SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Mark One [ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1996; or [ ] 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 0-11986 SUMMIT BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Texas 75-1694807 - ------------------------ -------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 1300 Summit Avenue, Fort Worth, Texas 76102 ---------------------------------------------- (Address of principal executive offices) (817) 336-6817 ---------------------------------------------------- (Registrant's telephone number, including area code) No Change - -------------------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report) 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. Yes X No ---- The number of shares of common stock, $1.25 par value, outstanding at March 31, 1996 was 3,156,386 shares. 1 SUMMIT BANCSHARES, INC. INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1996 and 1995 and at December 31, 1995 4 Consolidated Statements of Income for the Three Months Ended March 31, 1996 and 1995 and for the Year Ended December 31, 1995 5 Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 1996 and 1995 and for the Year Ended December 31, 1995 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 and for the Year Ended December 31, 1995 7-8 Notes to Consolidated Financial Statements for the Three Months Ended March 31, 1996 and 1995 and for the Year Ended December 31, 1995 9-19 The March 31, 1996 and 1995 and the December 31, 1995 financial statements included herein are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management of the registrant, necessary to a fair statement of the results for the interim periods. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 1996 and 1995 20-25 2 PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Change in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Unaudited) March 31 December 31, -------------------------- 1995 1996 1995 -------- --------- ----------- ASSETS (In Thousands) CASH AND DUE FROM BANKS $ 23,224 $ 17,647 $ 22,480 FEDERAL FUNDS SOLD 24,355 4,945 25,680 INVESTMENT SECURITIES - NOTE 2 (Market Value of $122,848,000 and $109,738,000 at March 31, 1996 and 1995 and $119,575,000 at December 31, 1995) 122,943 110,809 119,368 LOANS - NOTE 3 Loans, Net of Unearned Discount 188,953 148,274 178,493 Allowance for Loan Losses (2,653) (2,355) (2,500) --------- --------- -------- LOANS, NET 186,300 145,919 175,993 PREMISES AND EQUIPMENT - NOTE 4 7,387 6,734 7,157 ACCRUED INCOME RECEIVABLE 3,285 2,728 3,288 OTHER REAL ESTATE - NOTE 5 110 391 113 OTHER ASSETS 1,372 1,094 1,338 --------- -------- -------- TOTAL ASSETS $ 368,976 $ 290,267 $ 355,417 ========= ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $ 89,119 $ 69,537 $ 89,184 Interest-Bearing 234,697 186,891 220,925 ---------- --------- ---------- TOTAL DEPOSITS 323,816 256,428 310,109 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 12,199 5,736 13,528 NOTE PAYABLE -0- -0- -0- ACCRUED INTEREST PAYABLE 605 497 635 OTHER LIABILITIES 1,350 937 1,020 --------- --------- --------- TOTAL LIABILITIES 337,970 263,598 325,292 --------- --------- --------- COMMITMENTS AND CONTINGENCIES - NOTE 10 SHAREHOLDERS' EQUITY - NOTES 11, 13 and 17 Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 3,156,386, 1,578,923 and 3,149,886 shares issued and outstanding at March 31, 1996 and 1995 and at December 31, 1995, respectively 3,945 1,974 3,937 Capital Surplus 4,119 6,049 4,109 Retained Earnings 22,809 19,089 21,745 Unrealized Gain (Loss) on Investment Securities Available for Sale, Net of Tax 133 (233) 334 Treasury Stock at Cost (March 31, 1995 - 10,000 Shares) -0- (210) -0- TOTAL SHAREHOLDERS' EQUITY 31,006 26,669 30,125 ------- ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 368,976 $ 290,267 $ 355,417 ========= ========= ========= The accompanying Notes should be read with these financial statements. 4 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Unaudited) Year Ended For the Three Months Ended March 31, December 31, ------------------------------------ ------------- 1996 1995 1995 --------- --------- -------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $ 4,433 $ 3,395 $ 15,331 Interest and Dividends on Investment Securities: Taxable 1,790 1,639 6,479 Exempt from Federal Income Taxes 1 8 23 Interest on Federal Funds Sold 274 61 1,096 ------- ------ ------- TOTAL INTEREST INCOME 6,498 5,103 22,929 ------- ------ ------- INTEREST EXPENSE Interest on Deposits 2,246 1,683 7,936 Interest on Securities Sold Under Agreements to Repurchase 117 62 340 Interest on Notes Payable -0- 1 1 ------- ------ ------- TOTAL INTEREST EXPENSE 2,363 1,746 8,277 ------- ------ ------- NET INTEREST INCOME 4,135 3,357 14,652 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 124 42 236 ------- ------ ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,011 3,315 14,416 ------- ------ ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 385 384 1,525 Gain (Loss) on Sale of Investment Securities 3 (10) (10) Other Income 341 353 1,239 ------- ------- ------- TOTAL NON-INTEREST INCOME 729 727 2,754 ------- ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits 1,655 1,380 5,903 Occupancy Expense - Net 180 167 712 Furniture and Equipment Expense 197 152 691 Other Real Estate Owned Expense - Net (5) (77) (99) Other Expense 751 790 2,766 ------- ------- ------- TOTAL NON-INTEREST EXPENSE 2,778 2,412 9,973 ------- ------- ------- INCOME BEFORE INCOME TAXES 1,962 1,630 7,197 APPLICABLE INCOME TAXES - NOTE 8 677 554 2,468 ------ ------ ------- NET INCOME $ 1,285 $ 1,076 $ 4,729 ======= ======= ======= NET INCOME PER SHARE - NOTE 13 $ .41 $ .34 $ 1.51 ======= ======= ======= The accompanying Notes should be read with these financial statements. 5 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1995 Unrealized Common Stock Gain (Loss) ---------------------- Capital Retained on Investment Treasury Shares Amount Surplus Earnings Securities-Net Stock Total ---------- ------- -------- -------- -------------- -------- -------- BALANCE AT JANUARY 1, 1995 $1,578,723 $1,973 $ 6,047 $18,187 $ (873) $ -0- $ 25,334 Purchases of Stock Held in (210) (210) Treasury Net Income for the Three Months Ended March 31, 1995 1,076 1,076 Stock Options Exercised 200 1 2 3 Cash Dividend $.055 Per Share (174) (174) Securities Available-for- Sale Adjustment 640 640 --------- ------ ------- ----- ------ ------ ------ BALANCE AT MARCH 31, 1995 1,578,923 1,974 6,049 19,089 (233) (210) 26,669 Net Income for the Three Months Ended December 31, 1995 3,653 3,653 Stock Options Exercised 18,800 23 29 52 Purchases of Stock Held in Treasury (298) (298) Retirement of Stock Held In Treasury (22,780) (29) (479) 508 -0- Two-for-One Stock Split 1,574,943 1,969 (1,969) Cash Dividend $.165 Per Share (518) (518) Securities Available-for- Sale Adjustment 567 567 --------- ------ ------ ------ -------- ------ ------- BALANCE AT DECEMBER 31, 1995 3,149,886 3,937 4,109 21,745 334 -0- 30,125 Net Income for the Three Months Ended March 31, 1996 1,285 1,285 Stock Options Exercised 6,500 8 10 18 Cash Dividend $.07 Per Share (221) (221) Securities Available-for- Sale Adjustment (210) (201) --------- ------ ------ ------- ------ ------ -------- BALANCE AT MARCH 31, 1996 $3,156,386 $3,945 $4,119 $22,809 $ 133 $ -0- $31,006 ========== ====== ====== ======= ======= ====== ======== The accompanying Notes should be read with these financial statements. 6 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1995 (Unaudited) (Unaudited) March 31, December 31, -------------------------- 1996 1995 1995 ---------- ---------- ---------- (In Thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 1,285 $ 1,076 $ 4,729 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 185 140 652 Net Premium Amortization of Investment Securities 93 130 445 Provision for Loan Losses 124 42 236 Net Decrease in Deferred Income Taxes 1 -0- 68 (Gain) Loss on Sale of Investment Securities (3) 10 10 Writedown of Other Real Estate 3 2 12 Net Gain From Sale of Other Real Estate -0- (60) (78) Net Gain on Sale of Premises and Equipment (1) -0- -0- Increase in Accrued Income and Other Assets (227) (395) (1,044) Increase in Accrued Expenses and Other Liabilities 648 629 297 ------ ------- -------- Total Adjustments 823 498 598 ------ ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,108 1,574 5,327 ------ ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Federal Funds Sold 1,325 4,795 (15,940) Proceeds from Matured and Prepaid Investment Securities * Held-to-Maturity 6,497 2,179 21,154 * Available-for-Sale 6,702 655 12,703 Proceeds from Sales of Investment Securities 5,020 2,951 2,969 Purchase of Investment Securities * Held-to-Maturity (10,121) (1,041) (27,616) * Available-for-Sale (12,068) -0- (12,482) Loans Originated and Principal Repayments, Net (10,509) (9,463) (39,724) Recoveries of Loans Previously Charged-Off 29 66 201 Proceeds from Sale of Premises and Equipment 1 -0- -0- Proceeds from Sale of Other Real Estate -0- 318 502 Purchases of Premises and Equipment (415) (272) (1,207) -------- ------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (13,539) 188 (59,440) -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 13,632 (4,682) 45,230 Net Increase in Certificates of Deposit 75 1,570 5,338 Net Increase (Decrease) in Repurchase Agreements (1,329) 1,208 9,000 Principal Payments of Notes Payable -0- (250) (250) Payments of Cash Dividends (221) (174) (692) Purchase of Treasury Stock -0- (210) (508) Proceeds from Stock Options Exercised 18 3 55 -------- ------ ------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 12,175 (2,535) 58,173 -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 744 (773) 4,060 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 22,480 18,420 18,420 ------- -------- -------- CASH AND DUE FROM BANKS AT END OF PERIOD $23,224 $17,647 $ 22,480 ======= ======== ========= 7 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1995 (Unaudited) SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES: (Unaudited) (Unaudited) March 31, December 31, ------------------------- 1995 1996 1995 ------------------------- ----------- (In Thousands) (1) Interest Paid $ 2,393 $ 1,735 $8,129 (2) Income Taxes Paid (Refund Received) -0- -0- 2,410 (3) Other Real Estate Acquired in Settlement of Loans -0- -0- -0- (4) Bank Financed Sales of Other Real Estate -0- -0- 100 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) NOTE 1 - Summary of Significant Accounting Policies The accounting and reporting policies of Summit Bancshares, Inc. (the "Corporation") and Subsidiaries are in accordance with generally accepted accounting principles. A summary of the more significant policies follows: BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Corporation include its accounts and those of its wholly-owned subsidiaries, Summit National Bank, Alta Mesa National Bank and Camp Bowie National Bank (the "Subsidiary Banks") and Summit Bancservices, Inc., a wholly-owned operations subsidiary. All significant intercompany balances and transactions have been eliminated. CASH AND DUE FROM BANKS The Subsidiary Banks are required to maintain certain balances at the Federal Reserve Bank based on their levels of deposits. During the first three months of 1996 the average cash balance maintained at the Federal Reserve Bank was $2,488,000. Compensating balances held at correspondent banks, to minimize service charges, averaged approximately $12,431,000 during the same three month period of 1996. INVESTMENT SECURITIES The Corporation follows Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in the accounting and reporting for investments in equity securities that have readily determined fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: - Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. The Corporation has the ability and intent to hold to maturity its investment securities classified as held-to-maturity; accordingly, no adjustment has been made for the excess, if any, of amortized cost over market. In determining the investment category classifications, management considers its asset/liability strategy, changes in interest rates and prepayment risk, the need to increase capital and other factors. Under certain circumstances (including the deterioration of the issuer's creditworthiness, a change in tax law, or statutory or regulatory requirements), the Corporation may change the investment security classification. All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to income over the contractual maturity or estimated life of the individual investment on the level yield method. Gain or loss on sale of investments is based upon the specific identification method and the gain or loss is recorded in non-interest income. Income earned on the Corporation's investments in state and political subdivisions is not taxable. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are stated at the principal amount outstanding less unearned discount and the allowance for loan osses. Unearned discount on installment loans is recognized as income over the terms of the loans by a method approximating the interest method. Interest income on all other loans is recognized based upon the principal amounts outstanding. The accrual of interest on a loan is discontinued when, in the opinion of management, there is doubt about the ability of the borrower to pay interest or principal. Interest previously earned, but uncollected on such loans, is written off. When loans are put on non-accrual all payments received are applied to the principal and no interest income is recorded until the loan is returned to accrual status or the principal has been reduced to zero. 9 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) In January 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan." Under the new standard, the 1995 allowance for loan losses related to loans that are identified for evaluation in accordance with Statement No. 114 (impaired loans) is based on discounted cash flows using the loan's initial effective rate or the fair value of the collateral for certain collateral dependent loans. Prior to 1995, the allowance for loan losses related to these loans was based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The allowance for loan losses is comprised of amounts charged against income in the form of a provision for loan losses as determined by management. Management's evaluation is based on a number of factors, including the Subsidiary Banks' loss experience in relation to outstanding loans and the existing level of the allowance, prevailing and prospective economic conditions, and management's continuing review of the discounted cash flow values of impaired loans and its evaluation of the quality of the loan portfolio. Loans are placed on non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets ranging from three to forty years. Maintenance and repairs are charged to operating expenses. Renewals and betterments are added to the asset accounts and depreciated over the periods benefitted. Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any gain or loss is reflected in the income and expense accounts. OTHER REAL ESTATE Other real estate is foreclosed property held pending disposition and is valued at the lower of its fair value or the recorded investment in the related loan. At foreclosure, if the fair value of the real estate acquired is less than the bank's recorded investment in the related loan, a writedown is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in non-interest expense. FEDERAL INCOME TAXES The Corporation joins with its Subsidiaries in filing a consolidated federal income tax return. The Subsidiaries pay to the parent a charge equivalent to their current federal income tax based on the separate taxable income of the Subsidiaries. The Corporation and the Subsidiaries maintain their records for financial reporting and income tax reporting purposes on the accrual basis of accounting. Deferred income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are provided for accumulated temporary differences due to basic differences for assets and liabilities for financial reporting and income tax purposes. STATE INCOME TAXES The Corporation and each of the Subsidiaries file separate state franchise tax returns. As a result of a state franchise tax law, the Corporation and the Subsidiaries are subject to a "state income tax." Since the basis for the state income tax is "federal income tax taxable income", less interest on U.S. Government Obligations, the Corporation had no state income tax liability in 1995 or during the first three months of 1996. CASH AND CASH EQUIVALENTS For the purpose of presentation in the Statements of Cash Flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and Due from Banks." RECLASSIFICATION Certain reclassifications have been made to the 1995 financial statements to conform to the 1996 presentation. 10 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) AUDITED FINANCIAL STATEMENTS The consolidated balance sheet as of December 31, 1995, and the consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1995 are headed "unaudited" in these financial statements. These statements were reported in the Securities Exchange Commission Form 10-K as of December 31, 1995 as "audited" but are required to be reflected in these statements as unaudited because of the absence of an independent auditor's report. NOTE 2 - Investment Securities A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands): March 31, 1996 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 31,060 $ 182 $ (168) $ 31,074 U.S. Government Agencies and Corporations 25,808 39 (77) 25,770 U.S. Government Agency Mortgage Backed Securities 11,175 13 (84) 11,104 Obligations of States and Political Subdivisions 70 -0- -0- 70 --------- ------ ------- ------- Total Held-to-Maturity Securities 68,113 234 (329) 68,018 --------- ------ ------- ------- Investment Securities - Available-for-Sale U.S. Treasury Securities 46,038 286 (198) 46,126 U.S. Government Agencies and Corporations 4,492 58 (5) 4,545 U.S. Government Agency Mortgage Backed Securities 3,845 62 (2) 3,905 Federal Reserve Bank Stock 254 -0- -0- 254 --------- ------ ------- -------- Total Available-for-Sale Securities 54,629 406 (205) 54,830 --------- ------ ------- -------- Total Investment Securities $ 122,742 $ 640 $ (534) $122,848 In the above schedule the AMORTIZED COST of Total Held-to-Maturity Securities of $68,113,000 and the FAIR VALUE of Total Available-for-Sale Securities of $54,830,000 are reflected in Investment Securities on the consolidated balance sheet as of March 31, 1996 for a total of $122,943,000. A net unrealized gain of $201,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. 11 NOTE 2 - Investment Securities (cont'd.) The carrying value of investment securities totaling $26,797,000 at March 31, 1996, were pledged to secure federal, state and municipal deposits and for other purposes as required or permitted by law. The fair value of these pledged securities totaled $26,820,000 at March 31, 1996. March 31, 1995 ----------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------------------------------------------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 37,204 $ 133 $ (787) $36,550 U.S. Government Agencies and Corporations 15,218 -0- (185) 15,033 U.S. Government Agency Mortgage Backed Securities 6,403 1 (239) 6,165 Obligations of States and Political Subdivisions 391 6 -0- 397 -------- ------ ------ ------ Total Held-to-Maturity Securities 59,216 140 (1,211) 58,145 -------- ------ ------- ------- Investment Securities - Available-for-Sale U.S. Treasury Securities 45,073 101 (469) 44,705 U.S. Government Agencies and Corporations 3,028 38 (27) 3,039 U.S. Government Agency Mortgage Backed Securities 3,591 23 (19) 3,595 Federal Reserve Bank Stock 254 -0- -0- 254 -------- ------ ------- Total Available-for-Sale Securities 51,946 162 (515) 51,593 -------- ------ ------- ------- Total Investment Securities $ 111,162 $ 302 $ (1,726) $109,738 ========= ===== ========= ======== In the above schedule the amortized cost of Total Held-to-Maturity Securities of $59,216,000 and the fair value of Total Available-for-Sale Securities of $51,593,000 are reflected in Investment Securities on the consolidated balance sheet as of March 31, 1995 for a total of $110,809,000. A net unrealized loss of $353,000 is included in the Available-for-Sale Investment Securities balance. The unrealized loss, net of tax benefit, is included in Shareholders; Equity. Proceeds from sales of investment securities were $5,020,000 and $2,951,000 during the first three months of 1996 and 1995, respectively and $2,969,000 during the year 1995. In the three months ended March 31, 1996, gains of $9,000 and losses of $6,000 were realized; a loss of $10,000 was realized for the three months ended March 31, 1995 and for the year ended December 31, 1995. NOTE 3 - Loans and Allowance for Loan Losses The book values of loans by major type follow (in thousands): March 31, December 31, -------------------------- ------------ 1996 1995 1995 -------- --------- ---------- Commercial $ 87,420 $ 69,443 $ 81,542 Real Estate Mortgage 66,546 54,781 64,200 Real Estate Construction 11,745 3,972 10,189 Loans to Individuals, Less Unearned Discount 23,242 20,078 22,562 ------- --------- -------- 188,953 148,274 178,493 Allowance for Loan Losses (2,653) (2,355) (2,500 ------- --------- ------- Loans - Net $186,300 $ 145,919 $ 175,993 ======== ========= ========= 12 NOTE 3 - Loans and Allowance for Loan Losses (cont'd.) Transactions in the allowance for loan losses are summarized as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------- ------------ 1996 1995 1995 ------- ------- ------- Balance, Beginning of Period $ 2,500 $ 2,410 $ 2,410 Provisions, Charged (Credited) to Income 124 42 236 Loans Charged-Off -0- (163) (347) Recoveries of Loans Previously Charged-Off 29 66 201 ------- -------- -------- Net Loans Charged-Off 29 (97) 146 ------- -------- -------- Balance, End of Period $ 2,653 $ 2,355 $ 2,500 ======= ======== ======== The provisions for loan losses charged to operating expenses during the three months ended March 31, 1996 and March 31, 1995 of $124,000 and $42,000, respectively, were considered adequate to maintain the allowance in accordance with the policy discussed in Note 1. For the year ended December 31, 1995 a provision of $236,000 was recorded. At March 31, 1996, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $230,000 (of which $230,000 were on non-accrual status). The related allowance for loan losses for these loans was $71,000. The average recorded investment in impaired loans during the three months ended March 31, 1996 was approximately $205,000. For this period the Corporation recognized no interest income on these impaired loans. NOTE 4 - Premises and Equipment The investment in premises and equipment stated at cost and net of accumulated amortization and depreciation is as follows (in thousands): March 31, December 31, --------------------------- ------------ 1996 1995 1995 ------------ ------------ ------------ Land $ 1,442 $ 1,264 $ 1,279 Buildings and Improvements 7,296 6,816 7,115 Furniture & Equipment 5,107 4,661 5,051 --------- --------- -------- Total Cost 13,845 12,741 13,445 Less: Accumulated Amortization and Depreciation (6,458) (6,007) (6,288) --------- --------- -------- Net Book Value $ 7,387 $ 6,734 $ 7,157 ========= ========= ======== NOTE 5 - Other Real Estate The carrying value of other real estate is as follows (in thousands): March 31, December 31, ------------------------- ----------- 1996 1995 1995 -------- --------- --------- Other Real Estate $ 145 $ 426 $ 148 Valuation Reserve (35) (35) (35) -------- -------- -------- Net Other Real Estate $ 110 $ 391 $ 113 ======= ======= ======== 13 NOTE 5 - Other Real Estate (cont'd.) Transactions in the valuation reserve are summarized as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------- ----------- 1996 1995 1995 ----- ----- ---------- Balance, Beginning of Period $ 35 $ 35 $ 35 Provisions Charged to Income -0- -0- -0- Reductions from Sales -0- -0- -0- ----- ----- ----- Balance, End of Period $ 35 $ 35 $ 35 ===== ===== ===== In addition to the above provisions, direct writedowns of other real estate charged to income were $3,000 for the three months ended March 31, 1996 and $2,000 for the three months ended March 31, 1995. NOTE 6 - Deposits The book values of deposits by major type follow (in thousands): March 31, -------------------------- December 31, 1996 1995 1995 --------- --------- ----------- Noninterest-Bearing Demand Deposits $ 89,119 $ 69,537 $ 89,184 Interest-Bearing Deposits: --------- --------- --------- Interest-Bearing Transaction Accounts 115,886 99,603 110,160 Savings 45,179 17,501 36,870 Savings Certificates - Time 48,514 46,389 49,005 Certificates of Deposits $100,000 or more 24,779 23,161 24,551 Other 339 237 339 --------- --------- --------- Total 234,697 186,891 220,925 --------- --------- --------- Total Deposits $ 323,816 $ 256,428 $ 310,109 ========= ========= ========= NOTE 7 - Other Non-Interest Expense The significant components of other non-interest expense are as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------- ------------ 1996 1995 1995 ----------- ----------- ------------ Business Development $ 105 $ 103 $ 443 Legal and Professional Fees 98 112 479 Printing and Supplies 80 48 289 Regulatory Fees and Assessments 51 170 411 Other 417 357 1,144 ----- ----- ------- Total $ 751 $ 790 $ 2,766 ===== ===== ======= 14 NOTE 8 - Income Taxes Federal income taxes included in the consolidated balance sheets were as follows (in thousands): March 31, December 31, ----------------------- ----------- 1996 1995 1995 ------- -------- ----------- Current Tax Asset (Liability) $ (675) $ (525) $ 10 Deferred Tax Asset 338 569 235 ------- ------- ----- Total Included in Other Assets/ (Other Liabilities) $ (337) $ 44 $ 245 ======= ======= ===== The deferred tax asset at March 31, 1996 of $338,000 included $68,000 related to unrealized gains on Available-for-Sale Securities. The components of income tax expense were as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------- ------------ 1996 1995 1995 ------------ ----------- ------------ Federal Income Tax Expense Current $ 685 $ 525 $ 2,400 Deferred (8) 29 68 ------- ------ ------- Total Federal Income Tax Expense $ 677 $ 554 $ 2,468 ======= ====== ======= Effective Tax Rates 34.2% 34.0% 34.3% ======= ====== ======= The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to operating earnings are as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------- ----------- 1996 1995 1995 ------ ------ ------- Federal Income Taxes at Statutory Rate of 34% $ 667 $ 554 $ 2,447 Effect of Tax Exempt Interest Income (3) (17) (19) Other 13 17 40 ------ ------ -------- Income Taxes Per Income Statement $ 677 $ 554 $ 2,468 ====== ====== ======== NOTE 9 - Related Party Transactions The Subsidiary Banks have transactions made in the ordinary course of business with certain of its officers, directors and their affiliates. All loans included in such transactions are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons. Total loans outstanding to such parties amounted to approximately $3,769,000 at December 31, 1995. NOTE 10 - Commitments and Contingent Liabilities In the normal course of business, there are various outstanding commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the financial statements. No losses are anticipated as a result of these transactions. Commitments are most frequently extended for real estate, commercial and industrial loans. At March 31, 1996, outstanding documentary and standby letters of credit totaled $4,566,000 and commitments to extend credit totaled $ 69,281,000. 15 NOTE 11 - Stock Option Plans In 1982, the Corporation established an Incentive Stock Option Plan ("1982 Plan") and reserved 30,000 shares of common stock for grant thereunder. The 30,000 reserved shares were subsequently amended and increased in April 1993 and December 1995 to 240,000 as a result of two-for-one stock splits. The Plan, which expired in 1992, provided for the granting to management employees of Summit Bancshares, Inc. and subsidiaries incentive stock options, as defined under current tax laws. The outstanding options continue to be exercisable and will be exercisable for ten years from the date of grant of May 1991. In 1993, the Corporation established a similar Incentive Stock Option Plan ("1993 Plan") and reserved 300,000 shares (adjusted for the April 1993 and December 1995 two-for-one stock splits) of common stock for grant thereunder. The 1993 Plan provides for the granting to management employees of Summit Bancshares, Inc. and subsidiaries, incentive stock options, as defined under the current tax law. The options under the 1993 Plan will be exercisable for ten years from the date of grant and generally vest ratably over a five year period. Options under both plans will be and have been granted at prices which will not be less than 100-110% of the fair market value of the underlying common stock at the date of grant. The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Since the option prices are considered to approximate fair market value at date of grant, no compensation expense has been reported. The following is a summary of transactions during the periods presented: Shares Under Option --------------------------------------- Three Months Ended Year Ended March 31, 1996 December 31, 1995 --------------- ----------------- Outstanding, Beginning of Period 301,400 303,400 Additional Options Granted During the Period -0- 38,000 Forfeited During the Period -0- -0- Exercised During the Period 6,500 (40,000) -------- -------- Outstanding, End of Period 294,900 301,400 ======== ======== Options outstanding at March 31, 1996 ranged in price from $1.875 to $13.94 per share with 221,380 shares exercisable. There remain 53,320 shares reserved for future grants of options under the 1993 Plan. NOTE 12 - Employee Benefit Plans The Corporation has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation history. The employee's compensation used in the benefit calculation is the highest average for any five consecutive years of employment within the employee's last ten years of employment. Funding for the plan is provided by employer contributions to trust funds in amounts determined by actuarial assumptions and valuation of the plan. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. 16 NOTE 12 - Employee Benefit Plans (cont'd.) The table below sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheets at December 31 (in thousands): 1995 1994 --------- --------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,152,000 in 1995 and $1,034,000 in 1994 $ (1,183) $ (1,072) Projected benefit obligation for service rendered to date $ (1,912) $ (1,731) Plan assets at fair value, primarily listed stocks and U.S. bonds 1,786 1,616 Plan assets in excess of projected benefit obligation (126) (115) Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions 197 48 Prior service cost not yet recognized in net periodic pension cost 17 20 Net pension cost included in other assets/(other liabilities) $ 88 $ (47) Net pension cost included the following components (in thousands): Year Ended December 31, ------------------------- 1995 1994 --------- --------- Service Cost - benefits earned during the period $ 151 $ 111 Interest cost on projected benefit obligation 140 130 Less: Actual return on plan assets (260) (133) Net amortization and deferral 148 5 Net periodic pension cost $ 179 $ 113 The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.5 percent and 5 percent at December 31, 1995 and 1994. The expected long-term rate of return on plan assets in 1995 was 9 percent. The market value of plan assets at March 31, 1996 was $2,089,000. There was a contribution to the plan during 1996 of $313,000 and prepaid pension cost at March 31, 1996 was $248,000. MANAGEMENT SECURITY PLAN In 1992, the Corporation established a Management Security Plan to provide key employees with retirement, death or disability benefits in addition to those provided by the Pension Plan. The expense charged to operations for such future obligations was $56,000 and $42,000 during the first three months of 1996 and 1995, respectively, and $173,000 for the year 1995. OTHER POST RETIREMENT BENEFITS The Corporation provides certain health care benefits for certain retired employees who bear all costs of these benefits. These benefits are covered under the "Consolidated Omnibus Budget Reconciliation Act" (COBRA). 17 NOTE 13 - Earnings per Share Earnings per share of common stock are based on the weighed average number of shares outstanding during the periods as follows: Shares Periods of Three Months Ended: ------ March 31, 1996 3,154,326 March 31, 1995 3,150,260 Year Ended December 31, 1995 3,139,230 NOTE 14 - Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments, standby letters of credit and documentary letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Corporation's exposure to credit loss in the event of non-performance by the other party of these loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The total contractual amounts of financial instruments with off-balance sheet risk are as follows (in thousands): March 31, -------------------- 1996 1995 --------- -------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $ 69,281 $ 47,945 Documentary and Standby Letters of Credit 4,566 3,876 Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner occupied real estate and income-producing commercial properties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. NOTE 15 - Concentrations of Credit Risk The Subsidiary Banks grant commercial, consumer and real estate loans in their direct market which is defined as Fort Worth and its surrounding area. Although its Subsidiary Banks have diversified loan portfolios, a substantial portion of its debtors' abilities to honor their contracts is dependent upon the strength of the local and state economy. NOTE 16 - Litigation Certain of the Subsidiary Banks are involved in legal actions arising in the ordinary course of business. It is the opinion of legal counsel that the settlement of these matters will not materially affect the Corporation's financial position. 18 NOTE 17 - Stock Repurchase Plan On April 19, 1995, the Board of Directors approved a stock repurchase plan. The plan authorized mananagement to purchase up to 78,446 shares of the Corporation's common stock over the next twelve months through the open market or in privately negotiated transactions in accordance with all applicable state and federal laws and regulations. In 1995, 22,780 shares were purchased by the Corporation through the open market and canceled. In the first three months of 1996, no shares were purchased. NOTE 18 - Subsequent Event On April 16, 1996, the Board of Directors of the Corporation approved a quarterly dividend of $.07 per share to be paid on May 15, 1996 to shareholders of record on May 1, 1996. Also on April 16, 1996, the Board of Directors approved a renewal of the stock repurchase plan, thereby authorizing the purchase of up to 157,819 shares of the Corporation's common stock over the next twelve months. NOTE 19 - Fair Values of Financial Instruments The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate those assets' fair values. INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED 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, fair values are based on carrying values. The fair values for fixed rate loans such as mortgage loans (e.g., one-to-four family residential) and installment loans are estimated using discounted cash flow analysis. The carrying amount of accrued interest receivable approximates its fair value. DEPOSIT LIABILITIES: The fair value disclosed for interest bearing and noninterest-bearing demand deposits, passbook savings, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date or their carrying amounts. 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. SHORT-TERM BORROWINGS: The carrying amounts of borrowings under repurchase agreements approximate their fair values. NOTES PAYABLE: The fair value of the Corporation's note payable is based on its carrying amount at the reporting date. The estimated fair values of the Corporation's financial instruments are as follows (in thousands): March 31, -------------------------------------------------- 1996 1995 --------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- ------- --------- -------- Financial Assets Cash and due from banks $ 23,224 $ 23,224 $ 17,647 $ 17,647 Federal funds sold 24,355 24,355 4,945 4,945 Securities 122,943 120,591 110,809 109,738 Loans 188,953 189,465 148,274 148,185 Financial Liabilities Deposits 323,816 324,090 256,428 256,488 Securities sold under repurchase agreements 12,199 12,199 5,736 5,736 Off-balance Sheet Financial Instruments Loan commitments 69,281 47,945 Letters of credit 4,566 3,876 19 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Net income for the first quarter of 1996 was $1,285,000, or $.41 per share, compared with $1,076,000, or $.34 per share, for the first quarter of 1995. Per share amounts are based on average shares outstanding of 3,154,326 for the first quarter of 1996 and 3,150,260 for the comparable period of 1995 (restated for a two-for-one stock split that occurred in December 1995). On a per share basis, net income increased 20.6% over the first quarter of the prior year. Outstanding loans at March 31, 1996 of $189.0 million represented an increase of $40.7 million, or 27.4%, over March 31, 1995 and an increase of $10.5 million, or 5.9%, from December 31, 1995. Total deposits at March 31, 1996 of $323.8 million represented an increase of $67.4 million, or 26.3%, over March 31, 1995 and a increase of $13.7 million, or 4.4%, from December 31, 1995. In the first quarter, net interest income increased 23.2% over the previous year. An increase in non-interest expense of 15.2% partially offset the increase in net interest income. The following table summarizes the Corporation's performance for the three months ended March 31, 1996 and 1995 (tax equivalent basis and dollars in thousands). Three Months Ended March 31, ---------------------- 1996 1995 ------ ------ Interest Income $6,504 $5,111 Interest Expense 2,363 1,746 ------ ------ Net Interest Income 4,141 3,365 Provision for Loan Loss 124 42 ------ ------ Net Interest Income After Provision for Loan Loss 4,017 3,323 Non-Interest Income 729 727 Non-Interest Expense 2,778 2,412 ------ ------ Income Before Income Tax 1,968 1,638 Income Tax Expense 683 562 ------ ------ Net Income $1,285 $1,076 ====== ====== Net Income per Share $ .41 $ .34 Return on Average Assets 1.46% 1.54% Return on Average Stockholders' Equity*<FN1> 17.16% 16.55% <FOOTNOTE> *Before adjustment for unrealized gains and losses on Available-for-Sale securities. </FOOTNOTE> 20 SUMMARY OF EARNING ASSETS AND INTEREST-BEARING LIABILITIES The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the first quarter of 1996 and 1995 (rates on tax equivalent basis). Three Months Ended March 31, -------------------------------------------------------------- 1996 1995 ------------------------------ ----------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate --------- -------- ---------- -------- -------- ---------- (Dollars in Thousands) Earning Assets: Federal Funds Sold $ 20,324 $ 277 5.42% $ 3,811 $ 61 5.65% Investment Securities (Taxable) 119,321 1,789 6.02 112,424 1,638 5.85 Investment Securities (Tax-exempt) 70 2 10.99 393 12 11.78 Loans, Net of Unearned Discount<FN1> 184,454 4,436 9.67 142,731 3,400 9.66 -------- ------ -------- ------- Total Earning Assets 324,169 6,504 8.07 259,359 5,111 7.98 ------ ------- Non-interest Earning Assets: Cash and Due From Banks 19,740 15,683 Other Assets 11,884 10,872 Allowance for Loan Losses (2,546) (2,383) -------- ------- Total Assets $353,247 $283,531 ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts $ 113,248 928 3.29 $100,760 825 3.32 Savings 40,618 409 4.05 17,008 112 2.67 Savings Certificates 48,878 598 4.92 45,568 488 4.34 Certificates of Deposit $100,000 or more 24,457 306 5.03 22,757 255 4.55 Other Time 339 5 5.39 237 3 4.46 Other Borrowings 10,836 117 4.36 4,235 62 5.74 Notes Payable -0- -0- -0- 44 1 9.56 -------- ------ ------- ----- Total Interest-Bearing Liabilities 238,376 2,363 3.99 190,609 1,746 3.70 ------ ----- Non-interest Bearing Liabilities: Demand Deposits 82,189 66,009 Other Liabilities 2,180 1,227 Shareholders' Equity 30,502 25,686 -------- -------- Total Liabilities and Shareholders' Equity $ 353,247 $283,531 ========= ======== Net Interest Income and Margin (Tax-equivalent Basis)<FN2> $ 4,141 5.14 $ 3,365 5.26 ======= ======= <FOOTNOTE> (1) Loan interest income includes fees and loan volumes include loans on non-accrual. (2) Presented on a tax equivalent basis ("T/E") using a federal income tax rate of 34% in both years. </FOOTNOTE> 21 NET INTEREST INCOME Net interest income (tax equivalent) for the first quarter of 1996 was $4,141,000 which represented an increase of $776,000, or 23.1%, over the first quarter of 1995. This increase was heavily contributed to by a 29.2% increase in average loans for the first quarter of 1996 versus the same quarter last year. The following table summarizes the effects of changes in interest rates, average volumes of earning assets and interest bearing liabilities on net interest income ( tax equivalent) for the periods ended March 31, 1996 and 1995. ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands) 1st Qtr. 1996 vs. 1st Qtr. 1995 1st Qtr. 1995 vs. 1st Qtr. 1994 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: ------------------------------- ------------------------------ Volume Rate Total Volume Rate Total ------ ------- ------- -------- ------ ------- Interest Earning Assets: Federal Funds Sold $ 231 $ (15) $ 216 $ (301) $ 260 $ (41) Investment Securities (Taxable) 102 49 151 (47) 210 163 Investment Securities (Tax-exempt) (9) (1) (10) (4) 2 (2) Loans, Net of Unearned Discount 1,032 4 1,036 340 457 797 ------- ----- ------- ------ ---- ----- Total Interest Income 1,356 37 1,393 (12) 929 917 ------- ----- ------- ------ ---- ----- Interest-Bearing Liabilities: Deposits 407 156 563 (147) 626 479 Other Borrowings 149 (94) 55 19 23 42 Notes Payable (1) -0- (1) (20) 15 (5) ------ ----- ------- ------ ---- ----- Total Interest Expense 555 62 617 (148) 664 516 ------ ----- ------- ------ ---- ----- Net Interest Income $ 801 $ (25) $ 776 $ 136 $ 265 $ 401 ====== ====== ======= ====== ===== ===== ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING ASSETS The Corporation's allowance for loan losses was $2,653,000, or 1.40% of total loans, as of March 31, 1996 compared to $2,355,000, or 1.59% of total loans, as of March 31, 1995. Transactions in the allowance for loan losses are summarized as follows (in thousands): Three Months Ended March 31, ------- ------- 1996 1995 ------- ------- Balance, Beginning of Period $ 2,500 $ 2,410 Provisions, Charged to Income 124 42 Loans Charged-Off -0- (163) Recoveries of Loans Previously Charged-Off 29 66 -------- -------- Net Loans Charged-Off 29 (97) -------- -------- Balance, End of Period $ 2,653 $ 2,355 ======== ======== 22 The following table summarizes the non-performing assets as of the end of the last five quarters (in thousands). March 31, December 31, September 30, June 30, March 31, 1996 1995 1995 1995 1995 -------- ------------ ------------- -------- --------- Non-Accrual Loans $ 1,066 $ 990 $ 1,247 $ 372 $ 368 Other Real Estate Owned 110 113 345 348 391 Renegotiated Loans -0- -0- -0- -0- -0- -------- ------- ------- ------ ------ Total Non-Performing Assets $ 1,176 $ 1,103 $ 1,592 $ 720 $ 759 ======== ======= ======= ====== ====== Non-accrual loans to total loans were .56% at March 31, 1996 and non-performing assets were .62% of loans and other real estate owned at the same date. NON-INTEREST INCOME The major component of non-interest income is service charges on deposits. Other service fees are the majority of other non-interest income. The following table reflects the changes in non-interest income during the periods presented (dollars in thousands). Three Months Ended March 31, ------------------------------ 1996 1995 % Change ------- ------- -------- Service Charges on Deposit Accounts $ 385 $ 384 .3% Gains (Loss) on Sale of Investment Securities 3 (10) -- Non-recurring Income 32 126 -- Other Non-interest Income 309 227 36.1 ----- ----- Total Non-interest Income $ 729 $ 727 .3% ===== ===== Non-recurring income is primarily interest recovered on loans charged-off in prior years. The increase in other non-interest income was primarily due to increases in fees earned from investment brokerage services. NON-INTEREST EXPENSE Non-interest expenses include all expenses other than interest expense, loan loss provision and income tax expense. The following table summarizes the changes in non-interest expense during the periods presented (dollars in thousands). Three Months Ended March 31, ------------------------------------ 1996 1995 % Change -------- -------- ---------- Salaries & Employee Benefits 1,655 1,380 19.9% Occupancy Expense - Net 180 167 7.8 Furniture and Equipment Expense 197 152 29.6 Other Real Estate Expense - Net (5) (77) -- Other Expenses: Business Development 105 103 1.9 Insurance - Other 27 25 8.0 Legal & Professional Fees 98 112 (12.5) Taxes - Other 23 22 4.5 Postage & Courier 74 60 23.3 Printing & Supplies 80 48 66.7 Regulatory Fees & Assessments 51 170 (70.0) Other Operating Expenses 293 250 17.2 ----- ----- Total Other Expenses 751 790 (4.9) ----- ----- Total Non-interest Expense $ 2,778 $ 2,412 15.2 ======= ======= Total non-interest expense increased 15.2% in the first quarter of 1996 over 1995, reflecting increases in salaries and benefits, furniture and equipment expenses, postage and courier expenses and other operating expenses. As a percent of average assets, non-interest expenses were 3.16% in the first quarter of 1996 and 3.45% in in the same period of 1995. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 57.2% for the first quarter of 1996. These 23 measures of operating efficiency compare very favorably to other financial institutions in the Corporation's peer group. The increase in salaries and employee benefits for the first quarter of 1996 is due to salary merit increases, incentive compensation accrual increases, and an increase in pension plan expense. Also, the average number of full-time equivalent employees increased by eleven in the first quarter of 1996 to an average full-time equivalent of 134. The increases for salaries and number of employees include additions for a branch office opened in mid year of 1995. The increase in furniture and equipment expense is primarily a result of increased depreciation for a new communication system installed in 1995, furniture acquired in late 1995 for the new branch office, and acceleration of depreciation on certain item processing equipment. Postage and courier expenses increased because of additional customer mailings in the first quater of 1996. Regulatory fees and assessments declined in the first quarter of 1996 because of a decrease in mid 1995 in FDIC insurance premiums on deposits. Other operating expenses increased in the first quarter of 1996 due to an increase in various miscellaneous operating costs. INTEREST RATE SENSITIVITY Interest rate sensitivity is the relationship between changes in market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The following table, commonly referred to as a "static gap report", indicates the interest rate sensitivity position at March 31, 1996 and may not be reflective of positions in subsequent periods (dollars in thousands): Total Repriced Matures or Reprices within: Rate After ------------------------------------- Sensitive 1 Year or 30 Days 31-90 91-180 181 to One Year Non-interest or Less Days Days One Year or Less Sensitive Total -------- ------- -------- -------- --------- ------------ --------- Earning Assets: Loans $ 103,130 $ 8,026 $ 11,413 $ 18,128 $ 140,697 $ 48,256 $ 188,953 Investment Securities 7,751 7,763 10,858 22,850 49,222 73,721 122,943 Federal Funds Sold 24,355 -0- -0- -0- 24,355 -0- 24,355 --------- ------- ------- ------- -------- -------- --------- Total Earning Assets 135,236 15,789 22,271 40,978 214,274 121,977 336,251 --------- ------- ------- ------- -------- -------- --------- Interest Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 161,065 -0- -0- -0- 161,065 -0- 161,065 Certification of Deposits >$100,000 11,214 3,748 4,475 4,789 24,226 553 24,779 Other Time Deposits 3,166 9,426 13,283 16,776 42,651 6,202 48,853 Repurchase Agreements 12,199 -0- -0- -0- 12,199 -0- 12,199 -------- ------ ------ ------ ------ -------- Total Interest Bearing Liabilities 187,644 13,174 17,758 21,565 240,141 6,755 246,896 -------- ------ ------ ------ ------- -------- -------- Interest Sensitivity Gap $ (52,408) $ 2,615 $ 4,513 $ 19,413 $ (25,867) $ 115,222 $ 89,355 ========= ======== ======== ======== ========= ========= ========= Cumulative Gap $ (52,408) $(49,793) $(45,280) $(25,867) ========= ======== ======== ======== Cumulative Gap to Total Earning Assets (15.6%) (14.8%) (13.5%) (7.7%) Cumulative Gap to Total Assets (14.2%) (13.5%) (12.3%) (7.0%) 24 The preceding static gap report reflects a cumulative liability sensitive position during the one year horizon. An inherent weakness of this report is that it ignores the relative volatility any one category of assets liability may have in relation to other categories or market rates in general. For instance, the rate paid on NOW accounts typically moves slower than the three month T-Bill. Management attempts to capture this relative volatility by utilizing a simulation model with a "beta factor" adjustment which estimates the volatility of rate sensitive assets and/or liabilities in relation to other market rates. Beta factors are an estimation of the long term, multiple interest rate environment relation between an individual account and market rates in general. For instance, NOW, savings and money market accounts, which are repriceable within 30 days will have considerably lower beta factors than variable rate loans and most investment categories. Taking this into consideration, it is quite possible for a bank with a negative cumulative gap to total asset ratio to have a positive "beta adjusted" gap risk position. As a result of applying the beta factors established by management to the earning assets and interest bearing liabilities in the static gap report via a simulation model, the negative cumulative gap to total assets ratio at one year of 7.0% was reversed to a positive 15.1% "beta adjusted" gap position. Management feels that the "beta adjusted" gap risk technique more accurately reflects the Corporation's gap position. CAPITAL The Federal Reserve Board has guidelines for capital to total assets (leverage) and capital standards for bank holding companies. The Comptroller of the Currency also has similar guidelines for national banks. These guidelines require a minimum level of Tier I capital to total assets of 3 percent. A banking organization operating at or near these levels is expected to have well-diversified risk, excellent asset quality, high liquidity, good earnings and in general be considered a strong banking organization. Organizations not meeting these characteristics are expected to operate well above these minimum capital standards. Thus, for all but the most highly rated organizations, the minimum Tier I leverage ratio is to be 3 percent plus minimum additional cushions of at least 100 to 200 basis points. At the discretion of the regulatory authorities, additional capital may be required. At March 31, 1996, total capital to total assets was 8.34%. Also, the Federal Reserve Board and Comptroller of the Currency officially announced risk-adjusted capital adequacy guidelines that became effective in stages at the end of 1990. Capital under these new guidelines is defined as Tier I and Tier II. At Summit Bancshares, Inc. the only components of Tier I and Tier II capital are shareholders' equity and a portion of the allowance for loan losses, respectively. The guidelines also stipulate that four categories of risk weights (0, 20, 50 and 100 percent), primarily based on the relative credit risk of the counterparty, be applied to the different types of balance sheet assets. Risk weights for all off-balance sheet exposures are determined by a two-step process whereby the face value of the off-balance sheet item is converted to a "credit equivalent amount" and that amount is assigned to the appropriate risk category. The regulatory minimum ratio for total qualifying capital is 8.00% of which 4.00% must be Tier I capital. At March 31, 1996, the Corporation's Tier I capital represented 14.42% of risk weighted assets and total qualifying capital (Tier I and Tier II) represented 15.65% of risk weighted assets. Both ratios are well above current regulatory guidelines. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Change in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Computation of Earnings Per Common Share 27 Financial Data Schedule (b) No Reports on Form 8-K were filed during the period ending March 31, 1996 26 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. SUMMIT BANCSHARES, INC. Registrant Date: April 30, 1996 By: /s/ Philip E. Norwood -------------- ------------------------------- Philip E. Norwood, President and Chief Executive Officer Date: April 30, 1996 By: /s/ Bob G. Scott ------------------------------- Bob G. Scott, Senior Vice President and Chief Financial Officer 27 EXHIBIT INDEX Exhibit Page No. - ------- -------- 11 Computation of Earnings Per Common Share 27 Financial Data Schedule