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 June 30, 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 June 30, 2000 was 6,380,841 shares. SUMMIT BANCSHARES, INC. INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Balance Sheets at June 30, 2000 and 1999 and at December 31, 1999 4 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2000 and 1999 and for the Year Ended December 31, 1999 5-6 Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 2000 and 1999 and for the Year Ended December 31, 1999 7 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 and for the Year Ended December 31, 1999 8 Notes to Consolidated Financial Statements for the Six Months Ended June 30, 2000 and 1999 and for the Year Ended December 31, 1999 9-20 The June 30, 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 Six Months Ended June 30, 2000 and 1999 21-28 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) June 30, (Unaudited) -------------------- December 31, 2000 1999 1999 -------- -------- -------- ASSETS (In Thousands) CASH AND DUE FROM BANKS - NOTE 1 $ 27,577 $ 23,117 $ 19,092 FEDERAL FUNDS SOLD & DUE FROM TIME 19,245 8,980 18,012 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 121,769 108,358 129,116 Securities Held-to-Maturity, at cost (fair value of 24,029 29,336 27,324 $23,396,000, $29,175,000, and $26,739,000 June 30, 2000 and 1999 and December 31, 1999, respectively) LOANS - NOTE 3 AND 11 Loans, Net of Unearned Discount 377,641 339,212 355,414 Allowance for Loan Losses (6,899) (4,895) (5,169) -------- -------- -------- LOANS, NET 370,742 334,317 350,245 PREMISES AND EQUIPMENT - NOTE 4 8,404 8,964 8,562 ACCRUED INCOME RECEIVABLE 5,021 4,313 4,503 OTHER REAL ESTATE - NOTE 5 1,343 1,467 1,947 OTHER ASSETS 7,241 5,479 5,985 -------- -------- -------- TOTAL ASSETS $585,371 $524,331 $564,786 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $140,466 $128,753 $128,685 Interest-Bearing 362,755 325,145 351,861 -------- -------- -------- TOTAL DEPOSITS 503,221 453,898 480,546 SHORT TERM BORROWINGS - NOTE 7 29,052 20,340 32,091 NOTE PAYABLE - NOTE 8 -0- 250 -0- ACCRUED INTEREST PAYABLE 752 546 576 OTHER LIABILITIES 2,313 2,367 2,864 -------- -------- -------- TOTAL LIABILITIES 535,338 477,401 516,077 -------- -------- -------- COMMITMENTS AND CONTINGENCIES - NOTE 12, 14, 16 AND 18 SHAREHOLDERS' EQUITY - NOTES 13, 15 AND 19 Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 6,380,841, 6,453,497 and 6,361,247 shares issued and outstanding at June 30, 2000 and 1999 and at December 31, 1999, respectively 7,976 8,067 7,952 Capital Surplus 6,643 6,428 6,469 Retained Earnings 37,179 33,529 35,474 Accumulated Other Comprehensive Income - Unrealized Loss on Available for Sale Investment Securities, Net of Tax (1,298) (273) (1,186) Treasury Stock at Cost (28,563 and 43,500 shares at June 30, 2000 and 1999, respectively) (467) (821) -0- -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 50,033 46,930 48,709 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $585,371 $524,331 $564,786 ======== ======== ======== The accompanying Notes should be read with these financial statements. 4 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Six Months Ended June 30, (Unaudited) --------------------------------- Year Ended December 31, 2000 1999 1999 -------- -------- ------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $ 17,718 $ 14,546 $ 30,620 Interest and Dividends on Investment Securities: Taxable 4,570 4,091 8,495 Exempt from Federal Income Taxes 10 19 35 Interest on Federal Funds Sold & Due From Time 403 459 1,082 -------- -------- -------- TOTAL INTEREST INCOME 22,701 19,115 40,232 -------- -------- -------- INTEREST EXPENSE Interest on Deposits 7,813 6,094 12,837 Interest on Short Term Borrowings 721 314 926 Interest on Note Payable -0- 3 9 -------- -------- -------- TOTAL INTEREST EXPENSE 8,534 6,411 13,772 -------- -------- -------- NET INTEREST INCOME 14,167 12,704 26,460 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 1,728 638 1, 001 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 12,439 12,066 25,459 -------- -------- -------- NON-INTEREST INCOME Service Charges and Fees on Deposits 970 967 2,002 Loss on Sale of Investment Securities -0- -0- (3) Other Income 856 966 1,881 -------- -------- -------- TOTAL NON-INTEREST INCOME 1,826 1,933 3,880 -------- -------- -------- NON-INTEREST EXPENSE Salaries and Employee Benefits - NOTE 14 4,689 4,491 9,226 Occupancy Expense - Net 505 550 1,031 Furniture and Equipment Expense 692 590 1,202 Other Real Estate Owned Expense - Net 356 25 107 Other Expense - NOTE 9 2,200 1,760 3,658 -------- -------- -------- TOTAL NON-INTEREST EXPENSE 8,442 7,416 15,224 -------- -------- -------- INCOME BEFORE INCOME TAXES 5,823 6,583 14,115 APPLICABLE INCOME TAXES - NOTE 10 2,026 2,276 4,893 -------- -------- -------- NET INCOME $ 3,797 $ 4,307 $ 9,222 ======== ======== ======== NET INCOME PER SHARE - NOTE 15 Basic $ .60 $ .67 $ 1.44 Diluted .58 .64 1.39 The accompanying Notes should be read with these financial statements. 5 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Three Months Ended June 30, --------------------------- 2000 1999 -------- -------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $ 9,037 $ 7,537 Interest and Dividends on Investment Securities: Taxable 2,291 2,019 Exempt from Federal Income Taxes 4 9 Interest on Federal Funds Sold & Due From Time 219 156 ------- ------- TOTAL INTEREST INCOME 11,551 9,721 ------- ------- INTEREST EXPENSE Interest on Deposits 4,073 3,000 Interest on Short Term Borrowings 370 154 Interest on Note Payable -0- 3 ------- ------- TOTAL INTEREST EXPENSE 4,443 3,157 ------- ------- NET INTEREST INCOME 7,108 6,564 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 1,496 418 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,612 6,146 ------- ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 488 489 Other Income 430 413 ------- ------- TOTAL NON-INTEREST INCOME 918 902 ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits 2,332 2,350 Occupancy Expense - Net 247 305 Furniture and Equipment Expense 354 307 Other Real Estate Owned (Income) Expense - Net 368 (2) Other Expense 1,148 718 ------- ------- TOTAL NON-INTEREST EXPENSE 4,449 3,678 ------- ------- INCOME BEFORE INCOME TAXES 2,081 3,370 APPLICABLE INCOME TAXES - NOTE 10 734 1,159 ------- ------- NET INCOME $ 1,347 $ 2,211 ======= ======= NET INCOME PER SHARE Basic $ .22 $ .34 Diluted .21 .33 The accompanying Notes should be read with these financial statements. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 AND FOR THE YEAR ENDED DECEMBER 31, 1999 (Unaudited) (Unaudited) June 30, December 31, ------------------------ ------------- 2000 1999 1999 -------- -------- --------- CASH FLOW FROM OPERATING ACTIVITIES: (In Thousands) Net Income $ 3,797 $ 4,307 $ 9,222 -------- -------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 526 537 1,081 Net Discount Accretion of Investment Securities (41) (17) (39) Provision for Loan Losses 1,728 638 1,001 Deferred Income Taxes (Benefit) (713) (115) (385) Loss on Sale of Investment Securities -0- -0- 3 Writedown of Other Real Estate 420 -0- -0- Writedown of Other Assets -0- 1 -0- Net Gain From Sale of Other Real Estate (77) (9) (36) Net Gain on Sale of Premises and Equipment -0- -0- (105) Increase in Accrued Income and Other Assets (920) (205) (33) Increase (Decrease) in Accrued Expenses and Other Liabilities (375) (277) 250 -------- -------- --------- Total Adjustments 548 553 1,737 -------- -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,345 4,860 10,959 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) Decrease in Federal Funds Sold (1,233) 29,726 20,694 Proceeds from Matured and Prepaid Investment Securities . Held-to-Maturity 285 3,280 4,280 . Available-for-Sale 1,272 55,184 63,531 Proceeds from Sales of Investment Securities 45,929 3,997 71,214 Purchase of Investment Securities . Held-to-Maturity -0- (6,037) (6,037) . Available-for-Sale (36,978) (47,352) (144,026) Loans Originated and Principal Repayments, Net (22,673) (35,368) (52,828) Recoveries of Loans Previously Charged-Off 128 92 171 Proceeds from Sale of Premises and Equipment -0- -0- 567 Proceeds from Sale of Other Real Estate 503 49 559 Purchases of Premises and Equipment (368) (419) (1,023) -------- -------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (13,135) 3,152 (42,898) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 2,519 (8,642) 7,488 Net Increase (Decrease) in Certificates of Deposit 20,156 (2,960) 7,558 Net Increase (Decrease) in Repurchase Agreements (3,039) 2,501 14,252 Proceeds from Note Payable -0- 250 -0- Payments of Cash Dividends (1,276) (1,031) (2,052) Proceeds from Stock Options Exercised 263 154 219 Purchase of Treasury Stock (1,348) (1,902) (3,169) -------- -------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 17,275 (11,630) 24,296 -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 8,485 (3,618) (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 $ 27,577 $ 23,117 $ 19,092 ======== ======== ========= SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest Paid $ 8,358 $ 6,902 $ 14,232 Income Taxes Paid 2,762 2,419 5,198 Other Real Estate Acquired in Settlement of Loans 242 1,226 2,188 The accompanying Notes should be read with these financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES FOR THE SIX MONTHS ENDED JUNE 30, 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 six months of 2000 the average cash balance maintained at the Federal Reserve Bank was $1,007,000. Compensating balances held at correspondent banks, to minimize service charges, averaged approximately $18,373,000 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. Generally, loan origination and commitment fees are recognized at the time of funding and are considered adjustments to interest income. Related direct costs are not separately allocated to loans but are charged to non-interest expense in the period incurred. The net effect of not recognizing such fees and related costs over the life of the related loan is not considered to be material to the financial statements. 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 ranging from three to forty years. Maintenance and repairs are charged to non-interest expenses. Renewals and betterments are added to the asset accounts and depreciated over the periods benefited. 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, 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 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. 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 ----------------------------------------------- Earnings per common and common equivalent share is calculated by dividing net income by the weighted average number of common shares and common share equivalents. Stock options are regarded as common share equivalents and are therefore considered in earnings per share calculations, if dilutive. The number of common share equivalents is determined using the treasury stock method. 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): June 30, 2000 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 5,999 $ 10 $ -0- $ 6,009 U.S. Government Agencies and Corporations 18,030 -0- (643) 17,387 -------- ---- ------- -------- Total Held-to-Maturity Securities 24,029 10 (643) 23,396 -------- ---- ------- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 17,974 24 (50) 17,948 U.S. Government Agencies and Corporations 92,238 11 (1,707) 90,542 U.S. Government Agency Mortgage Backed Securities 11,934 10 (257) 11,687 Obligations of States and Political Subdivisions 350 -0- (2) 348 Federal Reserve and Federal Home Loan Bank Stock 1,244 -0- -0- 1,244 -------- ---- ------- -------- Total Available-for-Sale Securities 123,740 45 (2,016) 121,769 -------- ---- ------- -------- Total Investment Securities $147,769 $ 55 $(2,659) $145,165 ======== ==== ======= ======== In the above schedule the amortized cost of Total Held-to-Maturity Securities of $24,029,000 and the fair value of Total Available-for-Sale Securities of $121,769,000 are reflected in Investment Securities on the consolidated balance sheet as of June 30, 2000 for a total of $145,798,000. A net unrealized loss of $1,971,000 is included in the Available-for-Sale Investment Securities balance. The unrealized loss, net of tax benefit, is included in Shareholders' Equity. 10 NOTE 2 - Investment Securities (cont'd) - ------ A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands): June 30, 1999 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 8,992 $ 100 $ -0- $ 9,092 U.S. Government Agencies and Corporations 20,055 -0- (263) 19,792 Obligations of States and Political Subdivisions 289 2 -0- 291 --------- ----- ------ --------- Total Held-to-Maturity Securities 29,336 102 (263) 29,175 --------- ----- ------ --------- Investment Securities - Available-for-Sale U.S. Treasury Securities 26,020 186 (22) 26,184 U.S. Government Agencies and Corporations 65,598 34 (572) 65,060 U.S. Government Agency Mortgage Backed Securities 15,509 52 (95) 15,466 Obligations of States and Political Subdivisions 455 3 -0- 458 Federal Reserve and Federal Home Loan Bank Stock 1,190 -0- -0- 1,190 --------- ----- ------ --------- Total Available-for-Sale Securities 108,772 275 (689) 108,358 --------- ----- ------ --------- Total Investment Securities $ 138,108 $ 377 $ (952) $ 137,533 ========= ===== ====== ========= In the above schedule the amortized cost of Total Held-to-Maturity Securities of $29,336,000 and the fair value of Total Available-for-Sale Securities of $108,358,000 are reflected in Investment Securities on the consolidated balance sheet as of June 30, 1999 for a total of $137,694,000. A net unrealized loss of $414,000 is included in the Available-for-Sale Investment Securities balance. The unrealized loss, net of tax benefit, is included in Shareholders' Equity. NOTE 3 - Loans and Allowance for Loan Losses - ------ The book values of loans by major type follow (in thousands): June 30, --------------------------- December 31, 2000 1999 1999 ---- ---- ------------ Commercial $166,919 $157,320 $156,847 Real Estate Mortgage 127,421 111,323 120,596 Real Estate Construction 49,339 37,968 43,875 Loans to Individuals 34,049 32,894 34,261 Less: Unearned Discount (87) (293) (165) -------- -------- -------- 377,641 339,212 355,414 Allowance for Loan Losses (6,899) (4,895) (5,169) -------- -------- -------- Loans - Net $370,742 $334,317 $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): Six Months Ended June 30, Year Ended -------------------------- December 31, 2000 1999 1999 ------ ------ ------------ Balance, Beginning of Period $ 5,169 $ 4,724 $ 4,724 Provisions, Charged to Income 1,728 638 1,001 Loans Charged-Off (126) (559) (727) Recoveries of Loans Previously Charged-Off 128 92 171 ------- ------- ------- Net Loans (Charged-Off) Recovered 2 (467) (556) ------- ------- ------- Balance, End of Period $ 6,899 $ 4,895 $ 5,169 ======= ======= ======= The provisions for loan losses charged to operating expenses during the six months ended June 30, 2000 and June 30, 1999 of $1,728,000 and $638,000, 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 June 30, 2000, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $5,392,000 (of which $5,392,000 were on non-accrual status). The related allowance for loan losses for these loans was $2,184,000. The average recorded investment in impaired loans during the six months ended June 30, 2000 was approximately $3,990,000. 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): June 30, --------------------------- December 31, 2000 1999 1999 ------- -------- ----------- Land $ 2,320 $ 2,783 $ 2,320 Buildings and Improvements 7,784 7,560 7,715 Furniture & Equipment 8,034 7,600 8,003 ------- ------- ------- Total Cost 18,138 17,943 18,038 Less: Accumulated Amortization and Depreciation (9,734) (8,979) (9,476) ------- ------- ------- Net Book Value $ 8,404 $ 8,964 $ 8,562 ======= ======= ======= NOTE 5 - Other Real Estate - ------ The carrying value of other real estate is as follows (in thousands): June 30, --------------------------- December 31, 2000 1999 1999 ------- -------- ----------- Other Real Estate $ 1,343 $ 1,467 $ 1,947 ======= ======= ======= There were direct writedowns of other real estate charged to income for the six months ended June 30, 2000 of $420,000. There were no direct writedowns of other real estate for the six months ended June 30, 1999 or for the year ended December 31, 1999. 12 NOTE 6 - Deposits - ------ The book values of deposits by major type follow (in thousands): June 30, ---------------------- December 31, 2000 1999 1999 --------- --------- ------------- Noninterest-Bearing Demand Deposits $ 140,466 $ 128,753 $ 128,685 --------- --------- --------- Interest-Bearing Deposits: Interest-Bearing Transaction Accounts and Money Market Funds 160,085 156,658 154,304 Savings 83,684 80,177 98,728 Savings Certificates - Time 64,656 53,242 58,973 Certificates of Deposits $100,000 or more 53,552 34,290 39,078 Other 778 778 778 --------- --------- --------- Total 362,755 325,145 351,861 --------- --------- --------- Total Deposits $ 503,221 $ 453,898 $ 480,546 ========= ========= ========= NOTE 7 - Securities Sold Under Repurchase Agreements - ------ 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): Six Months Ended June 30, Year Ended ------------------------- December 31, 2000 1999 1999 --------- ---------- ------------ Securities Sold Under Repurchase Agreements: Average $ 22,437 $ 16,806 $ 20,488 Period-End 19,052 20,340 28,091 Maximum Month-End Balance During Period 25,019 20,340 30,309 Interest Rate Average 4.98% 3.77% 4.04% Period-End 6.06 3.83 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 June 30, 2000, the subsidiary had borrowed $10,000,000 bearing an interest rate of 6.77% and having a maturity of September 22, 2000. Also, at December 31, 1999, the subsidiary had borrowed $4,000,000 under the line of credit, bearing an interest rate of 5.43% and having a maturity of April 2000. NOTE 8 - Notes Payable - ------ On July 15, 1999, the Corporation obtained lines of credit from a bank under which the Corporation may borrow $9,000,000 at prime rate. The lines of credit are secured by stock of one of the Subsidiary Banks and mature in July 2000, whereupon, if balances are outstanding, the lines convert to term notes having five year terms. The Corporation will not pay a fee for any unused portion of the lines. As of June 30, 2000, no funds had been borrowed under these lines nor were outstanding. 13 NOTE 9 - Other Non-Interest Expense - ------ The significant components of other non-interest expense are as follows (in thousands): Six Months Ended June 30, Year Ended -------------------------- December 31, 2000 1999 1999 ------- ------- ----------- Business Development $ 360 $ 269 $ 602 Legal and Professional Fees 390 288 619 Printing and Supplies 190 196 379 Regulatory Fees and Assessments 116 91 183 Other 1,144 916 1,875 ------- ------- ------- Total $ 2,200 $ 1,760 $ 3,658 ======= ======= ======= NOTE 10 - Income Taxes - ------- Federal income taxes included in the consolidated balance sheets were as follows (in thousands): June 30, -------------------------- December 31, 2000 1999 1999 ------- ------- ------------ Current Tax Asset (Liability) $ (46) $ 38 $ (70) Deferred Tax Asset 3,030 1,517 2,257 ------- ------- ------- Total Included in Other Assets $ 2,984 $ 1,555 $ 2,187 ======= ======= ======= The deferred tax asset at June 30, 2000 of $3,030,000 included $672,000 related to unrealized losses on Available-for-Sale Securities. The components of income tax expense were as follows (in thousands): Six Months Ended June 30, Year Ended -------------------------- December 31, 2000 1999 1999 ------- ------- ------------ Federal Income Tax Expense Current $ 2,739 $ 2,391 $ 5,278 Deferred (benefit) (713) (115) (385) ------- ------- ------- Total Federal Income Tax Expense $ 2,026 $ 2,276 $ 4,893 ======= ======= ======= Effective Tax Rates 34.8% 34.6% 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): Six Months Ended June 30, Year Ended -------------------------- December 31, 2000 1999 1999 ------- ------- ------------ Federal Income Taxes at Statutory Rate of 34.3% $ 2,000 $ 2,258 $ 4,847 Effect of Tax Exempt Interest Income (4) (6) (12) Non-deductible Expenses 32 25 64 Other (2) (1) (6) ------- ------- ------- Income Taxes Per Income Statement $ 2,026 $ 2,276 $ 4,893 ======= ======= ======= 14 NOTE 10 - Income Taxes (con't) - ------- Six Months Ended June 30, Year Ended ------------------------- December 31, 2000 1999 1999 ------- ------- ------------ Federal Deferred Tax Assets: Allowance for Loan Losses $ 1,927 $ 1,221 $ 1,357 Valuation Reserves - Other Real Estate 144 1 -0- Interest on Non-accrual Loans 214 173 189 Deferred Compensation 463 417 458 Unrealized Losses on Available-for-Sale Securities 672 141 611 Other 7 16 19 ------- ------- ------- Gross Federal Deferred Tax Assets 3,427 1,969 2,634 ------- ------- ------- Federal Deferred Tax Liabilities: Depreciation and Amortization 312 297 321 Accretion 85 45 56 Other -0- 110 -0- ------- ------- ------- Gross Federal Deferred Tax Liabilities 397 452 377 ------- ------- ------- Net Deferred Tax Asset $ 3,030 $ 1,517 $ 2,257 ======= ======= ======= NOTE 11 - 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 12 - 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 June 30, 2000, outstanding documentary and standby letters of credit totaled $3,697,000 and commitments to extend credit totaled $137,012,000. NOTE 13 - 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, and the six months ended June 30, 2000. 15 NOTE 13 - Stock Option Plans (con't) - ------- The following is a summary of transactions during the periods presented: Shares Under Option ----------------------------------- Six Months Ended Year Ended June 30, 2000 December 31, 1999 --------------- ------------------ Outstanding, Beginning of Period 445,497 461,717 Additional Options Granted During the Period 10,000 49,500 Forfeited During the Period (17,500) (2,400) Exercised During the Period (71,238) (63,320) ------- ------- Outstanding, End of Period 366,759 445,497 ======= ======= Options outstanding at June 30, 2000 ranged in price from $3.00 to $19.25 per share with a weighted average exercise price of $9.70 and 284,927 shares exercisable. At June 30, 1999, there remained 490,300 shares reserved for future grants of options under the 1997 Plan. There are no shares available for grant under the 1993 Plan. NOTE 14 - 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 six months of 2000, the Corporation expensed $186,000 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 $94,000 and $103,000 during the first six 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 15 - 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. The number of shares used in the calculations reflect a two-for-one stock split in December 1997 (dollars in thousands) June 30, ---------------------- December 31, 2000 1999 1999 ---- ---- ------------ Net income $ 3,797 $ 4,307 $ 9,222 ========== ========== ========== Weighted average number of common shares used in Basic EPS 6,373,667 6,439,205 6,410,762 Effect of dilutive stock options 156,947 249,749 244,787 ---------- ---------- ---------- Weighted number of common shares and dilutive potential common stock used in Diluted EPS 6,530,614 6,688,954 6,655,549 ========== ========== ========== NOTE 16 - 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): June 30, -------------------- 2000 1999 -------- -------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $137,012 $118,199 Documentary and Standby Letters of Credit 3,697 4,032 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 17 - 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. 17 NOTE 18 - 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. NOTE 19 - Stock Repurchase Plan - ------- On April 18, 2000, the Board of Directors approved a stock repurchase plan. The plan authorized management to purchase up to 322,232 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 six months of 2000, 80,207 shares were purchased by the Corporation through a similar repurchase plan through the open market. NOTE 20 - Subsequent Event - ------- On July 18, 2000, the Board of Directors of the Corporation approved a quarterly dividend of $.10 per share to be paid on August 15, 2000 to shareholders of record on August 1, 2000. 18 NOTE 21 - 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. The estimated fair values of the Corporation's financial instruments are as follows (in thousands): June 30, ------------------------------------------ 2000 1999 ------------------ -------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Financial Assets Cash and due from banks $ 27,577 $ 27,577 $ 23,117 $ 23,117 Federal funds sold 19,245 19,245 8,980 8,980 Securities 145,798 145,165 137,694 137,533 Loans 377,641 373,696 339,212 340,327 Reserve for loan losses (6,899) (6,899) (4,895) (4,895) Financial Liabilities Deposits 503,221 502,835 453,898 454,166 Securities sold under repurchase agreements 29,052 29,052 20,340 20,340 Note Payable -0- -0- 250 250 Off-balance Sheet Financial Instruments Loan commitments 137,012 118,199 Letters of credit 3,697 4,032 NOTE 22 - 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 Six Months Ended June 30, --------------------------------- Year Ended 2000 1999 December 31, 1999 ---- ---- ----------------- Net Income $ 3,797 $ 4,307 $ 9,222 Other Comprehensive Income: Unrealized loss on securities available-for-sale, net of tax (112) (833) (1,746) ------- ------- ------- Comprehensive Income $ 3,685 $ 3,474 $ 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 second quarter of 2000 was $1,347,000, or $.21 diluted earnings per share, compared with $2,211,000, or $.33 diluted earnings per share, for the second quarter of 1999. Net income for the first six months of 2000 was $3,797,000, or $.58 diluted earnings per share, compared with $4,307,000, or $.64 diluted earnings per share, for the first six months of the prior year. On a per share basis, diluted earnings per shares decreased 36.4% over the second quarter of the prior year. Per share amounts are based on average shares outstanding of 6,530,614 for the first six months of 2000 and 6,688,954 for the comparable period of 1999 adjusted to reflect stock options granted. Outstanding loans at June 30, 2000 of $ 377.6 million represented an increase of $38.4 million, or 11.3%, over June 30,1999 and an increase of $22.2 million, or 6.3%, from December 31, 1999. Total deposits at June 30, 2000 of $503.2 million represented an increase of $49.3 million, or 10.9%, over June 30,1999 and an increase of $22.7 million, or 4.7%, from December 31, 1999. In the second quarter, net interest income increased 8.3% over the previous year. The Provision for Loan Losses increased $1,078,000 in the quarter over the same period of the prior year. Non-interest expense increased $771,000 or 21.0% in the second quarter over that of the same period in the prior year and included an increase in Other Real Estate Owned expense of $370,000. The following table summarizes the Corporation's performance for the three months and six months ended June 30, 2000 and 1999 (tax equivalent basis and dollars in thousands). Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- Interest Income $11,554 $9,725 $22,707 $19,124 Interest Expense 4,443 3,157 8,534 6,411 ------- ------ ------- ------- Net Interest Income 7,111 6,568 14,173 12,713 Provision for Loan Loss 1,496 418 1,728 638 ------- ------ ------- ------- Net Interest Income After Provision for Loan Loss 5,615 6,150 12,445 12,075 Non-Interest Income 918 902 1,826 1,933 Non-Interest Expense 4,449 3,678 8,442 7,416 ------- ------ ------- ------- Income Before Income Tax 2,084 3,374 5,829 6,592 Income Tax Expense 737 1,163 2,032 2,285 ------- ------ ------- ------- Net Income $ 1,347 $2,211 $ 3,797 $ 4,307 ======= ====== ======= ======= Net Income per Share- Basic $ .22 $ .34 $ .60 $ .67 Diluted .21 .33 .58 .64 Return on Average Assets .95% 1.71% 1.34% 1.67% Return on Average Stockholders' Equity 10.81% 18.89% 15.40% 18.59% 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 second quarter of 2000 and 1999 (rates on tax equivalent basis). Three Months Ended June 30, -------------------------------------------------------------------- 2000 1999 -------------------------------- --------------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate --------- -------- ---------- --------- -------- ----------- (Dollars in Thousands) Earning Assets: Federal Funds Sold & Due From Time $ 13,986 $ 219 6.30% $ 12,930 $ 156 4.84% Investment Securities (Taxable) 147,212 2,291 6.26 138,384 2,019 5.85 Investment Securities (Tax-exempt) 350 7 7.62 745 13 7.11 Loans, Net of Unearned Discount/(1)/ 373,251 9,037 9.74 330,685 7,537 9.14 -------- ------- -------- ------ Total Earning Assets 534,799 11,554 8.69 482,744 9,725 8.08 ------- ------ Non-interest Earning Assets: Cash and Due From Banks 24,250 23,095 Other Assets 19,488 18,850 Allowance for Loan Losses (5,524) (4,720) -------- -------- Total Assets $573,013 $519,969 ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Money Market Funds $160,178 1,538 3.86 $153,200 1,188 3.11 Savings 89,170 1,029 4.64 82,527 792 3.85 Savings Certificates 61,397 825 5.40 52,674 597 4.54 Certificates of Deposit $100,000 or more 47,636 670 5.66 34,722 413 4.77 Other Time 778 11 5.56 778 10 5.05 Other Borrowings 26,182 370 5.69 16,569 157 3.80 -------- ------- -------- ------ Total Interest-Bearing Liabilities 385,341 4,443 4.64 340,470 3,157 3.72 ------- ------ Non-interest Bearing Liabilities: Demand Deposits 136,250 130,200 Other Liabilities 1,347 2,735 Shareholders' Equity 50,075 46,564 -------- -------- Total Liabilities and Shareholders' Equity $573,013 $519,969 ======== ======== Net Interest Income and Margin (Tax-equivalent Basis)/(2)/ $ 7,111 5.35 $6,568 5.46 ======= ====== (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 The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the six months ended June 30, 2000 and 1999 (rates on tax equivalent basis). Six Months Ended June 30, -------------------------------------------------------------------- 2000 1999 -------------------------------- --------------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate --------- -------- ---------- --------- -------- ----------- (Dollars in Thousands) Earning Assets: Federal Funds Sold & Due From Time $ 13,527 $ 403 6.00% $ 19,135 $ 459 4.82% Investment Securities (Taxable) 147,807 4,570 6.22 141,868 4,091 5.82 Investment Securities (Tax-exempt) 421 16 7.45 817 28 7.08 Loans, Net of Unearned Discount/(1)/ 369,001 17,718 9.66 321,058 14,546 9.14 -------- ------- -------- ------- Total Earning Assets 530,756 22,707 8.60 482,878 19,124 7.99 ------- ------- Non-interest Earning Assets: Cash and Due From Banks 24,182 23,186 Other Assets 19,391 18,870 Allowance for Loan Losses (5,416) (4,754) -------- -------- Total Assets $568,913 $520,180 ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts & Money Market Funds $160,012 2,970 3.73 $153,973 2,400 3.14 Savings 92,614 2,088 4.53 82,723 1,607 3.92 Savings Certificates 60,003 1,552 5.20 52,949 1,211 4.61 Certificates of Deposit $100,000 or more 43,456 1,182 5.47 35,407 856 4.88 Other Time 778 21 5.47 778 20 5.13 Other Borrowings 27,832 721 5.21 16,900 317 3.78 -------- ------- -------- ------- Total Interest-Bearing Liabilities 384,695 8,534 4.46 342,730 6,411 3.77 ------- ------- Non-interest Bearing Liabilities: Demand Deposits 133,224 128,363 Other Liabilities 1,403 2,548 Shareholders' Equity 49,591 46,539 -------- -------- Total Liabilities and Shareholders' Equity $568,913 $520,180 ======== ======== Net Interest Income and Margin (Tax-equivalent Basis)/(2)/ $14,173 5.37 $12,713 5.31 ======= ======= (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. 22 Net Interest Income - ------------------- Net interest income (tax equivalent) for the second quarter of 2000 was $ 7,111,000 which represented an increase of $543,000, or 8.3%, over the second quarter of 1999. This increase was heavily contributed to by a 12.9% increase in average loans for the second quarter of 2000 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 June 30, 2000 and 1999. ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands) 2nd Qtr. 2000 vs. 2nd Qtr. 1999 Six Months 2000 vs. Six Months 1999 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: -------------------------------- ------------------------------------- Volume Rate Total Volume Rate Total ---------- -------- --------- ----------- ---------- ----------- Interest Earning Assets: Federal Funds Sold $ 13 $ 50 $ 63 $ (277) $ 221 $ (56) Investment Securities (Taxable) 130 142 272 181 298 479 Investment Securities (Tax-exempt) (12) 6 (6) (16) 4 (12) Loans, Net of Unearned Discount 993 507 1,500 2,297 875 3,172 ------ ------ ------- ------- ------- ------- Total Interest Income 1,124 705 1,829 2,185 1,398 3,583 ------ ------ ------- ------- ------- ------- Interest-Bearing Liabilities: Deposits 361 712 1,073 623 1,096 1,719 Other Borrowings 115 98 213 255 149 404 ------ ------ ------- ------- ------- ------- Total Interest Expense 476 810 1,286 878 1,245 2,123 ------ ------ ------- ------- ------- ------- Net Interest Income $ 648 $ (105) $ 543 $ 1,307 $ 153 $ 1,460 ====== ====== ======= ======= ======= ======= Allowance for Loan Losses and Non-Performing Assets - --------------------------------------------------- The Corporation's allowance for loan losses was $6,899,000 or 1.83% of total loans, as of June 30, 2000 compared to $4,895,000, or 1.44% of total loans, as of June 30,1999. Transactions in the provision for loan losses are summarized as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Balance, Beginning of Period $ 5,440 $ 4,749 $ 5,169 $ 4,724 Provisions, Charged to Income 1,496 418 1,728 638 Loans Charged-Off (95) (325) (126) (559) Recoveries of Loans Previously Charged-Off 58 53 128 92 ------- ------- ------- ------- Net Loans (Charged-Off) Recovered (37) (272) 2 (467) ------- ------- ------- ------- Balance, End of Period $ 6,899 $ 4,895 $ 6,899 $ 4,895 ======= ======= ======= ======= For the six months ended June 30, 2000 and 1999, net charge-offs (recoveries) were (.00)% and .14% of loans, respectively, not annualized. 23 The following table summarizes the non-performing assets as of the end of the last five quarters (in thousands). June 30, March 31, December 31, September 30, June 30, 2000 2000 1999 1999 1999 -------- --------- ------------ ------------- -------- Non-Accrual Loans $5,440 $2,518 $2,450 $2,899 $2,952 Renegotiated Loans 1 2 3 -0- -0- Other Real Estate Owned 1,343 1,945 1,947 1,494 1,467 ------ ------ ------ ------ ------ Total Non-Performing Assets $6,784 $4,465 $4,400 $4,393 $4,419 ====== ====== ====== ====== ====== June 30, March 31, December 31, September 30, June 30, 2000 2000 1999 1999 1999 -------- --------- ------------ ------------- -------- As a Percent of: Total Assets 1.16% .77% .78% .80% .84% Total Loans and Other Real Estate 1.79 1.20 1.23 1.26 1.30 Loans Past Due 90 days or More and Still Accruing $ -0- $ 105 $ -0- $ -0- $ 17 Non-accrual loans to total loans were 1.44% at June 30, 2000 and non- performing assets were 1.79% of loans and other real estate owned at the same date. As of June 30, 2000, the Company had two large credits that were on non- accrual loan status and represented 90% of the Company's non-performing loans. The first with a balance of approximately $1.5 million has been on non-accrual status since the second quarter of 1998. The balance of this loan has been reduced from approximately $2.1 million as the borrower has continued to make monthly payments. These payments, principal and interest, have reduced the balance. The second large credit was placed on non-accrual status in the second quarter. This loan has a balance of approximately $3.4 million and some amount of charge-off is expected on this credit before year-end. The balance of Other Real Estate Owned as of June 30, 2000, was $1,343,000. In the second quarter the Company wrote-down (expensed) $412,000 of one property, added a second property with a value of $230,000 and sold a property that had a value of $425,000. The write-down of the first property resulted in a carrying value of approximately $1.0 million for that property. This property, which was foreclosed in early 1999 after being constructed, had an original value of $1.6 million and is being aggressively marketed. The following table summarizes the relationship between non-performing loans, criticized loans and the allowance for loan losses (dollars in thousands). June 30, March 31, December 31, September 30, June 30, 2000 2000 1999 1999 1999 -------- --------- ------------ ------------- -------- Non-Performing Loans $ 5,441 $ 2,520 $ 2,453 $2,899 $2,952 Criticized Loans 13,064 12,367 11,804 9,196 9,755 Allowance for Loan Losses 6,899 5,440 5,169 5,044 4,895 Allowance for Loan Losses as a Percent of: Non-Performing Loans 127% 216% 211% 174% 166% Criticized Loans 53 44 44 55 50 24 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 Six Months Ended June 30, June 30, -------------------------- -------------------------- 2000 1999 % Change 2000 1999 % Change ----- ----- --------- ------ ------ ---------- Service Charges on Deposit Accounts $ 488 $ 489 (.2)% $ 970 $ 967 .3% Non-recurring Income 4 46 (91.3) 65 244 (73.4) Other Non-interest Income 426 367 16.1 791 722 9.6 ----- ----- ----- ------ ------ ----- Total Non-interest Income $ 918 $ 902 1.8 $1,826 $1,933 (5.5) ===== ===== ====== ====== Non-recurring income is primarily interest recovered on loans charged-off in prior years and gains on sales of assets taken in satisfaction of debt in prior years. The increase in other non-interest income in the second quarter of 2000 is primarily due to increases in mortgage brokerage/origination fees and fees earned on investment services to customers. 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 June 30, Six Months Ended June 30, ---------------------------- --------------------------- 2000 1999 % Change 2000 1999 % Change ------ ------ ---------- ------ ------ ---------- Salaries & Employee Benefits $2,332 $2,350 (.8)% $4,689 $4,491 4.4% Occupancy Expense - Net 247 305 (19.0) 505 550 (8.2) Furniture and Equipment Expense 354 307 15.3 692 590 17.3 Other Real Estate Expense - Net 368 (2) -- 356 25 -- Other Expenses: Business Development 184 145 26.9 360 269 33.8 Insurance - Other 25 36 (30.6) 52 71 (26.8) Legal & Professional Fees 202 121 66.9 390 288 35.4 Taxes - Other 44 47 (6.4) 100 112 (10.7) Postage & Courier 82 80 2.5 165 158 4.4 Printing & Supplies 90 91 (1.1) 190 196 (3.1) Regulatory Fees & Assessments 56 45 24.4 116 91 27.5 Other Operating Expenses 465 153 203.9 827 575 43.8 ------ ------ ------ ------ Total Other Expenses 1,148 718 59.9 2,200 1,760 25.0 ------ ------ ------ ------ Total Non-interest Expense $4,449 $3,678 21.0 $8,442 $7,416 13.8 ====== ====== ====== ====== Total non-interest expense increased 21.0% in the second quarter of 2000 over 1999, reflecting increases primarily in furniture and equipment expense, other real estate expense, business development expense, and legal and professional expense. As a percent of average assets, non-interest expenses were 3.18% in the second quarter of 2000 and 2.84% in the same period of 1999. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 55.88% for the second quarter of 2000. The increase in the second quarter in Other Real Estate Expense reflects the write-down of the carrying value of foreclosed real property and is net of a gain on sale of another property of approximately $77,000. The increase in furniture and fixtures primarily is a result of an increase in equipment maintenance expense. An increase in advertising expense and customer relations expense is reflected in the increase in business development expenses. Legal and Profession Fees increased in the second quarter 2000 over the prior year because of increases in attorney fees related to credit issues and consultant fees related to new product development. Other Operating Expenses in the second quarter of 1999 were somewhat lower than normal due to decreases in various miscellaneous operating expenses. 25 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 June 30, 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 $207,490 $ 21,351 $ 19,367 $248,208 $129,433 $377,641 Investment Securities 2,887 11,949 12,355 27,191 118,607 145,798 Federal Funds Sold 19,245 -0- -0- 19,245 -0- 19,245 -------- -------- -------- -------- -------- -------- Total Earning Assets 229,622 33,300 31,722 294,644 248,040 542,684 -------- -------- -------- -------- -------- -------- Interest Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 243,769 -0- -0- 243,769 -0- 243,769 Certificate of Deposits >$100,000 7,221 24,760 14,345 46,326 7,226 53,552 Other Time Deposits 5,928 23,712 18,897 48,537 16,897 65,434 Short Term Borrowings 29,052 -0- -0- 29,052 -0- 29,052 -------- -------- -------- -------- -------- -------- Total Interest Bearing Liabilities 285,970 48,472 33,242 367,684 24,123 391,807 -------- -------- -------- -------- -------- -------- Interest Sensitivity Gap $(56,348) $(15,172) $ (1,520) $(73,040) $223,917 $150,877 ======== ======== ======== ======== ======== ======== Cumulative Gap $(56,348) $(71,520) $(73,040) ======== ======== ======== Cumulative Gap to Total Earning Assets (10.4%) (13.2%) (13.5%) Cumulative Gap to Total Assets (9.6%) (12.2%) (12.5%) 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 (12.5%) was reversed to a positive 7.3% "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. 26 Capital (con't) - ------- 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 June 30, 2000, the Corporation's Tier I capital represented 13.19% of risk weighted assets and total qualifying capital (Tier I and Tier II) represented 14.44 % of risk weighted assets. Both ratios are well above current regulatory guidelines. Also, as of June 30, 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"). The Corporation and Subsidiary Banks' regulatory capital positions as of June 30, 2000, were as follows: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------- ----------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- CONSOLIDATED: As of June 30, 2000 Total Capital (to Risk Weighted Assets) $56,194 14.44% $31,132 8.0% Tier I Capital (to Risk Weighted Assets) 51,331 13.19 15,566 4.0 Tier I Capital (to Average Assets) 51,331 8.96 17,187 3.0 SUMMIT NATIONAL BANK: As of June 30, 2000 Total Capital (to Risk Weighted Assets) $22,527 14.75% $12,218 8.0% $15,273 10.0% Tier I Capital (to Risk Weighted Assets) 20,658 13.50 6,109 4.0 9,164 6.0 Tier I Capital (to Average Assets) 20,658 8.84 6,997 3.0 11,662 5.0 SUMMIT COMMUNITY BANK, N.A.: As of June 30, 2000 Total Capital (to Risk Weighted Assets) $29,710 12.78% $18,598 8.0% $23,247 10.0% Tier I Capital (to Risk Weighted Assets) 26,804 11.53 9,299 4.0 13,948 6.0 Tier I Capital (to Average Assets) 26,804 7.97 10,089 3.0 16,816 5.0 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. 27 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 At the Corporation's annual shareholders' meeting, held on April 18, 2000, the shareholders of the Corporation: . ratified the appointment by the Board of Directors of Stovall, Grandey & Whatley as independent auditors of the Corporation for its fiscal year ending December 31, 2000. The shareholder vote in this matter was 5,585,123 for, 8,600 against, and 2 abstaining. . elected the Board of Directors, consisting of ten (10) persons. The following directors, constituting the entire Board of Directors, were elected: For Against Abstain --------- ------- ------- D. Jerrell Farr 5,561,625 200 31,900 Elliott S. Garsek 5,561,825 31,900 Ronald J. Goldman 5,560,425 1,400 31,900 F.S. Gunn 5,561,825 31,900 Jeffrey M. Harp 5,479,393 82,432 31,900 Robert L. Herchert 5,561,625 200 31,900 William W. Meadows 5,561,825 31,900 James L. Murray 5,561,825 31,900 Philip E. Norwood 5,479,393 82,432 31,900 Byron B. Searcy 5,561,825 31,900 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 June 30, 2000 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: July 27, 2000 By: /s/ Philip E. Norwood ------------- ------------------------------------ Philip E. Norwood, Chairman Date: July 27, 2000 By: /s/ Bob G. Scott -------------- ------------------------------------ Bob G. Scott, Executive Vice President and Chief Operating Officer (Chief Accounting Officer) EXHIBIT INDEX Exhibit Page No. - ------- -------- 11 Computation of Earnings Per Common Share 27 Financial Data Schedule