<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
0-23235
COMMISSION FILE NUMBER
SUCCESS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-34976644
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
ONE MARRIOTT DRIVE
LINCOLNSHIRE, ILLINOIS 60069
(Address of principal executive offices)
(847) 634-4200
Registrant's telephone number, including area code:
COMMON STOCK, $0.001 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was approximately $34.0 million as of March
18, 1998. As of March 18, 1998, the registrant had outstanding 2,922,574
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Shareholders' Report for the year ended
December 31, 1997, are incorporated by reference into Part II hereof and
portions of the Proxy Statement for the registrant's Annual Meeting of
Shareholders to be held on June 24, 1998, are incorporated by reference into
Part III hereof.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1. Business ................................................................................ 1 - 14
ITEM 2. Properties .............................................................................. 14
ITEM 3. Legal Proceedings ....................................................................... 15
ITEM 4. Submission of Matters to Vote of Security Holders ....................................... 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters .................. 15 - 16
ITEM 6. Selected Financial Data ................................................................ 16
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 16
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk .............................. 16
ITEM 8. Financial Statements and Supplementary Data ............................................ 16
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ... 16
PART III
ITEM 10. Directors and Executive Officers of the Registrant ..................................... 17
ITEM 11. Executive Compensation ................................................................. 17
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ......................... 17
ITEM 13. Certain Relationships and Related Transactions ......................................... 17
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................ 17 - 18
Signatures ............................................................................. 19
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
Success Bancshares, Inc., a Delaware corporation incorporated in 1984 (the
"Company") is a bank holding company headquartered in Lincolnshire, Illinois
with total assets of over $375 million at December 31, 1997. Through its
majority-owned subsidiary, Success National Bank which was founded in 1973 (the
"Bank"), the Company engages in full service community banking. The Bank is
also headquartered in Lincolnshire, Illinois, located approximately 35 miles
north of downtown Chicago, and has eight branch offices serving individuals and
small-to-medium-sized businesses in communities in the north and northwest
suburbs of Chicago and the north side of Chicago. These banking facilities,
all of which have been established since 1991, are located in Deerfield (2),
Libertyville, Lincolnwood (2), Chicago (Lincoln Park), Arlington Heights and
Northbrook.
The Company provides community banking services to individuals,
small-to-medium-sized businesses, local governmental units and institutional
clients primarily in the northern Chicagoland area. These services include
traditional checking, NOW, money market, savings and time deposit accounts, as
well as a number of innovative deposit products targeted to specific market
segments. The Bank offers home equity, home mortgage, commercial real estate,
commercial and consumer loans, safe deposit facilities and other innovative and
traditional services specially tailored to meet the needs of customers in its
target markets. The Company's goal is to continue to offer innovative,
attractive financial products to businesses and individuals in its market area.
In May, 1996, the Bank became one of the first banks in its market area to go
on-line with its own home page on the World Wide Web
(http://www.successbank.com). The Bank's home page enables consumers to access
information regarding branch locations, deposit and loan rates and economic
forecasts.
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, including the accompanying notes, which
appear in the Company's 1997 Annual Report, filed as an exhibit to this Form
10-K.
Securities
The following table sets forth certain information with respect to the
Company's securities portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury................................. $ 3,775 $ 3,792 $ 748 $ 754 $ 1,236 $ 1,250
U.S. government sponsored entities............ 3,346 3,301 5,846 5,721 7,845 7,643
States and political subdivisions, exempt
from Federal income taxes.................... 4,437 4,442 1,565 1,561 1,779 1,769
Mortgage-backed securities.................... 7,019 7,054 2,568 2,585 555 556
SBA guaranteed loan participation certificates 3,221 3,238 4,337 4,290 4,293 4,359
Other securities.............................. 182 263 110 236 14 99
- ------------------------------------------------------------------------------------------------------------
Total...................................... $21,980 $22,090 $15,174 $15,147 $15,722 $15,676
============================================================================================================
SECURITIES HELD-TO-MATURITY:
U.S. Treasury................................. $ 246 $ 248 $ 242 $ 245 $ 238 $ 246
U.S. government sponsored entities............ 14,754 14,962 15,368 15,403 17,719 17,907
States and political subdivisions
Taxable...................................... 1,791 1,899 1,845 1,939 1,845 2,006
Exempt from Federal income taxes............. 6,506 6,702 6,906 7,041 7,174 7,327
Mortgage-backed securities.................... 5,148 5,409 5,804 6,037 6,384 6,768
Other securities.............................. 3,219 3,219 2,395 2,395 1,696 1,696
- ------------------------------------------------------------------------------------------------------------
Total...................................... $31,664 $32,439 $32,560 $33,060 $35,056 $35,950
============================================================================================================
</TABLE>
1
<PAGE> 4
Securities of a Single Issuer
There were no securities of any single issuer, other than the U.S. Treasury or
U.S. government sponsored entities, which had a book value in excess of ten
percent of shareholders' equity at December 31, 1997.
Securities, Maturities and Yields
The following table sets forth maturities and the weighted average yields of
the securities at December 31, 1997.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------------------------------------------------------
DUE IN ONE YEAR OR DUE AFTER ONE YEAR DUE AFTER FIVE YEARS
LESS THROUGH FIVE YEARS THROUGH TEN YEARS DUE AFTER TEN YEARS
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Balance Yield Balance Yield Balance Yield Balance Yield
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury......................... $2,030 5.42% $1,762 6.48% $ - -% $ - -%
U.S. government sponsored entities.... 1,335 3.71 749 5.66 1,217 5.81 - -
State and political subdivisions(1)... 585 5.86 2,087 6.28 1,770 6.34 - -
Mortgage-backed securities (2)........ 4,007 6.10 3,047 6.80 - - - -
SBA guaranteed loan
participation certificates (2)...... 94 8.22 68 7.48 - - 3,076 7.02
Other securities...................... - - - - - - 263 5.53
- ------------------------------------------------------------------------------------------------------------------------------------
$8,051 5.54% $7,713 6.48% $ 2,987 6.12% $3,339 6.90%
====================================================================================================================================
HELD-TO-MATURITY:
U.S. Treasury......................... $ 246 6.61% $ - -% $ - -% $ - -%
U.S. government sponsored entities.... 3,574 4.87 2,885 6.44 7,835 6.68 460 5.49
States and political subdivisions(1).. 461 7.38 3,049 7.45 1,965 8.16 2,822 8.44
Mortgage-backed securities(2)......... - - 1,360 7.58 2,948 7.30 840 7.39
Other securities...................... - - 150 8.00 300 7.65 2,769 5.93
- ------------------------------------------------------------------------------------------------------------------------------------
$4,281 5.24% $7,444 7.09% $13,048 7.07% $6,891 7.11%
====================================================================================================================================
</TABLE>
- -----------------------------
(1) The yield is reflected on a fully tax equivalent basis utilizing a 34%
tax rate.
(2) These securities are presented based on contractual maturities.
Loan Portfolio
The loan portfolio is the largest category of the Company's interest earning
assets. Since December 31, 1996 total loans as a percentage of total assets
have increased to 76.5% at December 31, 1997, from 74.3%.
The following table sets forth the historical composition of the loan
portfolio.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994
-----------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of
Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.......................... $87,506 30.21% $58,912 28.68% $45,217 26.14% $33,640 23.83%
Real estate - construction.......... 13,409 4.63 12,282 5.98 12,821 7.41 8,656 6.13
Real estate - mortgages............. 106,120 36.64 84,920 41.34 68,227 39.44 63,533 45.01
Home equity......................... 72,944 25.18 43,193 21.03 37,820 21.86 30,810 21.83
Installment......................... 9,253 3.19 5,615 2.73 8,655 5.00 4,056 2.87
Credit cards........................ 432 0.15 503 0.24 261 0.15 443 0.33
- --------------------------------------------------------------------------------------------------------------------------------
Total gross loans................ 289,664 100.00% 205,425 100.00% 173,001 100.00% 141,138 100.00%
====== ====== ====== ======
Unearned discount................... - (2) (3) (8)
Net deferred loan fees.............. (187) (261) (223) (126)
Unaccreted discount from loss on
transfer of loans from held-for-sale
to portfolio...................... (373) (438) (451) (513)
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees............ 289,104 204,724 172,324 140,491
Allowance for loan losses........... (2,079) (1,425) (1,189) (1,000)
- --------------------------------------------------------------------------------------------------------------------------------
Net loans......................... $287,025 $203,299 $171,135 $139,491
================================================================================================================================
<CAPTION>
December 31,
--------------------------------
1993
--------------------------------
Percent of
Amount Portfolio
- -----------------------------------------------------------------------
<S> <C> <C>
Commercial.......................... $34,118 30.96%
Real estate - construction.......... 6,697 6.08
Real estate - mortgages............. 29,691 26.94
Home equity......................... 36,366 33.00
Installment......................... 2,771 2.51
Credit cards........................ 562 0.51
- -----------------------------------------------------------------------
Total gross loans................ 110,205 100.00%
======
Unearned discount................... (18)
Net deferred loan fees.............. (108)
Unaccreted discount from loss on
transfer of loans from held-for-sale
to portfolio...................... -
- -----------------------------------------------------------------------
Loans, net of unearned discount and
net deferred loan fees............ 110,079
Allowance for loan losses........... (855)
- -----------------------------------------------------------------------
Net loans......................... $109,224
=======================================================================
</TABLE>
2
<PAGE> 5
Commercial Loans: Commercial loans are generally written with adjustable
interest rates to match variable rate funding sources. Such loans increased
$28.6 million to $87.5 million at December 31, 1997, as the Company actively
pursued more commercial loan relationships. Commercial loans represented 30.2%
of the total loan portfolio at December 31, 1997, as compared to 28.7% of the
total loan portfolio at December 31, 1996.
Real Estate Mortgage Loans: Real estate mortgage loans, which consist of
residential and commercial loans secured by real estate, totaled $106.1 million
at December 31, 1997, compared to $84.9 million at December 31, 1996. This
increase is primarily related to an increased emphasis in commercial real
estate lending. Real estate mortgage loans are typically written with fixed
rates of interest and commercial real estate loans typically have 5 year
balloon features.
Home Equity Loans: Home equity loans increased $29.8 million, or 68.9%, from
December 31, 1996 and were $72.9 million at December 31, 1997. At December 31,
1997, home equity loans accounted for 25.2% of the total loan portfolio,
compared to 21.0% of the total loan portfolio at December 31, 1996. The
increase in home equity loans is primarily due to the success of the Company's
prime rate-based home equity products, including a promotion featuring a 7.5%
fixed rate for three years, adjusting to prime thereafter. As of December 31,
1997, $61.8 million of total commitments on the loans had been closed, with
$27.5 million drawn and outstanding.
Home equity lines of credit, in addition to senior mortgage indebtedness,
normally do not exceed 80% of the residential real estate collateral value.
These loan to value ratios help to limit the credit risk associated with these
loans.
The Bank has no concentrations of loans to borrowers engaged in the same or
similar industries that exceed 10% of total loans. The Company maintains a
policy of directing its lending activities to the target markets from which its
deposits are drawn.
Loan Maturities
The following table sets forth the maturities of commercial and real estate
construction loans outstanding at December 31, 1997. Also set forth are the
amounts of such loans due after one year, classified according to sensitivity
to changes in interest rates.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------------------------------
DUE IN ONE DUE AFTER ONE YEAR
YEAR OR LESS THROUGH FIVE YEARS DUE AFTER FIVE YEARS TOTAL
------------ ------------------ -------------------- ------
(dollars in thousands)
FLOATING FLOATING
FIXED RATE FIXED RATE
------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial and real estate construction loans $88,318 $5,840 $3,232 $2,838 $687 $100,915
======= ====== ====== ====== ==== ========
</TABLE>
Non-performing Loans
Non-performing loans include: (1) loans accounted for on a non-accrual basis;
(2) accruing loans contractually past due ninety days or more as to interest or
principal payments; and (3) loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower.
The Bank has a reporting and control system to monitor non-performing loans.
The following table provides certain information on the Bank's non-performing
loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1996 1995 1994 1993
---------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans......................................... $1,479 $ - $ 13 $ 258 $ 852
Restructured loans....................................... - - - - -
Loans 90 days or more past due, still accruing........... 341 118 626 123 519
- ---------------------------------------------------------------------------------------------------
Total non-performing loans.......................... $1,820 $118 $ 639 $ 381 $1,371
- ---------------------------------------------------------------------------------------------------
Non-performing loans to loans, net of unearned
discount and net deferred loan fees................... 0.63% 0.06% 0.37% 0.27% 1.25%
Non-performing loans to allowance for loan losses........ 87.54% 8.28% 53.74% 38.10% 160.35%
</TABLE>
3
<PAGE> 6
The increase in non-performing loans of $1.7 million from December 31, 1996 to
December 31, 1997 is primarily attributable to seven loans. Of these loans,
two (totaling $303,000) are 90 days or more past due but still accruing
interest. Each of these loans is secured by a first lien on residential real
estate or a second lien where the Bank also holds the first lien. Should
management's view of the collectibility of these loans change, they may be
transferred to nonaccrual status. The remaining five large non-performing
loans are nonaccrual and are summarized as follows:
<TABLE>
<CAPTION>
Balance at
Number December 31, 1997
Loan Type of Loans (dollars in thousands)
- ------------------------------- -------- ----------------------
<S> <C> <C>
Residential Mortgage - 1st Lien 2 $385
Commercial Mortgage - 1st Lien 1 555
Commercial Construction 1 342
Commercial Line of Credit 1 100
</TABLE>
Management is aggressively pursuing collection efforts with respect to each of
these non-performing loans.
Loans with principal or interest payments contractually due but not yet paid
are reviewed by senior management on a weekly basis and are placed on
nonaccrual status when scheduled payments remain unpaid for 90 days or more,
unless the loan is both well-secured and in the process of collection.
Interest income on nonaccrual loans is recorded when actually received in
contrast to the accrual basis, which records income over the period in which it
is earned, regardless of when it is received.
Potential Problem Loans
In addition to those loans disclosed under "Non-performing Loans," there are
certain loans in the portfolio which management has identified, through its
problem loan identification system which exhibit a higher than normal credit
risk. However, these loans do not represent non-performing loans to the
Company. Management's review of the total loan portfolio to identify loans
where there is concern that the borrower will not be able to continue to
satisfy present loan repayment terms includes factors such as review of
individual loans, recent loss experience and current economic conditions.
Loans in this category include those with characteristics such as those that
have recent adverse operating cash flow or balance sheet trends, or have
general risk characteristics that the loan officer believes might jeopardize
the future timely collection of principal and interest payments. The principal
amount of loans in this category as of December 31, 1997 and December 31, 1996
were approximately $3.7 million and $983,000, respectively. One loan, a
commercial mortgage totaling $2.9 million, secured by a strip shopping center
in Deerfield, Illinois, contributed to the majority of this increase. This
loan, while current, was added to the Bank's watch list due to tight debt
service coverage and a high loan to value ratio. At December 31, 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.
Other Real Estate Owned
The Bank had one property, a single-family home in Deerfield, Illinois,
totaling $290,000 in other real estate owned at December 31, 1997, and none at
December 31, 1996.
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.
4
<PAGE> 7
Loans are charged to the allowance for loan losses when deemed uncollectible by
management, unless sufficient collateral exists to repay the loan.
Set forth in the following table is an analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
--------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period....... $1,425 $1,189 $1,000 $ 855 $647
Charge-offs:
Commercial........................... 71 49 - 88 26
Real estate - construction........... - - - - -
Real estate - mortgage............... - - - - -
Home equity.......................... - - - - -
Installment.......................... 23 20 4 1 7
Credit cards......................... 55 9 15 50 19
- -------------------------------------------------------------------------------
Total charge-offs...................... 149 78 19 139 52
- -------------------------------------------------------------------------------
Recoveries:
Commercial........................... 22 - - 31 23
Real estate - construction........... - - - - -
Real estate - mortgage............... - - - - -
Home equity.......................... - - - - -
Installment.......................... 15 3 - 1 -
Credit cards......................... - 1 1 2 17
- -------------------------------------------------------------------------------
Total recoveries....................... 37 4 1 34 40
- -------------------------------------------------------------------------------
Net charge-offs........................ 112 74 18 105 12
Provision for loan losses.............. 766 310 207 250 220
- -------------------------------------------------------------------------------
Allowance at end of period............. $2,079 $1,425 $1,189 $1,000 $855
===============================================================================
Allowance to loans, net of unearned
discount and net deferred loan fees.. 0.72% 0.70% 0.70% 0.71% 0.78%
Net charge-offs to average net loans... 0.05% 0.04% 0.01% 0.08% 0.01%
</TABLE>
In 1997, the loan loss provision of $766,000 reflects an increase of $456,000
from the 1996 provision. The increase was necessary to offset an increase in
net charge-offs, and to reflect the increase in commercial real estate lending.
The following table presents the allocation of the allowance for loan losses.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------- ----------------- ------------------ -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.................... $ 829 30.21% $ 597 28.68% $ 596 26.14% $ 550 23.83% $478 30.96%
Real estate - construction.... - 4.63 - 5.98 - 7.41 - 6.13 - 6.08
Real estate - mortgage........ 118 36.64 59 41.34 37 39.44 27 45.01 20 26.94
Installment................... 56 3.19 34 2.73 36 5.00 35 2.87 53 2.51
Home equity................... 387 25.18 224 21.03 190 21.86 180 21.83 163 33.00
Credit cards.................. 5 0.15 12 0.24 7 0.15 9 0.33 34 0.51
Unallocated................... 684 - 499 - 323 - 199 - 107 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total..................... $2,079 100.00% $1,425 100.00% $1,189 100.00% $1,000 100.00% $855 100.00%
===================================================================================================================================
</TABLE>
5
<PAGE> 8
Control of the Company's loan quality is continually monitored by management
and is reviewed by the Board of Directors and loan committee of the Bank on a
monthly basis, subject to the oversight by the Company's Board of Directors
through its members who serve on the loan committee. Independent external
review of the loan portfolio is provided by the examinations conducted by
regulatory authorities, independent public accountants in conjunction with
their annual audit, and an independent loan review performed by an entity
engaged by the Board of Directors. The amount of additions to the allowance
for 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 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
Average total deposits were $276.7 million for the year ended December 31,
1997, an increase of 23.2% from 1996. The increase in deposits occurred as a
result of opening new branches, and continued emphasis on deposit growth
through marketing and rate promotions. The composition of deposits has not
changed significantly from 1996.
The following table sets forth the maturities of certificates of deposit and
other time deposits of $100,000 or more at December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
(dollars in thousands)
<S> <C>
Maturing within three months............... $29,614
After three but within six months.......... 7,861
After six but within twelve months......... 11,342
After twelve months........................ 12,149
-------
Total...................................... $60,966
=======
</TABLE>
Asset Liability Management
As a continuing part of its financial strategy, the Company attempts to manage
the impact of fluctuations in market interest rates on its net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset liability
management policies are established and monitored by management in conjunction
with the Board of Directors of the Bank, subject to general oversight by the
Company's Board of Directors. The policies establish guidelines for acceptable
limits on the sensitivity of the market value of assets and liabilities to
changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest bearing
liabilities mature or reprice on a different basis than interest earning
assets. When interest bearing liabilities mature or reprice more quickly than
interest earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest earning assets mature or reprice more quickly than interest bearing
liabilities, falling interest rates could result in a decrease in net income.
The following table illustrates the Company's estimated interest rate
sensitivity and periodic and cumulative gap positions as calculated as of
December 31, 1997.
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
--------------------------------------------------------------
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
---------- ----------- --------- ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Net loans(1)................................................... $121,152 $18,265 $112,632 $34,976 $287,025
Securities..................................................... 9,363 12,227 17,451 14,713 53,754
Interest bearing deposits with financial institutions.......... 564 - - - 564
Federal funds sold............................................. 7,000 - - - 7,000
- -------------------------------------------------------------------------------------------------------------------------------
Total earning assets....................................... $138,079 $30,492 $130,083 $49,689 $348,343
===============================================================================================================================
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
----------------------------------------------------------------
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
---------- ----------- --------- ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST BEARING LIABILITIES:
NOW and money market accounts........................ $ 45,061 $ 8,891 $ 51,828 $ 3,218 $108,998
Savings deposits..................................... 626 1,907 10,927 5,929 19,389
Time deposits........................................ 57,298 51,305 46,798 411 155,812
Borrowings........................................... 5,544 4,162 4,056 2,401 16,163
- ------------------------------------------------------------------------------------------------------------------------
Total earning assets............................. $108,529 $ 66,265 $113,609 $ 11,959 $300,362
========================================================================================================================
Rate sensitive assets (RSA).......................... $138,079 $168,571 $298,654 $348,343 $348,343
Rate sensitive liabilities (RSL)..................... $108,529 $174,794 $288,403 $300,362 $300,362
Cumulative gap (GAP = RSA - RSL).................... $ 29,550 $ (6,223) $ 10,251 $ 47,981 $ 47,981
RSA/Total assets..................................... 36.46% 44.51% 78.86% 91.98% 91.98%
RSL/Total assets..................................... 28.66% 46.15% 76.15% 79.31% 79.31%
GAP/Total assets..................................... 7.80% (1.64%) 2.71% 12.67% 12.67%
GAP/RSA.............................................. 21.40% (3.69%) 3.43% 13.77% 13.77%
</TABLE>
- ------------------------------------
(1) Includes loans held for sale.
While the gap position illustrated above is a useful tool that management can
assess for general positioning of the Company's and the Bank's balance sheets,
management uses an additional measurement tool to evaluate its asset/liability
sensitivity which determines exposure to changes in interest rates by measuring
the percentage change in net interest income due to changes in rates over a
one-year time horizon. Management measures such percentage change assuming an
instantaneous permanent parallel shift in the yield curve of 100 and 200 basis
points, both upward and downward. The model uses an option-based pricing
approach to estimate the sensitivity of mortgage loans. The most significant
embedded option in these types of assets is the prepayment option of the
borrowers. The model uses various prepayment assumptions depending upon the
type of mortgage instrument (residential mortgages, commercial mortgages,
mortgage-backed securities, etc.). Prepayment rates for mortgage instruments
ranged from 5 to 45 CPR (Constant Prepayment Rate) as of December 31, 1997.
For administered rate core deposits (e.g. NOW and savings accounts), the model
utilizes interest rate floors equal to 100 basis points below their current
levels.
Utilizing this measurement concept, the interest rate risk of the Company,
expressed as a percentage change in net interest income over a one-year time
horizon due to changes in interest rates, at December 31, 1997, was as follows:
<TABLE>
<CAPTION>
BASIS POINT CHANGE
------------------------------
+100 +200 -100 -200
------------ ----------------
<S> <C> <C> <C> <C>
Percentage change in net interest income due to an immediate change
in interest over a one-year time horizon........................... 0.52% 0.94% (0.03%) (3.52%)
</TABLE>
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Securities Sold Under Agreements to Repurchase
See Note 9 to the Company's Consolidated Financial Statements for a description
of securities sold under agreements to repurchase.
7
<PAGE> 10
Liquidity and Capital Resources
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements could result in certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial condition. The regulations require
the Company and the Bank to meet specific capital adequacy guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting principles.
The capital classifications are also subject to qualitative judgments by the
regulators about risk weightings and other factors.
Quantitative measures established by Federal Reserve, Office of the Comptroller
of the Currency ("OCC") and Federal Deposit Insurance Corporation ("FDIC")
regulations to ensure capital adequacy require the Company and the Bank to
maintain minimum ratios of Tier 1 capital (as defined in such regulations) to
total average assets (as defined in such regulations) ("leverage ratio") and
minimum ratios of Tier 1 capital and total capital (as defined in such
regulations) to risk weighted assets (as defined in such regulations) ("Tier 1
Ratio" and "Tier 2 Ratio", respectively). As of December 31, 1997, the Company
and Bank are in compliance with such ratio requirements. However, there can be
no assurance that the Company or the Bank will continue to be in compliance
with their regulatory capital requirements. Failure by the Company and/or the
Bank to meet minimum capital requirements can result in certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have an adverse effect on the Company's growth and financial results.
Liquidity management at the Bank involves planning to meet anticipated funding
needs at a reasonable cost. Liquidity management is guided by policies
formulated and monitored by the Company's senior management and the Bank's
asset/liability committee, which take into account the marketability of assets,
the sources and stability of funding and the level of unfunded commitments.
The Bank's principal sources of funds are deposits, short-term borrowings and
capital contributions by the Company out of the proceeds of borrowings under
the revolving line of credit. Borrowings by the Bank from the Federal Reserve
Bank of Chicago and Federal Home Loan Bank of Chicago provide additional
sources of short-term liquidity.
The Bank's core deposits, the most stable source of liquidity for community
banks due to the nature of long-term relationships generally established with
depositors and the security of deposit insurance provided by the FDIC, are
available to provide long-term liquidity. At December 31, 1997 and 1996, 68.4%
and 69.8%, respectively, of the Company's total assets were funded by core
deposits with balances less than $100,000, while remaining assets were funded
by other funding sources such as core deposits with balances in excess of
$100,000, public funds, purchased funds, and the capital of the Bank.
Liquid assets refer to money market assets such as cash and due from banks,
Federal funds sold and interest bearing time deposits with financial
institutions, as well as securities available-for-sale and securities
held-to-maturity with a remaining maturity less than one year. Net liquid
assets represent the sum of the liquid asset categories less the amount of
assets pledged to secure public funds. As of December 31,1997 and 1996, net
liquid assets totaled approximately $39.0 million and $26.3 million,
respectively. The increase in net liquid assets from December 31, 1996 to
December 31, 1997 is a result of excess cash received from deposit inflows
being invested in short-term funds and the timing of investment maturities.
The Bank routinely accepts deposits from a variety of municipal entities.
Typically, these municipal entities require that banks pledge marketable
securities to collateralize these public deposits. At December 31, 1997 and
1996, the Bank had approximately $19 million and $14 million, respectively, of
securities collateralizing such public deposits. Deposits requiring pledged
assets are not considered to be core deposits, and the assets that are pledged
as collateral for these deposits are not deemed to be liquid assets.
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities,
consisting primarily of earnings, was $2.9 million for the year ended December
31, 1997, and $1.6 million for the year ended December 31, 1995. Net cash used
in operating activities was $266,000 for the year ended December 31, 1996. A
significant component in the fluctuation of net cash provided by or used in
operating activities is the timing of the sale of loans held for sale to
permanent investors. Net cash used in investing activities, consisting
primarily of loan and investment funding, was $93.0 million, $29.9 million and
$26.4 million for the years ended December 31, 1997, 1996, and 1995,
respectively. Net cash provided by financing activities, consisting
principally of deposit growth and the issuance of stock, was $100.1 million,
$23.5 million, and $26.9 million for the years ended December 31, 1997, 1996
and 1995, respectively.
8
<PAGE> 11
Year 2000 Issue
The Company has established a committee (the "Y2K Committee") comprised of
senior management to address the implications of the Year 2000 ("Y2K") on the
Company's business systems, services, major loan customers and competitive
conditions. The Y2K Committee reports directly to the Company's Audit
Committee and has adopted a formal Y2K plan designed to minimize the impact of
the Y2K on the Company. Such plan has been approved by the Audit Committee.
The Company does not maintain a proprietary mainframe system. Instead, the
majority of the Company's computer services are provided by M&I Data Systems
("M&I"), a major third party provider located in Milwaukee, Wisconsin. The Y2K
Committee is closely monitoring M&I's progress toward resolving the Y2K issues
in their product as well as evaluating other systems used by the Company.
Although there can be no assurances that M&I will timely convert its product to
properly utilize dates beyond December 31, 1999 or of the effect of such a
failure on the Company, the financial impact of the Y2K is not expected to be
materially adverse to the Company.
Competition
The Company competes in the commercial banking industry through its subsidiary,
Success National Bank, in the communities it serves. The commercial banking
industry is highly competitive, and the Bank faces strong direct competition
for deposits, loans, and other financial-related services. The Bank competes
directly in Cook and Lake counties with other commercial banks, thrifts, credit
unions, stockbrokers, and the finance divisions of automobile companies. Some
of these competitors are local, while others are statewide or nationwide. The
Bank has developed a community banking and marketing strategy. In keeping with
this strategy, the Bank provides highly personalized and responsive service
characteristic of locally-owned and managed institutions. As such, the Bank
competes for other deposits principally by offering depositors a variety of
deposit programs, convenient office locations, hours and other services. The
Bank competes for loan originations primarily through the interest rates and
loan fees it charges, the efficiency and quality of services it provides to
borrowers and the variety of its loan products. Some of the financial
institutions and financial services organizations with which the Bank competes
are not subject to the same degree of regulation as that imposed on bank
holding companies and national banking associations. In addition, the larger
banking organizations have significantly greater resources than those that will
be available to the Bank. As a result, such competitors have advantages over
the Bank in providing certain non-deposit services. Currently, major
competitors in certain of the Bank's markets include Harris Trust and Savings
Bank, The Northern Trust Company, LaSalle Bank, N.A., and American National
Bank and Trust Company of Chicago.
Employees
As of December 31, 1997, the Company had 162 full-time equivalent employees.
The employees are not represented by a collective bargaining unit. The Company
considers its relationship with its employees to be good.
Effects of Inflation
The financial statements and related financial data concerning the Company
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Inflation
can have a significant effect on the operating results of all industries.
However, the effects of inflation in the local economy and on the Company's
operating results have been relatively modest for the past several years.
Since substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates.
The primary impact of inflation on the operations of the Company is reflected
in increased operating costs. Furthermore, inflation can directly affect the
value of loan collateral in general, and real estate collateral in particular.
These factors are taken into account in the initial underwriting process and
over the life of the loans. The Company believes that it has systems in place
to continue to manage the rates, liquidity and interest rate sensitivity of the
Company's assets and liabilities. See "Asset Liability Management."
9
<PAGE> 12
Supervision and Regulation
Bank holding companies and banks are extensively regulated under federal and
state law. References under this heading to applicable statutes or regulations
are brief summaries of portions thereof which do not purport to be complete and
which are qualified in their entirety by reference to those statutes and
regulations. Any change in applicable laws or regulations may have a material
adverse effect on the business of commercial banks and bank holding companies,
including the Company and the Bank. However, management is not aware of any
current recommendations by any regulatory authority which, if implemented,
would have or would be reasonably likely to have a material effect on
liquidity, capital resources or operations of the Company or the Bank.
Bank Holding Company Regulation: The Company is registered as a "bank holding
company" with the Federal Reserve and, accordingly, is subject to supervision
by the Federal Reserve under the Bank Holding Company Act (the "BHC Act"). The
Company is required to file with the Federal Reserve periodic reports and such
additional information as the Federal Reserve may require pursuant to the BHC
Act. The Federal Reserve examines the Company and may examine the Bank.
The BHC Act requires prior Federal Reserve approval for, among other things,
the acquisition by a bank holding company of direct or indirect ownership or
control of more than five percent of the voting shares or substantially all the
assets of any bank or bank holding company, or for a merger or consolidation of
a bank holding company with another bank holding company. With certain
exceptions, the BHC Act prohibits a bank holding company from acquiring direct
or indirect ownership or control of voting shares of any company which is not a
bank or bank holding company and from engaging directly or indirectly in any
activity other than banking or managing or controlling banks or performing
services for its authorized subsidiaries. Under the BHC Act and Federal
Reserve regulations, the Company and the Bank are prohibited from engaging in
certain tie-in arrangements in connection with an extension of credit, lease,
sale of property, or furnishing of services.
Any person, including associates and affiliates of and groups acting in concert
with such person, who purchases or subscribes for five percent or more of the
Company's common stock may be required to obtain prior approval of the Federal
Reserve under the BHC Act. Under the Change in Bank Control Act, any person
who acquires stock of the Company such that its interest exceeds ten percent of
the Company, may be required to demonstrate that such person is not in control
of the Company. Prior regulatory approval will be required before acquiring
the power to directly or indirectly direct the management, operations or
policies of the Company or the Bank or before acquiring control of 25 percent
or more of any class of the Company's or Bank's outstanding voting stock. In
addition, any corporation, partnership, trust or organized group that acquires
a controlling interest in the Company or the Bank may have to obtain approval
of the Federal Reserve to become a bank holding company and thereafter be
subject to regulation as such.
It is the policy of the Federal Reserve that the Company is expected to act as
a source of financial strength to the Bank and to commit resources to support
the Bank. The Federal Reserve takes the position that in implementing this
policy, it may require the Company to provide such support when the Company
otherwise would not consider itself able to do so.
The Federal Reserve has adopted risk-based capital requirements for assessing
bank holding company capital adequacy. These standards define regulatory
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Under the Federal
Reserve's risk-based guidelines, capital is classified into two categories.
For bank holding companies, Tier 1 or "core" capital consists of common
shareholders' equity, perpetual preferred stock and trust preferred stock (both
subject to certain limitations) and minority interest in the common equity
accounts of consolidated subsidiaries, and is reduced by goodwill, certain
other intangible assets and certain investments in other corporations ("Tier 1
Capital"). Tier 2 capital consists of the allowance for loan and lease losses
(subject to certain conditions and limitations), perpetual preferred stock (to
the extent not included in Tier 1 capital), "hybrid capital instruments,"
perpetual debt and mandatory convertible debt securities, and term subordinated
debt and intermediate-term preferred stock.
Under the Federal Reserve's capital guidelines, bank holding companies are
required to maintain a minimum ratio of qualifying capital to risk-weighted
assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 Capital.
The Federal Reserve also requires a minimum leverage ratio of Tier 1 Capital to
total average assets of 4.0%, except that bank holding companies not rated in
the highest category under the regulatory rating system are required to
maintain a leverage ratio of 1.0% to 2.0% above such minimum. The 4.0% Tier 1
Capital to total average assets ratio constitutes the minimum leverage standard
for bank holding companies, and will be used in conjunction with the risk-based
ratio in determining the overall capital adequacy of banking organizations. In
addition, the Federal Reserve continues to consider the Tier 1 leverage ratio
in evaluating proposals for expansion or new activities.
10
<PAGE> 13
In its capital adequacy guidelines, the Federal Reserve emphasizes that the
foregoing standards are supervisory minimums and that banking organizations
generally are expected to operate well above the minimum ratios. These
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels. The growth of the Company and the Bank
has been, and may in the future be, constrained by these capital adequacy
requirements.
As of December 31, 1997, the Company had a Tier 1 capital to risk-weighted
assets ratio ("Tier 1 Ratio") of 11.55%, total capital to risk-weighted assets
ratio ("Tier 2 Ratio") of 12.37% and a Tier 1 capital to total average assets
ratio ("leverage ratio") of 9.69%.
Bank Regulation: The Bank is subject to supervision and examination by the OCC
pursuant to the National Bank Act and regulations promulgated thereunder. The
Bank is a member of the Federal Reserve and as such is also subject to
examination by the Federal Reserve.
The deposits of the Bank are insured by the Bank Insurance Fund under the
provisions of the Federal Deposit Insurance Act (The "FDIA"), and the Bank is,
therefore, also subject to supervision and examination by the FDIC. The FDIA
requires that the appropriate federal regulatory authority (the OCC, in the
case of the Bank) approve any merger and/or consolidation by or with an insured
bank, as well as the establishment or relocation of any bank or branch office.
The FDIC also supervises compliance with the provisions of federal law and
regulations which place restrictions on loans by FDIC-insured banks to their
directors, executive officers and other controlling persons.
Furthermore, banks are affected by the credit policies of other monetary
authorities, including the Federal Reserve, which regulate the national supply
of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The monetary policies of the Federal Reserve have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future.
Financial Institution Regulation Generally: Transactions with Affiliates.
Transactions between a bank and its holding company or other affiliates are
subject to various restrictions imposed by state and federal regulatory
agencies. Such transactions include loans and other extensions of credit,
purchases of securities and other assets, and payments of fees or other
distributions. In general, these restrictions limit the amount of transactions
between an institution and an affiliate of such institution, as well as the
aggregate amount of transactions between an institution and all of its
affiliates, and require transactions with affiliates to be on terms comparable
to those for transactions with unaffiliated entities.
Dividend Limitations. As a holding company, the Company is primarily dependent
upon dividend distributions from the Bank for its income. Federal statutes and
regulations impose restrictions on the payment of dividends by the Company and
the Bank.
Federal Reserve policy provides that a bank holding company should not pay
dividends unless (i) the bank holding company's net income over the prior year
is sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the capital needs, asset quality and
overall financial condition of the bank holding company and its subsidiaries.
Delaware law also places certain limitations on the ability of the Company to
pay dividends. For example, the Company may not pay dividends to its
shareholders if, after giving effect to the dividend, the Company would not be
able to pay its debts as they become due. Since a major source of the
Company's revenue is dividends the Company receives and expects to receive from
the Bank, the Company's ability to pay dividends is likely to be dependent on
the amount of dividends paid by the Bank. No assurance can be given that the
Bank will, in any circumstances, pay dividends to the Company.
Pursuant to the National Bank Act, all dividends must be paid out of undivided
profits. Federal regulations prohibit any Federal Reserve member bank,
including the Bank, from declaring dividends in any calendar year in excess of
its net profit for the year plus the retained net profits for the preceding two
years without the prior approval of the Federal Reserve. Furthermore, the OCC
may, after notice and opportunity for hearing, prohibit the payment of a
dividend by a national bank if it determines that such payment would constitute
an unsafe or unsound practice.
In additional to the foregoing, the ability of the Company and the Bank to pay
dividends may be affected by the various minimum capital requirements and the
capital and non-capital standards established under the Federal Deposit
Insurance
11
<PAGE> 14
Corporation Improvements Act of 1991 ("FDICIA"), as described below. The right
of the Company, its shareholders and its creditors to participate in any
distribution of the assets or earnings of its subsidiaries is further subject
to the prior claims of creditors of the respective subsidiaries.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the Federal Reserve, together with the other federal bank regulatory agencies,
to prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The Federal Reserve, the OCC and
the other federal bank regulatory agencies have adopted, effective August 9,
1995, a set of guidelines prescribing safety and soundness standards pursuant
to FDICIA, as amended. The guidelines establish general standards relating to
internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, each of the Federal Reserve
and the OCC adopted regulations that authorize, but do not require, the Federal
Reserve or the OCC, as the case may be, to order an institution that has been
given notice by the Federal Reserve or the OCC, as the case may be, that it is
not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit
an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the Federal Reserve or the OCC, as the case may be,
must issue an order directing action to correct the deficiency and may issue an
order directing other actions of the types to which an undercapitalized
association is subject under the "prompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the Federal
Reserve or the OCC, as the case may be, may seek to enforce such order in
judicial proceedings and to impose civil money penalties. The Federal Reserve,
the OCC and the other federal bank regulatory agencies also proposed guidelines
for asset quality and earnings standards.
A range of other provisions in FDICIA include requirements applicable to
closure of branches; additional disclosures to depositors with respect to terms
and interest rates applicable to deposit accounts; uniform regulations for
extensions of credit secured by real estate; restrictions on activities of and
investments by state-chartered banks; modification of accounting standards to
conform to generally accepted accounting principles including the reporting of
off-balance sheet items and supplemental disclosure of estimated fair market
value of assets and liabilities in financial statements filed with the banking
regulators; increased penalties in making or failing to file assessment reports
with the FDIC; greater restrictions on extensions of credit to directors,
officers and principal shareholders; and increased reporting requirements on
agricultural loans to small businesses.
In August, 1995, the Federal Reserve, OCC, FDIC and other federal banking
agencies published a final rule modifying their existing risk-based capital
standards to provide for consideration of interest rate risk when assessing the
capital adequacy of a bank. Under the final rule, the Federal Reserve, the OCC
and the FDIC must explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor in
evaluating a bank's capital adequacy. The Federal Reserve, the FDIC, the OCC
and other federal banking agencies also have adopted a joint agency policy
statement providing guidance to banks for managing interest rate risk. This
policy statement emphasizes the importance of adequate oversight by management
and a sound risk management process. The assessment of interest rate risk
management made by the banks' examiners will be incorporated into the banks'
overall risk management rating and used to determine the effectiveness of
management.
Prompt Corrective Action. FDICIA requires the federal banking regulators,
including the Federal Reserve, the OCC and the FDIC, to take prompt corrective
action with respect to depository institutions that fall below certain capital
standards and prohibits any depository institution from making any capital
distribution that would cause it to be undercapitalized. Institutions that are
not adequately capitalized may be subject to a variety of supervisory actions
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (such as
the Company). In other respects, FDICIA provides for enhanced supervisory
authority, including greater authority for the appointment of a conservator or
receiver for under capitalized institutions. The capital-based prompt
corrective action provisions of FDICIA and their implementing regulations apply
to FDIC-insured depository institutions. However, federal banking agencies
have indicated that, in regulating bank holding companies, the agencies may
take appropriate action at the holding company level
12
<PAGE> 15
based on their assessment of the effectiveness of supervisory actions imposed
upon subsidiary insured depository institutions pursuant to the prompt
corrective action provisions of FDICIA.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution,
the Bank is required to pay deposit insurance premiums based on the risk it
poses to the insurance fund. The FDIC has authority to raise or lower
assessment rates on insured deposits in order to achieve certain designated
reserve ratios in the insurance funds and to impose special additional
assessments. The FDIC amended the risk-based assessment system and on December
11, 1995, adopted a new assessment rate schedule for BIF insured deposits. The
new assessment rate schedule, effective with respect to the semiannual premium
assessment beginning January 1, 1996, provides for an assessment range of zero
to 0.27% (subject to a $2,000 minimum) of insured deposits depending on capital
and supervisory factors. Each depository institution is assigned to one of
three capital groups: "well capitalized", "adequately capitalized" or "less
than adequately capitalized." Within each capital group, institutions are
assigned to one of three supervisory subgroups: "healthy," "supervisory
concern" or "substantial supervisory concern." Accordingly, there are nine
combinations of capital groups and supervisory subgroups to which varying
assessment rates would be applicable. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned.
During 1997, the Bank was assessed at an average annual rate of the statutory
minimum of $2,000. Deposit insurance may be terminated by the FDIC upon a
finding that an institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted on
September 30, 1996 provides that beginning with semi-annual periods after
December 31, 1996, deposits insured by the Bank Insurance Fund ("BIF") will
also be assessed to pay interest on the bonds (the "FICO Bonds") issued in the
late 1980s by the Financing Corporation to recapitalize the now defunct Federal
Savings & Loan Insurance Corporation. For purposes of the assessments to pay
interest on the FICO Bonds, BIF deposits will be assessed at a rate of 20.0% of
the assessment rate applicable to Savings Association Insurance Fund ("SAIF")
deposits until December 31, 1999. After the earlier of December 31, 1999 or
the date on which the last savings association ceases to exist, full pro rata
sharing of FICO assessments will begin. It has been estimated that the rates
of assessment for the payment of interest on the FICO Bonds will be
approximately 1.3 basis points for BIF-assessable deposits and approximately
6.4 basis points for SAIF-assessable deposits. The payment of the assessment
to pay interest on the FICO Bonds did not materially affect the Bank.
Federal Reserve System: The Bank is subject to Federal Reserve regulations
requiring depository institutions to maintain non-interest-earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve regulations generally require 3.0% reserves
must be maintained against total transaction accounts of $47.8 million or less
plus 10.0% on the remainder. The first $4.7 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve) are exempted from the
reserve requirements. The Bank is in compliance with the foregoing
requirements.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), a
financial institution has a continuing and affirmative obligation, consistent
with the safe and sound operation of such institution, to help meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each federal banking agency, in connection with its examination of a
financial institution, to assess and assign one of four ratings to the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by the
institution, including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, acquisitions of assets or
assumptions of liabilities, and savings and loan holding company acquisitions.
The CRA also requires that all institutions make public disclosure of their CRA
ratings. The Bank received a "satisfactory" rating from the OCC on its most
recent CRA performance evaluations.
In April 1995, the Federal Reserve, the OCC and other federal banking agencies
adopted amendments revising their CRA regulations. Among other things, the
amended CRA regulations substitute for the prior process-based assessment
factors a new evaluation system that rates an institution based on its actual
performance in meeting community needs. In particular, the system focuses on
three tests: (i) a lending test, to evaluate the institution's record of
making loans in its assessment areas; (ii) an
13
<PAGE> 16
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and businesses; and (iii) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices. The amended CRA regulations also clarify how an institution's
CRA performance is considered in the application process.
Brokered Deposits. Well-capitalized institutions are not subject to
limitations on brokered deposits, while an adequately capitalized institution
is able to accept, renew or rollover brokered deposits only with a waiver from
the FDIC and subject to certain restrictions on the yield paid on such
deposits. Undercapitalized institutions are not permitted to accept brokered
deposits. The Bank is eligible under the statutory standard to accept brokered
deposits and may use this funding source form time to time when management
deems it appropriate from an asset/liability management perspective.
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
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
ITEM 2. PROPERTIES
The Company and the Bank are headquartered in Lincolnshire, Illinois. The Bank
has nine branch banking facilities located in Deerfield (2), Libertyville,
Lincolnwood (2), Chicago (Lincoln Park), Arlington Heights and Northbrook,
Illinois.
The table below summarizes the Company's owned and leased facilities.
<TABLE>
<CAPTION>
Approximate
Location Type of Facility Square Footage Expiration Date
- ----------------------- ------------------------------------- -------------- ---------------
<S> <C> <C> <C>
Lincolnshire, IL Corporate headquarters and branch 11,760 Owned
Lincolnwood, IL Branch 8,760 Owned
Lincolnwood, IL Branch 1,900 October 2001
Lincoln Park, IL Branch 1,967 April 2003
Libertyville, IL Operations center and branch 8,100 Owned
Northbrook, IL Branch 1,950 November 1998
Deerfield/Riverwoods, IL Commercial loan center and branch 4,100 September 1998
Deerfield/Downtown, IL Branch 2,200 Owned
Arlington Heights, IL Branch 1,300 Owned
</TABLE>
14
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are from time to time parties in various routine legal
actions arising in the normal course of business. Management believes that
there is no proceeding threatened or pending against the Company or the Bank
which, if determined adversely, would materially adversely affect the
consolidated financial position or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The following securities, which were not registered under the Securities
Act of 1933, as amended (the "Securities Act"), were sold by the Company during
fiscal year 1997:
(i) Effective July 24, 1997, holders of the Company's 115,500 outstanding
shares of Class A Common Stock, par value $1.00 per share, received .8749
shares of the Company's common stock, par value $0.001 per share ("Common
Stock"), in exchange for each share of Class A Common Stock, resulting in the
issuance of 101,032 shares of Common Stock. This transaction was exempt from
registration pursuant to Section 3(a)(9) of the Securities Act.
(ii) Effective July 24, 1997, holders of the Company's 53,591 outstanding
shares of Series B Convertible Preferred Stock received one share of Common
Stock in exchange for each share of Series B Convertible Preferred Stock,
resulting in the issuance of 53,591 shares of Common Stock. This transaction
was exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
(iii) A stock split was effected on July 30, 1997, pursuant to which
holders of the Company's 725,292 outstanding shares of Common Stock received
1.7 shares of Common Stock in exchange for each share of Common Stock,
resulting in the issuance of 507,675 shares of Common Stock. This transaction
was exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
(iv) In October 1997, holders of $1,815,000 aggregate outstanding
principal amount of the Company's 9% Convertible Subordinated Debentures
("Debentures"), received one share of Common Stock in exchange for each $8.58
principal amount of Debentures, resulting in the issuance of 211,257 shares of
Common Stock. This transaction was exempt from registration pursuant to
Section 3(a)(9) of the Securities Act.
(v) In October 1997, holders of $1,155,000 aggregate outstanding principal
amount of the Company's Convertible Subordinated Notes ("Notes"), received one
share of Common Stock in exchange for each $12.50 principal amount of Notes,
resulting in the issuance of 92,400 shares of Common Stock. This transaction
was exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
(vi) Between January 1, 1997 and July 30, 1997, nine directors of the
Company exercised options to purchase an aggregate of 14,761 shares of Common
Stock at a weighted average exercise price of $8.52 per share. These
transactions were exempt from registration pursuant to Section 3(a)(9) of the
Securities Act.
(vii) On January 1, 1997, each member of the Board of Directors of the
Company and the Bank was granted an option to purchase up to 10,000 shares of
Common Stock on or prior to December 31, 1997 at the book value per share of
Common Stock on the last day of the month prior to the month in which such
option was either fully or partially exercised. In June 1997, however, the
Board of Directors of each of the Company and the Bank approved a resolution
which reduced to 1,000 the number
15
<PAGE> 18
of shares of Common Stock for which options granted on January 1, 1997 could
be exercised and changed the expiration date of such options to July 23, 1997.
This issuance of options was exempt from registration pursuant to Section
3(a)(9) of the Securities Act.
(b) The effective date of the Company's Registration Statement on Form S-1
(Commission File No. 333-32561) filed with the Securities and Exchange
Commission with respect to the Company's initial public offering of common
stock, par value $0.001 per share (the "Offering"), was July 31, 1997. The
Offering commenced on September 19, 1997 and terminated on October 20, 1997,
following the sale of all securities registered. The managing underwriter of
the offering was EVEREN Securities, Inc. An aggregate of 1,380,000 shares of
common stock were registered and sold in the Offering, at an aggregate price of
$17,250,000. The Company incurred $905,625 in selling agent commission and
underwriting discounts in connection with the Offering, and $797,109 in other
expenses (the "Total Expenses"), none of which was paid to directors or
officers of the Company or their associates, to persons owning 10% or more of
any class of equity securities of the Company or to any affiliate of the
Company. The net offering proceeds to the Company from the Offering, after
deducting the Total Expenses, were $15,547,266. Of such amount, the Company
used approximately (i) $7,400,000 for the repayment of all outstanding amounts
under its $8 million revolving line of credit and (ii) the remainder as a
contribution to the capital of the Bank to support continued growth of the
Bank's loan portfolio. None of the net offering proceeds from the Offering
were paid to directors or officers of the Company or their associates, to
persons owning 10% or more of any class of equity securities of the Company or
to any affiliate of the Company.
All additional information required in response to this item is contained in
the Annual Report to Shareholders under the caption "Shareholder Information"
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required in response to this item is contained in the Annual Report
to Shareholders under the caption "Selected Financial Highlights" and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required in response to this item is contained in the Company's
Annual Report to Shareholders under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and is incorporated
herein by reference. The discussion and analysis of financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and supplementary data contained in the Company's Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest rate risk position is discussed under the heading
"Business-Asset Liability Management" in Item 1 of this Form 10-K. Other types
of market risk, such as foreign currency exchange risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required in response to this item is contained in the Annual
Report to Shareholders under the caption "Consolidated Financial Statements,"
and is incorporated herein by reference. Also, refer to Item 14 of this Report
for the Index to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
16
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item will be contained in the
Company's definitive Proxy Statement (the "Proxy Statement") for its Annual
Meeting of Shareholders to be held June 24, 1998, under the caption
"Management" and is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance: The Form 4's
reporting stock purchased through the Company's initial public offering by
George Ohlhausen, Director and Sam Moraras, Treasurer of the Company, were
filed late with the Securities and Exchange Commission in 1997. Each
individual reported one transaction on one late report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be contained in the
Company's Proxy Statement under the caption "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is incorporated by reference to the section "Principal Shareholders"
in the Proxy Statement for the Annual Meeting of Shareholders to be held on
June 24, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item will be contained in the
Proxy Statement under the caption "Certain Transactions," and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
1., 2. Financial Statements and Schedules
The Consolidated Financial Statements are incorporated by
reference to the following pages from the 1997 Annual Report
to Shareholders, attached hereto as Exhibit 13.1:
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Auditors.................................................. 10
Report of Consolidated Balance Sheets........................................... 11
Report of Consolidated Statements of Income..................................... 12
Report of Consolidated Statements of Shareholders' Equity....................... 13
Report of Consolidated Statements of Cash Flows 14
Report of Notes to Consolidated Financial Statements............................ 15-30
No schedules are required to be filed with this report.
</TABLE>
17
<PAGE> 20
3.0 Exhibits
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Form
S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange Commission on July 31, 1997).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2
of the Company's Form S-1 Registration Statement (No. 333-32561)
filed with the Securities and Exchange Commission on July 31,
1997).
10.1 $10 Million Business Loan Agreement between Success Bancshares,
Inc. and Cole Taylor Bank dated January 13, 1998.
10.2 1995 Success Bancshares, Inc. Employee Stock Option Plan
(incorporated by reference to Exhibit 10.2 of the Company's Form
S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange Commission on July 31, 1997).
10.3 Employment Agreement between the Company and Saul D. Binder
(incorporated by reference to Exhibit 10.3 of the Company's Form
S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange Commission on July 31, 1997).
10.4 Executive Severance Agreement between the Company and Steven A.
Covert (incorporated by reference to Exhibit 10.4 of the Company's
Form S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange 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 the Company's
Form S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange 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 the
Company's Form S-1 Registration Statement (No. 333-32561) filed
with the Securities and Exchange 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
the Company's Form S-1 Registration Statement (No. 333-32561)
filed with the Securities and Exchange Commission on July 31,
1997).
11.1 Statement re Computation of Per Share Earnings
13.1 1997 Annual Report to Shareholders
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
21.1 of the Company's Form S-1 Registration Statement (No.
333-32561) filed with the Securities and Exchange Commission on
July 31, 1997).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K dated December 18, 1997 was filed with the Securities
and Exchange Commission on December 19, 1997. The report was filed to
report a press release announcing the Company's offer to acquire North
Bancshares, Inc.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SUCCESS BANCSHARES, INC.
<TABLE>
<S> <C> <C>
By: Saul D. Binder /s/ Saul D. Binder March 25, 1998
-------------------------------------------------- ---------------
President /Chief Executive Officer (Dated)
Steven A. Covert /s/ Steven A. Covert March 25, 1998
-------------------------------------------------- ---------------
Executive Vice President / Chief Financial Officer (Dated)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Saul D. Binder /s/ Saul D. Binder March 25, 1998
----------------------------------- --------------
Director (Dated)
Charles G. Freund
----------------------------------- --------------
Director (Dated)
Avrom H. Goldfeder /s/ Avrom H. Goldfeder March 25, 1998
----------------------------------- --------------
Director (Dated)
Samuel Kahan /s/ Samuel Kahan March 25, 1998
----------------------------------- --------------
Director (Dated)
Sherwin Koopmans /s/ Sherwin Koopmans March 25, 1998
----------------------------------- --------------
Director (Dated)
George M. Ohlhausen /s/ George M. Ohlhausen March 25, 1998
----------------------------------- --------------
Director (Dated)
Norman D. Rich
----------------------------------- --------------
Director (Dated)
</TABLE>
19
<PAGE> 22
EXHIBIT INDEX
3.1 Second Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 of the Company's Form S-1 Registration
Statement (No. 333-32561) filed with the Securities and Exchange
Commission on July 31, 1997).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 of the
Company's Form S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange Commission on July 31, 1997).
10.1 $10 Million Business Loan Agreement between Success Bancshares, Inc. and
Cole Taylor Bank dated January 13, 1998.
10.2 1995 Success Bancshares, Inc. Employee Stock Option Plan (incorporated
by reference to Exhibit 10.2 of the Company's Form S-1 Registration
Statement (No. 333-32561) filed with the Securities and Exchange
Commission on July 31, 1997).
10.3 Employment Agreement between the Company and Saul D. Binder
(incorporated by reference to Exhibit 10.3 of the Company's Form S-1
Registration Statement (No. 333-32561) filed with the Securities and
Exchange Commission on July 31, 1997).
10.4 Executive Severance Agreement between the Company and Steven A. Covert
(incorporated by reference to Exhibit 10.4 of the Company's Form S-1
Registration Statement (No. 333-32561) filed with the Securities and
Exchange 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 the Company's Form S-1
Registration Statement (No. 333-32561) filed with the Securities and
Exchange 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 the Company's Form S-1
Registration Statement (No. 333-32561) filed with the Securities and
Exchange 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 the
Company's Form S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange Commission on July 31, 1997).
11.1 Statement re Computation of Per Share Earnings
13.1 1997 Annual Report to Shareholders
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
of the Company's Form S-1 Registration Statement (No. 333-32561) filed
with the Securities and Exchange Commission on July 31, 1997).
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 10.1
COMMERCIAL PLEDGE AND SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$10,000,000.00 01-13-1998 06-15-1998 0101 9A0 3210 0015131 010
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
BORROWER: SUCCESS BANCSHARES, INC. LENDER: COLE TAYLOR BANK
ONE MARRIOTT DRIVE CORRESPONDENT BANKING
LINCOLNSHIRE, IL 60069-3701 7601 S. CICERO AVENUE
CHICAGO, IL 60652
GRANTOR: SUCCESS BANCSHARES, INC. F/K/A LINCOLNSHIRE BANCSHARES, INC.
</TABLE>
THIS COMMERCIAL PLEDGE AND SECURITY AGREEMENT IS ENTERED INTO AMONG SUCCESS
BANCSHARES, INC. (REFERRED TO BELOW AS "BORROWER"); AND SUCCESS BANCSHARES,
INC. F/K/A LINCOLNSHIRE BANCSHARES, INC. (REFERRED TO BELOW AS "GRANTOR"); AND
COLE TAYLOR BANK (REFERRED TO BELOW AS "LENDER").
GRANT OF SECURITY INTEREST. FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY
LAW.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement:
AGREEMENT. The word "Agreement" means this Commercial Pledge and Security
Agreement, as this Commercial Pledge and Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules attached
to this Commercial Pledge and Security Agreement from time to time.
BORROWER. The word "Borrower" means each and every person or entity signing
the Note, including without limitation Success Bancshares, Inc.
COLLATERAL. The word "Collateral" means the following specifically described
property, which Grantor has delivered or agrees to deliver (or cause to be
delivered or appropriate book-entries made) immediately to Lender, together
with all Income and Proceeds as described below:
92.0% OF THE OUTSTANDING COMMON STOCK OF SUCCESS NATIONAL BANK F/K/A
FIRST NATIONAL BANK OF LINCOLNSHIRE
100.0% OF THE OUTSTANDING PREFERRED STOCK OF SUCCESS NATIONAL BANK F/K/A
FIRST NATIONAL BANK OF LINCOLNSHIRE
In addition, the word "Collateral" includes all property of Grantor, in the
possession of Lender (or in the possession of a third party subject to the
control of Lender), whether now or hereafter existing and whether tangible or
intangible in character, including without limitation each of the following:
(A) ALL PROPERTY TO WHICH LENDER ACQUIRES TITLE OR DOCUMENTS OF TITLE.
(B) ALL PROPERTY ASSIGNED TO LENDER.
(C) ALL PROMISSORY NOTES, BILLS OF EXCHANGE, STOCK CERTIFICATES, BONDS,
SAVINGS PASSBOOKS, TIME CERTIFICATES OF DEPOSIT, INSURANCE POLICIES, AND ALL
OTHER INSTRUMENTS AND EVIDENCES OF AN OBLIGATION.
(D) ALL RECORDS RELATING TO ANY OF THE PROPERTY DESCRIBED IN THIS COLLATERAL
SECTION, WHETHER IN THE FORM OF A WRITING, MICROFILM, MICROFICHE, OR
ELECTRONIC MEDIA.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"Events of Default."
GRANTOR. The word "Grantor" means Success Bancshares, Inc. f/k/a
Lincolnshire Bancshares, Inc.. Any Grantor who signs this Agreement, but
does not sign the Note, is signing this Agreement only to grant a security
interest in Grantor's interest in the Collateral to Lender and is not
personally liable under the Note except as otherwise provided by contract or
law (e.g., personal liability under a guaranty or as a surety).
GUARANTOR. The word "Grantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
the Indebtedness.
INCOME AND PROCEEDS. The words "Income and Proceeds" mean all present and
future income, proceeds, earnings, increases, and substitutions from or for
the Collateral of every kind and nature, including without limitation all
payments, interest, profits, distributions, benefits, rights, options,
warrants, dividends, stock dividends, stock splits, stock rights, regulatory
dividends, distributions, subscriptions, monies, claims for money due and to
become due, proceeds of any insurance on the Collateral, shares of stock of
different par value or no par value issued in substitution or exchange for
shares included in the Collateral, and all other property Grantor is entitled
to receive on account of such Collateral, including accounts, documents,
instruments, chattel paper, and general intangibles.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Borrower or Grantor is
responsible under this Agreement or under any of the Related Documents. In
addition, the word "Indebtedness" includes all other obligations, debts and
liabilities, plus interest thereon, of Borrower, or any one or more of them,
to Lender, as well as all claims by Lender against Borrower, or any one or
more of them, whether existing now or later; whether they are voluntary or
involuntary, due or not due, direct or indirect, absolute or contingent,
liquidated or unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness may
be or hereafter may become barred by any statute of limitations; and whether
such indebtedness may be or hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means COLE TAYLOR BANK, its successors and
assigns.
NOTE. The word "Note" means the note or credit agreement dated January 13,
1998, in the principal amount of $10,000,000.00 from Borrower to Lender,
together with all renewals of, extensions of, modifications of, refinancings
of, consolidations of and substitutions for the note or credit agreement.
OBLIGOR. The word "Obligor" means and includes without limitation any and
all persons or entities obligated to pay money or to perform some other act
under the Collateral.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the indebtedness.
BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under
this Agreement or by applicable law, (a) Borrower agrees that Lender need not
tell Borrower about any action or inaction Lender takes in connection with this
Agreement; (b) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (c) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this Agreement.
GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) this
Agreement is executed at Borrower's request and not at the request of Lender;
(b) Grantor has the full right, power and authority to enter into this
Agreement and to pledge the Collateral to Lender; (c) Grantor has established
adequate means of obtaining from Borrower on a continuing basis information
about Borrower's financial condition; and (d) Lender has made no
representation to Grantor about Borrower or Borrower's creditworthiness.
GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest,
demand, and notice of dishonor or non-payment to Grantor, Borrower, or any
other party to the Indebtedness or the Collateral. Lender may do any of the
following with respect to any obligation of any Borrower, without first
obtaining the consent of Grantor: (a) grant any extension of time for any
payment, (b) grant any renewal, (c) permit any modification of payment terms or
other terms, or (d) exchange or release any Collateral or other security. No
such act or failure to act shall affect Lender's rights against Grantor or the
Collateral.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Grantor hereby forever waives and relinquishes in favor of
Lender and Borrower, and their respective successors, any claim or
<PAGE> 2
01-13-1998 COMMERCIAL PLEDGE AND SECURITY AGREEMENT PAGE 2
LOAN NO 0101 (CONTINUED)
================================================================================
right to payment Grantor may now have or hereafter have or acquire against
Borrower, by subrogation or otherwise, so that at no time shall Grantor be or
become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b),
or any successor provision of the Federal bankruptcy laws.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory
security interest in and hereby assigns, conveys, delivers, pledges, and
transfers all of Grantor's right, title and interest in and to Grantor's
accounts with Lender (whether checking, savings, or some other account),
including all accounts held jointly with someone else and all accounts Grantor
may open in the future, excluding, however, all IRA and Keogh accounts, and all
trust accounts for which the grant of a security interest would be prohibited
by law. Grantor authorizes Lender, to the extent permitted by applicable
law, to charge or setoff all indebtedness against any and all such accounts.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL.
Grantor represents and warrants to Lender that:
OWNERSHIP. Grantor is the lawful owner of the Collateral free and clear of
all security interests, liens, encumbrances and claims of others except as
disclosed to and accepted by lender in writing prior to execution of this
Agreement.
RIGHT TO PLEDGE. Grantor has the full right, power and authority to enter
into this Agreement and to pledge the Collateral.
BINDING EFFECT. This Agreement is binding upon Grantor, as well as Grantor's
heirs, successors, representatives and assigns, and is legally enforceable in
accordance with its terms.
NO FURTHER ASSIGNMENT. Grantor has not, and will not, sell, assign,
transfer, encumber or otherwise dispose of any of Grantor's rights in the
Collateral except as provided in this Agreement.
NO DEFAULTS. There are no defaults existing under the Collateral, and there
are no offsets or counterclaims to the same. Grantor will strictly and
promptly perform each of the terms, conditions, covenants and agreements
contained in the Collateral which are to be performed by Grantor, if any.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its articles or agreements relating to entity incorporation, organization or
existence do not prohibit any term or condition of this Agreement.
LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO COLLATERAL. Lender may hold
the Collateral until all the Indebtedness has been paid and satisfied and
thereafter may deliver the Collateral to any Grantor. Lender shall have the
following rights in addition to all other rights it my have by law.
MAINTENANCE AND PROTECTION OF COLLATERAL. Lender may, but shall not be
obligated to, take such steps as it deems necessary or desirable to protect,
maintain, insure, store, or care for the Collateral, including payment of any
liens or claims against the Collateral. Lender may charge any cost incurred
in so doing to Grantor.
INCOME AND PROCEEDS FROM THE COLLATERAL. Lender may receive all Income and
Proceeds and add it to the Collateral. Grantor agrees to deliver to Lender
immediately upon receipt, in the exact form received and without commingling
with other property, all Income and Proceeds from the Collateral which may be
received by, paid, or delivered to Grantor or for Grantor's account, whether
as an addition to, in discharge of, in substitution of, or in exchange for
any of the Collateral.
APPLICATION OF CASH. At Lender's option, Lender may apply any cash, whether
included in the Collateral or received as Income and Proceeds or through
liquidation, sale, or retirement, of the Collateral, to the satisfaction of
the Indebtedness or such portion thereof as Lender shall choose, whether or
not matured.
TRANSACTIONS WITH OTHERS. Lender may (a) extend time for payment or other
performance, (b) grant a renewal or change in terms or conditions, or (c)
compromise, compound or release any obligation, with any one or more
Obligors, endorsers, or Guarantors of the Indebtedness as Lender deems
advisable, without obtaining the prior written consent of Grantor, and no
such act or failure to act shall affect Lender's rights against Grantor or
the Collateral.
ALL COLLATERAL SECURES INDEBTEDNESS. All Collateral shall be security for
the Indebtedness, whether the Collateral is located at one or more offices or
branches of Lender and whether or not the office or branch where the
Indebtedness is created is aware of or relies upon the Collateral.
COLLECTION OF COLLATERAL. Lender, at Lender's option may, but need not,
collect directly from the Obligors on any of the Collateral all Income and
Proceeds or other sums of money and other property due and to become due
under the Collateral, and Grantor authorizes and directs the Obligors, if
Lender exercises such option, to pay and deliver to Lender all Income and
Proceeds and other sums of money and other property payable by the terms of
the Collateral and to accept Lender's receipt for the payments.
POWER OF ATTORNEY. Grantor Irrevocably appoints Lender as Grantor's
attorney-in-fact, with full power of substitution, (a) to demand, collect,
receive, receipt for, sue and recover all Income and Proceeds and other sums
of money and other property which may now or hereafter become due, owing or
payable from the Obligors in accordance with the terms of the Collateral; (b)
to execute, sign and endorse any and all instruments, receipts, checks,
drafts and warrants issued in payment for the Collateral; (c) to settle or
compromise any and all claims arising under the Collateral, and in the place
and stead of Grantor, execute and deliver Grantor's release and acquittance
for Grantor; (d) to file any claim or claims or to take any action or
institute or take part in any proceedings, either in Lender's own name or in
the name of Grantor, or otherwise, which in the discretion of Lender may seem
to be necessary or advisable; and (e) to execute in Grantor's name and to
deliver to the Obligors on Grantor's behalf, at the time and in the manner
specified by the Collateral, any necessary instruments or documents.
PERFECTION OF SECURITY INTEREST. Upon request of Lender, Grantor will
deliver to Lender any and all of the documents evidencing or constituting the
Collateral. When applicable law provides more than one method of perfection
of Lender's security interest, Lender may choose the method(s) to be used.
Upon request of Lender, Grantor will sign and deliver any writings necessary
to perfect Lender's security interest. If the Collateral consists of
securities for which no certificate has been issued, Grantor agrees, at
Lender's option, either to request issuance of an appropriate certificate or
to execute appropriate instructions on Lender's forms instructing the issuer,
transfer agent, mutual fund company, or broker, as the case may be, to record
on its books or records, by book-entry or otherwise, Lender's security
interest in the Collateral. Grantor hereby appoints Lender as Grantor's
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME BORROWER MAY NOT BE INDEBTED TO LENDER.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes will then bear interest at the rate charged under the Note
from the date incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lender's
option, will (a) be payable on demand, (b) be added to the balance of the Note
and be apportioned among and be payable with any installment payments to become
due during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will
be due and payable at the Note's maturity. This Agreement also will secure
payment of these amounts. Such right shall be in addition to all other rights
and remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care
in the physical preservation and custody of the Collateral in Lender's
possession, but shall have no other obligation to protect the Collateral or its
value. In particular, but without limitation, Lender shall have no
responsibility for (a) any depreciation in value of the Collateral or for the
collection or protection of any Income and Proceeds from the Collateral, (b)
preseervation of rights against parties to the Collateral or against third
persons, (c) ascertaining any maturities, calls, conversions, exchanges,
offers, tenders, or similar matters relating to any of the Collateral, or (d)
informing Grantor about any of the above, whether or not Lender has or is
deemed to have knowledge of such matters. Except as provided above, Lender
shall have no liability for depreciation or deterioration of the Collateral.
REINSTATEMENT OF SECURITY INTEREST. If payment is made by Borrower, whether
voluntarily or otherwise, or by guarantor or by any third party, on the
Indebtedness and thereafter Lender is forced to remit the amount of that
payment (a) to Borrower's trustee in bankruptcy or to any similar person under
any federal or state bankruptcy law or law for the relief of debtors, (b) by
reason of any judgment, decree or order of any court or administrative body
having jurisdiction over Lender or any of Lender's property, or (c) by reason
of any settlement or compromise of any claim made by Lender with any claimant
(including without limitation Borrower), the Indebtedness shall be considered
unpaid for the purpose of enforcement of this Agreement and this Agreement
shall continue to be effective or shall be reinstated, as the case may be,
notwithstanding any cancellation of this Agreement or of any note or other
instrument or agreement evidencing the Indebtedness and the Collateral will
continue to secure the amount repaid or recovered to the same extent as if that
amount never had been originally received by Lender, and Grantor shall be bound
by any judgment, decree, order, settlement or compromise relating to the
indebtedness or to this Agreement.
<PAGE> 3
01-13-1998 COMMERCIAL PLEDGE AND SECURITY AGREEMENT PAGE 3
LOAN NO 0101 (CONTINUED)
================================================================================
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Borrower or Grantor to comply with or to perform
any other term, obligation, covenant or condition contained in this Agreement
or in any of the Related Documents or failure of Borrower to comply with or
to perform any term, obligation, covenant or condition contained in any other
agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or Grantor under this
Agreement, the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower or Grantor's
existence as a going business, the insolvency of Borrower or Grantor, the
appointment of a receiver for any part of Borrower or Grantor's property, any
assignment for the benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws by or
against Borrower or Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower or Grantor or
by any governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of Borrower or
Grantor's accounts, including deposit accounts, with Lender.
DETERIORATION OF COLLATERAL VALUE. The market value of the Collateral falls
below 200.0% of the outstanding principal balance of the Note or Notes. Book
Value shall be used to determine a default hereunder, and Borrower or Grantor
does not, by the close of business on the next business day after Lender has
sent written notice to Borrower or Grantor of the deterioration, either (a)
reduce the amount of the Indebtedness to the amount required by Lender or
(b) increase the cash value of Collateral to the amount required by Lender by
lodging with Lender additional collateral security acceptable to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes
incompetent.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender may exercise any one or more of the
following rights and remedies:
ACCELERATE INDEBTEDNESS. Declare all Indebtedness, including any prepayment
penalty which Borrower would be required to pay, immediately due and payable,
without notice of any kind to Borrower or Grantor.
COLLECT THE COLLATERAL. Collect any of the Collateral and, at Lender's
option and to the extent permitted by applicable law, retain possession of
the Collateral while suing on the Indebtedness.
SELL THE COLLATERAL. Sell the Collateral, at Lender's discretion, as a unit
or in parcels, at one or more public or private sales. Unless the Collateral
is perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, Lender shall give or mail to
Grantor, or any of them, notice at least ten (10) days in advance of the time
and place of any public sale, or of the date after which any private sale may
be made. Grantor agrees that any requirement of reasonable notice is
satisfied if Lender mails notice by ordinary mail addressed to Grantor, or
any of them, at the last address Grantor has given Lender in writing. If a
public sale is held, there shall be sufficient compliance with all
requirements of notice to the public by a single publication in any newspaper
of general circulation in the county where the Collateral is located, setting
forth the time and place of sale and a brief description of the property to
be sold. Lender may be a purchaser at any public sale.
REGISTER SECURITIES. Register any securities included in the Collateral in
Lender's name and exercise any rights normally incident to the ownership of
securities.
SELL SECURITIES. Sell any securities included in the Collateral in a manner
consistent with applicable federal and state securities laws, notwithstanding
any other provision of this or any other agreement. If, because of
restrictions under such laws, Lender is or believes it is unable to sell the
securities in an open market transaction, Grantor agrees that Lender shall
have no obligation to delay sale until the securities can be registered, and
may make a private sale to one or more persons or to a restricted group of
persons, even though such sale may result in a price that is less favorable
than might be obtained in an open market transaction, and such a sale shall
be considered commercially reasonable. If any securities held as Collateral
are "restricted securities" as defined in the Rules of the Securities and
Exchange Commission (such as Regulation D or Rule 144) or state securities
departments under state "Blue Sky" laws, or if Borrower or Grantor is an
affiliate of the issuer of the securities, Borrower and Grantor agree that
neither Grantor nor any agent of Grantor will sell or dispose of any
securities of such issuer without obtaining Lender's prior written consent.
FORECLOSURE. Maintain a judicial suit for foreclosure and sale of the
Collateral.
TRANSFER TITLE. Effect transfer of title upon sale of all or part of the
Collateral. For this purpose, Grantor irrevocably appoints Lender as its
attorney-in-fact to execute endorsements, assignments and instruments in the
name of Grantor and each of them (if more than one) as shall be necessary or
reasonable.
OTHER RIGHTS AND REMEDIES. Have and exercise any or all of the rights and
remedies of a secured creditor under the provisions of the Uniform Commercial
Code, at law, in equity, or otherwise.
APPLICATION OF PROCEEDS. Apply any cash which is part of the Collateral, or
which is received from the collection or sale of the Collateral, to
reimbursement of any expenses, including any costs for registration of
securities, commissions incurred in connection with a sale, attorney fees as
provided below, and court costs, whether or not there is a lawsuit and
including any fees on appeal, incurred by Lender in connection with the
collection and sale of such Collateral and to the payment of the Indebtedness
of Borrower to Lender, with any excess funds to be paid to Grantor as the
interests of Grantor may appear. Borrower agrees, to the extent permitted by
law, to pay any deficiency after application of the proceeds of the
Collateral to the Indebtedness.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or by any other writing, shall be cumulative and may be
exercised singularly or concurrently. Election by Lender to pursue any
remedy shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Grantor under this
Agreement, after Grantor's failure to perform, shall not affect Lender's
right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or parties
sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF ILLINOIS. IF THERE IS A LAWSUIT, BORROWER AND GRANTOR
AGREE UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF
COOK COUNTY, THE STATE OF ILLINOIS. LENDER, BORROWER AND GRANTOR HEREBY
WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
BROUGHT BY EITHER LENDER, BORROWER OR GRANTOR AGAINST THE OTHER. THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF ILLINOIS.
ATTORNEYS' FEES; EXPENSES. Borrower and Grantor agree to pay upon demand all
of Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Borrower and
Grantor shall pay the costs and expenses of such enforcement. Costs and
expenses include Lender's attorneys' fees and legal expenses whether or not
there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Borrower and Grantor also shall pay all court costs and
such additional fees as may be directed by the court.
<PAGE> 4
01-13-1998 COMMERCIAL PLEDGE AND SECURITY AGREEMENT PAGE 4
LOAN NO 0101 (CONTINUED)
================================================================================
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower and
Grantor under this Agreement shall be joint and several, and all references
to Borrower shall mean each and every Borrower, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required by
law), and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States
mail, first class, postage prepaid, addressed to the party to whom the notice
is to be given at the address shown above. Any party may change its address
for notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Borrower or Grantor, notice to any Borrower or Grantor will constitute
notice to all Borrower and Grantors. For notice purposes, Borrower and
Grantor will keep Lender informed at all time of Borrower and Grantor's
current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTEREST. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER AND GRANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS PLEDGE
AND SECURITY AGREEMENT, AND BORROWER AND GRANTOR AGREE TO ITS TERMS. THIS
AGREEMENT IS DATED JANUARY 13, 1998.
BORROWER:
SUCCESS BANCSHARES, INC.
BY:
----------------------------------------------------------
SAUL D. BINDER, PRESIDENT
GRANTOR:
SUCCESS BANCSHARES, INC. F/K/A LINCOLNSHIRE BANCSHARES, INC.
BY:
----------------------------------------------------------
SAUL D. BINDER, PRESIDENT
================================================================================
<PAGE> 1
Exhibit 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
BASIC EARNINGS
Net income $1,087 $ 783 $ 937
Less: Preferred stock dividends (40) (81) -
- ---------------------------------------------------------------------------------------------
Income available to common stockholders $1,047 $ 702 $ 937
=============================================================================================
Shares
Weighted average number of common shares outstanding 1,531 1,061 1,011
Basic earnings per share $ 0.68 $0.66 $ 0.93
=============================================================================================
DILUTED EARNINGS
Income available to common stockholders $1,047 $ 702 $ 937
Net interest expense related to convertible debt - - 112
- ---------------------------------------------------------------------------------------------
Net income as adjusted $1,047 $ 702 $1,049
=============================================================================================
Shares
Weighted average number of common shares outstanding
assuming effect of dilutive securities 1,607 1,122 1,215
Fully diluted earnings per share $ 0.65 $0.63 $ 0.86
=============================================================================================
</TABLE>
<PAGE> 1
Lincolnwood Lincolnshire
Lincolnwood Int'l Lincoln Park
1997
Annual Report
Success Bancshares, Inc.
Downtown Deerfield Libertyville
Deerfield/Riverwoods Arlington Heights Northbrook
<PAGE> 2
Success Bancshares, Inc. and Subsidiaries
- -------------------------------------------------------------------------------
(Insert Map)
<PAGE> 3
Success Bancshares, Inc. and Subsidiaries
Table of Contents
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Mission Statement 1
President's Message 2-3
Selected Financial Highlights 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations 5-9
Report of Independent Auditors 10
Consolidated Balance Sheets 11
Consolidated Statements of Income 12
Consolidated Statements of Shareholders' Equity 13
Consolidated Statements of Cash Flows 14
Notes to Consolidated Financial Statements 15-30
Listing of Directors and Officers 31
Shareholder Information Inside back cover
</TABLE>
<PAGE> 4
Success Bancshares, Inc. and Subsidiaries
Mission Statement
- -------------------------------------------------------------------------------
The Company, by its very nature, exists because of Trust. It is the purpose of
this Company to fulfill the trust given to it by its depositors, by its
borrowers, the employees, and the stockholders.
To fulfill its obligation to depositors, it will at all times strive to pay a
fair, equitable rate for these deposits and to minimize the cost of services.
To its borrowers, it is pledged to provide financial assistance to all segments
of society, be they economically described as high income, moderate income or
low income. This assistance will be provided taking into account all factors
involved in prudent banking, including economic conditions, the collateral
being pledged, the length of time of the credit, but simultaneously protecting
the assets of the Company while maintaining an atmosphere of fairness and
equality to all borrowers.
To all the individuals who receive their livelihood from the Company and whose
dedication to fulfill the trust placed in them, the Company pledges a fair,
equitable compensation, including benefits for their long-term financial
security, as well as friendly, collegial surrounding to do their work within.
To the stockholders who provide the capital base from which all business
entities evolve, this Company is dedicated to safeguarding their investment,
providing an equitable return on their investment with a clear understanding
that they are the risk-takers in providing the capital and are therefore
entitled to proper results of the deployment of their capital.
This Company is a member of society and is pledged to repay society and the
communities it serves for the benefits of membership by being a good corporate
citizen and to provide its services and benefits to all individuals and
entities regardless of race, creed, gender, sexual orientation or ethnic
background and supporting the community through involvement in community
activities and participating in such a way that it is acknowledged that because
of the Company's existence, it has made for a better world.
- -------------------------------------------------------------------------------
1
<PAGE> 5
Success Bancshares, Inc. and Subsidiaries
President's Message
- -------------------------------------------------------------------------------
To Our Shareholders and Customers:
This annual report, covering the year ended December 31, 1997, is especially
noteworthy because it is the first annual report for Success Bancshares, Inc.
as a publicly held company.
Net income for the year ended December 31, 1997 was $1.1 million, or $0.68 per
share, an increase of 39% from net income of $783,000 or $0.66 per share for
1996.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
NET INCOME 937 783 1,087
</TABLE>
Total assets were $378.7 million at December 31, 1997, compared with $276.3
million at the end of 1996, a 37% increase.
We believe these results are favorable if judged by the standards of a normal
year and could be, in fact, considered even more impressive given the special
dynamics of our past year.
PUBLIC OFFERING:
Completed in October, 1997, our initial public offering raised $15.7 million in
capital, effectively doubling our capital base and giving us the financial
resources to continue pursuing our rapid growth.
Despite the fact that this public offering doubled the number of common shares
outstanding during the last quarter of the year, the Company's performance was
sufficient to increase per-share earnings for the quarter by 12.5%, from $0.16
per share for the quarter ending December 31, 1996, to $0.18 per share for the
quarter ending December 31, 1997.
BRANCH OFFICE EXPANSION:
We continued our strategy of opening new branch offices in 1997 in order to
expand the number of individuals and businesses who can now take advantage of
our unique products and service mentality.
- - Deerfield Downtown: This office extended our existing Deerfield market
area and has been welcomed by both businesses and consumers who were looking
for an alternative to the large Chicago banks which previously dominated this
community. The initial performance of this office has, to date, exceeded our
expectations.
- - Arlington Heights: This office represents a market expansion into new
territory and its growth is satisfactory to us.
- - International Office: This office, which is located inside the
Lincolnwood Town Center Mall, caters to the extensive Pan-Asian community in
the area. The office staff can provide service in the Chinese, Thai and
Malaysian languages as well as in English. This office opened in November
1997, and the early results indicate that it will be successful in attracting
commercial accounts from the Asian community.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
TOTAL ASSETS 251,338 276,349 378,719
</TABLE>
- -------------------------------------------------------------------------------
2
<PAGE> 6
Success Bancshares, Inc. and Subsidiaries
President's Message
- -------------------------------------------------------------------------------
- - In 1998, we expect to continue our market expansion by opening full
service offices in the Loop section of Chicago, and the suburban communities of
Mundelein, Skokie, and North Libertyville, Illinois. We will also be opening
our first supermarket branch in a specialty grocery store in Skokie in the
first quarter of 1998.
The branch growth is not without cost, however, as shown by a 14% increase in
other operating expenses. As we continue our branch expansion, the Company is
likely to continue to experience the effects of higher operating expenses
relative to operating income from the new branches, which may limit increases
in profitability. Management believes, however, that as these new locations
mature, they should provide an acceptable level of profitability to the
Company.
AGGRESSIVE MARKETING:
The Company achieved significant growth in its mature market areas by actively
seeking new commercial lending relationships and offering an
attractively-priced home equity loan promotion targeted to high-quality loan
customers. While the utilization of promotional rates contributed to a
compression of the Company's net interest margin, from 4.25% in 1996 to 4.17%
in 1997, the business attracted by those rates contributed to a 41% increase in
loans outstanding.
CORPORATE CITIZENSHIP:
Success Bancshares, Inc., through its majority-owned subsidiary, Success
National Bank, has long based its business philosophy on four key principles:
growth through solid, well-planned market expansions; highly-competitive and
unique products; superior customer service; and good corporate citizenship.
While the first three of these principles are addressed directly or indirectly
through the financial sections of this report, I wish to call your attention
here to several developments related to the principle of good corporate
citizenship:
- - Success National Bank was one of the first financial institutions to
participate in the Ready Access Program sponsored by the Illinois Treasurer's
Office. This program makes low-interest loans available to disabled
individuals for accessibility and assistive technology equipment or
improvements.
- - The Bank has committed to participate in the Chicago Equity Fund which
builds and renovates housing for low-to-moderate income households.
- - To further help with the need for lower-cost housing, Success Bancshares,
Inc. is in the process of creating our own community development corporation.
Although this is Success Bancshares, Inc.'s first year as a publicly-held
company, it is our 25th year of existence as a banking organization. It is
important to keep in mind, therefore, that the ground work for this past year's
impressive results was started years ago when we first committed our
organization to our basic business principles: solid market expansion, good
customer values, good customer service and good citizenship. Our past
performance has shown that a business strategy based on these principles is
appropriate for long-term profitable growth as a community banking organization
serving individuals and small-to-medium sized businesses.
This past year has been one of great changes and progress for the Company and
we are proud of the results our employees have achieved in this dynamic
environment. As we look ahead with enthusiasm, we extend our thanks to our
shareholders, our employees and our customers. We appreciate your confidence
and support.
Very truly yours,
/s/ Saul D. Binder
-----------------------
Saul D. Binder
President
Chief Executive Officer
- -------------------------------------------------------------------------------
3
<PAGE> 7
Success Bancshares, Inc. and Subsidiaries
Selected Financial Highlights
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------------------------------------------
STATEMENT OF INCOME DATA: (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Interest income $ 24,912 $ 19,850 $ 18,675 $ 14,619 $ 10,960
Interest expense 12,861 10,020 9,886 7,221 5,016
- -------------------------------------------------------------------------------
Net interest income 12,051 9,830 8,789 7,398 5,944
Provision for loan losses 766 310 207 250 220
Other income 8,191 7,149 6,004 5,007 5,501
Other expenses 17,853 15,630 13,342 12,016 10,144
Minority interest in income
of subsidiary bank 37 23 47 58 79
- -------------------------------------------------------------------------------
Net income before taxes 1,586 1,016 1,197 81 1,002
Income tax expense (benefit) 499 233 260 (182) 176
- -------------------------------------------------------------------------------
Net income $ 1,087 $ 783 $ 937 $ 263 $ 826
===============================================================================
COMMON SHARE DATA:
Earnings per common share:
Basic $ 0.68 $ 0.66 $ 0.93 $ 0.27 $ 0.89
Diluted $ 0.65 $ 0.63 $ 0.86 $ 0.26 $ 0.84
Book value per common share $ 10.30 $ 8.99 $ 7.48 $ 5.83 $ 7.27
Weighted average common
shares outstanding 1,531 1,061 1,011 990 927
BALANCE SHEET DATA:
Cash and cash equivalents $ 23,901 $ 13,833 $ 20,559 $ 18,909 $ 8,190
Securities 53,754 47,707 55,614 55,393 30,250
Loans, net 287,025 203,299 171,135 139,491 109,224
Total assets 378,719 276,349 251,338 222,809 190,677
Deposits 329,424 245,105 227,308 204,171 162,676
Borrowings, including
repurchase agreements 16,163 18,975 14,395 11,174 19,644
Shareholders' equity $ 30,070 $ 10,100 $ 8,085 $ 5,973 $ 6,706
PERFORMANCE DATA:
Net interest margin 4.17% 4.25% 4.14% 4.38% 4.50%
Return on average assets 0.34% 0.31% 0.40% 0.13% 0.53%
Return on average equity 7.76% 8.33% 14.48% 4.29% 14.00%
Loans to deposits 87.13% 82.94% 75.29% 68.32% 67.14%
ASSET QUALITY RATIOS:
Nonperforming loans to
total loans (1) 0.63% 0.06% 0.37% 0.27% 1.25%
Nonperforming assets to
total assets 0.56% 0.04% 0.25% 0.17% 0.72%
Allowance for loan losses
to total loans 0.72% 0.70% 0.70% 0.71% 0.78%
Nonperforming loans to
allowance for loan losses 87.54% 8.28% 53.74% 38.10% 160.35%
Net loan charge-offs to
average loans 0.05% 0.04% 0.01% 0.08% 0.01%
CAPITAL RATIOS:
Risk-based capital 12.37% 8.00% 7.53% 7.83% 8.35%
Leverage capital (2) 9.69% 4.37% 3.70% 3.52% 3.67%
OTHER:
Branch offices 9 7 7 5 4
Full-time equivalent employees 162 144 150 120 114
</TABLE>
___________
(1) Nonperforming loans consist of non-accrual loans and loans contractually
past due 90 days or more.
(2) The leverage ratio is defined as the ratio of Tier 1 risk-based capital
to adjusted total assets.
- -------------------------------------------------------------------------------
4
<PAGE> 8
Success Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
The following discussion should be read in conjunction with "Selected Financial
Highlights" and the Consolidated Financial Statements of Success Bancshares,
Inc. (the "Company"), including the accompanying notes, each appearing
elsewhere in this Annual Report. In addition to historical information, the
following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ significantly
from those anticipated in these forward looking statements.
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.
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the average daily balances, net interest income
and expense and average yields and rates for the Company's earning assets and
interest bearing liabilities for the indicated periods on a tax-equivalent
basis assuming a 34% tax rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- -------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) & (2)......................... $239,084 $ 21,755 9.10% $182,453 $ 16,764 9.19% $156,896 $ 14,965 9.54%
Taxable investment securities........... 38,801 2,318 5.97 40,423 2,397 5.93 43,515 2,936 6.75
Investment securities exempt from
Federal income taxes................. 8,214 613 7.46 8,824 671 7.60 11,895 825 6.94
Interest bearing deposits with
financial institutions............... 4,032 215 5.33 2,189 125 5.71 4,586 108 2.35
Other interest earning assets........... 3,576 208 5.82 2,500 120 4.80 1,744 103 5.91
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets........... 293,707 $ 25,109 8.55% 236,389 $ 20,077 8.49% 218,636 $ 18,937 8.66%
Non-interest earning assets............. 25,335 19,890 14,846
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets......................... $319,042 $256,279 $233,482
===================================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
NOW & money market accounts.......... $ 88,652 $ 3,114 3.51% $ 76,127 $ 2,557 3.36% $ 68,574 $ 2,534 3.70%
Savings deposits..................... 19,946 640 3.21 18,329 606 3.31 18,293 589 3.22
Time deposits........................ 127,236 7,436 5.84 96,308 5,469 5.68 96,020 5,648 5.88
Notes payable........................... 4,249 363 8.54 4,237 355 8.38 5,190 449 8.65
Other borrowings........................ 20,978 1,308 6.24 15,923 1,033 6.49 10,746 666 6.20
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities...... 261,061 12,861 4.93 210,924 10,020 4.75 198,823 9,886 4.97
Demand deposits - non-interest bearing.. 40,868 33,922 26,884
Other non-interest bearing liabilities.. 2,560 1,515 789
Minority interest in subsidiary bank.... 544 515 513
Shareholders' equity.................... 14,009 9,403 6,473
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $319,042 $256,279 $233,482
===================================================================================================================================
Net interest income..................... $ 12,248 $ 10,057 $ 9,051
===================================================================================================================================
Net interest margin..................... 4.17% 4.25% 4.14%
===================================================================================================================================
</TABLE>
- ----------------------
(1) Non-accrual loans are included in average loans.
(2) Interest income on loans includes loan origination and other fees of
$762,000, $817,000, and $819,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
- -------------------------------------------------------------------------------
5
<PAGE> 9
Success Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
The increase in average earning assets of $57.3 million to $293.7 million for
the year ended December 31, 1997, is primarily attributable to the Company's
loan growth. The average balance of loans during 1997 was $239.1 million,
compared with $182.5 million for 1996, an increase of 31.0%.
The Company has been actively pursuing new commercial loan relationships in its
market area. Commercial loans and commercial mortgage loans totaled $151.0
million at December 31, 1997, compared with $102.2 million at December 31,
1996, an increase of $48.8 million, or 47.7%.
The Company also launched a successful home equity product in 1997. This home
equity line of credit offers a 7.5% fixed rate for three years and then
converts to a prime rate-based adjustable loan. As of December 31, 1997, total
closed commitments on this product were $61.8 million, and $27.5 million was
drawn and outstanding.
The Company primarily utilized interest bearing deposits to fund the loan
growth, which contributed to the $50.1 million increase in average interest
bearing liabilities during 1997.
CHANGES IN INTEREST INCOME AND EXPENSE
The following table shows the dollar amount of changes in interest income and
expense by major categories of interest earning assets and interest bearing
liabilities attributable to changes in volume or rate or both, for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 OVER 1996 1996 OVER 1995
------------------------ ------------------------
CHANGE DUE TO CHANGE DUE TO
--------------- TOTAL --------------- TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Net loans (1)............................................. $5,155 $ (164) $4,991 $2,365 $ (566) $1,799
Taxable investment securities............................. (97) 18 (79) (199) (340) (539)
Investment securities exempt from Federal income taxes (1) (46) (12) (58) (228) 74 (154)
Interest bearing deposits with financial institutions..... 99 (9) 90 (78) 95 17
Other interest earning assets............................. 59 29 88 39 (22) 17
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in interest income............ 5,170 (138) 5,032 1,899 (759) 1,140
- ---------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
NOW & money market accounts............................... $ 435 $ 122 557 $ 265 (242) 23
Savings deposits.......................................... 52 (18) 34 1 16 17
Time deposits............................................. 1,804 163 1,967 17 (196) (179)
Notes payable............................................. 1 7 8 (80) (14) (94)
Other borrowings.......................................... 317 (42) 275 335 32 367
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in interest expense........... 2,609 232 2,841 538 (404) 134
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income.............. $2,561 $ (370) $2,191 $1,361 $ (355) $1,006
</TABLE>
- ---------------------
(1) Tax-exempt income is reflected on a fully tax equivalent basis utilizing
a 34% rate for all periods presented.
Volume variances are computed using the change in volume multiplied by the
previous year's rate. Rate variances are computed using the changes in rate
multiplied by the previous year's volume. The change in interest due to both
rate and volume has been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each.
- -------------------------------------------------------------------------------
6
<PAGE> 10
Success Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
General
The Company's net income for the year ended December 31, 1997 was $1.1 million
compared to net income of $783,000 for the year ended December 31, 1996. The
$304,000 increase in net income was primarily attributable to an increase in
net interest income and other operating income, partially offset by increased
net operating expenses.
Net interest income
Net interest income increased to $12.1 million for the year ended December 31,
1997 from $9.8 million for 1996. This increase in net interest income of $2.2
million, or 22.6% was attributable to a $5.1 million increase in interest
income resulting from the 24.2% increase in average interest earning assets in
the year ended December 31, 1997 compared to the year ended December 31, 1996.
Partially offsetting this increase in interest income was a $2.8 million
increase in interest expense for the year ended December 31, 1997, a 28.4%
increase from 1996. The Company's net interest margin decreased to 4.17% for
1997 compared to 4.25% in 1996 as a result of the impact of promotional home
equity loan growth and market competition for high quality loan customers.
Provision for loan losses
The provision for loan losses increased to $766,000 in 1997, from $310,000 in
the prior year, primarily due to the growth in the loan portfolio. At December
31, 1997, the allowance for loan losses represented 0.72% of loans outstanding
which management believed was adequate to cover potential losses in the
portfolio. There can be no assurance that future losses will not exceed the
amounts provided for, thereby affecting future results of operations. The
amount of future additions to the allowance for loan losses will be dependent
upon the economy, changes in real estate values, interest rates, the view of
regulatory agencies toward adequate reserve levels, and past due and
non-performing loan levels.
Other operating income
Total other operating income increased approximately $1.1 million, or 14.6%, to
$8.2 million for 1997, compared to $7.1 million in 1996. Service charges on
deposit accounts increased by 34.0% to $1.9 million for the year ended December
31, 1997, from $1.4 million in 1996. The increase is primarily attributable to
a 15.0% increase in the average balance of deposit accounts subject to such
service charges and a 102.5% increase in average overdrafts outstanding. The
majority of service charges on deposit accounts consisted of fees charged for
overdrafts and failure to maintain required balances. Credit card processing
income increased to $6.0 million from $5.3 million for the years ended December
31, 1997 and 1996, respectively, due primarily to a 10.3% increase in the
amount of credit card sales processed and an increase in rates charged
merchants. Total processing volume increased to $290.3 million for the year
ended December 31, 1997, from $263.2 million in 1996.
Other operating expenses
Total other operating expenses increased $2.3 million, or 14.2%, to $17.9
million for 1997, as compared to $15.6 million in 1996. This increase reflects
the higher level of expenditures required to support the Company's growth.
Salaries and employee benefits increased to $6.2 million for the year ended
December 31, 1997, as compared to $5.5 million for the prior year. The
increase of $664,000 reflects increased staffing to support new locations and
the growth in deposit and loan accounts at existing banking locations which are
required to maintain high levels of customer service. Also contributing to the
increase in salaries were normal salary increases. Occupancy and equipment
expenses increased to $2.0 million for 1997, from $1.7 million for 1996,
primarily due to improvements in the Company's computer systems and the costs
associated with the April, 1997, opening of the Deerfield/Downtown branch
location and September, 1997 opening of the Arlington Heights branch location.
Data processing expense increased to
- -------------------------------------------------------------------------------
7
<PAGE> 11
Success Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
Other operating income (continued)
$889,000, (40.4%), for the year ended December 31, 1997, compared to $633,000
for 1996, primarily due to substantially higher volume levels and the costs
associated with the conversion of the Company's data processing provider in
March, 1997. Credit card processing expenses increased $528,000, or 10.5%, to
$5.5 million for 1997, compared to $5.0 million for 1996, primarily due to the
increase in the amount of credit card sales processed. Other non-interest
expenses increased by $360,000, or 13.6%, to $3.0 million for the year ended
December 31, 1997, from $2.6 million for 1996, primarily due to a $321,000
increase in legal fees attributable to increased collection costs and other
matters.
Income taxes
The Company recorded income tax expense of $499,000 for 1997, compared to an
income tax expense of approximately $233,000 in 1996, which increase is
attributable to the increase in net income before tax.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
General
The Company's net income was $783,000 for the year ended December 31, 1996,
compared to net income of $937,000 for the year ended December 31, 1995, a
decrease of $154,000 or 16.4%. The decrease in net income was primarily due to
increases in interest expense of $134,000, the provision for possible loan
losses of $103,000 and other operating expenses of $2.3 million, offset by
increases in interest income of $1.2 million and other operating income of $1.1
million.
Net interest income
Net interest income increased by $1.0 million, or 11.8%, to $9.8 million in
1996 from $8.8 million in 1995. This increase was attributable to a $17.8
million increase in average interest earning assets to $236.4 million in 1996
from $218.6 million in 1995. The Company's net interest margin in 1996
increased to 4.25% compared to 4.14% in 1995. This increase was primarily due
to the Company's ability to use the increase in demand deposits and other
borrowings to fund higher yielding commercial loans and real estate mortgage
loans.
Provision for loan losses
The provision for loan losses increased to $310,000 in 1996 from $207,000 in
1995, to provide for the growth in the Company's loan portfolio. Total loans
increased $32.4 million, or 18.7% to $205.4 million at December 31, 1996, from
$173.0 million at December 31, 1995. At December 31, 1996, the allowance for
loan losses represented 0.70% of total loans, which management believed was
adequate to cover potential losses in the loan portfolio.
Other operating income
Other operating income increased by $1.1 million, or 19.1%, to $7.1 million in
1996 from $6.0 million in 1995. Contributing to this increase was an increase
in service charges on deposit accounts of $268,000 to $1.4 million in 1996 and
an increase in credit card processing income of $945,000 to $5.3 million in
1996. The increase in service charges on deposit accounts is directly
attributable to the $17.8 million, or 7.8%, increase in deposits to $245.1
million at December 31, 1996, from $227.3 million at December 31, 1995. The
increase in credit card processing income is primarily attributable to the
increase in the number of participating merchants and a corresponding
processing volume increase to $263.2 million at December 31, 1996, from $214.7
million at December 31, 1995, a 22.6% increase.
- -------------------------------------------------------------------------------
8
<PAGE> 12
Success Bancshares, Inc. and Subsidiaries
Management's Discussion and Analysis
of Financial Condition and Results of Operations
- -------------------------------------------------------------------------------
Other operating expenses
Other operating expenses increased $2.3 million, or 17.1%, to $15.6 million in
1996 from $13.3 million in 1995, primarily due to a $784,000 increase in
salaries and employee benefits primarily attributable to a full year of
staffing of two additional branches, adding a number of experienced senior
personnel and additional staff to position the Company for future growth and
normal annual salary and wage increases. Occupancy and equipment expenses
increased $327,000, or 23.6%, to $1.7 million in 1996 from $1.4 million in 1995
primarily due to a full year of operating of two additional branch facilities
in 1996, one of which was in operation for 10 months in 1995 and the other for
less than one month in 1995. Credit card processing expenses increased by
approximately $1.1 million, or 29.2%, to $5.0 million in 1996 from $3.9 million
in 1995, primarily due to the increase in the number of participating merchants
and corresponding processing volume increases.
Income taxes
The Company recorded an income tax expense of $233,000 in 1996 compared to
$260,000 in 1995, reflecting the decrease in the Company's net income before
taxes in 1996.
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 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
- -------------------------------------------------------------------------------
9
<PAGE> 13
[MCGLADREY & PULLEN, LLP LETTERHEAD]
- -------------------------------------------------------------------------------
Board of Directors and Shareholders
Success Bancshares, Inc.
Lincolnshire, Illinois
We have audited the accompanying consolidated balance sheets of Success
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years ended December 31, 1997, 1996, and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Success Bancshares,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years ended December 31, 1997,
1996, and 1995, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Schaumburg, Illinois
February 13, 1998
- -------------------------------------------------------------------------------
10
<PAGE> 14
Success Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,901 $ 13,833
Interest-bearing time deposits with
financial institutions - 99
Securities available-for-sale 22,090 15,147
Securities held-to-maturity (fair value
$32,439 and $33,060 at 1997 and 1996,
respectively) 31,664 32,560
Real estate loans held-for-sale 65 117
Loans, less allowances for loan losses
of $2,079 and $1,425 at 1997 and
1996, respectively 287,025 203,299
Premises and equipment, net 8,786 7,049
Other real estate owned 290 -
Interest receivable and other assets 4,898 4,245
- -------------------------------------------------------------------------------
$378,719 $276,349
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 45,225 $ 42,596
Interest bearing deposits 284,199 202,509
- -------------------------------------------------------------------------------
Total deposits 329,424 245,105
Note payable - 4,815
Federal Home Loan Bank advances 10,720 5,152
Securities sold under
repurchase agreements 3,814 4,255
Demand notes payable to U.S. Government 1,429 1,586
Convertible subordinated debentures 200 3,167
Interest payable and other liabilities 2,482 1,645
- -------------------------------------------------------------------------------
Total liabilities 348,069 265,725
Minority interest in subsidiary bank 580 524
Shareholders' equity
Series B convertible preferred stock,
$1 par value 100,000 shares unauthorized,
93,141 shares issued and outstanding
at 1996 - 94
Common stock, $.001 par value at 1997
and $1 at 1996, 7,500,000 shares
authorized, 2,918,324 and
953,391 shares issued and outstanding,
at 1997 and 1996, respectively 3 953
Class A common stock, $1 par value,
1,000,000 shares authorized, -0- and
115,500 shares issued and
outstanding at 1997 and 1996,
respectively - 116
Additional paid-in capital 24,151 4,348
Retained earnings 6,352 5,305
Loan to Employee Stock Ownership Plan (158) (137)
- -------------------------------------------------------------------------------
Total before unrealized
loss on securities 30,348 10,679
Unrealized loss on securities, net of tax (278) (579)
- -------------------------------------------------------------------------------
Total shareholders' equity 30,070 10,100
- -------------------------------------------------------------------------------
$378,719 $276,349
===============================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
11
<PAGE> 15
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income
Loans (including fee income) $ 21,746 $ 16,757 $ 14,956
Investment securities
Taxable 2,318 2,397 2,936
Exempt from federal income tax 425 451 572
Other interest income 423 245 211
- -------------------------------------------------------------------------------
Total interest income 24,912 19,850 18,675
Interest expense
Deposits 11,190 8,632 8,771
Note payable 363 355 449
Convertible subordinated debentures 303 339 185
Other borrowings 1,005 694 481
- -------------------------------------------------------------------------------
Total interest expense 12,861 10,020 9,886
- -------------------------------------------------------------------------------
NET INTEREST INCOME 12,051 9,830 8,789
Provision for loan losses 766 310 207
- -------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,285 9,520 8,582
Other operating income
Service charges on deposit accounts 1,879 1,402 1,134
Securities gains, net - - 25
Gains on sales of loans, net 61 109 84
Writedown of real estate loans
held-for-sale, transferred
to portfolio - (74) -
Credit card processing income 5,987 5,334 4,389
Other fees and commissions 264 378 372
- -------------------------------------------------------------------------------
Total other operating income 8,191 7,149 6,004
Other operating expenses
Salaries and employee benefits 6,177 5,513 4,729
Occupancy and equipment expenses 2,044 1,715 1,388
Federal deposit and other insurance 199 113 350
Data processing 889 633 501
Credit card processing expenses 5,541 5,013 3,879
Other noninterest expenses 3,003 2,643 2,495
- -------------------------------------------------------------------------------
Total other operating expenses 17,853 15,630 13,342
Minority interest in income of
subsidiary bank 37 23 47
- -------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,586 1,016 1,197
Income tax expense 499 233 260
- -------------------------------------------------------------------------------
NET INCOME 1,087 783 937
Preferred stock dividends 40 81 -
- -------------------------------------------------------------------------------
NET INCOME APPLICABLE TO COMMON STOCK 1,047 $ 702 $ 937
===============================================================================
Basic earnings per share $ .68 $ .66 $ .93
Diluted earnings per share $ .65 $ .63 $ .86
</TABLE>
See accompanying notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
12
<PAGE> 16
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements Of Shareholders' Equity
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Series B Class A Additional Net Gain Total
Preferred Common Common Paid-In Retained (Loss) on ESOP Shareholders'
Stock Stock Stock Capital Earnings Securities Loan Equity
-------------------------------------------------------------------------------------------
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ - $ 1,025 $ - $ 2,639 $ 3,666 $ (1,295) $ (62) $ 5,973
Net income - - - - 937 - - 937
Issuance of 16,186 shares
of common stock - 16 - 94 - - - 110
Issuance of 40,000 shares
of Class A common - - 40 560 - - - 600
Loan to ESOP - - - - - - (147) (147)
Repayment of ESOP loan - - - - - - 26 26
Change in unrealized net loss
on securities, net of taxes - - - - - 586 - 586
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 1,041 40 3,293 4,603 (709) (183) 8,085
Net income - - - - 783 - - 783
Issuance of 5,658 shares
of common stock - 6 - 39 - - - 45
Issuance of 75,500 shares
of Class A common stock - - 76 1,016 - - - 1,092
Conversion of common stock
to series B preferred 94 (94) - - - - - -
Series B Preferred stock
dividends - - - - (81) - - (81)
Repayment of ESOP loan - - - - - - 46 46
Change in unrealized net loss
on securities, net of taxes - - - - - 130 - 130
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 94 $ 953 $ 116 $ 4,348 $ 5,305 $ (579) (137) $10,100
Net income - - - - 1,087 - - 1,087
Issuance of 16,461 shares of
common stock, through
option exercise - 16 - 140 - - - 156
Change in par value per common
share from $1.00 to $0.001 - (1,061) - 1,061 - - - -
Series B Preferred
stock dividends - - - - (40) - - (40)
Conversion of Class A common
stock into common stock - - (116) 116 - - - -
Conversion of Series B preferred
stock into common stock (94) 94 - - - - - -
Issuance of 1,380,000 shares
through initial public offering,
net of expenses - 1 - 15,539 - - - 15,540
Conversion of subordinated
debentures into common stock - - - 2,917 - - - 2,917
Loan to ESOP - - - - - - (50) (50)
ESOP shares released - - - 30 - - 29 59
Change in unrealized net loss
on securities, net of taxes - - - - - 301 - 301
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - $ 3 $ - $24,151 $ 6,352 $ (278) $(158) $30,070
============================================================================================================================
</TABLE>
See accompanying notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
13
<PAGE> 17
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,087 $ 783 $ 937
Adjustments to reconcile net income
to net cash provided by operating
activities
Premium amortization on
securities, net of
discount accretion (43) (49) (44)
Provision for loan losses 766 310 207
Depreciation and amortization 878 623 508
Provision for deferred taxes (279) (88) (208)
Minority interest in income
of subsidiary bank 37 23 47
Net gains on sales of securities - - (25)
Loans originated for sale (3,373) (5,453) (9,652)
Proceeds from sales of loans 3,486 3,326 9,438
Net (gains) losses on sales of loans (61) (109) (84)
Writedown of loans held for sale,
transferred to portfolio - 74 -
Accretion of loan discount (65) (87) (62)
Deferred loan fees (74) 38 96
Change in interest receivables
and other assets (374) (518) 606
Change in interest payable
and other liabilities 837 605 25
Other 109 256 (175)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 2,931 (266) 1,614
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of
available-for-sale securities - - 5,803
Proceeds from maturities of
available-for-sale securities 8,856 3,828 1,231
Purchases of available-for-
sale securities (15,651) (3,906) (2,272)
Proceeds from maturities of
held-to-maturity securities 1,381 3,171 2,990
Purchases of held-to-maturity
securities (374) - (1,834)
Changes in interest-bearing
balances with financial
institutions 99 100 298
Loans made to customers, net (84,643) (30,218) (32,112)
Proceeds from sales of
other real estate - - 366
Premises and equipment
expenditures (2,615) (2,889) (800)
Purchase of subsidiary bank
common stock (5) (25) (84)
- -------------------------------------------------------------------------------
Net cash used in
investing activities (92,952) (29,939) (26,414)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in non-interest
bearing deposits $ 2,629 $ 7,428 $ 5,916
Increase in interest
bearing deposits 81,690 10,369 17,222
Increase (decrease) in demand
notes payable to US Government (157) 1,251 (249)
Increase (decrease) in securities
sold under agreements
to repurchase (441) 2,387 59
Repayments of notes payable (7,815) (2,015) (1,690)
Proceeds from notes payable 3,000 3,000 1,000
Proceeds from Federal Home
Loan Bank advances 11,750 4,000 6,000
Repayment of Federal Home
Loan Bank advances (6,182) (4,798) (2,300)
Issuance of convertible
subordinated debentures - 755 400
Issuance of common stock 15,676 1,137 710
ESOP loan for common shares
purchased by ESOP (50) - (147)
Principal payment on ESOP loan 29 46 26
Dividends paid (40) (81) -
- -------------------------------------------------------------------------------
Net cash provided by
financing activities 100,089 23,479 26,947
- -------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 10,068 (6,726) 2,147
Cash and cash equivalents at
beginning of year 13,833 20,559 18,412
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,901 $ 13,833 $ 20,559
===============================================================================
Supplemental disclosures of
cash flow information
Cash paid during the
year for: Interest on deposits $ 11,002 $ 8,647 $ 8,784
Interest on borrowings 1,708 1,373 1,144
Income taxes 570 352 121
Selected noncash investing activities
Other real estate acquired
in settlement of loans $ 290 $ - $ 226
</TABLE>
See accompanying notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
14
<PAGE> 18
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Success Bancshares, Inc. (the Company), through its subsidiary, Success
National Bank (the Bank), provides a full range of financial services to
customers through nine locations in the Chicago metropolitan area.
(a) Basis of Presentation: The consolidated financial statements of Success
Bancshares, Inc. include the accounts of the Company and its
majority-owned subsidiary, Success National Bank, and its wholly-owned
subsidiary, Success Realty Ventures, Inc. ("Success"). The Company owns
100% of the Bank's preferred stock and approximately 92% of the Bank's
common stock. Significant intercompany accounts and transactions have
been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates which are particularly
susceptible to change in a short period of time include the determination
of the allowance for possible loan losses. Actual results could differ
from those estimates.
(b) Cash and Cash Equivalents: Cash and cash equivalents include cash on
hand, noninterest-bearing amounts due from banks, interest-bearing demand
balances with banks, and federal funds sold. Generally, federal funds are
sold or purchased for one-day periods. Cash flows from loans originated
by the Bank, deposits, securities sold under agreements to repurchase and
demand notes payable to U.S. Government are reported net.
(c) Securities: Securities classified as held-to-maturity are those debt
securities the Company has both the positive intent and ability to hold to
maturity regardless of changes in market conditions, liquidity needs or
changes in general economic conditions. These securities are carried at
cost adjusted for amortization of premium and accretion of discount which
are recognized in interest income using the interest method over the
period to maturity. Transfer of debt securities into the held-to-maturity
classification from the available-for-sale classification are made at fair
value on the date of transfer. The unrealized gain or loss on the date of
transfer is retained as a separate component of stockholders' equity and
in the carrying value of the held-to-maturity securities. Such amounts
are amortized over the remaining contractual lives of the securities by
the interest method.
Securities classified as available-for-sale are those debt securities that
the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's
assets and liabilities, liquidity needs, regulatory capital considerations
and other similar factors. Securities available for sale are carried at
fair value. The difference between fair value and amortized cost results
in an unrealized gain or loss. Unrealized gains or losses are reported as
increases or decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis of the cost
of specific securities sold, are included in earnings. Premiums and
discounts are recognized in interest income using the interest method over
their contractual lives.
(d) Real Estate Loans Held-for-Sale: Real estate loans held-for-sale are
carried at the lower of cost, net of loan fees collected, or fair value in
the aggregate. Loans are sold without recourse with servicing retained.
Gains and losses from the sale of loans are determined based upon the net
proceeds and the carrying value of the loans sold after allocating cost to
servicing rights retained. Net unrealized losses are recognized in a
valuation allowance by charges to income.
Transfer of loans held for sale to portfolio are accounted for at the
lower of cost or fair value at the date of transfer. The excess of the
carrying value over the fair value as of the transfer date is accreted
into interest income over the remaining estimated lives of the transferred
loans. Cost approximated fair value for loans held for sale as of
December 31, 1997 and 1996.
- -------------------------------------------------------------------------------
15
<PAGE> 19
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff ("portfolio" loans) are
stated net of unearned income, deferred loan fees, unaccreted discounts
and the allowance for loan losses. Interest on loans is accrued over the
term of the loan based on the amount of principal outstanding. For
impaired loans, accrual of interest is discontinued on a loan when
management believes, after considering collection efforts and other
factors, that the borrower's financial condition is such that collection
of interest is doubtful. Additionally, interest income is reduced for any
amounts previously accrued. Interest income is subsequently recognized
only to the extent cash payments are received and the principal is
considered fully collectible. Discounts are accreted into income over the
estimated lives of the loans on a method that approximates the interest
method. Loan origination fees and costs are deferred and recognized over
the life of the loan as a yield adjustment.
Because some loans may not be paid in full, an allowance for loan losses
is recorded. Increases to the allowance are recorded by a provision for
loan losses charged to expense. Estimating the risk of loss and the
amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained at a level considered adequate to cover possible
losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower
situations including their financial position and collateral values, and
other factors and estimates which are subject to change over time. A loan
is charged-off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
Commercial loans less than $100,000, residential real estate mortgages,
home equity loans, and installment loans are considered small balance
homogenous loan pools and are not evaluated for purposes of impairment.
All other loans are specifically evaluated for impairment. Loans are
considered impaired when, based on current information and events, it is
probable that the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The impairment
is measured based on the present value of expected future cash flows, or
alternatively, the observable market price of the loans or the fair value
of the collateral. However, for those loans that are collateral-dependent
and for which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the fair value of
the collateral. The amount of impairment, if any, and any subsequent
changes are included in the allowance for loan losses.
(f) Premises and Equipment: Buildings, leasehold improvements, furniture,
and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on the
straight-line method over estimated useful lives of the related assets.
Maintenance and repairs are expensed as incurred, while major improvements
are capitalized.
(g) Other Real Estate Owned: Other real estate owned (OREO) represents
properties acquired through foreclosure or other proceedings and is
initially recorded at fair value at the date of foreclosure, which
establishes a new cost. After foreclosure, OREO is held for sale and is
carried at the lower of cost or fair value less estimated costs of
disposal. Any write-down to fair value at the time of transfer to OREO is
charged to the allowance for loan losses. Property is evaluated regularly
to ensure the recorded amount is supported by its current fair value and
valuation allowances to reduce the carrying amount to fair value less
estimated costs to dispose are recorded as necessary. Revenue and expense
from the operations of OREO and changes in the valuation allowance are
included in the results of operations.
(h) Income Taxes: The Company files a consolidated income tax return with
its subsidiaries. Its share of the consolidated income tax provision is
computed on a separate return basis. Deferred taxes are provided using
the liability method to recognize deferred tax assets for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
- -------------------------------------------------------------------------------
16
<PAGE> 20
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) Earnings Per Share: In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
(j) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities: The Financial Accounting Standards Board
Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor
surrenders control over those assets is accounted for as a sale to the
extent that consideration other than beneficial interest in the
transferred assets is received in exchange. The Statement also
establishes standards on the initial recognition and measurement of
servicing assets and other retained interests and servicing liabilities,
and their subsequent measurement. The Statement requires that debtors
reclassify financial assets pledged as collateral and that secured parties
recognize those assets and their obligation to return them in certain
circumstances in which the secured party has taken control of those
assets. In addition, the Statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through
payment to the creditor or by being legally released from being the
primary obligor under the liability either judicially or by the creditor.
The Statement was 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. On January
1, 1997, the Company adopted the Statement except for as it relates to
transactions involving secured borrowings and collateral. The effect of
adoption of this Statement was not material. Also, the Company believes
the adoption of the Statement for transactions relating to secured
borrowings and collateral will not have a material impact on its
consolidated financial statements.
(k) Current Accounting Developments: Comprehensive income: The Financial
Accounting Standards Board has issued Statement No. 130, Reporting
Comprehensive Income, that the Company will be required to adopt for its
year ended December 31, 1998. This pronouncement is not expected to have
a significant impact on the Company's financial statements. The Statement
establishes standards for the reporting and presentation of comprehensive
income and its components. The statement requires that items recognized
as components of comprehensive income be reported in a financial
statement. The statement also requires that a company classify items of
other comprehensive income by their nature in a financial statement, and
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. Comprehensive income at the
Company currently consists of unrealized gains and losses on securities
available-for-sale.
Segments of an enterprise: Statement of Financial Accounting Standard No.
131, Disclosures about Segments of an Enterprise and Related Information,
was issued in July 1997 by the Financial Accounting Standards Board. The
Statement requires the Company to disclose the factors used to identify
reportable segments including the basis of organization, differences in
products and services, geographic areas, and regulatory environments. The
Statement additionally requires financial results to be reported in the
financial statements for each reportable segment. The Statement is
effective for financial statement periods beginning after December 15,
1997. The Company does not believe the adoption of the statement will have
a material impact on the consolidated financial statements.
(l) Prior Year Reclassifications: Certain reclassifications were made to
make the 1996 and 1995 financial statements comparable with the 1997
presentation.
- -------------------------------------------------------------------------------
17
<PAGE> 21
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Cash and due from banks $16,337 $13,780
Interest-bearing demand balances with
financial institutions 564 53
Federal funds sold 7,000 -
--------------------------------------------------------------------------
$23,901 $13,833
==========================================================================
</TABLE>
At December 31, 1997 and 1996, reserves of $7.2 million and $2.5 million,
respectively, were required to be held as cash or on deposit with the Federal
Reserve Bank of Chicago. These reserves do not earn interest.
NOTE 3 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of
securities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 3,775 $ 17 $ - $ 3,792
U.S. Government sponsored
entities 3,346 1 (46) 3,301
States and political
subdivisions exempt
from Federal income taxes 4,437 5 - 4,442
Mortgage-backed securities 7,019 35 - 7,054
SBA guaranteed loan
participation certificates 3,221 28 (11) 3,238
Other securities 182 84 (3) 263
--------------------------------------------------------------------------
$21,980 $ 170 $ (60) $22,090
==========================================================================
Securities held-to-maturity
U.S. Treasury $ 246 $ 2 $ - $ 248
U.S. Government sponsored
entities 14,754 362 (154) 14,962
States and political
subdivisions
Taxable 1,791 108 - 1,899
Exempt from Federal
income taxes 6,506 196 - 6,702
Mortgage-backed securities 5,148 261 - 5,409
Other securities 3,219 - - 3,219
--------------------------------------------------------------------------
$31,664 $ 929 $ (154) $32,439
==========================================================================
</TABLE>
The amortized cost and fair value of securities at December 31, 1997, by
contractual maturity, are shown below. Expected maturities of mortgage-backed
securities and SBA guaranteed loan participation certificates will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Therefore, these
securities are not included in the maturity categories in the following
maturity summary.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 3,964 $ 3,950 $ 4,281 $ 4,264
Due after one year
through five years 4,578 4,598 6,084 6,188
Due after five years
through ten years 3,016 2,987 10,100 10,401
Due after ten years 182 263 6,051 6,177
Mortgage-backed securities
and SBA guaranteed loan
participation certificates 10,240 10,292 5,148 5,409
---------------------------------------------------------------------------
$21,980 $22,090 $31,664 $32,439
===========================================================================
</TABLE>
- -------------------------------------------------------------------------------
18
<PAGE> 22
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE 3 - SECURITIES (CONTINUED)
The amortized cost, gross unrealized gains and losses, and fair values of
securities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury $ 748 $ 6 $ - $ 754
U.S. Government sponsored
entities 5,846 2 (127) 5,721
States and political
sub-divisions exempt
from Federal income taxes 1,565 6 (10) 1,561
Mortgage-backed securities 2,568 17 - 2,585
SBA guaranteed loan
participation certificates 4,337 3 (50) 4,290
Other securities 110 126 - 236
--------------------------------------------------------------------------
$15,174 $ 160 $ (187) $15,147
==========================================================================
Securities held-to-maturity
U.S. Treasury $ 242 $ 3 $ - $ 245
U.S. Government sponsored
entities 15,368 279 (244) 15,403
States and political
sub-divisions
Taxable 1,845 94 - 1,939
Exempt from Federal
income taxes 6,906 147 (12) 7,041
Mortgage-backed securities 5,804 233 - 6,037
Other securities 2,395 - - 2,395
--------------------------------------------------------------------------
$32,560 $ 756 $ (256) $33,060
==========================================================================
</TABLE>
Proceeds from sales of securities available-for-sale and realized gross gains
and losses in 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Securities available-for-sale
Proceeds from sales $ - $ - $ 5,803
Gross gains $ - $ - $ 56
Gross losses $ - $ - $ 31
</TABLE>
Securities with a carrying value of approximately $32.2 and $24.2 million at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.
NOTE 4 - LOANS
Loans at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------
(In thousands)
<S> <C> <C>
Commercial $ 87,506 $ 58,912
Residential real estate - mortgage 42,651 41,586
Commercial real estate - mortgage 63,469 43,334
Real estate - construction 13,409 12,282
Home equity 72,944 43,193
Other loans 9,685 6,118
-----------------------------------------------------------------
Total loans 289,664 205,425
Less
Unearned discount - (2)
Deferred loan fees (187) (261)
Unaccreted discount resulting
from loss on transfer of loans
from held-for-sale to portfolio (373) (438)
Allowance for loan losses (2,079) (1,425)
-----------------------------------------------------------------
Net loans $287,025 $203,299
=================================================================
</TABLE>
- -------------------------------------------------------------------------------
19
<PAGE> 23
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
NOTE 4 - LOANS (CONTINUED)
Activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,425 $ 1,189 $ 1,000
Provision for loan losses 766 310 207
Recoveries on loans previously charged-off 37 4 1
Loans charged-off (149) (78) (19)
---------------------------------------------------------------------------
Balance at end of year $ 2,079 $ 1,425 $ 1,189
===========================================================================
</TABLE>
Impaired loan information as of and for the years ended December 31, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Impaired loans for which no allowance
has been provided $ 1,479 $ 450
Impaired loans for which an allowance
has been provided - -
---------------------------------------------------------------------------
Total loans determined to be impaired $ 1,479 $ 450
===========================================================================
Allowance provided for impaired loans, included
in the allowance for loan losses $ - $ -
===========================================================================
Average recorded investment in impaired loans $ 1,869 $ 694
Interest income recognized from impaired loans $ 231 $ 101
Cash basis interest income recognized
from impaired loans $ 79 $ 94
</TABLE>
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation by the
Company are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of these loans were approximately $50.1 and $53.4
million at December 31, 1997 and 1996, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land $ 2,904 $ 2,454
Building and leasehold improvements 5,444 4,458
Furniture and equipment 4,232 3,167
----------------------------------------------------------------------
Total cost 12,580 10,079
Less accumulated depreciation and amortization 3,794 3,030
----------------------------------------------------------------------
Net book value $ 8,786 $ 7,049
======================================================================
</TABLE>
The Company has agreed to acquire a back office facility in 1998 for $1.6
million.
NOTE 6 - DEPOSITS
Deposits at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Demand deposits:
Non-interest-bearing $ 45,225 $ 42,596
Interest-bearing $ 76,058 $ 47,620
---------------------------------------------------------------------------
Total demand deposits 121,283 90,216
Savings 19,389 19,022
Money market 32,940 34,486
Other deposits 17,015 22,696
Time:
Due within one year 91,444 50,477
Due within one to two years 40,262 18,269
Due within two to three years 3,020 5,878
Due within three to four years 2,417 1,479
Due thereafter 1,654 2,582
---------------------------------------------------------------------------
Total time deposits 138,797 78,685
---------------------------------------------------------------------------
Total deposits $329,424 $245,105
===============================================================================
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE> 24
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (CONTINUED)
Time deposits in amounts of $100,000 or more were approximately $48.0 million
and $29.9 million at December 31, 1997 and 1996, respectively.
Interest expense on deposits for the years ending December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------
(In thousands)
<C> <C> <C> <C>
Interest-bearing demand $1,658 $1,200 $1,062
Savings 640 606 589
Money market 1,456 1,357 1,472
Other deposits 973 1,224 1,561
Time 6,463 4,245 4,087
-------------------------------------------------------
$11,190 $8,632 $8,771
=======================================================
</TABLE>
NOTE 7 - BORROWING ARRANGEMENTS
Note payable at December 31, 1997 and 1996 is comprised of a $10.0 million
revolving line of credit with Cole Taylor Bank with interest at the prime rate
(8.50% at December 31, 1997) payable quarterly, maturing June 15, 1998.
The revolving line of credit is secured by the common and preferred stock of
the Bank owned by the Company.
In addition, the Bank's allowance for loan losses must be at least 100% of the
Bank's nonperforming loans. Nonperforming loans and other real estate are also
limited under the agreement to 20% of the Bank's capital.
The Bank can also borrow from the Federal Reserve Bank ("FRB") up to 75% of
loans pledged to the FRB. As of December 31, 1997 and 1996, there were no
loans pledged to the FRB and there were no borrowings outstanding at either
date.
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1997 and 1996, advances from the Federal Home Loan Bank of
Chicago ("FHLB") were as follows:
<TABLE>
<CAPTION>
Advance Amount
Maturity Interest Frequency of ------------------
Date Rate Rate Adjustment 1997 1996
-----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
November, 1997 5.66% Fixed $ - $2,000
August, 1998 5.98% Fixed 4,000 -
July, 1999 6.30% Fixed 2,000 -
May, 2002 (1) 6.83% Fixed 1,782 1,869
February, 2003 (1) 5.65% Fixed 1,223 1,283
July, 2004 (1) 6.38% Fixed 1,715 -
-----------------------------------------------------------------
$10,720 $5,152
=================================================================
</TABLE>
(1) 15 year amortizing advance with a seven year balloon.
The Bank maintains a collateral pledge agreement with the FHLB covering secured
advances. Under this agreement, first mortgages on improved residential
property not more than 90 days delinquent are pledged as collateral. Total
loans pledged to secure advances at December 31, 1997 and 1996 were
approximately $39.5 million and $14.6 million, respectively.
- --------------------------------------------------------------------------------
21
<PAGE> 25
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are overnight repurchase
agreements with customers of the Bank and consist of primarily U.S. government
sponsored entity obligations.
The securities underlying the agreements are book-entry securities. During the
period, the securities were delivered by appropriate entry into a third-party
custodian's account designated by the Bank under a written custodial agreement
that explicitly recognizes the customer's interest in the securities. At
December 31, 1997, no material amount of agreements to repurchase securities
sold were outstanding with any individual customer. Securities sold under
agreements to repurchase averaged $5.8 million and $4.1 million during 1997 and
1996, respectively, and the maximum amounts outstanding at any month-end during
1997 and 1996 were $12.0 million and $4.6 million, respectively. The weighted
average rate paid during 1997 and 1996 was 4.15% and 4.20%, respectively, and
the weighted average rate at the end of 1997 and 1996 was 4.54% and 4.23%.
NOTE 10 - CONVERTIBLE SUBORDINATED DEBENTURES
In 1992, the Company issued $2.2 million of ten year 9% convertible
subordinated debentures (the debentures). The debentures pay interest
semi-annually. The debentures are convertible at any time prior to maturity
into common stock at $8.57 per share. The Company can redeem the debentures
(a) without paying a premium if the book value per share of the Company's
common stock equals or exceeds the conversion price; or (b) with a premium of
between 10% and 2% depending on the redemption date. All but $200,000 of these
debentures were converted to common stock in October 1997.
In November 1995, the Company began a private placement of units consisting of
$4,000 principal amount of ten year convertible subordinated notes (the Notes)
and 400 shares of Class A Common Stock. The interest on the notes was payable
semi-annually. The rate on the notes was 15% for notes in denominations less
than $100,000 and 17% for notes of $100,000 or more. All of these notes were
converted into common stock of the Company in October 1997.
The following table summarizes the debentures and notes outstanding at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
(In thousands)
<S> <C> <C>
9% Debentures $200 $2,012
15% Notes - 235
17% Notes - 920
--------------------------------------------------------
$200 $3,167
========================================================
</TABLE>
NOTE 11 - SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS
On July 23, 1997, the Company approved a 1.7 for 1 stock split effective July
30, 1997, on common shares. All references in the accompanying financial
statements to the number of common shares and per common share amounts have
been retroactively restated to reflect the stock split.
The Series B preferred stock was noncumulative and each share was convertible
into one share of common stock, which occurred in July 1997. All outstanding
shares were held by the Company's Employee Stock Ownership Plan.
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.
- --------------------------------------------------------------------------------
22
<PAGE> 26
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum ratios (set forth in the
table below) of Tier I capital (as defined in the regulations) to total average
assets (as defined) ("leverage ratio") and minimum ratios of Tier I and total
capital (as defined) to risk-weighted assets (as defined). Management believes
that as of December 31, 1997 the Company and the Bank met all capital adequacy
requirements to which they were subject. As of December 31, 1997, the most
recent notification from the corresponding regulatory agency categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be considered well capitalized, under this framework, the Bank must
maintain minimum leverage, Tier I and Total Capital ratios as set forth in the
following table. There are no conditions or events since the notification that
management believes has changed the Bank's category.
The required ratios and the Company's actual ratios at December 31, 1997 and
1996, are presented below:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Consolidated $33,124 12.37% $21,425 8.0% Not Applicable
Bank 30,425 11.38 21,388 8.0 $ 26,734 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 30,928 11.55 10,713 4.0 Not Applicable
Bank 28,346 10.60 10,694 4.0 16,041 6.0%
Tier 1 Capital (to Average Assets):
Consolidated 30,928 9.69 12,762 4.0 Not Applicable
Bank $28,346 8.90% $12,739 4.0% $ 15,924 5.0%
As of December 31, 1996
Total Capital (to Risk Weighted Assets):
Consolidated $14,475 8.00% $14,481 8.0% Not Applicable
Bank 20,207 11.20 14,471 8.0 $ 18,088 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 11,203 6.20 7,240 4.0 Not Applicable
Bank 18,782 10.40 7,235 4.0 10,853 6.0%
Tier 1 Capital (to Average Assets):
Consolidated 11,203 4.37 7,688 4.0 Not Applicable
Bank $18,782 7.30% $7,673 4.0% $ 12,788 5.0%
</TABLE>
Banking regulations limit the amount of dividends that the Bank may pay without
the prior approval of regulatory authorities. As of December 31, 1997,
approximately $1.4 million of the Bank's retained earnings were available for
dividends without prior regulatory approval. In addition, the Company's debt
agreement with its lending institution requires the Bank to maintain minimum
capital requirements which serve to limit dividends from the Bank. Under the
debt agreement, the Company and the Bank are required to maintain minimum
capital of $28.0 million and $26.0 million, respectively, and minimum Tier I
capital to assets ratio for the Bank of 6%. The Company's and Bank's capital
levels exceed these requirements. The debt agreement imposes a more
restrictive dividend limitation on the Bank than the banking regulations. The
Bank may not declare a dividend, other than for the purpose of the Company's
debt service, without the written consent of Cole Taylor Bank. The Company
cannot declare cash dividends in excess of 50% of its annual earnings or
acquire any of its own stock without the written consent of Cole Taylor Bank.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan ("ESOP"), which also has
a 401(k) feature. The ESOP covers substantially all employees of the Bank.
The ESOP is internally leveraged. Loans from the Company to the ESOP to
acquire Company stock are recorded as a reduction of shareholders' equity. At
December 31, 1997 and 1996, the fair value of unearned ("suspense") ESOP shares
is approximately $255,000 and $236,000, respectively. Suspense
- --------------------------------------------------------------------------------
23
<PAGE> 27
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
shares are released and allocated to participants as the ESOP's debt to the
Company is repaid. Employer contributions, including any matching contribution
for the 401(k) provision, are made at the discretion of the Bank's Board of
Directors. Contributions to the ESOP, which are not materially different from
the fair value of shares allocated to participants, were partially funded
through dividends on the Series B preferred stock during 1997, and fully in
1996. The fair value of dividends paid on suspense shares was not material and
was charged to retained earnings. Preferred dividends of $40,000 and $81,000
were paid in 1997 and 1996, respectfully. For the year ended December 31,
1997, $59,000 was recorded as compensation expense. During 1995, contributions
of $72,000 were charged to compensation expense.
Shares of the Company's stock held by the ESOP as of December 31, 1997 and
1996, are shown in the following table. The allocated and unallocated shares
as of December 31, 1997 are approximations, as the 1997 participant allocation
has not yet been completed.
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------
Common Series B Preferred
------ ------------------
<S> <C> <C>
Shares allocated to participants 75,527 41,891
Suspense (unallocated) shares 18,577 12,898
-----------------------------------------------------------------------
Total ESOP Shares 91,104 54,789
=======================================================================
</TABLE>
NOTE 13 - STOCK OPTIONS
In the past, the Company's Board of Directors has granted nonqualified options
to various members of senior management. The outstanding stock options may be
exercised at any time by the respective officers through a period ending three
years after termination of employment with the Bank or the Company. There were
no such options granted during 1997 or 1996.
In 1995, the Company adopted a qualified incentive stock option plan for senior
officers of the Company with options to be granted at the fair value of the
stock at the date of grant. Under this plan, 170,000 shares of authorized but
unissued common stock are reserved for the granting of options. Vesting of the
options is determined by the Board of Directors and typically is over a period
not exceeding four years. Options must be exercised within ten years after the
date of grant. The following table summarizes data concerning stock options:
<TABLE>
<CAPTION>
Common Shares Option Price Weighted Average
Under Option Per Share Exercise Price
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 156,740 $1.82-$6.18 $ 5.04
----------------------------------------------------------------------------------------------
Canceled (3,400) $6.09 $ 6.09
----------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 and 1997 153,340 $1.82-$6.18 $ 5.02
==============================================================================================
</TABLE>
At December 31, 1997, there are options exercisable for 136,340 shares at a
weighted average price of $4.88.
Grants under the plan are accounted for following APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for incentive stock option grants under the stock option plan. Had
compensation cost for the stock-based compensation plan been determined based
on the grant date fair values of awards, reported income and earnings per
common share would have been reduced to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income applicable to common stock (In thousands):
As reported $1,047 $ 702 $ 937
Pro Forma $1,047 $ 702 $ 904
Basic earnings per common share:
As reported $ 0.68 $0.66 $0.93
Pro Forma $ 0.68 $0.66 $0.89
Diluted earnings per common share:
As reported $ 0.65 $0.63 $0.86
Pro Forma $ 0.65 $0.63 $0.84
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 28
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS (CONTINUED)
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants during the year ended December 31, 1995; dividend yield of 0% for the
period; expected volatility of 0% for the period; risk free rate of return of
5.88%; and, expected life of 4 years.
Under the provisions of Statement No. 123, pro forma net income reflects only
options granted in 1995. Therefore, the full impact of calculating
compensation cost for stock options under Statement No. 123 is not reflected in
the pro forma net income amounts presented above because compensation cost for
options granted prior to January 1, 1995 is not considered.
NOTE 14 - INCOME TAXES
The deferred tax assets and liabilities consist of the following components as
of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 656 $ 402
Securities available for sale 224 398
Deferred loan fees 113 142
Premises and equipment 121 50
Stock options - 12
Loans 145 170
--------------------------------------------------------------
1,259 1,174
--------------------------------------------------------------
Deferred tax liabilities:
State income taxes $ 68 $ 27
Loans - tax mark to market 24 159
Mortgage servicing rights 38 33
Other 30 21
--------------------------------------------------------------
160 240
--------------------------------------------------------------
Net deferred tax assets $1,099 $ 934
==============================================================
</TABLE>
No valuation allowance was considered necessary.
Income tax expense for the years ended December 31, 1997, 1996 and 1995,
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current $778 $321 $468
Deferred (279) (88) (208)
----------------------------------------------------------------
$499 $233 $260
================================================================
</TABLE>
Reconciliations of income tax expense computed at the statutory federal income
tax rate to the Company's income tax expense for the years ended December 31,
1997, 1996, and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $539 $345 $407
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 82 21 13
Nontaxable interest income (net of disallowed expenses) (155) (141) (178)
Other 33 8 18
--------------------------------------------------------------------------------------------------
$499 $233 $260
==================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE> 29
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 15 - COMPUTATION OF EARNINGS PER SHARE
The table following summarizes the computation of earnings per share for the
years indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------------
Income Share Per-Share Income Share Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income $1,087 $783
Less: Preferred stock dividends (40) (81)
------ ----
BASIC EPS
Income available to
common stockholders 1,047 1,531 $0.68 702 1,061 $0.66
EFFECT OF DILUTIVE SECURITIES
Options 76 61
--------------------- --------------------
Convertible subordinated debt
DILUTED EPS
Income available to common stock-holders
+ assumed conversions $1,047 1,607 $0.65 $702 1,122 $0.63
=======================================================================
<CAPTION>
For the Year Ended December 31,
-------------------------------------
1995
-------------------------------------
Income Share Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
<S> <C> <C> <C>
Net income $ 937
Less: Preferred stock dividends -
------
BASIC EPS
Income available to
common stockholders 937 1,011 $0.93
EFFECT OF DILUTIVE SECURITIES
Options 47
Convertible subordinated debt 112 158
---------------------
DILUTED EPS
Income available to common stock-holders
+ assumed conversions $1,049 1,215 $0.86
================================
</TABLE>
In 1997 and 1996, the assumed conversion of the convertible subordinated debt
would have had an antidilutive effect and as such, was not included in diluted
EPS for those years. Additionally, the convertible Series B Preferred stock
would have had an antidilutive effect in 1997 and 1996, and as such, was not
included in diluted EPS for these years. There was no Series B Preferred stock
outstanding in 1995.
NOTE 16 - COMMITMENTS, CONTINGENCIES AND CREDIT RISK
Credit risk: The Company makes loans to, and obtains deposits from, customers
primarily in Lake County, Cook County, DuPage County, and McHenry County,
Illinois and surrounding areas. Most loans are secured by specific items of
collateral, including residential and commercial real estate and other business
and consumer assets. Collateral held varies but may include deposits held in
financial institutions; U.S. Treasury securities; other marketable securities;
income-producing commercial properties; residential real estate; accounts
receivable; and property, plant and equipment.
Financial instruments with off-balance sheet risk: The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet financing needs of its customers. These financial instruments
include commitments to make loans, standby letters of credit, and unused lines
of credit. The Company's exposure to credit loss in the event of
nonperformance by the other parties is represented by the contractual amounts
of the instruments. The Company uses the same credit policy to make such
commitments as it uses for on-balance-sheet items.
At December 31, 1997 and 1996, the contract amount of these financial
instruments is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Financial instruments whose contract amount represents credit risk
Unused home equity lines of credit $75,588 $45,195
Unused commercial and other consumer lines of credit 14,676 10,007
Standby letters of credit 2,041 1,808
Commitments to make loans 20,765 28,723
</TABLE>
Since many commitments to make loans expire without being used, the amounts
above do not necessarily represent future cash commitments. Collateral
obtained upon exercise of the commitment is determined using management's
credit evaluation of the borrower, and may include commercial and residential
real estate and other business and consumer assets.
- --------------------------------------------------------------------------------
26
<PAGE> 30
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 16 - COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED)
Low Income Housing Support: In December 1997, the Bank agreed to participate
in the Chicago Equity Fund. This fund finances low income housing projects in
neighborhoods around the Chicagoland area. The Bank has committed to invest
$250,000 in the Fund over a seven to nine year period.
Litigation: From time to time, the Company and the Bank are involved in
litigation, both as a defendant and as a plaintiff. Management believes that
the ultimate liability from such actions, if any, will not have a material
effect on the financial condition of the Company or the Bank.
Lease Commitments: The Bank leases branch facilities under noncancelable
operating lease agreements. Rent expense for branch facilities was $285,000,
$322,000, and $246,000 in 1997, 1996 and 1995, respectively, excluding taxes,
insurance and maintenance. The branch facilities are charged for their
proportionate share of taxes, insurance and maintenance costs plus monthly
rent. The minimum rental commitments, not including taxes, insurance and
maintenance, at December 31, 1996 under the leases are summarized below:
<TABLE>
<S> <C>
1998 $168,660
1999 98,640
2000 98,640
2001 90,724
2002 51,144
2003 and thereafter 8,524
---------------------------------------------
Total $516,332
=============================================
</TABLE>
NOTE 17 - RELATED PARTY TRANSACTIONS
In the normal course of business, certain executive officers, directors, and
companies with which they are affiliated have borrowed funds from the Bank. In
the opinion of management, these loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated parties. The activities in total
loans during 1997 is as follows (In thousands):
<TABLE>
<S> <C>
Balance as of January 1, 1997 $2,053
New loans 983
Repayments (187)
---------------------------------------------
Balance as of December 31, 1997 $2,849
=============================================
</TABLE>
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments.
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and these short-term instruments approximate their fair values.
Securities: Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair
values for other loans are determined using estimated future cash flows,
discounted at the interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality.
Deposit liabilities: The fair value of deposits with no stated maturity, such
as noninterest bearing deposits, savings, NOW accounts, and money market
accounts, is equal to the amount payable on demand (i.e. the carrying value.)
Fair values for fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
- --------------------------------------------------------------------------------
27
<PAGE> 31
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 18 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Borrowed funds: The fair value is estimated using a discounted cash flow
calculation using the rate currently available for similar term borrowings.
Accrued interest receivable and payable: The carrying amounts reported in the
balance sheet approximate their fair values.
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet
instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining term of the agreements and the
counterparties' credit standing. There is no material difference between the
notional amount and the estimated fair value of off-balance sheet items which
are primarily comprised of commitments to extend credit which are generally
priced at market at the time of funding.
The carrying amount and estimated fair value of financial instruments at
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 23,901 $ 23,901 $ 13,833 $ 13,833
Investment securities 53,754 54,529 47,707 48,207
Loans held-for-sale 65 65 117 117
Loans 287,025 292,219 203,299 203,043
Accrued interest receivable 2,507 2,507 1,761 1,761
Financial liabilities:
Deposits $329,424 $332,121 $245,105 $245,865
Borrowed funds 16,163 16,469 18,975 19,719
Accrued interest payable 510 510 359 359
</TABLE>
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 1997.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However,
borrowers with fixed rate obligations are more likely to prepay in a falling
rate environment and less likely to prepay in a rising rate environment.
Conversely, depositors who are receiving fixed rates are more likely to
withdraw funds before maturity in a rising rate environment and less likely to
do so in a falling rate environment. Management monitors rates and maturities
of assets and liabilities and attempts to minimize interest rate risk by
adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Company's overall interest rate risk.
- --------------------------------------------------------------------------------
28
<PAGE> 32
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
Presented below are the condensed balance sheets as of December 31, 1997 and
1996 and statements of income and statements of cash flows for the years ended
December 31, 1997, 1996, and 1995 for Success Bancshares, Inc.:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary bank $ 800 $ 388
Securities available-for-sale 2,293 -
Investment in subsidiaries 27,289 17,496
Other assets 425 374
---------------------------------------------------------------------
$30,807 $18,258
=====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ - $ 4,815
Note payable - Success Realty Ventures, Inc. 105 105
Subordinated convertible debt 200 3,167
Other liabilities 432 71
---------------------------------------------------------------------
Total liabilities 737 8,158
Shareholders' equity 30,070 10,100
---------------------------------------------------------------------
$30,807 $18,258
=====================================================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Operating income
Dividends from subsidiary bank $1,187 $949 $830
Interest and other income 53 32 47
- --------------------------------------------------------------------------------------------------
1,240 981 877
Operating expenses
Interest 686 695 640
Other expense 340 126 100
- --------------------------------------------------------------------------------------------------
1,026 821 740
- --------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 214 160 137
Income tax benefit 387 319 263
- --------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 601 479 400
Equity in undistributed income of subsidiaries 486 304 537
- --------------------------------------------------------------------------------------------------
NET INCOME $1,087 $783 $937
==================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE> 33
Success Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,087 $ 783 $ 937
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed income of subsidiaries (486) (304) (537)
Change in other assets and liabilities 310 62 (67)
Other (82) 15 -
- --------------------------------------------------------------------------------
Net cash provided by operating activities 829 556 333
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (2,212) - -
Purchase of subsidiary bank stock (9,005) (3,025) (1,084)
- --------------------------------------------------------------------------------
Net cash used in investing activities (11,217) (3,025) (1,084)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Subordinated debt - 755 400
Repayment of note payable (7,815) (2,015) (1,690)
Proceeds from note payable 3,000 3,000 1,000
Notes payable to subsidiary - - 105
Payment from (loan to) ESOP, net (21) 46 (122)
Dividends on Series B preferred stock (40) (81) -
Issuance of common stock 15,676 1,137 710
- --------------------------------------------------------------------------------
Net cash provided by financing activities 10,800 2,842 404
- --------------------------------------------------------------------------------
Increase (decrease) in cash 412 373 (347)
Cash at beginning of year 388 15 362
- --------------------------------------------------------------------------------
CASH AT END OF YEAR $ 800 $ 388 $ 15
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE> 34
Success Bancshares, Inc. and Subsidiaries
Directors and Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
DIRECTORS OF SUCCESS BANCSHARES, INC. OFFICERS OF SUCCESS NATIONAL BANK
SAUL D. BINDER SAUL D. BINDER, President
President, Success Bancshares, Inc. STEVEN A. COVERT, Executive Vice President and Chief
CHARLES G. FREUND Financial Officer
Retired Vice President, Mid-Con Corp. CHRISTA N. CALABRESE, Executive Vice President and Chief
AVROM H. GOLDFEDER Lending Officer
Member-trader Chicago Board of Trade RONALD W. TRAGASZ, Senior Vice President and Cashier
SAMUEL D. KAHAN JANIS A. ANDERSON, Vice President and Manager Mortgage
President, A.S.K. Financial Research, LTD. and Consumer Loans
SHERWIN KOOPMANS ANN-MARIE HALL-SPARKS, Vice President/CRA and
Retired Associate Director of the FDIC Compliance Officer
GEORGE M. OHLHAUSEN CANDY LOGIURATO, Vice President Commercial Loans
Chairman of the Board, Success Bancshares, Inc., Investor ANNA LONG, Vice President Credit Card Services
NORMAN D. RICH, C.P.A. BARBARA MANKOWSKI, Vice President and Auditor
Partner, Veatch, Rich & Nadler, Chtd. CHIWIN NILAPANT, Vice President Business Development
MARLENE SACHS, Vice President and Secretary to the Board of
Directors
OFFICERS OF SUCCESS BANCSHARES, INC. FRANCES V. SIMONS, Vice President
WALTER ADREANI, Assistant Vice President
SAUL D. BINDER, President and Chief Executive Officer SUSAN J. CHERF, Assistant Vice President,
STEVEN A. COVERT, Executive Vice President and Chief Accounting Manager
Financial Officer ROBERT HAMILTON, Assistant Vice President
MARLENE SACHS, Secretary REGINA HIRN, Assistant Vice President
RONALD W. TRAGASZ, Assistant Secretary & Assistant RONALD WILLIAMS, Assistant Vice President
Treasurer KAREN LANDRUM, Director of Human Resources and
Assistant Cashier
VICKI PELOQUIN, Assistant Cashier
NANCY PRESLEY, Loan Officer
SHAHRIYAR ALI, Assistant Cashier and Branch Manager
DONNA BYAN, Assistant Cashier and Branch Manager
JAMES CORSON, Assistant Cashier and Branch Manager
FRANCIS GORDON, Assistant Cashier and Branch Manager
MARGOT SMITH, Assistant Cashier and Branch Manager
DAVID ZERA, Assistant Cashier and Branch Manager
</TABLE>
============================================================
EQUAL OPPORTUNITY EMPLOYER
It is the policy of Success National Bank to provide equal
opportunity employment to all employees and applicants
without regard to race, age, religion, color, sex, national
origin, sexual orientation or physical disability, judging
each individual solely on functional qualifications for the
position or task to be assigned. This policy includes all
facets of employment, work relationships, and work conditions
including, but not restricted to hiring, recruitment,
placement, compensation, promotion and employee benefits.
============================================================
- --------------------------------------------------------------------------------
31
<PAGE> 35
Success Bancshares, Inc. and Subsidiaries
Shareholder Information
- --------------------------------------------------------------------------------
CORPORATE OFFICE
One Marriott Drive
Lincolnshire, IL 60069-3703
(847) 634-4200 + FAX (847) 634-2635
ANNUAL REPORT ON FORM 10-K
A copy of Success Bancshares, Inc.'s Annual Report on Form 10-K as filed with
the Securities and Exchange Commission may be obtained without charge upon
written request to Steven A. Covert, Executive Vice President, Chief Financial
Officer Success Bancshares, Inc., 1123 S. Milwaukee Avenue, Libertyville, IL
60048-3270, or by calling (847) 549-5900 ext. 1410.
REGISTRAR/TRANSFER AGENT
Communications regarding change of address, transfer of stock and lost
certificates should be sent to:
Harris Trust & Savings Bank
311 West Monroe Street, Floor 14
Chicago, IL 60606
(312) 461-5245
CORPORATE COUNSEL
Much Shelist Freed Denenberg Ament Bell & Rubenstein
200 N. LaSalle Street
#2100
Chicago, IL 60603
ACCOUNTANTS
McGladrey & Pullen, LLP
1699 East Woodfield Road
#300
Schaumburg, IL 60173
DIVIDENDS
The Company has not paid, and does not intend to pay in the foreseeable future,
any dividends on common stock. The Board of Directors will consider the
payment of future cash dividends, dependent on the results of operations and
financial condition of the Company, tax considerations, industry standards,
economic conditions, regulatory restrictions, general business practices and
other factors. The Company's ability to pay dividends may be dependent on the
dividend payments it receives from its subsidiary, Success National Bank, which
are subject to regulations and the Bank's continued compliance with all
regulatory capital requirements. See Note 11 of the Notes to the Consolidated
Financial Statements for information regarding limitations of the ability of
Success National Bank to pay dividends to the Company.
STOCK LISTING
Success Bancshares, Inc.'s common stock is traded over the counter and is
listed on the Nasdaq National Market System under the symbol "SXNB." At
December 31, 1997, there were 2,918,324 shares of Success Bancshares, Inc.
common stock issued and outstanding and there were approximately 720 holders of
record. The table below shows the high and low bid price on the common stock
for each month since the common stock began trading on October 21, 1997. These
prices do not represent actual transactions and do not include retail markups,
mark-downs or commissions.
<TABLE>
<CAPTION>
Bid
----------------
Month Ended High Low
- -----------------------------------------------------------
<S> <C> <C>
October 31, 1997(1) $15.13 $13.63
November 30, 1997 $14.75 $13.63
December 31, 1997 $14.00 $13.50
</TABLE>
- ---------------
(1) Reflects the period from October 21 through October 31, 1997.
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. High, low and closing prices
and daily trading volume are reported in most major newspapers.
MARKET MAKERS
EVEREN Securities, Inc.
Herzog, Heine, Geduld, Inc.
Tucker Anthony, Inc.
Friedman Billings Ramsey & Co.
<PAGE> 36
(BACK COVER)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements of Success Bancshares, Inc. for the year ended December 31,
1997, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16337
<INT-BEARING-DEPOSITS> 564
<FED-FUNDS-SOLD> 7000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22090
<INVESTMENTS-CARRYING> 31664
<INVESTMENTS-MARKET> 32439
<LOANS> 289104
<ALLOWANCE> 2079
<TOTAL-ASSETS> 378719
<DEPOSITS> 329424
<SHORT-TERM> 9243
<LIABILITIES-OTHER> 2482
<LONG-TERM> 6920
0
0
<COMMON> 24154
<OTHER-SE> 5916
<TOTAL-LIABILITIES-AND-EQUITY> 378719
<INTEREST-LOAN> 21746
<INTEREST-INVEST> 2743
<INTEREST-OTHER> 423
<INTEREST-TOTAL> 24912
<INTEREST-DEPOSIT> 11190
<INTEREST-EXPENSE> 12861
<INTEREST-INCOME-NET> 12051
<LOAN-LOSSES> 766
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 17853
<INCOME-PRETAX> 1586
<INCOME-PRE-EXTRAORDINARY> 1586
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1087
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 4.17
<LOANS-NON> 1479
<LOANS-PAST> 341
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3677
<ALLOWANCE-OPEN> 1425
<CHARGE-OFFS> 149
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 2079
<ALLOWANCE-DOMESTIC> 2079
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 684
</TABLE>
