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