U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the quarterly period ended June 30, 2000
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
Commission File Number 0-23235
Success Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3497644
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 Tri-State International, Suite 60069
300
P.O. Box 1499, Lincolnshire IL (Zip Code)
(Address of Principal Executive
Offices)
(847) 279-9000
(Registrant's telephone number, including area code)
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 of Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock: 2,433,864 shares $0.001 par value, outstanding as of August 1,
2000.
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Cash Flow 3
Footnotes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5 - 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk
11
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. (a) Exhibits 12
(b) Reports on Form 8-K
None
Form 10-Q Signature Page 13
Exhibit Index 14
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
June 30, December
2000 31, 1999
(In thousands)
ASSETS
Cash and cash equivalents $15,103 $17,057
Securities available-for-sale 34,412 36,329
Loans, less allowance for loan losses of $4,558
at June 30, 2000
and $4,269 at December 31, 1999 466,253 424,668
Premises and equipment, net 10,079 10,684
Interest receivable 3,167 2,876
Other real estate owned 45 50
Other assets 6,055 5,481
Total Assets $535,114 $497,145
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $58,963 $60,571
Interest bearing deposits 380,942 333,719
Total deposits 439,905 394,290
Federal funds purchased 2,300 -
Federal Home Loan Bank advances 38,719 45,946
Securities sold under repurchase agreements 3,046 5,002
Demand notes payable to U.S. Government 2,444 3,115
Note Payable 2,000 -
Trust preferred securities 15,000 15,000
Interest payable and other liabilities 3,200 2,942
Total Liabilities 506,614 466,295
Shareholders' equity
Preferred stock, $0.001 par value, 1,000,000 - -
shares authorized, none issued
Common stock, $0.001 par value, 7,500,000 shares
authorized,
At June 30, 2000: 3,074,326 shares issued and
2,434,664 shares outstanding
At December 31, 1999: 3,074,326 shares issued 3 3
and 2,732,190 shares outstanding
Additional paid-in capital 25,362 25,362
Retained earnings 10,065 9,284
Treasury stock (6,650) (3,563)
Loans to Employee Stock Ownership Plan (74) (74)
Unearned compensation (23) (36)
Accumulated other comprehensive income (183) (126)
Total Shareholders' Equity 28,500 30,850
Total Liabilities and Shareholders' Equity $535,114 $497,145
See accompanying notes to the Unaudited Consolidated Financial Statements.
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Six Months Ended
Ended
June 30, June 30,
2000 1999 2000 1999
(In thousands, except share data)
Interest income
Loans (including fee income) $9,809 $7,587 $18,757 $15,208
Investment securities
Taxable 379 375 762 765
Exempt from federal income tax 133 155 267 312
Other interest income - 73 2 170
10,321 8,190 19,788 16,455
Interest expense
Deposits 4,643 3,540 8,742 7,278
Trust preferred securities 335 336 671 671
Other borrowings 773 294 1,485 578
5,751 4,170 10,898 8,527
Net interest income 4,570 4,020 8,890 7,928
Provision for loan losses 475 150 575 300
Net interest income after 4,095 3,870 8,315 7,628
provision for loan losses
Other operating income
Service charges on deposit 675 521 1,270 1,010
accounts
Gain (Loss) on sale of loans (4) 53 1 148
Gain on sale of fixed assets, - 5 53 5
net
Net credit card processing - (8) 5 (15)
income (expense)
Other non-interest income 81 78 169 401
752 649 1,498 1,549
Other operating expense
Salaries and employee benefits 2,165 2,214 4,397 4,398
Occupancy and equipment expense 1,008 825 2,007 1,640
Data processing 217 214 427 404
Other non-interest expense 932 884 1,923 1,729
4,322 4,137 8,754 8,171
Income before income taxes 525 382 1,059 1,006
Income tax expense 131 90 270 273
Net income $394 $292 $789 $733
Basic earnings per share $ 0.15 $ 0.10 $ 0.30 $ 0.25
Diluted earnings per share $ 0.15 $ 0.10 $ 0.30 $ 0.25
See accompanying notes to the Unaudited Consolidated Financial Statements
<PAGE> Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
Six Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
(In thousands)
Net cash provided by operating activities $1,382 $1,422
Cash flows from investing activities:
Proceeds from maturities of available-for-sale 2,099 7,103
securities
Purchases of available-for-sale securities (96) (5,229)
Proceeds from the sale of other real estate - 440
owned
Proceeds from sale of premises and equipment 482 -
Net (increase) decrease in loans (42,160) 1,090
Premises and equipment expenditures (635) (1,056)
Net cash (used in) provided by investing (40,310) 2,348
activities
Cash flows from financing activities:
(Decrease) increase in non-interest bearing (1,608) 2,404
deposits
Increase (decrease) in interest bearing deposits 47,223 (16,815)
(Decrease) increase in demand notes payable to (671) 1,688
U.S. Government
(Decrease) increase in securities sold under (1,956) 1,817
agreements to repurchase
Net decrease in Federal Home Loan Bank advances (7,227) (121)
Increase in federal funds purchased 2,300 -
Increase in note payable 2,000 -
Issuance of common stock - 534
Purchase of common stock for treasury (3,143) (1,773)
Proceeds from issuance of treasury stock 56 -
Net cash provided by (used in) financing 36,974 (12,266)
activities
Decrease in cash and cash equivalents (1,954) (8,496)
Cash and cash equivalents at beginning of year 17,057 38,824
Cash and cash equivalents at end of period $15,103 $30,328
See accompanying notes to the Unaudited Consolidated Financial Statements,
NOTE 1: Basis of Presentation
The financial information of Success Bancshares, Inc. and subsidiaries (the
Company) included herein is unaudited; however, such information reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of results for the
interim periods. The interim financial statements should be read in
conjunction with the Company's Annual Report and Form 10-K for the period ended
December 31, 1999. The results of the interim period ended June 30, 2000 are
not necessarily indicative of the results expected for the year ending December
31, 2000.
NOTE 2: Recent Accounting Developments
In June 1999, The Financial Accounting Standards Board issued SFAS No. 137,
_Accounting for Derivative Instruments and Hedging Activities _ Deferral of the
Effective Date of FASB Statement No. 133_ which delays the effective date of
SFAS No. 133 to periods beginning after June 15, 2000. Since the Company has
no derivative or hedging activities, adoption of SFAS No. 133 does not
currently impact the Company's financial statements.
NOTE 3: Earnings Per Share
Basic earnings per share are computed by dividing net income, after deducting
dividends on preferred stock (if any), by the weighted average number of common
shares outstanding. Diluted earnings per share assumes the exercise of any
dilutive instruments, including stock options.
The following table summarizes the computation of earnings per share for the
periods indicated:
For the Three Months Ended June 30,
2000 1999
Income Share Per- Income Share Per-
(Numer (Denomi Share (Numer (Denomi Share
ator) nator) Amount ator) nator) Amount
(In thousands except per share amounts)
Net income $394 $292
Basic EPS
Income available to common 394 2,526 $0.15 292 2,91 $0.10
stockholders
Effect of Dilutive Securities
Options - 1 -
Diluted EPS
Income available to common
stockholders
+ assumed conversions $394 2,527 $0.15 $292 2,91 $0.10
2000 1999
Income Share Per- Income Share Per-
(Numer (Denomi Share (Numer (Denomi Share
ator) nator) Amount ator) nator) Amount
(In thousands except per share amounts)
Net income $789 $733
Basic EPS
Income available to common 789 2,605 $0.30 733 2,93 $0.25
stockholders
Effect of Dilutive Securities
Options - 1 -
Diluted EPS
Income available to common
stockholders
+ assumed conversions $789 2,606 $0.30 $733 2,93 $0.25
NOTE 4: Comprehensive Income
For the three and six month periods ended June 30, 2000 accumulated other
comprehensive income increased $50 thousand and decreased $57 thousand,
respectively. For the comparable periods in 1999, accumulated other
comprehensive income decreased $257 thousand and $297 thousand, respectively.
NOTE 5: Note Payable
The Company entered into a revolving line of credit agreement with American
National Bank on June 5, 2000. The line is in the amount of $10.0 million with
interest at 90 day libor plus 175 basis points. The interest rate on the line
resets quarterly and interest is payable quarterly. The revolving line is
secured by the common stock of the Bank and matures June 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The Company's principal business is conducted by its wholly owned subsidiary,
Success National Bank (the _Bank_) and consists of full service community
banking. The Bank is headquartered in Lincolnshire, Illinois located
approximately 35 miles north of downtown Chicago, and, in addition to its
headquarters, currently has nine branch offices. These banking facilities are
located in Deerfield, Libertyville (2), Lincolnwood (2), Chicago/Lincoln Park,
Lincolnshire, Skokie and Northbrook. Based upon an evaluation of all branch
offices, management has decided to close both the Lincolnwood Mall and Skokie
offices during the third quarter of this year.
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 associated with the level 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,
net credit card processing income and other fees and commissions. Other
operating expenses include salaries and employee benefits, occupancy and
equipment expenses, data processing 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 loans in the portfolio, as
well as economic and market factors. Other operating 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 such facilities. Growth in the number of account relationships
directly affects such expenses as data processing costs, supplies, postage and
other miscellaneous expenses.
Results of Operations
Net income for the quarter ended June 30, 2000 was $394 thousand, an increase
of $102 thousand or 34.9% from the net income of $292 thousand for the
comparable quarter in 1999. On a per share basis, earnings increased to $0.15
per diluted share for the second quarter of 2000 from $0.10 per diluted share
for the 1999 quarter. For the six-month period ended June 30, 2000, net income
was $789 thousand, an increase of $56 thousand or 7.6% from the net income of
$733 thousand reported for the comparable period in 1999. Diluted earnings per
share for the current six- month period was $0.30, an increase of $0.05 or 20%
over the $0.25 reported for the comparable period of 1999.
Net Interest Income
The major source of earnings for the Company is net interest income. The
related net interest margin represents the net interest income expressed as a
percentage of average interest earning assets during the period. The following
table sets forth information relating to the Company's consolidated average
balance sheets, interest income and interest expense, and reflects the average
yield on assets and cost of liabilities for the six-month periods ended June
30, 2000 and 1999. The yields and costs include adjustments for accretion and
amortization of deferred fees and costs.
Six Months Ended June 30
2000 1999
Average Interest Average Average InterestAverage
Assets Balance Income Rate Balance Income Rate
(Dollars in Thousands)
Loans (1) & (2) $450,908 $18,838 8.36% $371,681$15,221 8.19%
Taxable investment 24,646 757 6.14% 26,873 765 5.69%
securities
Investment securities
exempt from
federal income tax (1) 10,852 405 7.46% 13,250 473 7.14%
Interest bearing deposits
with financial
institutions 103 7 13.59% 1,889 42 4.45%
Other interest earning - - 5,197 128 4.93%
assets
Total interest earning $486,509 $20,007 8.22% $418,890$16,629 7.94%
assets
Non-interest earning 29,089 39,408
assets
Total assets $515,598 $458,298
Six Months Ended June 30
2000 1999
Average Interest Average AverageInterest Average
Liabilities & Balance Expense Rate Balance Expense Rate
Shareholders' Equity
(Dollars in Thousands)
Deposits:
NOW & money market $4,038 4.35% $163,844 $3,238 3.95%
accounts $185,531
Savings deposits 22,295 210 1.88% 22,825 241 2.11%
Time deposits 151,968 4,494 5.91% 143,225 3,799 5.30%
Notes payable 55 2 7.27% - - -
Other borrowings 65,434 2,154 6.58% 38,488 1,249 6.49%
Total interest bearing 425,283 10,898 5.13% 368,382 8,527 4.63%
liabilities
Demand deposits - non- 57,493 54,898
interest bearing
Other non-interest bearing 3,157 2,841
liabilities
Shareholders' equity 29,665 32,177
Total liabilities & $515,598 $458,298
shareholders' equity
Net Interest Income $9,109 $8,102
Net Interest Margin 3.74% 3.87%
(1) Tax-exempt income as reflected on a fully tax equivalent basis utilizing a
34% rate for all years presented.
(2) Non-accrual loans are included in average loans.
The Company's annualized net interest margin for the six months ended June 30,
2000 was 3.74% as compared to 3.87% for the same period in 1999. The decline
in the Company's net interest margin for the six months ended June 30, 2000
compared with the same period in 1999, is primarily attributable to the impact
of the Company's negative short-term gap position in a rising interest rate
environment as experienced during the past three quarters. Management has
entered into a balance sheet restructuring program in order to reduce interest
rate sensitivity involving the use of indexed loan and deposit products.
The following table represents a reconciliation of the change in fully tax
equivalent net interest income from the prior year.
(In thousands)
Fully tax equivalent net interest income for the six months $ 8,102
ended June 30, 1999
Change due to fluctuations in volume of average interest 1,443
earning assets
Change due to interest rate fluctuations (436)
Fully tax equivalent net interest income for the six months $ 9,109
ended June 30, 2000
Other Operating Income
Other operating income for the quarter ended June 30, 2000 was $752 thousand,
an increase of $103 thousand, or 15.9% over the $649 thousand recorded for the
comparable period in 1999. For the six-month periods ended June 30, 2000 and
1999, other operating income was $1.5 million, respectively. Service charges
on deposit accounts were $675 thousand and $1.3 million, respectively, for the
quarter and six-month period ended June 30, 2000 as compared to $521 thousand
and $1.0 million for the same periods, respectively, in 1999. For the quarter
ended June 30, 2000 other noninterest income was $81 thousand as compared to
$78 thousand for the same period in 1999. For the six-month period ended June
30, 2000 other noninterest income was $169 thousand versus $401 thousand for
the comparable period in 1999, a decrease of $232 thousand. The decrease is
primarily associated with the recognition, during the first quarter of 1999, of
nonrecurring income arising from the receipt of a lawsuit settlement of $70
thousand and the settlement of monthly billing claims and conversion related
charges with the Bank's service provider resulting in the reduction of
previously accrued expenses by $94 thousand. Gains on the sale of loans
decreased $57 thousand and $147 thousand for the quarter and six-month periods
ended June 30, 2000 as compared to the same periods in 1999. The decreases are
primarily related to the reduced fixed rate residential mortgage volume levels
experienced in a rising rate interest environment.
Other Operating Expenses
Other operating expenses were $4.3 million for the quarter ended June 30, 2000
compared with $4.1 million for the same quarter in 1999. Salaries and benefits
expense decreased $49 thousand, or 2.2%, to $2.2 million for the current
quarter as compared to the same period in 1999 reflecting the reduction in
employee headcount associated with the Company's branch consolidation efforts.
Occupancy expenses increased $183 thousand, or 22.2%, to $1.0 million for the
quarter ended June 30, 2000 versus the comparable period in 1999. The increase
in occupancy expense is due, in part, to the recognition of rental and utility
charges associated with the Company's corporate center that are not yet offset
by the elimination of the occupancy expenses related to the closed Chicago Loop
branch. The Company has not yet entered into a firm agreement to sublease the
closed Loop branch space. For the six-month period ended June 30, 2000 other
operating expenses were $8.8 million, an increase of $583 thousand, or 7.1%,
over the $8.2 million recorded for the comparable period in 1999. Salaries and
benefits expense was $4.4 million for both of the six-month periods ended June
30, 2000 and 1999. Occupancy expenses increased $367 thousand, or 22.4%, to
$2.0 million for the six-month period ended June 30, 2000 versus the comparable
period in 1999. During the second quarter of this year management continued in
its efforts to evaluate the Company's operational and business units, from both
financial and customer service perspectives. The evaluation process resulted
in the decision to close both the Lincolnwood Mall and Skokie branches during
the third quarter of this year. The Company will benefit in future periods as
costs associated with these offices are eliminated. In addition, management is
in the process of reviewing several options relating to the existing lease,
which terminates in 2008, of the Company's recently closed Chicago Loop office.
Financial Condition
Loans
The loan portfolio is the largest category of the Company's interest earning
assets. At June 30, 2000, total loans were $470.8 million, an increase of
$41.9 million, or 9.8% from the $428.9 million at December 31, 1999. As the
table below indicates, the growth in the loan portfolio is primarily
attributable to growth in commercial and real estate mortgages which increased
$16.4 million and $8.3 million, respectively. Strategically, during the past
year, the Company has initiated various marketing and calling programs to
generate potential business opportunities leading to the origination of
commercial loans. Home equity loans outstanding increased $8.6 million during
the first six months of 2000.
The following table sets forth the composition of the loan portfolio:
June 30, 2000 December 31,1999
Percent Percent
Amount of Amount of
Portfolio Portfolio
(Dollars in thousands)
$145,659 30.94% $129,233 30.13%
Real estate - construction 27,654 5.87% 19,422 4.53%
Real estate - mortgage 205,908 43.74% 197,587 46.06%
Home equity 83,509 17.74% 74,936 17.47%
Installment 7,733 1.64% 7,385 1.72%
Credit cards 338 0.07% 373 0.09%
Total gross loans 470,801 100.00% 428,936 100.00%
Net deferred loan fees 190 205
Unaccreted discount resulting from
loss on transfer of loans
from held-for-sale to portfolio (180) (204)
Loans net of unearned discount and net 470,811 428,937
deferred loan fees
Allowance for loan losses (4,558) (4,269)
Net loans $466,253 $424,668
Allowance to gross loans 0.97% 1.00%
Non-Performing Assets
The following table presents a summary of book value of non-performing assets
which includes (a) non-performing loans and (b) other real estate owned. Non-
performing loans include: (1) loans accounted for on a non-accrual basis; (2)
accruing loans contractually past due 90 days or more as to interest or
principal payment; and (3) loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower. The Company has a reporting and
control system to monitor non-performing loans.
Loans with principal or interest payments contractually due but not yet paid
are reviewed by senior management on a weekly basis and are placed on non-
accrual status when scheduled payments remain unpaid for 90 days or more,
unless the loan is both well-secured and in the process of collection.
Interest income on non-accrual loans is recorded when actually received in
contrast to the accrual basis, which records income over the period in which it
is earned, regardless of when it is received.
June 30, December
2000 31, 1999
(Dollars in thousands)
Non-performing loans:
Non-accrual $2,291 $1,486
90 days or more past due, still 1 222
accruing
Total non-performing loans 2,292 1,708
Other real estate owned 5 50
Total non-performing assets $2,337 $1,758
Non-performing loans to net loans 0.49% 0.40%
Non-performing loans to allowance for 50.29% 40.01%
loan losses
The increase in non-accrual loans of $805 thousand from December 31, 1999 to
June 30, 2000 resulted primarily from the classification of four additional
loans. Of the $2.3 million classified as non-accrual at June 30, 2000, the
largest loan has a balance of $1.1 million. It is anticipated that one
nonaccrual loan in the amount of $199 thousand will be repaid during the
quarter ending September 30, 2000. Loans past due 90 days or more and still
accruing decreased from $222,000 at December 31, 1999 to $1 thousand at June
30, 2000.
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 may not be able to continue to satisfy
present loan repayment terms includes factors such as review of individual
loans, recent loss experience and current economic conditions. Loans in this
category include those with characteristics such as those that have recent
adverse operating cash flow or balance sheet trends, or have general risk
characteristics that the loan officer believes might jeopardize the future
timely collection of principal and interest payments. The principal amount of
loans in this category as of June 30, 2000 and December 31, 1999 were
approximately $5.2 million and $2.3 million, respectively. At June 30, 2000,
there were no significant loans which were classified by any bank regulatory
agency that are not included above as non-performing or as a potential problem
loan.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for potential future losses in the Company's loan portfolio. The level
of the allowance is based upon management's periodic and comprehensive
evaluation of the loan portfolio. Reports of Examination furnished by Federal
banking authorities are also considered by management in this regard. The
evaluations by management in assessing the adequacy of the allowance include
consideration of past loan loss experience, changes in the composition of the
loan portfolio, the volume and condition of loans outstanding and current
market and economic conditions.
Loans are charged to the allowance for loan losses when deemed uncollectible by
management, unless sufficient collateral exists to repay the loan.
The following table summarizes transactions in the allowance for loan losses
for the periods indicated:
Six Months
Ended
June 30,
2000 1999
(Dollars in
thousands)
Balance at beginning of period $4,269 $3,824
Provision for loan losses 575 300
Recoveries on loans previously charged-off 3 3
Loans charged-off (289) (551)
Balance at end of period 4,558 3,576
Allowance as a % of total loans, net of unearned 0.97% 0.96%
discount and net deferred loan fees/costs
Ratio of net charge-offs to average loans outstanding 0.13% 0.29%
(annualized)
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 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 and through the Company's independent public accountants in
conjunction with the Company's annual audit. Internal loan review is primarily
the responsibility of the Loan Review Department. The Loan Review Department
measures risk in the Company's loan portfolio through (i) an in-depth credit
review which emphasizes larger and newer commercial and commercial real estate
credits, (ii) a system of process reviews for all retail portfolios, (iii)
attendance at loan committee meetings and (iv) the completion of monthly
monitoring activities evaluating the classification of delinquent and non-
accrual loans. The amount of additions to the allowance for loan losses, which
is charged to earnings through the provision for loan losses, is determined
based on a variety of factors, including actual charge-offs during the year,
historical loss experience and delinquent loans. 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
The following table sets forth deposits at the periods indicated:
June 30, Percent December Percent
2000 of 31, 1999 of
Deposits Deposits
(Dollars in thousands)
NOW and money market accounts $196,281 44.62 % $181,296 45.98 %
Savings 21,615 4.91 % 21,359 5.42 %
Time 163,046 37.07 % 131,064 33.24 %
Demand 58,963 13.40 % 60,571 15.36 %
Total $439,905 100.00 % $394,290100.00 %
Liquidity and Capital Resources
Shareholders' Equity and Capital Standards
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's growth and financial condition. The
regulations require the Company and the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
principles. The capital classifications are also subject to qualitative
judgments by the regulators about risk weightings and other factors.
Quantitative measures established by Federal regulations to ensure capital
adequacy require the Company and the Bank to maintain minimum ratios (set forth
in the table below) of Tier I capital (as defined in the regulations) to total
average assets (as defined in the regulations). As of June 30, 2000, the
Company's actual total capital to risk-weighted assets ratio was 11.61%. As of
June 30, 2000, the ratio of the Bank's total capital to risk-weighted assets
was 11.64% indicating that the Bank is considered _well capitalized._ In June
2000, the Company, through a reduction in investable cash, contributed an
additional $5.0 million in capital to the Bank.
The required ratios and the Company's and Bank's actual ratios at June 30,
2000, are presented below:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Action
Purposes Provisions
Amounts Ratio Amounts Ratio Amounts Ratio
(Dollars in thousands)
As of June 30, 2000
Total Capital (to Risk
Weighted Assets):
Consolidated $48,241 11.61% $33,254 8.0% Not Applicable
Bank 48,077 11.64% 33,046 8.0% $41,308 10.0%
Tier 1 Capital (to
Risk Weighted Assets):
Consolidated 38,244 9.20% 16,627 4.0% Not Applicable
Bank 43,519 10.54% 16,523 4.0% 24,785 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated 38,244 7.42% 20,624 4.0% Not Applicable
Bank $43,519 8.47% $20,549 4.0% $25,686 5.0%
Operating, Investing and Financing Activities
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. Borrowings by the Bank from the Federal
Reserve Bank of Chicago and Federal Home Loan Bank of Chicago provide
additional available sources of liquidity.
The Bank's core deposits, the most stable source of liquidity for community
banks due to the nature of long-term relationships generally established with
depositors and the security of deposit insurance provided by the FDIC, are
available to provide long-term liquidity. At June 30, 2000 and December 31,
1999, 32.31% and 36.83%, respectively, of the Company's total assets were
funded by NOW accounts and demand deposits.
Liquid assets refer to the Company's 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 on deposit with the Bank. As of June 30,
2000 and December 31, 1999, net liquid assets totaled approximately $23.8
million and $22.7 million, respectively.
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities consists
primarily of earnings. Net cash used in investing activities, consisting
primarily of loan and investment funding, was $40.3 million at June 30, 2000 as
compared to cash provided of $2.3 million for the same period in 1999. The
increased usage is primarily attributable to an increase in loan volume in
2000. Net cash provided by financing activities, consisting primarily of
deposit activities, was $37.0 million at June 30, 2000 as compared to cash used
of $12.3 million at June 30, 1999. The increase in cash provided is primarily
the result of an increase in interest bearing deposit balances in 2000.
Forward Looking Statements
Statements made about the Company's future economic performance, strategic
plans or objectives, revenues or earnings projections, or other financial
predictions 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 Company's ability to successfully manage the consolidation or closing
of existing branch facilities and the possibility of further difficulties or
delays in releasing the Chicago Loop office;
. Changes in management's estimate of the adequacy of the allowance for loan
losses;
. Increases in loan delinquencies or write-offs;
. Interest rate movements and their impact on customer behavior and the
Company's net interest margin;
. The impact of interest rate sensitivity restructuring activities;
. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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.
In order to evaluate its asset/liability sensitivity, management employs a
measurement tool which determines exposure to changes in interest rates by
measuring the percentage change in net interest income over a one-year time
horizon due to changes in rates. 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 48 CPR (Constant Prepayment Rate) as of June 30, 2000 and
December 31, 1999. 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 June 30, 2000 and December 31,
1999, was as follows:
Basis Point Change
+200 +100 -100 -200
At June 30, 2000 (6.5%) (3.2%) 3.2% 6.3%
At December 31, 1999 (8.8%) (4.4%) 4.6% 7.8%
As the table indicates, the Company's balance sheet restructuring activities in
2000, which involve indexed loan and deposit products, have resulted in an
improved interest rate sensitivity position.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Although such activities may be
permitted with the approval of the Board of Directors of the Bank, 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.
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on May 24, 2000.
At the Annual Meeting of Stockholders one matter was submitted to a vote of
stockholders:
The election of two directors to the Board of Directors to serve for a three
year term or until their successors are elected and qualified.
Director Votes for Votes
Withheld
Joseph A. Cari, Jr. 1,829,844 205,770
Norman D. Rich 1,829,354 206,260
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit Title
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 (the _Commission_) on
July 31, 1997).
3.1.1 Certificate of Designations of Series B Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1.1
of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
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 Commission on July 31, 1997).
3.2.1 Amendment No. 1 to By-laws (incorporated by reference to
Exhibit 3.2.1 of the Company's Form 10-Q filed with the
Commission on May 13, 1999).
4.1 Form of Subordinated Indenture relating to the Junior
Subordinated Debentures (incorporated by reference to Exhibit
4.1 of the Form S-1 Registration Statement of the Company and
Success Capital Trust I (_Success Capital_) (No. 333-51271
and No. 333-51271-01) filed with the Commission on April 28,
1998).
4.2 Form of Junior Subordinated Debenture Certificate (included
as an exhibit to Exhibit 4.1).
4.3 Certificate of Trust of Success Capital (incorporated by
reference to Exhibit 4.3 of the Form S-1 Registration
Statement of the Company and Success Capital (No. 333-51271
and 333-51271-01) filed with the Commission on April 28,
1998).
4.4 Form of Amended and Restated Trust Agreement of Success
Capital (incorporated by reference to Exhibit 4.4 of the Form
S-1 Registration Statement of the Company and Success Capital
(No. 333-51271 and 333-51271-01) filed with the Commission on
April 28, 1998).
4.5 Form of Trust Preferred Security Certificate of Success
Capital (included as an exhibit to Exhibit 4.4).
4.6 Form of Common Security Certificate of Success Capital
(included as an exhibit to Exhibit 4.4).
4.7 Form of Guarantee Agreement of the Company relating to the
Trust Preferred Securities (incorporated by reference to
Exhibit 4.7 of the Form S-1 Registration Statement of the
Company and Success Capital (No. 333-51271 and 333-51271-01)
filed with the Commission on April 28, 1998).
4.8 Form of Rights Agreement, dated as of August 1, 1998, between
the Company and Harris Trust and Savings Bank, which includes
as Exhibit B thereto the Form of Right Certificate
(incorporated by reference to Exhibit 1 of the Company's Form
8-A Registration Statement (File No. 001-14381) filed with
the Commission on August 6, 1998).
(1)27.1 Financial Date Schedule
Filed herewith
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Success Bancshares, Inc.
(Registrant)
August 11, 2000 /s/
Date Wilbur G. Meinen, Jr.
Chairman, President & Chief
Executive Officer
August 11, 2000 /s/
Date Kurt C. Felde
Executive Vice President
Chief Financial Officer
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 (the _Commission_) on
July 31, 1997).
3.1.1 Certificate of Designations of Series B Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1.1
of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
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 Commission on July 31, 1997).
3.2.1 Amendment No. 1 to By-laws (incorporated by reference to
Exhibit 3.2.1 of the Company's Form 10-Q filed with the
Commission on May 13, 1999).
4.1 Form of Subordinated Indenture relating to the Junior
Subordinated Debentures (incorporated by reference to
Exhibit 4.1 of the Form S-1 Registration Statement of the
Company and Success Capital Trust I (_Success Capital_) (No.
333-51271 and No. 333-51271-01) filed with the Commission on
April 28, 1998).
4.2 Form of Junior Subordinated Debenture Certificate (included
as an exhibit to Exhibit 4.1).
4.3 Certificate of Trust of Success Capital (incorporated by
reference to Exhibit 4.3 of the Form S-1 Registration
Statement of the Company and Success Capital (No. 333-51271
and 333-51271-01) filed with the Commission on April 28,
1998).
4.4 Form of Amended and Restated Trust Agreement of Success
Capital (incorporated by reference to Exhibit 4.4 of the
Form S-1 Registration Statement of the Company and Success
Capital (No. 333-51271 and 333-51271-01) filed with the
Commission on April 28, 1998).
4.5 Form of Trust Preferred Security Certificate of Success
Capital (included as an exhibit to Exhibit 4.4).
4.6 Form of Common Security Certificate of Success Capital
(included as an exhibit to Exhibit 4.4).
4.7 Form of Guarantee Agreement of the Company relating to the
Trust Preferred Securities (incorporated by reference to
Exhibit 4.7 of the Form S-1 Registration Statement of the
Company and Success Capital (No. 333-51271 and 333-51271-01)
filed with the Commission on April 28, 1998).
4.8 Form of Rights Agreement, dated as of August 1, 1998,
between the Company and Harris Trust and Savings Bank, which
includes as Exhibit B thereto the Form of Right Certificate
(incorporated by reference to Exhibit 1 of the Company's
Form 8-A Registration Statement (File No. 001-14381) filed
with the Commission on August 6, 1998).
(1)27. Financial Date Schedule
(1) Filed herewith
Exhibit 27 - Financial Data Schedule
Legend This schedule contains summary financial
information extracted from the quarterly
unaudited financial statements of Success
Bancshares, Inc. for the six months ended June
30, 2000, and is qualified in its entirety by
reference to such financial statements.
Name Success Bancshares, Inc.
Multiplier 1,000
Period Type Six months
Fiscal Year End Dec-31-2000
Period Start Jan-01-2000
Period End June-30-2000
Cash 15,103
Int. Bearing Deposits -
Fed Funds Sold -
Trading Assets -
Investments Held-for-Sale 34,412
Investments Carrying -
Investments Market -
Loans 470,811
Allowance 4,558
Total Assets 535,114
Deposits 439,905
Short Term 27,390
Liabilities - Other 3,200
Long Term 36,119
Preferred Mandatory -
Preferred -
Common 3
Other - SE 28,497
Total Liabilities and Equity 535,114
Interest - Loan 18,757
Interest - Invest 1,024
Interest - Other 7
Interest - Total 19,788
Interest - Deposit 8,742
Interest - Expense 10,898
Interest - Income - Net 8,890
Loan - Losses 575
Securities - Gains -
Expense - Other 8,754
Income - Pretax 1,059
Income - Pre-Extraordinary 1,059
Extraordinary -
Changes -
Net - Income 789
EPS - Basic $0.30
EPS - Diluted $0.30
Yield - Actual 3.74%
Loans - Non 2.291
Loans - Past 1
Loans - Troubled -
Loans - Problem 5,200
Allowance - Open 4,269
Charge-Offs 289
Recoveries 3
Allowance - Close 4,558
Allowance - Domestic 3,569
Allowance - Foreign -
Allowance - Unallocated 989
