SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Mark One [ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 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 March 31, 1999 was 6,506,347 shares. SUMMIT BANCSHARES, INC. INDEX PART I - FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1999 and 1998 and at December 31, 1998 4 Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 and for the Year Ended December 31, 1998 5 Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 1999 and 1998 and for the Year Ended December 31, 1998 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 and for the Year Ended December 31, 1998 7-8 Notes to Consolidated Financial Statements for the Three Months Ended March 31, 1999 and 1998 and for the Year Ended December 31, 1998 9-20 The March 31, 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 Three Months Ended March 31, 1999 and 1998 21-27 2 PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Change in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 3 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements - ----------------------------- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Unaudited) March 31, December 31, -------------------- 1999 1998 1998 -------- -------- ---------- ASSETS (In Thousands) CASH AND DUE FROM BANKS - NOTE 1 $ 23,371 $ 25,574 $ 26,735 FEDERAL FUNDS SOLD 16,800 43,390 38,706 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 117,953 59,503 121,417 Securities Held-to-Maturity, at cost (fair value of 30,344 47,946 26,595 $30,424,000, $48,268,000 and $26,959,000 at March 31, 1999 and 1998 and December 31, 1998, respectively) LOANS - NOTE 3 Loans, Net of Unearned Discount 318,795 287,632 305,833 Allowance for Loan Losses (4,749) (4,192) (4,724) -------- -------- -------- LOANS, NET 314,046 283,440 301,109 PREMISES AND EQUIPMENT - NOTE 4 9,136 7,857 9,082 ACCRUED INCOME RECEIVABLE 3,995 3,827 3,823 OTHER REAL ESTATE - NOTE 5 1,711 151 281 OTHER ASSETS 3,902 3,673 5,016 -------- -------- -------- TOTAL ASSETS $521,258 $475,361 $532,764 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $128,232 $114,454 $141,170 Interest-Bearing 327,151 303,889 324,330 -------- -------- -------- TOTAL DEPOSITS 455,383 418,343 465,500 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - NOTE 7 16,533 12,138 17,839 ACCRUED INTEREST PAYABLE 603 691 1,037 OTHER LIABILITIES 2,167 2,018 2,153 -------- -------- -------- TOTAL LIABILITIES 474,686 433,190 486,529 -------- -------- -------- COMMITMENTS AND CONTINGENCIES - NOTE 11, 13 and 17 SHAREHOLDERS' EQUITY - NOTES 12, 14 AND 18 Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 6,506,347, 6,518,094 and 6,471,827 shares issued and outstanding at March 31, 1999 and 1998 and at December 31, 1998, respectively 8,133 8,148 8,090 Capital Surplus 6,412 6,214 6,329 Retained Earnings 32,835 27,594 31,271 Accumulated Other Comprehensive Income-Unrealized Gain on Available-for-Sale Investment Securities, Net of Tax 273 314 560 Treasury Stock at Cost (61,700 shares at March 31, 1999) (1,081) (99) (15) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 46,572 42,171 46,235 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $521,258 $475,361 $532,764 ======== ======== ======== The accompanying Notes should be read with these financial statements. 4 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Unaudited) For the Three Months Ended March 31, Year Ended December 31, ------------------------------------ ----------------------- 1999 1998 1998 -------- -------- -------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $ 7,009 $ 6,678 $ 28,000 Interest and Dividends on Investment Securities: Taxable 2,072 1,624 6,963 Exempt from Federal Income Taxes 10 13 50 Interest on Federal Funds Sold 303 558 2,052 -------- -------- -------- TOTAL INTEREST INCOME 9,394 8,873 37,065 -------- -------- -------- INTEREST EXPENSE Interest on Deposits 3,094 3,086 12,786 Interest on Securities Sold Under Agreements to Repurchase 160 163 692 -------- -------- -------- TOTAL INTEREST EXPENSE 3,254 3,249 13,478 -------- -------- -------- NET INTEREST INCOME 6,140 5,624 23,587 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 220 158 785 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,920 5,466 22,802 -------- -------- -------- NON-INTEREST INCOME Service Charges and Fees on Deposits 478 486 2,018 Loss on Sale of Investment Securities -0- -0- 35 Other Income 553 384 1,797 -------- -------- -------- TOTAL NON-INTEREST INCOME 1,031 870 3,850 -------- -------- -------- NON-INTEREST EXPENSE Salaries and Employee Benefits 2,141 2,041 8,576 Occupancy Expense - Net 245 239 928 Furniture and Equipment Expense 283 295 1,150 Other Real Estate Owned (Income) Expense - Net 27 (3) (1) Other Expense - NOTE 8 1,042 934 3,520 -------- -------- -------- TOTAL NON-INTEREST EXPENSE 3,738 3,506 14,173 -------- -------- -------- INCOME BEFORE INCOME TAXES 3,213 2,830 12,479 APPLICABLE INCOME TAXES - NOTE 9 1,117 966 4,333 -------- -------- -------- NET INCOME $ 2,096 $ 1,864 $ 8,146 ======== ======== ======== NET INCOME PER SHARE - NOTE 14 Basic $ .33 $ .29 $ 1.25 Diluted .31 .27 1.20 The accompanying Notes should be read with these financial statements. 5 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONSOLIDATED AND COMPANY ONLY FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) Accumulated Other Comprehensive Income - Net Unrealized Gain (Loss) on Total Common Stock Capital Retained Investment Treasury Shareholders' ------------------ Shares Amount Surplus Earnings Securities Stock Equity - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) BALANCE AT JANUARY 1, 1998 6,501,332 $ 8,127 $ 6,251 $ 26,491 $ 243 $ -0- $ 41,112 Purchases of Stock Held in Treasury (494) (494) Retirement of Stock Held in Treasury (20,000) (25) (370) 395 -0- Stock Options Exercised 36,762 46 (37) 9 Cash Dividend - $.06 Per Share (391) (391) Net Income for the Three Months Ended March 31, 1998 1,864 1,864 Securities Available- for-Sale Adjustment 71 71 -------- Total Comprehensive Income 1,935 --------- ------- ------- ------- ----- -------- -------- BALANCE AT MARCH 31, 1998 6,518,094 8,148 6,214 27,594 314 (99) 42,171 Purchases of Stock Held in Treasury (1,454) (1,454) Retirement of Stock Held in Treasury (81,700) (102) (1,436) 1,538 -0- Stock Options Exercised 35,433 44 115 159 Cash Dividend - $.18 Per Share (1,169) (1,169) Net Income for the Nine Months Ended December 31, 1998 6,282 6,282 Securities Available- for-Sale Adjustment 246 246 -------- Total Comprehensive Income 6,528 --------- ------- ------- ------- ----- -------- -------- BALANCE AT DECEMBER 31, 1998 6,471,827 8,090 6,329 31,271 560 (15) 46,235 Purchases of Stock Held in Treasury (1,081) (1,081) Retirement of Stock Held in Treasury (800) (1) (14) 15 -0- Stock Options Exercised 35,320 44 83 127 Cash Dividend - $.08 Per Share (518) (518) Net Income for the Three Months Ended March 31, 1999 2,096 2,096 Securities Available- for-Sale Adjustment (287) (287) -------- Total Comprehensive Income 1,809 --------- ------- ------- ------- ----- -------- -------- BALANCE AT MARCH 31, 1999 6,506,347 $8,133 $6,412 $32,835 $ 273 $(1,081) $ 46,572 ========= ====== ======= ======= ===== ======== ======== The accompanying Notes should be read with these financial statements. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1998 (Unaudited) (Unaudited) March 31, December 31, ------------------------- 1999 1998 1998 ---------- ------------- ----------- (In Thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 2,096 $ 1,864 $ 8,146 -------- -------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 260 298 1,037 Net Premium Amortization (Discount Accretion) of Investment Securities (121) 30 (31) Provision for Loan Losses 220 158 785 Deferred Income Taxes (Benefit) (10) (97) (465) Loss on Sale of Investment Securities -0- -0- (35) Net Gain From Sale of Other Real Estate -0- -0- (2) Net Gain on Sale of Premises and Equipment -0- (1) (3) Decrease (Increase) in Accrued Income and Other Assets 1,204 504 (523) Increase (Decrease) in Accrued Expenses and Other Liabilities (420) 440 921 -------- -------- --------- Total Adjustments 1,133 1,332 1,684 -------- -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,229 3,196 9,830 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) Decrease in Federal Funds Sold 21,906 (7,630) (2,946) Proceeds from Matured and Prepaid Investment Securities . Held-to-Maturity 2,280 7,279 21,627 . Available-for-Sale 36,413 9,206 63,334 Proceeds from Sales of Investment Securities -0- -0- 11,992 Purchase of Investment Securities . Held-to-Maturity (6,037) (10,111) (20,644) . Available-for-Sale (33,254) (8,119) (118,148) Loans Originated and Principal Repayments, Net (14,731) (11,705) (30,482) Recoveries of Loans Previously Charged-Off 39 16 217 Proceeds from Sale of Premises and Equipment -0- 2 6 Proceeds from Sale of Other Real Estate -0- -0- 82 Purchases of Premises and Equipment (314) (240) (2,206) -------- -------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,302 (21,302) (77,168) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts (7,814) 15,593 60,585 Net Increase (Decrease) in Certificates of Deposit (2,303) 1,027 3,191 Net Increase (Decrease) in Repurchase Agreements (1,306) (2,551) 3,150 Payments of Cash Dividends (518) (391) (1,560) Proceeds from Stock Options Exercised 127 9 168 Purchase of Treasury Stock (1,081) (494) (1,948) -------- -------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (12,895) 13,193 63,586 -------- -------- --------- NET DECREASE IN CASH AND DUE FROM BANKS (3,364) (4,913) (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 $ 23,371 $ 25,574 $ 26,735 ======== ======== ========= 7 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1998 (Unaudited) SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES: (Unaudited) (Unaudited) March 31, December 31, ------------------------- 1999 1998 1998 ----------- ------------ ----------- (In Thousands) (1) Interest Paid $3,689 $3,236 $13,120 (2) Income Taxes Paid (Refund Received) -0- 10 4,815 (3) Other Real Estate Acquired in Settlement of Loans 1,430 -0- 210 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 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 the generally accepted accounting principles and the prevailing practices within the banking industry. A summary of the more significant policies follows: Basis of Presentation and Principles of Consolidation ----------------------------------------------------- The consolidated financial statements of the Corporation include its accounts and those of its wholly-owned subsidiaries, Summit National Bank and Summit Community Bank, National Association (the "Subsidiary Banks") and Summit Bancservices, Inc., a wholly-owned operations subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Due From Banks ----------------------- The Subsidiary Banks are required to maintain certain balances at the Federal Reserve Bank based on their levels of deposits. During the first three months of 1999 the average cash balance maintained at the Federal Reserve Bank was $1,003,000. Compensating balances held at correspondent banks, to minimize service charges, averaged approximately $ 17,382,000 during the same period. Investment Securities --------------------- The Corporation has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). At the date of purchase, the Corporation is required to classify debt and equity securities into one of three categories: held-to- maturity, trading or available-for-sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings. Investments not classified as either held-to-maturity or trading are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, in a separate component of shareholders' equity until realized. The Corporation has the ability and intent to hold to maturity its investment securities classified as held-to-maturity; accordingly, no adjustment has been made for the excess, if any, of amortized cost over market. In determining the investment category classifications at the time of purchase of securities, management considers its asset/liability strategy, changes in interest rates and prepayment risk, the need to increase capital and other factors. Under certain circumstances (including the deterioration of the issuer's creditworthiness, a change in tax law, or statutory or regulatory requirements), the Corporation may change the investment security classification. In the periods reported for 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. 9 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." 10 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): March 31, 1999 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 9,991 $184 $ -0- $ 10,175 U.S. Government Agencies and Corporations 20,062 25 (132) 19,955 Obligations of States and Political Subdivisions 291 3 -0- 294 -------- ---- ------ -------- Total Held-to-Maturity Securities 30,344 212 (132) 30,424 -------- ---- ------ -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 28,035 374 (1) 28,408 U.S. Government Agencies and Corporations 70,813 133 (144) 70,802 U.S. Government Agency Mortgage Backed Securities 17,057 71 (26) 17,102 Obligations of States and Political Subdivisions 455 7 -0- 462 Federal Reserve and Federal Home Loan Bank Stock 1,179 -0- -0- 1,179 -------- ---- ------ -------- Total Available-for-Sale Securities 117,539 585 (171) 117,953 -------- ---- ------ -------- Total Investment Securities $147,883 $797 $ (303) $148,377 ======== ==== ====== ======== In the above schedule the amortized cost of Total Held-to-Maturity Securities of $30,344,000 and the fair value of Total Available-for-Sale Securities of $117,953,000 are reflected in Investment Securities on the consolidated balance sheet as of March 31, 1999 for a total of $148,297,000. A net unrealized gain of $414,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. 11 NOTE 2 - Investment Securities (cont'd) - ------ A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands): March 31, 1998 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 17,988 $209 $ (5) $ 18,192 U.S. Government Agencies and Corporations 21,823 135 (67) 21,891 U.S. Government Agency Mortgage Backed Securities 6,996 51 (7) 7,040 Obligations of States and Political Subdivisions 1,139 6 -0- 1,145 -------- ---- ----- -------- Total Held-to-Maturity Securities 47,946 401 (79) 48,268 -------- ---- ----- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 44,534 456 (25) 44,965 U.S. Government Agencies and Corporations 7,068 13 (22) 7,059 U.S. Government Agency Mortgage Backed Securities 6,499 55 -0- 6,554 Federal Reserve and Federal Home Loan Bank Stock 925 -0- -0- 925 -------- ---- ----- -------- Total Available-for-Sale Securities 59,026 524 (47) 59,503 -------- ---- ----- -------- Total Investment Securities $106,972 $925 $(126) $107,771 ======== ==== ===== ======== In the above schedule the amortized cost of Total Held-to-Maturity Securities of $47,946,000 and the fair value of Total Available-for-Sale Securities of $59,503,000 are reflected in Investment Securities on the consolidated balance sheet as of March 31, 1998 for a total of $107,449,000. A net unrealized gain of $477,000 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): March 31, December 31, ------------------------- 1999 1998 1998 ---------- ------------- ----------- Commercial $147,991 $126,722 $133,066 Real Estate Mortgage 102,444 100,360 100,421 Real Estate Construction 36,917 28,774 40,456 Loans to Individuals 31,836 32,343 32,388 Less: Unearned Discount (393) (567) (498) -------- -------- -------- 318,795 287,632 305,833 Allowance for Loan Losses (4,749) (4,192) (4,724) -------- -------- -------- Loans - Net $314,046 $283,440 $301,109 ======== ======== ======== 12 NOTE 3 - Loans and Allowance for Loan Losses (cont'd.) - ------ Transactions in the allowance for loan losses are summarized as follows (in thousands): Year Ended Three Months Ended March 31, December 31, -------------------------------- 1999 1998 1998 -------- -------- ----------- Balance, Beginning of Period $4,724 $4,065 $4,065 Provisions, Charged to Income 220 158 785 Loans Charged-Off (234) (47) (343) Recoveries of Loans Previously Charged-Off 39 16 217 ------ ------ ------ Net Loans (Charged-Off) Recovered (195) (31) 126 ------ ------ ------ Balance, End of Period $4,749 $4,192 $4,724 ====== ====== ====== The provisions for loan losses charged to operating expenses during the three months ended March 31, 1999 and March 31, 1998 of $220,000 and $158,000, 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 March 31, 1999, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $3,776,000 (of which $3,776,000 were on non-accrual status). The related allowance for loan losses for these loans was $1,155,000. The average recorded investment in impaired loans during the three months ended March 31, 1999 was approximately $3,523,000. For this period the Corporation recognized no interest income on these impaired loans. NOTE 4 - Premises and Equipment - ------ The investment in premises and equipment stated at cost and net of accumulated amortization and depreciation is as follows (in thousands): March 31, December 31, ------------------- 1999 1998 1998 -------- --------- ------------ Land $ 2,783 $ 1,446 $ 2,783 Buildings and Improvements 7,549 7,526 7,537 Furniture & Equipment 7,536 6,693 7,234 ------- ------- ------- Total Cost 17,868 15,665 17,554 Less: Accumulated Amortization and Depreciation 8,732 7,808 8,472 ------- ------- ------- Net Book Value $ 9,136 $ 7,857 $ 9,082 ======= ======= ======= NOTE 5 - Other Real Estate - ------ The carrying value of other real estate is as follows (in thousands): March 31, December 31, ---------------------------- 1999 1998 1998 ---------- ------------- ------------- Other Real Estate $1,711 $ 185 281 Valuation Reserve -0- (34) -0- ------ ----- ----- Net Other Real Estate $1,711 $ 151 281 ====== ===== ===== 13 NOTE 5 - Other Real Estate (cont'd.) - ------ Transactions in the valuation reserve are summarized as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ---------------------------- 1999 1998 1998 ------ ------ --------- Balance, Beginning of Period $ -0- $ 34 $ 35 Provisions Charged to Income -0- -0- -0- Reductions from Sales -0- -0- 35 ------ ----- ----- Balance, End of Period $ -0- $ 34 $ -0- ====== ===== ===== There were no direct writedowns of other real estate charged to income for the three months ended March 31, 1999 or March 31, 1998, respectively, or for the year ended December 31, 1998. NOTE 6 - Deposits - ------ The book values of deposits by major type follow (in thousands): March 31, December 31, ----------------------- ------------ 1999 1998 1998 --------- ------------ ------------ Noninterest-Bearing Demand Deposits $128,232 $114,454 $141,170 -------- -------- -------- Interest-Bearing Deposits: Interest-Bearing Transaction Accounts and Money Market Funds 153,347 142,351 151,557 Savings 84,836 72,431 81,503 Savings Certificates - Time 52,665 51,774 53,394 Certificates of Deposits $100,000 or more 35,525 36,328 37,099 Other 778 1,005 777 -------- -------- -------- Total 327,151 303,889 324,330 -------- -------- -------- Total Deposits $455,383 $418,343 $465,500 ======== ======== ======== 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): Year Ended Three Months Ended March 31, December 31, ----------------------------- 1999 1998 1998 ---------- ------------ ------------- Securities Sold Under Repurchase Agreements: Average $17,235 $14,201 $15,742 Period-End 16,533 12,138 17,839 Maximum Month-End Balance During Period 19,734 15,249 19,354 Interest Rate Average 3.77% 4.66% 4.40% Period-End 4.10 4.56 3.83 14 NOTE 8 - Other Non-Interest Expense - ------ The significant components of other non-interest expense are as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ------------------------------- 1999 1998 1998 ------- ------- -------- Business Development $ 124 $ 144 $ 611 Legal and Professional Fees 167 131 511 Printing and Supplies 105 95 387 Regulatory Fees and Assessments 46 40 169 Other 600 524 1,842 ------ ----- ------ Total $1,042 $ 934 3,520 ====== ===== ====== NOTE 9 - Income Taxes - ------ Federal income taxes included in the consolidated balance sheets were as follows (in thousands): March 31, December 31, -------------------- 1999 1998 1998 --------- --------- ----------- Current Tax Asset (Liability) $(1,117) $(963) $ 10 Deferred Tax Asset 1,130 635 973 ------- ----- ----- Total Included in Other Assets/ (Other Liabilities) $ 13 $(328) $ 983 ======= ===== ===== The deferred tax asset at March 31, 1999 of $1,130,000 included $141,000 related to unrealized gains on Available-for-Sale Securities. The components of income tax expense were as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ------------------------------ 1999 1998 1998 --------- ----------- ------------- Federal Income Tax Expense Current $1,127 $1,063 $4,798 Deferred (10) (97) (465) ------ ------ ------ Total Federal Income Tax Expense $1,117 $ 966 $4,333 ====== ====== ====== Effective Tax Rates 34.7% 34.1% 34.7% ====== ====== ====== The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to operating earnings are as follows (in thousands): Year Ended Three Months Ended March 31, December 31, ------------------------------ 1999 1998 1998 --------------- ------------- ------------- Federal Income Taxes at Statutory Rate of 34.3% $1,102 $ 962 $4,278 Effect of Tax Exempt Interest Income (4) (5) (19) Non-deductible Expenses 12 10 58 Other 7 (1) 16 ------ ------ ------ Income Taxes Per Income Statement $1,117 $ 966 $4,333 ====== ====== ====== 15 NOTE 9 - Income Taxes (con't) - ------ Year Ended Three Months Ended March 31, December 31, ---------------------------- 1999 1998 1998 -------- -------- ---------- Federal Deferred Tax Assets: Allowance for Loan Losses $1,183 885 $1,107 Valuation Reserves - Other Real Estate -0- 35 1 Interest on Non-accrual Loans 166 91 199 Deferred Compensation 411 365 414 Other 19 37 18 ------ ------ ------ Gross Federal Deferred Tax Assets 1,779 1,413 1,739 ------ ------ ------ Federal Deferred Tax Liabilities: Depreciation and Amortization 298 250 301 Accretion 68 133 78 Unrealized Gains on Available-for-Sale Securities 141 162 289 Other 142 233 98 ------ ------ ------ Gross Federal Deferred Tax Liabilities 649 778 766 ------ ------ ------ Net Deferred Tax Asset $1,130 $ 635 $ 973 ====== ====== ====== 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 $2,848,000 at December 31, 1998. NOTE 11 - Commitments and Contingent Liabilities - ------- In the normal course of business, there are various outstanding commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the financial statements. No losses are anticipated as a result of these transactions. Commitments are most frequently extended for real estate, commercial and industrial loans. At March 31, 1999, outstanding documentary and standby letters of credit totaled $3,790,000 and commitments to extend credit totaled $104,189,000. NOTE 12 - Stock Option Plans - ------- The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the 1997 Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted for two-for-one stock splits in 1995 and 1997) of common stock for grants thereunder. The Plans provide for the granting to executive management and other key employees of Summit Bancshares, Inc. and subsidiaries incentive stock options, as defined under the current tax law. The options under the Plans will be exercisable for ten years from the date of grant and generally vest ratably over a five year period. Options will be and have been granted at prices which will not be less than 100-110% of the fair market value of the underlying common stock at the date of grant. The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Since the option prices are considered to approximate fair market value at date of grant, no compensation expense has been reported. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" the Corporation's net income and earnings per share would have been reduced by insignificant amounts on a proforma basis for the year ended December 31, 1998, and the three months ended March 31, 1999. 16 NOTE 12 - Stock Option Plans (con't) - ------- The following is a summary of transactions during the periods presented: Shares Under Option ------------------------------------ Three Months Ended Year Ended March 31, 1999 December 31, 1998 ---------------- ------------------ Outstanding, Beginning of Period 461,717 543,112 Additional Options Granted During the Period 34,500 3,000 Forfeited During the Period -0- (5,400) Exercised During the Period (35,320) (78,995) ------- ------- Outstanding, End of Period 460,897 461,717 ======= ======= Options outstanding at March 31, 1999 ranged in price from $3.00 to $19.25 per share with a weighted average exercise price of $8.32 and 333,935 shares exercisable. At March 31, 1999, there remained 498,800 shares reserved for future grants of options under the 1997 Plan. There are no shares available for grant under the 1993 Plan. NOTE 13 - Employee Benefit Plans - ------- Pension Plan - ------------ The Corporation 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. 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 will be distributed to the plan participants under terms of the plan as soon as administratively possible. 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. 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): 1998 1997 -------- -------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,719 in 1998 and $2,240 in 1997 $1,852 $2,420 ====== ====== Projected benefit obligation for service rendered to date $2,958 $3,035 Plan assets at fair value, primarily listed stocks and U.S. bonds 2,176 2,883 ------ ------ Projected benefit obligation in excess of (less than) plan assets 782 152 Unrecognized net loss from past experience different from that assumed and effect of changes in assumptions (930) (396) Prior service cost not yet recognized in net periodic pension cost (10) 12 ------ ------ Prepaid pension cost included in other assets $ 158 $ 232 ====== ====== Prepaid pension cost included the following components (in thousands): Year Ended December 31, ----------------------- 1998 1997 -------- ------- Service Cost - benefits earned during the period $ 355 $ 227 Interest cost on projected benefit obligation 170 157 Less: Actual return on plan assets (126) (196) Net amortization and deferral 39 5 ------ ------ Net periodic pension cost $ 438 $ 193 ====== ====== 17 NOTE 13 - Employee Benefit Plans (con't) - ------- The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7 percent and 6 percent, respectively. The expected long-term rate of return on plan assets was 7 percent. The market value of plan assets at March 31, 1999 was $2,097,000. There has not been a contribution to the plan during 1999. Prepaid pension cost at March 31, 1999 was $215,000. 401(k) Plan - ----------- The Corporation implemented a 401(k) plan in December 1997 covering substantially all employees. The Corporation has not matched the employee's contributions to date nor made any other contribution to the plan. Management Security Plan - ------------------------ In 1992, the Corporation established a Management Security Plan to provide key employees with retirement, death or disability benefits in addition to those provided by the Pension Plan. The expense charged to operations for such future obligations was $54,000 and $55,000 during the first three 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). NOTE 14 - Earnings per Share - ------- The following data shows the amounts used in computing earnings per share and the weighted average number of shares of dilutive potential common stock. The number of shares used in the calculations reflect a two-for-one stock split in December 1997 (dollars in thousands) March 31, December 31, ------------------------ 1999 1998 1998 ---------- ------------ ------------ Net income $ 2,096 $ 1,864 $ 8,146 ========== ========== ========== Weighted average number of common shares used in Basic EPS 6,460,003 6,504,173 6,496,595 Effect of dilutive stock options 254,682 348,946 316,702 ---------- ---------- ---------- Weighted number of common shares and dilutive potential common stock used in Diluted EPS 6,714,685 6,853,119 6,813,297 ========== ========== ========== NOTE 15 - Financial Instruments with Off-Balance Sheet Risk - ------- The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments, standby letters of credit and documentary letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Corporation's exposure to credit loss in the event of non-performance by the other party of these loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The total contractual amounts of financial instruments with off-balance sheet risk are as follows (in thousands): March 31, ------------------ 1999 1998 -------- -------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Commitments to Extend Credit $104,189 $94,074 Documentary and Standby Letters of Credit 3,790 5,152 18 NOTE 15 - Financial Instruments with Off-Balance Sheet Risk (con't) - ------- 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. NOTE 18 - 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 first three months of 1999, 61,700 shares were purchased by the Corporation through a similar repurchase plan through the open market. NOTE 19 - Subsequent Event - ------- On April 20, 1999, the Board of Directors of the Corporation approved a quarterly dividend of $.08 per share to be paid on May 14, 1999 to shareholders of record on April 30, 1999. 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. 19 The estimated fair values of the Corporation's financial instruments are as follows (in thousands): March 31, ------------------------------------------ 1999 1998 -------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- Financial Assets Cash and due from banks $ 23,371 $ 23,371 $ 25,574 $ 25,574 Federal funds sold 16,800 16,800 43,390 43,390 Securities 148,297 148,377 107,449 107,771 Loans 318,795 321,144 287,632 287,653 Reserve for loan losses (4,749) (4,749) (4,192) (4,192) Financial Liabilities Deposits 455,383 455,868 418,343 418,571 Securities sold under repurchase agreements 16,533 16,533 12,138 12,138 Off-balance Sheet Financial Instruments Loan commitments 104,189 94,074 Letters of credit 3,790 5,152 NOTE 21 - Comprehensive Income - ------- The Corporation has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". This new standard requires an entity to report and display comprehensive income and its components. Comprehensive income is as follows (in thousands): For the Three Months Ended March 31, Year Ended ------------------------------------- 1999 1998 December 31, 1998 ------------------ ----------------- ----------------- Net Income $2,096 $1,864 $8,146 Other Comprehensive Income: Unrealized gain (loss) on securities available-for-sale, net of tax (287) 71 317 ------ ------ ------ Comprehensive Income $1,809 $1,935 $8,463 ====== ====== ====== 20 Item 2 - Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- Summary - ------- Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation analyzes the major elements of the Corporation's consolidated balance sheets and statements of income. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes. Net income for the first quarter of 1999 was $2,096,000, or $.31 diluted earnings per share, compared with $1,864,000, or $.27 diluted earnings per share, for the first quarter of 1998. Per share amounts are based on average shares outstanding of 6,714,685 for the first quarter of 1999 and 6,853,119 for the comparable period of 1998 adjusted to reflect stock options granted. On a per share basis, diluted earnings per share increased 14.8% over the first quarter of the prior year. Outstanding loans at March 31, 1999 of $318.8 million represented an increase of $31.2 million, or 10.8%, over March 31, 1998 and an increase of $13.0 million, or 4.2%, from December 31, 1998. Total deposits at March 31, 1999 of $455.4 million represented an increase of $37.0 million, or 8.9%, over March 31, 1998 and a decrease of $10.1 million, or 2.2%, from December 31, 1998. In the first quarter, net interest income increased 9.1% over the previous year. An increase in non-interest expense of 6.6% partially offset the increase in net interest income. The following table summarizes the Corporation's performance for the three months ended March 31, 1999 and 1998 (tax equivalent basis and dollars in thousands). Three Months Ended March 31, ------------------------ 1999 1998 ---------- ---------- Interest Income $9,399 $8,881 Interest Expense 3,254 3,249 ------ ------ Net Interest Income 6,145 5,632 Provision for Loan Loss 220 158 ------ ------ Net Interest Income After Provision for Loan Loss 5,925 5,474 Non-Interest Income 1,031 870 Non-Interest Expense 3,738 3,506 ------ ------ Income Before Income Tax 3,218 2,838 Income Tax Expense 1,122 974 ------ ------ Net Income $2,096 $1,864 ====== ====== Net Income per Share - Basic $ .33 $ .29 Diluted .31 .27 Return on Average Assets 1.63% 1.65% Return on Average Shareholders' Equity 18.27% 18.18% 21 Summary of Earning Assets and Interest-Bearing Liabilities - ---------------------------------------------------------- The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the first quarter of 1999 and 1998 (rates on tax equivalent basis). Three Months ended March 31, -------------------------------------------------------------------- 1999 1998 --------------------------------- --------------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate ---------- -------- ----------- ---------- -------- ----------- (Dollars in Thousands) Earning Assets: Federal Funds Sold $ 25,408 $ 303 4.84% $ 41,105 $ 559 5.52% Investment Securities (Taxable) 145,391 2,072 5.78 106,387 1,623 6.19 Investment Securities (Tax-exempt) 890 15 7.06 1,141 20 7.11 Loans, Net of Unearned Discount(1) 311,326 7,009 9.13 277,001 6,679 9.78 -------- ------ -------- ------ Total Earning Assets 483,015 9,399 7.89 425,634 8,881 8.46 ------ ------ Non-interest Earning Assets: Cash and Due From Banks 23,278 22,355 Other Assets 18,890 15,475 Allowance for Loan Losses (4,789) (4,141) -------- -------- Total Assets $520,394 $459,323 ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Money Market Funds $154,753 1,212 3.18 $136,772 1,215 3.60 Savings 82,923 815 3.99 66,082 728 4.47 Savings Certificates 53,227 614 4.68 51,667 648 5.09 Certificates of Deposit $100,000 or more 36,099 443 4.98 36,765 482 5.32 Other Time 778 10 5.22 905 13 5.70 Other Borrowings 17,235 160 3.77 14,201 163 4.66 -------- ------ -------- ------ Total Interest-Bearing Liabilities 345,015 3,254 3.83 306,392 3,249 4.30 ------ ------ Non-interest Bearing Liabilities: Demand Deposits 126,505 109,092 Other Liabilities 2,360 2,253 Shareholders' Equity 46,514 41,586 -------- -------- Total Liabilities and Shareholders' Equity $520,394 $459,323 ======== ======== Net Interest Income and Margin (Tax-equivalent Basis)(2) $6,145 5.16 $5,632 5.37 ====== ====== (1) Loan interest income includes fees and loan volumes include loans on non- accrual. (2) Presented on a tax equivalent basis ("T/E") using a federal income tax rate of 34% in both years. 22 Net Interest Income - ------------------- Net interest income (tax equivalent) for the first quarter of 1999 was $6,145,000 which represented an increase of $513,000, or 9.1%, over the first quarter of 1998. This increase was heavily contributed to by a 12.4% increase in average loans and a 36.5% increase in average investment securities for the first 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 March 31, 1999 and 1998. ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands) 1st Qtr. 1999 vs. 1st Qtr. 1998 1st Qtr. 1998 vs. 1st Qtr. 1997 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: ------------------------------- -------------------------------- Volume Rate Total Volume Rate Total --------- --------- ------- ---------- -------- --------- Interest Earning Assets: Federal Funds Sold $ (194) $ (62) $ (256) $ 348 $ 8 $ 356 Investment Securities (Taxable) 1,115 (666) 449 (254) 141 (113) Investment Securities (Tax-exempt) (4) (1) (5) 16 -0- 16 Loans, Net of Unearned Discount 2,555 (2,225) 330 1,212 80 1,292 ------ ------- ---- ------ ---- ----- Total Interest Income 3,472 (2,954) 518 1,322 229 1,551 ------ ------- ---- ------ ---- ----- Interest-Bearing Liabilities: Deposits 1,310 (1,302) 8 471 200 671 Other Borrowings 132 (135) (3) 16 22 38 ------ ------- ---- ------ ---- ----- Total Interest Expense 1,442 (1,437) 5 487 222 709 ------ ------- ----- ------ ---- ----- Net Interest Income $2,030 $(1,517) $ 513 $ 835 $ 7 $ 842 ====== ======= ===== ====== ==== ===== Allowance for Loan Losses and Non-Performing Assets - --------------------------------------------------- The Corporation's allowance for loan losses was $4,749,000, or 1.49% of total loans, as of March 31, 1999 compared to $4,192,000, or 1.46% of total loans, as of March 31, 1998. Transactions in the allowance for loan losses are summarized as follows (in thousands): Three Months Ended March 31, ----------------------------- 1999 1998 -------- ----- Balance, Beginning of Period $4,724 $4,065 Provisions, Charged to Income 220 158 Loans Charged-Off (234) (47) Recoveries of Loans Previously Charged-Off 39 16 ----- ----- Net Loans (Charged-Off) Recovered (195) (31) ----- ----- Balance, End of Period $4,749 $4,192 ===== ===== For the three months ended March 31, 1999 and 1998, net charge-offs were .06% and .01%, respectively, not annualized. The following table summarizes the non-performing assets as of the end of the last five quarters (in thousands) March 31, December 31, September 30, June 30, March 31, 1999 1998 1998 1998 1998 ---------- ------------- ------------- --------- ---------- Non-Accrual Loans $4,207 $5,049 $6,213 $6,830 $2,885 Other Real Estate Owned 1,711 281 71 71 151 ------ ------ ------ ------ ------ Total Non-Performing Assets $5,918 $5,330 $6,284 $6,901 $3,036 ====== ====== ====== ====== ====== 23 Allowance for Loan Losses and Non-Performing Assets (con't) - ------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, 1999 1998 1998 1998 1998 --------- ------------ ------------ -------- ---------- As a Percent of: Total Assets 1.14% 1.00% 1.28% 1.48% .64% Total Loans and Other Assets 1.85 1.74 2.08 2.36 1.06 Loans Past Due 90 days or More and Still Accruing $ 7 $ 3 $ 269 $ 6 $ 23 Non-accrual loans to total loans were 1.32% at March 31, 1999 and non- performing assets were 1.85% of loans and other real estate owned at the same date. As of March 31, 1999, loans to five borrowers represent approximately 92% of the loans on non-accrual and three 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 implementation 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). March 31, December 31, September 30, June 30, March 31, 1999 1998 1998 1998 1998 ---------- ------------- ------------ --------- ---------- Non-Performing Loans $ 4,207 $ 5,055 $ 6,482 $ 6,830 $ 2,885 Criticized Loans 9,597 10,468 11,524 11,737 12,484 Allowance for Loan Losses 4,749 4,724 4,663 4,413 4,192 Allowance for Loan Losses as a Percent of: Non-Performing Loans 129% 94% 72% 65% 145% Criticized Loans 50 45 0 38 34 Non-interest Income - ------------------- The major component of non-interest income is service charges on deposits. Other service fees are the majority of other non-interest income. The following table reflects the changes in non-interest income during the periods presented (dollars in thousands). Three Months Ended March 31, ----------------------------- 1999 1998 % Change -------- ------- ---------- Service Charges on Deposit Accounts $ 478 $ 486 (1.7)% Non-recurring Income 198 66 - Other Non-interest Income 355 318 11.6 ------ ----- Total Non-interest Income $1,031 $ 870 18.5 ====== ===== 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. The increase in other non-interest income in the first quarter of 1999 is primarily due to increases in mortgage brokerage/origination fees and fees earned on investment services to customers. 24 Non-interest Expense - -------------------- Non-interest expenses include all expenses other than interest expense, provision for loan losses and income tax expense. The following table summarizes the changes in non-interest expense during the periods presented (dollars in thousands). Three Months Ended March 31, ------------------------------ 1999 1998 % Change -------- --------- --------- Salaries & Employee Benefits $2,141 $2,041 4.9% Occupancy Expense - Net 245 239 2.5 Furniture and Equipment Expense 283 295 (4.1) Other Real Estate Expense - Net 27 (3) -- Other Expenses: Business Development 124 144 (13.9) Insurance - Other 35 25 40.0 Legal & Professional Fees 167 131 27.5 Taxes - Other 65 85 (23.5) Postage & Courier 78 72 8.3 Printing & Supplies 105 95 10.5 Regulatory Fees & Assessments 46 40 15.0 Other Operating Expenses 422 342 23.3 ------ ------ ----- Total Other Expenses 1,042 934 11.6 ------ ------ ----- Total Non-interest Expense $3,738 $3,506 6.6% ====== ====== ===== Total non-interest expense increased 6.6% in the first quarter of 1999 over 1998, reflecting increases in salaries and benefits, occupancy expense, legal and professional expense, and other operating expenses. As a percent of average assets, non-interest expenses were 2.87% in the first quarter of 1999 and 3.10% in the same period of 1998. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 52.1% for the first 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 first quarter of 1999 is due to salary merit increases and additions to staff. The average number of full-time equivalent employees increased by 7 to an average full-time equivalent of 169.5 from the number twelve months prior. 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 and increased property taxes. Legal and professional fees increased due to increased legal fees related to substandard loans and increased audit fees. Other operating expenses increased in the first quarter of 1999 due to increases in various miscellaneous operating costs. 25 Interest Rate Sensitivity - ------------------------- Interest rate sensitivity is the relationship between changes in market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The following table, commonly referred to as a "static gap report", indicates the interest rate sensitivity position at March 31, 1999 and may not be reflective of positions in subsequent periods (dollars in thousands): Total Repriced Rate After Matures or Reprices within: Sensitive 1 Year or --------------------------- 30 Days 31-180 181 to One Year Non-interest or Less Days One Year or Less Sensitive Total ------------- ------------ --------- ---------- ------------ --------- Earning Assets: Loans $184,025 $ 16,771 $ 12,103 $212,899 $105,896 $318,795 Investment Securities 13,660 15,266 29,118 58,044 90,253 148,297 Federal Funds Sold 16,800 -0- -0- 16,800 -0- 16,800 -------- -------- -------- -------- -------- -------- Total Earning Assets 214,485 32,037 41,221 287,743 196,149 483,892 -------- -------- -------- -------- -------- -------- Interest Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 238,183 -0- -0- 238,183 -0- 238,183 Certificate of Deposits Less than $100,000 11,022 10,161 12,033 33,216 2,309 35,525 Other Time Deposits 10,100 17,327 20,879 48,306 5,137 53,443 Repurchase Agreements 16,533 -0- -0- 16,533 -0- 16,533 -------- -------- -------- -------- -------- -------- Total Interest Bearing Liabilities 275,838 27,488 32,912 336,238 7,446 343,684 -------- -------- -------- -------- -------- -------- Interest Sensitivity Gap $(61,353) $ 4,549 $ 8,309 $(48,495) $188,703 $140,208 ======== ======== ======== ======== ======== ======== Cumulative Gap $(61,353) $(56,804) $(48,495) ======== ======== ======== Cumulative Gap to Total Earning Assets (12.68%) (11.74%) (10.02%) Cumulative Gap to Total Assets (11.77%) (10.90%) (9.30%) 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 (9.3%) was reversed to a positive 11.1% "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. 26 Capital (con't) - ------- At March 31, 1999, total capital to total assets was 8.94%. The Federal Reserve Board and Comptroller of the Currency also have risk- adjusted capital adequacy guidelines. Capital under these new guidelines is defined as Tier I and Tier II. At Summit Bancshares, Inc. the only components of Tier I and Tier II capital are shareholders' equity and a portion of the allowance for loan losses, respectively. The guidelines also stipulate that four categories of risk weights (0, 20, 50 and 100 percent), primarily based on the relative credit risk of the counterparty, be applied to the different types of balance sheet assets. Risk weights for all off-balance sheet exposures are determined by a two-step process whereby the face value of the off-balance sheet item is converted to a "credit equivalent amount" and that amount is assigned to the appropriate risk category. The regulatory minimum ratio for total qualifying capital is 8.00% of which 4.00% must be Tier I capital. At March 31, 1999, the Corporation's Tier I capital represented 14.0% of risk weighted assets and total qualifying capital (Tier I and Tier II) represented 15.3% of risk weighted assets. Both ratios are well above current regulatory guidelines. Also, as of March 31, 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 to existing software, the Year 2000 Issue can be mitigated. However, if such modifications are not made, or are not completed timely, the Year 2000 Issue could have material impact on the operations of the Corporation. 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. 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Change in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) No Report on Form 8-K were filed during the period ending March 31, 1999 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT BANCSHARES, INC. Registrant Date: April 30, 1999 By: /s/ Philip E. Norwood -------------- ------------------------------------------- Philip E. Norwood, Chairman Date: April 30, 1999 By: /s/ Bob G. Scott -------------- ------------------------------------------- Bob G. Scott, Executive Vice President and Chief Operating Officer (Chief Accounting Officer) 29 EXHIBIT INDEX Exhibit Page No. - ------- -------- 11 Computation of Earnings Per Common Share 27 Financial Data Schedule