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 September 30, 1997; 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 September 30, 1997 was 3,243,846 shares. SUMMIT BANCSHARES, INC. INDEX PART I - FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Balance Sheets at September 30, 1997 and 1996 and at December 31, 1996 4 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1997 and 1996 and for the Year Ended December 31, 1996 5-6 Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 1997 and 1996 and for the Year Ended December 31, 1996 7 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 and for the Year Ended December 31, 1996 8-9 Notes to Consolidated Financial Statements for the Nine Months Ended September 30, 1997 and 1996 and for the Year Ended December 31, 1996 10-21 The September 30, 1997 and 1996 and the December 31, 1996 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 Nine Months Ended September 30, 1997 and 1996 22-29 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) September 30, (Unaudited) ------------------------------ December 31, 1997 1996 1996 -------------- -------------- ----------- (In Thousands) ASSETS CASH AND DUE FROM BANKS - NOTE 1 $ 33,060 $ 24,962 $ 28,339 FEDERAL FUNDS SOLD 23,485 8,330 20,350 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 58,595 60,069 58,576 Securities Held-to-Maturity, at cost (fair value of 47,712 62,950 58,437 47,908,000, $62,472,000, and $58,629,000 September 30, 1997 and 1996 and December 31, 1996, respectively) LOANS - NOTE 3 Loans, Net of Unearned Discount 262,784 213,962 220,006 Allowance for Loan Losses (3,682) (3,008) (2,972) -------- -------- -------- LOANS, NET 259,102 210,954 217,034 PREMISES AND EQUIPMENT - NOTE 4 7,797 7,159 7,105 ACCRUED INCOME RECEIVABLE 3,368 3,281 3,189 OTHER REAL ESTATE - NOTE 5 151 169 166 OTHER ASSETS 2,928 2,020 2,052 -------- -------- -------- TOTAL ASSETS $436,198 $379,894 $395,248 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $114,198 $ 91,528 $103,695 Interest-Bearing 270,025 238,270 241,328 -------- -------- -------- TOTAL DEPOSITS 384,223 329,798 345,023 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - NOTE 7 10,284 14,453 13,209 ACCRUED INTEREST PAYABLE 653 589 638 OTHER LIABILITIES 1,511 1,711 1,298 -------- -------- -------- TOTAL LIABILITIES 396,671 346,551 360,168 -------- -------- -------- COMMITMENTS AND CONTINGENCIES - NOTE 11 SHAREHOLDERS' EQUITY - NOTES 12, 14 AND 18 Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 3,243,846, 3,234,186 and 3,233,036 shares issued and outstanding at September 30, 1997 and 1996 and at December 31, 1996, respectively 4,055 4,043 4,041 Capital Surplus 4,222 4,130 4,167 Retained Earnings 30,996 25,386 26,644 Unrealized Gain (Loss) on Investment Securities Available for Sale, Net of Tax 254 (59) 228 Treasury Stock at cost (9,000 shares at September 30, 1996) -0- (157) -0- -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 39,527 33,343 35,080 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $436,198 $379,894 $395,248 ======== ======== ======== The accompanying Notes should be read with these financial statements. 4 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the Nine Months Ended September 30, (Unaudited) --------------------------------------- Year Ended December 31, 1997 1996 1996 --------------- ----------------- ----------------------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $17,594 $14,051 $19,274 Interest and Dividends on Investment Securities: Taxable 5,243 5,559 7,405 Exempt from Federal Income Taxes 15 1 1 Interest on Federal Funds Sold 593 672 897 ------- ------- ------- TOTAL INTEREST INCOME 23,445 20,283 27,577 ------- ------- ------- INTEREST EXPENSE Interest on Deposits 7,836 6,833 9,243 Interest on Securities Sold Under Agreements to Repurchase 369 381 528 ------- ------- ------- TOTAL INTEREST EXPENSE 8,205 7,214 9,771 ------- ------- ------- NET INTEREST INCOME 15,240 13,069 17,806 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 633 480 819 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,607 12,589 16,987 ------- ------- ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 1,389 1,210 1,645 Loss on Sale of Investment Securities (1) (15) (14) Other Income 1,019 1,050 1,345 ------- ------- ------- TOTAL NON-INTEREST INCOME 2,407 2,245 2,976 ------- ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits 5,470 5,043 6,753 Occupancy Expense - Net 573 566 772 Furniture and Equipment Expense 668 606 800 Other Real Estate Owned Expense - Net (29) 12 10 Other Expense 2,368 2.040 2,582 ------- ------- ------- TOTAL NON-INTEREST EXPENSE 9,050 8,267 10,917 ------- ------- ------- INCOME BEFORE INCOME TAXES 7,964 6,567 9,046 APPLICABLE INCOME TAXES - NOTE 9 2,738 2,253 3,103 ------- ------- ------- NET INCOME $ 5,226 $ 4,314 $ 5,943 ======= ======= ======= NET INCOME PER SHARE - NOTE 14 $ 1.61 $ 1.35 $ 1.86 ======= ======= ======= 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 September 30, --------------------------------------- 1997 1996 ------------------ ------------------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $6,264 $4,991 Interest and Dividends on Investment Securities: Taxable 1,705 1,893 Exempt from Federal Income Taxes 6 -0- Interest on Federal Funds Sold 274 180 ------ ------ TOTAL INTEREST INCOME 8,249 7,064 ------ ------ INTEREST EXPENSE Interest on Deposits 2,840 2,345 Interest on Securities Sold Under Agreements to Repurchase 112 145 ------ ------ TOTAL INTEREST EXPENSE 2,952 2,490 ------ ------ NET INTEREST INCOME 5,297 4,574 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 281 192 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,016 4,382 ------ ------ NON-INTEREST INCOME Service Charges and Fees on Deposits 489 423 Loss on Sale of Investment Securities (1) (8) Other Income 337 370 ------ ------ TOTAL NON-INTEREST INCOME 825 785 ------ ------ NON-INTEREST EXPENSE Salaries and Employee Benefits 1,895 1,691 Occupancy Expense - Net 186 179 Furniture and Equipment Expense 237 206 Other Real Estate Owned Expense - Net (21) (4) Other Expense 831 615 ------ ------ TOTAL NON-INTEREST EXPENSE 3,128 2,687 ------ ------ INCOME BEFORE INCOME TAXES 2,713 2,480 APPLICABLE INCOME TAXES - NOTE 9 931 846 ------ ------ NET INCOME $1,782 $1,634 ====== ====== NET INCOME PER SHARE - NOTE 14 $.55 $.51 ====== ====== The accompanying Notes should be read with these financial statements. 6 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1996 (Unaudited) Unrealized Common Stock Gain (Loss) ------------------- Capital Retained on Investment Treasury Shares Amount Surplus Earnings Securities-Net Stock Total --------- ------- ------- ------------ -------------- -------- --------- (Dollars in Thousands, Except Per Share Data) BALANCE AT JANUARY 1, 1996 3,149,886 $3,937 $ 4,109 $ 21,745 $ 334 $ -0- $30,125 Purchases of Stock Held in Treasury (157) (157) Net Income for the Nine Months Ended September 30, 1996 4,314 4,314 Stock Options Exercised 84,300 106 21 127 Cash Dividend $.21 Per Share (673) (673) Securities Available-for- Sale Adjustment (393) (393) --------- ------ ------- --------- --------- ------ ------- BALANCE AT SEPTEMBER 30, 1996 3,234,186 4,043 4,130 25,386 (59) -0- 33,343 Net Income for the Three Months Ended December 31, 1996 1,629 1,629 Stock Options Exercised 7,850 9 37 46 Retirement of Stock Held In Treasury (9,000) (11) (146) 157 -0- Cash Dividend $.07 Per Share (225) (225) Securities Available-for- Sale Adjustment 287 287 --------- ------ ------- --------- --------- ------ ------- BALANCE AT DECEMBER 31, 1996 3,233,036 4,041 4,167 26,644 228 -0- 35,080 Net Income for the Nine Months Ended September 30, 1997 5,226 5,226 Stock Options Exercised 10,810 14 55 69 Cash Dividend $.27 Per Share (874) (874) Securities Available-for- Sale Adjustment 26 26 --------- ------ ------- --------- --------- ------ ------- BALANCE AT SEPTEMBER 30, 1997 3,243,846 $4,055 $ 4,222 $ 30,996 $ 254 $ -0- $39,527 ========= ====== ======= ========= ========= ====== ======= The accompanying Notes should be read with these financial statements. 7 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1996 (Unaudited) September 30, (Unaudited) ----------------------------- December 31, 1997 1996 1996 -------------- ------------- ------------ (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 5,226 $ 4,314 $ 5,943 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 604 565 762 Net Premium Amortization of Investment Securities 76 253 310 Provision for Loan Losses 633 480 819 Deferred Income Taxes (Benefit) 114 (115) (137) Loss on Sale of Investment Securities 1 15 14 Writedown of Other Real Estate 4 9 12 Net Gain on Sale of Other Real Estate (21) -0- -0- Net (Gain) Loss on Sale of Premises and Equipment 12 1 (1) Increase in Accrued Income and Other Assets (1,230) (223) (270) Increase in Accrued Expenses and Other Liabilities 228 645 280 -------- -------- -------- Total Adjustments 421 1,631 1,767 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,647 5,945 7,710 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (Increase) Decrease in Federal Funds Sold (3,135) 17,350 5,330 Proceeds from Matured and Prepaid Investment Securities . Held-to-Maturity 14,362 16,560 20,001 . Available-for-Sale 11,709 15,600 20,486 Proceeds from Sales of Investment Securities 4,506 12,524 14,527 Purchase of Investment Securities . Held-to-Maturity (8,285) (18,183) (19,174) . Available-for-Sale (11,622) (31,016) (33,969) Loans Originated and Principal Repayments, Net (42,932) (35,738) (42,171) Recoveries of Loans Previously Charged-Off 277 97 115 Proceeds from Sale of Other Real Estate 32 -0- -0- Proceeds from Sale of Premises and Equipment 1 1 1 Purchases of Premises and Equipment (1,309) (569) (710) -------- -------- -------- NET CASH USED BY INVESTING ACTIVITIES (36,396) (23,374) (35,564) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 25,734 20,574 36,011 Net Increase (Decrease) in Certificates of Deposit 13,466 (885) (1,097) Net Increase (Decrease) in Repurchase Agreements (2,925) 925 (319) Payments of Cash Dividends (874) (673) (898) Purchase of Treasury Stock -0- (157) (157) Proceeds from Stock Options Exercised 69 127 173 -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 35,470 19,911 33,713 -------- -------- -------- NET INCREASE IN CASH AND DUE FROM BANKS 4,721 2,482 5,859 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 28,339 22,480 22,480 -------- -------- -------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 33,060 $ 24,962 $ 28,339 ======== ======== ======== 8 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1996 (Unaudited) SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES: (Unaudited) (Unaudited) September 30, December 31, ---------------------------- ------------ 1997 1996 1996 -------------- ------------ ------------ (In Thousands) (1) Interest Paid $8,190 $7,261 $9,769 (2) Income Taxes Paid 2,885 2,331 3,285 (3) Other Real Estate Acquired in Settlement of Loans -0- 65 65 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) NOTE 1 - Summary of Significant Accounting Policies - ------ The accounting and reporting policies of Summit Bancshares, Inc. (the "Corporation") and Subsidiaries are in accordance with generally accepted accounting principles. A summary of the more significant policies follows: Basis of Presentation and Principles of Consolidation ----------------------------------------------------- The consolidated financial statements of the Corporation include its accounts and those of its wholly-owned subsidiaries, Summit National Bank 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 nine months of 1997 the average cash balance maintained at the Federal Reserve Bank was $4,209,000. Compensating balances held at correspondent banks, to minimize service charges, averaged approximately $14,677,000 during the same period. Investment Securities --------------------- The Corporation follows Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in the accounting and reporting for investments in equity securities that have readily determined fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: - Debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity ---------------- securities and reported at amortized cost. - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading ------- securities and reported at fair value, with unrealized gains and losses included in earnings. - Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale ------------------ securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. The Corporation has the ability and intent to hold to maturity its investment securities classified as held-to-maturity; accordingly, no adjustment has been made for the excess, if any, of amortized cost over market. In determining the investment category classifications, management considers its asset/liability strategy, changes in interest rates and prepayment risk, the need to increase capital and other factors. Under certain circumstances (including the deterioration of the issuer's creditworthiness, a change in tax law, or statutory or regulatory requirements), the Corporation may change the investment security classification. In 1997 and 1996 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. 10 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 accrual of interest on a loan is discontinued when, in the opinion of management, there is doubt about the ability of the borrower to pay interest or principal. Interest previously earned, but uncollected on such loans, is written off. When loans are put on non-accrual all payments received are applied to the principal and no interest income is recorded until the loan is returned to accrual status or the principal has been reduced to zero. The Corporation follows 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 placed on non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. Premises and Equipment ---------------------- Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets ranging from three to forty years. Maintenance and repairs are charged to operating expenses. Renewals and betterments are added to the asset accounts and depreciated over the periods benefitted. Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any gain or loss is reflected in the income and expense accounts. Other Real Estate ----------------- Other real estate is foreclosed property held pending disposition and is valued at the lower of its fair value or the recorded investment in the related loan. At foreclosure, if the fair value of the real estate acquired is less than the bank's recorded investment in the related loan, a writedown is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in non-interest expense. Federal Income Taxes -------------------- The Corporation joins with its Subsidiaries in filing a consolidated federal income tax return. The Subsidiaries pay to the parent a charge equivalent to their current federal income tax based on the separate taxable income of the Subsidiaries. The Corporation and the Subsidiaries maintain their records for financial reporting and income tax reporting purposes on the accrual basis of accounting. Deferred income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are provided for accumulated temporary differences due to basic differences for assets and liabilities for financial reporting and income tax purposes. 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." Reclassification ---------------- Certain reclassifications have been made to the 1996 financial statements to conform to the 1997 presentation. 11 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) - ------ Audited Financial Statements ---------------------------- The consolidated balance sheet as of December 31, 1996, and the consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1996 are headed "unaudited" in these financial statements. These statements were reported in the Securities Exchange Commission Form 10-K as of December 31, 1996 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): September 30, 1997 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 22,980 $160 $ (23) $ 23,117 U.S. Government Agencies and Corporations 15,217 31 (16) 15,232 U.S. Government Agency Mortgage Backed Securities 8,925 48 (8) 8,965 Obligations of States and Political Subdivisions 590 4 -0- 594 -------- ---- ----- -------- Total Held-to-Maturity Securities 47,712 243 (47) 47,908 -------- ---- ----- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 52,466 377 (53) 52,790 U.S. Government Agencies and Corporations 2,991 12 -0- 3,003 U.S. Government Agency Mortgage Backed Securities 1,838 49 -0- 1,887 Federal Reserve and Federal Home Loan Bank Stock 915 -0- -0- 915 -------- ---- ----- -------- Total Available-for-Sale Securities 58,210 438 (53) 58,595 -------- ---- ----- -------- Total Investment Securities $105,922 $681 $(100) $106,503 ======== ==== ===== ======== In the above schedule the amortized cost of Total Held-to-Maturity -------------- Securities of $47,712,000 and the fair value of Total Available-for-Sale ---------- Securities of $58,595,000 are reflected in Investment Securities on the consolidated balance sheet as of September 30, 1997 for a total of $106,307,000. A net unrealized gain of $385,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. 12 NOTE 2 - Investment Securities (cont'd.) - ------ Investment securities with carrying value of $33,707,000 at September 30, 1997, were pledged to secure federal, state and municipal deposits and for other purposes as required or permitted by law. The fair value of these pledged securities totaled $33,772,000 at September 30, 1997. September 30, 1996 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 28,014 $103 $(173) $ 27,944 U.S. Government Agencies and Corporations 23,774 -0- (301) 23,473 U.S. Government Agency Mortgage Backed Securities 11,162 11 (118) 11,055 -------- ---- ----- -------- Total Held-to-Maturity Securities 62,950 114 (592) 62,472 -------- ---- ----- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 51,975 152 (297) 51,830 U.S. Government Agencies and Corporations 4,489 26 (15) 4,500 U.S. Government Agency Mortgage Backed Securities 3,440 54 (9) 3,485 Federal Reserve Bank Stock 254 -0- -0- 254 -------- ---- ----- -------- Total Available-for-Sale Securities 60,158 232 (321) 60,069 -------- ---- ----- -------- Total Investment Securities $123,108 $346 $(913) $122,541 ======== ==== ===== ======== In the above schedule the amortized cost of Total Held-to-Maturity -------------- Securities of $62,950,000 and the fair value of Total Available-for-Sale ---------- Securities of $60,069,000 are reflected in Investment Securities on the consolidated balance sheet as of September 30, 1996 for a total of $123,019,000. A net unrealized loss of $89,000 is included in the Available-for-Sale Investment Securities balance. The unrealized loss, net of tax, is included in Shareholders' Equity. Proceeds from sales of securities were $4,506,000 and $12,524,000 during the first nine months of 1997 and 1996, respectively and $14,527,000 during the year 1996. In the nine months ended September 30, 1997, gains of $2,000 and losses of $3,000 were realized. In the nine months ended September 30, 1996, gains of $11,000 and losses of $26,000 were realized. For the year ended December 31, 1996, losses from sales of securities of $27,000 were realized, but were partially offset by gains of $13,000. NOTE 3 - Loans and Allowance for Loan Losses - ------ The book values of loans by major type follow (in thousands): September 30, ----------------------- December 31, 1997 1996 1996 -------------- ------- ------------ Commercial $122,643 $ 99,963 $103,414 Real Estate Mortgage 85,084 73,686 76,771 Real Estate Construction 24,725 15,140 12,862 Loans to Individuals 31,094 25,893 27,674 Less: Unearned Discount (762) (720) (715) -------- -------- -------- 262,784 213,962 220,006 Allowance for Loan Losses (3,682) (3,008) (2,972) -------- -------- -------- Loans - Net $259,102 $210,954 $217,034 ======== ======== ======== 13 NOTE 3 - Loans and Allowance for Loan Losses (cont'd.) - ------ Transactions in the allowance for loan losses are summarized as follows (in thousands): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 -------------- ------------- ------------ Balance, Beginning of Period $2,972 $2,500 $2,500 Provisions, Charged to Income 633 480 819 Loans Charged-Off (200) (69) (462) Recoveries of Loans Previously Charged-Off 277 97 115 ------ ------ ------ Net Loans (Charged-Off) Recovered 77 28 (347) ------ ------ ------ Balance, End of Period $3,682 $3,008 $2,972 ====== ====== ====== The provisions for loan losses charged to operating expenses during the nine months ended September 30, 1997 and September 30, 1996 of $633,000 and $480,000, respectively, were considered adequate to maintain the allowance in accordance with the policy discussed in Note 1. For the year ended December 31, 1996, a provision of $819,000 was recorded. At September 30, 1997, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $359,000 (of which $359,000 were on non-accrual status). The related allowance for loan losses for these loans was $146,000. The average recorded investment in impaired loans during the nine months ended September 30, 1997 was approximately $337,000. For this period the Corporation recognized interest income of $2,000 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): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 -------------- ------------- ------------ Land $ 2,170 $ 1,446 $ 1,446 Buildings and Improvements 7,448 7,367 7,375 Furniture & Equipment 5,664 5,168 5,182 ------- ------- ------- Total Cost 15,282 13,981 14,003 Less: Accumulated Amortization and Depreciation (7,485) (6,822) (6,898) ------- ------- ------- Net Book Value $ 7,797 $ 7,159 $ 7,105 ======= ======= ======= NOTE 5 - Other Real Estate - ------ The carrying value of other real estate is as follows (in thousands): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 -------------- ------------- ------------ Other Real Estate $ 186 $ 204 $ 201 Valuation Reserve (35) (35) (35) ----- ----- ----- Net Other Real Estate $ 151 $ 169 $ 166 ===== ===== ===== 14 NOTE 5 - Other Real Estate (cont'd.) - ------ Transactions in the valuation reserve are summarized as follows (in thousands): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Balance, Beginning of Period $ 35 $ 35 $ 35 Provisions Charged to Income -0- -0- -0- Reductions from Sales -0- -0- -0- ----- ----- ----- Balance, End of Period $ 35 $ 35 $ 35 ===== ===== ===== Direct writedowns of other real estate charged to income were $4,000 or the nine months ended September 30, 1997 and $9,000 for the nine months ended September 30, 1996 and $12,000 for the year ended December 31, 1996. NOTE 6 - Deposits - ------ The book values of deposits by major type follow (in thousands): September 30, ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Noninterest-Bearing Demand Deposits $114,198 $ 91,528 $103,695 -------- -------- -------- Interest-Bearing Deposits: Interest-Bearing Transaction Accounts and Money Market Funds 132,619 115,365 119,316 Savings 51,480 50,233 49,048 Savings Certificates - Time 51,926 47,741 47,025 Certificates of Deposits $100,000 or more 33,295 24,426 25,434 Other 705 505 505 -------- -------- -------- Total 270,025 238,270 241,328 -------- -------- -------- Total Deposits $384,223 $329,798 $345,023 ======== ======== ======== 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): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Securities Sold Under Repurchase Agreements: Average $11,050 $11,880 $12,181 Period-End 10,284 14,453 13,209 Maximum Month-End Balance During Period 13,212 14,453 14,453 Interest Rate Average 4.35% 4.32% 4.33% Period-End 4.51 4.28 4.35 15 NOTE 8 - Other Non-Interest Expense - ------ The significant components of other non-interest expense are as follows (in thousands): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Business Development $ 459 $ 318 $ 426 Legal and Professional Fees 400 309 442 Printing and Supplies 267 236 303 Regulatory Fees and Assessments 123 154 134 Other 1,119 1,023 1,277 ------ ------ ------ Total $2,368 $2,040 $2,582 ====== ====== ====== NOTE 9 - Income Taxes - ------ Federal income taxes included in the consolidated balance sheets were as follows (in thousands): September 30, ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Current Tax Asset $ 61 $ (26) $ 26 Deferred Tax Asset 547 552 449 ----- ----- ----- Total Included in Other Assets $ 608 $ 526 $ 475 ===== ===== ===== The deferred tax asset at September 30, 1997 of $547,000 included $131,000 related to unrealized gains on Available-for-Sale Securities. The components of income tax expense were as follows (in thousands): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Federal Income Tax Expense Current $2,852 $2,368 $3,240 Deferred (114) (115) (137) ------ ------ ------ Total Federal Income Tax Expense $2,738 $2,253 $3,103 ====== ====== ====== Effective Tax Rates 34.4% 34.3% 34.3% ====== ====== ====== The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to operating earnings are as follows (in thousands): Nine Months Ended September 30, Year Ended ------------------------------- December 31, 1997 1996 1996 ------------ ------------ ------------ Federal Income Taxes at Statutory Rate of 34% $2,708 $2,233 $3,076 Effect of Tax Exempt Interest Income (9) (7) (8) Non-deductible Expenses 36 27 39 Other 3 0 (4) ------ ------ ------ Income Taxes Per Income Statement $2,738 $2,253 $3,103 ====== ====== ====== 16 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 $3,819,000 at December 31, 1996. 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 September 30, 1997, outstanding documentary and standby letters of credit totaled $3,970,000 and commitments to extend credit totaled $90,164,000. NOTE 12 - Stock Option Plans - ------- The Corporation adopted an Incentive Stock Option Plan ("1993 Plan") with 300,000 shares (adjusted for the April 1993 and December 1995 two-for-one stock splits) of common stock reserved for grants thereunder. The Board of Directors and the Shareholders have approved a new plan, the 1997 Incentive Stock Option Plan ("1997 Plan"). The 1997 Plan reserved 300,000 shares for grants thereunder. These plans provide for the granting to management employees of Summit Bancshares, Inc. and Subsidiaries, incentive stock options, as defined under the current tax law. The options will be exercisable for ten years from the date of grant and generally vest ratably over a five year period. Options under both plans will be 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, 1996, or the nine months ended September 30, 1997. The following is a summary of transactions during the periods presented: Shares Under Option --------------------------------------- Nine Months Ended Year Ended September 30, 1997 December 31, 1996 ------------------- ------------------ Outstanding, Beginning of Period 232,050 301,400 Additional Options Granted During the Period 36,076 29,800 Forfeited During the Period (640) (1,000) Exercised During the Period (10,810) (98,150) ------- ------- Outstanding, End of Period 256,676 232,050 ======= ======= Options outstanding at September 30, 1997 ranged in price from $6.00 to $26.38 per share with a weighted average exercise price of $11.93 and with 184,415 shares exercisable. At September 30, 1997, there remained 334 shares reserved for future grants of options under the 1993 Plan and 288,750 shares reserved for future grants of options under the 1997 Plan. NOTE 13 - Employee Benefit Plans - ------- The Corporation has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation history. The employee's compensation used in the benefit calculation is the highest average for any five consecutive years of employment within the employee's last ten years of employment. Funding for the plan is provided by employer contributions to trust funds in amounts determined by actuarial assumptions and valuation of the plan. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. 17 NOTE 13 - Employee Benefit Plans (cont'd.) - ------- The table below sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheets at December 31 (in thousands): 1996 1995 ------- ------ Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,647 in 1996 and $1,152 in 1995 $1,762 $1,183 ====== ====== Projected benefit obligation for service rendered to date $1,997 $1,912 Plan assets at fair value, primarily listed stocks and U.S. bonds 2,192 1,786 ------ ------ Plan assets in excess of (less than) projected benefit obligation 195 (126) Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions 21 197 Prior service cost not yet recognized in net periodic pension cost 15 17 ------ ------ Net pension cost included in other assets/ $ 231 $ (88) (other liabilities) ====== ====== Prepaid (accrued) pension cost included the following components (in thousands): Year Ended December 31, ----------------------- 1996 1995 ----------- ---------- Service Cost - benefits earned during the period $ 195 $ 154 Interest cost on projected benefit obligation 131 140 Less: Actual return on plan assets (153) (260) Net amortization and deferral (2) 145 ------ ------ Net periodic pension cost $ 171 $ 179 ====== ====== The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8 percent and 5 percent, respectively. The expected long-term rate of return on plan assets was 8 percent. The market value of plan assets at September 30, 1997 was $2,830,000. There was a contribution to the plan during 1997 of $370,000 and prepaid pension cost at September 30, 1997 was $446,000. Management Security Plan - ------------------------ In 1992, the Corporation established a Management Security Plan to provide key employees with retirement, death or disability benefits in addition to those provided by the Pension Plan. The expense charged to operations for such future obligations was $243,000 and $170,000 during the first nine months of 1997 and 1996, respectively, and $239,000 for the year 1996. 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). 18 NOTE 14 - Earnings per Share - ------- Earnings per share of common stock are based on the weighed average number of shares outstanding during the periods as follows: Shares --------- Periods of Nine Months Ended: September 30, 1997 3,237,171 September 30, 1996 3,189,359 Year Ended December 31, 1996 3,199,480 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): September 30, ------------------ 1997 1996 -------- -------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $90,164 $76,542 Documentary and Standby Letters of Credit 3,970 4,665 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. 19 NOTE 18 - Stock Repurchase Plan - ------- On April 15, 1997, the Board of Directors approved a stock repurchase plan. The plan authorized management to purchase up to 161,782 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 1996, 9,000 shares were purchased by the Corporation through a similar repurchase plan through the open market. Such shares were canceled and returned to authorized and unissued status. In the first nine months of 1997, no shares were purchased. NOTE 19 - Subsequent Event - ------- On October 21, 1997, the Board of Directors of the Corporation approved a quarterly dividend of $.09 per share to be paid on November 14, 1997 to shareholders of record on October 31, 1997. On October 21, 1997, the Board of Directors of the Corporation approved a two for one (2 for 1) stock split to be effected as a 100% stock dividend. The stock split is to be payable on December 9, 1997 to holders of record of the Company's common stock as of the close of business on November 19, 1997. 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. 20 NOTE 20 - Fair Values of Financial Instruments (cont'd.) - ------- The estimated fair values of the Corporation's financial instruments are as follows (in thousands): September 30, ------------------------------------- 1997 1996 ----------------- ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- -------- Financial Assets Cash and due from banks $ 33,060 33,060 $ 24,962 $ 24,962 Federal funds sold 23,485 23,485 8,330 8,330 Securities 106,307 106,503 123,019 122,541 Loans 262,784 261,734 213,962 214,543 Financial Liabilities Deposits 384,223 384,451 329,798 329,910 Securities sold under repurchase agreements 10,284 10,284 14,453 14,453 Off-balance Sheet Financial Instruments Loan commitments 90,164 76,542 Letters of credit 3,970 4,665 21 Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Summary - ------- Net income for the third quarter of 1997 was $1,782,000, or $.55 per share, compared with $1,634,000, or $.51 per share, for the third quarter of 1996. On a per share basis, net income increased 7.8% over the third quarter of the prior year. Net income for the first nine months of 1997 was $5,226,000, or $1.61 per share, compared with $4,314,000, or $1.35 per share for the first nine months of 1996. Per share amounts are based on average shares outstanding of 3,237,171 for the first nine months of 1997 and 3,189,359 for the first nine months of 1996. Outstanding loans at September 30, 1997 of $262.8 million represented an increase of $48.8 million, or 22.8%, over September 30, 1996 and an increase of $42.8 million, or 19.4%, from December 31, 1996. Total deposits at September 30, 1997 of $384.2 million represented an increase of $54.4 million, or 16.5%, over September 30, 1996 and an increase of $39.2 million, or 11.4%, from December 31, 1996. In the third quarter, net interest income increased 15.8% over the previous year. An increase in non-interest expense of 16.4% partially offset the increase in net interest income. The following table summarizes the Corporation's performance for the nine months ended September 30, 1997 and 1996 (tax equivalent basis and dollars in thousands). Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 -------- -------- -------- ------- Interest Income $8,254 $7,067 $23,458 $20,293 Interest Expense 2,952 2,490 8,205 7,214 ------ ------ ------- ------- Net Interest Income 5,302 4,577 15,253 13,079 Provision for Loan Loss 281 192 633 480 ------ ------ ------- ------- Net Interest Income After Provision for Loan Loss 5,021 4,385 14,620 12,599 Non-Interest Income 825 785 2,407 2,245 Non-Interest Expense 3,128 2,687 9,050 8,267 ------ ------ ------- ------- Income Before Income Tax 2,718 2,483 7,977 6,577 Income Tax Expense 936 849 2,751 2,263 ------ ------ ------- ------- Net Income $1,782 $1,634 $ 5,226 $ 4,314 ====== ====== ======= ======= Net Income per Share $ .55 $ .51 $ 1.61 $ 1.35 Return on Average Assets 1.68% 1.73% 1.73% 1.58% Return on Average Stockholders' Equity* 18.17% 19.97% 18.74% 18.30% * Before adjustment for unrealized gains and losses on Available-for-Sale securities. 22 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 third quarter of 1997 and 1996 (rates on tax equivalent basis). Three Months ended September 30, -------------------------------------------------------------------- 1997 1996 --------------------------------------------- --------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate ---------- -------- ----------- ---------- -------- ----------- (Dollars in Thousands) Earning Assets: Federal Funds Sold $ 19,432 $ 273 5.58% $ 13,083 $ 185 5.37% Investment Securities (Taxable) 110,201 1,705 6.14 124,332 1,888 6.04 Investment Securities (Tax-exempt) 592 10 6.55 -0- -0- -0- Loans, Net of Unearned Discount/(1)/ 254,428 6,266 9.77 208,236 4,994 9.54 -------- ------ -------- ------ Total Earning Assets 384,653 8,254 8.51 345,651 7,067 8.13 ------ ------ Non-interest Earning Assets: Cash and Due From Banks 26,317 21,350 Other Assets 13,656 12,549 Allowance for Loan Losses (3,545) (2,882) -------- -------- Total Assets $421,081 $376,668 ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Money Market Funds $131,601 1,211 3.65 $118,321 985 3.31 Savings 50,514 548 4.30 48,770 495 4.04 Savings Certificates 51,080 646 5.02 47,738 562 4.68 Certificates of Deposit $100,000 or more 31,719 424 5.30 24,253 300 4.92 Other Time 705 10 5.54 487 5 4.18 Other Borrowings 9,890 113 4.52 13,505 143 4.33 -------- ------ -------- ------ Total Interest-Bearing Liabilities 275,509 2,952 4.25 253,074 2,490 3.91 ------ ------ Non-interest Bearing Liabilities: Demand Deposits 104,482 88,637 Other Liabilities 2,171 2,405 Shareholders' Equity 38,919 32,552 -------- -------- Total Liabilities and Shareholders' Equity $421,081 $376,668 ======== ======== Net Interest Income and Margin (Tax-equivalent Basis)/(2)/ $5,302 5.47 $4,577 5.27 ====== ====== (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. 23 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 nine months of 1997 and 1996 (rates on tax equivalent basis). Nine Months ended September 30, ------------------------------------------------------------------ 1997 1996 ------------------------------- --------------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate -------- -------- ----------- ---------- -------- ----------- (Dollars in Thousands) Earning Assets: Federal Funds Sold $ 14,239 $ 589 5.53% $ 16,576 $ 677 5.35% Investment Securities (Taxable) 113,676 5,243 6.17 122,880 5,553 6.04 Investment Securities (Tax-exempt) 473 23 6.51 32 2 8.15 Loans, Net of Unearned Discount/(1)/ 242,215 17,599 9.71 195,727 14,061 9.57 -------- ------- -------- ------- Total Earning Assets 370,603 23,454 8.46 335,215 20,293 8.09 ------- ------- Non-interest Earning Assets: Cash and Due From Banks 24,283 20,778 Other Assets 13,144 12,209 Allowance for Loan Losses (3,365) (2,715) -------- -------- Total Assets $404,665 $365,487 ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts & Money Market Funds $127,444 3,380 3.55 $115,572 2,837 3.28 Savings 50,248 1,562 4.16 45,053 1,359 4.03 Savings Certificates 48,414 1,773 4.90 48,226 1,723 4.77 Certificates of Deposit $100,000 or more 28,672 1,103 5.14 24,350 900 4.94 Other Time 594 23 5.27 402 14 4.63 Other Borrowings 11,107 360 4.33 11,880 381 4.32 -------- ------- -------- ------- Total Interest-Bearing Liabilities 266,479 8,201 4.11 245,483 7,214 3.93 ------- ------- Non-interest Bearing Liabilities: Demand Deposits 98,766 86,264 Other Liabilities 2,147 2,245 Shareholders' Equity 37,273 31,495 -------- -------- Total Liabilities and Shareholders' Equity $404,665 $365,487 ======== ======== Net Interest Income and Margin (Tax-equivalent Basis)/(2)/ $15,253 5.50 $13,079 5.21 ======= ======= (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. 24 Net Interest Income - ------------------- Net interest income (tax equivalent) for the third quarter of 1997 was $5,302,000 which represented an increase of $725,000, or 15.8%, over the third quarter of 1996. This increase was heavily contributed to by a 22.2% increase in average loans for the third quarter of 1997 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 September 30, 1997 and 1996. ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands) 3rd Qtr. 1997 vs. 3rd Qtr. Nine Mos. 1997 vs. Nine Mos. 1996 1996 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: ---------------------------- ----------------------------- Volume Rate Total Volume Rate Total -------- ------- --------- -------- ------ --------- Interest Earning Assets: Federal Funds Sold $ 81 $ 7 $ 88 $ (119) $ 31 $ (88) Investment Securities (Taxable) (377) 194 (183) (489) 179 (310) Investment Securities (Tax-exempt) 10 -0- 10 22 (1) 21 Loans, Net of Unearned Discount 1,147 125 1,272 3,333 205 3,538 ------ ---- ------ ------ ---- ------ Total Interest Income 861 326 1,187 2,747 414 3,161 ------ ---- ------ ------ ---- ------ Interest-Bearing Liabilities: Deposits 272 220 492 653 355 1,008 Other Borrowings (70) 40 (30) (23) 2 (21) ------ ---- ------ ------ ---- ------ Total Interest Expense 202 260 462 630 357 987 ------ ---- ------ ------ ---- ------ Net Interest Income $ 659 $ 66 $ 725 $2,117 $ 57 $2,174 ====== ==== ====== ====== ==== ====== Allowance for Loan Losses and Non-Performing Assets - --------------------------------------------------- The Corporation's allowance for loan losses was $3,682,000, or 1.40% of total loans, as of September 30, 1997 compared to $3,008,000, or 1.41% of total loans, as of September 30, 1996. Transactions in the allowance for loan losses are summarized as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ Balance, Beginning of Period $3,512 $2,829 $2,972 $2,500 Provisions, Charged to Income 281 192 633 480 Loans Charged-Off (129) (42) (200) (69) Recoveries of Loans Previously Charged-Off 18 29 277 97 ------ ------ ------ ------ Net Loans (Charged-Off) Recovered (111) (13) 77 28 ------ ------ ------ ------ Balance, End of Period $3,682 $3,008 $3,682 $3,008 ====== ====== ====== ====== 25 The following table summarizes the non-performing assets as of the end of the last five quarters (in thousands). September 30, June 30, March 31, December 31, September 30, 1997 1997 1997 1996 1996 ------------- -------- --------- ------------ ------------- Non-Accrual Loans $1,245 $ 901 $1,005 $1,102 $1,282 Other Real Estate Owned 151 151 163 166 169 ------ ------ ------ ------ ------ Total Non-Performing Assets $1,396 $1,052 $1,168 $1,268 $1,451 ====== ====== ====== ====== ====== Non-accrual loans to total loans were .47% at September 30, 1997 and non- performing assets were .53% of loans and other real estate owned at the same date. Non-interest Income - ------------------- The major component of non-interest income is service charges on deposits. Other service fees are the majority of other non-interest income. The following table reflects the changes in non-interest income during the periods presented (dollars in thousands). Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------------ 1997 1996 % Change 1997 1996 % Change ------ ------ --------- -------- -------- ---------- Service Charges on Deposit Accounts $ 489 $ 423 15.6% $1,389 $1,210 14.8% Loss on Sale of Investment Securities (1) (8) -- (1) (15) -- Non-recurring Income 33 88 -- 120 157 (23.6) Other Non-interest Income 304 282 7.8 899 893 1.0 ----- ----- ------ ------ Total Non-interest Income $ 825 $ 785 5.1 $2,407 $2,245 7.2 ===== ===== ====== ====== Non-recurring income is primarily interest recovered on loans charged-off in prior years. The decrease in other non-interest income for the nine months ended September 30, 1997 was primarily due to decreases in fees earned from investment brokerage services and issuances of letters of credit. 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 September 30, Nine Months Ended September 30, ----------------------------------- --------------------------------- 1997 1996 % Change 1997 1996 % Change ---------- ---------- ----------- ---------- --------- ---------- Salaries & Employee Benefits $1,895 $1,691 12.1% $5,470 $5,043 8.5% Occupancy Expense - Net 186 179 3.9 573 566 1.2 Furniture and Equipment Expense 237 206 15.1 668 606 10.2 Other Real Estate Expense - Net (21) (4) -- (29) 12 -- Other Expenses: Business Development 186 100 86.0 459 318 44.3 Insurance - Other 25 25 -- 72 76 (5.3) Legal & Professional Fees 152 104 14.4 400 309 29.5 Taxes - Other 54 27 200.0 127 74 71.2 Postage & Courier 77 68 13.2 209 198 5.6 Printing & Supplies 93 82 13.4 267 236 13.1 Regulatory Fees & Assessments 38 52 (26.9) 123 154 (20.1) Other Operating Expenses 206 157 31.2 711 675 5.3 ------ ------ ------ ------ Total Other Expenses 831 615 35.1 2,368 2,040 16.1 ------ ------ ------ ------ Total Non-interest Expense $3,128 $2,687 16.4 $9,050 $8,267 9.5 ====== ====== ====== ====== 26 Total non-interest expense increased 16.4% in the third quarter of 1997 over 1996, reflecting increases in salaries and benefits, furniture and equipment expenses, business development, legal and professional expense, taxes-other and printing and supplies. As a percent of average assets, non-interest expenses were 2.97% in the third quarter of 1997, an increase from 2.85% in the third quarter of 1996. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 51.1% for the third quarter of 1997. 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 third quarter of 1997 is due to salary merit increases, incentive compensation accrual increases, and an increase in pension plan expense. Also, the average number of full-time equivalent employees increased by seven in the third quarter of 1997 to an average full-time equivalent of 142 compared to the same quarter last year. The increase in furniture and equipment expense is primarily a result of increased depreciation for new furniture and equipment acquired in the past year. Business development expense increased as a result of increased advertising expenses related to the new name for Summit Community Bank and advertising expenses related to new products. Legal and professional fees increased due to increased miscellaneous legal fees and other miscellaneous professional fees. Taxes-other increased due to additional state franchise taxes paid on increased levels of capital and additional taxes due as a result of audits of franchise tax returns of all SBI entities for the four years prior to 1996. The increase in printing and supplies was also primarily related to the expenses of the Summit Community Bank name change and new product brochures. Other operating expenses increased in the third quarter of 1997 due to increases in various miscellaneous operating costs including extraordinary expenses related to merchant credit card account relationships. 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. 27 The following table, commonly referred to as a "static gap report", indicates the interest rate sensitivity position at September 30, 1997 and may not be reflective of positions in subsequent periods (dollars in thousands): Total Repriced Matures or Reprices within: Rate After ------------------------------------ Sensitive 1 Year or 30 Days 31-180 181 to One Year Non-interest or Less Days One Year or Less Sensitive Total ---------- --------- --------- --------- ------------ --------- Earning Assets: Loans $151,158 $ 17,388 $15,636 $184,182 $ 78,602 $262,784 Investment Securities 4,243 20,633 24,487 49,363 56,944 106,307 Federal Funds Sold 23,485 -0- -0- 23,485 -0- 23,485 -------- -------- ------- -------- -------- -------- Total Earning Assets 178,886 38,021 40,123 257,030 135,546 392,576 -------- -------- ------- -------- -------- -------- Interest Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 184,100 -0- -0- 184,100 -0- 184,100 Certificate of Deposits greater than $100,000 6,875 13,561 7,569 28,005 5,290 33,295 Other Time Deposits 5,315 21,809 15,048 42,172 10,458 52,630 Repurchase Agreements 10,284 -0- -0- 10,284 -0- 10,284 -------- -------- ------- -------- -------- -------- Total Interest Bearing Liabilities 206,574 35,370 22,617 264,561 15,748 280,309 -------- -------- ------- -------- -------- -------- Interest Sensitivity Gap $(27,688) $ 2,651 $17,506 $ (7,531) $119,798 $112,267 ======== ======== ======= ======== ======== ======== Cumulative Gap $(27,688) $(25,037) $(7,531) ======== ======== ======= Cumulative Gap to Total Earning Assets (7.1%) (6.4%) (1.9%) Cumulative Gap to Total Assets (6.3%) (5.7%) (1.7%) The preceding static gap report reflects a cumulative liability sensitive position during the one year horizon. An inherent weakness of this report is that it ignores the relative volatility any one category of assets liabilities 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 six 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 (1.7%) was reversed to a positive 20.1% "beta adjusted" gap position. Management feels that the "beta adjusted" gap risk technique more accurately reflects the Corporation's gap position. Capital - ------- The Federal Reserve Board has guidelines for capital to total assets (leverage) and capital standards for bank holding companies. The Comptroller of the Currency also has similar guidelines for national banks. These guidelines require a minimum level of Tier I capital to total assets of 3 percent. A banking organization operating at or near these levels is expected to have well- diversified risk, excellent asset quality, high liquidity, good earnings and in general be considered a strong banking organization. Organizations not meeting these characteristics are expected to operate well above these minimum capital standards. Thus, for all but the most highly rated organizations, the minimum Tier I leverage ratio is to be 3 percent plus minimum additional cushions of at least 100 to 200 basis points. At the discretion of the regulatory authorities, additional capital may be required. At September 30, 1997, total capital to total assets was 8.94%. 28 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 September 30, 1997, the Corporation's Tier I capital represented 14.09% of risk weighted assets and total qualifying capital (Tier I and Tier II) represented 15.34% of risk weighted assets. Both ratios are well above current regulatory guidelines. 29 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 September 30, 1997 30 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: November 7, 1997 By: /s/ Philip E. Norwood ----------------- ----------------------------------------- Philip E. Norwood, President and Chief Executive Officer Date: November 7, 1997 By: /s/ Bob G. Scott ----------------- ---------------------------------------- Bob G. Scott, Senior Vice President and Chief Financial Officer 31 EXHIBIT INDEX Exhibit Page No. - ------- -------- 11 Computation of Earnings Per Common Share 27 Financial Data Schedule