<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, 1999
0-23235
COMMISSION FILE NUMBER
SUCCESS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3497644
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 TRI STATE INTERNATIONAL - SUITE 300
P.O. BOX 1499
LINCOLNSHIRE, ILLINOIS 60069-1499
(Address of principal executive offices)
(847) 279-9000
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 $28.5 million as of March 3,
2000. As of March 3, 2000, the registrant had outstanding 2,664,606 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1999, 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 May 24, 2000, are incorporated by reference into Part
III hereof.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
ITEM 1. Business....................................................................................... 1 - 15
ITEM 2. Properties..................................................................................... 16
ITEM 3. Legal Proceedings.............................................................................. 16
ITEM 4. Submission of Matters to Vote of Security Holders.............................................. 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 17
ITEM 6. Selected Financial Data........................................................................ 17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 17
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..................................... 17
ITEM 8. Financial Statements and Supplementary Data.................................................... 17
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................................. 18
ITEM 11. Executive Compensation......................................................................... 18
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 18
ITEM 13. Certain Relationships and Related Transactions................................................. 18
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 19 - 22
Signatures .................................................................................... 23
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
OVERVIEW
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 $497 million at December 31, 1999. The Company's
common stock is quoted on the NASDAQ National Market System under the symbol
"SXNB." Through its wholly-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, in addition to its
headquarters, has nine additional branch offices. These banking facilities are
located in Deerfield, Libertyville (2), Lincolnwood (2), Lincolnshire,
Chicago-Lincoln Park, Skokie and Northbrook. Effective December 24, 1999, the
Company closed its Chicago Loop branch. In addition, the Company has entered
into a contract to sell its Arlington Heights branch property on February 22,
2000. This sale transaction, which includes the branch building and equipment,
will generate a gain estimated at $75 thousand. Both the Loop and Arlington
Heights branches, which were open for 21 months and 31 months, respectively,
were unable to secure sufficient business to warrant their continued operation.
The lease on the Company's Deerfield/Riverwoods branch, which space was used
primarily for loan origination and processing, was not renewed in October 1999.
Employees from the Deerfield/Riverwoods branch were moved to the newly leased
corporate center. The Company's corporate center is currently staffed with
approximately 115 employees.
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 target markets. The Bank
maintains its own home page on the World Wide Web (http://www.successbank.com)
and enables consumers to access information regarding branch locations, deposit
and loan rates and economic forecasts. The Bank's principal business activities
are competitive with other financial services providers offering a wide array of
financial products and services. The competitors include other banks, savings
and loan associations, credit unions, brokerage firms, finance companies,
insurance companies, mutual funds and mortgage bankers. Competition is generally
in the form of interest rates and points charged on loans, interest rates paid
on deposits, service charges, banking hours and other service-related products.
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 1999 Annual Report, filed as an exhibit to this Form
10-K.
STATISTICAL INFORMATION
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 interest earning
assets and interest bearing liabilities for the indicated years on a
tax-equivalent basis assuming a 34% tax rate.
1
<PAGE> 4
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -------------------------
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) ................................. $382,812 $ 32,033 8.37% $331,878 $ 28,970 8.73% $239,084 $ 21,755 9.10%
Taxable investment securities ................... 26,090 1,548 5.93 40,130 2,317 5.77 38,801 2,318 5.97
Investment securities exempt from
Federal income taxes (1) ..................... 12,773 923 7.23 12,798 939 7.34 8,214 613 7.46
Interest bearing deposits with financial
institutions.................................. 3,687 181 4.91 5,349 283 5.29 4,032 215 5.33
Other interest earning assets ................... 6,694 343 5.12 5,398 301 5.58 3,576 208 5.82
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets ................... 432,056 $ 35,028 8.11% 395,553 $ 32,810 8.29% 293,707 $ 25,109 8.55%
Non-interest earning assets ..................... 33,737 31,685 25,335
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets ................................ $465,793 $427,238 $319,042
===================================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
NOW & money market accounts .................. $166,065 $ 6,593 3.97% $131,681 $ 5,976 4.54% $ 88,652 $ 3,114 3.51%
Savings deposits ............................. 22,769 459 2.02 21,104 667 3.16 19,946 640 3.21
Time deposits ................................ 145,115 7,677 5.29 163,139 8,622 5.29 127,236 7,436 5.84
Notes payable ................................... - - - - - - 4,249 363 8.54
Other borrowings ................................ 40,704 2,693 6.62 28,873 1,919 6.65 20,978 1,308 6.24
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities .............. 374,653 17,422 4.65 344,797 17,184 4.98 261,061 12,861 4.93
Demand deposits - non-interest bearing .......... 56,354 48,044 40,868
Other non-interest bearing liabilities .......... 3,011 2,674 2,560
Minority interest in subsidiary bank ............ - - 544
Shareholders' equity............................. 31,775 31,723 14,009
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholder's equity..... 465,793 $427,238 $319,042
===================================================================================================================================
Net interest income.............................. $ 17,606 $ 15,626 $ 12,248
===================================================================================================================================
Net interest margin.............................. 4.07% 3.95% 4.17%
===================================================================================================================================
</TABLE>
- ----------------------
(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 increase in average interest earning assets of $36.5 million to $432.1
million for the year ended December 31, 1999, is primarily attributable to the
Company's loan growth. The average balance of loans during 1999 was $382.8
million, compared with $331.9 million for 1998, an increase of $50.9 million or
15.3%. Average taxable investment securities decreased $14.0 million or 35.0%
during 1999 to $26.1 million as compared to $40.1 million for 1998.
The increase in the loan portfolio during this period was due to increased loan
demand primarily in commercial and commercial real estate loans. At December 31,
1999 commercial loans increased $26.6 million to $129.2 million, or 26.0%, from
December 31, 1998. For 1999, commercial real estate loans increased $34.7
million, or 36.0%, to $131.1 million as compared to $96.4 million at year end
1998.
The Company's loan growth was funded primarily with non-interest bearing
deposits and borrowings. Non-interest bearing deposits at December 31, 1999
increased $7.0 million to $60.6 million, or 13.1%, from December 31, 1998.
Borrowings at December 31, 1999, including a $15.0 million trust preferred
securities issuance in May 1998, increased $32.6 million to $69.1 million, or
89.3%, over December 31, 1998.
Rate/Volume Analysis
The following table sets forth the affects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate) and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume). Changes in
rate/volume (change in rate multiplied by change in volume) have been allocated
to the rate and volume categories in proportion to the relationship of the
absolute dollar amounts of the change in each.
2
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 OVER 1998 1998 OVER 1997
----------------------------- ----------------------------
CHANGE DUE TO TOTAL CHANGE DUE TO TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1) ................................................... $ 4,301 $(1,238) $ 3,063 $ 8,133 $ (918) $ 7,215
Taxable investment securities ............................... (831) 62 (769) 78 (79) (1)
Investment securities exempt from Federal income taxes (1)... (2) (14) (16) 337 (11) 326
Interest bearing deposits with financial institutions ....... (83) (19) (102) 70 (2) 68
Federal funds sold (Other interest earning assets) .......... 68 (26) 42 102 (9) 93
- ---------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in interest income ............ $ 3,453 (1,235) 2,218 8,720 (1,019) 7,701
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
NOW & money market accounts ................................. $ 1,428 $ (811) 617 $ 1,787 $ 1,075 2,862
Savings deposits ............................................ 49 (257) (208) 37 (10) 27
Time deposits ............................................... (954) 9 (945) 1,948 (762) 1,186
Notes payable ............................................... (181) (182) (363)
Other borrowings ............................................ 783 (9) 774 520 91 611
- ---------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in interest expense ........... 1,306 (1,068) 238 4,111 212 4,323
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income .............. $ 2,147 $ (167) $ 1,980 $ 4,609 $(1,231) $ 3,378
===========================================================================================================================
</TABLE>
- ---------------------------------------
(1) Tax-exempt income is reflected on a fully tax equivalent basis utilizing a
34% rate for all periods presented.
Securities
The following table sets forth certain information with respect to the Company's
securities portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
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 .................................. $ 4,989 $ 4,940 $ 5,201 $ 5,215 $ 3,775 $ 3,792
U.S. government sponsored entities ............. 6,926 6,831 4,251 4,276 3,346 3,301
States and political subdivisions;
Taxable ...................................... 1,668 1,690 1,732 1,881 - -
Exempt from Federal income taxes ............. 11,138 10,989 12,995 13,191 4,437 4,442
Mortgage-backed securities ..................... 7,197 7,072 10,691 10,788 7,019 7,054
SBA guaranteed loan participation certificates.. 850 829 2,304 2,290 3,221 3,238
Other securities ............................... 3,767 3,978 3,141 3,396 182 263
- -------------------------------------------------------------------------------------------------------------
Total ...................................... $36,535 $36,329 $40,315 $41,037 $21,980 $22,090
=============================================================================================================
SECURITIES HELD-TO-MATURITY:
U.S. Treasury .................................. $ $ $ - $ - $ 246 $ 248
U.S. government sponsored entities ............. - - 14,754 14,962
States and political subdivisions
Taxable ...................................... - - 1,791 1,899
Exempt from Federal income taxes ............. - - 6,506 6,702
Mortgage-backed securities ..................... - - 5,148 5,409
Other securities ............................... - - 3,219 3,219
- -------------------------------------------------------------------------------------------------------------
Total ...................................... $ $ $ - $ - $31,664 $32,439
=============================================================================================================
</TABLE>
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, 1999. Securities, Maturities and
Yields
3
<PAGE> 6
The following table sets forth maturities and the weighted average yields of the
securities at December 31, 1999.
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------------------------------------------------------
DUE IN ONE YEAR DUE AFTER ONE YEAR DUE AFTER FIVE YEARS
OR 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....................... $ 2,970 5.19 $ 1,970 5.07 $ - $ -
U.S. government sponsored entities.. 496 5.19 6,106 6.03 229 6.08 2,559 6.07
State and political subdivisions (1) 691 4.58 5,084 4.86 4,244 5.08 536 6.32
Mortgage-backed securities.......... 414 6.48 4,341 6.47 1,780 6.37 6.37
SBA guaranteed loan
participation certificates (2)... 54 7.11 88 7.04 110 7.04 577 7.01
Other securities.................... 50 9.00 400 8.24 3,528 5.73
- --------------------------------------------------------------------------------------------------------------------------------
$ 4,675 5.28 $17,989 5.76 $ 6,364 5.51 $ 7,301 6.00
================================================================================================================================
</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. At December 31, 1999 the ratio of total loans to total assets was 86.3%
as compared to a ratio of 79.7% at December 31, 1998.
The following table sets forth the historical composition of the loan portfolio.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- -------------------- ------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial................... $129,233 30.13% $102,592 27.34% $ 87,506 30.21% $ 58,912 28.68% $ 45,217 26.14%
Real estate - construction... 19,422 4.53% 15,517 4.14 13,409 4.63 12,282 5.98 12,821 7.41
Real estate - mortgages...... 197,587 46.06% 168,833 45.00 106,120 36.64 84,920 41.34 68,227 39.44
Home equity.................. 74,936 17.47% 78,384 20.89 72,944 25.18 43,193 21.03 37,820 21.86
Installment.................. 7,385 1.72% 9,433 2.51 9,253 3.19 5,615 2.73 8,655 5.00
Credit cards................. 373 0.09% 456 0.12 432 0.15 503 0.24 261 0.15
- ----------------------------------------------------------------------------------------------------------------------------------
Total gross loans....... 428,936 100.00% 375,215 100.00% 289,664 100.00% 205,425 100.00% 173,001 100.00%
======= ======= ======= ======= =======
Unearned discount............ - - - (2) (3)
Net deferred loan fees....... 205 135 (187) (261) (223)
Unaccreted discount from
loss on transfer of loans
from held-for-sale to
portfolio................. (204) (263) (373) (438) (451)
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned
discount and net deferred
loan fees................. 428,937 375,087 289,104 204,724 172,324
Allowance for loan losses.... (4,269) (3,824) (2,079) (1,425) (1,189)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loans................. $424,668 $371,263 $287,025 $203,299 $171,135
==================================================================================================================================
</TABLE>
Commercial Loans: Commercial loans are written with either adjustable interest
rates to match variable rate funding sources or fixed interest rates. At
December 31,1999, the adjustable rate commercial loans represented approximately
68.2% of total commercial loans. Total commercial loans increased $26.6 million
to $129.2 million at December 31, 1999, as the Company continued to actively
pursue commercial loan relationships. Commercial loans represented 30.1% of the
total loan portfolio at December 31, 1999, as compared to 27.3% of the total
loan portfolio at December 31, 1998.
Real Estate Mortgage Loans: Real estate mortgage loans, which consist of
residential and commercial loans secured by real estate, totaled $197.6 million
at December 31, 1999, compared to $168.8 million at December 31, 1998. This
increase is primarily associated with growth during 1999 of $34.7 million or
36.0% in commercial mortgage loans to $131.1 million at December 31, 1999 as
compared to December 31, 1998. Residential real estate loans decreased $6.0
million, or 8.2%, to $66.5 million as compared to December 31, 1998.
4
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Home Equity Loans: Home equity loans decreased $3.4 million, or 4.4%, from
December 31, 1998 and were $74.9 million at December 31, 1999. At December 31,
1999, home equity loans accounted for 17.5% of the total loan portfolio,
compared to 20.9% of the total loan portfolio at December 31, 1998. The majority
of the Company's home equity loans feature a fixed rate for three years,
adjusting to prime thereafter.
The Bank has no concentrations of loans to borrowers engaged in the same or
similar industries that exceed 10% of total loans. The Company attempts to
direct 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, 1999. 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.. $ 108,828 $ 14,298 $ 14,310 $ 8,057 $ 3,162 $ 148,655
============ =========== =========== =========== ========== ==========
</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,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ................................... $1,486 $ 268 $1,479 $ - $ 13
Restructured loans ................................. - - - - -
Loans 90 days or more past due, still accruing ..... 222 81 341 118 626
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans .................... $1,708 $ 349 $1,820 $ 118 $ 639
- -----------------------------------------------------------------------------------------------------------------------------
Non-performing loans to loans, net of unearned
discount and net deferred loan fees ............. 0.40% 0.09% 0.63% 0.06% 0.37%
Non-performing loans to allowance for loan losses... 40.01% 9.13% 87.54% 8.28% 53.74%
</TABLE>
Management is aggressively pursuing collection efforts with respect to
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, in the
judgement of management, the loan is both well-secured and in the process of
collection. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
Restructured loans include troubled debt restructuring (which involved forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than the market rate). The Company had no restructured loans at
December 31, 1999.
5
<PAGE> 8
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. 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, 1999 and December 31, 1998 were
approximately $2.3 million and $812 thousand, respectively. The loans classified
as potential problem loans at December 31, 1998 were either repaid or upgraded
during 1999. At year-end 1999, loans in the amounts of $1.1 million and $895
thousand comprised a majority of the $2.3 million classified as potential
problem loans. Early in the year 2000, a $304 thousand prepayment was received
on the larger loan. At December 31, 1999, 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 totaling $50 thousand in other real estate owned at
December 31, 1999. At December 31, 1998 other real estate owned was comprised of
two commercial strip centers with combined balances of $435 thousand.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for potential future losses in the Company's loan portfolio. The level
of the allowance is based upon management's periodic and comprehensive
evaluation of the loan portfolio, as well as current and projected economic
conditions. Reports of examination furnished by Federal banking authorities are
also considered by management in this regard. These evaluations by management in
assessing the adequacy of the allowance include consideration of past loan loss
experience, changes in the composition of the loan portfolio, the volume and
condition of loans outstanding and current market and economic conditions.
Loans are charged to the allowance for loan losses when deemed uncollectible by
management, unless sufficient collateral exists to repay the loan.
Set forth in the following table is an analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period ......... $3,824 $2,079 $1,425 $1,189 $1,000
Charge-offs:
Commercial ............................ 768 185 71 49 -
Real estate - construction ............ - - - - -
Real estate - mortgage ................ 50 - - - -
Home equity ........................... - - - - -
Installment ........................... 18 13 23 20 4
Credit cards .......................... 6 9 55 9 15
- -----------------------------------------------------------------------------------------------------------------
Total charge-offs ........................ 842 207 149 78 19
- -----------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial ............................ 106 2 22 - -
Real estate - construction ............ - - - - -
Real estate - mortgage ................ - - - - -
Home equity ........................... - - - - -
Installment ........................... - 5 15 3 -
Credit cards .......................... 1 2 - 1 1
- -----------------------------------------------------------------------------------------------------------------
Total recoveries ......................... 107 9 37 4 1
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs .......................... 735 198 112 74 18
Provision for loan losses ................ 1,180 1,943 766 310 207
- -----------------------------------------------------------------------------------------------------------------
Allowance at end of period ............... $4,269 $3,824 $2,079 $1,425 $1,189
=================================================================================================================
Allowance to loans, net of unearned
discount and net deferred loan fees ... 1.00% 1.02% 0.72% 0.70% 0.70%
Net charge-offs to average net loans ..... 0.19% 0.06% 0.05% 0.04% 0.01%
</TABLE>
6
<PAGE> 9
The loan loss provision of $1.2 million in 1999 reflects a decrease of $763
thousand from the 1998 provision. In 1998, management determined that the
appropriate level for the allowance for loan losses was approximately $3.8
million necessitating a material provision for loan losses of $1.9 million
during the year.
The following table presents management's allocation of the allowance for loan
losses.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------- ------------------ -------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial...................$ 2,288 30.13% $ 1,242 27.34% $ 829 30.21% $ 597 28.68% $ 596 26.14%
Real estate - construction... - 4.53% - 4.14 - 4.63 - 5.98 - 7.41
Real estate - mortgage....... 99 46.06% 64 45.00 118 36.64 59 41.34 37 39.44
Installment.................. 61 1.72% 91 2.51 56 3.19 34 2.73 36 5.00
Home equity.................. 732 17.47% 635 20.89 387 25.18 224 21.03 190 21.86
Credit cards................. - 0.09% 10 0.12 5 0.15 12 0.24 7 0.15
Unallocated.................. 1,089 1,782 - 684 - 499 - 323 -
- --------------------------------------------------------------------------------------------------------------------------------
Total...................$ 4,269 100.00% $ 3,824 100.00% $ 2,079 100.00% $ 1,425 100.00% $ 1,189 100.00%
================================================================================================================================
</TABLE>
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 and an independent loan review. 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 Company's
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 $390.3 million for the year ended December 31, 1999,
an increase of $26.3 million or 7.2% from 1998. The increase in deposits
occurred primarily as a result of improved marketing initiatives and rate
promotions.
The following table sets forth the maturities of certificates of time deposit of
$100,000 or more and other time deposits of $100 thousand or more at December
31, 1999.
DECEMBER 31, 1999
----------------------
(dollars in thousands)
Maturing within three months.................. $ 11,653
After three but within six months............. 11,242
After six but within twelve months............ 15,795
After twelve months........................... 5,811
----------------------
Total.................................... $ 44,501
======================
7
<PAGE> 10
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, 1999, no material amount of agreements to repurchase securities
sold were outstanding with any individual customer. Securities sold under
agreements to repurchase averaged $5.4 million during both 1999 and 1998,
respectively, and the maximum amounts outstanding at any month-end during 1999
and 1998 were $7.1 million and $6.4 million, respectively. The weighted average
rate paid during 1999 and 1998 was 3.78% and 4.15%, respectively, and the
weighted average rate at the end of 1999 and 1998 was 4.43% and 3.92%.
YEAR 2000 ISSUES
The year 2000 was the first century date change ever for an automated society.
For years, information systems were designed using a two-digit date field. This
practice has created an environment in which older generation software programs
may not be able to discern the difference between the year 2000 and the year
1900. This problem could result in the failure of computers and/or information
systems. Due to its reliance on both computers and information systems, in early
1998, the Company began the process of identifying and assessing the degree to
which its hardware and software would be impacted by the date change. As a
result of the efforts described below, the Company experienced no year 2000
related problems.
A committee, comprised of representatives from all major operating areas, was
created to assess whether or not the Company's internal and external systems,
particularly those that are mission-critical, are year 2000 compliant. The
committee developed and adopted an action plan that addressed the Company's year
2000 renovation, testing, contingency planning and management review process. In
addition the Company developed a due diligence process to monitor and evaluate
the efforts of external third party suppliers to achieve year 2000 readiness.
The committee developed and implemented a written testing plan for both internal
and external mission-critical systems and finalized substantially all testing of
internal mission-critical systems by December 31, 1998. A business resumption
contingency plan that defines scenarios for mission-critical systems failing to
achieve year 2000 readiness and evaluates the Company's options was completed by
the committee during 1999.
The Company was committed to year 2000 compliance and, as such, undertook steps
to educate its customers in identifying potential year 2000 problems. A year
2000 risk assessment of borrowers with loans in excess of $100 thousand was
completed. The Company was satisfied that these borrowers represented a low year
2000 risk.
It is estimated that the Company spent approximately $140 thousand in total in
preparation for year 2000 compliance.
COMPETITION
The Company competes in the commercial banking industry through its subsidiary,
the 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
8
<PAGE> 11
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. Factors which affect competition
generally include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets. 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, American National
Bank, LaSalle Bank, N.A., BankOne and Bank of America.
EMPLOYEES
As of December 31, 1999, the Company had 185 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.
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.
On November 12, 1999, President Clinton signed legislation that will allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve,
in consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The Act specifies certain activities that are
deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
under section 4(c)(8) of the Bank Holding Company Act. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National Banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company
9
<PAGE> 12
portfolio investments and (iv) merchant banking. The authority of a national
bank to invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
At this time, the Company is unable to predict the impact the Act may have on
the Company or the Bank. Various bank regulatory agencies have begun issuing
proposed regulations as mandated by the Act. On January 19, 1999, the Federal
Reserve issued an interim rule, which sets forth procedures by which bank
holding companies may become financial holding companies, the criteria necessary
for such a conversion, and the Federal Reserve's enforcement powers should a
holding company fail to maintain compliance with the criteria. That same day the
Office of the Comptroller of the Currency issued a proposed rule discussing the
procedures by which national banks may establish financial subsidiaries as well
as the qualifications and safeguards that will be required. Both rules became
effective on March 11, 2000, the effective day of the Act.
The Act limits the nonbanking activities of unitary savings and loan holding
companies by generally prohibiting any savings and loan holding company from
engaging in any activity other than activities that (i) are currently permitted
for multiple savings and loan holding companies or (ii) are permissible for
financial holding companies (as described above) (collectively "permissible
activities"). The Act also generally prohibits any company from acquiring
company control of a savings association or savings and loan holding company
unless the acquiring company engages solely in permissible activities. The Act
creates an exemption from the general prohibitions for unitary savings and loan
holding companies in existence, or formed pursuant to an application pending
before the Office of Thrift Supervision, on or before May 4, 1999.
Bank Holding Company Regulation:
General.
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.
Investments and Activities.
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.
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
10
<PAGE> 13
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.
Capital Requirements.
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 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.
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, 1999, the Company had a Tier 1 Ratio of 10.83%, a Total
Risk-Based Capital Ratio of 13.18% and a Tier 1 capital to total average assets
ratio (leverage ratio) of 8.87%.
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. 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.
11
<PAGE> 14
Bank Regulation:
General.
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.
Transactions with Insiders and 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.
Capital Requirements.
The OCC has established the following minimum capital standards for national
banks, such as the Bank: a leverage requirement consisting of a minimum ratio of
Tier 1 capital to total assets of 3% for the most highly-rated banks within
minimum requirements of 4% to 5% for all others, and a risk-based capital
requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consists of substantially the same components as Tier 1 capital and total
capital under the Federal Reserve's capital guidelines for bank holding
companies. See "--Bank Holding Company Regulation--Capital Requirements."
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. For example, the regulations of the
OCC provide that additional capital may be required to take adequate account of,
among other things, interest rate risk or the risks posed by concentrations of
credit, nontraditional activities or securities trading activities.
During the year ended December 31, 1999, the Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1999, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 8.00% and a risk-based capital
ratio of 10.95%.
In August, 1995, 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
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.
12
<PAGE> 15
Dividend Limitations.
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 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 bank regulatory agencies also proposed guidelines for asset quality and
earnings standards.
Prompt Corrective Action.
FDICIA requires the federal banking regulators, including the Federal Reserve,
the OCC and the FDIC, to take prompt corrective action with respect to
depository institutions that fall below certain capital standards and prohibits
any depository institution from making any capital distribution that would cause
it to be undercapitalized. Institutions that are not adequately capitalized may
be subject to a variety of supervisory actions including, but not limited to,
restrictions on growth, investment activities, capital distributions and
affiliate transactions and will be required to submit a capital restoration plan
which, to be accepted by the regulators, must be guaranteed in part by any
company having control of the institution (such as the Company). In other
respects, FDICIA provides for enhanced supervisory authority, including greater
authority for the appointment of a conservator or receiver for under capitalized
institutions. The capital-based prompt corrective action provisions of FDICIA
and their implementing regulations apply to FDIC-insured depository
institutions. However, federal banking agencies have indicated that, in
regulating bank holding companies, the agencies may take appropriate action at
the holding company level based on their assessment of the effectiveness of
supervisory actions imposed upon subsidiary insured depository institutions
pursuant to the prompt corrective action provisions of FDICIA.
13
<PAGE> 16
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.
During 1999, the Bank was assessed at an average annual rate of [0]% of
deposits. 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 $44.3 million or less plus 10.0% on the remainder. The
first $5.0 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.
14
<PAGE> 17
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 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.
Monetary Policy and Economic Conditions.
The earnings of banks and bank holding companies are affected by general
economic conditions and also by the fiscal and monetary policies of federal
regulatory agencies, including the Federal Reserve. Through open market
transactions, variations in the discount rate and the establishment of reserve
requirements, the Federal Reserve exerts considerable influence over the cost
and availability of funds obtainable for lending or investing.
The above monetary and fiscal policies and resulting changes in interest rates
have affected the operating results of all commercial banks in the past and are
expected to do so in the future. The Bank cannot fully predict the nature or the
extent of any effects which fiscal or monetary policies may have on its business
and earnings.
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 throughout this annual report or Form 10-K including without
limitation in Item 1. 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.
15
<PAGE> 18
ITEM 2. PROPERTIES
The Company and the Bank are headquartered in Lincolnshire, Illinois. In
addition to its headquarters the Bank has nine branch facilities located in
Deerfield, Libertyville (2), Lincolnwood (2), Chicago-Lincoln Park,
Lincolnshire, Skokie 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 26,578 October 2003
Lincolnshire, IL Branch 11,760 Owned
Lincolnwood, IL Branch 8,760 Owned
Lincolnwood/International, IL Branch 1,900 October 2001
Chicago/Lincoln Park, IL Branch 1,967 April 2003
Libertyville, IL Branch 8,100 Owned
Libertyville, IL Branch 6,250 Owned
Northbrook, IL Branch 4,100 November 2000
Deerfield/Downtown, IL Branch 2,200 Owned
Skokie, IL Branch 648 March 2001
</TABLE>
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 quarter ended
December 31, 1999.
16
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 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," within the heading
"Asset/Liability Management."
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.
17
<PAGE> 20
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 May 24, 2000, under the captions "General
Information-Section 16(a) Beneficial Ownership Reporting Compliance," "Election
of Directors" and "Executive Officers" and is incorporated herein by reference.
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
The information required in response to this item will be contained in the
Company's Proxy Statement under the caption "General Information
Security-Ownership of Principal Holders and Management" and is incorporated
herein by reference.
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 "Election of Directors - Certain Relationships and
Related Transactions," and is incorporated herein by reference.
18
<PAGE> 21
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 1999 Annual Report
to Shareholders, attached hereto as Exhibit 13.1:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors.......................................................... 17
Report of Consolidated Balance Sheets................................................... 18
Report of Consolidated Statements of Income............................................. 19
Report of Consolidated Statements of Shareholders' Equity............................... 20
Report of Consolidated Statements of Cash Flows 21
Report of Notes to Consolidated Financial Statements.................................... 22-34
</TABLE>
No financial statement schedules are required to be filed with
this report.
3. 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 (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 S-1 Registration Statement (No. 333-32561)
filed with the Securities and Exchange Commission (the
"Commission") on July 31, 1997).
3.2 By-laws of 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).
19
<PAGE> 22
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)10.1 Success Bancshares, Inc. 1995 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
Commission on July 31, 1997).
(1)10.2 Employment Agreement between the Bank and Laurie K.
Breitenstein dated as of April 15, 1999 (incorporated by
reference to Exhibit 10.3 of the Company's Form 10-Q filed
with the Commission on August 15, 1999).
10.3 Success Bancshares, Inc. 1999 Stock Option Plan (incorporated
by reference to Exhibit 10.4 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
10.4 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).
10.5 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 Commission on July 31, 1997).
10.6 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 Commission on July 31, 1997).
(1)10.7 Employment Agreement between the Bank and Christa N. Calabrese
dated as of August 1, 1998, as amended (incorporated by
reference to Exhibit 10.9 of the Company's Form 10-Q filed
with the Commission on November 13, 1998).
(1)10.8 Employment Agreement between the Bank and Kurt C. Felde dated
as of August 1, 1998, as amended (incorporated by reference to
Exhibit 10.10 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.9 Employment Agreement between the Bank and Ronald W. Tragasz
dated as of August 1,1 998, as amended (incorporated by
reference to Exhibit 10.11 of the Company's Form 10-Q filed
with the Commission on November 13, 1998).
(1)10.10 Employment Agreement between the Bank and Marlene Sachs dated
as of August 1, 1998 (incorporated by reference to Exhibit
10.12 of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
(1)10.11 Stock Option Agreement dated as of September 23, 1998 between
the Company and Christa N. Calabrese (incorporated by
reference to Exhibit 10.13 of the Company's Form 10-Q filed
with the Commission on November 13, 1998).
(1)10.12 Stock Option Agreement dated as of June 25, 1998 between the
Company and Kurt C. Felde (incorporated by reference to
Exhibit 10.14 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.13 Stock Option Agreement dated as of September 23, 1998 between
the Company and Ronald W. Tragasz (incorporated by reference
to Exhibit 10.15 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.14 Stock Option Agreement dated as of September 23, 1998 between
the Company and Marlene Sachs (incorporated by reference to
Exhibit 10.16 of the Company's Form 10-Q filed with the
Commission on
20
<PAGE> 23
November 13, 1998).
(1)10.15 Stock Option Agreement dated as of August 26, 1998 between the
Company and Sherwin Koopmans (incorporated by reference to
Exhibit 10.17 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.16 Stock Option Agreement dated as of August 26, 1998 between the
Company and George M. Ohlhausen (incorporated by reference to
Exhibit 10.18 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.17 Stock Option Agreement dated as of August 26, 1998 between the
Company and Norman D. Rich (incorporated by reference to
Exhibit 10.20 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.18 Amendment No. 1 to Employment Agreement dated as of August 1,
1998 between the Bank and Marlene Sachs (incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
(1)10.19 Stock Option Agreement dated as of August 26, 1998 between the
Company and Avrom H. Goldfeder (incorporated by reference to
Exhibit 10.22 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.20 Stock Option Agreement dated as of August 26, 1998 between the
Company and Glen Wherfel (incorporated by reference to Exhibit
10.23 of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
(1)10.21 Employment Agreement dated as of December 16, 1998 between the
Bank and Wilbur G. Meinen (incorporated by reference to
Exhibit 10.24 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.22 Stock Option Agreement dated as of December 16, 1998 between
the Company and Kurt C. Felde (incorporated by reference to
Exhibit 10.25 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.23 Stock Option Agreement dated as of December 16, 1998 between
the Company and Wilbur G. Meinen (incorporated by reference to
Exhibit 10.26 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.24 Stock Option Agreement dated as of January 27, 1999 between
the Company and Wilbur G. Meinen (incorporated by reference to
Exhibit 10.27 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.25 Success Bancshares, Inc. 1998 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K filed with the Commission on March
30, 1999).
(1)10.26 Amendment No. 1 to 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
(1)10.27 Restricted Stock Agreement dated as of December 16, 1998
between the Company and Wilbur G. Meinen (incorporated by
reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
10.28 Lease with respect to Chicago downtown branch banking facility
(May, 1998) (incorporated by reference to Exhibit 10.31 of the
Company's Annual Report on Form 10-K filed with the Commission
on March 30, 1999).
(1)10.29 Amendment No. 2 to Employment Agreement dated as of December
16, 1998 between the Bank and Christa N. Calabrese
(incorporated by reference to Exhibit 10.32 of the Company's
Form 10-Q filed with the Commission on May 13, 1999).
21
<PAGE> 24
(1)10.30 Agreement dated April 28, 1999 between the Company and Ronald
W. Tragasz (incorporated by reference to Exhibit 10.33 of the
Company's Form 10-Q filed with the Commission on August 15,
1999).
(1)10.31 Stock Option Agreement dated April 28, 1999 between the
Company and Ronald W. Tragasz (incorporated by reference to
Exhibit 10.34 of the Company's Form 10-Q filed with the
Commission on August 15, 1999).
10.32 Sublease with respect to Corporate Center (April, 1999)
(incorporated by reference to Exhibit 10.35 of the Company's
Form 10-Q filed with the Commission on August 15, 1999).
(1)10.33 Stock Option Agreement dated August 25, 1999 between the
Company and Sherwin Koopmans (incorporated by reference to
Exhibit 10.36 of the Company's Form 10-Q filed with the
Commission on November 10, 1999).
(1)10.34 Stock Option Agreement dated August 25, 1999 between the
Company and Glen Wherfel (incorporated by reference to Exhibit
10.37 of the Company's Form 10-Q filed with the Commission on
November 10, 1999).
(1)10.35 Stock Option Agreement dated August 25, 1999 between the
Company and George M. Ohlhausen (incorporated by reference to
Exhibit 10.38 of the Company's Form 10-Q filed with the
Commission on November 10, 1999).
(1)10.36 Stock Option Agreement dated August 25, 1999 between the
Company and Avrom Goldfeder (incorporated by reference to
Exhibit 10.39 of the Company's Form 10-Q filed with the
Commission on November 10, 1999).
(1)10.37 Stock Option Agreement dated August 25, 1999 between the
Company and Norman Rich (incorporated by reference to Exhibit
10.41 of the Company's Form 10-Q filed with the Commission on
November 10, 1999).
(2)13.1 1999 Annual Report to Shareholders
21.1 Subsidiary 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
(2)23.1 Consent of McGladrey & Pullen, L.L.P.
(2)27.1 Financial Data Schedule
- -----------------------------
(1) Management contract or compensatory plan or arrangement
(2) Filed herewith
(b) Reports on Form 8-K
None
22
<PAGE> 25
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: Wilbur G. Meinen, Jr. /s/ Wilbur G. Meinen March 23, 2000
-------------------------------------------------- --------------------
President /Chief Executive Officer (Dated)
Kurt C. Felde /s/ Kurt C. Felde March 23, 2000
-------------------------------------------------- --------------------
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>
Wilbur G. Meinen, Jr. /s/ Wilbur G. Meinen March 23, 2000
-------------------------------------------------- --------------------
Director
Avrom H. Goldfeder /s/ Avrom H. Goldfeder March 23, 2000
-------------------------------------------------- --------------------
Director (Dated)
Glen R. Wherfel /s/ Glen R. Wherfel March 23, 2000
-------------------------------------------------- --------------------
Director (Dated)
Sherwin Koopmans /s/ Sherwin Koopmans March 23, 2000
-------------------------------------------------- --------------------
Director (Dated)
George M. Ohlhausen
-------------------------------------------------- --------------------
Director (Dated)
Norman D. Rich /s/ Norman D. Rich March 23, 2000
-------------------------------------------------- --------------------
Director (Dated)
Joseph A. Cari, Jr.
-------------------------------------------------- --------------------
Director (Dated)
</TABLE>
23
<PAGE> 26
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 S-1 Registration Statement (No. 333-32561)
filed with the Securities and Exchange Commission (the
"Commission") on July 31, 1997).
3.2 By-laws of 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)10.1 Success Bancshares, Inc. 1995 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
Commission on July 31, 1997).
(1)10.2 Employment Agreement between the Bank and Laurie K.
Breitenstein dated as of April 15, 1999 (incorporated by
reference to Exhibit 10.3 of the Company's Form 10-Q filed
with the Commission on August 15, 1999).
10.3 Success Bancshares, Inc. 1999 Stock Option Plan (incorporated
by reference to Exhibit 10.4 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
10.4 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).
10.5 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 Commission on July 31, 1997).
<PAGE> 27
10.6 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 Commission on July 31, 1997).
(1)10.7 Employment Agreement between the Bank and Christa N. Calabrese
dated as of August 1, 1998, as amended (incorporated by
reference to Exhibit 10.9 of the Company's Form 10-Q filed
with the Commission on November 13, 1998).
(1)10.8 Employment Agreement between the Bank and Kurt C. Felde dated
as of August 1, 1998, as amended (incorporated by reference to
Exhibit 10.10 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.9 Employment Agreement between the Bank and Ronald W. Tragasz
dated as of August 1,1 998, as amended (incorporated by
reference to Exhibit 10.11 of the Company's Form 10-Q filed
with the Commission on November 13, 1998).
(1)10.10 Employment Agreement between the Bank and Marlene Sachs dated
as of August 1, 1998 (incorporated by reference to Exhibit
10.12 of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
(1)10.11 Stock Option Agreement dated as of September 23, 1998 between
the Company and Christa N. Calabrese (incorporated by
reference to Exhibit 10.13 of the Company's Form 10-Q filed
with the Commission on November 13, 1998).
(1)10.12 Stock Option Agreement dated as of June 25, 1998 between the
Company and Kurt C. Felde (incorporated by reference to
Exhibit 10.14 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.13 Stock Option Agreement dated as of September 23, 1998 between
the Company and Ronald W. Tragasz (incorporated by reference
to Exhibit 10.15 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.14 Stock Option Agreement dated as of September 23, 1998 between
the Company and Marlene Sachs (incorporated by reference to
Exhibit 10.16 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.15 Stock Option Agreement dated as of August 26, 1998 between the
Company and Sherwin Koopmans (incorporated by reference to
Exhibit 10.17 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.16 Stock Option Agreement dated as of August 26, 1998 between the
Company and George M. Ohlhausen (incorporated by reference to
Exhibit 10.18 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.17 Stock Option Agreement dated as of August 26, 1998 between the
Company and Norman D. Rich (incorporated by reference to
Exhibit 10.20 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.18 Amendment No. 1 to Employment Agreement dated as of August 1,
1998 between the Bank and Marlene Sachs (incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
(1)10.19 Stock Option Agreement dated as of August 26, 1998 between the
Company and Avrom H. Goldfeder (incorporated by reference to
Exhibit 10.22 of the Company's Form 10-Q filed with the
Commission on November 13, 1998).
(1)10.20 Stock Option Agreement dated as of August 26, 1998 between the
Company and Glen Wherfel (incorporated by reference to Exhibit
10.23 of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
(1)10.21 Employment Agreement dated as of December 16, 1998 between the
Bank and Wilbur G. Meinen (incorporated by reference to
Exhibit 10.24 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
<PAGE> 28
(1)10.22 Stock Option Agreement dated as of December 16, 1998 between
the Company and Kurt C. Felde (incorporated by reference to
Exhibit 10.25 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.23 Stock Option Agreement dated as of December 16, 1998 between
the Company and Wilbur G. Meinen (incorporated by reference to
Exhibit 10.26 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.24 Stock Option Agreement dated as of January 27, 1999 between
the Company and Wilbur G. Meinen (incorporated by reference to
Exhibit 10.27 of the Company's Annual Report on Form 10-K
filed with the Commission on March 30, 1999).
(1)10.25 Success Bancshares, Inc. 1998 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.28 of the Company's
Annual Report on Form 10-K filed with the Commission on March
30, 1999).
(1)10.26 Amendment No. 1 to 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.29 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
(1)10.27 Restricted Stock Agreement dated as of December 16, 1998
between the Company and Wilbur G. Meinen (incorporated by
reference to Exhibit 10.30 of the Company's Annual Report on
Form 10-K filed with the Commission on March 30, 1999).
10.28 Lease with respect to Chicago downtown branch banking facility
(May, 1998) (incorporated by reference to Exhibit 10.31 of the
Company's Annual Report on Form 10-K filed with the Commission
on March 30, 1999).
(1)10.29 Amendment No. 2 to Employment Agreement dated as of December
16, 1998 between the Bank and Christa N. Calabrese
(incorporated by reference to Exhibit 10.32 of the Company's
Form 10-Q filed with the Commission on May 13, 1999).
(1)10.30 Agreement dated April 28, 1999 between the Company and Ronald
W. Tragasz (incorporated by reference to Exhibit 10.33 of the
Company's Form 10-Q filed with the Commission on August 15,
1999).
(1)10.31 Stock Option Agreement dated April 28, 1999 between the
Company and Ronald W. Tragasz (incorporated by reference to
Exhibit 10.34 of the Company's Form 10-Q filed with the
Commission on August 15, 1999).
10.32 Sublease with respect to Corporate Center (April, 1999)
(incorporated by reference to Exhibit 10.35 of the Company's
Form 10-Q filed with the Commission on August 15, 1999).
(1)10.33 Stock Option Agreement dated August 25, 1999 between the
Company and Sherwin Koopmans (incorporated by reference to
Exhibit 10.36 of the Company's Form 10-Q filed with the
Commission on November 10, 1999).
(1)10.34 Stock Option Agreement dated August 25, 1999 between the
Company and Glen Wherfel (incorporated by reference to Exhibit
10.37 of the Company's Form 10-Q filed with the Commission on
November 10, 1999).
(1)10.35 Stock Option Agreement dated August 25, 1999 between the
Company and George M. Ohlhausen (incorporated by reference to
Exhibit 10.38 of the Company's Form 10-Q filed with the
Commission on November 10, 1999).
(1)10.36 Stock Option Agreement dated August 25, 1999 between the
Company and Avrom Goldfeder (incorporated by reference to
Exhibit 10.39 of the Company's Form 10-Q filed with the
Commission on November 10, 1999).
(1)10.37 Stock Option Agreement dated August 25, 1999 between the
Company and Norman Rich (incorporated by reference to Exhibit
10.41 of the Company's Form 10-Q filed with the Commission on
November 10, 1999).
(2)13.1 1999 Annual Report to Shareholders
21.1 Subsidiary 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
(2)23.1 Consent of McGladrey & Pullen, L.L.P.
<PAGE> 29
(2)27.1 Financial Data Schedule
- ------------------------------
(1) Management contract or compensatory plan or arrangement
(2) Filed herewith
<PAGE> 1
RETAIL BANKING LOCATIONS
TO REACH ANY LOCATION CALL
847.279.9000
DEERFIELD
630 North Waukegun Road
Deerfield, IL 60015-4325
LIBERTYVILLE
1123 South Milwaukee Avenue
Libertyville, IL 60048-3270
LIBERTYVILLE NORTH
1409 West Peterson Road
Libertyville, IL 60048-1001
LINCOLN PARK
2424 North Clark Street
Chicago, IL 60614-2718
LINCOLNWOOD-
INTERNATIONAL OFFICE
3443 West Touhy Avenue
Lincolnwood, IL 60712-2721
LINCOLNWOOD
333 West Touhy Avenue
Lincolnwood, IL 60712-2116
LINCOLNSHIRE
One Marriott Drive
Lincolnshire, IL 60069-3703
NORTHBROOK
1368 Shermer Road
Northbrook, IL 60062-4599
SKOKIE
4028 West Oakton
Skokie, IL 60076-3434
LINCOLNSHIRE-
CORPORATE OFFICE
100 Tri-State International, P.O. Box 1499
Lincolnshire, IL 60069-1499
[SUCCESS BANCHSARES, INC. LOGO]
9
<PAGE> 2
FINANCIALS
[SUCCESS NATIONAL BANCSHARES LOGO]
10
<PAGE> 3
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
----------------------------------------------------------------------------------------------------------
Interest income $ 34,657 $ 32,459 $ 24,912 $ 19,850 $ 18,675
Interest expense 17,422 17,184 12,861 10,020 9,886
----------------------------------------------------------------------------------------------------------
Net interest income 17,235 15,275 12,051 9,830 8,789
Provision for loan losses 1,180 1,943 766 310 207
Other income 3,160 3,275 2,650 2,136 2,125
Other expenses 16,800 15,690 12,349 10,640 9,510
----------------------------------------------------------------------------------------------------------
Net income before taxes 2,415 917 1,586 1,016 1,197
Income tax expense (benefit) 687 (287) 499 233 260
----------------------------------------------------------------------------------------------------------
Net income $ 1,728 $ 1,204 $ 1,087 $ 783 $ 937
----------------------------------------------------------------------------------------------------------
COMMON SHARE DATA:
Earnings per common share:
Basic $ 0.60 $ 0.41 $ 0.68 $ 0.66 $ 0.93
Diluted $ 0.60 $ 0.40 $ 0.65 $ 0.63 $ 0.86
Book value per common share $ 11.29 $ 10.95 $ 10.30 $ 8.99 $ 7.48
Weighted average common shares outstanding 2,879 2,938 1,531 1,061 1,011
BALANCE SHEET DATA:
Cash and cash equivalents $ 17,057 $ 38,824 $ 23,901 $ 13,833 $ 20,559
Securities 36,329 41,037 53,754 47,707 55,614
Loans, net 424,668 371,263 287,025 203,299 171,135
Total assets 497,145 470,478 378,719 276,349 251,338
Deposits 394,290 398,735 329,424 245,105 227,308
Borrowings, including repurchase agreements 54,063 21,513 16,163 18,975 14,395
Trust preferred securities 15,000 15,000 -- -- --
Shareholders' equity $ 30,850 $ 32,324 $ 30,070 $ 10,100 $ 8,085
PERFORMANCE DATA:
Net interest margin 4.07% 3.95% 4.17% 4.25% 4.14%
Return on average assets 0.37% 0.28% 0.34% 0.31% 0.40%
Return on average equity 5.44% 3.80% 7.76% 8.33% 14.48%
Loans to deposits 107.70% 93.11% 87.13% 82.94% 75.29%
ASSET QUALITY RATIOS:
Nonperforming loans to total loans(1) 0.40% 0.09% 0.63% 0.06% 0.37%
Nonperforming assets to total assets 0.35% 0.17% 0.56% 0.04% 0.25%
Allowance for loan losses to total loans 1.00% 1.02% 0.72% 0.70% 0.70%
Nonperforming loans to allowance for loan
losses 40.01% 9.13% 87.54% 8.28% 53.74%
Net loan charge-offs to average loans 0.19% 0.06% 0.05% 0.04% 0.01%
CAPITAL RATIOS:
Risk-based capital 13.18% 15.23% 12.37% 8.00% 7.53%
Leverage capital(2) 8.87% 9.96% 9.69% 4.37% 3.70%
OTHER:
Branch offices (including headquarters) 10 11 9 7 7
Full-time equivalent employees 185 196 162 144 150
</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.
11
<PAGE> 4
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion is intended to assist in understanding the financial
condition, changes in financial condition and results of operation of the
Company. The information contained in this section should be read in conjunction
with the Financial Statements and the accompanying Notes to Financial Statements
and the other sections contained in this annual report.
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 Company's results of operations depend primarily on its net
interest income, which is the difference between the income the Company receives
on its interest earning assets and the interest expense associated with its
deposits and borrowings. The Company's results of operations are also affected
by its provision for loan losses, the level of its noninterest income and
expenses, and income tax expense.
Net interest income is dependent on the amounts of and yields on 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 is impacted by the Company's asset/liability management procedures
in coping with such changes. The provision for loan losses is dependent on
growth in the loan portfolio, management's assessment of the collectibility of
the loan portfolio, as well as economic and market factors. Noninterest expenses
are heavily influenced by the growth of the Company, 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 expenses such as data processing costs, supplies, postage and
other miscellaneous expenses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management at both the Company and the Bank involves planning to meet
anticipated funding requirements at reasonable costs. 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 December 31, 1999 and 1998, 36.83%
and 38.96%, respectively, of the Company's total assets were funded by demand
deposits.
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 and securities available-for-sale 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, 1999 and 1998, net liquid assets totaled approximately $22.7
million and $52.7 million, respectively.
At December 31, 1999, the consolidated capital to assets ratio of the Company
was 6.2%. As of year-end 1999, the Bank exceeded all of its regulatory capital
requirements with total capital to risk weighted assets, tier 1 capital to risk
weighted assets and tier 1 capital to average assets ratios of 10.95%, 9.82% and
8.00%. See Note 10 -- Shareholders' Equity and Capital Standards of this 1999
Annual Report for an additional discussion of capital resources.
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 $4.0 million for the year ended December 31, 1999,
and $1.4 million for the year ended December 31, 1998. 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 $51.2 million and $76.4 million for the years ended December 31,
1999 and 1998, respectively. Net cash provided by financing activities,
consisting of deposit growth and increased borrowings, was $25.4 million and
$90.0 million for the years ended December 31, 1999 and 1998, respectively.
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.
12
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
The following table illustrates the Company's estimated interest rate
sensitivity and periodic and cumulative gap positions as calculated as of
December 31, 1999.
<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 $126,727 $ 44,118 $168,350 $ 89,742 $428,937
Securities 2,394 5,169 20,942 7,824 36,329
Interest bearing deposits with financial
institutions -- -- -- -- --
Federal funds sold -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total earning assets $129,121 $ 49,287 $189,292 $ 97,566 $465,266
- -------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
NOW and money market accounts $ 96,443 $ 13,396 $ -- $ -- $109,839
Savings deposits -- -- -- -- --
Time deposits 51,578 75,450 21,494 549 149,071
Borrowings 30,990 260 12,812 10,000 54,063
- -------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $179,011 $ 89,106 $ 34,306 $ 10,549 $312,972
- -------------------------------------------------------------------------------------------------------------------
Rate sensitive assets (RSA) $129,121 $ 49,287 $189,292 $ 97,566 $465,266
Rate sensitive liabilities (RSL) $179,011 $ 89,106 $ 34,306 $ 10,549 $312,972
GAP (GAP = RSA-RSL) $(49,890) $ (39,819) $154,986 $ 87,017 $152,294
Cumulative gap $(49,890) $ (89,709) $ 65,277 $152,294 $152,294
RSA/Total assets 25.97% 9.91% 38.08% 19.63% 93.59%
RSL/Total assets 36.01% 17.92% 6.90% 2.12% 62.95%
GAP/Total assets (10.04%) (8.01%) 31.18% 17.50% 30.63%
GAP/RSA (38.64%) (80.79%) 81.88% 89.19% 32.73%
Cumulative GAP/Total Assets (10.04%) (18.04%) 13.13% 30.63% 30.63%
Cumulative GAP/RSA (38.64%) (182.01%) 34.48% 156.09% 32.73%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
While the gap position illustrated above is a useful tool that management can
utilize for general positioning of the Company's balance sheet, 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, 1999 and 1998.
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, 1999 and 1998, was as
follows:
<TABLE>
<CAPTION>
BASIS POINT CHANGE
---------------------------------------
+200 +100 -100 -200
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999 (8.8%) (4.4%) 4.6% 7.8%
- -------------------------------------------------------------------------------------------------------
At December 31, 1998 (9.5%) (4.8%) 3.9% 5.6%
</TABLE>
Although the Company's interest rate risk position at December 31, 1999
continues as one in which rate-sensitive liabilities exceed rate sensitive
assets, balance sheet restructuring during 1999 has reduced the exposure from
that identified at December 31, 1998. The Company's position at December 31,
1999 would be expected, for example, to result in an 8.8% decrease in net
interest income should interest rates immediately increase by 200 basis points
for a one year period. Conversely, a decline in interest rates of 200 basis
points would result in an increase of 7.8% of net interest income. The positive
shift in the rate sensitive position of the Company between December 31, 1999
and December 31, 1998 was in part due to the emphasis placed upon the generation
of floating rate loans versus fixed rate loans.
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.
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
13
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
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.
CONSOLIDATED RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
General
The Company reported net income of $1.7 million for the year ended December 31,
1999 compared to net income of $1.2 million for the year ended December 31,
1998, an increase of $524 thousand or 43.5%. For the year, net interest income
increased $2.0 million or 12.8% over 1998. In addition, for the year 1999 as
compared to 1998, the provision for loan losses decreased $763 thousand to $1.2
million, other operating income decreased $115 thousand to $3.2 million and
other operating expense increased $1.1 million to $16.8 million. For the year
ended December 31, 1999, the Company's provision for income taxes was $687
thousand, an increase of $974 thousand over the benefit of $287 thousand
recorded in 1998. These and other significant fluctuations in the Company's
results of operation are discussed below.
Net interest income
Net interest income increased to $17.2 million for the year ended December 31,
1999 from $15.2 million for 1998. This increase in net interest income of $2.0
million, or 12.8%, was attributable to a $2.2 million increase in interest
income resulting from the 9.2% increase in average interest earning assets in
the year ended December 31, 1999 compared to the year ended December 31, 1998.
Partially offsetting this increase in interest income was a $238 thousand
increase in interest expense for the year ended December 31, 1999 resulting from
an 8.7% increase in average interest bearing liabilities during 1999 as compared
to 1998. The Company's net interest margin increased to 4.07% for 1999 compared
to 3.95% in 1998 as a result of the Company's continued efforts to convert
noninterest earning assets into interest earning assets. The ratio of interest
earning assets to total assets increased from 91.4% at December 31, 1998 to
93.6% at December 31, 1999. In addition, the Company reduced the cost associated
with its average interest bearing liabilities from 4.98% for 1998 to 4.65% for
1999.
Provision for loan losses
The provision for loan losses decreased to $1.2 million in 1999 from $1.9
million in the prior year. At December 31, 1999, the allowance for loan losses
represented 1.00% of gross 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 decreased $115 thousand, or 3.5%, to $3.2 million
for 1999, compared to $3.3 million for 1998. In 1998, the Company included in
other noninterest income $1.0 million of life insurance proceeds related to the
death of Company President and CEO, Saul D. Binder. Excluding the life insurance
proceeds, other noninterest income increased $584 thousand to $796 thousand in
1999 as compared to 1998. The increase in 1999 is largely the result of the
Company having received a lawsuit settlement of $70 thousand and having settled
monthly billing claims and conversion related charges with its service provider
and reduced previously accrued expenses by $94 thousand. Service charges on
deposit accounts increased by $115 thousand, or 8.2%, to $2.1 million for the
year ended December 31, 1999, from $2.0 million in 1998. The majority of service
charges on deposit accounts consisted of fees charged for overdrafts and failure
to maintain required balances. In 1999, the Company recognized $200 thousand
related to gains on the sale of loans, an increase of $41 thousand, or 25.8%,
over 1998.
Other operating expenses
Total other operating expenses increased $1.1 million, or 7.1%, to $16.8 million
for 1999, as compared to $15.7 million in 1998. This increase reflects the
higher level of expenditures required to support the Company's growth. Salaries
and employee benefits increased $829 thousand, or 10.1%, to $9.0 million for the
year ended December 31, 1999, as compared to $8.2 million for the prior year.
The increase in salary and benefits expense reflects higher staffing levels to
support new locations and the growth in deposit and loan accounts at existing
14
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
banking locations which are required to maintain high levels of customer
service. Occupancy and equipment expenses increased to $3.4 million for 1999,
from $2.7 million for 1998, primarily due to the higher level of expense
associated with the May, 1998 opening of the downtown Chicago branch location
(closed December 24, 1999), the August, 1998 opening of the Skokie/Oakton Street
branch location and the March, 1999 opening of the North Libertyville branch
office. In addition, the Company leased approximately 26,578 square feet of
space for use as a corporate office in October 1999. Data processing expense
increased to $802 thousand for the year ended December 31, 1999, compared to
$739 thousand for 1998, primarily as a result of higher transaction volume
levels.
Income taxes
The Company recorded income tax expense of $687 thousand for 1999, compared to
an income tax benefit of $287 thousand in 1998. The increase is attributable to
both an increase in net income before tax and to a decrease in income not
subject to federal tax. In 1998, the Company received $1.0 million of life
insurance proceeds related to the death of Company President and CEO, Saul D.
Binder, which are exempt from tax.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
General
The Company reported net income of $1.2 million for the year ended December 31,
1998 compared to net income of $1.1 million for the year ended December 31,
1997, an increase of $117 thousand or 10.8%. For the year, the loan loss
provision increased by $1.2 million and total other operating expenses increased
by $3.3 million. These increases were offset by an increase in net interest
income of $3.2 million, an increase in other operating income of $625 thousand
and a decrease in the provision for income taxes of $786 thousand. These and
other significant fluctuations in the Company's results of operation are
discussed below.
Net interest income
Net interest income increased to $15.3 million for the year ended December 31,
1998 from $12.1 million for 1997. This increase in net interest income of $3.2
million, or 26.8%, was attributable to a $7.5 million increase in interest
income resulting from the 34.7% increase in average interest earning assets in
the year ended December 31, 1998 compared to the year ended December 31, 1997.
Partially offsetting this increase in interest income was a $4.3 million
increase in interest expense for the year ended December 31, 1998, a 33.6%
increase from 1997. The Company's net interest margin decreased to 3.95% for
1998 compared to 4.17% in 1997 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 $1.9 million in 1998, from $766
thousand in the prior year, necessitated by the growth in the loan portfolio. At
December 31, 1998, the allowance for loan losses represented 1.02% of loans
outstanding.
Other operating income
Total other operating income increased approximately $625 thousand, or 23.6%, to
$3.3 million for 1998, compared to $2.7 million in 1997. Service charges on
deposit accounts increased by 8.2% to $2.0 million for the year ended December
31, 1998, from $1.9 million in 1997. The increase is primarily attributable to a
22.2% increase in the average balance of deposit accounts subject to such
service charges. The majority of service charges on deposit accounts consisted
of fees charged for overdrafts and failure to maintain required balances. Net
credit card processing income decreased to $71 thousand from $446 thousand for
the years ended December 31, 1998 and 1997, respectively, primarily as a result
of competitive pressures to reduce transaction charges for volume customers. In
1998, a loss of $200 thousand on the sale of the Company's $3.0 million
structured note portfolio was partially offset by gains from the sale of loans
in the secondary market in the amount of $159 thousand. In 1998, the Company
included in other noninterest income $1.0 million of life insurance proceeds
related to the death of Company President and CEO, Saul D. Binder.
Other operating expenses
Total other operating expenses increased $3.3 million, or 27.1%, to $15.7
million for 1998, as compared to $12.3 million in 1997. This increase reflects
the higher level of expenditures required to support the Company's growth.
Salaries and employee benefits increased to $8.2 million for the year ended
December 31, 1998, as compared to $6.2 million for the prior year. The increase
of $2.0 million 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 and the contractual
compensation expenses of approximately $350 thousand incurred in connection with
the unexpected death of Mr. Binder. Occupancy and equipment expenses increased
to $2.7 million for 1998, from $2.0 million for 1997, primarily due to
improvements in the Company's computer systems and the costs associated with the
May, 1998, opening of the downtown Chicago branch location and August, 1998
opening of the Skokie/Oakton Street branch location. Data processing expense
decreased to $739 thousand for the year ended December 31,
15
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
1998, compared to $889 thousand for 1997, primarily due to the inclusion in 1997
of the costs associated with the conversion of the Company's data processing
provider. Other noninterest expenses increased by $852 thousand, or 26.3%, to
$4.1 million for the year ended December 31, 1998, from $3.2 million for 1997,
primarily due to a $246 thousand increase of costs related to the carry and
revaluation of other real estate owned, a $119 thousand increase in legal fees
and an increase of $119 thousand in consulting fees attributable to branch
architectural services.
Income taxes
The Company recorded income tax benefit of $287 thousand for 1998, compared to
an income tax expense of approximately $499 thousand in 1997. The decrease is
attributable to both a decrease in net income before tax and to an increase in
income not subject to federal tax. In 1998, the Company received $1.0 million of
life insurance proceeds related to the death of Company President and CEO, Saul
D. Binder, which are exempt from tax.
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 throughout this Annual Report, including in the Management
Letter and Management's Discussion and Analysis of Financial Condition and
Results of Operations, 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.
16
<PAGE> 9
[GCGLADREY AND RSM LOGOS]
Independent Auditor's Report
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, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999.
[MCGLADREY & PULLEN SIGS]
Schaumburg, Illinois
February 11, 2000
17
<PAGE> 10
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-----------------------------------------------------------------------------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,057 $ 38,824
Securities available-for-sale 36,329 41,037
Real estate loans held-for-sale -- 1,006
Loans, less allowances for loan losses of $4,269 at 1999 and
$3,824 at 1998 424,668 371,263
Premises and equipment, net 10,684 11,362
Interest receivable 2,876 2,699
Other real estate owned 50 435
Other assets 5,481 3,852
-----------------------------------------------------------------------------------------
Total assets $497,145 $470,478
-----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 60,571 $ 53,557
Interest bearing deposits 333,719 345,178
-----------------------------------------------------------------------------------------
Total deposits 394,290 398,735
Federal Home Loan Bank advances 45,946 15,491
Securities sold under repurchase agreements 5,002 5,136
Demand notes payable to U.S. Government 3,115 886
Trust preferred securities 15,000 15,000
Interest payable and other liabilities 2,942 2,906
-----------------------------------------------------------------------------------------
Total liabilities 466,295 438,154
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 December 31, 1999: 3,074,326 issued and 2,732,190 shares
outstanding
At December 31, 1998: 2,959,236 shares issued and
outstanding 3 3
Additional paid-in capital 25,362 24,528
Retained earnings 9,284 7,556
Loan to Employee Stock Ownership Plan (74) (113)
Unearned compensation (36) (92)
Treasury stock (3,563) --
Accumulated other comprehensive income (loss) (126) 442
-----------------------------------------------------------------------------------------
Total shareholders' equity 30,850 32,324
-----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $497,145 $470,478
-----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
18
<PAGE> 11
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Loans (including fee income) $31,976 $28,938 $21,746
Investment securities
Taxable 1,548 2,317 2,318
Exempt from federal income tax 609 620 425
Other interest income 524 584 423
-------------------------------------------------------------------------------------------------------
Total interest income 34,657 32,459 24,912
Interest expense
Deposits 14,729 15,265 11,190
Note payable -- -- 363
Trust preferred securities 1,343 838 --
Other borrowings 1,350 1,081 1,308
-------------------------------------------------------------------------------------------------------
Total interest expense 17,422 17,184 12,861
Net interest income 17,235 15,275 12,051
Provision for loan losses 1,180 1,943 766
-------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 16,055 13,332 11,285
Other operating income
Service charges on deposit accounts 2,148 2,033 1,879
Gains on sales of loans 200 159 61
Gain (loss) on sale of securities, net 5 (200) --
Net credit card processing income 16 71 446
Life insurance proceeds -- 1,000 --
Other income 791 212 264
-------------------------------------------------------------------------------------------------------
3,160 3,275 2,650
Other operating expenses
Salaries and employee benefits 9,001 8,172 6,177
Occupancy and equipment expenses 3,391 2,688 2,044
Data processing 802 739 889
Other expenses 3,606 4,091 3,239
-------------------------------------------------------------------------------------------------------
16,800 15,690 12,349
-------------------------------------------------------------------------------------------------------
Income before income taxes 2,415 917 1,586
Income tax expense (credit) 687 (287) 499
-------------------------------------------------------------------------------------------------------
NET INCOME 1,728 1,204 1,087
-------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.60 $ 0.41 $ 0.68
Diluted earnings per share $ 0.60 $ 0.40 $ 0.65
</TABLE>
See accompanying notes to Consolidated Financial Statements
19
<PAGE> 12
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------------------------------
SERIES B CLASS A ADDITIONAL
PREFERRED COMMON COMMON PAID-IN RETAINED ESOP UNEARNED
STOCK STOCK STOCK CAPITAL EARNINGS LOAN COMPENSATION
----------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 94 $ 953 $ 116 $ 4,348 $5,305 $(137) $ --
Comprehensive Income:
Net income -- -- -- -- 1,087 -- --
Other comprehensive income, net of
tax: -- -- -- -- -- -- --
Unrealized gains on securities
available for sale arising during
the period, net of taxes of $190 -- -- -- -- -- -- --
Reclassification adjustment, net
of taxes -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- -- -- --
Issuance of 16,461 shares of common
stock, through option exercise -- 16 -- 140 -- -- --
Change in par value per common
share from $1.00 to $0.001 -- (1,061) -- 1,016 -- -- --
Series B preferred stock dividends -- -- -- -- (40) -- --
Conversion of Class A common stock
into common stock -- -- (116) 116 -- -- --
Conversion of Series B referred
stock into common stock (94) 94 -- -- -- -- --
Issuance of 1,380,000 shares
through initial public offering,
net of expenses -- 1 -- 15,539 -- -- --
Conversion of subordinated
debentures into common stock -- -- -- 2,917 -- -- --
Loan to ESOP -- -- -- -- -- (50) --
ESOP shares released -- -- -- 30 -- 29 --
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- 3 -- 24,151 6,352 (158) --
Comprehensive Income:
Net income -- -- -- -- 1,204 -- --
Other comprehensive income, net of
tax: -- -- -- -- -- -- --
Unrealized gains on securities
available for sale arising during
the period, net of taxes of $533 -- -- -- -- -- -- --
Reclassification adjustment, net
of tax benefit of $78 -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total comprehensive Income -- -- -- -- -- -- --
Issuance of shares of common stock,
through option exercise -- -- -- 131 -- -- --
Issuance of restricted stock -- -- -- 92 -- -- (92)
Conversion of subordinated
debentures into common stock -- -- -- -- -- -- 100
ESOP shares released -- -- -- -- -- 45 54
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- 3 -- 24,528 7,556 (113) (92)
Comprehensive Income:
Net income -- -- -- -- 1,728 -- --
Other comprehensive income, net of
tax: -- -- -- -- -- -- --
Unrealized losses on securities
available for sale arising during
the period, net of tax benefit of
$293 -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total comprehensive Income -- -- -- -- -- -- --
Issuance of shares of common stock,
through option exercise -- -- -- 823 -- -- --
Issuance of restricted stock -- -- -- -- -- -- 56
Reissuance of treasury shares -- -- -- (5) -- -- --
Purchase of treasury shares -- -- -- -- -- -- --
ESOP shares released -- -- -- 16 -- 39 --
-----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ -- $ 3 $ -- $25,362 $9,284 $ (74) $(36)
-----------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1999, 1998 AND 1997
-------------------------------------
UNREALIZED
NET GAIN TOTAL
TREASURY (LOSS) ON SHAREHOLDERS'
STOCK SECURITIES EQUITY
-------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1997 $ -- $(579) $10,100
Comprehensive Income:
Net income -- -- 1,087
Other comprehensive income, net of
tax: -- -- --
Unrealized gains on securities
available for sale arising during
the period, net of taxes of $190 -- -- 301
Reclassification adjustment, net
of taxes -- -- --
----------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,388
Issuance of 16,461 shares of common
stock, through option exercise -- -- 156
Change in par value per common
share from $1.00 to $0.001 -- -- --
Series B preferred stock dividends -- -- (40)
Conversion of Class A common stock
into common stock -- -- --
Conversion of Series B referred
stock into common stock -- -- --
Issuance of 1,380,000 shares
through initial public offering,
net of expenses -- -- 15,540
Conversion of subordinated
debentures into common stock -- -- 2,917
Loan to ESOP -- -- (50)
ESOP shares released -- -- 59
-------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- (278) 30,070
Comprehensive Income:
Net income -- -- 1,204
Other comprehensive income, net of
tax: -- -- --
Unrealized gains on securities
available for sale arising during
the period, net of taxes of $533 -- -- 842
Reclassification adjustment, net
of tax benefit of $78 -- -- 122
-----------------------------------------------------------------------------------------------------------------
Total comprehensive Income -- -- 1,924
Issuance of shares of common stock,
through option exercise -- -- 131
Issuance of restricted stock -- -- --
Conversion of subordinated
debentures into common stock -- -- 100
ESOP shares released -- -- 99
-----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- 442 32,324
Comprehensive Income:
Net income -- -- 1,728
Other comprehensive income, net of
tax: -- -- --
Unrealized losses on securities
available for sale arising during
the period, net of tax benefit of
$293 -- -- (568)
-----------------------------------------------------------------------------------------------------------------
Total comprehensive Income -- -- 1,160
Issuance of shares of common stock,
through option exercise -- -- 823
Issuance of restricted stock -- -- 56
Reissuance of treasury shares 57 -- 52
Purchase of treasury shares (3,620) -- (3,620)
ESOP shares released -- -- 55
-----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $(3,563) $(126) $30,850
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to Consolidated Financial Statements
20
<PAGE> 13
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,728 $ 1,204 $ 1,087
Adjustments to reconcile net income to net cash provided by
operating activities
Premium amortization on securities, net of discount
accretion (71) 122 (43)
Provision for loan losses 1,180 1,943 766
Depreciation and amortization 1,698 1,191 878
Provision for deferred taxes (59) (737) (279)
Net (gains) losses on sales of securities (5) 200 --
Loans originated for sale (16,272) (10,569) (3,373)
Proceeds from sales of loans 17,478 9,787 3,486
Net gains on sales of loans (200) (159) (61)
Net (gains) losses on sale of other real estate owned (5) 76 --
Accretion of loan discount (59) (110) (65)
Deferred loan fees (70) (322) (74)
Change in interest receivables and other assets (1,806) (1,419) (374)
Change in interest payable and other liabilities 36 14 837
Other 426 151 146
-------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,999 1,372 2,931
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securities $ 39 $ 35 $ --
Proceeds from maturities of available-for-sale securities 11,844 14,571 8,856
Purchases of available-for-sale securities (8,062) (11,902) (15,651)
Proceeds from maturities of held-to-maturity securities -- 11,333 1,381
Purchases of held-to-maturity securities -- (3,000) (374)
Changes in interest-bearing balances with financial
institutions -- -- 99
Loans made to customers, net (54,506) (86,178) (84,643)
Purchase of other real estate owned -- (1,430) --
Proceeds from sales of other real estate 440 1,638 --
Proceeds from sales of premises and equipment 680 -- --
Premises and equipment expenditures (1,600) (3,762) (2,615)
Purchase of subsidiary bank common stock -- (580) (5)
-------------------------------------------------------------------------------------------------
Net cash used in investing activities (51,165) (76,440) (92,952)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in non-interest bearing deposits $ 7,014 $ 8,332 $ 2,629
Increase (decrease) in interest bearing deposits (11,459) (543) (157)
Increase (decrease) in demand notes payable to US Government 2,229 (543) (157)
Increase (decrease) in securities sold under agreements to
repurchase (134) 1,322 (441)
Repayments of notes payable -- -- (7,815)
Proceeds from notes payable -- -- 3,000
Proceeds from Federal Home Loan Bank advances 36,700 9,000 11,750
Repayment of Federal Home Loan Bank advances (6,245) (4,229) (6,182)
Repayment of convertible subordinated debentures -- (100) --
Purchase of common shares for treasury (3,620) -- --
Proceeds from issuance of treasury shares 52 -- --
Issuance of Trust Preferred securities -- 15,000 --
Issuance of common stock 823 185 15,676
ESOP loan for common shares purchased by ESOP -- -- (50)
Principal payment on ESOP loan 39 45 29
Dividends paid -- -- (40)
-------------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,399 89,991 100,089
-------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (21,767) 14,923 10,068
Cash and cash equivalents at beginning of year 38,824 23,901 13,833
-------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,057 $ 38,824 $ 23,901
-------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for: Interest on deposits $ 14,768 $ 15,208 $ 11,002
Interest on borrowings 2,638 1,877 1,708
Income taxes 659 627 570
Selected noncash investing activities
Other real estate acquired in settlement of loans $ 50 $ 671 $ 290
</TABLE>
See accompanying notes to Consolidated Financial Statements
21
<PAGE> 14
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 its 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 wholly owned
subsidiaries: Success National Bank, Success Realty Ventures, Inc. ("Success"),
and Success Capital Trust I ("Trust"). 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.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" as of January
1, 1998. Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Company's net income or shareholder's equity.
(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 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 is 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. At December 31,
1999, the Company had no loans categorized as held-for-sale. Cost approximated
fair value for loans held-for-sale as of December 31, 1998.
(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 are being deferred in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." This statement requires
that loan origination fees and direct loan origination costs for a completed
loan be netted and then deferred and amortized into interest income as an
adjustment of yield over the contractual life of the loan.
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. 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.
22
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
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. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there are
any significant changes in economic indicators. In addition, various regulatory
agencies periodically review the allowance for loan losses. These agencies may
require the Company to make additions to the allowance based upon their
judgement of collectibility after reviewing information available to them at the
time of their examination.
(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.
(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: Deferred taxes are provided using the liability method to
recognize deferred tax assets for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
(i) Earnings Per Share: The Company computes its earnings per share (EPS) in
accordance with SFAS No. 128, "Earnings per Share." This statement simplifies
the standards for computing EPS previously found in Accounting Principles Board
Opinion No. 5, "Earnings per Share" and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
(j) Recent Accounting Developments: In October 1998, The Financial Accounting
Standards Board ("FASB") issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective for the first fiscal quarter
after December 15, 1998. This statement amends SFAS No. 65 "Accounting for
Certain Mortgage Banking Activities." This statement revises the accounting for
retained securities and beneficial interests. The adoption of SFAS No. 134 does
not presently impact the Company's consolidated financial condition or results
of operations.
In June 1999, FASB 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 for all fiscal quarters of all fiscal years
to periods beginning after June 15, 2000. Management does not believe that the
adoption of SFAS No. 133 will have a material impact on the Company's
consolidated financial condition or results of operation.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company maintains its
books and records and performs its financial accounting responsibilities. It is
intended only as a brief summary of some of the recent pronouncements made by
the FASB which are of particular interest to financial institutions.
(k) Prior Year Reclassifications: Certain reclassifications were made to make
the 1998 and 1997 financial statements comparable with the 1999 presentation.
NOTE 2 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and due from banks $ 17,057 $24,905
Interest-bearing demand balances with banks -- 7,019
Federal funds sold -- 6,900
- --------------------------------------------------------------------------------------
$ 17,057 $38,824
- --------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
At December 31, 1999 and 1998, reserves of $500 thousand and $9.9 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, 1999 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 $ 4,989 $ -- $ (49) $ 4,940
U.S. Government sponsored entities 6,926 -- (95) 6,831
States and political subdivisions
Taxable 1,668 22 -- 1,690
Exempt from Federal income taxes 11,138 52 (201) 10,989
Mortgage-backed securities 7,197 -- (125) 7,072
SBA guaranteed loan participation certificates 850 -- (21) 829
Other securities 3,767 223 (12) 3,978
- -----------------------------------------------------------------------------------------------------------------
$ 36,535 $ 297 $ (503) $ 36,329
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities at December 31, 1999, 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
------------------------
AMORTIZED FAIR
COST VALUE
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less $ 4,207 $ 4,207
Due after one year through five years 13,781 13,560
Due after five years through ten years 4,524 4,474
Due after ten years 5,976 6,187
Mortgage-backed securities and SBA guaranteed loan
participation certificates 8,047 7,901
- --------------------------------------------------------------------------------------
$ 36,535 $ 36,329
- --------------------------------------------------------------------------------------
</TABLE>
The amortized cost, gross unrealized gains and losses, and fair values of
securities at December 31, 1998 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 $ 5,201 $ 19 $ (5) $ 5,215
U.S. Government sponsored entities 4,251 30 (5) 4,276
States and political subdivisions
Taxable 1,732 149 -- 1,881
Exempt from Federal income taxes 12,995 233 (37) 13,191
Mortgage-backed securities 10,691 97 -- 10,788
SBA guaranteed loan participation certificates 2,304 1 (15) 2,290
Other securities 3,141 267 (12) 3,396
- ----------------------------------------------------------------------------------------------------------------
$40,315 $796 $(74) $41,037
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available-for-sale and realized gross gains
and losses in 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities available-for-sale
Proceeds from sales $39 $2,815 $--
Gross gains 5 4 --
Gross losses -- (220) --
</TABLE>
24
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
Securities with a carrying value of approximately $23.7 and $27.2 million at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes as required or permitted by law.
In 1998 the Company sold held-to-maturity securities with an amortized cost of
$3.0 million and realized a net loss of $200 thousand. Additionally, the Company
transferred its remaining held-to-maturity securities portfolio with an
amortized cost of $26.5 million to available-for-sale and recorded as a
component of equity, an unrealized gain of $525 thousand, net of $332 thousand
deferred taxes. In accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities," these securities are accounted for
at fair value, and any unrealized gain or loss net of deferred tax effect is
reflected in accumulated other comprehensive income.
NOTE 4 -- LOANS
Loans at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Commercial $ 129,233 $102,592
Residential real estate-mortgage 66,455 72,420
Commercial real estate-mortgage 131,132 96,413
Real estate -- construction 19,422 15,517
Home equity 74,936 78,384
Installment 7,758 9,889
- ----------------------------------------------------------------------------------------
Total gross loans $ 428,936 $375,215
- ----------------------------------------------------------------------------------------
Net deferred loan fees 205 135
Unaccreted discount resulting from loss on transfer of loans
from held for sale to portfolio (204) (263)
Allowance for loan losses (4,269) (3,824)
- ----------------------------------------------------------------------------------------
Net loans $ 424,668 $371,263
- ----------------------------------------------------------------------------------------
</TABLE>
Activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 3,824 $2,079 $1,425
Provision for loan losses 1,180 1,943 766
Recoveries on loans previously charged-off 107 9 37
Loans charged-off (842) (207) (149)
- -------------------------------------------------------------------------------------------------
Balance at end of year $ 4,269 $3,824 $2,079
- -------------------------------------------------------------------------------------------------
</TABLE>
Impaired loan information as of and for the years ended December 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Impaired loans for which no allowance has been provided $ 1,486 $268
Impaired loans for which an allowance has been provided -- --
- ----------------------------------------------------------------------------------
Total loans determined to be impaired $ 1,486 $268
- ----------------------------------------------------------------------------------
Allowance provided for impaired loans, included in the
allowance for loan losses $ -- $ --
- ----------------------------------------------------------------------------------
Interest income recognized from impaired loans $ 100 $ 5
Cash basis interest income recognized from impaired loans $ -- $ --
</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 $50.6 and $45.7
million at December 31, 1999 and 1998, respectively.
25
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
NOTE 5 -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Land $ 2,904 $ 2,904
Building and leasehold improvements 7,500 7,571
Furniture and equipment 6,755 5,859
- --------------------------------------------------------------------------------------
Total cost 17,159 16,334
Less accumulated depreciation and amortization 6,475 4,972
- --------------------------------------------------------------------------------------
Net book value $ 10,684 $11,362
- --------------------------------------------------------------------------------------
</TABLE>
NOTE 6 -- DEPOSITS
Deposits at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Demand deposits:
Non-interest-bearing $ 60,571 $ 53,557
Interest-bearing 122,508 129,730
- ----------------------------------------------------------------------------------------
Total demand deposits 183,079 183,287
Savings 21,359 22,686
Money market 40,779 36,691
Other deposits 18,009 17,239
Time:
Due within one year 109,021 118,321
Due within one to two years 17,183 14,994
Due within two to three years 2,734 2,844
Due within three to four years 584 1,756
Due thereafter 1,542 917
- ----------------------------------------------------------------------------------------
Total time deposits 131,064 138,832
- ----------------------------------------------------------------------------------------
Total deposits $ 394,290 $398,735
- ----------------------------------------------------------------------------------------
</TABLE>
Time deposits in amounts of $100,000 or more were approximately $44.5 million
and $58.2 million at December 31, 1999 and 1998, respectively.
Interest expense on deposits for the years ending December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-bearing demand $ 5,166 $ 3,211 $ 1,658
Savings 459 667 640
Money market 1,428 1,934 1,456
Other deposits 817 831 973
Time 6,859 8,622 6,463
- ----------------------------------------------------------------------------------------------------
$ 14,729 $15,265 $11,190
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7 -- BORROWING ARRANGEMENTS
The Bank is permitted to borrow from the Federal Reserve Bank ("FRB") up to 75%
of loans pledged to the FRB. As of December 31, 1999 and 1998, there were no
loans pledged to the FRB and there were no borrowings outstanding at either
date.
26
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
NOTE 8 -- FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1999 and 1998, advances from the Federal Home Loan Bank of
Chicago ("FHLB") were as follows:
<TABLE>
<CAPTION>
ADVANCE AMOUNT
INTEREST FREQUENCY OF ----------------------
MATURITY DATE RATE RATE ADJUSTMENT 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Overnight 4.74% Daily $ 21,700 $ --
July, 1999 6.30% Fixed -- 2,000
October, 2001 4.75% Fixed 5,000 5,000
May, 2002(1) 6.83% Fixed 1,590 1,643
February, 2003(1) 5.65% Fixed 1,092 1,159
July, 2004(1) 6.38% Fixed 1,564 1,689
November, 2004(2) 5.26% Fixed 5,000 --
April, 2008(3) 4.80% Fixed -- 4,000
October, 2009(4) 5.20% Fixed 10,000 --
- ---------------------------------------------------------------------------------------------------------------------
$ 45,946 $15,491
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 15 year amortizing advance with a seven year balloon.
(2) 5 year advance, 6 month term lock, quarterly call
(3) Called at end of one year
(4) 10 year advance, 6 month term lock, quarterly call
The Bank maintains a blanket lien agreement with the FHLB covering secured
advances. Under this agreement, 60% of the outstanding balances of first
mortgages secured by improved residential property not more than 90 days
delinquent are considered pledged as collateral. As of December 31, 1999, the
Bank reported $98.4 million of required loan balances which established a limit
for total FHLB advances at $59.0 million. At December 31, 1998, the Bank
maintained a specific pledge agreement with the FHLB for which approximately
$28.2 million of loans and securities were pledged.
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, 1999 no material amount of agreements to repurchase securities sold
were outstanding with any individual customer. Securities sold under agreements
to repurchase averaged $5.4 million during both 1999 and 1998, respectively, and
the maximum amounts outstanding at any month-end during 1999 and 1998 were $7.1
million and $6.4 million, respectively. The weighted average rate paid during
1999 and 1998 was 4.65% and 4.15%, respectively, and the weighted average rate
at the end of 1999 and 1998 was 4.43% and 3.92%.
NOTE 10 -- SHAREHOLDERS' EQUITY AND CAPITAL STANDARDS
On May 27, 1998, the Board of Directors of the Company approved implementation
of a Shareholder Rights Plan. The Board declared distribution of one right (a
"Right") for each share of the Company's common stock, which was outstanding on
August 10, 1998 (the "Record Date"). Each share of common stock issued after the
Record Date will be issued with an attached Right. The Rights will not be
immediately exercisable or detachable from the common stock. The Rights will
become exercisable and detachable only following the acquisition by a person or
a group of 15% or more of the outstanding common stock of the Company or
following the announcement of a tender or exchange offer for 15% or more of the
outstanding common stock.
The Rights will, if they become exercisable, permit the holders of the Rights to
purchase a certain amount of preferred stock of the Company, or to exchange the
Rights for common stock, if the Board permits, at a 50% discount. Where an
acquiring company effects a merger or other control transaction with the
company, the Rights may also entitle the holders of such Rights to acquire stock
of the acquiring company at a 50% discount. If a person or group acquires 15% or
more of the common stock (or announces a tender or exchange offer for 15% or
more of the common stock), the acquiring person's or group's Rights become void.
In certain circumstances, the Rights may be redeemed by the Company at an
initial redemption price of $.01 per Right. If not redeemed, the Rights will
expire ten years after the Record Date.
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 Company's and the Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about risk weightings and
other factors.
27
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
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, 1999 the Company and the Bank met all capital adequacy
requirements to which they were subject. As of December 31, 1999, 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, 1999 and
1998, are presented below:
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL CAPITALIZED
ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk Weighted Assets):
Consolidated $ 50,245 13.18% $ 30,509 8.00% NOT APPLICABLE
Bank 41,485 10.95% 30,307 8.00% $37,884 10.0%
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated 41,301 10.83% 15,254 4.00% NOT APPLICABLE
Bank 37,217 9.82% 15,254 4.00% 22,730 6.00%
Tier 1 Capital (to Average Assets):
Consolidated 41,301 8.87% 18,632 4.00% NOT APPLICABLE
Bank 37,216 8.00% 18,600 4.00% 23,251 5.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
Consolidated $50,706 15.23% $26,628 8.0% Not Applicable
Bank 36,379 10.99% 26,486 8.0% $33,108 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 42,509 12.77% 13,314 4.0% Not Applicable
Bank 32,555 9.83% 13,243 4.0% 19,865 6.0%
Tier 1 Capital (to Average Assets):
Consolidated 42,509 9.96% 17,073 4.0% Not Applicable
Bank 32,555 7.66% 17,004 4.0% 21,255 5.0%
</TABLE>
The Bank may not declare or pay cash dividends on any of its shares of common
stock if the effect thereof would cause stockholders' equity to be reduced below
applicable regulatory capital maintenance requirements or if such declaration
and payment would otherwise violate regulatory requirements.
Unlike the Bank, the Company is not subject to these regulatory restrictions on
the payment of dividends to its stockholders. However, the Company's source of
funds for future dividends may depend upon dividends received by the Company
from the Bank.
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company maintains an Employee Stock Ownership Plan ("ESOP"), which also has
a 401(k) feature. The ESOP, which is internally leveraged, covers substantially
all employees of the Bank. Loans from the Company to the ESOP to acquire Company
stock are recorded as a reduction of shareholders' equity. At December 31, 1999
and 1998, the fair value of unearned ("suspense") ESOP shares was approximately
$118,000 and $175,000, respectively. Suspense shares are released and allocated
to participants as the ESOP's debt to the Company is repaid. Employer
contributions, including any matching contribution for the 401(k) provision, are
made at the discretion of the Bank's Board of Directors. For the year ended
December 31, 1999, the Company recorded 401(k) expense of $64,000 and ESOP
expense of $70,000 as compared with $55,000 of 401(k) expense and $99,000 of
ESOP expense for 1998.
28
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
Shares of the Company's stock held by the ESOP as of December 31, 1999 and 1998,
are shown in the following table. The allocated and unallocated common shares as
of December 31, 1999 are approximations, as the 1999 participant allocation has
not yet been completed.
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
Shares allocated to participants 56,298 72,953
Suspense (unallocated) shares 11,846 15,211
- -------------------------------------------------------------------------------------
Total ESOP Shares 68,144 88,164
- -------------------------------------------------------------------------------------
</TABLE>
In addition, on December 1, 1998, the Board of Directors of the Company adopted
the 1998 Employee Stock Purchase Plan (the "Plan") and authorized the Company to
reserve for issuance under the Plan an aggregate of 200,000 shares of common
stock. The Plan is intended to provide employees with an opportunity to purchase
common stock of the Company through accumulated payroll deductions. The Plan
will be effective for a period of 10 years, unless terminated by the Board prior
to such time. The Board may amend the Plan at any time and for any reason
without shareholder approval except to change the number of shares reserved for
issuance under the Plan.
Employees who elect to participate in the Plan do so by means of a payroll
deduction. An employee's purchase under the Plan may not be less than 2% or more
than 12% percent of his or her salary and no employee may purchase common stock
under the Plan during any one calendar year with an aggregate fair market value
of more than $25,000. The purchase price for shares purchased pursuant to the
Plan will be 85% of the fair market value of a share of common stock.
NOTE 12 -- STOCK OPTIONS AND RESTRICTED STOCK AWARD
Prior to adopting the 1995 Incentive Stock Plan, the Company's Board of
Directors granted non-qualified 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.
In 1995, the Company adopted a qualified incentive stock option plan for senior
officers and directors 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.
In 1999, the Company adopted and shareholders approved the 1999 Stock Option
Plan ("Plan") for the officers, directors and employees of the Company and the
Bank. The Plan permits the grant of stock options as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code or as
non-qualified stock options. Up to 200,000 shares of common stock may be issued
under the Plan, subject to increases and adjustments as provided in Plan
documents. The exercise price of any stock option granted under the Plan is
determined by the Plan Administrator at the time of grant, but may not be less
than fair market value of the common stock at the date of grant in the case of
incentive stock options. The term of each stock option is fixed by the Plan
Administrator, or, if not established, will be 10 years from the date of grant
(five years in the case of a 10% shareholder for incentive stock options). The
stock options are exercisable at such time(s) and subject to such terms and
conditions as determined by the Plan Administrator. If no such time is
established, the shares subject to option will vest in increments of 25% per
year over a four year period during which the holder of the option provides
continuous service to the Company, commencing on the second anniversary of the
date of grant.
The following table summarizes data concerning stock options:
<TABLE>
<CAPTION>
WEIGHTED
COMMON AVERAGE
SHARES UNDER OPTION PRICE EXERCISE
OPTION PER SHARE PRICE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 and 1997 153,340 $ 1.82 - $ 6.18 $ 5.02
Exercised (21,250) $ 6.18 - $10.15 $ 7.04
Cancelled (17,000) $ 6.18 $ 6.18
Issued 116,500 $11.50 - $14.50 $ 13.91
- ---------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 231,590 $ 1.82 - $14.50 $ 9.22
Exercised (113,390) $ 1.82 - $ 6.09 $ 4.61
Cancelled (30,700) $ 6.09 - $14.50 $ 12.93
Issued 60,500 $10.13 - $11.94 $ 10.84
- ---------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 148,000 $10.13 - $14.50 $ 12.77
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, there are options exercisable for 148,000 shares at a
weighted average price of $12.77.
Grants under both plans are accounted for following Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," 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 consistent with SFAS No.
123, based on
29
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
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>
1999 1998 1997
<S> <C> <C> <C>
Net income applicable to common stock (in thousands):
As reported $ 1,728 $1,204 $1,047
Pro forma $ 1,716 $1,094 $1,047
Basic earnings per common share:
As reported $ 0.60 $ 0.41 $ 0.68
Pro forma $ 0.59 $ 0.37 $ 0.68
Diluted earnings per common share:
As reported $ 0.60 $ 0.40 $ 0.65
Pro forma $ 0.59 $ 0.36 $ 0.65
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants during the year ended December 31, 1999: dividend yield of 0% for the
period; expected volatility of 5.00% for the period; risk free rate of return of
5.00%; and expected life of 9.5 years. For the year ended December 31, 1998, the
assumptions included a dividend yield of 0% for the period, expected volatility
of 0% for the period, a risk free rate of return of 4.50% and an expected life
of 9.5 years.
In December 1998 the Company granted its President, Wilbur G. Meinen, a total of
8,000 restricted shares of Company stock. Under terms of the grant, 2,667 shares
of the restricted stock vested on December 31, 1999, 2,667 will vest on December
31, 2000 and 2,666 will vest on December 31, 2001. Unearned compensation of $92
thousand was recognized at December 31, 1998 and will be amortized to
compensation expense over the vesting period. During 1999, compensation expense
of $56 thousand related to the restricted stock was recorded by the Company.
NOTE 13 -- INCOME TAXES
The deferred tax assets and liabilities consist of the following components as
of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,599 $1,416
Securities available-for-sale 80 --
Deferred loan fees -- 6
Premises and equipment 202 124
Writedown of other real estate owned -- 39
Alternative minimum tax credit carry forward 126 144
Loans 84 109
- ------------------------------------------------------------------------------------
2,091 1,838
- ------------------------------------------------------------------------------------
Deferred tax liabilities:
State income taxes $ 97 $ 93
Securities available-for-sale -- 279
Deferred loan fees 48 --
Mortgage servicing rights 148 70
Other 57 63
- ------------------------------------------------------------------------------------
350 505
- ------------------------------------------------------------------------------------
Net deferred tax assets $ 1,741 $1,333
- ------------------------------------------------------------------------------------
</TABLE>
No valuation allowance was considered necessary.
Income tax expense for the years ended December 31, 1999, 1998 and 1997,
consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current $746 $ 450 $ 778
Deferred (59) (737) (279)
- --------------------------------------------------------------------------------------------
Total $687 $(287) $ 499
- --------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
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,
1999, 1998, and 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 821 $ 312 $ 539
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit (64) (28) 82
Nontaxable interest income (net of disallowed expenses) (213) (195) (155)
Officer's life insurance proceeds -- (340) --
Other 143 (36) 33
- ---------------------------------------------------------------------------------------------
$ 687 $(287) $ 499
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE 14 -- 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,
------------------------------------------------------------------
1999 1998
------------------------------------ ---------------------------
PER-
INCOME SHARE SHARE INCOME SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR)
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net income $1,728 $1,204
Less: Preferred stock dividends
- ---------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common stockholders $1,728 2,879 $0.60 $1,204 2,938
Effect of Dilutive Securities -- Options 1 88
Diluted EPS
- ---------------------------------------------------------------------------------------------------------------
Income available to common stockholders and
assumed conversions $1,728 2,880 $0.60 $1,204 3,026
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997
------ ------------------------------------
PER- PER-
SHARE INCOME SHARE SHARE
AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- -------------------------------------------- ---------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income $1,087
Less: Preferred stock dividends (40)
- ---------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common stockholders $0.41 1,047 1,531 $0.68
Effect of Dilutive Securities -- Options 76
Diluted EPS
- ---------------------------------------------------------------------------------------------------------------
Income available to common stockholders and
assumed conversions $0.40 $1,047 1,607 $0.65
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15 -- COMMITMENTS, CONTINGENCIES AND CREDIT RISK
Credit risk: The Company makes loans to, and obtains deposits from, customers
primarily in Lake County, Cook County, DuPage County, and McHenry County,
Illinois and surrounding areas. Most loans are secured by specific items of
collateral, including residential and commercial real estate and other business
and consumer assets. Collateral held varies but may include deposits held in
financial institutions; U.S. Treasury securities; other marketable securities;
income-producing commercial properties; residential real estate; accounts
receivable; and property, plant and equipment.
Financial instruments with credit risk: The Company is a party to financial
instruments with credit 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, 1999 and 1998, the contract amount of these financial
instruments is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amount represents
credit risk
Unused home equity lines of credit $108,486 $95,112
Unused commercial and other consumer lines of credit 38,293 8,690
Standby letters of credit 1,725 3,214
Commitments to make loans 12,069 12,595
</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.
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.
31
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
Lease Commitments: The Bank leases branch facilities under noncancelable
operating lease agreements. Rent expense for branch facilities was $747
thousand, $434 thousand, and $285 thousand in 1999, 1998 and 1997, 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, 1999 under the leases are summarized below (in
thousands):
<TABLE>
<S> <C>
2000 $ 879
2001 820
2002 791
2003 684
2004 303
2005 and thereafter 864
- ------------------------------------------------------------------------
Total $ 4,341
- ------------------------------------------------------------------------
</TABLE>
NOTE 16 -- RELATED PARTY TRANSACTIONS
In the normal course of business, certain executive officers, directors, and
companies with which they are affiliated have borrowed funds from the Bank. In
the opinion of management, these loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated parties. The activities in total
loans during 1999 is as follows (in thousands):
<TABLE>
<S> <C>
BALANCE AS OF JANUARY 1, 1999 $1,468
New loans 933
Repayments (740)
- ----------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 1999 $1,661
- ----------------------------------------------------------------------
</TABLE>
NOTE 17 -- 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.
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.
32
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
The carrying amount and estimated fair value of financial instruments at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,057 $ 17,057 $ 38,824 $ 38,824
Investment securities 36,329 36,329 41,037 41,037
Loans held-for-sale 1,006 1,006
Loans 424,668 428,811 371,263 377,548
Accrued interest receivable 2,876 2,876 2,699 2,699
Financial liabilities:
Deposits $394,290 $394,650 $398,735 $399,904
Borrowed funds 69,063 66,599 36,513 36,332
Accrued interest payable 635 635 633 633
</TABLE>
Loan commitments on which the committed interest rate is less than the current
market rate are insignificant at December 31, 1999.
NOTE 18 -- TRUST PREFERRED SECURITIES
On May 19, 1998, the Company issued $15 million of Trust Preferred Securities
("Securities") through Success Capital Trust I ("Trust"), a statutory business
trust and wholly owned subsidiary of the Company. The Securities pay cumulative
cash distributions quarterly at an annual rate of 8.95%. Proceeds from the sale
of the Securities were invested by the Trust in 8.95% Junior Subordinated
Deferrable Interest Debentures issued by the Company which represents all of the
assets of the Trust. The Securities are subject to mandatory redemption, in
whole or in part, upon repayment of the Junior Subordinated Debentures at the
stated maturity or their earlier redemption, in each case at a redemption price
equal to the aggregate liquidation preference of the Securities plus any
accumulated and unpaid distributions thereon to the date of redemption. Prior
redemption is permitted under certain circumstances such as changes in tax and
investment company regulations. The Company fully and unconditionally guarantees
the Securities through the combined operation of the debentures and other
related documents. The Company's obligations under the guarantee are unsecured
and subordinate to senior and subordinated indebtedness of the Bank.
NOTE 19 -- PARENT COMPANY FINANCIAL INFORMATION
Presented below are the condensed balance sheets as of December 31, 1999 and
1998 and statements of income and statements of cash flows for the years ended
December 31, 1999, 1998, and 1997 for Success Bancshares, Inc.:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary bank $ 7,446 $13,281
Securities available-for-sale 116 175
Investment in subsidiaries 37,464 32,989
Other assets 2,271 2,171
- -------------------------------------------------------------------------------------
$47,297 $48,616
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable -- Success Realty Ventures, Inc. $ 105 $ 105
Jr. subordinated debentures 15,464 15,464
Other liabilities 878 723
- -------------------------------------------------------------------------------------
Total liabilities 16,447 16,292
Shareholders' equity 30,850 32,324
- -------------------------------------------------------------------------------------
$47,297 $48,616
- -------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income
Dividends from subsidiary bank $ 0 $1,776 $1,187
Interest and other income 508 1,561 53
- -------------------------------------------------------------------------------------------------
508 3,337 1,240
Operating expenses
Interest 1,395 872 686
Other expense 721 1,043 340
- -------------------------------------------------------------------------------------------------
2,116 1,915 1,026
- -------------------------------------------------------------------------------------------------
Income (loss) before income taxes (1,608) 1,422 214
Income tax benefit 621 536 387
- -------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed earnings (987) 1,958 601
Equity (deficit) in undistributed earnings 2,715 (754) 486
- -------------------------------------------------------------------------------------------------
Net income $ 1,728 $1,204 $1,087
- -------------------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,728 $ 1,204 $ 1,087
Adjustments to reconcile net income to net cash from
operating activities
Equity (deficit) in undistributed income of subsidiaries (2,715) 754 (486)
Change in other assets and liabilities 55 (1,455) 310
Other (236) 404 (82)
- ----------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (1,168) 907 829
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities -- 2,000 --
Proceeds from sales of available-for-sale securities 39 --
Purchase of available-for-sale securities -- -- (2,212)
Investment in equity of subsidiaries (2,000) -- --
Purchase of subsidiary bank stock -- (5,557) (9,005)
- ----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,961) (3,556) (11,217)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Subordinated debt -- (200) --
Repayment of note payable -- -- (7,815)
Proceeds from note payable -- -- 3,000
Issuance of Jr. subordinated debentures -- 15,000 --
Payment from (loan to) ESOP, net 39 45 (21)
Dividends on Series B preferred stock -- -- (40)
Purchase of common share for treasury (3,620) -- --
Issuance of treasury stock 52 -- --
Issuance of common stock 823 285 15,676
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,706) 15,130 10,800
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in cash (5,835) 12,481 412
Cash at beginning of year 13,281 800 388
- ----------------------------------------------------------------------------------------------------
Cash at end of year $ 7,446 $13,281 $ 800
- ----------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 27
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
DIRECTORS AND OFFICERS
DIRECTORS OF SUCCESS BANCSHARES, INC.
WILBUR G. MEINEN, JR., Chairman, President and CEO
Success Bancshares, Inc. and Success National Bank
JOSEPH A. CARI, JR., Attorney
Ungaretti & Harris
AVROM H. GOLDFEDER, Managing Director
I.N.G.-Barings Futures and Options Clearing Services
SHERWIN KOOPMANS, Retired Associate Director
Federal Deposit Insurance Corporation
GEORGE M. OHLHAUSEN, Investments
NORMAN D. RICH, C.P.A., Former Partner
Veatch, Rich & Nadler, Chtd.
GLEN R. WHERFEL, C.P.A.,
Wherfel and Associates
DIRECTORS OF SUCCESS NATIONAL BANK
WILBUR G. MEINEN, JR., Chairman, President and CEO
Success Bancshares, Inc. and Success National Bank
FRANK L. BAASCH, Past President
BDL Inc.
AVROM H. GOLDFEDER, Managing Director
I.N.G.-Barings Futures and Options Clearing Services
GEORGE M. OHLHAUSEN, Investments
NORMAN D. RICH, C.P.A., Former Partner
Veatch, Rich & Nadler, Chtd.
GLEN R. WHERFEL, C.P.A.,
Wherfel and Associates
OFFICERS OF SUCCESS BANCSHARES, INC.
WILBUR G. MEINEN, JR., Chairman, President and CEO
KURT C. FELDE, Executive Vice President and
Chief Financial Officer
LAURIE K. BREITENSTEIN, Senior Vice President and
General Counsel
MARLENE SACHS, Secretary
RONALD W. TRAGASZ, Assistant Secretary &
Assistant Treasurer
SUSAN J. CHERF, Controller and Assistant Treasurer
OFFICERS OF SUCCESS NATIONAL BANK
WILBUR G. MEINEN, JR., Chairman, President and CEO
CHRISTA N. CALABRESE, Executive Vice President and
Chief Lending Officer
KURT C. FELDE, Executive Vice President and
Chief Financial Officer
CRAIG J. LOVE, Executive Vice President and
Chief Operating Officer
JOSEPH BAUER, Senior Vice President, Retail Lending
LAURIE BREITENSTEIN, Senior Vice President and
General Counsel
KEVIN M. COOK, Senior Vice President, Commercial Banking
PAMELA JACKSON, Senior Vice President and Human
Resources Director
PATRICIA MCGROUARY, Senior Vice President and MIS Director
MARY PURCELL, Senior Vice President/Internal Audit and
Compliance Manager
RONALD W. TRAGASZ, Senior Vice President and Cashier
MARTIN A. WAIDE, Senior Vice President and Chief
Credit Officer
WALTER ADREANI, Vice President, Commercial Banking
JANIS A. ANDERSON, Vice President, Retail Banking
SUSAN J. CHERF, Vice President and Controller
GEORGE KOVACS, Vice President, Commercial Banking
CANDY S. LOGIURATO, Vice President, Commercial Banking
ANNA LONG, Vice President, Merchant Card Services
BARBARA M. MANKOWSKI, Vice President
CHIWIN NILAPANT, Vice President, Commercial Banking
MARLENE SACHS, Vice President and Secretary to the
Board of Directors
MARY WAYMAN, Vice President, Commercial Loan
Documentation
LARRY D. YOUNG, Vice President, Commercial Banking
JENNY CAI, Assistant Vice President, Commercial Banking
ANTONIO GONZALEZ, Assistant Vice President, Loan Servicing
ROBERT HAMILTON, Assistant Vice President, Commercial Banking
REGINA HIRN, Assistant Vice President, Commercial Banking
LOU MARGAGLIONE, Assistant Vice President, Commercial Banking
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.
[MEMBER FDIC LOGO] [EQUAL HOUSING LENDER LOGO]
35
<PAGE> 28
SUCCESS BANCSHARES, INC. AND SUBSIDIARIES
SHAREHOLDER INFORMATION
CORPORATE OFFICE
100 Tri State International
P.O. Box 1499
Lincolnshire, IL 60069-1499
847.279.9000 (tel)
847.279.9049 (fax)
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 Kurt C. Felde, Executive Vice President and Chief Financial
Officer, Success Bancshares, Inc., 100 Tri State International, P.O. Box 1499,
Lincolnshire, IL 60069-1499, or by calling 847.279.5069.
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
SECURITIES 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 10 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 March 3, 2000,
there were 3,074,326 shares of Success Bancshares, Inc. common stock issued and
2,664,606 shares outstanding and there were approximately 509 holders of record.
The table below shows the high and low sales prices on the common stock for each
quarter during 1998 and 1999. These prices do not represent actual transactions
and do not include retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
BID
-------------------
QUARTER ENDED HIGH LOW
- -------------------------------------------
<S> <C> <C>
March 31, 1998 $14.00 $13.00
June 30, 1998 $14.88 $13.38
September 30, 1998 $16.38 $12.75
December 31, 1998 $13.13 $10.50
March 31, 1999 $11.75 $9.75
June 30, 1999 $11.31 $9.75
September 30, 1999 $11.13 $10.50
December 31, 1999 $12.00 $9.88
</TABLE>
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
First Union Capital Markets
Herzog, Heine, Geduld, Inc.
Tucker Anthony, Inc.
Friedman Billings Ramsey & Co.
[SUCCESS BANCSHARES, INC. LOGO]
36
<PAGE> 1
Exhibit 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Success Bancshares, Inc. of our report dated February 11, 2000 included in
the 1999 Annual Report to Shareholders of Success Bancshares, Inc. We also
consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-42615) pertaining to the Success Bancshares, Inc. Employee Stock
Ownership Plan, 1990, 1992 and 1993 Executive Officer Stock Option Agreements
and the 1995 Employee Stock Option Plan of our report dated February 11, 2000,
with respect to the consolidated financial statements incorporated herein by
reference.
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
quarterly unaudited financial statements of Success Bancshares, Inc. for the
year ended December 31, 1999, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001009569
<NAME> SUCCESS BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,057
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,329
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 428,937
<ALLOWANCE> 4,269
<TOTAL-ASSETS> 497,145
<DEPOSITS> 394,290
<SHORT-TERM> 29,817
<LIABILITIES-OTHER> 2,942
<LONG-TERM> 24,246
15,000
0
<COMMON> 25,365
<OTHER-SE> 5,485
<TOTAL-LIABILITIES-AND-EQUITY> 497,145
<INTEREST-LOAN> 31,976
<INTEREST-INVEST> 2,157
<INTEREST-OTHER> 524
<INTEREST-TOTAL> 34,657
<INTEREST-DEPOSIT> 14,729
<INTEREST-EXPENSE> 17,422
<INTEREST-INCOME-NET> 17,235
<LOAN-LOSSES> 1,180
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 16,800
<INCOME-PRETAX> 2,415
<INCOME-PRE-EXTRAORDINARY> 2,415
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,728
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 8.11
<LOANS-NON> 1,486
<LOANS-PAST> 222
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,300
<ALLOWANCE-OPEN> 3,824
<CHARGE-OFFS> 842
<RECOVERIES> 107
<ALLOWANCE-CLOSE> 4,269
<ALLOWANCE-DOMESTIC> 4,269
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,089
</TABLE>
