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, 1999; 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, 1999 was 6,422,497 shares.
SUMMIT BANCSHARES, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1999
and 1998 and at December 31, 1998 4
Consolidated Statements of Income for the Three Months
and Nine Months Ended September 30, 1999 and 1998
and for the Year Ended December 31, 1998 5-6
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1999
and 1998 and for the Year Ended December 31, 1998 7
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 and for
the Year Ended December 31, 1998 8-9
Notes to Consolidated Financial Statements for the Nine
Months Ended September 30, 1999 and 1998 and for the
Year Ended December 31, 1998 10-21
The September 30, 1999 and 1998 and the December 31, 1998 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, 1999 and 1998 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,
1999 1998 1998
---------- ---------- -----------
ASSETS (In Thousands)
CASH AND DUE FROM BANKS NOTE 1 $ 21,982 $ 20,127 $ 26,735
FEDERAL FUNDS SOLD 14,135 37,135 38,706
INVESTMENT SECURITIES NOTE 2
Securities Available-for-Sale, at fair value 126,461 74,787 121,417
Securities Held-to-Maturity, at cost (fair value of 29,329 46,036 26,595
$28,956,000, $46,803,000, and $26,959,000
September 30, 1999 and 1998 and December 31, 1998,
respectively)
LOANS NOTE 3
Loans, Net of Unearned Discount 344,952 301,972 305,833
Allowance for Loan Losses (5,044) (4,663) (4,724)
-------- -------- --------
LOANS, NET 339,908 297,309 301,109
PREMISES AND EQUIPMENT NOTE 4 8,926 7,960 9,082
ACCRUED INCOME RECEIVABLE 4,410 3,835 3,823
OTHER REAL ESTATE NOTE 5 1,494 71 281
OTHER ASSETS 5,671 4,969 5,016
-------- -------- --------
TOTAL ASSETS $ 552,316 $ 492,229 $ 532,764
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS NOTE 6
Noninterest-Bearing Demand $ 135,973 $ 117,982 $ 141,170
Interest-Bearing 336,633 306,452 324,330
------- ------- -------
TOTAL DEPOSITS 472,606 424,434 465,500
SHORT TERM BORROWINGS NOTE 7 28,310 18,838 17,839
ACCRUED INTEREST PAYABLE 560 676 1,037
OTHER LIABILITIES 2,877 3,276 2,153
------ ------ ------
TOTAL LIABILITIES 504,353 447,224 486,529
------- ------- -------
COMMITMENTS AND CONTINGENCIES NOTE 12
SHAREHOLDERS' EQUITY NOTES 13, 15 AND 19
Common Stock - $1.25 Par Value; 20,000,000 shares
authorized; 6,422,497, 6,514,694 and 6,471,827 shares
issued and outstanding at September 30, 1999 and 1998
and at December 31, 1998, respectively 8,028 8,144 8,090
Capital Surplus 6,452 6,285 6,329
Retained Earnings 34,633 30,429 31,271
Accumulated Other Comprehensive Income Unrealized Gain
(Loss) on Available for Sale Investment Securities,
Net of Tax (571) 661 560
Treasury Stock at Cost (30,700 shares at September 30,
1999) (579) (514) (15)
------ ------ ------
TOTAL SHAREHOLDERS' EQUITY 47,963 45,005 46,235
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 552,316 $ 492,229 $ 532,764
======= ======= =======
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,
1999 1998 1998
-------------- -------------- --------------
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and Fees on Loans $ 22,387 $ 20,789 $ 28,000
Interest and Dividends on Investment Securities:
Taxable 6,313 5,026 6,963
Exempt from Federal Income Taxes 27 38 50
Interest on Federal Funds Sold 610 1,535 2,052
------- -------- -------
TOTAL INTEREST INCOME 29,337 27,388 37,065
------- -------- -------
INTEREST EXPENSE
Interest on Deposits 9,307 9,500 12,786
Interest on Short Term Borrowings 551 496 692
Interest on Note Payable 5 -0- -0-
------- -------- -------
TOTAL INTEREST EXPENSE 9,863 9,996 13,478
------- -------- -------
NET INTEREST INCOME 19,474 17,392 23,587
LESS: PROVISION FOR LOAN LOSSES NOTE 3 778 539 785
------- -------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 18,696 16,853 22,802
------- -------- -------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 1,489 1,504 2,018
Gain on Sale of Investment Securities -0- -0- 35
Other Income 1,338 1,235 1,797
------- -------- -------
TOTAL NON-INTEREST INCOME 2,827 2,739 3,850
------- -------- -------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 6,801 6,302 8,576
Occupancy Expense - Net 825 692 928
Furniture and Equipment Expense 904 882 1,150
Other Real Estate Owned (Income) Expense - Net 15 11 (1)
Other Expense NOTE 9 2,753 2,594 3,520
------- -------- -------
TOTAL NON-INTEREST EXPENSE 11,298 10,481 14,173
------- -------- -------
INCOME BEFORE INCOME TAXES 10,225 9,111 12,479
APPLICABLE INCOME TAXES NOTE 10 3,535 3,149 4,333
------- -------- -------
NET INCOME $ 6,690 $ 5,962 $ 8,146
======= ======== =======
NET INCOME PER SHARE NOTE 15
Basic $ 1.04 $ .92 $ 1.25
Diluted 1.00 .87 1.20
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,
--------------------------
1999 1998
-------- --------
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and Fees on Loans $ 7,841 $ 7,136
Interest and Dividends on Investment Securities:
Taxable 2,222 1,754
Exempt from Federal Income Taxes 8 12
Interest on Federal Funds Sold 151 546
-------- --------
TOTAL INTEREST INCOME 10,222 9,448
-------- --------
INTEREST EXPENSE
Interest on Deposits 3,213 3,270
Interest on Short Term Borrowings 237 189
Interest on Note Payable 2 -0-
-------- --------
TOTAL INTEREST EXPENSE 3,452 3,459
-------- --------
NET INTEREST INCOME 6,770 5,989
LESS: PROVISION FOR LOAN LOSSES NOTE 3 140 131
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,630 5,858
-------- --------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 522 500
Loss on Sale of Investment Securities -0- -0-
Other Income 372 413
-------- --------
TOTAL NON-INTEREST INCOME 894 913
-------- --------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,310 2,200
Occupancy Expense - Net 275 221
Furniture and Equipment Expense 314 298
Other Real Estate Owned Expense - Net (10) 11
Other Expense 993 810
-------- --------
TOTAL NON-INTEREST EXPENSE 3,882 3,540
-------- --------
INCOME BEFORE INCOME TAXES 3,642 3,231
APPLICABLE INCOME TAXES NOTE 10 1,259 1,136
-------- --------
NET INCOME $ 2,383 $ 2,095
======== ========
NET INCOME PER SHARE - NOTE 15
Basic $ .37 $ .33
Diluted .36 .31
The accompanying Notes should be read with these financial statements.
6
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED AND COMPANY ONLY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
Accumulated
Other
Comprehensive
Income -
Net Unrealized
Common Stock Gain (Loss) on Total
----------------- Capital Retained Investment Treasury Shareholders'
Shares Amount Surplus Earnings Securities Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
BALANCE AT
JANUARY 1, 1998 6,501,332 $8,127 $6,251 $26,491 $ 243 $ -0- $41,112
Purchases of Stock Held
in Treasury (1,422) (1,422)
Retirement of Stock
Held in Treasury (45,000) (56) (852) 908 -0-
Stock Options Exercised 58,362 73 34 107
Cash Dividend -
$.18 Per Share (1,172) (1,172)
Net Income for the
Nine Months Ended
September 30,1998 5,962 5,962
Securities Available-
for-Sale Adjustment 418 418
-------
Total Comprehensive
Income 6,380
--------- ------ ------ ------- ----- ------- -------
BALANCE AT
SEPTEMBER 30, 1998 6,514,694 8,144 6,285 30,429 661 (514) 45,005
Purchases of Stock Held
in Treasury (526) (526)
Retirement of Stock
Held in Treasury (56,700) (71) (954) 1,025 -0-
Stock Options Exercised 13,833 17 44 61
Cash Dividend -
$.06 Per Share (388) (388)
Net Income for the
Three Months Ended
December 31, 1998 2,184 2,184
Securities Available-
for-Sale Adjustment (101) (101)
-------
Total Comprehensive
Income 2,083
--------- ------ ------ ------- ----- ------- -------
BALANCE AT
DECEMBER 31, 1998 6,471,827 8,090 6,329 31,271 560 (15) 46,235
Purchases of Stock Held
in Treasury (2,481) (2,481)
Retirement of Stock
Held in Treasury (106,000) (133) (1,784) 1,917 -0-
Stock Options Exercised 56,670 71 123 194
Cash Dividend -
$.24 Per Share (1,544) (1,544)
Net Income for the
Nine Months Ended
September 30, 1999 6,690 6,690
Securities Available-
for-Sale Adjustment (1,131) (1,131)
-------
Total Comprehensive
Income 5,559
--------- ------ ------ ------- ----- ------- -------
BALANCE AT
SEPTEMBER 30, 1999 6,422,497 $8,028 $6,452 $34,633 $(571) $ (579) $47,963
========= ====== ====== ======= ===== ======= =======
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, 1999 AND 1998
AND FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
September 30, (Unaudited)
---------------------- December 31,
1999 1998 1998
-------- -------- -----------
(In Thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 6,690 $ 5,962 $ 8,146
-------- -------- --------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 808 775 1,037
Net Premium Amortization (Accretion)
of Investment Securities 57 85 (31)
Provision for Loan Losses 778 539 785
Deferred Income Taxes (Benefit) (230) (364) (465)
Gain on Sale of Investment Securities (1) -0- (35)
Net Gain From Sale of Other Real Estate (20) (2) (2)
Net Gain From Sale of Premises and Equipment -0- (3) (3)
Increase in Accrued Income and Other Assets (151) (683) (523)
Increase in Accrued Expenses and Other Liabilities 246 1,683 921
-------- -------- --------
Total Adjustments 1,487 2,030 1,684
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,177 7,992 9,830
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in Federal Funds Sold 24,571 (1,375) (2,946)
Proceeds from Matured and Prepaid Investment Securities
Held-to-Maturity 3,280 17,627 21,627
Available-for-Sale 61,571 33,727 63,334
Proceeds from Sales of Investment Securities 12,084 -0- 11,992
Purchase of Investment Securities
Held-to-Maturity (6,037) (17,617) (20,644)
Available-for-Sale (80,445) (48,385) (118,148)
Loans Originated and Principal Repayments, Net (41,207) (26,165) (30,482)
Recoveries of Loans Previously Charged-Off 136 198 217
Proceeds from Sale of Premises and Equipment -0- 3 6
Proceeds from Sale of Other Real Estate 23 82 82
Purchases of Premises and Equipment (652) (819) (2,206)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (26,676) (42,724) (77,168)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Demand Deposits, Savings
Accounts and Interest Bearing Transaction Accounts 1,093 21,095 60,585
Net Increase in Certificates of Deposit 6,013 1,615 3,191
Net Increase in Repurchase Agreements 10,471 4,149 3,150
Payments of Cash Dividends (1,544) (1,172) (1,560)
Proceeds from Stock Options Exercised 194 107 168
Purchase of Treasury Stock (2,481) (1,422) (1,948)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,746 24,372 63,586
-------- -------- --------
NET DECREASE IN CASH AND DUE FROM BANKS (4,753) (10,360) (3,752)
CASH AND DUE FROM BANKS AT BEGINNING
OF PERIOD 26,735 30,487 30,487
-------- -------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 21,982 $ 20,127 $ 26,735
======== ======== ========
8
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES:
(Unaudited)
September 30, (Unaudited)
------------------- December 31,
1999 1998 1998
-------- -------- -----------
(In Thousands)
(1) Interest Paid $ 10,340 $ 9,998 $ 13,120
(2) Income Taxes Paid 3,773 3,649 4,815
(3) Other Real Estate Acquired in Settlement of Loans 1,216 -0- 210
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 1998 (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 1999 the average cash balance maintained at the
Federal Reserve Bank was $978,000. Compensating balances held at
correspondent banks, to minimize service charges, averaged
approximately $17,797,000 during the same period.
Investment Securities
---------------------
The Corporation has adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). At the date of purchase, the Corporation is
required to classify debt and equity securities into one of three
categories: held-to-maturity, trading or available-for-sale. At each
reporting date, the appropriateness of the classification is
reassessed. Investments in debt securities are classified as held-to-
maturity and measured at amortized cost in the financial statements
only if management has the positive intent and ability to hold those
securities to maturity. Securities that are bought and held principally
for the purpose of selling them in the near term are classified as
trading and measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Investments not
classified as either held-to-maturity or trading are classified as
available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a
separate component of shareholders' equity until realized.
The Corporation has the ability and intent to hold to maturity its
investment securities classified as held-to-maturity; accordingly, no
adjustment has been made for the excess, if any, of amortized cost over
market. In determining the investment category classifications,
management considers its asset/liability strategy, changes in interest
rates and prepayment risk, the need to increase capital and other
factors. Under certain circumstances (including the deterioration of
the issuer's creditworthiness, a change in tax law, or statutory or
regulatory requirements), the Corporation may change the investment
security classification. In the periods reported for 1999 and 1998 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 simple interest method. Generally, loan origination and commitment
fees are recognized at the time of funding and are considered
adjustments to interest income. Related direct costs are not separately
allocated to loans but are charged to non-interest expense in the
period incurred. The net effect of not recognizing such fees and
related costs over the life of the related loan is not considered to be
material to the financial statements. The accrual of interest on a loan
is discontinued when, in the opinion of management, there is doubt
about the ability of the borrower to pay interest or principal.
Interest previously earned, but uncollected on such loans, is written
off. After loans are placed on non-accrual all payments received are
applied to principal and no interest income is recorded until the loan
is returned to accrual status or the principal has been reduced to
zero.
The Corporation has adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan," as amended
by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosure." Under this standard, the allowance for loan losses related
to loans that are identified for evaluation in accordance with
Statement No. 114 (impaired loans) is based on discounted cash flows
using the loan's initial effective rate or the fair value of the
collateral for certain collateral dependent loans.
The allowance for loan losses is comprised of amounts charged against
income in the form of a provision for loan losses as determined by
management. Management's evaluation is based on a number of factors,
including the Subsidiary Banks' loss experience in relation to
outstanding loans and the existing level of the allowance, prevailing
and prospective economic conditions, and management's continuing review
of the discounted cash flow values of impaired loans and its evaluation
of the quality of the loan portfolio. Loans are charged against the
allowance for loan losses when management believes that the
collectibility of the principal is unlikely.
The evaluation of the adequacy of loan collateral is often based upon
estimates and appraisals. Because of changing economic conditions, the
valuations determined from such estimates and appraisals may also
change. Accordingly, the Corporation may ultimately incur losses which
vary from management's current estimates. Adjustments to the allowance
for loan losses will be reported in the period such adjustments become
known or are reasonably estimable.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation expense is computed on the straight-line
method based upon the estimated useful lives of the assets ranging from
three to forty years. Maintenance and repairs are charged to non-
interest expenses. Renewals and betterments are added to the asset
accounts and depreciated over the periods benefited. Depreciable assets
sold or retired are removed from the asset and related accumulated
depreciation accounts and any gain or loss is reflected in the income
and expense accounts.
Other Real Estate
-----------------
Other real estate is foreclosed property held pending disposition and
is valued at the lower of its fair value or the recorded investment in
the related loan. At foreclosure, if the fair value, less estimated
costs to sell, of the real estate acquired is less than the
Corporation's recorded investment in the related loan, a writedown is
recognized through a charge to the allowance for loan losses. Any
subsequent reduction in value is recognized by a charge to income.
Operating expenses of such properties, net of related income, and gains
and losses on their disposition are included in non-interest expense.
Federal Income Taxes
--------------------
The Corporation joins with its Subsidiaries in filing a consolidated
federal income tax return. The Subsidiaries pay to the parent a charge
equivalent to their current federal income tax based on the separate
taxable income of the Subsidiaries.
The Corporation and the Subsidiaries maintain their records for
financial reporting and income tax reporting purposes on the accrual
basis of accounting. Deferred income taxes are provided in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Deferred income taxes are provided for accumulated
temporary differences due to basic differences for assets and
liabilities for financial reporting and income tax purposes.
Realization of net deferred tax assets is dependent on generating
sufficient future taxable income. Although realization is not assured,
management believes it is more likely than not that all of the net
deferred tax assets will be realized. The amount of the net deferred
tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income are reduced.
Cash and Cash Equivalents
-------------------------
For the purpose of presentation in the Statements of Cash Flows, cash
and cash equivalents are defined as those amounts included in the
balance sheet caption "Cash and Due from Banks."
11
NOTE 1 - Summary of Significant Accounting Policies (cont'd.)
- ------
Reclassification
----------------
Certain reclassifications have been made to the 1998 financial
statements to conform to the 1999 presentation.
Earnings Per Common and Common Equivalent Share
-----------------------------------------------
Earnings per common and common equivalent share is calculated by
dividing net income by the weighted average number of common shares and
common share equivalents. Stock options are regarded as common share
equivalents and are therefore considered in earnings per share
calculations, if dilutive. The number of common share equivalents is
determined using the treasury stock method.
Audited Financial Statements
----------------------------
The consolidated balance sheet as of December 31, 1998, and the
consolidated statements of income, changes in shareholders' equity and
cash flows for the year ended December 31, 1998 are headed "unaudited"
in these financial statements. These statements were reported in the
Securities Exchange Commission Form 10-K as of December 31, 1998 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, 1999
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Investment Securities - Held-to-Maturity
U.S. Treasury Securities $ 8,993 $ 76 $ -0- $ 9,069
U.S. Government Agencies and Corporations 20,048 -0- (449) 19,599
Obligations of States and Political Subdivisions 288 -0- -0- 288
------- ------- ------- -------
Total Held-to-Maturity Securities 29,329 76 (449) 28,956
------- ------- ------- -------
Investment Securities - Available-for-Sale
U.S. Treasury Securities 24,206 126 (24) 24,308
U.S. Government Agencies
and Corporations 87,361 30 (857) 86,534
U.S. Government Agency Mortgage
Backed Securities 14,207 35 (177) 14,065
Obligations of States and Political Subdivisions 350 2 -0- 352
Federal Reserve and Federal Home Loan Bank Stock 1,202 -0- -0- 1,202
------- ------- ------- -------
Total Available-for-Sale Securities 127,326 193 (1,058) 126,461
------- ------- ------- -------
Total Investment Securities $156,655 $ 269 $ (1,507) $155,417
======= ======= ======= =======
In the above schedule the amortized cost of Total Held-to-Maturity
--------------
Securities of $29,329,000 and the fair value of Total Available-for-Sale
----------
Securities of $126,461,000 are reflected in Investment Securities on the
consolidated balance sheet as of September 30, 1999 for a total of $155,790,000.
A net unrealized loss of $865,000 is included in the Available-for-Sale
Investment Securities balance. The unrealized loss, net of tax, is included in
Shareholders' Equity.
Investment securities with carrying value of $48,055,000 at September
30, 1999 were pledged to secure federal, state and municipal deposits for other
purposed as required or permitted by law. The fair value of these pledged
securities totaled $47,888,000 at September 30, 1999.
12
NOTE 2 - Investment Securities (cont'd.)
- ------
A summary of amortized cost and estimated fair values of investment
securities is as follows (in thousands):
September 30, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Investment Securities - Held-to-Maturity
U.S. Treasury Securities $ 13,991 $ 319 $ -0- $ 14,310
U.S. Government Agencies and Corporations 25,377 401 (2) 25,776
U.S. Government Agency Mortgage Backed Securities 5,636 40 (3) 5,673
Obligations of States and Political Subdivisions 1,032 12 -0- 1,044
-------- ------ ---- --------
Total Held-to-Maturity Securities 46,036 772 (5) 46,803
-------- ------ ---- --------
Investment Securities - Available-for-Sale
U.S. Treasury Securities 38,045 701 -0- 38,746
U.S. Government Agencies
and Corporations 25,149 278 (6) 25,421
U.S. Government Agency Mortgage
Backed Securities 9,531 31 (2) 9,560
Obligations of States and Political Subdivisions
Federal Reserve and Federal Home Loan Bank Stock 1,060 -0- -0- 1,060
-------- ------ ---- --------
Total Available-for-Sale Securities 73,785 1,010 (8) 74,787
-------- ------ ---- --------
Total Investment Securities $119,821 $1,782 $(13) $121,590
======== ====== ==== ========
In the above schedule the amortized cost of Total Held-to-Maturity
--------------
Securities of $46,036,000 and the fair value of Total Available-for-Sale
----------
Securities of $74,787,000 are reflected in Investment Securities on the
consolidated balance sheet as of September 30, 1998 for a total of $120,823,000.
A net unrealized gain of $1,002,000 is included in the Available-for-Sale
Investment Securities balance. The unrealized gain, net of tax, is included in
Shareholders' Equity.
Effective October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards Board No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") which establishes accounting and reporting
standards for derivative instruments and requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. At the effective date, the Corporation
transferred approximately $ 17,448,000 of securities from Held-to-Maturity to
Available-for-Sale classification. At the time of transfer the securities had an
approximate unrealized gain of $349,000.
NOTE 3 - Loans and Allowance for Loan Losses
- ------
The book values of loans by major type follow (in thousands):
September 30,
-------------------- December 31,
1999 1998 1998
---- ---- -----------
Commercial $152,975 $130,780 $133,066
Real Estate Mortgage 117,033 99,191 100,421
Real Estate Construction 42,303 40,067 40,456
Loans to Individuals 32,861 32,473 32,388
Less: Unearned Discount (220) (539) (498)
-------- -------- --------
344,952 301,972 305,833
Allowance for Loan Losses (5,044) (4,663) (4,724)
-------- -------- --------
Loans - Net $339,908 $297,309 $301,109
======== ======== ========
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,
1999 1998 1998
------------ ------------ ------------
Balance, Beginning of Period $4,724 $4,065 $4,065
Provisions, Charged to Income 778 539 785
Loans Charged-Off (594) (139) (343)
Recoveries of Loans Previously
Charged-Off 136 198 217
------ ------ ------
Net Loans (Charged-Off) Recovered (458) 59 (126)
------ ------ ------
Balance, End of Period $5,044 $4,663 $4,724
====== ====== ======
The provisions for loan losses charged to operating expenses during the
nine months ended September 30, 1999 and September 30,1998 of $778,000 and
$539,000, respectively, were considered adequate to maintain the allowance in
accordance with the policy discussed in Note 1. For the year ended December 31,
1998, a provision of $785,000 was recorded.
At September 30, 1999, the recorded investment in loans that are considered
to be impaired under Statement of Financial Accounting Standards No. 114 was
$2,757,000 (of which $ 2,757,000 were on non-accrual status). The related
allowance for loan losses for these loans was $913,000. The average recorded
investment in impaired loans during the nine months ended September 30, 1999 was
approximately $3,253,000. For this period the Corporation recognized no
interest income on these impaired loans.
NOTE 4 - Premises and Equipment
- ------
The investment in premises and equipment stated at cost and net of
accumulated amortization and depreciation is as follows (in thousands):
September 30,
------------------- December 31,
1999 1998 1998
------- ------- ------------
Land $ 2,783 $ 1,446 $ 2,783
Buildings and Improvements 7,610 7,811 7,537
Furniture & Equipment 7,755 7,000 7,234
------- ------- -------
Total Cost 18,148 16,257 17,554
Less: Accumulated Amortization and Depreciation (9,222) (8,297) (8,472)
------- ------- -------
Net Book Value $ 8,926 $ 7,960 $ 9,082
======= ======= =======
NOTE 5 - Other Real Estate
- ------
The carrying value of other real estate is as follows (in thousands):
September 30,
------------------- December 31,
1999 1998 1998
------- ------- ------------
Other Real Estate $ 1,494 $ 71 $ 281
Valuation Reserve -0- -0- -0-
------- ------ -----
Net Other Real Estate $ 1,494 $ 71 $ 281
======= ====== =====
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,
1999 1998 1998
------- ------- ------------
Balance, Beginning of Period $-0- $ 34 $ 34
Provisions Charged to Income -0- -0- -0-
Reductions from Sales -0- (34) (34)
---- ---- ----
Balance, End of Period $-0- $-0- $-0-
==== ==== ====
There were no direct writedowns of other real estate charged to income for
the nine months ended September 30, 1999 or September 30,1998, respectively, or
for the year ended December 31, 1998.
NOTE 6 - Deposits
- ------
The book values of deposits by major type follow (in thousands):
September 30,
------------------- December 31,
1999 1998 1998
-------- -------- ------------
Noninterest-Bearing Demand Deposits $135,973 $117,982 $141,170
-------- -------- --------
Interest-Bearing Deposits:
Interest-Bearing Transaction
Accounts and Money Market Funds 155,398 148,277 151,557
Savings 83,951 68,480 81,503
Savings Certificates - Time 58,614 52,489 53,394
Certificates of Deposits $100,000 or more 37,892 36,328 37,099
Other 778 878 777
-------- -------- --------
Total 336,633 306,452 324,330
-------- -------- --------
Total Deposits $472,606 $424,434 $465,500
======== ======== ========
NOTE 7 Short Term Borrowings
- ------
Securities sold under repurchase agreements generally represent borrowings
with maturities ranging from one to thirty days. Information relating to these
borrowings is summarized as follows (in thousands):
Nine Months Ended September 30, Year Ended
------------------------------- December 31,
1999 1998 1998
------- ------- ------------
Securities Sold Under Repurchase Agreements:
Average $17,444 $14,450 $15,742
Period-End 24,310 18,838 17,839
Maximum Month-End Balance During Period 24,310 18,838 19,354
Interest Rate
Average 3.89% 4.59% 4.40%
Period-End 4.26 4.59 3.83
The Corporation, through one of its subsidiaries, has available a line of
credit with the Federal Home Loan Bank of Dallas which allows the subsidiary to
borrow on a collateralized basis at a fixed term. At September 30, 1999, the
subsidiary had borrowed $4,000,000, bearing an interest rate of 5.43% and having
a maturity of April 2000 under the line of credit.
NOTE 8 - Notes Payable
- ------
On July 15, 1999, the Corporation obtained lines of credit from a bank
under which the Corporation may borrow $9,000,000 at prime rate. The lines of
credit are secured by stock of one of the Subsidiary Banks and mature in July
2000, whereupon, if balances are outstanding, the lines convert to term notes
having five year terms. The Corporation will not pay a fee for any unused
portion of the lines. As of September 30, 1999, there were no borrowings
outstanding.
15
NOTE 9 - 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,
1999 1998 1998
-------- -------- ------------
Business Development $ 417 $ 459 $ 611
Legal and Professional Fees 468 362 511
Printing and Supplies 286 305 387
Regulatory Fees and Assessments 137 123 169
Other 1,445 1,345 1,842
------ ------ ------
Total $2,753 $2,594 $3,520
====== ====== ======
NOTE 10 - Income Taxes
- -------
Federal income taxes included in the consolidated balance sheets were as
follows (in thousands):
September 30,
-------------------- December 31,
1999 1998 1998
------ ------ ------------
Current Tax Asset (Liability) $ 18 $ 129 $ 10
Deferred Tax Asset 1,786 820 973
------ ------ ------
Total Included in Other Assets $1,804 $ 949 $ 983
====== ====== ======
The deferred tax asset at September 30, 1999 of $1,786,000 included
$294,000 related to unrealized losses 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,
1999 1998 1998
-------- -------- ------------
Federal Income Tax Expense
Current $3,765 $3,513 $4,798
Deferred (230) (364) (465)
------ ------ ------
Total Federal Income Tax Expense $3,535 $3,149 $4,333
====== ====== ======
Effective Tax Rates 34.6% 34.6% 34.7%
====== ====== ======
The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to operating earnings
are as follows (in thousands):
Nine Months Ended September 30, Year Ended
------------------------------- December 31,
1999 1998 1998
-------- -------- ------------
Federal Income Taxes at Statutory
Rate of 34.3% $3,507 $3,114 $4,278
Effect of Tax Exempt Interest Income (9) (15) (19)
Non-deductible Expenses 39 39 58
Other (2) 11 16
------ ------ ------
Income Taxes Per Income Statement $3,535 $3,149 $4,333
====== ====== ======
16
NOTE 10 - Income Taxes (con't)
- -------
Deferred income tax expense (benefit) results from differences between
amounts of assets and liabilities as measured for income tax return and
financial reporting purposes. The significant components of federal deferred tax
assets and liabilities are in the following table (in thousands):
Nine Months Ended
September 30, Year Ended
-------------------- December 31,
1999 1998 1998
------ ------ ------------
Federal Deferred Tax Assets:
Allowance for Loan Losses $1,290 $ 991 $1,107
Valuation Reserves - Other Real Estate 1 1 1
Interest on Non-accrual Loans 202 206 199
Deferred Compensation 426 385 414
Unrealized Losses on Available-for-Sale Securities 294 -0- -0-
Other 24 27 18
------ ------ ------
Gross Federal Deferred Tax Assets 2,237 1,610 1,739
------ ------ ------
Federal Deferred Tax Liabilities:
Depreciation and Amortization 287 263 301
Accretion 54 75 78
Unrealized Gains on Available-for-Sale Securities -0- 341 289
Other 110 111 98
------ ------ ------
Gross Federal Deferred Tax Liabilities 451 790 766
------ ------ ------
Net Deferred Tax Asset $1,786 $ 820 $ 973
====== ====== ======
NOTE 11 - Related Party Transactions
- -------
The Subsidiary Banks have transactions made in the ordinary course of
business with certain of its officers, directors and their affiliates. All loans
included in such transactions are made on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with other persons. Total loans outstanding to such
parties amounted to approximately $2,848,000 at December 31, 1998.
NOTE 12 - Commitments and Contingent Liabilities
- -------
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the financial statements. No losses are anticipated
as a result of these transactions. Commitments are most frequently extended for
real estate, commercial and industrial loans.
At September 30, 1999, outstanding documentary and standby letters of
credit totaled $4,189,000 and commitments to extend credit totaled $111,732,000.
NOTE 13 - Stock Option Plans
- -------
The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the
1997 Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted for
two-for-one stock splits in 1993, 1995 and 1997) of common stock for grants
thereunder. The Plans provide for the granting to executive management and
other key employees of Summit Bancshares, Inc. and subsidiaries incentive stock
options, as defined under the current tax law. The options under the Plans will
be exercisable for ten years from the date of grant and generally vest ratably
over a five year period. Options will be and have been granted at prices which
will not be less than 100-110% of the fair market value of the underlying common
stock at the date of grant.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Since the option prices are considered to approximate
fair market value at date of grant, no compensation expense has been reported.
Had compensation cost for these plans been determined consistent with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" the Corporation's net income and earnings per share would have
been reduced by insignificant amounts on a proforma basis for the year ended
December 31, 1998, and the nine months ended September 30, 1999.
17
NOTE 13 - Stock Option Plans (con't)
- -------
The following is a summary of transactions during the periods presented:
Shares Under Option
----------------------------------------
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
------------------- -----------------
Outstanding, Beginning of Period 461,717 543,112
Additional Options Granted During
the Period 49,500 3,000
Forfeited During the Period (2,400) (5,400)
Exercised During the Period (56,670) (78,995)
------- -------
Outstanding, End of Period 452,147 461,717
======= =======
Options outstanding at September 30, 1999 ranged in price from $3.00 to
$19.25 per share with a weighted average exercise price of $8.29 and 337,685
shares exercisable. At September 30, 1999, there remained 484,800 shares
reserved for future grants of options under the 1997 Plan.
NOTE 14 - Employee Benefit Plans
- -------
Pension Plan
- ------------
The Corporation had a defined benefit pension plan covering substantially
all of its employees. Effective August 31, 1998, the accrual of benefits under
this plan were suspended. In February 1999, the Board of Directors chose to
terminate the plan effective April 15, 1999. The assets held in trust have been
distributed to the plan participants under terms of the plan.
Funding for the plan was provided by employer contributions to trust funds
in amounts determined by actuarial assumptions and valuation of the plan. The
market value of plan assets at the time of the termination of the plan was
$2,146,000. There has not been a contribution to the plan during 1999.
401(k) Plan
- -----------
The Corporation established a 401(k) plan in December 1997 covering
substantially all employees. The Corporation did not match the employee's
contributions in 1997, 1998 nor to date in 1999.
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 $156,000 and $183,000 during the first nine months of 1999 and
1998, respectively, and $237,000 for the year 1998.
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 15 - Earnings per Share
- -------
The following data shows the amounts used in computing earnings per share
and the weighted average number of shares of dilutive potential common stock.
September 30,
---------------- December 31,
1999 1998 1998
---- ---- ----
Net income $ 6,690 $ 5,962 $ 8,146
========== ========== ==========
Weighted average number of common
shares used in Basic EPS 6,425,897 6,503,876 6,496,595
Effect of dilutive stock options 244,071 329,947 316,702
---------- ---------- ----------
Weighted number of common shares
and dilutive potential common
stock used in Diluted EPS 6,669,968 6,833,823 6,813,297
========== ========== ==========
NOTE 16 - Financial Instruments with Off-Balance Sheet Risk
- -------
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include loan commitments, standby
letters of credit and documentary letters of credit. The instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the financial statements.
The Corporation's exposure to credit loss in the event of non-performance
by the other party of these loan commitments and standby letters of credit is
represented by the contractual amount of those instruments. The Corporation uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
The total contractual amounts of financial instruments with off-balance
sheet risk are as follows (in thousands):
September 30,
----------------------
1999 1998
-------- --------
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $111,732 $105,247
Documentary and Standby Letters of Credit 4,189 2,868
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
The Corporation evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, owner occupied real estate and income-
producing commercial properties.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
NOTE 17 - Concentrations of Credit Risk
- -------
The Subsidiary Banks grant commercial, consumer and real estate loans in
their direct market which is defined as Fort Worth and its surrounding area. The
Board of Directors of each Subsidiary Bank monitors concentrations of credit by
purpose, collateral and industry at least quarterly. Certain limitations for
concentration are set by the Boards. Additional loans in excess of these limits
must have prior approval of the bank's directors' loan committee. Although its
Subsidiary Banks have diversified loan portfolios, a substantial portion of its
debtors' abilities to honor their contracts is dependent upon the strength of
the local and state economy.
NOTE 18 - Litigation
- -------
Certain of the Subsidiary Banks are involved in legal actions arising in
the ordinary course of business. It is the opinion of management, after
reviewing such actions with outside legal counsel, that the settlement of these
matters will not materially affect the Corporation's financial position.
19
NOTE 19 - Stock Repurchase Plan
- -------
On April 20, 1999, the Board of Directors approved a stock repurchase plan.
The plan authorized management to purchase up to 322,232 shares of the
Corporation's common stock over the next twelve months through the open market
or in privately negotiated transactions in accordance with all applicable state
and federal laws and regulations.
In the nine months of 1999, 135,900 shares were purchased in the open
market by the Corporation through a similar repurchase plan and subsequently
105,200 shares have been canceled.
NOTE 20 - Subsequent Event
- -------
On October 19, 1999, the Board of Directors of the Corporation approved a
quarterly dividend of $.08 per share to be paid on November 15, 1999 to
shareholders of record on November 1, 1999.
NOTE 21 - Fair Values of Financial Instruments
- -------
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and due from banks and federal funds sold approximate those
assets' fair values.
Investment securities (including mortgage-backed securities): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: For variable-rate loans, fair values are based on carrying values.
The fair values for fixed rate loans such as mortgage loans (e.g., one-to-
four family residential) and installment loans are estimated using
discounted cash flow analysis. The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair value disclosed for interest bearing and
noninterest-bearing demand deposits, passbook savings, and certain types of
money market accounts are, by definition, equal to the amount payable on
demand at the reporting date or their carrying amounts. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements approximate their fair values.
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
September 30,
-----------------------------------------
1999 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial Assets
Cash and due from banks $ 21,982 $ 21,982 $ 20,127 $ 20,127
Federal funds sold 14,135 14,135 37,135 37,135
Securities 155,790 155,417 120,823 121,590
Loans 344,952 344,185 301,972 301,548
Reserve for loan losses (5,044) (5,044) (4,663) (4,663)
Financial Liabilities
Deposits 472,606 472,691 424,434 424,776
Short Term Borrowings 28,310 28,309 18,838 18,838
Off-balance Sheet Financial
Instruments
Loan commitments 111,732 105,247
Letters of credit 4,189 2,868
20
NOTE 22 - Comprehensive Income
- -------
The Corporation has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income". This new standard requires an entity to report and display
comprehensive income and its components. Comprehensive income is as follows (in
thousands):
For the Nine Months Ended September 30,
--------------------------------------- Year Ended
1999 1998 December 31, 1998
------- ------- -----------------
Net Income $ 6,690 $ 5,962 $ 8,146
Other Comprehensive Income:
Unrealized gain (loss) on securities
available-for-sale, net of tax (1,131) 418 317
------- ------- -------
Comprehensive Income $ 5,559 $ 6,380 $ 8,463
======= ======= =======
21
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Summary
- -------
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Corporation analyzes the major elements of the Corporation's
consolidated balance sheets and statements of income. This discussion should be
read in conjunction with the consolidated financial statements and accompanying
notes.
Net income for the third quarter of 1999 was $2,383,000, or $. 36 diluted
earnings per share, compared with $2,095,000, or $.31 diluted earnings per
share, for the third quarter of 1998. Net income for the first nine months of
1999 was $6,690,000, or $1.00 diluted earnings per share, compared with
$5,962,000, or $.87 diluted earnings per share, for the first nine months of the
prior year. On a per share basis, diluted earnings per share increased 16.1%
over the third quarter of the prior year. Per share amounts are based on average
shares outstanding of 6,669,968 for the first nine months of 1999 and 6,833,823
for the comparable period of 1998 adjusted to reflect stock options granted.
Outstanding loans at September 30, 1999 of $345.0 million represented an
increase of $43.0 million, or 14.2%, over September 30,1998 and an increase of
$39.1 million, or 12.8%, from December 31, 1998.
Total deposits at September 30, 1999 of $472.6 million represented an
increase of $48.2 million, or 11.4%, over September 30,1998 and an increase of
$7.1 million, or 1.5%, from December 31, 1998.
In the third quarter, net interest income increased 13.0% over the previous
year. Non-interest expense increased 9.7% in the third quarter over that of the
same period in the prior year.
The following table summarizes the Corporation's performance for the three
months and nine months ended September 30, 1999 and 1998 (tax equivalent basis
and dollars in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
Interest Income $10,226 $ 9,454 $29,350 $27,410
Interest Expense 3,452 3,459 9,863 9,996
------- ------- ------- -------
Net Interest Income 6,774 5,995 19,487 17,414
Provision for Loan Loss 140 131 778 539
------- ------- ------- -------
Net Interest Income After
Provision for Loan Loss 6,634 5,864 18,709 16,875
Non-Interest Income 894 913 2,827 2,739
Non-Interest Expense 3,882 3,540 11,298 10,481
------- ------- ------- -------
Income Before Income Tax 3,646 3,237 10,238 9,133
Income Tax Expense 1,263 1,142 3,548 3,171
------- ------- ------- -------
Net Income $ 2,383 $ 2,095 $ 6,690 $ 5,962
======= ======= ======= =======
Net Income per Share-
Basic $ .37 $ .33 $ 1.04 $ .92
Diluted .36 .31 1.00 .87
Return on Average Assets 1.76% 1.71% 1.70% 1.70%
Return on Average Stockholders'
Equity 19.84% 18.75% 19.19% 18.54%
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 1999 and 1998 (rates on tax equivalent basis).
Three Months Ended September 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Average Average Average Average
Balances Interest Yield/Rate Balances Interest Yield/Rate
--------- -------- ---------- --------- -------- ----------
(Dollars in Thousands)
Earning Assets:
Federal Funds Sold & Due Fr Time $ 17,326 $ 151 5.14% $ 38,743 $ 546 5.57%
Investment Securities (Taxable) 145,401 2,222 5.87 115,539 1,754 6.03
Investment Securities (Tax-exempt) 709 12 7.01 1,101 18 6.81
Loans, Net of Unearned Discount(1) 337,034 7,841 9.23 296,573 7.136 9.55
-------- ------- -------- ------
Total Earning Assets 500,470 10,226 8.11 451,956 9.454 8.30
-------- ------- -------- ------
Non-interest Earning Assets:
Cash and Due From Banks 24,402 21,926
Other Assets 18,789 15,651
Allowance for Loan Losses (4,947) (4,547)
-------- --------
Total Assets $538,714 $484,986
======== ========
Interest-Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Money Market Funds $159,643 1,290 3.21 $146,627 1,369 3.70
Savings 81,952 823 3.98 65,542 731 4.43
Savings Certificates 56,051 643 4.55 52,098 664 5.06
Certificates of Deposit
$100,000 or more 36,925 447 4.80 36,645 494 5.35
Other Time 778 10 4.97 868 12 5.59
Other Borrowings 21,947 239 4.32 16,395 189 4.57
-------- ------- -------- ------
Total Interest-Bearing Liabilities 357,296 3,452 3.83 318,175 3,459 4.31
------- ------
Non-interest Bearing Liabilities:
Demand Deposits 131,650 119,965
Other Liabilities 2,760 2,542
Shareholders' Equity 47,008 44,304
-------- --------
Total Liabilities and
Shareholders' Equity $538,714 $484,986
======== ========
Net Interest Income and Margin
(Tax-equivalent Basis)(2) $ 6,774 5.37 $5,995 5.26
======= =====
(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 34.3% 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 nine months ended September 30, 1999 and 1998 (rates on tax
equivalent basis).
Nine Months Ended September 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Average Average Average Average
Balances Interest Yield/Rate Balances Interest Yield/Rate
-------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
Earning Assets:
Federal Funds Sold & Due Fr Time $ 18,524 $ 682 4.92% $ 36,993 $1, 535 5.55%
Investment Securities (Taxable) 143,059 6,240 5.83 109,895 5,026 6.12
Investment Securities (Tax-exempt) 781 41 7.06 1,126 60 6.93
Loans, Net of Unearned Discount(1) 326,443 22,386 9.17 288,200 20,789 9.65
-------- ------- -------- -------
Total Earning Assets 488,807 29,349 8.03 436,214 27,410 8.40
------- -------
Non-interest Earning Assets:
Cash and Due From Banks 23,596 22,087
Other Assets 19,820 15,546
Allowance for Loan Losses (4,819) (4,333)
-------- --------
Total Assets $527,404 $469,514
======== ========
Interest-Bearing Liabilities:
Interest-Bearing Transaction
Accounts & Money Market Funds $155,884 3,689 3.16 $141,124 3,867 3.66
Savings 82,464 2,430 3.94 65,273 2,169 4.44
Savings Certificates 53,994 1,854 4.59 51,878 1,972 5.08
Certificates of Deposit
$100,000 or more 35,918 1,303 4.85 36,447 1,454 5.33
Other Time 778 30 5.08 909 38 5.63
Other Borrowings 18,601 556 4.00 14,450 496 4.59
-------- ------- -------- -------
Total Interest-Bearing Liabilities 347,639 9,862 3.79 310,081 9,996 4.31
------- -------
Non-interest Bearing Liabilities:
Demand Deposits 129,470 114,024
Other Liabilities 3,674 2,409
Shareholders' Equity 46,621 43,000
-------- --------
Total Liabilities and
Shareholders' Equity $527,404 $469,514
======== ========
Net Interest Income and Margin
(Tax-equivalent Basis)(2) $19,487 5.33 $17,414 5.34
======= =======
(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 34.3% in both years.
24
Net Interest Income
- -------------------
Net interest income (tax equivalent) for the third quarter of 1999 was
$6,774,000 which represented an increase of $779,000, or 13.0%, over the third
quarter of 1998. This increase was heavily contributed to by a 13.6% increase in
average loans for the third quarter of 1999 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, 1999 and
1998.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in Thousands)
3rd Qtr. 1999 vs. 3rd Qtr. 1998 Nine Months 1999 vs. Nine Months 1998
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------ ------- ----- ------ ------- -----
Interest Earning Assets:
Federal Funds Sold $ (283) $ (39) $(322) $ (696) $ (157) $ (853)
Investment Securities (Taxable) 694 (299) 395 1,598 (384) 1,214
Investment Securities (Tax-exempt) (10) 4 (6) (21) 2 (19)
Loans, Net of Unearned Discount 2,090 (1,385) 705 3,177 (1,580) 1,597
------ ------- ----- ------ ------- ------
Total Interest Income 2,491 (1,719) 772 4,058 (2,119) 1.939
------ ------- ----- ------ ------- ------
Interest-Bearing Liabilities:
Deposits 1,444 (1,501) (57) 1,384 (1,578) (194)
Other Borrowings 114 (64) 50 160 (100) 60
------ ------- ----- ------ ------- ------
Total Interest Expense 1,558 (1,565) (7) 1,544 (1,678) (134)
------ ------- ----- ------ ------- ------
Net Interest Income $ 933 $ (154) $ 779 $2,514 $ (441) $2,073
====== ======= ===== ====== ======= ======
Allowance for Loan Losses and Non-Performing Assets
- ---------------------------------------------------
The Corporation's allowance for loan losses was $5,044,000, or 1.46% of
total loans, as of September 30, 1999 compared to $4,663,000, or 1.54% of total
loans, as of September 30,1998.
Transactions in the provision for loan losses are summarized as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ --------------------
1999 1998 1999 1998
------ ------ ------ ------
Balance, Beginning of Period $4,895 $4,413 $4,724 $4,065
Provisions, Charged to Income 140 131 778 539
Loans Charged-Off (35) (24) (594) (139)
Recoveries of Loans Previously
Charged-Off 44 143 136 198
------ ------ ------ ------
Net Loans (Charged-Off)
Recovered 9 119 (458) 59
------ ------ ------ ------
Balance, End of Period $5,044 $4,663 $5,044 $4,663
====== ====== ====== ======
For the nine months ended September 30, 1999 and 1998, net charge-offs
(recoveries) were .13% and (.02)% of average loans, respectively, not
annualized.
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,
1999 1999 1999 1998 1998
------------- -------- --------- ------------ -------------
Non-Accrual Loans $2,899 $3,278 $4,207 $5,049 $6,213
Other Real Estate Owned 1,494 1,467 1,711 281 71
------ ------ ------ ------ ------
Total Non-Performing Assets $4,393 $4,745 $5,918 $5,330 $6,284
====== ====== ====== ====== ======
As a Percent of:
Total Assets .80% .90% 1.14% 1.00% 1.48%
Total Loans and Other Assets 1.26 1.39 1.85 1.74 2.36
Loans Past Due 90 days or
More and Still Accruing $-0- $17 $7 $3 $6
Non-accrual loans to total loans were .84% at September 30, 1999 and non-
performing assets were 1.26% of loans and other real estate owned at the same
date.
As of September 30, 1999, loans to four borrowers represent approximately
88% of the loans on non-accrual and two of these borrowers are current as to
payment of principal and interest on their loans. The Corporation does not see
the increase in non-accrual loans in mid 1998 as a signal of a weakened local
economy or a change in the Corporation's lending standards, rather this is the
enforcement of the Corporation's strict policy of identifying problem loans as
soon as any difficulty a borrower may be experiencing is noted.
The following table summarizes the relationship between non-performing
loans, criticized loans and the allowance for loan losses (dollars in
thousands).
September 30, June 30, March 31, December 31, September 30,
1999 1999 1999 1998 1998
------------- -------- --------- ------------ -------------
Non-Performing Loans $2,899 $3,278 $4,207 $ 5,049 $ 6,213
Criticized Loans 9,196 9,755 9,597 10,468 11,524
Allowance for Loan Losses 5,044 4,895 4,749 4,724 4,663
Allowance for Loan Losses
as a Percent of:
Non-Performing Loans 174% 149% 129% 94% 72%
Criticized Loans 55 50 50 45 40
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,
1999 1998 % Change 1999 1998 % Change
---- ---- -------- ---- ---- --------
Service Charges on Deposit Accounts $522 $500 4.4% $1,489 $1,504 (1.0)%
Non-recurring Income 26 32 -- 270 186 --
Other Non-interest Income 346 381 (9.2) 1,068 1,049 1.8
---- ---- ------ ------
Total Non-interest Income $894 $913 (2.1) $2,827 $2,739 3.2
==== ==== ====== ======
Non-recurring income is primarily franchise tax refunds, interest recovered
on loans charged-off in prior years and gains on sales of assets taken in
satisfaction of debt in prior years.
26
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,
-------------------------------- ---------------------------------
1999 1998 % Change 1999 1998 % Change
------ ------ -------- ------ ------ --------
Salaries & Employee Benefits $2,310 $2,200 5.0% $ 6,801 $ 6,302 7.9%
Occupancy Expense - Net 275 221 24.4 825 692 19.2
Furniture and Equipment Expense 314 298 5.4 904 882 2.5
Other Real Estate Expense - Net (10) 11 -- 15 11 --
Other Expenses:
Business Development 148 156 (5.1) 417 459 (9.2)
Insurance - Other 25 27 (7.4) 96 73 31.5
Legal & Professional Fees 180 110 63.6 468 362 29.3
Taxes - Other 29 70 (58.6) 141 237 (40.5)
Postage & Courier 78 73 6.9 236 214 10.3
Printing & Supplies 90 103 (12.6) 286 305 (6.2)
Regulatory Fees & Assessments 46 39 18.0 137 123 11.4
Other Operating Expenses 397 232 71.1 972 821 18.4
------ ------ ------- -------
Total Other Expenses 993 810 22.6 2,753 2,594 6.1
------ ------ ------- -------
Total Non-interest Expense $3,882 $3,540 9.7 $11,298 $10,481 7.8
====== ====== ======= =======
Total non-interest expense increased 9.7% in the third quarter of 1999 over
1998, reflecting increases primarily in salaries and benefits, occupancy expense
and other operating expenses. As a percent of average assets, non-interest
expenses were 2.86% in the third quarter of 1999 and 2.90% in the same period of
1998. The "efficiency ratio" (non-interest expenses divided by total non-
interest income plus net interest income) was 50.6% for the third quarter of
1999. 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
1999 is due to salary merit increases and additions to staff. The average number
of full-time equivalent employees for the nine months increased by seven to an
average full-time equivalent of 173 from the level of the prior year. This
increase in number of employees was required because of the increase in assets
over the past year.
The increase in occupancy expense is primarily due to increased repairs,
increased property taxes and increased rent as a result of one branch office
relocating from temporary quarters to a permanent facility.
Other operating expenses increased in the third quarter of 1999 due to
increases in various miscellaneous operating costs.
27
Interest Rate Sensitivity
- -------------------------
Interest rate sensitivity is the relationship between changes in market
interest rates and net interest income due to the repricing characteristics of
assets and liabilities.
The following table, commonly referred to as a "static gap report",
indicates the interest rate sensitivity position at September 30, 1999 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 $189,020 $ 17,616 $ 18,190 $224,826 $120,126 $344,952
Investment Securities 16,995 21,024 10,763 48,782 107,008 155,790
Federal Funds Sold 14,135 -0- -0- 14,135 -0- 14,135
-------- -------- -------- -------- -------- --------
Total Earning Assets 220,150 38,640 28,953 287,743 227,134 514,877
-------- -------- -------- -------- -------- --------
Interest Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Savings 239,349 -0- -0- 239,349 -0- 239,349
Certificate of Deposits
(greater than)$100,000 5,153 16,313 14,788 36,254 1,638 37,892
Other Time Deposits 4,084 28,492 20,880 53,456 5,936 59,392
Repurchase Agreements 24,310 -0- -0- 24,310 -0- 24,310
FHLB Borrowings 4,000 -0- -0- 4,000 -0- 4,000
-------- -------- -------- -------- -------- --------
Total Interest Bearing
Liabilities 276,896 44,805 35,668 357,369 7,574 364,943
-------- -------- -------- -------- -------- --------
Interest Sensitivity
Gap $(56,746) $ (6,165) $ (6,715) $(69,626) $219,560 $149,934
======== ======== ======== ======== ======== ========
Cumulative Gap $(56,746) $(62,911) $(69,626)
======== ======== ========
Cumulative Gap to
Total Earning Assets (11.02%) (12.22%) (13.52%)
Cumulative Gap to
Total Assets (10.27%) (11.39%) (12.61%)
The preceding static gap report reflects a cumulative liability sensitive
position during the one year horizon. An inherent weakness of this report is
that it ignores the relative volatility any one category may have in relation to
other categories or market rates in general. For instance, the rate paid on NOW
accounts typically moves slower than the three month T-Bill. Management
attempts to capture this relative volatility by utilizing a simulation model
with a "beta factor" adjustment which estimates the volatility of rate sensitive
assets and/or liabilities in relation to other market rates.
Beta factors are an estimation of the long term, multiple interest rate
environment relation between an individual account and market rates in general.
For instance, NOW, savings and money market accounts, which are repriceable
within 30 days will have considerably lower beta factors than variable rate
loans and most investment categories. Taking this into consideration, it is
quite possible for a bank with a negative cumulative gap to total asset ratio to
have a positive "beta adjusted" gap risk position.
As a result of applying the beta factors established by management to the
earning assets and interest bearing liabilities in the static gap report via a
simulation model, the negative cumulative gap to total assets ratio at one year
of (12.61%) was reversed to a positive 8.92% "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,
28
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.
Capital (con't)
- ---------------
At September 30, 1999, total capital to total assets was 8.68%.
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, 1999, the Corporation's Tier I
capital represented 13.61% of risk weighted assets and total qualifying capital
(Tier I and Tier II) represented 8.85% of risk weighted assets. Both ratios
are well above current regulatory guidelines.
Also, as of September 30, 1999, the Corporation and its Subsidiary Banks
met the criteria for classification as a "well-capitalized" institution under
the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Corporation's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business activities.
Based on assessments, the Corporation determined that it would be required
to modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Corporation presently
believes that with modifications made to existing software, the Year 2000 Issue
will be mitigated.
The Corporation has utilized both internal and external resources to
correct and test the software for Year 2000 modifications. The Corporation has
substantially completed the Year 2000 project. The remaining work on the project
includes finalization of the Corporation's contingency plans should any area not
function as tested or any external event impact the operation of the
Corporation. The total cost of the Year 2000 project has not been material to
the financial condition of the Corporation.
Forward-Looking Statements
- --------------------------
The Corporation may from time to time make forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
with respect to earnings per share, credit quality, expected Year 2000
compliance program, corporate objectives and other financial and business
matters. The Corporation cautions the reader that these forward-looking
statements are subject to numerous assumptions, risks and uncertainties,
including economic conditions; actions taken by the Federal Reserve Board;
legislative and regulatory actions and reforms; competition; as well as other
reasons, all of which change over time. Actual results may differ materially
from forward-looking statements.
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, 1999
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: October 30, 1999 By: /s/ Philip E. Norwood
---------------- ----------------------------------------
Philip E. Norwood, Chairman
Date: October 30, 1999 By: /s/ Bob G. Scott
---------------- ----------------------------------------
Bob G. Scott, Executive Vice President
and Chief Operating Officer
(Chief Accounting Officer)
31
EXHIBIT INDEX
Exhibit Page No.
- ------- --------
11 Computation of Earnings Per Common Share
27 Financial Data Schedule