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, 2000; 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, 2000 was 6,431,285 shares. SUMMIT BANCSHARES, INC. INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2000 and 1999 and at December 31, 1999 4 Consolidated Statements of Income for the Three Months Ended March 31, 2000 and 1999 and for the Year Ended December 31, 1999 5 Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 2000 and 1999 and for the Year Ended December 31, 1999 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999 and for the Year Ended December 31, 1999 7 Notes to Consolidated Financial Statements for the Three Months Ended March 31, 2000 and 1999 and for the Year Ended December 31, 1999 8-19 The March 31, 2000 and 1999 and the December 31, 1999 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, 2000 and 1999 21-26 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, ------------------------------------ 2000 1999 1999 ---------------- ------------- ----------- ASSETS (In Thousands) CASH AND DUE FROM BANKS - NOTE 1 $ 26,506 $ 23,371 $ 19,092 FEDERAL FUNDS SOLD 25,820 16,800 18,012 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 119,272 117,953 129,116 Securities Held-to-Maturity, at cost (fair value of $25,345,000, $30,424,000 and $26,739,000 March 31, 2000 and 1999 and December 31, 1999, respectively) 26,032 30,344 27,324 LOANS - NOTE 3 Loans, Net of Unearned Discount 370,125 318,795 355,414 Allowance for Loan Losses (5,440) (4,749) (5,169) ---------- ----------- ---------- LOANS, NET 364,685 314,046 350,245 PREMISES AND EQUIPMENT - NOTE 4 8,442 9,136 8,562 ACCRUED INCOME RECEIVABLE 4,557 3,995 4,503 OTHER REAL ESTATE - NOTE 5 1,945 1,711 1,947 OTHER ASSETS - NOTE 9 5,287 3,902 5,985 ---------- ----------- ---------- TOTAL ASSETS $ 582,546 $ 521,258 $ 564,786 ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $ 133,389 $ 128,232 $ 128,685 Interest-Bearing 368,435 327,151 351,861 ---------- ----------- ---------- TOTAL DEPOSITS 501,824 455,383 480,546 SHORT TERM BORROWINGS - NOTE 7 28,438 16,533 32,091 ACCRUED INTEREST PAYABLE 610 603 576 OTHER LIABILITIES 2,091 2,167 2,864 ---------- ----------- ---------- TOTAL LIABILITIES 532,963 474,686 516,077 ---------- ----------- ---------- COMMITMENTS AND CONTINGENCIES - NOTE 11, 13 and 17 SHAREHOLDERS' EQUITY - NOTES 12, 14 AND 18 Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 6,431,285 and 6,506,347 shares issued and outstanding at March 31, 2000 and 1999 and 6,361,247 at December 31, 1999, respectively 8,039 8,133 7,952 Capital Surplus 6,641 6,412 6,469 Retained Earnings 37,281 32,835 35,474 Accumulated Other Comprehensive Income-Unrealized Gain (Loss) On Available-for-Sale Investment Securities, Net of Tax (1,498) 273 (1,186) Treasury Stock at Cost (51,644 and 61,700 shares at March 31, 2000 and 1999, respectively) (880) (1,081) -0- ---------- ----------- ---------- TOTAL SHAREHOLDERS' EQUITY 49,583 46,572 48,709 ---------- ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 582,546 $ 521,258 $ 564,786 ========== =========== ========== The accompanying Notes should be read with these financial statements. 4 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Unaudited) For the Three Months Ended March 31, Year Ended December 31, ------------------------------------ 2000 1999 1999 ---------------- ----------------- ----------------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $ 8,681 $ 7,009 $ 30,620 Interest and Dividends on Investment Securities: Taxable 2,287 2,072 8,495 Exempt from Federal Income Taxes 6 10 35 Interest on Federal Funds Sold 176 303 1,082 -------- ------- -------- TOTAL INTEREST INCOME 11,150 9,394 40,232 -------- ------- -------- INTEREST EXPENSE Interest on Deposits 3,740 3,094 12,837 Interest on Short Term Borrowings 351 160 926 Interest on Note Payable -0- -0- 9 -------- ------- -------- TOTAL INTEREST EXPENSE 4,091 3,254 13,772 -------- ------- -------- NET INTEREST INCOME 7,059 6,140 26,460 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 232 220 1,001 -------- ------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,827 5,920 25,459 -------- ------- -------- NON-INTEREST INCOME Service Charges and Fees on Deposits 482 478 2,002 Net Gain (Loss) on Sale of Investment Securities -0- -0- (3) Other Income 426 553 1,881 -------- ------- -------- TOTAL NON-INTEREST INCOME 908 1,031 3,880 -------- ------- -------- NON-INTEREST EXPENSE Salaries and Employee Benefits 2,357 2,141 9,226 Occupancy Expense - Net 258 245 1,031 Furniture and Equipment Expense 338 283 1,202 Other Real Estate Owned (Income) Expense - Net (12) 27 107 Other Expense - NOTE 8 1,052 1,042 3,658 -------- ------- -------- TOTAL NON-INTEREST EXPENSE 3,993 3,738 15,224 -------- ------- -------- INCOME BEFORE INCOME TAXES 3,742 3,213 14,115 APPLICABLE INCOME TAXES - NOTE 9 1,292 1,117 4,893 -------- ------- -------- NET INCOME $ 2,450 $ 2,096 $ 9,222 ======== ======= ======== NET INCOME PER SHARE - NOTE 14 Basic $ .38 $ .33 $ 1.44 Diluted .37 .31 1.39 The accompanying Notes should be read with these financial statements. 5 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONSOLIDATED AND COMPANY ONLY FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 AND FOR THE YEAR ENDED DECEMBER 31, 1999 (Unaudited) Accumulated Other Comprehensive Income - Net Unrealized Gain (Loss) on Total Common Stock Capital Retained Investment Treasury Shareholders' ----------------------- Shares Amount Surplus Earnings Securities Stock Equity - -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) BALANCE AT JANUARY 1, 1999 6,471,827 $ 8,090 $ 6,329 $ 31,271 $ 560 $ (15) $ 46,235 Stock Options Exercised 35,320 44 83 127 Purchases of Stock Held in Treasury (1,081) (1,081) Retirement of Stock Held in Treasury (800) (1) (14) 15 -0- Cash Dividend - $.08 Per Share (518) (518) Net Income for the Three Months Ended March 31, 1999 2,096 2,096 Securities Available- for-Sale Adjustment (287) (287) ---------- Total Comprehensive Income 1,809 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT MARCH 31, 1999 6,506,347 8,133 6,412 32,835 273 (1,081) 46,572 Stock Options Exercised 28,000 35 57 92 Purchases of Stock Held in Treasury (2,088) (2,088) Retirement of Stock Held in Treasury (173,100) (216) (2,953) 3,169 -0- Cash Dividend - $.24 Per Share (1,534) (1,534) Net Income for the Nine Months Ended December 31, 1999 7,126 7,126 Securities Available- for-Sale Adjustment (1,459) (1,459) ---------- Total Comprehensive Income 5,667 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1999 6,361,247 7,952 6,469 35,474 (1,186) -0- 48,709 Stock Options Exercised 70,038 87 172 259 Purchases of Stock Held in Treasury (880) (880) Cash Dividend - $.10 Per Share (643) (643) Net Income for the Three Months Ended March 31, 2000 2,450 2,450 Securities Available- for-Sale Adjustment (312) (312) ---------- Total Comprehensive Income 2,138 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT MARCH 31, 2000 6,431,285 $ 8,039 $ 6,641 $ 37,281 $ (1,498) $ (880) $ 49,583 ========== ========== ========== ========== ========== ========== ========== The accompanying Notes should be read with these financial statements. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 AND FOR THE YEAR ENDED DECEMBER 31, 1999 (Unaudited) (Unaudited) March 31, December 31, ------------------------------------ 2000 1999 1999 ------------- ------------ ------------- (In Thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 2,450 $ 2,096 $ 9,222 ---------- --------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 264 260 1,081 Net Discount Accretion of Investment Securities (15) (121) (39) Provision for Loan Losses 232 220 1,001 Deferred Income Tax Benefit (48) (10) (385) Net Loss on Sale of Investment Securities -0- -0- 3 Writedown of Other Real Estate 5 -0- -0- Net Gain From Sale of Other Real Estate -0- -0- (36) Net Gain on Sale of Premises and Equipment -0- -0- (105) Decrease (Increase) in Accrued Income and Other Assets 900 1,204 (33) Increase (Decrease) in Accrued Expenses and Other Liabilities (738) (420) 250 ---------- --------- --------- Total Adjustments 600 1,133 1,737 ---------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,050 3,229 10,959 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Federal Funds Sold (7,808) 21,906 20,694 Proceeds from Matured and Prepaid Investment Securities . Held-to-Maturity 285 2,280 4,280 . Available-for-Sale 625 36,413 63,531 Proceeds from Sales of Investment Securities 18,991 -0- 71,214 Purchase of Investment Securities . Held-to-Maturity -0- (6,037) (6,037) . Available-for-Sale (9,227) (33,254) (144,026) Loans Originated and Principal Repayments, Net (14,788) (14,731) (52,828) Recoveries of Loans Previously Charged-Off 70 39 171 Proceeds from Sale of Premises and Equipment -0- -0- 567 Proceeds from Sale of Other Real Estate -0- -0- 559 Purchases of Premises and Equipment (145) (314) (1,023) ---------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (11,997) (6,302) (42,898) ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 18,494 (7,814) 7,488 Net Increase (Decrease) in Certificates of Deposit 2,784 (2,303) 7,558 Net Increase (Decrease) in Short Term Borrowings (3,653) (1,306) 14,252 Payments of Cash Dividends (643) (518) (2,052) Proceeds from Stock Options Exercised 259 127 219 Purchase of Treasury Stock (880) (1,081) (3,169) ---------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 16,361 (12,895) 24,296 ---------- --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 7,414 (3,364) (7,643) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 19,092 26,735 26,735 ---------- --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 26,506 $ 23,371 $ 19,092 ========== ========= ========= SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest Paid $ 3,961 $ 3,689 $ 14,232 Income Taxes Paid 75 -0- 5,198 Other Real Estate Acquired in Settlement of Loans 3 1,430 2,188 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1999 (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 the generally accepted accounting principles and the prevailing practices within the banking industry. 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 and Summit Community Bank, National Association (the "Subsidiary Banks") and Summit Bancservices, Inc., a wholly-owned operations subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 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 2000 the average cash balance maintained at the Federal Reserve Bank was $1,088,000. Compensating balances held at correspondent banks, to minimize service charges, averaged approximately $17,981,000 during the same period. Investment Securities --------------------- The Corporation has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). At the date of purchase, the Corporation is required to classify debt and equity securities into one of three categories: held-to-maturity, trading or available-for-sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings. Investments not classified as either held-to-maturity or trading are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, in a separate component of shareholders' equity until realized. 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 at the time of purchase of securities, 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. In the periods reported for 2000 and 1999 the Corporation held no securities that would have been classified as trading securities. 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. 8 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) Loans and Allowance for Loan Losses ----------------------------------- Loans are stated at the principal amount outstanding less unearned discount and the allowance for loan losses. 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 simple interest method. 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. After loans are placed on non-accrual all payments received are applied to principal and no interest income is recorded until the loan is returned to accrual status or the principal has been reduced to zero. The Corporation has adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure." Under this standard, the 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. 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 charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Corporation may ultimately incur losses which vary from management's current estimates. Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or are reasonably estimable. Premises and Equipment ---------------------- Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets. Maintenance and repairs are charged to non-interest expenses. Renewals and betterments are added to the asset accounts and depreciated over the periods benefited. 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, less estimated costs to sell, of the real estate acquired is less than the Corporation'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 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 reporting. Realization of net deferred tax assets is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax assets will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. 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." 9 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) - ---- Reclassification ---------------- Certain reclassifications have been made to the 1999 financial statements to conform to the 2000 presentation. Earnings Per Common and Common Equivalent Share ----------------------------------------------- Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," requires presentation of basic and diluted earnings per share. Basic earnings per share has been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Net income per common share for all periods presented has been calculated in accordance with SFAS 128. Outstanding stock options issued by the Corporation represent the only dilutive effect reflected in diluted weighted average shares. Audited Financial Statements ---------------------------- The consolidated balance sheet as of December 31, 1999, and the consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1999 are headed "unaudited" in these financial statements. These statements were reported in the Securities Exchange Commission Form 10-K as of December 31, 1999 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, 2000 ------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 7,997 $ 2 $ (9) $ 7,990 U.S. Government Agencies and Corporations 18,035 -0- (680) 17,355 -------- ----- ------ -------- Total Held-to-Maturity Securities 26,032 2 (689) 25,345 -------- ----- ------ -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 16,997 5 (94) 16,908 U.S. Government Agencies and Corporations 90,376 9 (2,022) 88,363 U.S. Government Agency Mortgage Backed Securities 12,593 52 (222) 12,423 Obligations of States and Political Subdivisions 350 -0- (1) 349 Federal Reserve and Federal Home Loan Bank Stock 1,229 -0- -0- 1,229 -------- ----- ------ -------- Total Available-for-Sale Securities 121,545 66 (2,339) 119,272 -------- ----- ------ -------- Total Investment Securities $ 147,577 $ 68 $ (3,028) $ 144,617 ======== ===== ====== ======== In the above schedule the amortized cost of Total Held-to-Maturity Securities of $26,032,000 and the estimated fair value of Total Available-for-Sale Securities of $119,272,000 are reflected in Investment Securities on the consolidated balance sheet as of March 31, 2000 for a total of $145,304,000. A net unrealized loss of $2,273,000 is included in the Available-for-Sale Investment Securities balance. The unrealized loss, net of tax, is included in Shareholders' Equity. NOTE 2 - Investment Securities (cont'd) - ------ A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands): March 31, 1999 ---------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 9,991 $ 184 $ -0- $ 10,175 U.S. Government Agencies and Corporations 20,062 25 (132) 19,955 Obligations of States and Political Subdivisions 291 3 -0- 294 ------- --- ---- ------- Total Held-to-Maturity Securities 30,344 212 (132) 30,424 ------- --- ---- ------- Investment Securities - Available-for-Sale U.S. Treasury Securities 28,035 374 (1) 28,408 U.S. Government Agencies and Corporations 70,813 133 (144) 70,802 U.S. Government Agency Mortgage Backed Securities 17,057 71 (26) 17,102 Obligations of States and Political Subdivisions 455 7 -0- 462 Federal Reserve and Federal Home Loan Bank Stock 1,179 -0- -0- 1,179 ------- --- ----- ------- Total Available-for-Sale Securities 117,539 585 (171) 117,953 ------- --- ---- ------- Total Investment Securities $ 147,883 $ 797 $ (303) $ 148,377 ======= === ===== ======= In the above schedule the amortized cost of Total Held-to-Maturity Securities of $30,344,000 and the estimated fair value of Total Available-for-Sale Securities of $117,953,000 are reflected in Investment Securities on the consolidated balance sheet as of March 31, 1999 for a total of $148,297,000. A net unrealized gain of $414,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. NOTE 3 - Loans and Allowance for Loan Losses The book values of loans by major type follow (in thousands): March 31, December 31, --------------------------------- 2000 1999 1999 ---- ---- ------------ Commercial $ 164,383 $ 147,991 $ 156,847 Real Estate Mortgage 124,158 102,444 120,596 Real Estate Construction 48,368 36,917 43,875 Loans to Individuals 33,339 31,836 34,261 Less: Unearned Discount (123) (393) (165) ------- ------- ------- 370,125 318,795 355,414 Allowance for Loan Losses (5,440) (4,749) (5,169) ------- ------- ------- Loans - Net $ 364,685 $ 314,046 $ 350,245 ======= ======= ======= 11 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, -------------------------------------- 2000 1999 1999 ------------ ------------ ----------- Balance, Beginning of Period $ 5,169 $ 4,724 $ 4,724 Provisions, Charged to Income 232 220 1,001 Loans Charged-Off (31) (234) (727) Recoveries of Loans Previously Charged-Off 70 39 171 ------- ------- ------- Net Charge-Offs/(Recoveries) (39) 195 556 ------- ------- ------- Balance, End of Period $ 5,440 $ 4,749 $ 5,169 ======= ======= ======= The provisions for loan losses charged to operating expenses during the three months ended March 31, 2000 and March 31, 1999 of $232,000 and $220,000, respectively, were considered adequate to maintain the allowance in accordance with the policy discussed in Note 1. For the year ended December 31, 1999, a provision of $1,001,000 was recorded. At March 31, 2000, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $2,462,000 (of which $2,462,000 were on non-accrual status). The related allowance for loan losses for these loans was $865,000. The average recorded investment in impaired loans during the three months ended March 31, 2000 was approximately $2,374,000. 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, ------------------------------------------- 2000 1999 1999 ---------------- ---------------- ---------- Land $ 2,320 $ 2,783 $ 2,320 Buildings and Improvements 7,783 7,549 7,715 Furniture & Equipment 8,010 7,536 8,003 ------- -------- ------- Total Cost 18,113 17,868 18,038 Less: Accumulated Amortization and Depreciation 9,671 8,732 9,476 ------- -------- ------- Net Book Value $ 8,442 $ 9,136 $ 8,562 ======= ======== ======= NOTE 5 - Other Real Estate - ------ The carrying value of other real estate is as follows (in thousands): March 31, December 31, --------------------------------------- 2000 1999 1999 ------------ ------------ --------- Other Real Estate $ 1,945 $ 1,711 1,947 ===== ===== ===== 12 NOTE 5 - Other Real Estate (cont'd.) - ------ There were direct writedowns of other real estate charged to income for the three months ended March 31, 2000 of $5,000. For the three months ended March 31, 1999, or for the year ended December 31, 1999, respectively, there were no direct writedowns. NOTE 6 - Deposits - ------ The book values of deposits by major type follow (in thousands): March 31, December 31, ---------------------------------- 2000 1999 1999 ------------ ------------ ---------- Noninterest-Bearing Demand Deposits $ 133,389 $ 128,232 $ 128,685 ------- -------- -------- Interest-Bearing Deposits: Interest-Bearing Transaction Accounts and Money Market Funds 172,354 153,347 154,304 Savings 94,468 84,836 98,728 Savings Certificates - Time 59,164 52,665 58,973 Certificates of Deposits $100,000 or more 41,671 35,525 39,078 Other 778 778 778 ------- ------- ------- Total 368,435 327,151 351,861 ------- ------- ------- Total Deposits $ 501,824 $ 455,383 $ 480,546 ======= ======= ======= NOTE 7 - Short Term Borrowings - ------ Securities sold under repurchase agreements generally represent borrowings with maturities ranging from one to thirty days. Information relating to these borrowings is summarized as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------------- 2000 1999 1999 -------------- -------------- ----------- Securities Sold Under Repurchase Agreements: Average $ 25,420 $ 17,235 $ 20,488 Period-End 24,438 16,533 28,091 Maximum Month-End Balance During Period 25,019 19,734 30,309 Interest Rate Average 4.66% 3.77% 4.04% Period-End 4.80 4.10 3.38 The Corporation, through one of its subsidiaries, has available a line of credit with the Federal Home Loan Bank of Dallas which allows the subsidiary to borrow on a collateralized basis at a fixed term. At December 31, 1999, the subsidiary had borrowed $4,000,000, bearing an interest rate of 5.43% and having a maturity of April 2000 under the line of credit. 13 NOTE 8 - 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, ------------------------------------ 2000 1999 1999 ----------- ----------- ---------- Business Development $ 176 $ 124 $ 602 Legal and Professional Fees 188 167 619 Printing and Supplies 100 105 379 Regulatory Fees and Assessments 60 46 183 Other 528 600 1,875 ------- ------- ------- Total $ 1,052 $ 1,042 $ 3,658 ======= ======= ======= NOTE 9 - Income Taxes Federal income taxes included in the consolidated balance sheets were as follows (in thousands): March 31, December 31, ------------------------------- 2000 1999 1999 ----------- ------------ ---------- Current Tax Asset (Liability) $ (1,335) $ (1,117) $ (70) Deferred Tax Asset 2,470 1,130 2,257 ------ ------ ----- Total Included in Other Assets/ (Other Liabilities) $ 1,135 $ 13 $ 2,187 ====== ====== ===== The deferred tax asset at March 31, 2000 of $2,470,000 included $776,000 related to unrealized losses 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, ---------------------------- 2000 1999 1999 --------- --------- ---------- Federal Income Tax Expense Current $ 1,340 $ 1,127 $ 5,278 Deferred (48) (10) (385) ------ ------- ------ Total Federal Income Tax Expense $ 1,292 $ 1,117 $ 4,893 ====== ======= ====== Effective Tax Rates 34.5% 34.7% 34.7% ====== ======= ====== 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, ------------------------------ 2000 1999 1999 ----------- ---------- ---------- Federal Income Taxes at Statutory Rate of 34.3% $ 1,285 $ 1,102 $ 4,847 Effect of Tax Exempt Interest Income (2) (4) (12) Non-deductible Expenses 15 12 64 Other (6) 7 (6) ------- ------- -------- Income Taxes Per Income Statement $ 1,292 $ 1,117 $ 4,893 ======= ======= ======== 14 NOTE 9 - Income Taxes (con't) - ------ Year Ended Three Months Ended March 31, December 31, ------------------------------ 2000 1999 1999 --------- --------- ---------- Federal Deferred Tax Assets: Allowance for Loan Losses $ 1,437 $ 1,183 $ 1,357 Valuation Reserves - Other Real Estate 2 -0- -0- Interest on Non-accrual Loans 180 166 189 Deferred Compensation 455 411 458 Unrealized Losses on Available-for-Sale Securities 775 -0- 611 Other 18 19 19 -------- -------- ----------- Gross Federal Deferred Tax Assets 2,867 1,779 2,634 -------- -------- ----------- Federal Deferred Tax Liabilities: Depreciation and Amortization 325 298 321 Accretion 72 68 56 Unrealized Gains on Available-for-Sale Securities -0- 141 -0- Other -0- 142 -0- -------- -------- ----------- Gross Federal Deferred Tax Liabilities 397 649 377 -------- -------- ----------- Net Deferred Tax Asset $ 2,470 $ 1,130 $ 2,257 ======== ======== =========== NOTE 10 - 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 $3,488,000 at December 31, 1999. NOTE 11 - 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, 2000, outstanding documentary and standby letters of credit totaled $3,353,000 and commitments to extend credit totaled $113,787,000. NOTE 12 - Stock Option Plans The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the 1997 Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted for two-for-one stock splits in 1995 and 1997) of common stock for grants thereunder. The Plans provide for the granting to executive management and other key employees of Summit Bancshares, Inc. and subsidiaries incentive stock options, as defined under the current tax law. The options under the Plans will be exercisable for ten years from the date of grant and generally vest ratably over a five year period. Options 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. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" the Corporation's net income and earnings per share would have been reduced by insignificant amounts on a proforma basis for the year ended December 31, 1999, or the three months ended March 31, 2000. 15 NOTE 12 - Stock Option Plans (con't) - ------- The following is a summary of transactions during the periods presented: Shares Under Option ---------------------------------------- Three Months Ended Year Ended March 31, 2000 December 31, 1999 --------------- ----------------- Outstanding, Beginning of Period 445,497 461,717 Additional Options Granted During the Period -0- 49,500 Forfeited During the Period (2,000) (2,400) Exercised During the Period (70,038) (63,320) ------- ------- Outstanding, End of Period 373,459 445,497 ======= ======= Options outstanding at March 31, 2000 ranged in price from $3.00 to $19.25 per share with a weighted average exercise price of $9.59 and 290,027 shares exercisable. At March 31, 2000, there remained 484,800 shares reserved for future grants of options under the 1997 Plan. There are no shares available for grant under the 1993 Plan. NOTE 13 - Employee Benefit Plans - ------- Pension Plan - ------------ The Corporation had a defined benefit pension plan covering substantially all of its employees. The benefits were based on years of service and the employee's compensation history. The employee's compensation used in the benefit calculation were the highest average for any five consecutive years of employment within the employee's last ten years of employment. Effective August 31, 1998, the accrual of benefits under this plan were suspended. In February 1999, the Board of Directors chose to terminate the plan effective April 15, 1999. The assets held in trust were distributed to the plan participants in mid-1999 under terms of the plan. During 1999 the Corporation expensed $321,000 in support of the plan. 401(k) Plan - ----------- The Corporation implemented a 401(k) plan in December 1997 covering substantially all employees. The Corporation made no contribution to this plan in 1999 or 1998. In 2000, the Corporation will make matching contributions to the participant's deferrals of compensation up to 100% of the employee contributions not to exceed 6% of the employee's annual compensation. For the first three months of 2000, the Corporation expensed $93,000 in support of the plan. 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 $50,000 and $54,000 during the first three months of 2000 and 1999, respectively, and $223,000 for the year 1999. 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). 16 NOTE 14 - Earnings per Share - ------- The following data shows the amounts used in computing earnings per share and the weighted average number of shares of dilutive potential common stock. March 31, December 31, ------------------------------------ 2000 1999 1999 ------------ ------------ ------------ Net income $ 2,450 $ 2,096 $ 9,222 ============ ============ ============ Weighted average number of common shares used in Basic EPS 6,384,238 6,460,003 6,410,762 Effect of dilutive stock options 163,669 254,682 244,787 ------------ ------------ ------------ Weighted number of common shares and dilutive potential common stock used in Diluted EPS 6,547,907 6,714,685 6,655,549 ============ ============ ============ NOTE 15 - 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, ------------------------- 2000 1999 --------- --------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $113,787 $104,189 Documentary and Standby Letters of Credit 3,353 3,790 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 16 - 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. The Board of Directors of each Subsidiary Bank monitors concentrations of credit by purpose, collateral and industry at least quarterly. Certain limitations for concentration are set by the Boards. Additional loans in excess of these limits must have prior approval of the bank's directors' loan committee. 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 17 - Litigation - ------- Certain of the Subsidiary Banks are involved in legal actions arising in the ordinary course of business. It is the opinion of management, after reviewing such actions with outside legal counsel, that the settlement of these matters will not materially affect the Corporation's financial position. 17 NOTE 18 - Stock Repurchase Plan - ------- On April 18, 2000, the Board of Directors approved a stock repurchase plan. The plan authorized management to purchase up to 318,982 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 the first three months of 2000, 51,644 shares were purchased by the Corporation through a similar repurchase plan through the open market. NOTE 19 - Subsequent Event - ------- On April 18, 2000, the Board of Directors of the Corporation approved a quarterly dividend of $.10 per share to be paid on May 15, 2000 to shareholders of record on May 1, 2000. NOTE 20 - 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. 18 NOTE 20 - Fair Values of Financial Instruments (cont'd.) - ------- The estimated fair values of the Corporation's financial instruments are as follows (in thousands): March 31, ----------------------------------------------------------- 2000 1999 ------------------------ --------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets Cash and due from banks $ 26,506 $ 26,506 $ 23,371 $ 23,371 Federal funds sold 25,820 25,820 16,800 16,800 Securities 145,304 144,617 148,297 148,377 Loans 370,125 366,096 317,795 321,144 Reserve for loan losses (5,440) (5,440) (4,749) (4,749) Financial Liabilities Deposits 501,824 501,362 455,383 455,868 Short Term Borrowings 28,438 28,441 16,533 16,533 Off-balance Sheet Financial Instruments Loan commitments 113,787 104,189 Letters of credit 3,353 3,790 NOTE 21 - Comprehensive Income - ------- The Corporation has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". This new standard requires an entity to report and display comprehensive income and its components. Comprehensive income is as follows (in thousands): For the Three Months Ended March 31, Year Ended ------------------------------------ 2000 1999 December 31, 1999 -------- -------- ----------------- Net Income $ 2,450 $ 2,096 $ 9,222 Other Comprehensive Income: Unrealized gain (loss) on Available-for-Sale securities, net of tax (312) (287) (1,746) ------- ------- --------- Comprehensive Income $ 2,138 $ 1,809 $ 7,476 ======= ======= ========= 19 Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Summary - ------- Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation analyzes the major elements of the Corporation's consolidated balance sheets and statements of income. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes. Net income for the first quarter of 2000 was $2,450,000, or $.37 diluted earnings per share, compared with $2,096,000, or $.31 diluted earnings per share, for the first quarter of 1999. Per share amounts are based on average shares outstanding of 6,547,907 for the first quarter of 2000 and 6,714,685 for the comparable period of 1999 adjusted to reflect stock options granted. On a per share basis, diluted earnings per share increased 19.4% over the first quarter of the prior year. Outstanding loans at March 31, 2000 of $370.1 million represented an increase of $51.3 million, or 16.1%, over March 31, 1999 and an increase of $14.7 million, or 4.1%, from December 31, 1999. Total deposits at March 31, 2000 of $501.8 million represented an increase of $46.4 million, or 10.2%, over March 31, 1999 and an increase of $21.3 million, or 4.4%, from December 31, 1999. In the first quarter, net interest income increased 14.9% over the previous year. An increase in non-interest expense of 6.8% partially offset the increase in net interest income. The following table summarizes the Corporation's performance for the three months ended March 31, 2000 and 1999 (tax equivalent basis and dollars in thousands). Three Months Ended March 31, ---------------------------- 2000 1999 ---- ---- Interest Income $ 11,153 $ 9,399 Interest Expense 4,091 3,254 ------ ------ Net Interest Income 7,062 6,145 Provision for Loan Loss 232 220 ------ ------ Net Interest Income After Provision for Loan Loss 6,830 5,925 Non-Interest Income 908 1,031 Non-Interest Expense 3,993 3,738 ------ ------ Income Before Income Tax 3,745 3,218 Income Tax Expense 1,295 1,122 ------ ------ Net Income $ 2,450 $ 2,096 ====== ====== Net Income per Share - Basic $ .38 $ .33 Diluted .37 .31 Return on Average Assets 1.74% 1.63% Return on Average Shareholders' Equity 20.06% 18.27% 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 2000 and 1999 (rates on tax equivalent basis). Three Months ended March 31, --------------------------------------------------------------- 2000 1999 --------------------------- --------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate -------- -------- ---------- ---------- -------- ---------- (Dollars in Thousands) Earning Assets: Federal Funds Sold $ 13,068 $ 184 5.68% $ 25,408 $ 303 4.84% Investment Securities (Taxable) 148,404 2,279 6.18 145,391 2,072 5.78 Investment Securities (Tax-exempt) 491 9 7.29 890 15 7.06 Loans, Net of Unearned Discount(1) 364,750 8,681 9.57 311,326 7,009 9.13 --------- -------- --------- ------- Total Earning Assets 526,713 11,153 8.52 483,015 9,399 7.89 -------- ------- Non-interest Earning Assets: Cash and Due From Banks 24,115 23,278 Other Assets 19,293 18,890 Allowance for Loan Losses (5,309) (4,789) --------- --------- Total Assets $ 564,812 $ 520,394 ========= ========= Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Money Market Funds $ 159,846 1,432 3.60 $ 154,753 1,212 3.18 Savings 96,059 1,059 4.43 82,923 815 3.99 Savings Certificates 58,607 727 4.99 53,227 614 4.68 Certificates of Deposit $100,000 or more 39,275 512 5.24 36,099 443 4.98 Other Time 778 10 5.38 778 10 5.22 Other Borrowings 29,483 351 4.79 17,235 160 3.77 --------- ------ --------- ------ Total Interest-Bearing Liabilities 384,048 4,091 4.28 345,015 3,254 3.83 ------ ------ Non-interest Bearing Liabilities: Demand Deposits 130,197 126,505 Other Liabilities 1,460 2,360 Shareholders' Equity 49,107 46,514 --------- --------- Total Liabilities and Shareholders' Equity $ 564,812 $ 520,394 ========= ========= Net Interest Income and Margin (Tax-equivalent Basis)(2) $7,062 5.39 $6,145 5.16 ====== ====== (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. 21 Net Interest Income - ------------------- Net interest income (tax equivalent) for the first quarter of 2000 was $7,062,000 which represented an increase of $917,000, or 14.9%, over the first quarter of 1999. This increase was heavily contributed to by a 17.2% increase in average loans for the first quarter of 2000 versus the same quarter last year. This increase reflects a 23 basis point increase in net interest margin for the period compared to the first quarter of 1999. 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, 2000 and 1999. ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands) 1st Qtr. 2000 vs. 1st Qtr. 1999 1st Qtr. 1999 vs. 1st Qtr. 1998 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: ------------------------------------ ----------------------------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- Interest Earning Assets: Federal Funds Sold $ (403) $ 284 $ (119) $ (194) $ (62) $ (256) Investment Securities (Taxable) 48 159 207 1,115 (666) 449 Investment Securities (Tax-exempt) (9) 3 (6) (4) (1) (5) Loans, Net of Unearned Discount 1,304 368 1,672 2,555 (2,225) 330 ------- ------- -------- ----------- ------- -------- Total Interest Income 940 814 1,754 3,472 (2,954) 518 ------- ------- -------- ----------- ------- -------- Interest-Bearing Liabilities: Deposits 312 334 646 1,310 (1,302) 8 Other Borrowings 138 53 191 132 (135) (3) ------- ------- -------- ----------- ------- -------- Total Interest Expense 450 387 837 1,442 (1,437) 5 ------- ------- -------- ----------- ------- -------- Net Interest Income $ 490 $ 427 $ 917 $ 2,030 $(1,517) $ 513 ======= ======= ======== =========== ======= ======== Allowance for Loan Losses and Non-Performing Assets - --------------------------------------------------- The Corporation's allowance for loan losses was $5,440,000, or 1.47% of total loans, as of March 31, 2000 compared to $4,749,000, or 1.49% of total loans, as of March 31, 1999. Transactions in the allowance for loan losses are summarized as follows (in thousands): Three Months Ended March 31, --------------------------- 2000 1999 ---------- ---------- Balance, Beginning of Period $ 5,169 $ 4,724 Provisions, Charged to Income 232 220 Loans Charged-Off (31) (234) Recoveries of Loans Previously Charged-Off 70 39 ---------- ---------- Net Charge-Off's (Recoveries) (39) 195 ---------- ---------- Balance, End of Period $ 5,440 $ 4,749 ========== ========== For the three months ended March 31, 2000 and 1999, net charge-off's (recoveries) were (.01)% and .06%, respectively, not annualized. 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, 2000 1999 1999 1999 1999 --------- ------------ ------------- -------- --------- Non-Accrual Loans $ 2,518 $ 2,450 $ 2,899 $ 2,952 $ 4,207 Renegotiated Loans 2 3 Other Real Estate Owned 1,945 1,947 1,494 1,467 1,711 ------- ------- ------- -------- ------- Total Non-Performing Assets $ 4,465 $ 4,400 $ 4,393 $ 4,419 $ 5,918 ======= ======= ======= ======== ======= 22 Allowance for Loan Losses and Non-Performing Assets (con't) - --------------------------------------------------- March 31, December 31, September 30, June 30, March 31, 2000 1999 1999 1999 1999 --------- ------------ ------------- -------- --------- As a Percent of: Total Assets .77% .78% .80% .84% 1.14% Total Loans and Other Assets 1.20 1.23 1.26 1.30 1.85 Loans Past Due 90 days or More and Still Accruing $ 105 $ -0- $ -0- $ 17 $ 7 Non-accrual loans to total loans were .68% at March 31, 2000 and non- performing assets were 1.20% of loans and other real estate owned at the same date. As of March 31, 2000, loans to three borrowers represent approximately 88% of the loans on non-accrual and the largest of these borrowers is current as to payment of principal and interest on its loan. The other two credits have significant SBA guarantees. The following table summarizes the relationship between non-performing loans, criticized loans and the allowance for loan losses (dollars in thousands). March 31, December 31, September 30, June 30, March 31, 2000 1999 1999 1999 1999 --------- ------------ ------------- -------- --------- Non-Performing Loans $ 2,520 $ 2,453 $ 2,899 $ 2,952 $ 4,207 Criticized Loans 12,367 11,804 9,196 9,755 9,597 Allowance for Loan Losses 5,440 5,169 5,044 4,895 4,749 Allowance for Loan Losses as a Percent of: Non-Performing Loans 216% 211% 174% 166% 129% Criticized Loans 44 44 55 50 50 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, -------------------------------------- 2000 1999 % Change ------- -------- -------- Service Charges on Deposit Accounts $ 482 $ 478 .8% Non-recurring Income 61 198 -- Other Non-interest Income 365 355 2.8 --- --- Total Non-interest Income $ 908 $ 1,031 (11.9%) ====== ===== Non-recurring income in the current quarter is primarily interest recovered on non-accrual loans of prior years of which interest was collected in the current quarter. 23 Non-interest Expense Non-interest expenses include all expenses other than interest expense, provision for loan losses 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, ---------------------------------------- 2000 1999 % Change -------- ------- -------- Salaries & Employee Benefits $ 2,357 $ 2,141 10.1% Occupancy Expense - Net 258 245 5.3 Furniture and Equipment Expense 338 283 19.4 Other Real Estate (Income) Expense - Net (12) 27 -- Other Expenses: Business Development 176 124 41.9 Insurance - Other 27 35 (22.9) Legal & Professional Fees 188 167 12.6 Taxes - Other 56 65 (13.8) Postage & Courier 83 78 6.4 Printing & Supplies 100 105 (5.0) Regulatory Fees & Assessments 60 46 30.4 Other Operating Expenses 362 422 (14.2) -------- ------- ----- Total Other Expenses 1,052 1,042 1.0 -------- ------- ----- Total Non-interest Expense $ 3,993 $ 3,738 6.8% ======== ======= ===== Total non-interest expense increased 6.8% in the first quarter of 2000 over 1999, reflecting increases in salaries and benefits, furniture and equipment expense, business development expense and legal and professional expense. As a percent of average assets, non-interest expenses annualized were 2.83% in the first quarter of 2000 and 2.87% in the same period of 1999. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 50.1% for the first quarter of 2000. These 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 2000 is due to salary merit increases and additions to staff. The average number of full-time equivalent employees increased by 9.5 to an average full-time equivalent of 179 from the number in the first quarter of last year. This increase in number of employees was required because of growth of the Company over the past year. The increase in furniture and equipment expense is primarily due to increased repairs and increased expense for service contracts. Legal and professional fees increased due to increases in audit fees and various consultant fees. The increase in business development expense is due to increased advertising expense. 24 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, 2000 and may not be reflective of positions in subsequent periods (dollars in thousands): Total Repriced Rate After Matures or Reprices within: Sensitive 1 Year or ------------------------------------- 30 Days 31-180 181 to One Year Non-interest or Less Days One Year or Less Sensitive Total --------- --------- -------- --------- ---------- ---------- Earning Assets: Loans $ 211,763 $ 20,183 $ 17,661 $ 249,607 $ 120,518 $ 370,125 Investment Securities 3,602 6,764 16,832 27,198 118,106 145,304 Federal Funds Sold 25,820 -0- -0- 25,820 -0- 25,820 --------- --------- -------- --------- ----------- --------- Total Earning Assets 241,185 26,947 34,493 302,625 238,624 541,249 --------- --------- -------- --------- ----------- --------- Interest Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 266,822 -0- -0- 266,822 -0- 266,822 Certificate of Deposits >$100,000 7,616 18,785 8,253 34,654 7,018 41,672 Other Time Deposits 6,440 23,521 15,144 45,105 14,836 59,941 Short Term Borrowings 28,438 -0- -0- 28,438 -0- 28,438 --------- --------- -------- --------- ----------- --------- Total Interest Bearing Liabilities 309,316 42,306 23,397 375,019 21,854 396,873 --------- --------- -------- --------- ----------- --------- Interest Sensitivity Gap $ (68,131) $ (15,359) $ 11,096 $ (72,394) $ 216,770 $ 144,376 ========== ========= ======== ========= =========== ========= Cumulative Gap $ (68,131) $ (83,490) $(72,394) ========== ========= ======== Cumulative Gap to Total Earning Assets (12.6%) (15.4%) (13.4%) Cumulative Gap to Total Assets (11.7%) (14.3%) (12.4%) 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 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 (12.4%) was reversed to a positive 8.6% "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. 25 Capital (con't) - ------- At March 31, 2000, total capital to total assets was 8.51%. The Federal Reserve Board and Comptroller of the Currency also have risk- adjusted capital adequacy guidelines. 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, 2000, the Corporation's Tier I capital represented 13.3% of risk weighted assets and total qualifying capital (Tier I and Tier II) represented 14.5% of risk weighted assets. Both ratios are well above current regulatory guidelines. Also, as of March 31, 2000, the Corporation and its Subsidiary Banks met the criteria for classification as a "well-capitalized" institution under the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). Forward-Looking Statements - -------------------------- The Corporation may from time to time make forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) with respect to earnings per share, credit quality, expected Year 2000 compliance program, corporate objectives and other financial and business matters. The Corporation cautions the reader that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including economic conditions; actions taken by the Federal Reserve Board; legislative and regulatory actions and reforms; competition; as well as other reasons, all of which change over time. Actual results may differ materially from forward-looking statements. 26 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, 2000 27 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 28, 2000 By: /s/ Philip E. Norwood -------------- --------------------------- Philip E. Norwood, Chairman Date: April 28, 2000 By: /s/ Bob G. Scott -------------- --------------------------- Bob G. Scott, Executive Vice President and Chief Operating Officer (Chief Accounting Officer) 28 EXHIBIT INDEX Exhibit Page No. - ------- -------- 11 Computation of Earnings Per Common Share 27 Financial Data Schedule