U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
Commission File Number 0-23235
Success Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3497644
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
100 Tri-State International, Suite 60069
300 (Zip Code)
P.O. Box 1499, Lincolnshire IL
(Address of Principal Executive
Offices)
(847) 279-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange of Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock: 2,434,833 shares, $0.001 par value, outstanding as of October
22, 2000.
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Cash Flow 3
Footnotes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk12
Part II. OTHER INFORMATION
Item 6. (a) Exhibits 13-14
(b) Reports on Form 8-K
None
Form 10-Q Signature Page 15
Exhibit Index 16-17
Success Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(Unaudited)
September 30, December 31,
2000 1999
(In thousands)
ASSETS
Cash and cash equivalents $ 25,566 $ 17,057
Securities available-for-sale 34,149 36,329
Real estate loans held-for-sale 254 -
Loans, less allowance for loan losses of $4,638
at September 30, 2000
and $4,269 at December 31, 1999 468,117 424,668
Premises and equipment, net 9,838 10,684
Interest receivable 3,550 2,876
Other real estate owned 43 50
Other assets 6,301 5,481
Total Assets $ 547,818 $ 497,145
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits $ 61,631 $ 60,571
Interest bearing deposits 403,276 333,719
Total deposits 464,907 394,290
Federal funds purchased - -
Federal Home Loan Bank advances 29,054 45,946
Securities sold under repurchase agreements 2,255 5,002
Demand notes payable to U.S. Government 1,612 3,115
Note Payable 2,000 -
Trust preferred securities 15,000 15,000
Interest payable and other liabilities 3,679 2,942
Total Liabilities 518,507 466,295
Shareholders' equity
Preferred stock, $0.001 par value, 1,000,000 - -
shares authorized, none issued
Common stock, $0.001 par value, 7,500,000 shares
authorized,
At September 30, 2000: 3,074,326 shares issued
and 2,434,833 shares outstanding
At December 31, 1999: 3,074,326 shares issued 3 3
and 2,732,190 shares outstanding
Additional paid-in capital 25,362 25,362
Retained earnings 10,701 9,284
Treasury stock (6,658) (3,563)
Loans to Employee Stock Ownership Plan (74) (74)
Unearned compensation (17) (36)
Accumulated other comprehensive income (6) (126)
Total Shareholders' Equity 29,311 30,850
Total Liabilities and Shareholders' Equity $ 547,818 $ 497,145
See accompanying notes to the Unaudited Consolidated Financial Statements
- 1 -
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(In thousands, except share data)
Interest income
Loans (including fee income) $10,265 $ 7,902 $ 29,022 $23,110
Investment securities
Taxable 369 374 1,131 1,139
Exempt from federal income tax 132 151 399 463
Other interest income 42 320 44 490
10,808 8,747 30,596 25,202
Interest expense
Deposits 5,183 3,700 13,925 10,978
Trust preferred securities 336 336 1,007 1,007
Other borrowings 644 264 2,129 842
6,163 4,300 17,061 12,827
Net interest income 4,645 4,447 13,535 12,375
Provision for loan losses 150 150 725 450
Net interest income after 4,495 4,297 12,810 11,925
provision for loan losses
Other operating income
Service charges on deposit 609 567 1,879 1,577
accounts
Gain on sale of loans 35 34 36 182
Gain on sale of fixed assets, net - 9 53 14
Net credit card processing income 2 (13) 7 (28)
(expense)
Other non-interest income 135 215 304 616
781 812 2,279 2,361
Other operating expense
Salaries and employee benefits 2,178 2,324 6,575 6,722
Occupancy and equipment expense 1,044 816 3,051 2,456
Data processing 190 199 617 603
Other non-interest expense 930 931 2,853 2,660
4,342 4,270 13,096 12,441
Income before income taxes 934 839 1,993 1,845
Income tax expense 289 273 559 546
Net income $645 $ 566 $ 1,434 $1,299
Basic earnings per share $ 0.26 $ 0.20 $ 0.56 $ 0.45
Diluted earnings per share $ 0.26 $ 0.20 $ 0.56 $ 0.45
See accompanying notes to the Unaudited Consolidated Financial Statements
- 2 -
Success Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
2000 1999
(In thousands)
Net cash provided by operating activities $ 2,363 $ 2,274
Cash flows from investing activities:
Proceeds from maturities of available-for-sale 2,695 9,602
securities
Purchases of available-for-sale securities (138) (6,381)
Proceeds from the sale of other real estate - 440
owned
Proceeds from sale of premises and equipment 482 -
Net increase in loans (44,428) (16,036)
Premises and equipment expenditures (845) (627)
Net cash used in investing activities (42,234) (13,002)
Cash flows from financing activities:
Increase in non-interest bearing deposits 1,060 3,621
Increase (decrease) in interest bearing deposits 69,557 (6,159)
(Decrease) increase in demand notes payable to (1,503) 2,253
U.S. Government
(Decrease) increase in securities sold under (2,747) 1,350
agreements to repurchase
Net decrease in Federal Home Loan Bank advances (16,892) (2,182)
Increase in note payable 2,000 -
Issuance of common stock - 586
Purchase of common stock for treasury (3,207) (2,683)
Proceeds from issuance of treasury stock 112 -
Net cash provided by (used in) financing 48,380 (3,214)
activities
Increase (decrease) in cash and cash equivalents 8,509 (13,942)
Cash and cash equivalents at beginning of year 17,057 38,824
Cash and cash equivalents at end of period $ 25,566 $ 24,882
See accompanying notes to the Unaudited Consolidated Financial Statements
- 4 -
NOTE 1: Basis of Presentation
The financial information of Success Bancshares, Inc. and subsidiaries (the
Company) included herein is unaudited; however, such information reflects all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair statement of results for the
interim periods. The interim financial statements should be read in
conjunction with the Company's Annual Report and Form 10-K for the period ended
December 31, 1999. The results of the interim period ended September 30, 2000
are not necessarily indicative of the results expected for the year ending
December 31, 2000.
NOTE 2: Recent Accounting Developments
In June 1999, The Financial Accounting Standards Board (FASB) issued SFAS No.
137, _Accounting for Derivative Instruments and Hedging Activities _ Deferral
of the Effective Date of FASB Statement No. 133_ which delayed the effective
date of SFAS No. 133 to periods beginning after June 15, 2000. In addition, in
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement No.
133" which amends and/or supersedes various sections of SFAS No. 133. Since
the Company has no derivative or hedging activities, adoption of either SFAS
No. 133 or SFAS No. 138 is not currently expected to impact the Company's
financial statements.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB Statement No.
53 and amendments to FASB Statements No. 63, 89 and 121" effective for periods
beginning after December 15, 2000. The application of SFAS No. 139 will not
impact the Company's financial statements.
Additionally, in September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
- a replacement of FASB Statement No. 125." SFAS No. 140 replaces SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. SFAS No. 140 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. This Statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures about securitization and collateral accepted need not be reported
for periods ending on or before December 15, 2000, for which financial
statements are presented for comparative purposes. The application of SFAS No.
140 is not expected to impact the Company's financial statements.
- 5 -
NOTE 3: Earnings Per Share
Basic earnings per share are computed by dividing net income, after deducting
dividends on preferred stock (if any), by the weighted average number of common
shares outstanding. Diluted earnings per share assumes the exercise of any
dilutive instruments, including stock options.
The following table summarizes the computation of earnings per share for the
periods indicated:
For the Three Months Ended September 30,
2000 1999
Income Share Per-Share Income Share Per-Share
(Numerat (Denomin Amount (Numerat (Denomin Amount
or) ator) or) ator)
(In thousands, except per share amounts)
Net income $645 $566
Basic EPS
Income available to 645 2,436 $ 0.26 566 2,847 $ .20
common stockholders
Effect of Dilutive $ 0.26 566 2,847 $ .20
common stockholders
Effect of Dilutive
Securities
Options - 9 - 2
Diluted EPS
Income available to
common stockholders
+ assumed conversions $645 2,445 $ 0.26 $566 2,849 $ 0.20
For the Nine Months Ended September 30,
2000 1999
Income Share Per-Share Income Share Per-Share
(Numerat (Denomin Amount (Numerat (Denomin Amount
or) ator) or) ator)
(In thousands, except per share amounts)
Net income $1,434 $1,299
Basic EPS
Income available to common 1,434 2,549 $ 0.56 1,299 2,908$ 0.45
stockholders
Effect of Dilutive
Securities
common 1,434 2,549 $ 0.56 1,299 2,908$ 0.45
stockholders
Effect of Dilutive
Securities
Options - 1 - 1
Diluted EPS
Income available to common
stockholders
+ assumed conversions $1,434 2,550 $ 0.56 $1,299 2,909$ 0.45
NOTE 4: Comprehensive Income
For the three and nine month periods ended September 30, 2000, accumulated
other comprehensive income increased $177 thousand and $120 thousand,
respectively. For the comparable periods in 1999, accumulated other
comprehensive income decreased $114 thousand and $411 thousand, respectively.
NOTE 5: Note Payable
The Company entered into a revolving line of credit agreement with American
National Bank on June 5, 2000. The line is in the amount of $10.0 million with
interest payable at the 90 day LIBOR rate, plus 175 basis points. The interest
rate on the line resets quarterly and interest is payable quarterly. The
revolving line is secured by the common stock of the Bank and matures June 30,
2002.
- 6 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The Company's principal business is conducted by its wholly owned subsidiary,
Success National Bank (the _Bank_) a full service community bank. The Bank is
headquartered in Lincolnshire, Illinois located approximately 35 miles north of
downtown Chicago, and, in addition to its headquarters, currently has seven
branch offices. These banking facilities are located in Deerfield,
Libertyville (2), Lincolnwood, Chicago/Lincoln Park, Lincolnshire and
Northbrook. Based upon an overall evaluation of its branch locations,
management closed both the Lincolnwood Mall and Skokie offices during the third
quarter of this year.
The profitability of the Company's operations depends primarily on its net
interest income, provision for loan losses, other operating income, and other
operating expenses. Net interest income is the difference between the income
the Company receives on its loan and investment portfolios and its cost of
funds, which consists of interest paid on deposits and borrowings and
distributions on trust preferred securities. The provision for loan losses
reflects the cost associated with the level of credit risk in the Company's
loan portfolio. Other operating income consists primarily of service charges
on deposit accounts, securities gains, if any, gains on sale of loans, net
credit card processing income and other fees and commissions. Other operating
expenses include salaries and employee benefits, occupancy and equipment
expenses, data processing and other non-interest expenses.
Net interest income is dependent on the amounts and yields of interest earning
assets as compared to the amounts of and rates on interest bearing liabilities.
Net interest income is sensitive to changes in market rates of interest and the
Company's asset/liability management procedures in coping with such changes.
The provision for loan losses is dependent on increases in the loan portfolio,
management's assessment of the collectibility of loans in the portfolio, as
well as economic and market factors. Other operating expenses are heavily
influenced by the number of branches which impacts both salary and occupancy
expenses. Growth in the number of account relationships directly affects such
expenses as data processing costs, supplies, postage and other miscellaneous
expenses.
Results of Operations
Net income for the quarter ended September 30, 2000 was $645 thousand, an
increase of $79 thousand or 14.0% from net income of $566 thousand for the
comparable quarter in 1999. On a per share basis, earnings increased to $0.26
per diluted share for the third quarter of 2000 from $0.20 per diluted share
for the 1999 quarter. For the nine-month period ended September 30, 2000, net
income was $1.4 million, an increase of $135 thousand or 10.4% from net income
of $1.3 million reported for the comparable period in 1999. Diluted earnings
per share for the current nine-month period were $0.56, an increase of $0.11 or
24.4% over the $0.45 reported for the comparable period of 1999.
- 8 -
Net Interest Income
The major source of earnings for the Company is net interest income. The
related net interest margin represents the net interest income expressed as a
percentage of average interest earning assets during the period. The following
table sets forth information relating to the Company's consolidated average
balance sheets, interest income and interest expense, and reflects the average
yield on assets and cost of liabilities for the nine-month periods ended
September 30, 2000 and 1999. The yields and costs include adjustments for
accretion and amortization of deferred fees and costs.
Nine Months Ended September 30,
2000 1999
Average Interest Average Average Interest Average
Assets Balance Income Rate Balance Income Rate
(Dollars in thousands)
Loans (1) & (2) $457,940 $29,158 8.49% $372,793 $23,129 8.27%
Taxable investment 24,264 1,139 6.26% 26,343 1,139 5.76%
securities
Investment securities
exempt from
Federal income tax 10,846 604 7.43% 13,010 701 7.18%
(1)
Interest bearing deposits
with
financial 214 9 5.61% 4,512 164 4.85%
institutions
Other interest earning 545 27 6.61% 8,587 326 5.06%
assets
Total interest earning $493,809 $30,937 8.35% $425,245 $25,459 7.98%
assets
Non-interest earning 28,691 36,191
assets
Total assets $522,500 $461,436
- 9 -
Results of Operations (continued)
Net Interest Income (continued)
Nine Months Ended September 30,
2000 1999
Average Interest Average Average Interest Average
Liabilities & Balance Expense Rate Balance Expense Rate
Shareholders' Equity
(Dollars in thousands)
Deposits:
NOW & money market $6,485 4.52% $166,431 $4,936 3.95%
accounts $191,321
Savings deposits 22,188 313 1.88% 22,986 353 2.05%
Time deposits 156,476 7,127 6.07% 143,920 5,689 5.27%
Notes payable 708 46 8.66% - - -
Other borrowings 61,021 3,090 6.75% 37,690 1,849 6.54%
Total interest bearing 431,714 17,061 5.27% 371,027 12,827 4.61%
liabilities
Demand deposits - non- 58,120 55,583
interest bearing
Other non-interest 3,330 2,907
bearing liabilities
Shareholders' equity 29,336 31,919
Total liabilities & $522,500 $461,436
shareholders' equity
Fully Taxable Equivalent $13,876 $12,632
Net Interest Income
Net Yield on Interest 3.75% 3.96%
Earning Assets
Tax-exempt income reflected on a fully tax equivalent basis utilizing a 34%
rate for all years presented.
Non-accrual loans are included in average loans.
The Company's annualized net interest margin for the nine months ended
September 30, 2000 was 3.75% as compared to 3.96% for the same period in 1999.
The decline in the Company's net interest margin for the nine months ended
September 30, 2000 compared with the same period in 1999 is primarily
attributable to the impact of the Company's negative short-term gap position in
a rising interest rate environment as experienced during the past year.
Management has entered into a balance sheet restructuring program involving the
use of indexed loan and deposit products in order to reduce interest rate
sensitivity and in an effort to improve the net interest margin. The Company's
12-month GAP position has been improved from negative 18% at December 31, 1999
to approximately negative 13% at September 30, 2000.
- 10 -
The following table represents a reconciliation of the change in fully tax
equivalent net interest income from the prior year.
(In thousands)
Fully tax equivalent net interest income for the nine months $ 12,632
ended September 30, 1999
Change due to fluctuations in volume of average interest 2,115
earning assets
Change due to interest rate fluctuations (871)
Fully tax equivalent net interest income for the nine months $ 13,876
ended September 30, 2000
Other Operating Income
Other operating income for the quarter ended September 30, 2000 was $781
thousand, a decrease of $31 thousand, or 3.8% over the $812 thousand recorded
for the comparable period in 1999. For the nine-month period ended September
30, 2000 other operating income was $2.3 million, a decrease of $82 thousand,
or 3.5% over the $2.4 million reported for the comparable period in 1999. For
the nine-month period ended September 30, 2000, service charges on deposit
accounts amounted to $1.9 million, an increase of $302 thousand, or 19.2% over
the $1.6 million recorded during the comparable period in 1999. Additionally,
for the nine-month period ended September 30, 2000 the gain on the sale of
residential one-to-four family loans was $36 thousand versus a gain of $182
thousand for the comparable period in 1999. The decrease in the current period
in the gain on sale of residential one-to-four family loans is primarily due to
increased interest rates that resulted in reduced loan origination volumes.
For the quarter ended September 30, 2000 other noninterest income was $135
thousand as compared to $215 thousand for the same period in 1999. The
decrease during the current quarter resulted primarily from the recognition of
approximately $99 thousand of nonrecurring income in the third quarter of 1999.
For the nine-month period ended September 30, 2000 other noninterest income was
$304 thousand versus $616 thousand for the comparable period in 1999, a
decrease of $312 thousand. The decrease is primarily the result of the
recognition of, during the first quarter of 1999, nonrecurring income including
the receipt of a lawsuit settlement of $70 thousand and the settlement of
monthly billing claims and conversion related charges with the Bank's service
provider and the reduction of previously accrued expenses by $94 thousand.
Other Operating Expenses
Other operating expenses were $4.3 million for the quarter ended September 30,
2000, an increase of $72 thousand or 1.7% as compared with $4.3 million for the
same quarter in 1999. Salaries and benefits expense decreased $146 thousand,
or 6.3%, to $2.2 million for the current quarter as compared to the same period
in 1999, reflecting reduced staffing levels related to the branch closures.
Occupancy expenses increased $228 thousand, or 27.9%, to $1.0 million for the
quarter ended September 30, 2000 versus the comparable period in 1999. The
increase in occupancy expense is due, in part, to the recognition in 2000 of
rental and utility charges associated with the Company's corporate center that
are not yet offset by the elimination of the occupancy expenses related to the
closed Chicago Loop, Lincolnwood Mall and Skokie branches. While management
continues to explore possible subtenant and lease buyout arrangements, the
Company has not yet entered into a firm agreement to eliminate or reduce the
significant rental cost associated with the closed Loop branch space. For the
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nine-month period ended September 30, 2000 other operating expenses were $13.1
million, an increase of $655 thousand, or 5.3%, over the $12.4 million recorded
for the comparable period in 1999. Salaries and benefits expense was $6.6
million for the nine-month period ended September 30, 2000, a decrease of $147
thousand or 2.2% over the comparable period in 1999 due to reduced staffing
levels. Occupancy expense increased $595 thousand, or 24.2%, to $3.1 million
for the nine-month period ended September 30, 2000 versus the comparable period
in 1999.
Financial Condition
Loans
The loan portfolio is the largest category of the Company's interest earning
assets. At September 30, 2000, total loans were $472.8 million, an increase of
$43.8 million, or 10.2% from the $428.9 million at December 31, 1999. As the
table below indicates, the growth in the loan portfolio is primarily
attributable to growth in commercial and real estate mortgages which increased
$14.8 million and $17.3 million, respectively. Strategically, during the past
year, the Company has initiated various marketing and calling programs to
generate potential business opportunities leading to the origination of
commercial loans. Home equity loans outstanding increased $7.2 million during
the first nine months of 2000.
The following table sets forth the composition of the loan portfolio:
September 30, 2000 December 31, 1999
Percent of Percent of
Amount Portfolio Amount Portfolio
(Dollars in thousands)
Commercial $ 118,273 25.02% $ 103,486 30.13%
Real estate _ construction 22,076 4.67% 17,758 4.53%
Real estate _ mortgage 246,301 52.10% 229,036 46.06%
Home equity 83,159 17.59% 75,919 17.47%
Installment 2,618 0.55% 2,392 1.72%
Credit cards 326 0.07% 345 0.09%
Total gross loans 472,753 100.00% 428,936 100.00%
Net deferred loan fees 157 205
Unaccreted discount resulting from
loss on transfer of loans
from held-for-sale to portfolio (155) (204)
Loans net of unearned discount and 472,755 428,937
net deferred loan fees
Allowance for loan losses (4,638) (4,269)
Net loans $ 468,117 $ 424,668
Allowance to gross loans 0.98% 1.00%
Non-Performing Assets
- 12 -
The following table summarizes the balances of non-performing assets which
includes (a) non-performing loans and (b) other real estate owned. Non-
performing loans include: (1) loans accounted for on a non-accrual basis; (2)
accruing loans contractually past due 90 days or more as to interest or
principal payment; and (3) loans whose terms have been renegotiated to provide
a reduction or deferral of interest or principal because of a deterioration in
the financial position of the borrower. The Company has a reporting and
control system to monitor non-performing loans.
Loans with principal or interest payments contractually due but not yet paid
are reviewed by senior management on a weekly basis and are placed on non-
accrual status when scheduled payments remain unpaid for 90 days or more,
unless the loan is both well-secured and in the process of collection.
Interest income on non-accrual loans is recorded when actually received in
contrast to the accrual basis, which records income over the period in which it
is earned, regardless of when it is received.
September 30, December 31,
2000 1999
(Dollars in thousands)
Non-performing loans:
Non-accrual $ 3,326 $ 1,486
90 days or more past due, still - 222
accruing
Total non-performing loans 3,326 1,708
Other real estate owned 43 50
Total non-performing assets $ 3,369 $ 1,758
Non-performing loans to loans, net of
unearned discount 0.70% 0.40%
and net deferred loan fees
Non-performing loans to allowance for 71.71% 40.01%
loan losses
The net increase in non-accrual loans of $1.8 million from December 31, 1999 to
September 30, 2000 resulted primarily from the classification of five
additional loans in the amount of $2.2 million. In addition, during the nine-
month period ended September 30, 2000, non-accrual loans in the amount of $370
thousand were repaid. Of the $3.3 million classified as non-accrual at
September 30, 2000, the two largest loans have a combined balance of $2.4
million. Loans past due 90 days or more and still accruing decreased from
$222,000 at December 31, 1999 to zero at September 30, 2000.
Potential Problem Loans
In addition to those loans disclosed under _Non-performing Loans,_ there are
certain loans in the portfolio which management has identified through its
problem loan identification system which exhibit a higher than normal credit
risk. However, these loans do not represent non-performing loans to the
Company. Management's review of the total loan portfolio to identify loans
where there is concern that the borrower may not be able to continue to satisfy
present loan repayment terms includes factors such as review of individual
loans, recent loss experience and current economic conditions. Loans in this
category include those with characteristics such as those that have recent
- 13 -
adverse operating cash flow or balance sheet trends, or have general risk
characteristics that the loan officer believes might jeopardize the future
timely collection of principal and interest payments. The principal amount of
loans in this category as of September 30, 2000 and December 31, 1999 were
approximately $5.4 million and $2.3 million, respectively. At September 30,
2000, there were no significant loans which were classified by any bank
regulatory agency that are not included above as non-performing or as a
potential problem loan.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for potential future losses in the Company's loan portfolio. The level
of the allowance is based upon management's periodic and comprehensive
evaluation of the loan portfolio. Management also considers reports of
examination furnished by Federal banking authorities in this regard. The
evaluations by management in assessing the adequacy of the allowance include
consideration of past loan loss experience, changes in the composition of the
loan portfolio, the volume and condition of loans outstanding and current
market and economic conditions. Loans are charged to the allowance for loan
losses when deemed uncollectible by management, unless sufficient collateral
exists to repay the loan.
The following table summarizes transactions in the allowance for loan losses
for the periods indicated:
Nine Months Ended
September 30,
2000 1999
(Dollars in
thousands)
Balance at beginning of year $4,269 $3,824
Provision for loan losses 725 300
Recoveries on loans previously charged-off 39 3
Loans charged-off (395) (551)
Balance at end of year 4,638 3,576
Allowance as a % of total loans, net of unearned 0.98% 0.96%
discount and net of deferred loan fees/costs
Ratio of net charge-offs to average loans outstanding 0.10% 0.29%
(annualized)
Control of the Company's loan quality is continually monitored by management
and is reviewed by the Board of Directors and loan committee of the Bank on a
monthly basis, subject to oversight by the Company's Board of Directors through
its members who serve on the loan committee. Independent external review of
the loan portfolio is provided by the examinations conducted by regulatory
authorities and through the Company's independent public accountants in
conjunction with the Company's annual audit. Internal loan review is primarily
the responsibility of the Loan Review Department. The Loan Review Department
measures risk in the Company's loan portfolio through (i) an in-depth credit
review which emphasizes larger and newer commercial and commercial real estate
credits, (ii) a system of process reviews for all retail loan portfolios, (iii)
attendance at loan committee meetings and (iv) the completion of monthly
- 14 -
monitoring activities evaluating the classification of delinquent and non-
accrual loans. The amount of additions to the allowance for loan losses, which
is charged to earnings through the provision for loan losses, is determined
based on a variety of factors, including actual charge-offs during the year,
historical loss experience and delinquent loans. Although management believes
the allowance for loan losses is adequate to cover any potential losses, there
can be no assurance that the allowance will prove sufficient to cover actual
loan losses in the future.
Deposits
The following table sets forth deposits at the periods indicated:
Sept. 30, Percent of December 31,Percent of
2000 Deposits 1999 Deposits
(Dollars in thousands)
NOW and money market $213,018 45.82 % $ 181,296 45.98 %
accounts
Savings 19,637 4.22 % 21,359 5.42 %
Time 170,621 36.70 % 131,064 33.24 %
Demand 61,631 13.26 % 60,571 15.36 %
Total $464,907 100.00 % $ 394,290 100.00 %
Liquidity and Capital Resources
Shareholders' Equity and Capital Standards
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's growth and financial condition. The
regulations require the Company and the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
principles. The capital classifications are also subject to qualitative
judgments by the regulators about risk weightings and other factors.
Quantitative measures established by Federal regulations to ensure capital
adequacy require the Company and the Bank to maintain minimum ratios (set forth
in the table below) of Tier I capital (as defined in the regulations) to total
average assets (as defined in the regulations). As of September 30, 2000, the
Company's actual total capital to risk-weighted assets ratio was 11.46%. As of
September 30, 2000, the ratio of the Bank's total capital to risk-weighted
assets was 11.59% indicating that the Bank is considered _well capitalized._
The required ratios and the Company's and Bank's actual ratios at September 30,
2000, are presented below:
To Be Well
Capitalized
For Capital Under Prompt
Corrective
Actual Adequacy Purposes Action
Provisions
- 15 -
Provisions
Amounts Ratio Amounts Ratio Amounts Ratio
(Dollars in thousands)
Total Capital (to
Risk Weighted
Assets):
Consolidated $48,955 11.46% $34,176 8.0% Not Applicable
Bank 49,149 11.59% 33,919 8.0% $42,399 10.0%
Tier 1 Capital (to
Risk Weighted
Assets):
Consolidated 39,089 9.15% 17,088 4.0% Not Applicable
Bank 44,511 10.50% 16,960 4.0% 25,439 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated 39,089 7.48% 20,900 4.0% Not Applicable
Bank $44,511 8.55% $20,825 4.0% $26,032 5.0%
The Company purchased approximately 310 thousand shares of treasury stock at a
cost of $3.2 million during the nine-month period ended September 30, 2000, an
average cost of $10.39 per share. In the aggregate, since initiating a stock
repurchase program in May 1999, the Company has repurchased a total of
approximately 658 thousand shares through September 30, 2000 at a cost of $6.8
million, an average cost per share of $10.40. As of September 30, 2000
approximately 18 thousand shares of those repurchased had been utilized in
Company benefit plans. The book value of the Company's common shares as of
September 30, 2000 was $12.04.
Operating, Investing and Financing Activities
Liquidity management at the Bank involves planning to meet anticipated funding
needs at a reasonable cost. Liquidity management is guided by policies
formulated and monitored by the Company's senior management and the Bank's
asset/liability committee, which take into account the marketability of assets,
the sources and stability of funding and the level of unfunded commitments.
The Bank's principal sources of funds are deposits, short-term borrowings and
capital contributions by the Company. Borrowings by the Bank from the Federal
Reserve Bank of Chicago and Federal Home Loan Bank of Chicago provide
additional available sources of liquidity.
The Bank's core deposits, the most stable source of liquidity for community
banks due to the nature of long-term relationships generally established with
depositors and the security of deposit insurance provided by the FDIC, are
available to provide long-term liquidity. At September 30, 2000 and December
31, 1999, 31.90% and 36.83%, respectively, of the Company's total assets were
funded by NOW accounts and demand deposits.
Liquid assets refer to the Company's money market assets such as cash and due
from banks, federal funds sold and interest bearing time deposits with
financial institutions, as well as securities available for sale and securities
held-to-maturity with a remaining maturity less than one year. Net liquid
assets represent the sum of the liquid asset categories less the amount of
assets pledged to secure public funds on deposit with the Bank. As of
September 30, 2000 and December 31, 1999, net liquid assets totaled
approximately $38.7 million and $22.7 million, respectively.
- 16 -
The Company's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities consists
primarily of earnings. Net cash used in investing activities, consisting
primarily of loan and investment funding, was $42.2 million at September 30,
2000 as compared to cash used of $13.0 million for the same period in 1999.
The increased usage is primarily attributable to an increase in loan volume in
2000. Net cash provided by financing activities, consisting primarily of
deposit activities, was $48.4 million at September 30, 2000 as compared to cash
used of $3.2 million at September 30, 1999. The increase in cash provided is
primarily the result of an increase in interest bearing deposit balances in
2000.
Forward Looking Statements
Statements made about the Company's future economic performance, strategic
plans or objectives, revenues or earnings projections, or other financial
predictions and similar statements are not guarantees of future performance,
but are forward looking statements. By their nature, these statements are
subject to numerous uncertainties that could cause actual results to differ
materially from those predicted in the statements. Important factors that
might cause the Company's actual results to differ materially include, but are
not limited to, the following:
. Federal and state legislative and regulatory developments;
. The impact of continued loan and deposit promotions on the Company's net
interest margin;
. The Company's ability to successfully manage the integration of business and
operations from closed branches into remaining facilities and the possibility
of further difficulties or delays in releasing the Chicago Loop office;
. Changes in management's estimate of the adequacy of the allowance for loan
losses;
. Increases in loan delinquencies or write-offs;
. Interest rate movements and their impact on customer behavior and the
Company's net interest margin;
. The impact of interest rate sensitivity restructuring activities;
. The impact of repricing and competitors' pricing initiatives on loan and
deposit products;
. The Company's ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace;
. The Company's ability to access cost effective funding; and
. Changes in financial markets and general economic conditions.
- 17 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest bearing
liabilities mature or reprice on a different basis than interest earning
assets. When interest bearing liabilities mature or reprice more quickly than
interest earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest bearing
liabilities, falling interest rates could result in a decrease in net income.
In order to evaluate the Company's asset/liability sensitivity, management
employs a measurement tool which determines exposure to changes in interest
rates by measuring the percentage change in net interest income over a one-year
time horizon due to changes in rates. Management measures such percentage
change assuming an instantaneous permanent parallel shift in the yield curve of
100 and 200 basis points, both upward and downward. The model uses an option-
based pricing approach to estimate the sensitivity of mortgage loans. The most
significant embedded option in these types of assets is the prepayment option
of the borrowers. The model uses various prepayment assumptions depending upon
the type of mortgage instrument (residential mortgages, commercial mortgages,
mortgage-backed securities, etc.). Prepayment rates for mortgage instruments
ranged from 5 to 48 CPR (Constant Prepayment Rate) as of September 30, 2000 and
December 31, 1999. For administered rate core deposits (e.g. NOW and savings
accounts), the model utilizes interest rate floors equal to 100 basis points
below their current levels.
Utilizing this measurement concept, the interest rate risk of the Company,
expressed as a percentage change in net interest income over a one-year time
horizon due to changes in interest rates, at September 30, 2000 and December
31, 1999, was as follows:
Basis Point Change
+200 +100 -100 -200
At September 30, 2000 (5.0%) (2.5%) 2.3% 4.7%
At December 31, 1999 (8.8%) (4.4%) 4.6% 7.8%
As the table indicates, the Company's balance sheet restructuring activities in
2000, which involve indexed loan and deposit products, have resulted in an
improved interest rate sensitivity position.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Although such activities may be
permitted with the approval of the Board of Directors of the Bank, the Company
does not intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
- 18 -
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibits
Number Exhibit Title
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Form S-1 Registration Statement (No. 333-32561) filed with
the Securities and Exchange Commission (the _Commission_) on
July 31, 1997).
3.1.1 Certificate of Designations of Series B Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1.1
of the Company's Form 10-Q filed with the Commission on
November 13, 1998).
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Form S-1 Registration Statement (No.
333-32561) filed with the Commission on July 31, 1997).
3.2.1 Amendment No. 1 to By-laws (incorporated by reference to
Exhibit 3.2.1 of the Company's Form 10-Q filed with the
Commission on May 13, 1999).
4.1 Form of Subordinated Indenture relating to the Junior
Subordinated Debentures (incorporated by reference to Exhibit
4.1 of the Form S-1 Registration Statement of the Company and
Success Capital Trust I (_Success Capital_) (No. 333-51271
and No. 333-51271-01) filed with the Commission on April 28,
1998).
4.2 Form of Junior Subordinated Debenture Certificate (included
as an exhibit to Exhibit 4.1).
4.3 Certificate of Trust of Success Capital (incorporated by
reference to Exhibit 4.3 of the Form S-1 Registration
Statement of the Company and Success Capital (No. 333-51271
and 333-51271-01) filed with the Commission on April 28,
1998).
4.4 Form of Amended and Restated Trust Agreement of Success
Capital (incorporated by reference to Exhibit 4.4 of the Form
S-1 Registration Statement of the Company and Success Capital
(No. 333-51271 and 333-51271-01) filed with the Commission on
April 28, 1998).
4.5 Form of Trust Preferred Security Certificate of Success
Capital (included as an exhibit to Exhibit 4.4).
4.6 Form of Common Security Certificate of Success Capital
(included as an exhibit to Exhibit 4.4).
4.7 Form of Guarantee Agreement of the Company relating to the
Trust Preferred Securities (incorporated by reference to
Exhibit 4.7 of the Form S-1 Registration Statement of the
Company and Success Capital (No. 333-51271 and 333-51271-01)
filed with the Commission on April 28, 1998).
4.8 Form of Rights Agreement, dated as of August 1, 1998, between
the Company and Harris Trust and Savings Bank, which includes
as Exhibit B thereto the Form of Right Certificate
(incorporated by reference to Exhibit 1 of the Company's Form
8-A Registration Statement (File No. 001-14381) filed with
the Commission on August 6, 1998).
(1)(2)10.1 Employment Agreement between the Bank and Kurt C. Felde dated
as of July 31, 2000.
19
(1)(2)10.2 Stock Option Agreement dated as of July 26, 2000 between the
Company and Wilbur G. Meinen, Jr.
(1)(2)10.3 Stock Option Agreement dated as of July 26, 2000 between the
Company and Wilbur G. Meinen, Jr.
(1)(2)10.4 Stock Option Agreement dated as of August 23, 2000 between
the Company and Frank L. Baasch.
(1)(2)10.5 Stock Option Agreement dated as of August 23, 2000 between
the Company and Joseph A. Cari, Jr.
(1)(2)10.6 Stock Option Agreement dated as of August 23, 2000 between
the Company and Avrom H. Goldfeder.
(1)(2)10.7 Stock Option Agreement dated as of August 23, 2000 between
the Company and Wilbur G. Meinen, Jr.
(1)(2)10.8 Stock Option Agreement dated as of August 23, 2000 between
the Company and Sherwin Koopmans.
(1)(2)10.9 Stock Option Agreement dated as of August 23, 2000 between
the Company and Norman D. Rich.
(1)(2)10.10 Stock Option Agreement dated as of August 23, 2000 between
the Company and Glen R. Wherfel.
(1)(2)10.11 Stock Option Agreement dated as of September 29, 2000 between
the Company and Craig J. Love.
(1)(2)10.12 Stock Option Agreement dated as of September 29, 2000 between
the Company and Laurie K. Breitenstein.
(1)(2)10.13 Stock Option Agreement dated as of September 29, 2000 between
the Company and Kurt C. Felde.
(1)(2)10.14 Stock Option Agreement dated as of September 29, 2000 between
the Company and Ronald W. Tragasz.
(1)(2)10.15 Stock Option Agreement dated as of September 29, 2000 between
the Company and Christa N. Calabrese.
(1)(2)10.16 First Modification of Employment Agreement between the Bank
and Wilbur G. Meinen, Jr. dated as of July 26, 2000.
(2)27.1 Financial Date Schedule
(1) Management contract or compensatory plan or arrangement
(2) Filed herewith
(b) Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Success Bancshares, Inc.
(Registrant)
November 13, 2000 lsl
Date Wilbur G. Meinen, Jr.
Chairman, President & Chief
Executive Officer
November 13, 2000 lsl
Date Kurt C. Felde
Executive Vice President
Chief Financial Officer
21
EXHIBIT INDEX
Exhibits
Number Exhibit Title
3.1 Second Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Form S-1 Registration Statement (No. 333-32561) filed with the
Securities and Exchange Commission (the _Commission_) on July
31, 1997).
3.1.1 Certificate of Designations of Series B Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1.1 of
the Company's Form 10-Q filed with the Commission on November
13, 1998).
3.2 By-laws of the Company (incorporated by reference to Exhibit
3.2 of the Company's Form S-1 Registration Statement (No. 333-
32561) filed with the Commission on July 31, 1997).
3.2.1 Amendment No. 1 to By-laws (incorporated by reference to
Exhibit 3.2.1 of the Company's Form 10-Q filed with the
Commission on May 13, 1999).
4.1 Form of Subordinated Indenture relating to the Junior
Subordinated Debentures (incorporated by reference to Exhibit
4.1 of the Form S-1 Registration Statement of the Company and
Success Capital Trust I (_Success Capital_) (No. 333-51271 and
No. 333-51271-01) filed with the Commission on April 28,
1998).
4.2 Form of Junior Subordinated Debenture Certificate (included as
an exhibit to Exhibit 4.1).
4.3 Certificate of Trust of Success Capital (incorporated by
reference to Exhibit 4.3 of the Form S-1 Registration
Statement of the Company and Success Capital (No. 333-51271
and 333-51271-01) filed with the Commission on April 28,
1998).
4.4 Form of Amended and Restated Trust Agreement of Success
Capital (incorporated by reference to Exhibit 4.4 of the Form
S-1 Registration Statement of the Company and Success Capital
(No. 333-51271 and 333-51271-01) filed with the Commission on
April 28, 1998).
4.5 Form of Trust Preferred Security Certificate of Success
Capital (included as an exhibit to Exhibit 4.4).
4.6 Form of Common Security Certificate of Success Capital
(included as an exhibit to Exhibit 4.4).
4.7 Form of Guarantee Agreement of the Company relating to the
Trust Preferred Securities (incorporated by reference to
Exhibit 4.7 of the Form S-1 Registration Statement of the
Company and Success Capital (No. 333-51271 and 333-51271-01)
filed with the Commission on April 28, 1998).
4.8 Form of Rights Agreement, dated as of August 1, 1998, between
the Company and Harris Trust and Savings Bank, which includes
as Exhibit B thereto the Form of Right Certificate
(incorporated by reference to Exhibit 1 of the Company's Form
8-A Registration Statement (File No. 001-14381) filed with
the Commission on August 6, 1998).
(1)(2)10.1 Employment Agreement between the Bank and Kurt C. Felde dated
as of July 31, 2000.
(1)(2)10.2 Stock Option Agreement dated as of July 26, 2000 between the
Company and Wilbur G. Meinen, Jr.
(1)(2)10.3 Stock Option Agreement dated as of July 26, 2000 between the
Company and Wilbur G. Meinen, Jr.
22
(1)(2)10.4 Stock Option Agreement dated as of August 23, 2000 between the
Company and Frank L. Baasch.
(1)(2)10.5 Stock Option Agreement dated as of August 23, 2000 between the
Company and Joseph A. Cari, Jr.
(1)(2)10.6 Stock Option Agreement dated as of August 23, 2000 between the
Company and Avrom H. Goldfeder.
(1)(2)10.7 Stock Option Agreement dated as of August 23, 2000 between the
Company and Wilbur G. Meinen, Jr.
(1)(2)10.8 Stock Option Agreement dated as of August 23, 2000 between the
Company and Sherwin Koopmans.
(1)(2)10.9 Stock Option Agreement dated as of August 23, 2000 between the
Company and Norman D. Rich.
(1)(2)10.10 Stock Option Agreement dated as of August 23, 2000 between the
Company and Glen R. Wherfel.
(1)(2)10.11 Stock Option Agreement dated as of September 29, 2000 between
the Company and Craig J. Love.
(1)(2)10.12 Stock Option Agreement dated as of September 29, 2000 between
the Company and Laurie K. Breitenstein.
(1)(2)10.13 Stock Option Agreement dated as of September 29, 2000 between
the Company and Kurt C. Felde.
(1)(2)10.14 Stock Option Agreement dated as of September 29, 2000 between
the Company and Ronald W. Tragasz.
(1)(2)10.15 Stock Option Agreement dated as of September 29, 2000 between
the Company and Christa N. Calabrese.
(1)(2)10.16 First Modification of Employment Agreement between the Bank
and Wilbur G. Meinen, Jr. dated as of July 26, 2000.
(2)27.1 Financial Date Schedule
(1) Management contract or compensatory plan or arrangement
(2) Filed herewith
23
Legend This schedule contains summary financial information
extracted from the quarterly unaudited financial
statements of Success Bancshares, Inc. for the nine-
months ended September 30, 2000, and is qualified in
its entirety by reference to such financial
statements.
Name Success Bancshares, Inc.
Multiplier 1,000
Period Type Nine months
Fiscal Year End Dec-31-2000
Period Start Jan-01-2000
Period End Sept.-30-
2000
Cash 18,101
Int. Bearing Deposits 65
Fed Funds Sold 7,400
Trading Assets -
Investments Held-for-Sale 34,149
Investments Carrying -
Investments Market -
Loans 468,371
Allowance 4,638
Total Assets 547,818
Deposits 464,907
Short Term 3,867
Liabilities - Other 3,679
Long Term 46,054
Preferred Mandatory -
Preferred -
Common 3
Other - SE 29,308
Total Liabilities and Equity 547,818
Interest - Loan 29,022
Interest - Invest 1,530
Interest - Other 44
Interest - Total 30,596
Interest - Deposit 13,925
Interest - Expense 17,061
Interest - Income - Net 13,535
Loan - Losses 725
Securities - Gains -
Expense - Other 13,096
Income - Pretax 1,993
Income - Pre-Extraordinary 1,993
Extraordinary -
Changes -
Net - Income 1,434
EPS - Basic $0.56
EPS - Diluted $0.56
Yield - Actual 3.75%
Loans - Non 3.326
Loans - Past -
Loans - Troubled -
Loans - Problem 5,400
Allowance - Open 4,269
Charge-Offs 395
Recoveries 39
Allowance - Close 4,638
Allowance - Domestic 3,519
Allowance - Foreign -
Allowance - Unallocated 1,119
