPS
Income available to
common stockholders 318 2,929 $0.11 187 1,184 $0.16
Effective of Dilutive securities:
Options - 76 - 61
Convertible preferred stock - - - 42
Convertible subordinated debt - - - -
----- ------ ----- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $318 3,006 $0.11 $187 1,287 $0.15
====== ====== ===== ===== ====== =====
Six Months Ended June 30,
1998 1997
Income Share Per Share Income Share PerShare
Numerator Denom. Amount Numerator Denom. Amount
- ------------------------------------------------
(Dollars in thousands)
Net income $703 $360
Less preferred stock dividends - 40
------ -----
Basic EPS
Income available to
common stockholders 703 2,924 $0.24 320 1,185 $0.27
Effective of Dilutive securities:
Options - 76 - 54<PAGE>
Convertible preferred stock - - - 42
Convertible subordinated debt 5 20 - -
----- ------ ----- ------
Diluted EPS
Income available to common
stockholders and assumed
conversions $708 3,020 $0.23 $320 1,281 $0.25
====== ====== ===== ===== ====== =====
For the quarter ended June 30, 1998 and for the quarter and six-month periods
ended June 30, 1997, the assumed conversion of the convertible subordinated
debt would have had an antidilutive effect and as such, was not included in
diluted earnings per share. Had the result of the assumed conversion been
dilutive, the interest expense on the convertible subordinated debentures would
have been eliminated and the number of shares of common stock increased.<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The principal business of Success Bancshares, Inc. (referred to as the
"Company" when such reference includes Success Bancshares, Inc. and its
subsidiaries, collectively, or "Success Bancshares" when referring only to the
parent company), 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.
Since the consummation of its initial public offering in October 1997, the
Company has worked to aggressively execute its strategic plan of continued
growth by providing a high level of service to its core customers while
expanding its market share in its target markets and by entering new markets.
In addition to opening its Downtown Chicago branch in May 1998, the Company's
expansion plans currently include:
Location Projected Opening By
---------------------- ------------------------
Skokie/Oakton St. August 1998
Skokie October 1998
Lake Zurich October 1998
North Libertyville December 1998
Mundelein January 1999
Operating Results
For the three months ended June 30, 1998, net income was $318,000, an increase
of 40% from the net income of $227,000 for the same period in 1997. For the
first six months of 1998, net income was $703,000, an increase of 95% from the
net income of $360,000, for the same period in 1997. For the quarter and six
month period ended June 30, 1998, net income per diluted share was $0.11 and<PAGE>
$0.23, respectively, as compared to $0.15 and $0.25 per diluted share for the
same period in 1997.
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 interest 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 interest earning assets and interest bearing
liabilities for the indicated periods on a tax equivalent basis assuming a 34%
tax rate.
Period Ended June 30,
1998 1997
Average Average Average Average
Assets Balance Interest Rate Balance Interest Rate
---------------------------------------
(Dollars in thousands)
Loans (1) $305,033 $13,487 8.84% $213,013 $9,695 9.10%
Taxable investment securities 43,503 1,273 5.85 39,024 1,215 6.23
Investment securities exempt
from Federal income taxes 11,928 441 7.39 8,252 270 6.54
Interest bearing deposits with
financial institutions 6,678 179 5.36 2,219 55 4.96
Other interest earning assets 5,266 151 5.73 2,887 79 5.47
-------- ------- ----- -------- ------ ------
Total interest earning assets $372,408 $15,531 8.34% 265,395$11,314 8.53%
Non-interest earning assets 31,439 24,286
-------- --------
Total assets $403,847 $289,681
======== ========
Liabilities & Shareholders' Equity
Deposits:
NOW & money market accounts $121,657 $2,366 3.89% $81,525 $1,367 3.35%
Savings deposits 20,458 328 3.21 19,408 325 3.35
Time deposits 160,389 4,681 5.84 113,437 3,235 5.70
Notes payable - - - 4,615 189 8.19
Other borrowings 18,933 705 7.45 18,648 609 6.53
-------- ------- ----- -------- ------ ------
Total interest bearing
liabilities 321,437 8,080 5.03 237,633 5,725 4.82
Demand deposits - non-interest
bearing 45,158 39,209
Other non-interest bearing
liabilities 6,156 1,773
Minority interest in subsidiary
bank 579 523
Shareholder's equity 30,517 10,543
-------- --------
Total liabilities &
shareholders' equity $403,847 $289,681
======== ========<PAGE>
Net Interest Income $7,451 $5,589
====== ======
Net Yield on Interest Earning Assets 4.00% 4.21%
===== =====
(1) Non-accrual loans are included in average loans.
The decline in annualized net interest margin for the six months ended June 30,
1998 compared with the same period of 1997, 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 and to the effect of promotional
rate home equity products. The situation was further impacted by promotional
deposit programs intended 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.
(Dollars in thousands)
Fully tax equivalent net interest income for the
six months ended June 30, 1997 $5,589
Change due to average earnings assets fluctuations 2,474
Change due to interest rate fluctuations (612)
------
Fully tax equivalent net interest income for the
six months ended June 30, 1998 $7,451
======
Provision for Loan Losses
The provision for loan losses was $281,000 for the quarter ended June 30, 1998
versus $146,000 for the comparable period in 1997. For the six month period
ended June 30, 1998, the Bank provided $477,000 as an addition to the allowance
for loan losses as compared to a provision of $228,000 for the comparable
period in 1997. The increased provisions for the quarter as well as the six
month period were required to support the growth of the Company's loan
portfolio, as more fully discussed below.
Other Operating Income
For the second quarter of 1998, other operating income decreased $205,000 to
$2.1 million, compared with $2.3 million for the comparable period in 1997.
The decrease is primarily the result of a lower level of service charges on
deposit accounts for the current quarter as compared to the same quarter last
year. Service charges on deposit accounts amounted to $536,000 and $766,000
for the quarters ended June 30, 1998 and 1997, respectively.
For the six month period ended June 30, 1998, other operating income increased
$75,000 over the comparable period in 1997 which was largely the result of an
increase in income relating to service charges on deposit accounts.
Other Operating Expenses
In the second quarter of 1998, other operating expenses increased $839,000, or
19.3%, to $5.2 million, compared with $4.4 million in 1997. In the first six
months of 1998, other operating expense increased $1.3 million, or 14.7%, to<PAGE>
$9.9 million, as compared to $8.6 million for the same period in 1997.
The increase for both the quarter and six month period reflects the higher
level of cost necessary to support the Company's growth. Salary and employee
benefit expenses increased $1.0 million, or 34.2%, to $3.9 million for the six
month period ended June 30, 1998 as compared to the same period in 1997. This
increase reflects both the increased staffing to support the growth of deposit
and loan accounts at existing bank locations as well as the staffing
requirements for newly opened offices.
Income Taxes
The Bank recorded income tax provisions of $27,000 and $200,000 for the quarter
and six month periods ended June 30, 1998, respectively, as compared to
$142,000 and $188,000 for the respective comparable periods in 1997. Although
income before tax increased $355,000, or 65%, to $903,000 for the six month
period ended June 30, 1998 as compared to $548,000 for the same period in 1997,
income not subject to Federal income tax also increased resulting in reduced
provisions.
Financial Condition
Loans
The loan portfolio is the largest category of the Company's interest earning
assets. For the quarter ended June 30, 1998, loans increased $39.8 million, or
13.8%, to $328.9 million, as compared to $289.1 million at December 31, 1997.
The increase in loans outstanding has been a result of the Bank's active
solicitation of new lending relationships in the commercial area and the
utilization of a 7.5% three year fixed rate home equity loan promotion.
The following table sets forth the composition of the loan portfolio:
June 30, 1998
December 31, 1997
Percent of Percent of
Amount Portfolio Amount Portfolio
------------------------------------------
(Dollars in thousands)
Commercial $93,424 28.39% $87,506 30.21%
Real estate - construction 16,714 5.08 13,409 4.63
Real estate - mortgage 133,595 40.59 106,120 36.64
Home equity 75,765 23.02 72,944 25.18
Installment 9,222 2.80 9,253 3.19
Credit Cards 376 0.11 432 0.15
------- ------- ------- -------
Total gross loans 329,096 100.00% 289,664 100.00%
======= =======
Unearned discount - -
Net deferred loan fees 120 (187)
Unaccreted discount resulting
from loss on transfer of loans
held for sale to portfolio (347) (373)
-------- --------
Loans net of unearned discount
and net deferred loan fees 328,869 289,104 <PAGE>
Allowance for loan losses (2,544) (2,079)
-------- --------
Net loans $326,325 $287,025
======== ========
Allowance to gross loans 0.77% 0.72%
Non-Performing Assets
The following table presents a summary of book value of non-performing assets
which includes (a) non-performing loans and (b) other real estate owned.
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.
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.
June 30, December 31,
1998 1997
------------- -------------
(Dollars in thousands)
Non-performing loans:
Non-accrual $ 542 $ 1,479
90 days or more past due, still accruing 385 341
Restructured - -
------ -------
Total non-performing loans 927 1,820
Other real estate owned 671 290
------ -------
$1,598 $2,110
====== ======
Non-performing loans to total loans, net of
unearned discount and net deferred loan fees 0.28% 0.63%
===== ======
Non-performing loans to allowance for
loan losses 36.44% 87.54%
====== ======
Non-performing loans as a percentage
of total assets 037% 0.56%
====== =====
The decrease in nonaccrual loans of $937,000 from December 31, 1997 to June 30,
1998 is primarily associated with the transfer of three loans with balances
amounting to $671,000 to other real estate owned. The largest loan transferred
is a commercial real estate loan with a balance approximating $529,000. At
June 30, 1998, other real estate owned was comprised solely of such three
loans. During the first six months of 1998, the only property which had been
classified at December 31, 1997 as other real estate owned with a carrying<PAGE>
value of $290,000 was sold for a net loss of $44,000.
Potential Problem Loans
In addition to those loans disclosed under "Non-performing Assets," 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, 1998 and December 31, 1997 were
approximately $3.9 million and $3.7 million, respectively. These loans were
classified due to their debt service coverage levels and loan to value ratios.
At June 30, 1998, 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.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for potential future losses in the Company's loan portfolio. 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
for the periods indicated.
Six Months Ended
June 30,
1998 1997
------- ------
(Dollars in thousands)
Balance at beginning of period $2,079 $1,425
Charge-offs (18) (55)
Recoveries 6 31
Provision for loan losses 477 228
------ ------
Allowance at end of period $2,544 $1,629
====== ======
Allowance to total loans, net of
unearned discount and net <PAGE>
deferred loan fees 0.77% 0.50%
===== =====
Net charge-offs to average
loans outstanding
(annualized) 0.012% 0.052%
====== ======
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. Additions to the allowance for possible
loan losses, which are charged to earnings through the provision for 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. Although management believes the allowance for possible loan losses is
adequate to cover any potential losses, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses in the future.
Deposits
The following table sets forth the amount and composition of deposit products
for the periods indicated:
June 30, PercentDecember 31,Percent
1998 of Deposits 1997 of Deposits
-------------------------------------------
(Dollars in thousands)
NOW and money market accounts $126,896 34.86% $108,998 33.09%
Savings deposits 20,882 5.74 19,389 5.89
Time deposits 166,690 45.79 155,812 47.30
Demand deposits - non-interest bearing 49,550 13.61 45,225 13.73
------- -------- -------- -------
Total $364,018 100.00% $329,424 100.00%
======== ======== ======== ========
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 growth and 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 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<PAGE>
average assets (as defined in the regulations). As of June 30, 1998, the
Company's actual total capital to risk-weighted assets ratio was 16.54%. As of
June 30, 1998, 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 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 June 30,
1998, are presented below:
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
As of June 30, 1998 Actual Ratio Actual Ratio Actual Ratio
------------ -------------- -------- ------
Total Capital (to Risk Weighted Assets):
Consolidated $49,40016.54% $23,919 8.0% N/A
Bank 30,70510.31 23,819 8.0 $29,773 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 45,52814.22 11,959 4.0 N/A
Bank 28,161 9.46 11,909 4.0 17,864 6.0
Tier 1 Capital (to Total Average Assets):
Consolidated 42,52810.53 16,154 4.0 N/A
Bank $28,161 7.02% $16,041 4.0% $20,051 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 $45.3 million and $28.4 million
for the six months ended June 30, 1998 and 1997, 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 $57.3 million and $28.5 million
for the six months ended June 30, 1998 and 1997, respectively.
Forward Looking Statements
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<PAGE>
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
. Changes in financial markets and general economic conditions.<PAGE>
PART II OTHER INFORMATION
Item 2(d). Changes in Securities and use of Proceeds
(c) The following securities, which were not registered under the Securities
Act of 1933 (the "Act"), were sold by Success Bancshares during the quarter
ending June 30, 1998:
(1) On June 11, 1998, Steven A. Covert, the departing Chief Financial Officer
of Success Bancshares, exercised options held by him to purchase 17,000 shares
of common stock, par value $.001 per share (the "Common Stock"), of Success
Bancshares for an aggregate purchase price of $105,060, or $6.18 per share.
This transaction was exempt from registration pursuant to Section 3(a)(9) of
the Act.
(2) In May, 1998, holders of $100,000.00 aggregate outstanding principal amount
of Success Bancshares' 9% Convertible Subordinated Debentures received one
share of Common Stock in exchange for each $8.58 principal amount of debentures
resulting in the issuance of 11,662 shares of Common Stock. This transaction
was exempt from registration pursuant to Section 3(a)(9) of the Act.
Item 4. Matters Submitted to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on June 24, 1998.
(c) At the Annual Meeting of Stockholders the following matter was submitted to
a vote of stockholders: (1) The election of two directors to the Board of
Directors to serve until the next annual meeting of stockholders or until their
successors are elected and qualified.
Director Votes For Votes
Withheld
Charles G. Freund 2,379,676 29,616
Samuel D. Kahan 2,380,026 29,266
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
Number Exhibit Title
3.1 Second Restated Certificate of Incorporation of Success Bancshares
(incorporated by reference to Exhibit 3.1 of Success Bancshares' Form
S-1 Registration Statement (No. 333-32561) filed with the Securities
and Exchange Commission the ("Commission"); on July 31, 1997).
3.2 By-laws of Success Bancshares (incorporated by reference to Exhibit 3.2
of Success Bancshares' Form S-1 Registration Statement (No. 333-32561)
filed with the Commission on July 31, 1997).
4.1 Form of Subordinated Indenture relating to the Junior Subordinated
Debentures (incorporated by reference to Exhibit 4.1 of the Form S-1
Registration Statement of Success Bancshares and Success Capital Trust
I ("Success Capital") (No. 333-51271 and No. 333-51271-01) filed with
the Commission on April 28, 1998).
4.2 Form of Junior Subordinated Debenture Certificate (included as an
exhibit to Exhibit 4.1).
4.3 Certificate of Trust of Success Capital (incorporated by reference to
Exhibit 4.3 of the Form S-1 Registration Statement of Success
Bancshares and Success Capital (No. 333-51271 and 333-51271-01) filed<PAGE>
with the Commission on April 28, 1998).
4.4 Form of Amended and Restated Trust Agreement of Success Capital
(incorporated by reference to Exhibit 4.4 of the Form S-1 Registration
Statement of Success Bancshares and Success Capital (No. 333-51271 and
333-51271-01) filed with the Commission on April 28, 1998).
4.5 Form of Trust Preferred Security Certificate of Success Capital
(included as an exhibit to Exhibit 4.4).
4.6 Form of Common Security Certificate of Success Capital (included as an
exhibit to Exhibit 4.4).
4.7 Form of Guarantee Agreement of Success Bancshares relating to the Trust
Preferred Securities (incorporated by reference to Exhibit 4.7 of the
Form S-1 Registration Statement of Success Bancshares and Success
Capital (No. 333-51271 and 333-51271-01) filed with the Commission on
April 28, 1998).
10.1 $10 Million Business Loan Agreement, dated January 13, 1997, between
Success Bancshares and Cole Taylor Bank (incorporated by reference to
Exhibit 10.1 of Success Bancshares' 1997 Annual Report on Form 10-K
filed with the Commission on March 31, 1998).
10.2 1995 Success Bancshares, Inc. Employee Stock Option Plan (incorporated
by reference to Exhibit 10.2 of Success Bancshares' Form S-1
Registration Statement (No. 333-32561) filed with the Commission on
July 31, 1997).
10.3 Employment Agreement between Success Bancshares and Saul D. Binder
(incorporated by reference to Exhibit 10.3 of Success Bancshares' Form
S-1 Registration Statement (No. 333-32561f) filed with the Commission
on July 31, 1997).
10.4 Executive Severance Agreement between Success Bancshares and Steven A.
Covert (incorporated by reference to Exhibit 10.4 of Success
Bancshares' Form S-1 Registration Statement (No. 333-32561) filed with
the Commission on July 31, 1997).
10.5 Lease with respect to Lincolnwood branch banking facility (October,
1991) (incorporated by reference to Exhibit 10.5 of the Company's Form
S-1 Registration Statement (No. 333-32561) filed with the Securities
and Exchange Commission on July 31, 1997).
10.6 Lease with respect to Lincoln Park branch banking facility (April,
1993) (incorporated by reference to Exhibit 10.6 of Success Bancshares'
Form S-1 Registration Statement (No. 333-32561) filed with the
Commission on July 31, 1997).
10.7 Lease with respect to Northbrook branch banking facility (December,
1994) (incorporated by reference to Exhibit 10.7 of Success Bancshares'
Form S-1 Registration Statement (No. 333-32561) filed with the
Commission on July 31, 1997).
10.8 Lease with respect to Deerfield/Riverwoods branch banking facility
(September, 1995) (incorporated by reference to Exhibit 10.8 of Success
Bancshares' Form S-1 Registration Statement (No. 333-32561) filed with
the Commission on July 31, 1997).
*27.1 Financial Data Schedule
* Filed herewith
(b) Reports on Form 8-K
On June 11, 1998 the Company filed Form 8-K which included a press release
dated June 10, 1998 related to the resignation and replacement of the
Success Bancshares' Chief Financial Officer and Executive Vice President.<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: August 10, 1998 /s/Christa Calabrese
---------------------------
Christa Calabrese
Acting Chief Operating Officer
DATE: August 10, 1998 /s/Kurt C. Felde
------------------------------
Kurt C. Felde
Senior Vice President
and Chief Financial Officer<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
3.1 Second Restated Certificate of Incorporation of Success Bancshares
(incorporated by reference to Exhibit 3.1 of Success Bancshares' Form
S-1 Registration Statement (No. 333-32561) filed with the Securities
and Exchange Commission (the "Commission") on July 31, 1997).
3.2 By-laws of Success Bancshares (incorporated by reference to Exhibit 3.2
of Success Bancshares' Form S-1 Registration Statement (No. 333-32561)
filed with the Commission on July 31, 1997).
4.1 Form of Subordinated Indenture relating to the Junior Subordinated
Debentures (incorporated by reference to Exhibit 4.1 of the Form S-1
Registration Statement of Success Bancshares and Success Capital Trust
I ("Success Capital") (No. 333-51271 and No. 333-51271-01) filed with
the Commission on April 28, 1998).
4.2 Form of Junior Subordinated Debenture Certificate (included as an
exhibit to Exhibit 4.1).
4.3 Certificate of Trust of Success Capital (incorporated by reference to
Exhibit 4.3 of the Form S-1 Registration Statement of Success
Bancshares and Success Capital (No. 333-51271 and 333-51271-01) filed
with the Commission on April 28, 1998f).
4.4 Form of Amended and Restated Trust Agreement of Success Capital
(incorporated by reference to Exhibit 4.4 of the Form S-1 Registration
Statement of Success Bancshares and Success Capital (No. 333-51271 and
333-51271-01) filed with the Commission on April 28, 1998).
4.5 Form of Trust Preferred Security Certificate of Success Capital
(included as an exhibit to Exhibit 4.4).
4.6 Form of Common Security Certificate of Success Capital (included as an
exhibit to Exhibit 4.4).
4.7 Form of Guarantee Agreement of Success Bancshares relating to the Trust
Preferred Securities (incorporated by reference to Exhibit 4.7 of the
Form S-1 Registration Statement of Success Bancshares and Success
Capital (No. 333-51271 and 333-51271-01) filed with the Commission on
April 28, 1998).
10.1 $10 Million Business Loan Agreement, dated January 13, 1997, between
Success Bancshares and Cole Taylor Bank (incorporated by reference to
Exhibit 10.1 of Success Bancshares' 1997 Annual Report on Form 10-K
filed with the Commission on March 31, 1998).
10.2 1995 Success Bancshares, Inc. Employee Stock Option Plan (incorporated
by reference to Exhibit 10.2 of Success Bancshares' Form S-1
Registration Statement (No. 333-32561) filed with the Commission on
July 31, 1997).
10.3 Employment Agreement between Success Bancshares and Saul D. Binder
(incorporated by reference to Exhibit 10.3 of Success Bancshares' Form
S-1 Registration Statement (No. 333-32561) filed with the Commission on
July 31, 1997).
10.4 Executive Severance Agreement between Success Bancshares and Steven A.
Covert (incorporated by reference to Exhibit 10.4 of Success
Bancshares' Form S-1 Registration Statement (No. 333-32561) filed with
the Commission on July 31, 1997).
10.5 Lease with respect to Lincolnwood branch banking facility (October,
1991) (incorporated by reference to Exhibit 10.5 of Success Bancshares'
Form S-1 Registration Statement (No. 333-32561) filed with the
Commission on July 31, 1997).
10.7 Lease with respect to Northbrook branch banking facility (December,<PAGE>
1994) (incorporated by reference to Exhibit 10.7 of Success Bancshares'
Form S-1 Registration Statement (No. 333-32561) filed with the
Commission on July 31, 1997).
10.8 Lease with respect to Deerfield/Riverwoods branch banking facility
(September, 1995) (incorporated by Reference to Exhibit 10.8 of Success
Bancshares' Form S-1 Registration Statement (No. 333-32561) filed with
the Commission on July 31, 1997.
*27.1 Financial Data Schedule
* Filed herewith<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly unaudited financial statements of Success Bancshares, Inc. for the
three months ended June 30, 1998, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,141
<INT-BEARING-DEPOSITS> 9,696
<FED-FUNDS-SOLD> 7,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,173
<INVESTMENTS-CARRYING> 32,949
<INVESTMENTS-MARKET> 33,593
<LOANS> 328,869
<ALLOWANCE> 2,544
<TOTAL-ASSETS> 436,562
<DEPOSITS> 364,018
<SHORT-TERM> 13,002
<LIABILITIES-OTHER> 2,240
<LONG-TERM> 10,606
0
0
<COMMON> 24,405
<OTHER-SE> 6,716
<TOTAL-LIABILITIES-AND-EQUITY> 436,562
<INTEREST-LOAN> 13,469
<INTEREST-INVEST> 1,564
<INTEREST-OTHER> 330
<INTEREST-TOTAL> 15,363
<INTEREST-DEPOSIT> 7,375
<INTEREST-EXPENSE> 8,080
<INTEREST-INCOME-NET> 7,283
<LOAN-LOSSES> 477
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,891
<INCOME-PRETAX> 903
<INCOME-PRE-EXTRAORDINARY> 903
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703
<EPS-PRIMARY> .24
<EPS-DILUTED> .23
<YIELD-ACTUAL> 4
<LOANS-NON> 542
<LOANS-PAST> 385
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,900
<ALLOWANCE-OPEN> 2,079
<CHARGE-OFFS> 18
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 2,544
<ALLOWANCE-DOMESTIC> 2,544
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 920
</TABLE>
