-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NFbs1EHjiONJW8g8jMLqtRshFixXC6ENLTUBBrVeACnGy6sB5V4C8ObqJLPVeaOz JODcNxJNiDtEoHEwrLWvFw== 0000930661-99-000647.txt : 19990402 0000930661-99-000647.hdr.sgml : 19990402 ACCESSION NUMBER: 0000930661-99-000647 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT BANCSHARES INC /TX/ CENTRAL INDEX KEY: 0000745344 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 751694807 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11986 FILM NUMBER: 99579950 BUSINESS ADDRESS: STREET 1: 1300 SUMMIT AVE CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173368383 MAIL ADDRESS: STREET 1: 1300 SUMMIT AVENUE CITY: FORT WORTH STATE: TX ZIP: 76102 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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) Securities registered pursuant to Section 12(b) of the Act: None Not Applicable ------------------ ------------------------- (Title of Class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1.25 PAR VALUE ----------------------------- (Title of Class) 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 authorized to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the shares of voting stock held by non-affiliates of the registrant at March 17, 1999 was approximately $92,933,000. The number of shares of common stock, $1.25 par value, outstanding at March 17, 1999 was 6,505,627 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement dated March 19, 1999 filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 for the 1998 Annual Meeting of Shareholders of Summit Bancshares, Inc., are incorporated by reference into Part III. PART I ITEM 1. BUSINESS. THE CORPORATION. Summit Bancshares, Inc. (the "Corporation"), a corporation - --------------- incorporated under the laws of the state of Texas in 1979, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Corporation maintains its principal office at 1300 Summit Avenue, Suite 604, Fort Worth, Texas 76102. The Corporation's principal activity is the ownership and management of its subsidiaries. The Corporation owns all of the issued and outstanding shares of capital stock of two national banking associations, Summit National Bank and Summit Community Bank, N.A. (the "Subsidiary Banks") and a nonbank subsidiary, Summit Bancservices, Inc., all located in Fort Worth, Texas. In January 1997 Camp Bowie National Bank at the time, a wholly-owned subsidiary, changed its name to Summit Community Bank, N.A. and in March 1997 Alta Mesa National Bank merged with Summit Community Bank, N.A. Alta Mesa National Bank was a former wholly-owned subsidiary of the Corporation. At December 31, 1998 the Corporation had consolidated total assets of $532,764,000, consolidated total loans of $305,833,000, consolidated total deposits of $465,500,000 and consolidated total shareholders' equity of $46,235,000. The Corporation provides advice and services to the Subsidiary Banks and coordinates their activities in the areas of financial accounting controls and reports, internal audit programs, regulatory compliance, financial planning and employee benefit programs. However, each Subsidiary Bank operates under the day-to-day management of its own officers and directors. The Corporation's major source of income is dividends received from the Subsidiary Banks which are restricted as discussed below. Dividend payments by the Subsidiary Banks are determined on an individual basis, generally in relation to each Subsidiary Bank's earnings, deposits and capital. The Corporation's business is neither seasonal in nature nor in any manner related to or dependent upon patents, licenses, franchises or concessions and the Corporation has not spent material amounts on research activities. THE SUBSIDIARY BANKS. The services offered by the Subsidiary Banks are - -------------------- generally those offered by commercial banks of comparable size in their respective areas. Certain of the principle services offered by the Subsidiary Banks are described below. COMMERCIAL BANKING. The Subsidiary Banks provide general commercial banking services for corporate and other business clients principally located in Tarrant County, Texas. Loans are made for a wide variety of purposes, including interim construction and mortgage financing on real estate and financing of equipment and inventories. CONSUMER BANKING. The Subsidiary Banks provide a full range of consumer banking services, including interest and non-interest-bearing checking accounts, various savings programs, installment and real estate loans, money transfers, on-site ATM facilities and safe deposit facilities. SECURITIES SERVICES. Summit Bancshares, Inc. through an agreement with LM Financial Partners, Inc. offers investment brokerage services. LM Financial Partners, Inc., a subsidiary of Legg Mason, Inc. is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Investment executives are available at each of the Subsidiary Banks and can provide information about tax-free municipals, government securities, stocks, mutual funds, or annuities. -2- Certain information with respect to each Subsidiary Bank as of February 28, 1999 is set forth in the following table. Interbank balances have not been eliminated in the table as such balances are not material to total deposits or total assets.
As of February 28, 1999 --------------------------------------------------------- (In Thousands) Organiza- Acqui- Share- Name and Address of tion sition Total Total Total holders' Subsidiary Bank Date Date Assets Loans Deposits Equity ------------------------ --------- ------ -------- -------- -------- -------- SUMMIT NATIONAL BANK 1975 1980 $216,687 $116,652 $183,525 $19,859 1300 Summit Avenue Fort Worth, TX 76102 SUMMIT COMMUNITY BANK, 1984 1984 $302,596 $200,059 $275,025 $23,110 N.A. 3859 Camp Bowie Blvd. Fort Worth, TX 76107
COMPETITION. There is significant competition among bank holding companies in - ----------- Tarrant County, Texas and the Corporation believes that such competition among such bank holding companies will continue in the future. Additionally, the Subsidiary Banks encounter intense competition in their commercial banking businesses, primarily from other banks represented in their respective market areas, many of which have far greater assets and financial resources. The Subsidiary Banks also encounter intense competition in their commercial banking businesses from savings and loan associations, credit unions, factors, insurance companies, commercial and captive finance companies and certain other types of financial institutions located in its own and in other major metropolitan areas in the United States, many of which are larger in terms of capital, resources and personnel. EMPLOYEES. As of December 31, 1998 the Corporation and the Subsidiary Banks - --------- collectively had a total of 163 full-time employees and 11 part-time employees. REGULATION AND SUPERVISION The Corporation and the Subsidiary Banks are subject to federal and state law applicable to businesses generally and also to federal and state laws specifically applicable to financial institutions and financial institution holding companies. The laws and regulations governing financial institutions and their parent holding companies are intended primarily for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, and the banking system as a whole and not for the protection of shareholders or creditors. Those laws give regulatory authorities broad enforcement powers over banks and bank holding companies including the power to require remedial actions and to impose substantial fines and other penalties for violation of laws or regulations. The following description of statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the applicable statutes and regulations. Any change in applicable statutes or regulations or the policies of regulatory authorities may have a material effect on the business, operations, and prospects of the Corporation and the Subsidiary Banks. The Corporation is unable to predict the nature or extent of the affect on its business and earnings that fiscal or monetary policies, economic controls, or changes in federal or state statutes or regulations or regulatory policies may have in the future. THE CORPORATION GENERAL. The Corporation is a bank holding company within the meaning of the BHC Act and as such is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the "FRB"). Under federal law bank holding companies are subject to restrictions on the types of activities in which they may engage and to wide range of supervisory requirements and actions, including periodic examinations and reporting requirements and regulatory enforcement actions for any violations of laws, regulations, or policies. The FRB has authority to order a bank holding company to cease and desist from unsafe or unsound practices, to assess civil money penalties against companies and affiliated individuals who -3- violate the BHC Act or FRB regulations or orders, and to order termination by a bank holding company of any activities in which it is engaged which are not permitted activities for a bank holding company. The Corporation is a legal entity, separate and distinct from its subsidiaries. As a result, the Corporation's right to participate in the distribution of assets of any subsidiary upon liquidation or reorganization of the subsidiary will be subject to the prior claims of depositors and creditors of the subsidiary. In the event of a liquidation or reorganization of a Subsidiary Bank, the claims of depositors and creditors of the Bank will have priority over the rights of the Corporation and its shareholders and creditors. SCOPE OF PERMISSIBLE ACTIVITIES. The BHC Act prohibits a bank holding company, with certain limited exceptions, from directly or indirectly engaging in, or from directly or indirectly acquiring ownership or control of more than 5% of any class of voting shares of any company engaged in, any activities other than banking or managing or controlling banks or certain other subsidiaries or other activities determined by the FRB to be so closely related to banking as to be a proper incident thereto. Some of the activities which have been determined by FRB regulation to be closely related to banking are making or servicing loans, performing certain data processing services, acting as an investment or financial advisor to certain investment trusts or investment companies, and providing certain securities brokerage services. In approving or disapproving a bank holding company's acquiring a company engaged in bank-related activities or engaging itself in bank-related activities, the FRB considers a number of factors and weighs the expected benefits to the public (such as greater convenience and increased competition or gains in efficiency) against possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.) In considering these factors, the FRB may differentiate between a bank holding company's commencing activities itself and its acquiring a going concern already engaged in those activities. SAFETY AND SOUNDNESS. Bank holding companies may not engage in unsafe or unsound banking practices. For example, with some exceptions for well- capitalized and well-managed companies, FRB regulations require a bank holding company to give the FRB prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding twelve- month period, is equal to 10% or more of the company's consolidated net worth. The FRB may disapprove a redemption or repurchase if it finds the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. A holding company may not impair the financial soundness of a subsidiary bank by causing it to make funds available to nonbanking subsidiaries or their customers when such a transaction would not be prudent. In some circumstances, the FRB could take the position that paying a dividend would constitute an unsafe or unsound banking practice. The policy of the FRB is generally that a bank holding company should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organizations future needs and financial condition. This policy provides that a bank holding company should not maintain a level of cash dividends that undermines the company's ability to serve as a source of strength to its banking subsidiaries. The FRB may exercise various administrative remedies, including issuing orders requiring parent bank holding companies and their nonbanking subsidiaries to refrain from actions believed by the FRB to constitute a serious risk to the financial safety, soundness, or stability of a subsidiary bank. SOURCE OF STRENGTH TO SUBSIDIARY BANKS. FRB regulations require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and commit resources to their support. This concept has become known as the "source of strength" doctrine. The FRB takes the position that a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial adversity and should maintain the financial flexibility and capital-raising capacity necessary to obtain resources for assisting its subsidiary banks if required. A bank holding company which fails to meet its obligations to serve as a source of strength to its subsidiary banks may be considered by the FRB to be engaged in an unsafe and unsound banking practice and in violation of FRB regulations. Further, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires a bank holding company to guarantee, up to certain limits, an undercapitalized subsidiary bank's compliance with any capital restoration plan approved by the bank's primary federal regulatory authority. See Imposition of Liability for Undercapitalized Subsidiaries below. ENFORCEMENT. The Financial Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA") expanded the FRB's authority to prohibit activities of bank holding companies and their nonbanking subsidiary which are unsafe or unsound banking practices or constitute violations of laws or regulations. Bank regulatory authorities may issue cease and desist orders which may, among other things, require affirmative action to correct conditions resulting from such a violation or practice, including -4- restitution, reimbursement, or indemnification or guaranty against loss. Under FIRREA, a bank holding company or financial institution may also be ordered to restrict its growth, dispose of certain assets, or take other appropriate action as determined by the ordering agency. FIRREA increased the amount of civil money penalties that the FRB and other regulatory agencies may assess for certain activities conducted on a knowing and reckless basis, if those activities cause a substantial loss to a depository institution. The penalties may reach as much as $1,000,000 per day. FIRREA also expanded the scope of individuals and entities against whom such penalties may be assessed. FIRREA contains a "cross-guarantee" provision that makes commonly controlled insured depository institutions liable to the Federal Deposit Insurance Corporation (the "FDIC") for any losses incurred, or reasonably anticipated to be incurred, in connection with the failure of an affiliated insured depository institution. ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to certain other services offered by a holding company or its affiliates. REPORTING AND EXAMINATION. The Corporation is required to file quarterly and annual reports with the Federal Reserve Bank of Dallas (the "Federal Reserve Bank") and provide such additional information as the Federal Reserve Bank may require pursuant to the BHC Act. The Federal Reserve Bank may examine the Corporation and any nonbank subsidiary and charge the Corporation for the cost of such an examination. The Corporation is also subject to reporting and disclosure requirements under state and federal securities laws. CAPITAL ADEQUACY REQUIREMENTS. The FRB monitors the capital adequacy of bank holding companies using a combination of risk-based guidelines and leverage ratios to evaluate their capital adequacy. Under the risk-based capital guidelines, asset categories are assigned different risk weights based generally on perceived credit risk. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. Certain off-balance sheet items are added to the risk-weighted asset base by converting them to balance sheet components. For the purposes of the guidelines, a bank holding company's qualifying total capital is defined as the sum of its "Tier 1" and "Tier 2" capital elements, with the "Tier 2" element being limited to an amount not exceeding 100% of the "Tier 1" element. "Tier 1" capital includes, with certain limitations, common stockholders' equity, qualifying perpetual noncumulative preferred stock, and minority interests in consolidated subsidiaries. "Tier 2" capital includes, with some limitations, certain other preferred stock as well as qualifying debt instruments and all or part of the allowance for possible loan losses. The FRB guidelines require a minimum ratio of qualifying total capital to total risk-weighted assets of 8.0% (of which at least 4.0% must be in the form of "Tier 1" capital). At December 31, 1998, the Corporation's ratios of "Tier 1" and qualifying total capital to risk-weighted assets were 13.8% and 15.1%, respectively. At such date, both ratios exceeded regulatory minimums. The FRB also uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is defined as a company's "Tier 1" capital divided by its adjusted average total assets. The FRB guidelines require a minimum ratio of 3.0% "Tier 1" capital to adjusted average total assets for bank holding companies having the highest regulatory rating. For all other bank holding companies, the minimum ratio of "Tier 1" capital to total assets is 4.0%, and companies with supervisory, financial, or managerial weaknesses, as well as those anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. The Corporation's leverage ratio at December 31, 1998, was 8.5% which exceeded the regulatory minimum. A bank holding company which fails to meet the applicable capital standards will be at a disadvantage in several respects. For example, FRB policy discourages the payment of dividends by a bank holding company if payment would adversely affect capital adequacy or borrowing by a company with inadequate capital for the purpose of paying dividends. In some circumstances, a failure to meet the capital guidelines may also result in enforcement action by the FRB. IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. FDICIA requires bank regulators to take "prompt corrective action" to resolve insured depository institutions problems. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan to its federal regulatory agency. The regulatory agency will not accept the plan unless it meets certain criteria. One requirement for acceptance of a capital restoration plan is that each company "having control of" the undercapitalized institution must guarantee, up to certain limits, the subsidiary's compliance with the capital restoration plan. -5- The Corporation has control of the Subsidiary Banks for purpose of this statute. See below The Subsidiary Banks - Capital Adequacy Requirements. Under FDICIA, the aggregate liability of all companies controlling a particular institution is generally limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with application capital standards. FDICIA grants greater powers to regulatory authorities in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a timely and acceptable capital restoration plan or to implement an accepted capital restoration plan. A bank holding company controlling such an institution may be required to obtain prior FRB approval of proposed dividends or consent to a merger or to divest the troubled institution or other affiliates. In the event of a proceeding for a bank holding company under Chapter 11 of the U.S. Bankruptcy Code, the trustee (or the debtor-in-possession) will, by law, be deemed to have assumed, and required immediately to cure any deficit under, any commitment made by the company to a federal regulatory agency to maintain the capital of an insured depository institution, and any claim based upon such a commitment will have a priority of payment. ACQUISITION BY BANK HOLDING COMPANIES. The BHC Act prohibits a bank holding company, with some limited exceptions, from acquiring direct or indirect control of more than 5% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or bank holding company, or merging or consolidating with another bank holding company, without the prior approval of the FRB. In approving bank or bank holding company acquisitions by bank holding companies, the FRB is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. The Attorney General of the United States may, within 30 days after approval of an acquisition by the FRB, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. In some circumstances, any such action must be brought in less than 30 days after FRB approval. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") permits adequately capitalized and managed bank holding companies to acquire banks located in other states, regardless of whether the acquisition would be prohibited by applicable state law. An out-of- state bank holding company seeking to acquire ownership or control of a state or national bank located in Texas or any bank holding company owning or controlling a state bank or a national bank located in Texas must obtain the prior approval of both the FRB and the Banking Commissioner of Texas. Under the Interstate Banking Act, a bank holding company and its insured depository institution affiliates may not complete an acquisition which would cause it to control more than 10% of total deposits in insured depository institutions nationwide or to control 30% or more of total deposits in insured depository institutions in the home state of the bank sought to be acquired. However, state deposit concentration caps adopted by various states, such as Texas, which limit control of in-state insured deposits to a greater extent than the Interstate Banking Act will be given effect. Texas has adopted a deposit concentration cap of 20% of in-state insured deposits; therefore, the Texas state deposit concentration cap will lower the otherwise applicable 30% federal deposit concentration cap. State law may establish a minimum age (not to exceed five years) of local banks subject to interstate acquisition. The minimum age established by Texas is five years. ACQUISITION OF BANK HOLDING COMPANIES. The Change in Bank Control Act of 1978 prohibits a person or group of persons from acquiring "control" of a bank holding company unless the FRB has been given prior notice and has not disapproved the acquisition. Acquisition of 25% or more of any class of voting shares of a bank holding company constitutes acquisition of "control." The FRB presumes that the acquisition of 10% or more, but less than 25%, of any class of voting stock of a bank holding company constitutes acquisition of control if the company has securities registered under Section 12 of the Exchange Act, such as does the Corporation, or if no other person will own or control a greater percentage of that class of voting securities immediately after the transaction. That presumption can be rebutted by showing the acquisition will not in fact result in control. Any company would be required to obtain the approval of the FRB under the BHC Act before acquiring 25% (5% in the case of an acquiror that is a bank holding company) or more of the outstanding common stock of the Corporation or otherwise obtaining control or a "controlling influence" over the Corporation. THE SUBSIDIARY BANKS GENERAL. The Subsidiary Banks are national banking associations organized under the National Bank Act, as amended, (the "National Bank Act") and are subject to regulatory supervision and examination by the Office of the Comptroller of the Currency (the "OCC"). Pursuant to such regulation, the Banks are subject to various restrictions and supervisory requirements, and potentially to enforcement actions. The OCC regularly examines national banks with respect to, among other matters, capital -6- adequacy, reserves, loan portfolio, investments and management practices. The Subsidiary Banks must also furnish quarterly and annual reports to the OCC, and the OCC may exercise cease and desist and other enforcement powers over the Subsidiary Banks if their actions represent unsafe or unsound practices or violations of law. Since the deposits of the Subsidiary Banks are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Company (the "FDIC"), the Bank is also subject to regulation and supervision by the FDIC. Because the FRB regulates the Corporation, the FRB has supervisory authority which affects the Subsidiary Banks. Banks are subject to the credit policies of governmental authorities which affect the national supply of bank credit. Such policies influence overall growth of bank loans, investments, and deposits and may affect interest rates charged on loans and paid on deposits. The monetary policies of the FRB have had a significant effect on the results of operations of commercial banks in the past and may be expected to continue to do so in the future. SCOPE OF PERMISSIBLE ACTIVITIES. The National Bank Act provides the rights, privileges, and powers of national banks and defines the activities in which national banks may engage. Permitted activities for a national bank include making, arranging, purchasing, or selling loans, purchasing, holding, and conveying real estate under certain conditions, deal in investment securities in certain circumstances, and, generally, engaging in the "business of banking" and activities that are "incidental" to banking. Activities deemed "incidental" to the business of banking include the borrowing and lending of money, receiving deposits (including deposits of public funds), holding or selling stock or other property acquired in connection with security on a loan, discounting and negotiating evidences of debt, acting as guarantor (if the bank has a "substantial interest in the performance of the transaction"), issuing letters of credit to or on behalf of its customers, operating a safe deposit business, providing check guarantee plans, issuing credit cards, operating a loan production office, selling loans under repurchase agreements, selling money orders at offices other than bank branches, providing consulting services to banks, and verifying and collecting checks. BRANCHING. National banks located in Texas may establish a branch anywhere in Texas with prior OCC approval. For this purpose, a national bank is located in Texas if it has either its main office or a branch in Texas. In acting on a branch application, the OCC considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. The Interstate Banking Act, which expanded the authority of bank holding companies to engage in interstate bank acquisitions regardless of state law prohibitions, also allows banks to merge across state lines and thereafter have interstate branches by continuing to operate, as a main office or a branch, any office of any bank involved in the merger. States are, however, permitted to "opt-out" of interstate mergers by enacting laws meeting certain requirements. The Texas Legislature "opted out" of the interstate branching provisions during its 1995 Session. However, the Texas "opt-out" legislation, which by its terms will expire in September of 1999, has not been effective to prohibit interstate mergers involving banks in Texas. In granting an application for an interstate merger involving a national bank located in Texas, the OCC concluded that the Texas "opt-out" legislation was ineffective because it did not meet the requirement of the Interstate Banking Act. The Texas Banking Commissioner has also determined that the "opt-out" legislation is ineffective under federal law to prohibit interstate mergers and has, therefore, accepted applications for interstate merger and branching transaction for state-chartered institutions. As a consequence, the Texas "opt-out" legislation does not have the effect of prohibiting interstate merger and branching transactions otherwise allowed under federal law. The Interstate Banking Act further allows a bank to open new branches in a state in which it does not already have banking operations if the laws of that state permit a de novo branch of an out-of-state bank. A "de novo branch" is a branch office of a bank originally established as a branch and not one becoming a branch by acquisition or merger. Texas has elected not to permit de novo branching. The Texas legislation prohibiting de novo branching expires in September of 1999. RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. The Subsidiary Banks are subject to federal statutes which limit transactions with the Corporation and other affiliates. One set of restrictions is found in Section 23A of the Federal Reserve Act, which limits loans to, purchases of assets from, and investments in "affiliates" of the Subsidiary Banks. The term "affiliates" would include the Corporation and any of its subsidiaries. Section 23A imposes limits on the amount of such transactions and also requires certain levels of collateral for such loans. In addition, Section 23A limits the amount of loans or extensions of credit to third parties which are collateralized by the securities or obligations of the Corporation or its subsidiaries. Another set of restrictions is found in Section 23B of the Federal Reserve Act. Among the other things, Section 23B requires that certain transactions between a Subsidiary Bank and its affiliates must be on terms substantially the same, or at least as -7- favorable to the Subsidiary Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In the absence of such comparable transactions, any transaction between a Subsidiary Bank and an affiliate must be on terms and under circumstances, including credit underwriting standards and procedures, that in good faith would be offered to or would apply to nonaffiliated companies. Each Subsidiary Bank is also subject to certain prohibitions against advertising that suggests that the Subsidiary Bank is responsible for the obligations of its affiliates. The regulations and restriction on transactions with affiliates may limit the Corporation's ability to obtain funds from its Subsidiary Banks for its cash needs, including funds for payment of dividends and operating expenses. Under the Federal Reserve Act and FRB Regulation O, there are restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as "insiders") which apply to all banks with deposits insured by the FDIC and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such loans can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the bank's total unimpaired capital and surplus, and the OCC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. INTEREST RATE LIMITS AND LENDING REGULATIONS. The Subsidiary Banks are subject to various state and federal statutes relating to the extension of credit and the making of loans. The maximum legal rate of interest that the Subsidiary Banks may charge on a loan depends on a variety of factors such as the type of borrower, purpose of the loan, amount of the loan and date the loan is made. Texas statutes establish maximum legal rates of interest for various lending situations. Penalties are provided by law for charging interest in excess of the maximum lawful rate. Loans made by banks located in Texas are subject to numerous other federal and state laws and regulations, including Truth-in-Lending Act, the Texas Credit Title, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act. These laws provide remedies for the borrower and penalties for the lender for failure of the lender to comply with such laws. The scope and requirements of these laws and regulations have expanded in recent years, and claims by borrowers under these laws and regulations may increase. RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS. Substantially all of the Corporation's cash revenues is derived from dividends paid by the Subsidiary Banks. Dividends payable by the Subsidiary Banks are restricted under the National Bank Act. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - Dividends." The Subsidiary Banks' ability to pay dividends is further restricted by the requirement that they maintain adequate levels of capital in accordance with capital adequacy guidelines promulgated from time to time by the OCC. Moreover, the prompt corrective action provisions of FDICIA and implementing regulations prohibit a bank from paying dividends or management fees if, following the payment, the bank would be in any of the three capital categories for undercapitalized institutions. See "Capital Adequacy Requirements" below. EXAMINATIONS. The OCC periodically examines and evaluates national banks. Based upon such evaluations, the OCC may require revaluation of certain assets of a bank and require the bank to establish specific reserves to allow for the difference between the regulatory-determined value and the book value of such assets. The OCC is authorized to assess the institution an annual fee based on, among other things, the costs of conducting the examinations. CAPITAL ADEQUACY REQUIREMENTS. OCC regulations require national banks to maintain minimum risk-based capital ratios such as to those for bank holding companies discussed above. The applicable regulations establish five capital levels, ranging from "well capitalized" to "critically undercapitalized." A national bank is considered "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and if it is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A national bank is considered "adequately capitalized" if it has a total risk- based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of at least 4% and leverage capital ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution was given the highest rating in its most recent report of examination, subject to appropriate federal banking agency guidelines) and the bank does not meet the definition of a well capitalized bank. A national bank is considered "undercapitalized" if it has a total risk- based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution received the highest rating in its most recent report of examination, subject to appropriate federal banking agency guidelines). A "significantly undercapitalized" institution is one which has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that -8- is less than 3.0%, or a leverage ratio that is less than 3.0%. A "critically undercapitalized" institution is one which has a ratio of tangible equity to total assets that is equal to or less than 2.0%. At December 31, 1998, each of the Subsidiary Banks was well capitalized. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources." CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. FDICIA requires the federal banking regulators to take "prompt corrective action" with respect to capital- deficient institutions with the overall goal of reducing losses to the depository insurance fund. FDICIA contains broad restrictions on certain activities of undercapitalized institutions involving asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, national banks will be prohibited from making capital distributions, including dividends, or paying management fees to a holding company if the payment of such distributions or fees will cause them to become undercapitalized. Furthermore, undercapitalized national banks will be required to file capital restoration plans with the OCC. Such a plan will not be accepted unless, among other things, the banking institution's holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy. Undercapitalized national banks also will be subject to restrictions on growth, acquisitions, branching, and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The OCC also may, among other things, require an undercapitalized national bank to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances, to divest itself of any subsidiary. The OCC and other Federal banking agencies are authorized by FDICIA to take various enforcement actions against any significantly undercapitalized national bank and any national bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC. These powers include, among other things, requiring the institution to be recapitalized, prohibiting asset growth or requiring asset reduction, restricting interest rates paid, requiring FRB prior approval of any capital distributions by any bank holding company which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. Significantly and critically undercapitalized national banks may be subject to more extensive control and supervision. Such an institution may be prohibited from, among other things, entering into any material transaction not in the ordinary course of business, amending its charter or bylaws, or engaging in certain transactions with affiliates. In addition, critically undercapitalized institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of a national bank's becoming critically undercapitalized, the OCC must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued viability. DEPOSIT INSURANCE ASSESSMENTS. The FDIC is required by the Federal Deposit Insurance Act to assess all banks in order to fund adequately the Bank Insurance Fund (the "BIF") so as to resolve any insured bank that is declared insolvent by its primary regulator. FDICIA required the FDIC to establish a risk-based deposit insurance premium schedule. The risk-based assessment system is used to calculate deposit insurance assessments made on BIF member banks to maintain the designated reserves for the fund. In addition, the FDIC can impose special assessments to repay borrowings from the U.S. Treasury, the Federal Financing Bank, and BIF member banks. Under the risk-based system, banks are assessed insurance premiums according to how much risk they are deemed to present to the BIF. Such premiums currently range from zero percent of insured deposits to 0.27% of insured deposits. Banks with higher levels of capital and involving a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or involving a higher degree of supervisory concern. Each of the Subsidiary Banks are currently being assessed at the lowest rate of zero percent. Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), beginning in 1997 banks insured under the BIF were required to pay a part of the interest on bonds issued by the Financing Corporation ("FICO") in the late 1980s to recapitalize the defunct Federal Savings and Loan Insurance Corporation. Before the Funds Act, FICO payments were made only by depository institutions which were members of the Savings Association Insurance Fund (the "SAIF"). FICO assessment rates for the second semi-annual assessment period of 1998 were set by FDIC at .0122% annually for BIF members and .0610% annually for SAIF members. These rates may be adjusted quarterly to reflect changes in the assessment bases for the BIF and the SAIF. By law, the FICO assessment rate on BIF members must be one-fifth the rate on SAIF members until the two insurance funds are merged or until January 1, 2000, whichever occurs first. -9- INTERNAL OPERATING REQUIREMENTS. FDICIA requires financial institutions with over $500 million in assets to file an annual report with the FDIC and its primary federal regulator and any appropriate state banking agency within 90 days after the end of its fiscal year. The report must contain financial statements audited by an independent public accountant; a statement of management's responsibilities for (1) preparing the financial statements and for maintaining internal controls; (2) for financial reporting and complying with designated safety and soundness laws and regulations; and (3) a separate assessment by management of the effectiveness of the internal controls and the institutions' internal controls for financial reporting. The independent public accountant also must report separately on the institution's internal controls and certain of the statements made by management in the report. The requirement of an annual audit of the Subsidiary Banks can be satisfied by an annual audit of the Corporation. COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977 ("CRA") and the regulations issued by the OCC to implement that law are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. FIRREA requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of its subsidiary banks is reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. In 1995, the bank regulatory agencies adopted final regulations implementing the CRA. These regulations affect extensive changes to existing procedures for determining compliance with the CRA and the full effect of these new regulations cannot be determined at this time. EXPANDING ENFORCEMENT AUTHORITY. One of the major effects of FDICIA was the increased ability of banking regulators to monitor the activities of banks and their holding companies. The Federal banking agencies have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions, and publicly disclose such actions. CHANGING REGULATORY STRUCTURE. Legislative and regulatory proposals regarding changes in banking, regulations of banks, thrifts and other financial institutions, are being considered by the executive branch of the federal government, Congress, and various state governments, including Texas. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial service industry. The Corporation cannot predict accurately whether any of these proposals will be adopted or, if adopted, how these proposals will affect the Corporation or the Subsidiary Banks. EFFECT ON ECONOMIC ENVIRONMENT. The policies of regulatory authorities, including the monetary policy of the FRB, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FRB to affect the money supply are open market operations in U.S. Government securities, control of borrowings at the "discount window," changes in the discount rate on member bank borrowing, changes in reserve requirements against member bank deposits and against certain borrowings by banks and their affiliates and the placing of limits on interest rates that member banks may pay on time and savings deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may affect interest rates charged on loans or paid for deposits. FRB monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The Corporation cannot predict the nature of future monetary policies and the effect of such policies on the business and earnings of the Corporation and the Subsidiary Banks. ITEM 2. PROPERTIES. The principal offices of the Corporation are located at 1300 Summit Avenue, Fort Worth, Texas 76102. The Corporation and Summit National Bank, a subsidiary, lease space at this address from an unrelated third-party through leases that expire February 15, 2000 and December 31, 2009, respectively. The Corporation has options to extend its lease for two additional five year terms. Summit National Bank owns a detached motor bank facility. -10- Summit Community Bank, N.A. owns the building at its principal office at 3859 Camp Bowie Boulevard, Fort Worth, Texas. There are no encumbrances on this property. The Alta Mesa office of Summit Community Bank, N.A. is located at 3000 Alta Mesa Boulevard, Fort Worth, Texas. The building is owned by the Corporation with the bank office using approximately 25% of the facility. The remainder of the building is fully leased. There are no third-party encumbrances on the property. The Northeast office and motor bank facility of Summit Community Bank, N.A., at 9001 Airport Freeway, North Richland Hills, Texas, is leased from a third-party under a lease agreement expiring in April 2008. Summit Community Bank, N.A. owns a tract of land adjacent to the Northeast office to be used for building of a new motor bank facility that would be owned by the bank. The Fossil Creek office of Summit Community Bank, N.A., at 3851 NE Loop 820, Fort Worth, Texas is currently housed in a temporary facility. A new building is being built to house this office. The new building, to be completed in April 1999, is to be a joint venture between the Summit Community Bank, N.A. and an unrelated third party, with the Fossil Creek office occupying approximately 28% of the building under a long-term lease with the joint venture. Summit Community Bank, N.A. owns approximately five acres near the intersection of Tarrant County Parkway and Davis Boulevard in Northeast Tarrant County. This unimproved property is to be used to establish a new branch office in mid 1999 using a temporary facility. The property not used for a banking facility would be sold. A subsidiary of the Corporation owns an improved tract of land that serves as the site of the operations center which is the principal office of Summit Bancservices. This site is located at 500 Eighth Avenue, Fort Worth, Texas. ITEM 3. LEGAL PROCEEDINGS. In the opinion of management, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the Corporation's business, to which it or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise, during the fourth quarter of 1998. ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION. The executive officers of the Corporation, each elected to serve at the pleasure of the Board of Directors until the next annual meeting of the Board of Directors to be held on April 20, 1999, their respective ages, and their present positions with the Corporation are as follows:
Position Held Position With Since Name Age the Corporation ------------- - ------------------- --- ---------------------------- Philip E. Norwood 49 Chairman 1998 Jeffrey M. Harp 50 President 1998 Bob G. Scott 61 Executive Vice President and 1998 Chief Operating Officer
The business experience of each of these executive officers during the past five (5) years is set forth below: -11- Mr. Norwood became Chairman of the Board of Summit Bancshares, Inc. and Chairman of Summit Community Bank, N.A. in January 1998 and President of Summit Community Bank, N.A. in July 1994 and continues to serve in these capacities. From October 1993 to January 1998 Mr. Norwood served as President and Chief Executive Officer of the Corporation. He has served as a director of the Corporation since March 1984. From January 1990 to October 1993 Mr. Norwood served as Secre tary of the Corporation, from December 1992 to October 1993 he served as Executive Vice President of the Corporation, and from March 1984 to January 1990 he served as Secretary and Treasurer of the Corporation. From April 1981 to December 1992 Mr. Norwood served as President of Alta Mesa National Bank (currently a banking office of Summit Community Bank, N.A.). From December 1992 to December 1995 Mr. Norwood served as Chief Executive Officer of Alta Mesa National Bank. Mr. Norwood served as a director of Alta Mesa National Bank from April 1981 to March 1997 and as a director of Summit Community Bank, N.A. since January 1990. Mr. Norwood served as a director of Summit National Bank from March 1983 to January 1996. Mr. Harp became President of the Corporation in January 1998 and continues to serve in that capacity. From October 1993 to January 1998 Mr. Harp served as Chief Operating Officer and Secretary of the Corporation. He served as Executive Vice President of the Corporation from December 1992 to January 1998, and Treasurer from January 1990 to January 1998. He has served as director of the Corporation since January 1990. He has served as President of Summit National Bank since January 1991, and served as Executive Vice President of Summit National Bank from February 1985 to December 1990. He has served as a director of Summit National Bank since January 1990. He served as a director of Alta Mesa National Bank and Summit Community Bank, N.A. from January 1990 to January 1996. Mr. Scott became Executive Vice President, Chief Operating Officer, Secretary and Treasurer in January 1998 and continues to serve in these capacities. He served as Senior Vice President and Chief Financial Officer from June 1994 to January 1998. From February 1992 to June 1994 Mr. Scott was a Senior Vice President with Alexander and Alexander of Texas, Inc. Prior to February 1992, Mr. Scott was a financial officer with Team Bancshares, Inc., Fort Worth, Texas and with Texas American Bancshares, Inc., Fort Worth. No family relationships exist among the executive officers and directors of the Corporation. -12- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. Since May 3, 1993 the Corporation's Common Stock has been - ------------------ traded on the Nasdaq Stock Market under the symbol "SBIT." The following table sets forth the high and low stock prices as quoted for the Corporation's Common Stock for the periods indicated:
Bid ---------------- High Low ------- ------- 1998 Fiscal Year: - ---------------- First Quarter $23.75 $19.00 Second Quarter 25.25 20.00 Third Quarter 21.75 14.25 Fourth Quarter 20.00 14.00 1997 Fiscal Year: - ---------------- First Quarter $13.75 $11.25 Second Quarter 13.75 12.63 Third Quarter 17.25 13.50 Fourth Quarter 21.50 17.13
This data has been restated to reflect a two-for-one stock split effected on December 9, 1997. On March 17, 1999 the closing price reported for the Common Stock was $17.75. The foregoing quotations reflect prices quoted by market makers of the Corporation's Common Stock, without retail markup, markdown or commissions, and may not necessarily represent actual transactions. Prior to May 3, 1993 there was no established public trading market for the issued and outstanding shares of Common Stock of the Corporation. Accordingly, there exists no published information with respect to market prices before that date. From time to time, however, moderate numbers of shares of Common Stock were transferred on the books of the Corporation. SHAREHOLDERS. At the close of business on March 17, 1999 there were 634 - ------------ shareholders of record of Common Stock of the Corporation. The number of beneficial shareholders is unknown to the Corporation at this time. -13- DIVIDENDS. The Corporation has paid regular cash dividends on its common stock - --------- on a quarterly basis since the beginning of 1993. The following table sets forth, for each quarter since the beginning of 1997, the quarterly dividends paid by the Corporation on its Common Stock for the indicated periods. Data has been restated to reflect a two-for one stock split effective on December 9, 1997.
1998 Dividends Per Share ---------------- ------------------- First Quarter $0.060 Second Quarter 0.060 Third Quarter 0.060 Fourth Quarter 0.060 1997 ---------------- First Quarter $0.045 Second Quarter 0.045 Third Quarter 0.045 Fourth Quarter 0.045
Although the Board of Directors intends to continue to pay quarterly cash dividends in the future, there can be no assurance that cash dividends will continue to the paid in the future or, if paid, that such cash dividends will be comparable to cash dividends previously paid by the Corporation, since future dividend policy is subject to the discretion of the Board of Directors of the Corporation and will depend upon a number of factors, including future earnings of the Corporation, the financial condition of the Corporation, the Corporation's cash needs, general business conditions and the amount of dividends paid to the Corporation by the Subsidiary Banks. The principal source of the Corporation's cash revenues is dividends received from the Subsidiary Banks. Pursuant to the National Bank Act, no national bank may pay dividends from its paid-in capital. All dividends must be paid out of current or retained net profits, after deducting reserves for losses and bad debts. The National Bank Act further restricts the payment of dividends out of net profits by prohibiting a national bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until one- tenth of a bank's net profits for the preceding half year in the case of quarterly or semi-annual dividends, or the preceding two half-year periods in the case of annual dividends, are transferred to the surplus fund. The approval of the OCC is required prior to the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for that year combined with its net profits for the two preceding years. Under FDICIA, a Subsidiary Bank may not pay a dividend if, after paying the dividend, the Subsidiary Bank would be undercapitalized. In addition, the appropriate regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends which would constitute an unsafe and unsound banking practice. The Subsidiary Banks and the Corporation are not currently subject to any regulatory restrictions on their dividends. -14- ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth summary historical data for the past five years (in thousands except ratios and per share data). All share and per share information has been restated to reflect the two-for-one splits in 1997 and 1995:
Years Ended December 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Summary of Earnings: Interest Income $ 37,065 $ 31,972 $ 27,577 $ 22,929 $ 18,143 Interest Expense 13,478 11,301 9,771 8,277 5,625 -------- -------- -------- -------- -------- Net Interest Income 23,587 20,671 17,806 14,652 12,518 Provision (Credit) for Loan Losses 785 900 819 236 (114) Securities Gains (Losses) 35 (1) (14) (10) (152) Non-interest Income 3,815 3,266 2,990 2,764 2,729 Non-interest Expense 14,173 12,318 10,917 9,973 9,075 -------- -------- -------- -------- -------- Earnings Before Income Taxes 12,479 10,718 9,046 7,197 6,134 Income Tax Expense 4,333 3,678 3,103 2,468 2,094 -------- -------- -------- -------- -------- Net Income $ 8,146 $ 7,040 $ 5,943 $ 4,729 $ 4,040 ======== ======== ======== ======== ======== Balance Sheet Data (at period-end): Total Assets $532,764 $459,794 $395,248 $355,417 $291,011 Investment Securities 148,012 105,627 117,013 119,368 114,722 Loans, Net of Unearned Discount 305,833 276,069 220,006 178,493 138,966 Allowance for Loan Losses 4,724 4,065 2,972 2,500 2,410 Demand Deposits 141,170 126,398 103,695 89,184 72,992 Total Deposits 465,500 401,724 345,023 310,109 259,539 Long-term Debt and Notes Payable -0- -0- -0- -0- 250 Shareholders' Equity 46,235 41,112 35,080 30,125 25,334 Per Share Data: Net Income - Basic $ 1.25 $ 1.09 $ .93 $ .76 $ .64 Net Income - Diluted 1.20 1.04 .90 .72 .61 Book Value - Period-End 7.14 6.32 5.43 4.78 4.01 Dividends Declared .24 .18 .14 .11 .09 Weighted Average Shares Outstanding (000) 6,497 6,479 6,399 6,278 6,172 Average Common Share Equivalents (000) 317 321 314 322 309 Selected Performance Ratios: Return on Average Assets 1.70% 1.70% 1.60% 1.52% 1.43% Return on Average Shareholders' Equity 18.62 18.49 18.50 17.14 16.55 Net Interest Margin (tax equivalent) 5.28 5.47 5.24 5.15 4.85 Efficiency Ratio 51.60 51.42 52.50 57.20 59.96 Asset Quality Ratios: Non-Performing Loans to Total Loans - Period-End 1.65% .77% .50% .55% .46% Allowance for Loan Losses to Total Loans - Period-End 1.54 1.47 1.35 1.40 1.73 Allowance for Loan Losses to Non-Performing Loans - Period-End 94.0 193.0 270.0 252.0 375.0 Net Charge-Offs (Recoveries) to Average Loans .04 (.08) .17 .09 .05 Capital Ratios: Shareholders' Equity to Total Assets - Period-End 8.68% 8.94% 8.88% 8.48% 8.71% Average Shareholders' Equity to Average Assets 9.11 9.21 8.66 8.85 8.64 Total Risk-based Capital to Risk Weighted Assets - at Period-End* 15.06 15.06 15.85 15.91 18.09 Leverage Ratio - at Period-End* 8.52 8.83 8.82 8.42 8.69
* Calculated in accordance with Federal Reserve guidelines currently in effect. -15- QUARTERLY RESULTS (UNAUDITED) A summary of the unaudited results of operations for each quarter of 1998 and 1997 follows (in thousands except for per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998: - ----- Interest Income $8,873 $9,067 $9,448 $9,677 Interest Expense 3,249 3,288 3,459 3,482 Net Interest Income 5,624 5,779 5,989 6,195 Provision for Loan Losses 158 250 131 246 Non-interest Income 870 956 913 1,111 Non-interest Expense 3,506 3,435 3,540 3,692 Income Tax Expense 966 1,047 1,136 1,184 Net Income 1,864 2,003 2,095 2,184 Per Share Data: Net Income: Basic $ .29 $ .30 $ .33 $ .33 Diluted .27 .29 .31 .33 Dividends Paid .06 .06 .06 .06 Stock Price Range: High 23.75 25.25 21.75 20.00 Low 19.00 20.00 14.25 14.00 Close 23.38 21.25 15.75 18.50 First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997: - ----- Interest Income $7,326 $7,870 $8,249 $8,527 Interest Expense 2,540 2,713 2,952 3,096 Net Interest Income 4,786 5,157 5,297 5,431 Provision for Loan Losses 155 197 281 267 Non-interest Income 762 820 825 858 Non-interest Expense 2,846 3,076 3,128 3,268 Income Tax Expense 875 932 931 940 Net Income 1,672 1,772 1,782 1,814 Per Share Data: Net Income: Basic $ .26 $ .27 $ .28 $ .28 Diluted .25 .26 .26 .27 Dividends Paid .045 .045 .045 .045 Stock Price Range: High 13.75 13.75 17.25 21.50 Low 11.25 12.63 13.50 17.13 Close 12.38 13.75 17.13 21.00
-16- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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, accompanying notes, and selected financial data appearing elsewhere in this report. PERFORMANCE SUMMARY. Net income for 1998 was $8.1 million, an increase of $1.1 million, or 15.7%, over the $7.0 million recorded for 1997. On a weighted average share basis, net income for 1998 was $1.20 per diluted share as compared to $1.04 per share for 1997, an increase of 15.4%. The major contribution to the improved earnings during 1998 was a 14.1% increase in net interest income. Also contributing to the increase in net income was a decrease in the provision for loan losses of $115,000 and an increase of $585,000 in non-interest income. Partially offsetting these increases was an increase in non-interest expenses of $1,855,000. Further explanations of these changes are set forth below. Continuing to reflect the strong and growing economy in the Corporation's market area, loans increased 10.8% over the previous year-end to $306 million at December 31, 1998. Deposits experienced even more dramatic growth, particularly in the fourth quarter, increasing 15.9% over the same period to $466 million. Shareholders' equity was $46 million at year-end, an increase of 12.5%. Net income for 1997 was $7.0 million compared to net income of $5.9 million for 1996, an increase of 18.5%. The increase in earnings for 1997 was also attributable to a significant increase net interest income. The following table shows selected key performance ratios over the last three (3) years: 1998 1997 1996 ------ ------ ------ Return on Average Assets 1.70% 1.70% 1.60% Return on Average Shareholders' Equity 18.62 18.49 18.50 Shareholders' Equity to Assets - Average 9.11 9.21 8.66 Dividend Payout Ratio - Per Diluted Share 20.00 17.31 15.55 The ratio, return on assets, is calculated by dividing net income by average total assets for the year. The return on equity ratio is calculated by dividing net income by average shareholders' equity for the year. The equity to assets ratio is calculated by dividing average shareholders' equity by average total assets for the year. The dividend payout is determined by dividing the dividend paid per share by the diluted earnings per share. NET INTEREST INCOME. Net interest income is the difference between interest earned on earning assets and interest paid for the funds supporting those assets. The largest category of earning assets consists of loans to businesses and individuals. The second largest is investment securities. Net interest income is the principal source of the Corporation's earnings. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities supporting those assets, affect net interest income. Interest rates primarily are determined by national and international market trends, as well as competitive pressures in the Corporation's operating markets. For analytical purposes, income from tax-exempt assets, primarily securities issued by or loans made to state and local governments, is adjusted by an increment which equates tax-exempt income to interest from taxable assets. Net interest income (tax equivalent) for 1998 was $23.6 million, an increase of $2.9 million, or 14.2% compared to the prior year. The net increase reflected a $5.1 million increase in interest income which was offset by a $2.2 million increase in interest expense. The Corporation's yield on earning assets declined to 8.30% in 1998, from 8.45% for 1997. Rates paid on the Corporation's interest-bearing liabilities, increased from 4.16% in 1997 to 4.24% in 1998. These negative shifts in yield on earning assets and cost of interest-bearing liabilities resulted in the net interest margin declining from 5.47% in 1997 to 5.28% for 1998. However, an18.1% increase in average earning assets more than offset the decline in net interest margin. Also, contributing to the improved net interest income for 1998 was the increase in noninterest-bearing demand deposits. In 1998, the average balance of demand deposits increased 14.4%. Although the average demand deposits as a percent of average total deposits declined to 27.8% in 1998 from 28.2% in 1997 this ratio remains very positive compared to the Corporation's peers. -17- SUMMARY OF EARNING ASSETS AND INTEREST BEARING LIABILITIES Although the year-end detail provides satisfactory indicators of general trends, the daily average balance sheets are more meaningful for analysis purposes than year-end data because averages reflect the day-to-day fluctuations that are common to bank balance sheets. Also, average balances for earning assets and interest-bearing liabilities can be related directly to the components of interest income and interest expense on the statements of income. This provides the basis for analysis of rates earned and paid, and sources of increases and decreases in net interest income as derived from changes in volumes and rates. The following schedule presents average balance sheets for the most recent three years in a format that highlights earning assets and interest-bearing liabilities.
Years Ended December 31, ----------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ----------------------- --------------------- Average Average Average Average Average Average (Dollars in Thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate --------- ---------- ----------- --------- --------- ---------- -------- --------- --------- Earning Assets: Federal Funds Sold $ 38,112 $ 2,053 5.39% $ 18,059 $ 1,008 5.58% $ 16,696 $ 906 5.32% Investment Securities (Taxable) 115,663 6,963 6.02 111,578 6,874 6.16 122,212 7,398 6.05 Investment Securities (Tax-exempt) 1,103 76 6.90 539 36 6.59 24 2 8.17 Loans, Net of Unearned Discount/(1)/ 292,060 28,002 9.59 248,303 24,069 9.69 201,506 19,285 9.57 -------- -------- -------- -------- -------- ------- Total Earning Assets 446,938 37,094 8.30 378,479 31,987 8.45 340,438 27,591 8.11 -------- -------- ------- Other Assets: Cash and Due From Banks 22,226 24,909 21,027 Other Assets 16,261 13,568 12,243 Allowance for Loan Losses (4,430) (3,470) (2,811) -------- -------- -------- Total Assets $480,995 $413,486 $370,897 ======== ======== ======== Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts $144,133 5,186 3.60 $128,880 4,599 3.57 $116,811 3,853 3.30 Savings 68,011 2,972 4.37 50,756 2,134 4.21 46,324 1,871 4.04 Savings Certificates 52,261 2,631 5.03 49,203 2,434 4.95 48,058 2,292 4.77 Certificates of Deposit $100,000 or more 36,752 1,948 5.30 30,242 1,572 5.20 24,405 1,208 4.95 Other Time 877 49 5.59 622 34 5.38 428 19 4.42 Other Borrowings 15,742 692 4.40 11,668 528 4.53 12,318 528 4.33 -------- -------- -------- -------- -------- ------- Total Interest-Bearing Liabilities 317,776 13,478 4.24 271,371 11,301 4.16 248,344 9,771 3.93 -------- -------- ------- Other Liabilities: Demand Deposits 116,428 101,813 88,022 Other Liabilities 3,030 2,212 2,399 Shareholders' Equity 43,761 38,090 32,132 -------- -------- -------- Total Liabilities and Shareholders' Equity $480,995 $413,486 $370,897 ======== ======== ======== Net Interest Income and Margin (T/E Basis)/(2)/ $ 23,616 5.28 $ 20,686 5.47 $17,820 5.24 ======== ======== =======
(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 all three years. Net interest margin, the net return on earning assets which is computed by dividing net interest income by average total earning assets, was 5.28% for 1998, a nineteen basis point decline from the previous year. This decline in the margin reflected a lower yield on earning assets contributed to by a declining interest rate market in the fourth quarter of 1998 and a more competitive economic market that resulted in somewhat lower pricing of some loans. Also, competitive market conditions resulted in higher rates being paid on deposit products, along with a shift by the Corporation's customers to higher interest rate deposit products. -18- The table below analyzes the increase in net interest income for each of the years ended December 31, 1998 and 1997 on a fully tax equivalent basis. Non- accruing loans have been included in assets for these computations, thereby reducing yields on total loans. The changes in interest due to both rate and volume in the rate/volume analysis table below have been allocated to volume or rate change in proportion to the absolute amounts of the change in each.
1998 1997 vs. 1997 vs. 1996 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: ------------------------------ ----------------------------- (Dollars in Thousands) Volume Rate Total Volume Rate Total --------- ------- ---------- -------- -------- --------- Interest Earning Assets: Federal Funds Sold $1,080 $ (35) $1,045 $ 64 $ 38 $ 102 Investment Securities (Taxable) 248 (159) 89 (656) 132 (524) Investment Securities (Tax-exempt) 38 2 40 34 -0- 34 Loans, Net of Unearned Discount 4,185 (252) 3,933 4,539 245 4,784 ------ ----- ------ ------ ----- ------ Total Interest Income 5,551 (444) 5,107 3,981 415 4,396 ------ ----- ------ ------ ----- ------ Interest-Bearing Liabilities: Deposits 1,793 220 2,013 962 573 1,535 Other Borrowings 170 (6) 164 (25) 16 (9) ------ ----- ------ ------ ----- ------ Total Interest Expense 1,963 214 2,177 937 589 1,526 ------ ----- ------ ------ ----- ------ Changes in Net Interest Income $3,588 $(658) $2,930 $3,044 $(174) $2,870 ====== ===== ====== ====== ===== ======
Net interest income for 1998 increased $2,930,000, or 14.2% over the prior year. In this same period total interest income increased 15.9% and total interest expense increased 19.3%. NON-INTEREST INCOME. Non-interest income is an important contributor to net earnings. The major component of the Corporation's non-interest income is various charges and fees earned on deposit accounts and related services. The following table summarizes the changes in non-interest income during the past three years (dollars in thousands):
1998 1997 1996 ---------------------- ----------------------- ------ Amount % Change Amount % Change Amount ------- --------- -------- --------- ------ Service Charges on Deposit Accounts $2,018 6.8% $1,890 14.9% $1,645 Non-recurring Income 412 -- 151 (25.2) 202 Gain (Loss) on Sale of Investment Securities 35 -- (1) -- (14) Other Non-interest Income 1,385 13.1 1,225 7.2 1,143 ------ ------ ------ Total Non-interest Income $3,850 17.9 $3,265 9.7 $2,976 ====== ====== ======
Service charges on deposits increased in 1998 as a result of an increase in the various service fees charged on deposit accounts and an increase in the number of accounts. The non-recurring income in 1998 included $137,000 from refunds of state franchise taxes paid in prior years, $178,000 from gains on sales of assets taken in satisfaction of debts in prior years and $97,000 of interest recovered on loans either charged-off in prior years or loans that were on non-accural status in prior years. Non-recurring income in 1997 and 1996 is primarily interest recovered on loans charged-off in prior years and gains on sales of miscellaneous assets. The increase in other non-interest income in 1998 is primarily due to income from two new products, debit cards and mortgage brokerage/origination, partially offset by lower fees earned on investment services to customers. Excluding non-recurring income and gains and losses on securities, non-interest income increased 9.3% in 1998 and 11.7% in 1997. -19- NON-INTEREST EXPENSE. Non-interest expense includes all expenses of the Corporation other than interest expense, provision for loan losses and income tax expense. The following table summarizes the changes in the non-interest expenses for the past three years (dollars in thousands):
1998 1997 1996 ----------------------- -------------------- ------ Amount % Change Amount % Change Amount ------ -------- ------ -------- ------ Salaries and Employee Benefits $ 8,576 14.0% $ 7,524 11.4% $ 6,753 Occupancy Expense - Net 928 19.9 774 2.6 772 Furniture and Equipment Expense 1,150 25.1 919 14.9 800 Other Real Estate Owned Expense (1) -- (63) -- 10 Other Expenses: Business Development 611 3.9 588 38.0 426 Insurance - Other 102 5.2 97 (3.0) 100 Legal and Professional Fees 511 3.0 496 12.2 442 Other Taxes 277 52.2 182 80.2 101 Postage and Courier 286 .7 284 8.4 262 Printing and Supplies 387 3.8 373 23.1 303 Regulatory Fees and Assessments 169 5.6 160 19.4 134 Other Operating Expenses 1,177 19.6 984 20.9 814 ------- ------- ------- Total Other Expenses 3,520 11.3 3,164 22.5 2,582 ------- ------- ------- Total Non-interest Expense $14,173 15.1 $12,318 12.8 $10,917 ======= ======= =======
Total non-interest expense increased 15.1% in 1998 over 1997 reflecting increases in salaries and benefits, occupancy expenses, furniture and equipment expenses, other taxes and other operating expenses. As a percent of average assets, non-interest expenses were 2.95% in 1998 and the "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 51.60% for 1998. The efficiency ratio measures what percentage of total revenues are absorbed by non-interest expense. These measures of operating efficiency compare very favorably to other financial institutions in the Corporation's peer groups. The increase in salaries and employee benefits for 1998 is due to salary merit increases and additions to staff. The average number of full-time equivalent employees increased by 21 in 1998 to an average full-time equivalent of 166. At year end 1998 the full-time equivalent staff was 169 versus 160 at the same time the prior year. The increases for salaries and number of employees include additions for a branch office opened in 1997. Also, several lending officers and customer service officers and employees were added in the last half of 1997 and were on staff for the full year of 1998. The increase in occupancy expense includes the rent for a new branch office that was opened in the fourth quarter of 1997. Also, increases of approximately 13%, in the aggregate, were experienced in utilities expense, repairs expense and ad valorem tax expense in current facilities. The increase in furniture and equipment expense is primarily a result of depreciation and service contract expense for a new computer network system installed in mid 1997 as well as, new item processing equipment added in late 1997. Also, expenses related to a new branch office opened in 1997 are reflected. Other taxes, primarily franchise taxes paid to the State of Texas were higher due to higher levels of taxable capital at all entities and the loss of certain tax credits that were available in prior years. As noted in the discussion of non-interest income, tax refunds were received for the tax years of 1995 through 1997 by filing amended returns to reflect new interpretations of taxable capital. These new interpretations should assist in maintaining somewhat lower taxes in future years. Other operating expenses increased in 1998 due to an increase in various miscellaneous operating costs including telephone service fees, ATM support expenses, third party data processing support fees, and travel expenses. -20- FEDERAL AND STATE INCOME TAX EXPENSE. The Corporation has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." See Note 10 of the Corporation's Notes to Consolidated Financial Statements for details of tax expense. The Corporation provided $4.3 million for federal income taxes for 1998, resulting in an effective tax rate of 34.7%. INVESTMENT SECURITIES. The following table presents the consolidated investment securities portfolio at amortized cost as of December 31, 1998, classified as to -------------- whether the security is to be Held-to-Maturity or is Available-for-Sale (see Note 1 of the Notes to Consolidated Financial Statements for a discussion of these designations), by stated maturity and with the weighted average interest yield for each range of maturities. The yields on tax-exempt obligations are computed on a fully taxable equivalent basis using statutory rates for federal income taxes.
December 31, 1998 ------------------------------------------------------------------------------- Due 1 to Due 5 to Due After Due 1 Year or Less 5 Years 10 Years 10 Years ------------------- ----------------------- ------------------ ---------------------------- (Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total ---------- ------- ----------- --------- ---------- -------- --------- ------- --------- U.S. Treasury Securities - HTM $ 3,002 6.02% $ 8,988 6.32% $ -0- -- $ -0- -- $ 11,990 U.S. Treasury Securities - AFS 12,047 5.99 16,992 6.19 -0- -- -0- -- 29,039 ------- ------- ------- ------- -------- Total 15,049 6.00 25,980 6.24 -0- -0- 41,029 ------- ------- ------- ------- -------- U.S. Government Agencies - HTM -0- -- 13,020 5.96 1,011 6.00% -0- -- 14,031 U.S. Government Agencies - AFS 29.779 5.09 28,433 5.86 15,305 5.79 -0- -- 73,517 ------- ------- ------- ------- -------- Total 29,779 5.09 41,453 5.89 16,316 5.81 -0- 87,548 ------- ------- ------- ------- -------- U.S. Government Agency Mortgage Backed Securities - AFS 740 5.66 -0- -- 2,955 5.96 12,790 5.57 16,485 ------- ------- ------- ------- -------- Obligations of States and Political Subdivisions - HTM 281 6.29 293 6.47 -0- -- -0- -- 574 Obligations of States and Political Subdivisions - AFS 105 6.81 350 7.27 -0- -- -0- -- 455 ------- ------- ------- ------- -------- Total 386 6.43 643 6.91 -0- -0- -- 1,029 ------- ------- ------- ------- -------- Other Securities - AFS -0- -- -0- -- -0- -- 1,072 6.00 1,072 ------- ------- ------- ------- -------- Total $45,954 5.41 $68,076 6.03 $19,271 5.83 $13,862 5.60 $147,163 ======= ======= ======= ======= ======== Held-to-Maturity ("HTM") $ 3,283 6.04% $22,301 6.11% $ 1,011 6.00% $ -0- -- $ 26,595 Available-for-Sale ("AFS") 42,671 5.36 45,775 5.99 18,260 5.82 13,862 5.60% 120,568
The yield on the investment securities portfolio of the Corporation at December 31, 1998 was 5.94% and the weighted average life of the portfolio on that date was approximately 1.6 years. At December 31, 1997 the yield of the portfolio was 6.08% and the weighted average life was 2.2 years. In late 1998 the Corporation purchased $30,000,000 par value of U.S. Agency Discount notes. These securities had a maturity of 30 to 120 days and provided a yield greater than Federal funds while providing the necessary liquidity. The inclusion of these notes in the portfolio reduced the average life of the portfolio. Note 2 to the Corporation's Notes to Consolidated Financial Statements shown in this report reflects the estimated fair values for various categories of investment securities as of December 31, 1998 and 1997. As of December 31, 1998, there was a net unrealized gain of $1,213,000 in the portfolio of which $849,000 related to Available-for-Sale securities, or .7% of the amortized cost of those securities. The following table summarizes the book value of investment securities held by the Corporation as of December 31 for the past five years (in thousands):
December 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- U.S. Treasury Securities $ 41,672 $ 70,794 $ 77,678 $ 78,981 $ 85,601 U.S. Government Agencies and Corporations 87,791 20,249 25,276 26,922 18,277 U.S. Government Agency Mortgage Backed Securities 16,440 12,527 13,805 13,141 10,196 Obligations of States and Political Subdivisions 1,037 1,142 -0- 70 394 Federal Reserve Bank and Federal Home Loan Bank Stock 1,072 915 254 254 254 -------- -------- -------- -------- -------- Total $148,012 $105,627 $117,013 $119,368 $114,722 ======== ======== ======== ======== ========
-21- In 1998, approximately $12 million of investment securities were sold, resulting in a net gain on sale of securities of $35,000. Management of the Corporation views these trades as an opportunity to restructure the portfolio for future benefits. LOANS. The following schedule classifies loans according to type as of December 31 for the past five years (dollars in thousands):
December 31, -------------------------------------------------------------------------------- % of % of % of % of % of ------------ 1998 Total 1997 Total 1996 Total 1995 Total 1994 Total ------------ ------ --------- ------ --------- ------ --------- ------ --------- ------ Commercial $133,066 43.5% $127,800 46.3% $103,414 47.0% $ 81,542 45.7% $ 69,610 50.1% Real Estate Mortgage 100,421 32.9 90,638 32.8 76,771 34.9 64,200 36.0 51,684 37.2 Real Estate Construction 40,456 13.2 26,290 9.5 12,862 5.8 10,189 5.7 3,656 2.6 Loans to Individuals, Net of Unearned Discount 31,890 10.4 31,341 11.4 26,959 12.3 22,562 12.6 14,016 10.1 -------- -------- -------- -------- ----- -------- ----- Total Loans, Net of Unearned Income $305,833 100.0% $276,069 100.0% $220,006 100.0% $178,493 100.0% $138,966 100.0% ======== ======== ======== ======== ========
The preceding loan distribution table reflects that total loans increased $29.8 million (10.8%) between year-end 1997 and 1998. Although this dollar increase was significant, the Corporation is continuing to apply stringent credit criteria on all loan applications. At December 31, 1998, loans were 65.7% of deposits compared to 68.7% at the previous year-end reflecting an above average increase in deposits in the fourth quarter of 1998. However, average loans were 69.8% of average deposits in 1998 compared to 68.7% in 1997. Primarily, the commercial loan customers of the Subsidiary Banks are small to medium-sized businesses and professionals and executives. The banks offer a variety of commercial loan products that include revolving lines of credit, letters of credit, working capital loans and loans to finance accounts receivable, inventory and equipment. Generally, these commercial loans have floating rates of interest with terms of maturity of three years or less. A significant portion of the $100 million real estate mortgage portfolio is loans to finance owner-occupied real estate. At December 31, 1998, $62 million of loans, approximately 62% of the real estate mortgage portfolio, had been made for this purpose. Also, approximately 34% of the loans in the real estate mortgage portfolio have variable rates of interest with a significant portion of the remaining portfolio having balloon terms at five to seven years and/or rate adjustment clauses. Real estate construction loans are made primarily to finance construction of single family residences in the Corporation's market area of Tarrant County. Construction loans generally are secured by first liens on real estate and have floating interest rates. The Corporation's lending activities in this area are primarily with borrowers that have been in the building trade for many years and with which the banks have long standing relationships. The Corporation's lending officers meet quarterly with consultants that carefully track the residential building activities within the market. The Corporation will adjust its construction lending activities based on the trends of housing starts and absorption rates in the market. The Corporation also lends to consumers for purchases of various consumer goods, such as automobiles, boats and home improvements. The terms of these loans typically are five years or less and are well secured with liens on products purchased or other assets. These loans are primarily made to customers who have other relationships with the banks. The Corporation does not issue credit cards and does not have any credit card loans outstanding. The following table presents commercial loans and real estate construction loans at December 31, 1998, based on scheduled principal repayments and the total amount of loans due after one year classified according to sensitivity to changes in interest rates (in thousands):
Over One Year One Year Through Over Five or Less Five Years Years Total --------- ---------- --------- --------- Commercial $107,623 $22,688 $2,755 $133,066 Real Estate Construction 36,016 2,305 2,135 40,456 -------- ------- ------ -------- Totals $143,639 $24,993 $4,890 $173,522 ======== ======= ====== ========
-22- Of the loans maturing after one year, all have fixed rates of interest, with many having rate adjustment clauses during the remaining term of the loan that allow for periodic adjustments to rates. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Loans, or portions thereof, which are considered to be uncollectible are charged against this allowance and subsequent recoveries, if any, are credited to the allowance. The allowance represents the amount which, in management's judgement, will be adequate to absorb future charge-offs of existing loans which may become uncollectible. The adequacy of the allowance is determined by management's periodic evaluation of the loan portfolio and by the employment of third party loan review specialists. All known problem loans, unknown inherent risks generally associated with bank lending, past loan loss experience, delinquency ratios and current and projected economic conditions are taken into account in evaluating the adequacy of the allowance. The Corporation has adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure" ("SFAS No. 118"). These standards specify how allowances for certain impaired loans should be determined and the accounting for in-substance foreclosures. Loans are generally placed on non-accrual status when principal or interest is past due 90 days or more and the loan is not both well-secured and in the process of collection, or immediately, if in the opinion of management, full collection of principal or interest is doubtful. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The following table presents average loans net of unearned income and an analysis of the consolidated allowance for loan losses (dollars in thousands):
Years Ended December 31, ----------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Average Loans Outstanding $ 292,060 $ 248,303 $ 201,506 $ 156,374 $ 132,079 ========== ========== ========== ========== ========== Analysis of Allowance for Loan Losses: Balance, Beginning of Year $ 4,065 $ 2,972 $ 2,500 $ 2,410 $ 2,594 Charge-Offs: Commercial 128 148 424 321 101 Real Estate Mortgage 39 -0- -0- -0- 180 Real Estate Construction 6 -0- -0- -0- -0- Loans to Individuals 170 98 36 26 32 ---------- ---------- ---------- --------- ---------- Total Charge-Offs 343 246 462 347 313 ---------- ---------- ---------- --------- ---------- Recoveries: Commercial 87 379 58 74 129 Real Estate Mortgage 111 56 54 114 79 Real Estate Construction -0- -0- -0- -0- -0- Loans to Individuals 19 4 3 13 35 ---------- ---------- ---------- --------- ---------- Total Recoveries 217 439 115 201 243 ---------- ---------- ---------- --------- ---------- Net Charge-Offs (Recoveries) 126 (193) 347 146 70 ---------- ---------- ---------- --------- ---------- Provision Charged (Credited) to Operating Expense 785 900 819 236 (114) ---------- ---------- ---------- --------- ---------- Balance, End of Year $ 4,724 $ 4,065 $ 2,972 $ 2,500 $ 2,410 ========== ========== ========== ========= ========== Ratio of Net Charge-Offs (Recoveries) to Average Loans Outstanding .04% (.08)% .17% .09% .05% ========== ========== ========== ========= ==========
-23- The decrease in provision for loan losses in 1998 over 1997 primarily recognizes the significant increase in reserve to loans ratio in the prior year (1.47% vs 1.35%) and a lower rate of growth in loans. The following table reflects the allowance for loan losses compared to total loans at the end of each year (dollars in thousands):
December 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Total Loans $305,833 $276,069 $220,006 $178,493 $138,966 Allowance for Loan Losses 4,724 4,065 2,972 2,500 2,410 Allowance for Loan Losses as a Percent of Total Loans 1.54% 1.47% 1.35% 1.40% 1.73% Allowance for Loan Losses As a Percent of Non-Performing Loans 94.0 193.0 270.0 252.0 375.0
The following table illustrates the allocation of the allowance for loan losses to the various loan categories (dollars in thousands); see the tables on page 22 for the percent of specific types of loans to total loans:
December 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- % % % % % Amount Total Amount Total Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- ------ ------ ------ ----- Allowance For Loan Losses: Commercial $2,713 57.4% $1,729 42.5% $1,072 36.1% $1,249 50.0% $ 953 39.5% Real Estate Mortgage 818 17.3 699 17.2 556 18.7 524 21.0 648 26.9 Real Estate Construction 452 9.6 184 4.5 81 2.7 63 2.5 28 1.2 Loans to Individuals 372 7.9 272 6.7 165 5.6 132 5.3 198 8.2 Unallocated Portion 369 7.8 1,181 29.1 1,098 36.9 532 21.2 583 24.2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $4,724 100.0% $4,065 100.0% $2,972 100.0% $2,500 100.0% $2,410 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The allocation is determined by providing specific reserves against each criticized loan plus a general allocation against the remaining balance of the portfolio based on experience factors. Management of the Corporation believes that the allowance for loan losses at December 31, 1998, is adequate to cover losses inherent in the portfolio. There can be no assurance that the Corporation will not sustain loan losses in future periods which could be substantial in relation to the size of the current allowance. The total allowance is available to absorb losses from any segment of loans. NON-PERFORMING ASSETS. Non-performing assets consist of non-accrual loans, renegotiated loans and other real estate. Non-accrual loans are those on which the accrual of interest has been suspended and on which the interest is recorded as earned when it is received. Loans are generally placed on non-accrual status when principal or interest is past due 90 days or more, and the loan is not both well-secured and in the process of collection, or immediately, if in the opinion of management, full collection of principal or interest is doubtful. At the time a loan is placed on non-accrual status, interest previously recorded but not collected is reversed and charged against current interest income. Renegotiated loans are loans on which the interest and/or the principal has been reduced due to a deterioration in the borrower's financial condition. Even though these loans are actually performing, they are included in non-performing assets because of the loss of revenue related to the reduction of interest and/or principal. Other real estate is real estate acquired through foreclosure or through partial settlement of debts and which is awaiting sale and disposition. At the time of acquisition, other real estate is recorded at the lower of estimated fair value or the loan balance or settlement agreement with any write-down charged to the allowance for loan losses. Any further write-downs, expenses related to the property, and any gain or loss resulting from the sale of the property are recorded in current operating expenses. -24- The following table summarizes the non-performing assets and loans 90 days past due and still accruing as of December 31, (dollars in thousands):
December 31, ----------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Non-accrual Loans $5,049 $2,112 $1,102 $ 990 $ 643 Renegotiated Loans 6 -0- -0- -0- -0- Other Real Estate 281 151 166 113 649 ------ ------ ------ ------ ------ Total Non-Performing Assets $5,336 $2,263 $1,268 $1,103 $1,292 ====== ====== ====== ====== ====== As a Percent of: Total Assets 1.00% .49% .32% .31% .44% Total Loans and Other Real Estate 1.74 .82 .58 .62 .93 Loans Past Due 90 Days or More and Still Accruing $ 3 $ 78 $ 36 $ -0- $ 32
The Subsidiary Banks are required, by the regulatory authorities, to have other real estate evaluated periodically. In the event the new evaluation value is less than the carrying value of the property, the excess is written off to expense. Some properties are written down below their evaluation values when management feels the economic value of the property has declined below the evaluation value. Non-accrual loans at December 31, 1998, were comprised of $2,393,000 in commercial loans, $451,000 in real estate mortgages, $2,108,000 in interim construction loans and $97,000 to consumers. Within the non-accrual commercial loans is one loan of $1,914,000 that is performing as to payment of principal and interest, however, the borrower is experiencing financial difficulty due to their line of business - health insurance underwriting. The non-accrual interim construction loans includes a commercial construction loan for $1,609,000 to a borrower that is in bankruptcy. In January 1999, the property was foreclosed. The property has been appraised at a value above the loan value, therefore the foreclosed asset was recorded at the loan value at foreclosure. The impact on interest income from the above non-accrual loans and renegotiated loans for the past five (5) years is provided below (in thousands):
Years Ended December 31, ------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Gross Amount of Interest That Would Have Been Recorded at Original Rate $ 537 $ 272 $ 111 $ 102 $ 35 Interest Included in Income 312 154 30 42 25 ------ ------ ------ ------ ------ Interest Not Recorded in Income $ 225 $ 118 $ 81 $ 60 $ 10 ====== ====== ====== ====== ======
Loans of each Subsidiary Bank are graded on a system similar to that used by the regulators. The first level of criticized loans is "Other Assets Especially Mentioned" (OAEM). These loans are normally fundamentally sound but have potential weaknesses which may, if not corrected, weaken the asset or inadequately protect the bank's credit position at some future date. The second level is "Substandard", which are loans inadequately protected by current sound net worth, paying capacity or pledged collateral. The last level of criticized loans, before they are charged off, is "Doubtful". Doubtful loans are considered to have inherent weaknesses because collection or liquidation in full is highly questionable. Non-accrual loans normally include weaker Substandard loans and loans that are considered to be Doubtful. -25- The following table summarizes the relationship between non-performing loans, criticized loans and the allowance for loan losses (dollars in thousands):
December 31, ---------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Non-Performing Loans $ 5,055 $ 2,112 $ 1,102 $ 990 $ 643 Criticized Loans 10,468 9,295 4,589 7,621 4,497 Allowance for Loan Losses 4,724 4,065 2,972 2,500 2,410 Allowance for Loan Losses as a Percent of: Non-Performing Loans 94.0% 193.0% 270.0% 252.0% 375.0% Criticized Loans 45.0 44.0 65.0 33.0 54.0
Independent third party loan reviews of the Subsidiary Banks were completed at various times in 1998. In addition, regulatory examinations were completed in early 1999. Based on the findings of these reviews and exams the Subsidiary Banks appear to be adequately reserved. Management is not aware of any potential loan problems, that have not been disclosed, to which serious doubts exist as to the ability of the borrower to substantially comply with the present repayment terms. DEPOSITS. The primary source of the Corporation's funds is the deposits of the Subsidiary Banks. The majority of the Corporation's deposits are considered "core" deposits, that is, deposits that are not subject to material changes due to customer withdrawal because of market rate changes. The Corporation does not accept brokered deposits. Average demand deposits increased $14.6 million, or 14.4% in 1998. These deposits represented 27.8% of total deposits. Average interest-bearing deposits increased $42.3 million, or 16.3%. The deposit types' daily average balance and related average rates paid during each of the last three (3) years are as follows (dollars in thousands):
1998 1997 1996 ------------------- ------------------------------- --------- Amount Rate Paid Amount Rate Paid Amount Rate Paid ------ --------- -------- ---------- -------- --------- Noninterest-Bearing Demand Deposits $116,428 $101,813 $ 88,022 Interest-Bearing Deposits: Interest-Bearing Transaction Accounts 144,133 3.60% 128,880 3.57% 116,811 3.30% Savings 68,011 4.37 50,756 4.21 46,324 4.04 Savings Certificates 52,261 5.03 49,203 4.95 48,058 4.77 Certificates of Deposit of $100,000 or More 36,752 5.30 30,242 5.20 24,405 4.95 Other Time Deposits 877 5.59 622 5.38 428 4.42 -------- -------- -------- Total Interest-Bearing Deposits 302,034 4.23 259,703 4.15 236,026 3.92 -------- -------- -------- Total Deposits $418,462 $361,516 $324,048 ======== ======== ========
The remaining maturity on certificates of deposit of $100,000 or more as of December 31, 1998, 1997 and 1996 is presented below (in thousands):
% of % of % of Maturity 1998 Total 1997 Total 1996 Total - ------------------ -------- ------ -------- ------ -------- ------ 3 months or less $14,227 38.4% $15,480 43.4% $10.215 40.1% 3 to 6 months 7,943 21.4 6,894 19.3 7,342 28.9 6 to 12 months 8,471 22.8 11,383 31.9 6.350 25.0 Over 12 months 6,458 17.4 1,933 5.4 1,527 6.0
-26- BORROWINGS. Securities sold under repurchase agreements generally represent borrowings with maturities ranging from one to thirty days. These borrowings are with significant commercial customers of the banks that require short-term liquidity for their funds. Information relating to these borrowings is summarized as follows:
December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Securities sold under repurchase agreements: Average $ 15,742 $ 11,668 $ 12,181 Year-end 17,839 14,689 13,209 Maximum month-end balance during year 19,354 15,263 14,453 Interest Rate: Average 4.40% 4.53% 4.33% Year-end 3.83 4.55 4.35
INTEREST RATE SENSITIVITY. The objectives of monitoring and managing the interest rate risk of the balance sheet are to contribute to earnings by minimizing adverse changes in net interest income as a result of changes in the direction and level of interest rates and to provide liquidity to satisfy cash flow requirements to meet customers' fluctuating demands. Interest rate sensitivity is the relationship between changes in the market interest rates and changes in net interest income due to the repricing characteristics of assets and liabilities. An asset-sensitive position in a given period will result in more assets than liabilities being subject to repricing; therefore, market interest-rate changes will be reflected more quickly in asset rates. If interest rates decline, such a position will have an adverse effect on net interest income. Conversely, in a liability-sensitive position, where liabilities reprice more quickly than assets in a given period, a decline in market rates will benefit net interest income. A mix of earning assets and interest-bearing liabilities in which relatively equal volumes reprice each period represents a matched interest sensitivity "gap" position; any excess of these assets or liabilities results in an interest sensitive gap. The following table, commonly referred to as a "static gap report", indicates the interest rate-sensitivity position at December 31, 1998 and may not be reflective of positions in subsequent periods (dollars in thousands):
Repriced Due in After 1 30 Due in Due in Total Year or Days 31-180 181 Days Rate Non-Rate Or Less Days to One Year Sensitive Sensitive Total --------- --------- ----------- --------- --------- ------- Earning Assets: Loans $ 160,376 $ 20,763 $ 16,639 $ 197,778 $ 108,055 $305,833 Investment Securities 12,694 30,145 21,133 63,972 84,040 148,012 Federal Funds Sold 38,706 -0- -0- 38,706 -0- 38,706 --------- --------- -------- --------- --------- -------- Total Earning Assets 211,776 50,908 37,772 300,456 192,095 492,551 --------- --------- -------- --------- --------- -------- Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 233,060 -0- -0- 233,060 -0- 233,060 Certificates of Deposits > $100,000 8,286 13,935 8,504 30,725 6,374 37,099 Other Time Deposits 4,923 22,000 14,349 41,272 12,899 54,171 Repurchase Agreements 17,839 -0- -0- 17,839 -0- 17,839 --------- --------- -------- --------- --------- -------- Total Interest- Bearing Liabilities 264,108 35,935 22,853 322,896 19,273 342,169 --------- --------- -------- --------- --------- -------- Interest Sensitivity Gap $ (52,332) $ 14,973 $ 14,919 $ (22,440) $ 172,822 $150,382 ========= ========= ======== ========= ========= ======== Cumulative Gap $ (52,332) $ (37,359) $(22,440) ========= ========= ======== Cumulative Gap To Total Earning Assets (10.62%) (7.58%) (4.56%) Cumulative Gap To Total Assets (9.82%) (7.01%) (4.21%)
-27- In the preceding table under the "After 1 Year" category, $80,806,000 in investment securities will reprice or mature within one to three years and another $653,000 will reprice or mature within three to five years. The average maturity of the investment portfolio is approximately 1.6 years. Also, the above table reflects the call dates versus maturity dates and periodic principal amortization of investment securities. 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 certain interest-bearing transaction 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 the Corporation's management to the earning assets and interest-bearing liabilities in the static gap report via a simulation model, the cumulative gap to total assets ratio at one year of (4.21%) was reversed to a positive 14.72% "beta adjusted" gap position. Management feels that the "beta adjusted" gap risk technique more accurately reflects the Corporation's gap position. Also, based on the Corporation's analysis of its interest rate sensitivity position at year end 1998, a 100-basis point change in interest rates would not have a significant impact on its net interest income over a twelve month period. The following table reflects the spreads and margins for the past three (3) years:
1998 1997 1996 ----- ----- ----- Yield on Earning Assets (T/E) 8.30% 8.45% 8.11% Cost of Funds 4.24 4.16 3.93 Net Interest Spread (T/E) 4.06 4.29 4.18 Net Interest Margin (T/E) 5.28 5.47 5.24
CAPITAL RESOURCES. At December 31, 1998 shareholders' equity totaled $46.2 million, an increase of $5.1 million or111 12.5% for the year. This increase was primarily from retained earnings, i.e., earnings net of dividends to shareholders and the impact of the repurchase of shares of the Corporation. Bank regulatory authorities have established risk-based capital guidelines for U.S. banking organizations. The objective of these efforts is to provide a more consistent system for comparing capital positions of banking organizations and to reflect the level of risk associated with holding various categories of assets. The guidelines define Tier 1 capital and Tier 2 capital. The only components of Tier 1 and Tier 2 capital, for the Corporation, are equity capital and equity capital plus 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 whereas 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. Off-balance sheet items at December 1996, 1997 and 1998 included unfunded loan commitments and letters of credit. The minimum ratio for qualifying total capital is 8.00 percent, of which 4.00 percent must be Tier 1 capital. The Federal Reserve Board and the Comptroller of the Currency also have a capital to total assets (leverage) guideline. These guidelines establish a minimum level of Tier 1 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 1 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. -28- The table below illustrates the Corporation's and its Subsidiary Banks' compliance with the regulatory guidelines as of December 31, 1998 (dollars in thousands):
The Summit Summit Consolidated National Community Corporation Bank Bank, N.A. ------------- ---------- ----------- Total Assets $532,764 $219,601 $307,715 Risk Weighted Assets 330,836 129,321 197,747 Equity Capital (Tier 1) $ 45,675 $ 19,467 $ 22,809 Qualifying Allowance For Loan Losses 4,136 1,617 2,472 -------- -------- -------- Total Tier 2 Capital $ 49,811 $ 21,084 $ 25,281 ======== ======== ======== Leverage Ratio 8.52% 8.80% 7.35% Risk Capital Ratio: Tier 1 13.81% 15.05% 11.53% Total Tier 2 Capital 15.06 16.30 12.78
The Corporation had an unrealized gain on Available-for-Sale securities, net of deferred taxes, of $560,000 as of December 31, 1998. Under regulatory requirements, the unrealized gain or loss on Available-for-Sale securities is not included in the calculation of risk-based capital. As can be seen in the preceding table, the Corporation and its Subsidiary Banks exceed the risk-based capital and leverage requirements set by the regulators as of December 31, 1998. Also, as of December 31, 1998, 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 INFLATION. The effects of inflation on the local economy and on the Corporation's operating results have been relatively modest for the past several years. Since substantially all of the Corporation's assets and liabilities are monetary in nature, such as cash, investments, loans and deposits, their values are less sensitive to the effects of inflation than to changing interest rates, which do not necessarily change in accordance with inflation rates. The Corporation attempts to control the impact of interest rate fluctuations by managing the relationship between its interest rate sensitive assets and liabilities. LIQUIDITY. Liquidity is defined as the Corporation's ability to meet deposit withdrawals, provide for the legitimate credit needs of customers, and take advantage of certain investment opportunities as they arise. While maintaining adequate liquid assets to fulfill these functions, it must also maintain compatible levels of maturity and rate concentrations between its sources of funds and earning assets. The liability structure of the Corporation is short- term in nature and the asset structure is likewise oriented towards short maturities. The Corporation's primary "internal" source of liquidity is its federal funds sold and its marketable investment securities, particularly those with shorter maturities. At December 31, 1998, federal funds sold and investment securities maturing within 30 days represented $51.4 million or 9.6% of total assets. Additionally, the Corporation's ability to sell loan participations and purchase federal funds serves as secondary sources of liquidity. Each of the Subsidiary Banks have approved federal funds lines at other banks. The liquidity of the Corporation is enhanced by the fact that 92% of total deposits at December 31, 1998, were "core" deposits. Core deposits for this purpose are defined as total deposits less public funds and certificates of deposit greater than $100,000. The parent Corporation's income, which provides funds for the payment of dividends to shareholders and for other corporate purposes, is derived from the investment in its subsidiaries and from management fees paid by the subsidiaries. See Note 16 - Dividends from Subsidiaries for limitations on dividends payable by subsidiaries. -29- 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. ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For information regarding the market risk of the Corporation's financial instruments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity and Liquidity." The Corporation's principal market risk exposure is to interest rates. -30- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: PAGE ---------------------------------------------------- ---- Independent Auditor's Report 32 Management's Responsibility for Financial Reporting 33 Consolidated Balance Sheets of Summit Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997 34 Consolidated Statements of Income of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996 35 Statements of Changes in Shareholders' Equity of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996 (Consolidated and Parent Company Only) 36 Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996 37 Notes to Consolidated Financial Statements 38-54
-31- INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders of Summit Bancshares, Inc. Fort Worth, Texas We have audited the accompanying consolidated balance sheets of Summit Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ending December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Summit Bancshares, Inc. and Subsidiaries, as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 1998, in conformity with generally accepted accounting principles. /s/ Stovall, Grandey, & Whatley STOVALL, GRANDEY, & WHATLEY Fort Worth, Texas January 22, 1999 -32- MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of the Corporation is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The consolidated financial statements have been prepared in accordance with general accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements. In meeting its responsibility both for the integrity and fairness of these financial statements and information, management depends on the accounting systems and related internal accounting controls that are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and that proper and reliable records are maintained. The concept of reasonable assurance is based on the recognition that the cost of a system of internal controls should not exceed the related benefits. As an integral part of the system of internal controls, the Corporation retains auditors who monitor compliance with and evaluate the effectiveness of the system of internal controls and coordinate audit coverage with the independent auditors. The Audit Committee of the Corporation and the Banking Subsidiaries' Board of Directors, which are composed entirely of directors independent of management, meet regularly with management, regulatory examiners, internal auditors, the loan review consultants and independent auditors to discuss financial reporting matters, internal controls, regulatory reports, internal auditing and the nature, scope and results of audit efforts. Internal audit and loan review personnel report directly to the Audit Committee. The banking regulators, internal auditors and independent auditors have direct access to the Audit Committee. The consolidated financial statements have been audited by Stovall, Grandey & Whatley, independent auditors, who render an independent opinion on management's financial statements. Their appointment was recommended by the Audit Committee and approved by the Board of Directors and by the shareholders. The audit by the independent auditors provides an additional assessment of the degree to which the Corporation's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures, which include their consideration of the internal control structure and performance of selected tests of transactions and records, as they deem appropriate. These auditing procedures are designed to provide an additional reasonable level of assurance that the financial statements are fairly presented in accordance with general accepted accounting principles in all material respects. /s/ Philip E. Norwood /s/ Jeff Harp PHILIP E. NORWOOD JEFFREY M. HARP CHAIRMAN OF THE BOARD PRESIDENT /s/ Bob G. Scott BOB G. SCOTT EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER -33- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1998 1997 -------- -------- ASSETS (In Thousands) CASH AND DUE FROM BANKS - NOTE 1 $ 26,735 $ 30,487 FEDERAL FUNDS SOLD 38,706 35,760 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 121,417 60,476 Securities Held-to-Maturity, at cost (fair value of $26,959,000 and $45,360,000 at December 31, 1998 and 1997, respectively) 26,595 45,151 LOANS - NOTE 3 Loans, Net of Unearned Discount 305,833 276,069 Allowance for Loan Losses (4,724) (4,065) -------- -------- LOANS, NET 301,109 272,004 PREMISES AND EQUIPMENT, NET - NOTE 4 9,082 7,916 ACCRUED INCOME RECEIVABLE 3,823 3,442 OTHER REAL ESTATE - NOTE 5 281 151 OTHER ASSETS - NOTE 10 5 ,016 4,407 -------- -------- TOTAL ASSETS $532,764 $459,794 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $141,170 $126,398 Interest-Bearing 324,330 275,326 -------- -------- TOTAL DEPOSITS 465,500 401,724 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - NOTE 7 17,839 14,689 ACCRUED INTEREST PAYABLE 1,037 678 OTHER LIABILITIES 2,153 1,591 -------- -------- TOTAL LIABILITIES 486,529 418,682 -------- -------- COMMITMENTS AND CONTINGENCIES - NOTES 4, 8, 13, 15 and 17 SHAREHOLDERS' EQUITY - NOTES 12, 14, 18 and 19 Common Stock - $1.25 par value; 20,000,000 shares authorized; 6,471,827 and 6,501,332 shares issued and outstanding at December 31, 1998 and 1997, respectively 8,090 8,127 Capital Surplus 6,329 6,251 Retained Earnings 31,271 26,491 Accumulated Other Comprehensive Income-Unrealized Gain on Available-for-Sale Investment Securities, Net of Tax 560 243 Treasury Stock at Cost (800 shares at December 31, 1998) (15) -0- -------- -------- TOTAL SHAREHOLDERS' EQUITY 46,235 41.112 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $532,764 $459,794 ======== ========
The accompanying Notes should be read with these financial statements. -34- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $28,000 $24,063 $19,274 Interest and Dividends on Investment Securities: Taxable 6,963 6,878 7,405 Exempt from Federal Income Taxes 50 23 1 Interest on Federal Funds Sold 2,052 1,008 897 ------- ------- ------- TOTAL INTEREST INCOME 37,065 31,972 27,577 ------- ------- ------- INTEREST EXPENSE Interest on Deposits - NOTE 6 12,786 10,773 9,243 Interest on Securities Sold Under Agreements to Repurchase 692 528 528 ------- ------- ------- TOTAL INTEREST EXPENSE 13,478 11,301 9,771 ------- ------- ------- NET INTEREST INCOME 23,587 20,671 17,806 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 785 900 819 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,802 19,771 16,987 ------- ------- ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 2,018 1,890 1,645 Net Gain (Loss) on Sale of Investment Securities 35 (1) (14) Other Income 1,797 1,376 1,345 ------- ------- ------- TOTAL NON-INTEREST INCOME 3,850 3,265 2,976 ------- ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits 8,576 7,524 6,753 Occupancy Expense - Net 928 774 772 Furniture and Equipment Expense 1,150 919 800 Other Real Estate Owned (Income) Expense - Net (1) (63) 10 Other Expense - NOTE 9 3,520 3,164 2,582 ------- ------- ------- TOTAL NON-INTEREST EXPENSE 14,173 12,318 10,917 ------- ------- ------- INCOME BEFORE INCOME TAXES 12,479 10,718 9,046 APPLICABLE INCOME TAXES - NOTE 10 4,333 3,678 3,103 ------- ------- ------- NET INCOME $ 8,146 $ 7,040 $ 5,943 ======= ======= ======= NET INCOME PER SHARE - NOTE 14 Basic $ 1.25 $ 1.09 $ .93 Diluted 1.20 1.04 .90
The accompanying Notes should be read with these financial statements. -35- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONSOLIDATED AND COMPANY ONLY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1996 3,149,886 $ 3,937 $ 6,078 $ 19,776 $ 334 $ -0- $ 30,125 Stock Options Exercised 92,150 115 58 173 Purchases of Stock Held in Treasury (157) (157) Retirement of Stock Held in Treasury (9,000) (11) (146) 157 -0- Cash Dividend - $.14 Per Share (898) (898) Net Income for Year Ended 1996 5,943 5,943 Securities Available- for-Sale Adjustment (106) (106) ---------- Total Comprehensive Income 5,837 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1996 3,233,036 4,041 6,136 24,675 228 -0- 35,080 Stock Options Exercised 21,790 28 115 143 Two-for-One Stock Split 3,246,506 4,058 (4,058) Cash Dividend - $.18 Per Share (1,166) (1,166) Net Income for Year Ended 1997 7,040 7,040 Securities Available- for-Sale Adjustment 15 15 ---------- Total Comprehensive Income 7,055 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1997 6,501,332 8,127 6,251 26,491 243 -0- 41,112 Stock Options Exercised 72,195 90 78 168 Purchases of Stock Held in Treasury (1,948) (1,948) Retirement of Stock Held in Treasury (101,700) (127) (1,806) 1,933 Cash Dividend - $.24 Per Share (1,560) (1,560) Net Income for Year Ended 1998 8,146 8,146 Securities Available- for-Sale Adjustment 317 317 ---------- Total Comprehensive Income 8,463 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1998 6,471,827 $ 8,090 $ 6,329 $ 31,271 $ 560 $ (15) $ 46,235 ========== ========== ========== ========== ========== =========== ==========
The accompanying Notes should be read with these financial statements. -36- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands) YEAR ENDED DECEMBER 31, - ---------------------- --------------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 8,146 $ 7,040 $ 5,943 --------- --------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 1,037 840 762 Net Premium Amortization (Accretion) of Investment Securities (31) 97 310 Provision for Loan Losses 785 900 819 Deferred Federal Income Taxes (Benefit) (465) (233) (137) Net (Gain) Loss on Sale of Investment Securities (35) 1 14 Writedown of Other Real Estate -0- 4 12 Net Gain From Sale of Other Real Estate (2) (21) -0- Net (Gain) Loss on Sale of Premises and Equipment (3) 12 (1) Increase in Accrued Income and Other Assets (523) (2,330) (292) Increase in Accrued Expenses and Other Liabilities 921 333 280 --------- --------- --------- TOTAL ADJUSTMENTS 1,684 (397) 1,767 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,830 6,643 7,710 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net (Increase) Decrease in Federal Funds Sold (2,946) (15,410) 5,330 Proceeds from Matured and Prepaid Investment Securities . Held-to-Maturity 21,627 21,486 20,001 . Available-for-Sale 63,334 14,906 20,486 Proceeds from Sales of Investment Securities 11,992 4,506 14,527 . Held-to-Maturity . Available-for-Sale (20,644) (12,884) (19,174) Loans Originated and Principal Repayments, Net (118,148) (16,702) (33,969) Recoveries of Loans Previously Charged-Off (30,482) (56,363) (42,171) Proceeds for Sale of Premises and Equipment 217 439 115 Proceeds from Sale of Other Real Estate 6 1 1 Purchases of Premises and Equipment 82 32 -0- (2,206) (1,664) (710) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (77,168) (61,653) (35,564) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net Increase in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 60,585 41,081 36,011 Net Increase (Decrease) in Certificates of Deposit 3,191 15,620 (1,097) Net Increase (Decrease) in Repurchase Agreements 3,150 1,480 (319) Payments of Cash Dividends (1,560) (1,166) (898) Proceeds from Stock Options Exercised 168 143 173 Purchase of Treasury Stock (1,948) -0- (157) --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 63,586 57,158 33,713 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (3,752) 2,148 5,859 CASH AND DUE FROM BANKS - BEGINNING OF YEAR 30,487 28,339 22,480 --------- --------- --------- CASH AND DUE FROM BANKS - END OF YEAR $ 26,735 $ 30,487 $ 28,339 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest Paid $ 13,120 $ 11,260 $ 9,769 Income Taxes Paid 4,815 3,876 3,285 Other Real Estate Acquired in Settlement of Loans 210 -0- 65
The accompanying Notes should be read with these financial statements. -37- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The accounting and reporting policies of Summit Bancshares, Inc. ("the Corporation") and its Subsidiaries are in accordance with 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, Summit Community Bank, N.A. (the "Subsidiary Banks") and Summit Bancservices, Inc. ("Bancservices"). All significant intercompany balances and transactions have been eliminated. 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 period. Actual results could differ from those estimates. CASH AND DUE FROM BANKS - ----------------------- The Subsidiary Banks are required to maintain certain restricted balances at the Federal Reserve Bank based on their level of deposits. During 1998 the average cash balance maintained at the Federal Reserve Bank was approximately $678,000. Compensating balances held at correspondent banks to minimize service charges averaged approximately $16,668,000 in 1998. 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 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 credit worthiness, a change in tax law, or statutory or regulatory requirements), the Corporation may change the investment security classification. In 1998 and 1997 the Corporation held no securities that would have been classified as trading securities. -38- All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to interest 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 securities of state and political subdivisions is not taxable. 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" ("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure." Under SFAS 114, the allowance for loan losses related to any loans that are identified for evaluation in accordance with SFAS 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 the provision for loan losses as determined by management. Management's evaluation is based on a number of subjective 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 nonperformance loans and its evaluation of the quality of the loan portfolio. Loan balances are charged against the allowance for loan losses when management believes that the collectability 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. Maintenance and repairs are charged to non-interest expense. Renewals and improvements are added to the asset accounts and depreciated over the periods benefited. 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 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 the Corporation 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 taxes are provided for the accumulated temporary differences -39- due to basic differences for assets and liabilities for financial reporting and income tax reporting. Realization of net deferred tax assets is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax assets will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. CASH AND CASH EQUIVALENTS - ------------------------- For the purpose of presentation in the Statements of Cash Flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and Due from Banks". RECLASSIFICATION - ---------------- Certain reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 presentation. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - ----------------------------------------------- Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per share," requires presentation of basic and diluted earnings per share. Basic earnings per share has been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Net income per common share for all periods presented has been calculated in accordance with SFAS 128. Outstanding stock options issued by the Corporation represent the only dilutive effect reflected in diluted weighted average shares. NOTE 2 - INVESTMENT SECURITIES A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands):
December 31, 1998 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 11,990 $ 306 $ -0- $ 12,296 U.S. Government Agencies and Corporations 14,031 60 (7) 14,084 Obligations of States and Political Subsidiaries 574 5 -0- 579 -------- ------ ----- -------- Total Held-to-Maturity Securities 26,595 371 (7) 26,959 -------- ------ ----- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 29,039 643 -0- 29,682 U.S. Government Agencies and Corporations 73,517 330 (87) 73,760 U.S. Government Agency Mortgage Backed Securities 16,485 15 (60) 16,440 Obligations of States and Political Subsidiaries 455 8 -0- 463 Federal Reserve Bank and Federal Home Loan Bank Stock 1,072 -0- -0- 1,072 -------- ------ ----- -------- Total Available-for-Sale Securities 120,568 996 (147) 121,417 -------- ------ ----- -------- Total Investment Securities $147,163 $1,367 $(154) $148,376 ======== ====== ===== ========
In the above schedule, the amortized cost of Total Held-to-Maturity Securities of $26,595,000 and the estimated fair value of Total Available-for-Sale Securities of $121,417,000 are reflected in Investment Securities on the consolidated balance sheet as of December 31, 1998 for a total of $148,012,000. A net unrealized gain of $849,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. -40-
December 31, 1997 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ----------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 19,983 $178 $ (15) $ 20,146 U.S. Government Agencies and Corporations 16,238 24 (27) 16,235 U.S. Government Agency Mortgage Backed Securities 7,788 46 (6) 7,828 Obligations of States and Political Subsidiaries 1,142 9 -0- 1,151 -------- ---- ----- -------- Total Held-to-Maturity Securities 45,151 257 (48) 45,360 -------- ---- ----- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 50,481 397 (67) 50,811 U.S. Government Agencies and Corporations 4,014 3 (6) 4,011 U.S. Government Agency Mortgage Backed Securities 4,697 42 -0- 4,739 Federal Reserve Bank and Federal Home Loan Bank Stock 915 -0- -0- 915 -------- ---- ----- -------- Total Available-for-Sale Securities 60,107 442 (73) 60,476 -------- ---- ----- -------- Total Investment Securities $105,258 $699 $(121) $105,836 ======== ==== ===== ========
In the above schedule, the amortized cost of Total Held-to-Maturity Securities of $45,151,000 and the estimated fair value of Total Available-for-Sale Securities of $60,476,000 are reflected in Investment Securities on the consolidated balance sheet as of December 31, 1997 for a total of $105,627,000. A net unrealized gain of $369,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. A summary of the amortized cost and estimated fair value of debt securities by contractual maturity as of December 31, 1998, is shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
December 31, 1998 ----------------------------------------- Held-to-Maturity Available-for-Sale ------------------- -------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- --------- Due in One Year or Less $ 3,283 $ 3,294 $ 42,671 $ 42,761 Due after One Year through Five Years 22,301 22,651 45,775 46,540 Due after Five Years through Ten Years 1,011 1,014 18,260 18,296 Due after Ten Years -0- -0- 13,862 13,820 ------- ------- -------- -------- Total $26,595 $26,959 $120,568 $121,417 ======= ======= ======== ========
Included in the investment securities is $15,745,000 and $11,104,000 at December 31, 1998 and December 31, 1997, respectively, of mortgage-backed securities having stated maturities after five years. The estimated maturities on these securities are between two and twelve years as of December 31, 1998, based on estimated prepayments of the underlying mortgages. Investment securities with carrying values of $44,567,000 and $34,663,000 at December 31, 1998 and 1997, respectively, were pledged to secure federal, state and municipal deposits and for other purposes as required or permitted by law. Also, the fair values of those pledged securities totaled $44,849,000 and $34,823,000 at December 31, 1998 and 1997, respectively. Proceeds from sales of investment securities were $11,992,000 during 1998, $4,506,000 during 1997 and $14,527,000 during 1996. In 1998, gross gains from sale of securities of $35,000 were realized. In 1997, gross losses from sale of securities of -41- $3,000 were realized, but were partially offset by gross gains of $2,000. In 1996, gross losses from sale of securities of $27,000 were realized but were partially offset by gross gains of $13,000. The total amount of proceeds from securities sales have been from sales of securities included in the Available- for-Sale category. The Corporation or subsidiaries do not own any investment securities of any one issuer (excluding U.S. Government or U.S. Government Agency Securities) of which aggregate adjusted cost exceeds 10% of the consolidated shareholders' equity at December 31, 1998 and 1997, respectively. 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 loan portfolio consists of various types of loans made principally to borrowers located in Tarrant County, Texas. The book values of loans by major type follow (in thousands):
December 31, ---------------------- 1998 1997 ---------- ---------- Commercial $133,066 $127,800 Real Estate Mortgage 100,421 90,638 Real Estate Construction 40,456 26,290 Loans to Individuals 32,388 32,003 Less: Unearned Discount (498) (662) -------- -------- 305,833 276,069 Allowance for Loan Losses (4,724) (4,065) -------- -------- Loans, Net $301,109 $272,004 ======== ========
At December 31, 1998 and 1997, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $4,596,000 and $1,652,000, respectively. These loans were on non-accrual status. The related allowance for loan losses for these loans was $1,052,000 and 349,000, respectively. The average recorded investment in impaired loans during the year ended December 31, 1998 was approximately $4,954,000. For 1998 the Corporation recognized no interest income on any loan classified as impaired. Loans on which accrued interest has been discontinued or reduced amounted to approximately $5,049,000, $2,112,000, and $1,102,000 at December 31, 1998, 1997 and 1996 respectively. If interest on these loans had been recorded in accordance with their original terms such income would have approximated $537,000 for 1998, $272,000 for 1997 and $111,000 for 1996. Interest income on those loans included in net income was $312,000 for 1998, $154,000 for 1997 and $30,000 for 1996. Transactions in the allowance for loan losses are summarized as follows (in thousands):
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Balance, Beginning of Year $4,065 $2,972 $2,500 Provision, Charged to Income 785 900 819 Loans Charged Off (343) (246) (462) Recoveries of Loans Previously Charged Off 217 439 115 ------ ------ ------ Net Charge-Offs/(Recoveries) (126) 193 (347) ------ ------ ------ Balance, End of Year $4,724 $4,065 $2,972 ====== ====== ======
-42- NOTE 4 - PREMISES AND EQUIPMENT The investment in premises and equipment stated at cost and net of accumulated depreciation and amortization is as follows (in thousands):
December 31, -------------------------------------------------------- 1998 1997 1996 ------------- -------------- ------------- Land $ 2,783 $ 1,446 $ 1,446 Buildings and Improvements 7,537 7,532 7,375 Furniture and Equipment 7,234 6,661 5,182 ------- ------- ------- Total Cost 17,554 15,639 14,003 Less: Accumulated Depreciation and Amortization 8,472 7,723 6,898 ------- ------- ------- Net Book Value $ 9,082 $ 7,916 $ 7,105 ======= ======= =======
Depreciation and amortization charged to expense amounted to $1,037,000, $840,000 and $762,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the Corporation and subsidiaries had certain noncancelable operating leases which cover premises with future minimum annual rental payments as follows (in thousands): 1999 $ 402 2000 437 2001 430 2002 430 2003 440 Thereafter 4,021 It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other property. Rental income and rental expense of premises included in the consolidated financial statements is computed as follows (in thousands):
Year Ended December 31, --------------------------------------------------------- 1998 1997 1996 ------- ------ ------ Total Rental Income $ 359 $ 365 $ 344 Less: Rental Expense 350 272 245 ----- ----- ----- Net Rental Income $ 9 $ 93 $ 99 ===== ===== =====
NOTE 5 - OTHER REAL ESTATE The carrying value of other real estate was as follows (in thousands):
December 31, ------------------------------------------------ 1998 1997 1996 ----- ------ ------ Other Real Estate $ 281 $ 185 $ 201 Valuation Reserve -0- (34) (35) ----- ----- ----- Net Other Real Estate $ 281 $ 151 $ 166 ===== ===== =====
-43- Transactions in the valuation reserve are summarized as follows (in thousands):
Year Ended December 31, -------------------------- 1998 1997 1996 ------- ------ ------ Balance, Beginning of Year $ 35 $ 35 $ 35 Provisions Charged to Income -0- -0- -0- Reductions from Sales 35 1 -0- ----- ----- ----- Balance, End of Year $ -0- $ 34 $ 35 ===== ===== =====
Direct writedowns of other real estate charged to income were: 1998 - $-0-, 1997 - - $4,000, and 1996 - $12,000. NOTE 6 - DEPOSITS AND RELATED EXPENSE At December 31, 1998, 1997 and 1996, deposits and related interest expense for the related years ended December 31, consisted of the following (in thousands):
Deposits Interest Expense ----------------------------------------- ----------------- 1998 1997 1996 1998 1997 1996 --------- --------- --------- -------- -------- ------- Noninterest-Bearing Demand Deposits $141,170 $126,398 $103,695 Interest-Bearing Deposits: Interest-Bearing Transaction Accounts 151,557 133,139 119,316 $ 5,186 $ 4,599 $3,853 Savings 81,503 54,107 49,048 2,972 2,135 1,871 Savings Certificates - Time 53,394 51,685 47,025 2,631 2,434 2,292 Certificates of Deposit $100,000 or More 37,099 35,690 25,434 1,948 1,572 1,208 Other 777 705 505 49 33 19 -------- -------- -------- ------- ------- ------ Total 324,330 275,326 241,328 $12,786 $10,773 $9,243 -------- -------- -------- ======= ======= ====== Total Deposits $465,500 $401,724 $345,023 ======== ======== ========
The Corporation has no brokered deposits and there are no major concentrations of deposits. NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 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 (dollars in thousands):
December 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Securities Sold Under Repurchase Agreements: Average $15,742 $11,668 $12,181 Year-end 17,839 14,689 13,209 Maximum Month-End Balance During Year 19,354 15,263 14,453 Interest Rate Average 4.40% 4.45% 4.33% Period-End 3.83 4.55 4.35
-44- NOTE 8 - NOTES PAYABLE The note payable at the Parent Company is an intercompany note and, therefore, is reflected in the Parent Company financial statements but is eliminated in the consolidated financial statements. The note balance at December 31, 1998 and 1997, was $762,000 and $859,000, respectively. This note matures December 15, 1999 and is secured by banking premises. The interest rate at December 31, 1998 was 7.75% and is fixed annually on the note's anniversary date. The fair value of the note payable is it's carrying value since the note is a variable rate loan and the note is adjusted annually in December of each year at prime rate. On July 15, 1998, 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 1999, 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. There have been no borrowings to date on these lines of credit. NOTE 9 - OTHER NON-INTEREST EXPENSE The significant components of other non-interest expense are presented below (in thousands):
Year Ended December 31, --------------------------------------------- 1998 1997 1996 ------------- -------------- -------------- Business Development $ 611 $ 588 $ 426 Legal and Professional Fees 511 496 442 Printing and Supplies 387 373 303 Regulatory Fees and Assessments 169 160 134 Other 1,842 1,547 1,277 ------ ------ ------ Total $3,520 $3,164 $2,582 ====== ====== ======
NOTE 10 - INCOME TAXES The consolidated provision for income taxes consists of the following (in thousands):
Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Federal Income Tax Expense Current $4,798 $3,911 $3,240 Deferred (465) (233) (137) ------ ------ ------ Total Federal Income Tax Expense $4,333 $3,678 $3,103 ====== ====== ====== Effective Tax Rates 34.7% 34.3% 34.3% ====== ====== ======
The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to operating earnings are as follows (in thousands):
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Federal Income Taxes at Statutory Rate of 34% $4,278 $3,644 $3,076 Effect of Tax Exempt Interest Income (19) (12) (8) Nondeductible Expenses 58 47 39 Other 16 (1) (4) ------ ------ ------ Income Taxes Per Income Statement $4,333 $3,678 $3,103 ====== ====== ======
-45- Federal income taxes included in the consolidated balance sheets were as follows (in thousands):
December 31, ------------------- 1998 1997 -------- --------- Current Tax Asset (Liability) $ 10 $ (7) Deferred Tax Asset 973 672 ----- ----- Total Included in Other Assets $ 983 $ 665 ===== =====
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):
Year Ended December 31, ----------------------------------- 1998 1997 1996 ---------- ---------- ----------- Federal Deferred Tax Assets: Allowance for Loan Losses $1,107 $ 831 $ 525 Valuation Reserves - Other Real Estate 1 36 60 Interest on Non-accrual Loans 199 66 46 Deferred Compensation 414 359 260 Other 18 43 63 ------ ------ ----- Gross Federal Deferred Tax Assets 1,739 1,335 954 ------ ------ ----- Federal Deferred Tax Liabilities: Depreciation and Amortization 301 228 217 Accretion 78 165 97 Unrealized Gains on Available-for-Sale Securities 289 125 117 Other 98 145 74 ------ ------ ----- Gross Federal Deferred Tax Liabilities 766 663 505 ------ ------ ----- Net Deferred Tax Asset $ 973 $ 672 $ 449 ====== ====== =====
NOTE 11 - RELATED PARTY TRANSACTIONS During 1998 and 1997 the Subsidiary Banks had transactions which were made in the ordinary course of business with certain of their and the Corporation's officers, directors and their affiliates. All loans included in such transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and all loans are current as to principal and interest payments. A summary of these transactions follows (in thousands):
Balance at Net Beginning Net Amounts Balance at of Year Additions Collected End of Year ---------- --------- ---------- ----------- For the Year ended December 31, 1998: 22 Directors and Officers $3,443 $1,494 $(2,089) $2,848 For the Year ended December 31, 1997: 22 Directors and Officers $3,819 $1,011 $(1,387) $3,443
-46- NOTE 12 - STOCK OPTION PLAN 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 following is a summary of transactions (adjusted for stock splits) for the years presented:
Year Ended December 31, ---------------------------------------------------------------- 1998 1997 1996 ------------------- -------------------- --------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Shares Ex. Price Shares Ex. Price Shares Ex. Price -------- --------- --------- --------- ---------- --------- Outstanding, Beginning of Year 543,112 $ 6.77 464,100 $ 4.57 602,800 $ 2.96 Granted 3,000 19.25 118,752 14.58 59,600 10.38 Exercised (78,995) 3.76 (35,260) 4.04 (196,300) 1.43 Canceled (5,400) 17.54 (4,480) 6.62 (2,000) 3.00 ------- -------- --------- Outstanding, End of Year 461,717 $ 7.24 543,112 $ 6.77 464,100 $ 4.57 ======= ======== ========= Exercisable at End of Year 354,825 5.66 375,510 $ 4.60 323,700 $ 3.67 Weighted Average Fair Value of Options Granted During the Year $19.25 $14.58 $10.375
The options outstanding at December 31, 1998, have exercise prices between $3.00 and $19.25 with a weighted average exercise price of $ and a weighted average remaining contractual life of years. Stock options have been adjusted retroactively for the effects of stock dividends. The Corporation accounts for this plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized for options granted. Had compensation cost for the plan 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 pro forma basis for the years ended December 31, 1998 and 1997. The fair value of the options granted in 1997 and 1998 were estimated as of the date of grant using an accepted options pricing model with the following weighted-average assumptions: risk-free interest rate of 5.48% and 6.10% respectively, expected dividend yield of 2.0% and 2.4%, respectively, and expected life of 6.5 years and expected volatility 29.7% and 29.2%, respectively. NOTE 13 - 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 and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the financial statements. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for 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. -47- The amounts of financial instruments with off-balance sheet risk are as follows (in thousands):
December 31, December 31, 1998 1997 Contract Contract Amount Amount ------------ ------------ Financial Instruments Whose Contract Amounts Represent Credit Risk: Loan commitments including unfunded lines of credit $106,806 $94,942 Standby letters of credit 2,155 4,568
Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the loan commitments and letters of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Standby letters of credit are conditional commitments by the Corporation to guarantee the performance of a customer to a third party. 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 counter party. Collateral held varies but may include certificates of deposits, accounts receivable, inventory, property, plant and equipment, and real property. The Corporation originates real estate, commercial and consumer loans primarily to customers in the Tarrant County area. Although the Corporation has a diversified loan portfolio, a substantial portion of its customers' ability to honor their contracts is dependent upon the local economy and the real estate market. The Corporation maintains funds on deposit at correspondent banks which at times exceed the federally insured limits. Management of the Corporation monitors the balance in the account and periodically assesses the financial condition of correspondent banks. 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)
1998 1997 1996 ---------- ---------- ---------- Net income $ 8,146 $ 7,040 $ 5,943 ========== ========== ========== Weighted average number of common shares used in Basic EPS 6,496,595 6,478,795 6,398,960 Effect of dilutive stock options 316,702 321,081 314,079 ---------- ---------- ---------- Weighted number of common shares and dilutive potential common stock used in Diluted EPS 6,813,297 6,799,876 6,713,039 ========== ========== ==========
NOTE 15 - 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 in 1999 under terms of the plan. -48- Funding for the plan is provided by employer contributions to trust funds in amounts determined by actuarial assumption and valuation of the plan. The following table 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 ------ ------ Plan assets in excess of projected benefit obligation 782 152 Unrecognized net loss from past experience different from that assumed and effects 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 ====== ======
Net pension expense included the following components (in thousands):
Year ended December 31, --------------------------------------- 1998 1997 1996 -------- -------- -------- Service cost for benefits earned during the period $ 355 $ 227 $ 195 Interest cost on projected benefit obligation 170 157 131 Less: Actual return on plan assets, net of expenses (126) (196) (153) Net amortization and deferral 39 5 (2) ------ ------ ------ Net periodic pension expense $ 438 $ 193 $ 171 ====== ====== ======
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation in 1998 were 7 percent and 6 percent, respectively. The expected long-term rate of return on plan assets was 7 percent. During 1998 and 1997 the Corporation contributed $407,000 and $370,000 to the plan, respectively. 401(K) PLAN - ----------- The Corporation implemented a 401(k) plan in December 1997 covering substantially all employees. The Corporation made no contribution to this plan in 1998 or 1997. 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 in 1998, 1997, and 1996 for such future obligations was $237,000, $276,000, and $239,000, respectively. 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). COMPENSATED ABSENCES - -------------------- Employees of the Corporation are entitled to paid vacation, paid sick days and other personal days off, depending on job classification, length of service, and other factors. It is impracticable to estimate the amount of compensation for future absences, and, accordingly, no liability has been recorded in the accompanying financial statements. The Corporation's policy is to recognize the costs of compensated absences when actually paid to employees. -49- NOTE 16- DIVIDENDS FROM SUBSIDIARIES The primary source of funds for the Parent Company is cash dividends received from the Subsidiary Banks. The amount of dividends that the Subsidiary Banks may pay in any one year, without approval of the Comptroller of the Currency, is the sum of the retained net profits for the preceding two years plus its total of the net profits for the current year. Under this formula, in 1999 the Subsidiary Banks can legally initiate dividend payments of $10,081,000 plus an additional amount equal to their net profits, as defined, for 1999 to the date of any such dividend payment. The Subsidiary Banks are also restricted from paying dividends that would cause the Bank to be under-capitalized. Internal dividend policies limit dividends paid by Subsidiary Banks if their equity capital levels fall below certain minimums determined by the respective Boards of Directors. 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 SPLIT In October 1997, the Board of Directors of the Corporation approved a two-for- one stock split of the Corporation's common stock to be effected as a 100% stock dividend. The split was paid in December 1997. All references in the accompanying financial statements regarding stock options and per share data for prior periods have been restated to reflect the stock split. NOTE 19 - STOCK REPURCHASE PLAN On April 21, 1998 the Board of Directors approved a stock repurchase plan. The plan authorized management to purchase up to 325,654 shares of the Corporation's common stock over the following twelve months through the open market or in privately negotiated transactions in accordance with all applicable state and federal laws and regulations. In 1998, 102,500 shares were purchased on the open market. Under similar programs approved by the Board in the years 1994 through 1997, 188,680 shares in the aggregate were purchased in those years, reflecting two- for-one stock splits in years 1995 and 1997. NOTE 20 - REGULATORY CAPITAL COMPLIANCE The Corporation and Subsidiary Banks are subject to regulatory risk-based capital requirements that assign risk factors to all assets, including off- balance sheet items such as loan commitments and standby letters of credit. Failure to meet minimum capital requirements can cause certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statement. Capital is separated into two categories, Tier 1 and Tier 2, which combine for total capital. At December 1998 and 1997, the Corporation's and Subsidiary Bank's Tier 1 capital consists of their respective shareholders' equity and Tier 2 consists of the allowance for loans losses subject to certain limitations. The guidelines require total capital of 8% of risk-weighted assets. In conjunction with risk-based capital guidelines, the regulators have issued capital leverage guidelines. The leverage ratio consists of Tier 1 capital as a percent of total assets. The minimum leverage ratio for all banks is 3%, with a higher minimum ratio dependent upon the condition of the individual bank. The 3% minimum was established to make certain that all banks have a minimum capital level to support their assets, regardless of risk profile. -50- In addition to the minimum guidelines stated above, the regulatory authorities have established minimums for an institution to be classified as "well capitalized." A financial institution is deemed to be well capitalized if the institution has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ration of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Corporation and Subsidiary Banks currently exceed all minimum capital requirements and are considered to be "well capitalized", the highest rating, by the regulatory authorities. Management is not aware of any conditions or events that would have changed the Corporation's capital rating since December 31, 1998. The Corporation's regulatory capital position was as follows:
Actual, Minimum Required, December 31, December 31, ---------------------------- ------------------ 1998 1997 1998 ------------- ------------- ---------------- Total Qualifying Capital to Risk-Based Assets 15.06% 15.06% 8.00% Tier I Capital to Risk-Based Assets 13.81 13.81 4.00 Tier I Capital to Average Assets (Leverage) 8.52 8.83 3.00
NOTE 21 - SUBSEQUENT EVENTS On January 19, 1999, the Board of Directors of Summit Bancshares, Inc. approved a quarterly dividend of $.08 per share to be paid on February 16, 1999 to shareholders of record on February 1,1999. NOTE 22 - RECENT ACCOUNTING PRONOUNCEMENTS The Corporation adopted Statement of Financial Accounting Standards Board No. 131, "Disclosures About Segments of an Enterprise and Related Information," ("SFAS No. 131") effective January 1, 1998. This statement establishes standards for reporting information about segments in annual and interim financial statements. SFAS No. 131 introduces a new model for segment reporting called "management approach". The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other in which management disaggregates a company. Based on the "management approach" model, the Corporation has determined that its business is comprised of a single operating segment and that SFAS No. 131 therefore has no impact on its consolidated financial statements. NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value tables or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. SFAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. -51- 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 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 non- -------------------- interest 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 value of borrowings under repurchase ---------------------- agreements approximate their fair values. The estimated fair values of the Corporation's financial instruments are as follows (in thousands):
December 31, -------------------------------------- 1998 1997 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Financial Assets Cash and due from banks $ 26,735 $ 26,735 $ 30,487 $ 30,487 Federal funds sold 38,706 38,706 35,760 35,760 Securities 148,012 148,376 105,627 105,836 Loans 305,833 306,790 276,069 276,663 Financial Liabilities Deposits 465,500 465,858 401,724 401,957 Securities sold under repurchase agreements 17,839 17,845 14,689 14,689 Off-balance Sheet Financial Instruments Loan commitments 106,806 94,942 Letters of credit 2,155 4,568
NOTE 24 - COMPREHENSIVE INCOME The Corporation has adopted Statement of Financial Accounting Standards Board No. 130, "Reporting Comprehensive Income". The statement requires an entity to report and display comprehensive income and its components. Comprehensive income is as follows (in thousands):
December 31, --------------------------- 1998 1997 1996 -------- ------- -------- Net Income $8,146 $7,040 $5,943 Other Comprehensive Income: Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Tax 317 15 (106) ------ ------ ------ Comprehensive Income $8,463 $7,055 $5,837 ====== ====== ======
-52- NOTE 25- CONDENSED PARENT COMPANY FINANCIAL STATEMENTS BALANCE SHEETS
December 31, ----------------------- 1998 1997 ---------- ----------- ASSETS (In Thousands) CASH IN SUBSIDIARY BANKS Demand $ 100 $ 1,110 Time 833 811 INVESTMENTS IN SUBSIDIARIES Bank Subsidiaries 42,877 36,989 Non-Bank Subsidiary 371 388 NOTE RECEIVABLE FROM SUBSIDIARY 495 500 PREMISES AND EQUIPMENT - NET 1,654 1,776 OTHER ASSETS 1,996 1,619 ------- ------- TOTAL ASSETS $48,326 $43,193 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Notes Payable $ 762 $ 859 Other Liabilities 1,329 1,222 SHAREHOLDERS' EQUITY 46,235 41,112 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,326 $43,193 ======= =======
STATEMENTS OF INCOME Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- (In Thousands) INCOME Dividends from Subsidiaries $3,200 $ 3,000 $ 2,000 Interest 76 33 18 Other Income 188 322 417 ------ ------- ------- TOTAL INCOME 3,464 3,355 2,435 ------ ------- ------- EXPENSES Interest 70 76 88 Salaries and Employee Benefits 752 845 795 Occupancy and Furniture-Net (6) (44) 4 Other Expense 347 262 293 ------ ------- ------- TOTAL EXPENSE 1,163 1,139 1,180 ------ ------- ------- INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,301 2,216 1,255 INCOME TAX BENEFIT 291 262 244 ------ ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,592 2,478 1,499 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 5,554 4,562 4,444 ------ ------- ------- NET INCOME $8,146 $ 7,040 $ 5,943 ====== ======= =======
-53- STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 8,146 $ 7,040 $ 5,943 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 137 134 140 Deferred Federal Income Taxes 81 71 77 Undistributed Earnings of Subsidiaries (5,554) (4,562) (4,444) Increase in Other Assets (350) (167) (403) Increase (Decrease) in Other Liabilities 107 (150) 293 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,567 2,366 1,606 CASH FLOWS FROM INVESTING ACTIVITIES Net Funding to Non-Bank Subsidiary (105) (440) -0- Purchases of Premises and Equipment (13) (46) (117) ------- ------- ------- NET CASH USED BY INVESTING ACTIVITIES (118) (486) (117) CASH FLOWS FROM FINANCING ACTIVITIES Principal Payments on Notes Payable (97) (92) (80) Payments of Cash Dividends (1,560) (1,166) (898) Receipts from Stock Options Exercised 168 143 173 Purchase of Treasury Stock (1,948) -0- (157) ------- ------- ------- NET CASH USED BY FINANCING ACTIVITIES (3,437) (1,115) (962) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (988) 765 527 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,921 1,156 629 ------- ------- ------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 933 $ 1,921 $ 1,156 ======= ======= =======
-54- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in accountants and no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the twenty-four (24) month period ended December 31, 1998. -55- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the caption "PROPOSAL NO. 1: ELECTION OF DIRECTORS" on pages 2 through 9 of the Corporation's Proxy Statement dated March 19, 1999, relating to the 1999 Annual Meeting of Shareholders of the Corporation, the information set forth under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 10 through 12 of such Proxy Statement, and the information set forth under the caption "EXECUTIVE OFFICERS OF THE CORPORATION" on pages 11 and 12 of Part I of this report is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the caption "EXECUTIVE COMPENSATION AND OTHER INFORMATION" on pages 13 through 22 of the Corporation's Proxy Statement dated, March 19, 1999 relating to the 1999 Annual Meeting of Shareholders of the Corporation, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information with respect to shareholders of the Corporation who are known to be beneficial owners of more than five percent (5%) of the outstanding shares of Common Stock of the Corporation set forth under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 10 through 12 of the Corporation's Proxy Statement dated March 19, 1999, relating to the 1999 Annual Meeting of Shareholders of the Corporation, is incorporated herein by reference. The information relating to the beneficial ownership of the outstanding shares of Common Stock of the Corporation by its directors and executive officers set forth under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 10 through 12 of the Corporation's Proxy Statement dated March 19, 1999, relating to the 1999 Annual Meeting of Shareholders of the Corporation, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "CERTAIN TRANSACTIONS" on page 24 of the Corporation's Proxy Statement dated March 19, 1999, relating to the 1999 Annual Meeting of Shareholders of the Corporation, is incorporated herein by reference. -56- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) FINANCIAL STATEMENTS. The following financial statements are included -------------------- in Part II, Item 8: Independent Auditor's Report Consolidated Balance Sheets of Summit Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997 Consolidated Statements of Income of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996 Statements of Changes in Shareholders' Equity of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996 (Consolidated and Parent Company Only) Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996 Notes to Financial Statements (2) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules are ----------------------------- omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (3) EXHIBITS. The following exhibits are filed as a part of this report: -------- 3(a) Restated Articles of Incorporation of the Corporation as of July 21, 1998.** 3(b) Amended and Restated Bylaws of the Corporation dated April 21, 1998.** 4(a) Summit Bancshares, Inc.'s Rights Agreement dated April 17, 1990 (incorporated herein by reference to Exhibit 1 to the Corporation's Current Report on Form 8-K dated April 18, 1990 filed on April 24, 1990).* 10(a) Lease Agreement dated August 28, 1985 by and between Alta Mesa National Bank, as lessor, and the Corporation, as lessee (incorporated herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1985).* 10(b) Lease Agreement dated October 1, 1986 by and between the Corporation, as lessor, and Alta Mesa National Bank, as lessee (incorporated herein by reference to Exhibit 10(f) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1986).* 10(c) Promissory Note dated December 21, 1989 in the original principal amount of $1,400,000 executed by Summit Bancshares, Inc. and payable to the order of Summit National Bank (incorporated herein by reference to Exhibit 10(s) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1989).* 10(d) Lease Agreement dated February 14, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit Bancshares, Inc., as tenant (incorporated herein by reference to Exhibit 10(I) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992).* -57- 10(e) First Amendment dated May 3, 1994 to Lease Agreement dated February 14, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit Bancshares, Inc., as tenant (incorporated herein by reference to Exhibit 10(k) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994).* 10(f) Management Security Plan of Summit Bancshares, Inc. effective September 1, 1992; Management Security Plan Agreement between Summit Bancshares, Inc. and F. S. Gunn; and Management Security Plan Agreement between Summit Bancshares, Inc. and James L. Murray (incorporated herein by reference to Exhibit 10(k) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992).* 10(g) Commercial-Industrial Lease Agreement dated January 1, 1993 by and between Summit National Bank, as landlord, and Summit Bancservices, Inc., as tenant (incorporated herein by reference to Exhibit 10(m) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992).* 10(h) 1993 Incentive Stock Option Plan of Summit Bancshares, Inc. (incorporated herein by reference to Exhibit 10(n) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993).* 10(i) Loan Agreement dated July 12, 1995, between the Corporation and The Frost National Bank (incorporated herein by reference to Exhibit 10 to the Corporation's Quarterly Report on Form 10-Q for the three months ended June 30, 1995).* 10(j) Lease Agreement dated July 6, 1989 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit National Bank as tenant (incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995).*. 10(k) First Amendment dated July 15, 1996 to Loan Agreement dated July 12, 1995, between the Corporation and The Frost National Bank (incorporated herein by reference to Exhibit 10(s) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997).* 10(l) 1997 Incentive Stock Option Plan of Summit Bancshares, Inc. (incorporated herein by reference to Annex I to the Corporation's Proxy Statement for Annual Meeting of Shareholders, dated March 17, 1997.* 10(m) Second Amendment dated July 15, 1997 to Loan Agreement dated July 12, 1995, between the Corporation and The Frost National Bank.* 10(n) Second Lease Amendment and Extension Agreement to the Lease Agreement dated July 6, 1989, as amended by the Amendment of Lease dated August 12, 1993, by and between EOP-Summit Limited Partnership (as successor in interest to Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership), as landlord, and Summit National Bank, as tenant.* 10(o) Agreement of Limited Partnership of IDI Summit, Ltd. dated November 6, 1997, between Summit Community Bank, N.A. and Innovative Developers, Inc.* 10(p) Lease Agreement dated November 6, 1997 between Summit Community Bank, N.A., as tenant, and IDI - Summit, Ltd., as landlord.* 10(q) Second Amemdment dated July 8, 1998 to Lease Agreement dated February 13, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit Bancshares, Inc., as tenant.** -58- 10(r) Third Amendment dated July 15, 1998 to Loan Agreement dated July 12, 1995, between the Corporation and the Frost National Bank.** 21 Subsidiaries of the Corporation. 23 Consent of Stovall, Grandey & Whatley, independent certified public accountants. 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K. ------------------- The Corporation did not file during the last quarter covered by this report any reports on Form 8-K. ___________________________ * A copy of this Exhibit is available to any shareholders, at the actual cost of reproduction upon written request to the Corporation. ** File herewith. -59- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. DATE: March 19, 1999 By: /s/ Philip E. Norwood ------------------------------- Philip E. Norwood, Chairman Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on this 19th day of March, 1999. SIGNATURE TITLE --------- ----- /s/ Philip E. Norwood Chairman and Director - ---------------------------------- Philip E. Norwood (Principal Executive Officer) /s/ Bob G. Scott Chief Operating Officer, Executive - ---------------------------------- Bob G. Scott Vice President, Secretary and Treasurer (principal financial officer and principal accounting officer) /s/ Jeffrey M. Harp President and Director - ---------------------------------- Jeffrey M. Harp /s/ Robert E. Bolen Director - ---------------------------------- Robert E. Bolen /s/ Elliott S. Garsek Director - ---------------------------------- Elliott S. Garsek /s/ Ronald J. Goldman Director - ---------------------------------- Ronald J. Goldman /s/ F.S. Gunn Director - ---------------------------------- F.S. Gunn /s/ Robert L. Herchert Director - ---------------------------------- Robert L. Herchert /s/ William W. Meadows Director - ---------------------------------- William W. Meadows -60- /s/ Edward P. Munson Director - ---------------------------------- Edward P. Munson /s/ James L. Murray Director - ---------------------------------- James L. Murray /s/ Byron B. Searcy Director - ---------------------------------- Byron B. Searcy /s/ Edgar Snelson Director - ---------------------------------- Edgar Snelson -61- EXHIBIT INDEX
EXHIBIT PAGE NO. - ------- -------- 3(a) Amended and Restated Articles of Incorporation of the Corporation as of July 21, 1998.** 3(b) Amended and Restated Bylaws of the Corporation dated April 21, 1998.** 4(a) Summit Bancshares, Inc.'s Rights Agreement dated April 17, 1990 (incorporated herein by reference to Exhibit 1 to the Corporation's Current Report on Form 8-K dated April 18, 1990 filed on April 24, 1990).* 10(a) Lease Agreement dated August 28, 1985 by and between Alta Mesa National Bank, as lessor, and the Corporation, as lessee (incorporated herein by reference to Exhibit 10(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1985).* 10(b) Lease Agreement dated October 1, 1986 by and between the Corporation, as lessor,and Alta Mesa National Bank, as lessee (incorporated herein by reference to Exhibit 10(f) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1986).* 10(c) Promissory Note dated December 21, 1989 in the original principal amount of $1,400,000 executed by Summit Bancshares, Inc. and payable to the order of Summit National Bank (incorporated herein by reference to Exhibit 10(s) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1989).* 10(d) Lease Agreement dated February 14, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit Bancshares, Inc., as tenant (incorporated herein by reference to Exhibit 10(I) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992).* 10(e) First Amendment dated May 3, 1994 to Lease Agreement dated February 14, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit Bancshares, Inc., as tenant (incorporated herein by reference to Exhibit 10(k) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994).* 10(f) Management Security Plan of Summit Bancshares, Inc. effective September 1, 1992; Management Security Plan Agreement between Summit Bancshares, Inc. and F. S. Gunn; and Management Security Plan Agreement between Summit Bancshares, Inc. and James L. Murray (incorporated herein by reference to Exhibit 10(k) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992).* 10(g) Commercial-Industrial Lease Agreement dated January 1, 1993 by and between Summit National Bank, as landlord, and Summit Bancservices, Inc., as tenant (incorporated herein by reference to Exhibit 10(m) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1992).* 10(h) 1993 Incentive Stock Option Plan of Summit Bancshares, Inc. (incorporated herein by reference to Exhibit 10(n) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993).*
10(i) Loan Agreement dated July 12, 1995, between the Corporation and The Frost National Bank (incorporated herein by reference to Exhibit 10 to the Corporation's Quarterly Report on Form 10-Q for the three months ended June 30, 1995).* 10(j) Lease Agreement dated July 6, 1989 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit National Bank as tenant (incorporated herein by reference to Exhibit 10(r) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995).*. 10(k) First Amendment dated July 15, 1996 to Loan Agreement dated July 12, 1995, between the Corporation and The Frost National Bank (incorporated herein by reference to Exhibit 10(s) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997).* 10(l) 1997 Incentive Stock Option Plan of Summit Bancshares, Inc. (incorporated herein by reference to Annex I to the Corporation's Proxy Statement for Annual Meeting of Shareholders, dated March 17, 1997.* 10(m) Second Amendment dated July 15, 1997 to Loan Agreement dated July 12, 1995, between the Corporation and The Frost National Bank.* 10(n) Second Lease Amendment and Extension Agreement to the Lease Agreement dated July 6, 1989, as amended by the Amendment of Lease dated August 12, 1993, by and between EOP-Summit Limited Partnership (as successor in interest to Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership), as landlord, and Summit National Bank, as tenant.* 10(o) Agreement of Limited Partnership of IDI Summit, Ltd. dated November 6, 1997, between Summit Community Bank, N.A. and Innovative Developers, Inc.* 10(p) Lease Agreement dated November 6, 1997 between Summit Community Bank, N.A., as tenant, and IDI - Summit, Ltd., as landlord.* 10(q) Second Amemdment dated July 8, 1998 to Lease Agreeement dated February 13, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership, as landlord, and Summit Bancshares, Inc., as tenant.** 10(r) Third Amendment dated July 15, 1998 to Loan Agreement dated July 12, 1995, between the Corporation and the Frost National Bank.** 21 Subsidiaries of the Corporation. 23 Consent of Stovall, Grandey & Whatley, independent certified public accountants. 27 Financial Data Schedule. EX-3.(A) 2 RESTATED ARTICLES OF INCORPORATION EXHIBIT 3 (A) RESTATED ARTICLES OF INCORPORATION ARTICLE ONE Summit Bancshares, Inc., pursuant to the provisions of Article 4.07 of the Texas Business Corporation Act, hereby adopts Restated Articles of Incorporation which accurately copy the Articles of Incorporation and all amendments thereto that are in effect to date and such Restated Articles of Incorporation contain no change in any provision thereof. ARTICLE TWO The Restated Articles of Incorporation were adopted by resolution of the Board of Directors of the corporation on the 21st day of July, 1998. ARTICLE THREE The Articles of Incorporation and all amendments and supplements thereto are hereby superseded in the following Restated Articles of Incorporation which accurately copy the entire text thereof. RESTATED ARTICLES OF INCORPORATION OF SUMMIT BANCSHARES. INC. ----------------------- The undersigned natural person, of the age of eighteen years or more, acting as incorporator of a corporation under the Texas Business Corporation Act, hereby adopts the following Articles of Incorporation for the corporation. ARTICLE 1. The name of the corporation is SUMMIT BANCSHARES, INC. ARTICLE 2. The period of its duration is perpetual. ARTICLE 3. The corporation is organized to buy, sell, lease and deal in services, personal property and real property, subject to Part Four of the Texas Miscellaneous Corporation Laws Act, and to transact any and all other lawful business for which a corporation may be incorporated under the Texas Business Corporation Act. ARTICLE 4. The aggregate number of shares which the corporation shall have authority to issue is 20,000,000 shares of the par value of One Dollar and 25/100 Dollars ($1.25) per share. The shares are designated as Common Stock and have identical rights and privileges in every respect. ARTICLE 5. The corporation will not commence business until it has received for the issuance of its shares consideration of the value of One Thousand Dollars ($1,000.00) consisting of money paid, labor done or property actually received. ARTICLE 6. No shareholder or other person shall have any preemptive rights whatsoever. ARTICLE 7. Directors shall be elected by plurality vote. Cumulative voting shall not be permitted. ARTICLE 8. The initial bylaws shall be adopted by the Board of Directors. The power to alter, amend or repeal the bylaws or adopt new bylaws is vested in the Board of Directors, subject to repeal or change by action of the shareholders. 2 ARTICLE 9. INDEMNIFICATION: INSURANCE. -------------------------- The corporation shall indemnify to the fullest extent permitted by law any person who is made a named defendant or respondent in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a director, advisory director or officer of the corporation, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such director, advisory director or officer in connection with any such action, suit or proceeding. The corporation may indemnify other persons, as permitted by law. The corporation shall pay or reimburse expenses to directors, advisory directors and officers and may pay or reimburse expenses to other persons, as permitted by law. The corporation may purchase and maintain insurance, create a trust fund, establish any form of self-insurance, secure its indemnity obligation by grant of a security interest or other lien on the assets of the corporation, establish a letter of credit, guaranty or surety arrangement, or other arrangement on behalf of directors, advisory directors, officers or other persons, against any liability asserted against such persons in their capacities as directors, advisory directors, officers or otherwise, of the corporation, whether or not the corporation would have the power to indemnify such directors, advisory directors, officers or other persons against such liability, as permitted by law. ARTICLE 10. The street address of its initial registered office is 1300 Summit Avenue, Fort Worth, Texas, and the name of its current registered agent at such address is Bobby G. Scott. ARTICLE 11. The number of directors constituting the initial Board of Directors is three (3) and the names and addresses of the persons who are to serve as directors until the first annual meeting of 3 the shareholders or until their successors are elected and qualified are: NAME ADDRESS ---- ------- James L. Murray 1300 Summit Ave. Fort Worth, Texas 76102 F. S. Gunn 1300 Summit Ave. Fort Worth, Texas 76102 Henry A. Meadows 444 West 7th Street Fort Worth, Texas 76102 ARTICLE 12. The name and address of the incorporator is Loren Q. Hanson, 2700 Continental National Bank Building, Fort Worth, Texas 76102. ARTICLE 13. No director of the corporation shall be liable to the corporation or its shareholders for monetary damages for an act or omission in such director's capacity as a director of the corporation, except that this Article 13 shall not eliminate or limit the liability of a director of the corporation for: (i) a breach of such director's duty of loyalty to the corporation or its shareholders; (ii) an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; (iv) an act or omission for which the liability of a director 4 is expressly provided by statute; or (v) an act related to an unlawful stock repurchase or payment of a dividend. Any repeal or amendment of this Article 13 by the shareholders of the corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such repeal or amendment. Anything herein to the contrary notwithstanding, if the Texas Miscellaneous Corporation Laws Act is amended after approval by the shareholders of this Article 13 to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Texas Miscellaneous Corporation Laws Act, as so amended from time to time. ARTICLE 14. SPECIAL MEETINGS OF SHAREHOLDERS -------------------------------- Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called by the President, the Board of Directors or the holders of not less than three-tenths (3/10) of all shares entitled to vote at the meetings. Business transacted at a special meeting shall be confined to the purpose or purposes stated in the notice of the meeting. DATED the 21st day of July, 1998. SUMMIT BANCSHARES, INC. By: /s/ Bob G. Scott --------------------------------- Its Authorized Officer EX-3.(B) 3 BYLAWS OF SUMMIT BANCSHARES, INC. EXHIBIT 3 (B) BYLAWS OF SUMMIT BANCSHARES, INC. CONTENTS ARTICLE 1: Offices ------- 1.01 Registered Office and Agent 1.02 Other Offices ARTICLE 2: Shareholders ------------ 2.01 Place of Meetings 2.02 Annual Meeting 2.03 Voting List 2.04 Special Meetings 2.05 Notice 2.06 Quorum 2.07 Majority Vote; Withdrawal of Quorum 2.08 Method of Voting 2.09 Record Date; Closing Transfer Books 2.10 Order of Business at Meetings ARTICLE 3: Directors --------- 3.01 Management 3.02 Number; Qualification; Election; Term 3.03 Election of Directors 3.04 Removal 3.05 Vacancies 3.06 Place of Meetings 3.07 First Meeting 3.08 Regular Meetings 3.09 Special Meetings 3.10 Quorum; Majority Vote 3.11 Compensation 3.12 Procedure 3.13 Interested Directors and Officer 3.14 Action Without Meeting 3.15 Committees of Directors ARTICLE 4: Notice and Attendance Through Use of Electronic Equipment --------------------------------------------------------- 4.01 Method 4.02 Waiver 4.03 Telephone and Similar Meetings i ARTICLE 5: Officers and Agents ------------------- 5.01 Number; Qualification; Election; Term 5.02 Removal 5.03 Vacancies 5.04 Authority 5.05 Compensation 5.06 Chairman of the Board 5.07 President 5.08 Vice President 5.09 Secretary 5.10 Assistant Secretary 5.11 Treasurer 5.12 Assistant Treasurer ARTICLE 6: Certificates and Shareholders ----------------------------- 6.01 Certificates 6.02 Issuance 6.03 Payment for Shares 6.04 Subscriptions 6.05 Lien 6.06 Lost, Stolen or Destroyed Certificates 6.07 Registration of Transfer 6.08 Registered Shareholders 6.09 Preemptive Rights ARTICLE 7: General Provisions ------------------ 7.01 Dividends and Reserves 7.02 Books and Records 7.03 Report to Shareholders 7.04 Checks and Notes 7.05 Fiscal Year 7.06 Seal 7.07 Indemnification; Insurance 7.08 Resignation 7.09 Amendment to Bylaws 7.10 Construction 7.11 Relation to Articles of Incorporation ii ARTICLE 1: Offices ------- 1.01 Registered Office and Agent. The registered office of the --------------------------- corporation shall be at 1300 Summit Avenue, Fort Worth, Texas 76102. The name of the registered agent at such address is Bob G. Scott. Anything in these Bylaws to the contrary notwithstanding, revision of the registered office or the registered agent of the corporation in accordance with the provisions of the Texas Business Corporation Act shall automatically and without further action amend this section to name such newly adopted registered office or registered agent. 1.02 Other Offices. The corporation may have offices at other places ------------- both within and without the state of Texas as the Board of Directors may determine or as the business of the corporation may require. ARTICLE 2: Shareholders ------------ 2.01 Place of Meetings. All meetings of the shareholders shall be held ----------------- at such time and place, in or out of the state of Texas, as shall be stated in the notice of the meeting or in a waiver of notice. 2.02 Annual Meeting. An annual meeting of the shareholders shall be -------------- held each year at 4:00 o'clock p.m. on the third Tuesday of April of each year. If such a day is a legal holiday, then the meeting shall be on the next business day following. At the meeting, the shareholders shall elect directors and transact such other business as may properly be brought before the meeting. In the event the annual meetings is omitted by oversight or otherwise and not held as provided herein, an annual meeting may be called in the manner provided for special meetings herein at a subsequent date, and the business transacted at such meeting shall be valid as if transacted at the annual meeting held during the month of April. 2.03 Voting List. At least ten days before each meeting of shareholders, ----------- a complete list of the shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the officer or agent having charge of the stock transfer books. The list, for a period of ten days prior to the meeting, shall be kept on file at the registered office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and shall be subject to the inspection of any shareholder during the whole time of the meeting. 2.04 Special Meetings. Special meetings of the shareholders, for any ---------------- purpose or purposes, unless otherwise prescribed by statue, the Articles of Incorporation or these Bylaws, may be called by the President, the Board of Directors or the holders of not less than one-tenth of all the shares entitled to vote at the meetings. Business transacted at a special meeting shall be confined to the purpose or purposes stated in the notice of the meeting. 1 2.05 Notice. Written or printed notice stating the place, day and hour ------ of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the Secretary or the officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting, except to the extent that notice is not required to be given to any shareholder by law. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. 2.06 Quorum. The holders of a majority of the shares issued and ------ outstanding and entitled to vote, present in person or represented by proxy, shall be required and shall constitute a quorum at meetings of the shareholders for the transaction of business, except as otherwise provided by statue, the Articles of Incorporation or these Bylaws. If a quorum is not present or represented at a meeting of the shareholders, the shareholders entitled to vote, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice (other than announcement at the meeting of the time and place at which the meeting is to be reconvened) until a quorum is present and represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. 2.07 Majority Vote; Withdrawal of Quorum. When a quorum is present at ----------------------------------- any meeting of the shareholders and unless otherwise required by statute, the Articles of Incorporation or these Bylaws, the vote of the holders of a majority of the shares entitled to vote, present in person or represented by proxy and voting "for" or "against" any matter brought before the meeting shall decide such matter. In the determination of such majority, abstentions and broker non- votes shall not be counted (even though such shares are considered present and entitled to vote for purposes of determining a quorum pursuant to Bylaw 2.06 of these Bylaws). The term "abstentions" means shares which are not voted "for" or "against" a particular matter by a holder or holders present in person or by proxy at a meeting and entitled to vote such shares on such matter. The term "broker non-votes" means shares held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote and that the broker or nominee does not have discretionary power to vote on the particular matter on which the vote is being counted. The shareholders present at a duly constituted meeting may continue to transact business until adjournment, and the subsequent withdrawal from the meeting of any shareholder shall not affect the presence of a quorum at the meeting. 2.08 Method of Voting. Each outstanding share shall be entitled to one ---------------- vote on each matter submitted to a vote at a meetings shareholders. At any meeting of the shareholders, every shareholder having the right to vote may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless otherwise made irrevocable by law. Each proxy shall be filed with the Secretary of the corporation prior to or at the time of the meeting. 2 Voting for directors shall be in accordance with Bylaw 3.03 of these Bylaws. Any vote may be taken by voice or by show of hands unless someone entitled to vote objects, in which case written ballots shall be used. 2.09 Record Date; Closing Transfer Books. The Board of Directors may fix ----------------------------------- in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, the record date to be not less than ten nor more than sixty days prior to the meeting, or the Board of Directors may close the stock transfer books for such purpose for a period of not less than ten nor more than sixty days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be the record date. Whenever action by shareholders is proposed to be taken by consent in writing without a meeting of shareholders, the Board of Directors may fix a record date for the purpose of determining shareholders entitled to consent to that action, which record date shall not precede, and shall not be more than ten days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors and prior action of the Board of Directors is not required by law, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office, its principal place of business, or an officer or agent of the corporation having custody of the books in which proceedings of meetings of shareholders are recorded. If no record date shall have been fixed by the Board of Directors and prior action of the Board of Directors is required by law, the record date for determining shareholders entitled to consent to action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts a resolution taking such prior action. 2.10 Order of Business at Meetings. The order of business insofar as ----------------------------- practicable or applicable at annual and other meetings of shareholders shall be as follows: (a) call to order; (b) proof of due notice of meeting or waiver; (c) determination of quorum and examination of proxies; (d) announcement of availability of voting list (see Bylaw 2.03); (e) reading and disposing of minutes of last meeting of shareholders; (f) reports of officers and committees; (g) appointment of voting inspectors; (h) unfinished business; (i) new business; (j) nomination of directors; (k) opening of polls for voting; (l) recess; (m) reconvening; closing of polls; (n) report of voting inspectors; (o) other business; 3 (p) adjournment. The failure to follow this order of business at any meeting of shareholders shall have no effect on the validity of such meeting. ARTICLE 3: Directors --------- 3.01 Management. The business and affairs of the corporation shall be ---------- managed by the Board of Directors who may exercise all such powers of the corporation and do all such lawful acts and things as are not (by statue or the Articles of Incorporation or these Bylaws) directed or required to be exercised or done by shareholders. 3.02 Number; Qualification; Election; Term. The Board of Directors shall ------------------------------------- consist of not more than twenty five (25) directors, the exact number of which shall be determined from time to time as specified by resolution of the Board of Directors; provided, that no director's term shall be shortened by reason of a resolution reducing the number of directors; and further provided, that the number of directors constituting the Board of Directors at the time of the adoption of these Bylaws shall be thirteen (13) and shall remain at such number unless and until changed by resolution of the Board of Directors. The directors shall be elected at the annual meeting of shareholders, except as provided in Bylaw 3.05. Directors need not be shareholders or residents of the state of Texas. 3.03 Election of Directors. Directors shall be elected by plurality --------------------- vote. Cumulative voting shall not be permitted. 3.04 Removal. Any director may be removed either with or without cause ------- at any special or annual meeting of shareholders by the affirmative vote of a majority in number of shares of the shareholders present in person or by proxy at such meeting and entitled to vote for the election of such director if notice of intention to act upon such matter shall have been given in the notice calling such meeting. 3.05 Vacancies. Except as provided below, any vacancy occurring in the --------- Board of Directors (by death, resignation, removal, increase in number of directors or otherwise) may be filled by an affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors, or may be filled (at the election of the Board of Directors) by an election at an annual or special meeting of shareholders called for that purpose. If the vacancy is caused by reason of an increase in the number of directors, the Board of Directors may vote to fill not more than two such directorships during the period between any two successive annual meetings of shareholders. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, or until the next election of directors by shareholders if the vacancy is caused by an increase in the number of directors. 4 3.06 Place of Meetings. Meetings of the Board of Directors, regular or ----------------- special, may be held either within or without the state of Texas. 3.07 First Meeting. The first meeting of each newly elected Board of ------------- Directors shall be held without further notice immediately following the annual meeting of shareholders and at the same place, unless (by unanimous consent of the directors then elected and serving) such time or place shall be changed. 3.08 Regular Meetings. Regular meetings of the Board of Directors shall ---------------- be held quarterly without notice on the third Tuesday of each January, April, July and October at 1300 Summit Avenue, Fort Worth, Texas 76113 or at such other address as the Board of Directors may determine. 3.09 Special Meetings. Special meetings of the Board of Directors may ---------------- be called by the Chairman of the Board on one days' notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the Chairman of the Board or Secretary in like manner and on like notice on the written request of the President or on the written request of a majority of the directors. Except as otherwise expressly provided by statue or the Articles of Incorporation or these Bylaws, neither the business to be transacted at nor the purpose of any special meeting need be specified in a notice or waiver of notice. 3.10 Quorum; Majority Vote. At all meetings of the Board of Directors, a --------------------- majority of the directors fixed in the manner provided in these Bylaws shall constitute a quorum for the transaction of business. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors. If a quorum is not present at a meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The vote of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors, unless the vote of a different number is required or permitted by the Articles of Incorporation or these Bylaws. If a quorum is not present at any meeting of the Board of Directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.11 Compensation. By resolution of the Board of Directors, the ------------ directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of any committee of the Board of Directors may, by resolution of the Board of Directors, be allowed like compensation for attending committee meetings. 3.12 Procedure. The Board of Directors shall keep regular minutes of its --------- proceedings. The minutes shall be placed in the minute book of the corporation. 5 3.13 Interested Directors and Officers. --------------------------------- (a) No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association or other organization in which one or more of the directors or officers are directors or officers or have a financial interest, shall be voidable solely for this reason, solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purposes, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the shareholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof. 3.14 Action Without Meeting. Any action required or permitted to be ---------------------- taken at a meeting of the Board of Directors or any committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all members of the Board of Directors or the committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting and may be stated as such in any document or instrument filed with the Secretary of State. 3.15 Committees of Directors. ----------------------- (a) The Board of Directors, by resolution adopted by a majority of the full Board, may designate from among its members an executive committee and one or more other committees, each of which, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors in the business and affairs of the corporation, except where the action of the Board of Directors is required by statute. Vacancies in the membership of a committee shall be filled by the Board of Directors at a regular or special meeting of the Board of Directors. The executive committee shall keep regular minutes of its proceedings and report the same to the Board when required. The designation of any such committee and the delegation thereto of authority shall 6 not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. (b) The Board of Directors may designate a chairman and vice chairman for each committee. Unless otherwise provided by the Board of Directors, a majority of the full committee shall constitute a quorum for each committee, and the act of a majority of the committee members present at any meeting at which a quorum is present shall be the act of the committee. The Board of Directors may at any time add or remove committee members, change the authority or responsibility of any committee or abolish a committee. ARTICLE 4: Notice and Attendance Through Use of Electronic Equipment --------------------------------------------------------- 4.01 Method. Whenever by statue or the Articles of Incorporation or ------ these Bylaws notice is required to be given to any director, committee member or shareholder, and no provision is made as to how the notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given (i) in writing, by mail, postage prepaid, addressed to the director, committee member or shareholder at the address appearing on the books of the corporation, or (ii) in any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is thus deposited in the United States mail. 4.02 Waiver. Whenever by statute or the Articles of Incorporation or ------ these Bylaws notice is required to be given to any director, committee member or shareholder, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Attendance of a director, committee member or shareholder at a meeting shall constitute a waiver of notice of such meeting, except where a director, committee member or shareholder attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 4.03 Telephone and Similar Meetings. Directors, committee members and ------------------------------ shareholders may participate in and hold a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute presence in person at the meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 7 ARTICLE 5: Officers and Agents ------------------- 5.01 Number; Qualification; Election; Term. ------------------------------------- (a) The corporation shall have: (1) a President and a Secretary and (2) such other officers (including a Chairman of the Board, Vice Presidents and a Treasurer) and assistant officers and agents as the Board of Directors may deem necessary. (b) No officer or agent need to be a shareholder, director or resident of the state of Texas. (c) Officers named in Bylaw 5.01(a)(1) shall be elected by the Board of Directors on the expiration of an officer's term or whenever a vacancy exists. Officers and agents named in Bylaw 5.01(a)(2) may be elected by the Board at any meeting. (d) Unless otherwise specified by the Board at the time of election or appointment, or in any employment contract approved by the Board, each officer's and agent's term shall end at the first meeting of directors after the next annual meeting of shareholders. He shall serve until the end of his term or, if earlier, his death, resignation or removal. (e) Any two or more offices may be held by the same person. 5.02 Removal. Any officer or agent elected or appointed by the Board of ------- Directors may be removed by the Board of Directors whenever, in its judgment, the best interests of the corporation will be served thereby. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 5.03 Vacancies. Any vacancy occurring in any office of the corporation --------- (by death, resignation, removal or otherwise) may be filled by the Board of Directors. 5.04 Authority. Officers and agents shall have such authority and --------- perform such duties in the management of the corporation as are provided in these Bylaws or as may be determined by resolution of the Board of Directors not inconsistent with these Bylaws. 5.05 Compensation. The compensation of officers and agents shall be ------------ fixed from time to time by the Board of Directors. 5.06 Chairman of the Board. The Chairman of the Board, if any, shall --------------------- preside over all Board of Directors' and shareholders' meetings. The Chairman shall also perform such other authority and powers as the Board of Directors may from time to time prescribe. 8 5.07 President. The President shall assist the Chairman of the Board in --------- presiding over all Board of Directors' and shareholders' meetings. In the absence of a Chairman of the Board, the President shall preside over all such meetings. The President shall also perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe. 5.08 Vice President. The Executive Vice President, if any, shall be the -------------- chief operating officer of the Corporation and shall be treated as the Vice President with most seniority. The Vice Presidents, if any, inclusive of the Executive Vice President, in the order of their seniority unless otherwise determined by the Board of Directors, shall, in the absence or disability of the Chairman of the Board and President, preside over all Board of Directors' and shareholders' meetings. The Vice President, inclusive of the Executive Vice President, shall also perform all duties and have such other authority and powers as the Board of Directors may from time to time prescribe. 5.09 Secretary. --------- (a) The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record the minutes of all proceedings in a book to be kept for that purpose. (b) The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board of Directors. (c) The Secretary shall keep in safe custody the seal of the corporation and, when authorized by the Board of Directors or the executive committee, affix the same to any instrument requiring it. (d) If no Treasurer or Assistant Treasurer is appointed, or in the event of the absence or disability of the Treasurer and Assistant Treasurer, the Secretary shall perform the duties, have the authority and exercise the powers of the Treasurer. (e) The Secretary shall be under the supervision of the Chairman of the Board and shall also perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe. 5.10 Assistant Secretary. The Assistant Secretary, if any, shall, in ------------------- the absence or the disability of the Secretary, perform the duties and have the authority and exercise the powers of the Secretary. He shall also perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. 5.11 Treasurer. --------- (a) The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements of the corporation and shall deposit all monies and other valuable effects in the name and to the credit of the corporation in such 9 depositories as may be designated by the Board of Directors. (b) He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board, President and directors, at the regular meetings of the Board of Directors or whenever any of them may require it, an account of all transactions as Treasurer and of the financial condition of the corporation. (c) If required by the Board of Directors, he shall give the corporation a bond in such form, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. (d) He shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the President may from time to time delegate. 5.12 Assistant Treasurer. The Assistant Treasurer, if any, shall, in ------------------- the absence or disability of the Treasurer, perform the duties and have the authority and exercise the powers of the Treasurer. He shall also perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE 6: Certificates and Shareholders ----------------------------- 6.01 Certificates. Certificates in the form determined by the Board of ------------ Directors shall be delivered representing all shares to which shareholders are entitled. Certificates shall be consecutively numbered and shall be entered in the books of the corporation or its agents as they are issued. Each certificate shall state on its face the holder's name, the number and class of shares, the par value of shares or a statement that such shares are without par value, and such other matters as may be required by law. They shall be signed by the Chairman of the Board, President, a Vice President, the Secretary, the Assistant Secretary, or such other officer or officers as the Board of Directors shall designate and may be sealed with the seal of the corporation or a facsimile thereof. The signature of any such officer may be a facsimile. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of its issuance. 6.02 Issuance. Shares (both treasury and authorized but unissued) may be -------- issued for such consideration (not less than par value) and to such persons as the Board of Directors may determine from time to time. Shares may not be issued until the full amount of the consideration, fixed as 10 provided by law, has been paid. 6.03 Payment for Shares. ------------------ (a) Kind. The consideration for the issuance of shares shall consist of ---- money paid, labor done (including services actually performed for the corporation) or property (tangible or intangible) actually received. Neither promissory notes nor the promise of future services shall constitute payment for shares. (b) Valuation. In the absence of fraud in the transaction, the judgment --------- of the Board of Directors as to the value of consideration received shall be conclusive. (c) Effect. When consideration, fixed as provided by law, has been ------ paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. (d) Allocation of Consideration. The consideration received for shares --------------------------- shall be allocated by the Board of Directors in accordance with law, between stated capital and capital surplus accounts. 6.04 Subscriptions. Unless otherwise provided in the subscription ------------- agreement, subscriptions for shares, whether made before or after organization of the corporation, shall be paid in full at such time or in such installments and at such times as shall be determined by the Board of Directors. Any call made by the Board of Directors for payment on subscriptions shall be uniform as to all shares of the same series. In case of default in the payment on any installment or call when payment is due, the corporation may proceed to collect the amount due in the same manner as any debt due to the corporation. 6.05 Lien. For any indebtedness of a shareholder to the corporation, the ---- corporation shall have a first and prior lien on all shares of its stock owned by him and on all dividends or other distributions declared thereon. 6.06 Lost, Stolen or Destroyed Certificates. -------------------------------------- (a) Issuance of New Certificates. The corporation shall issue a new ---------------------------- certificate in place of any certificate for shares previously issued if the registered owner of the certificate: (1) Claim. Makes proof in affidavit form that it has been lost, ----- destroyed or wrongfully taken; (2) Timely Request. Requests the issuance of a new certificate -------------- before the corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; 11 (3) Bond. Gives a bond in such form, and with such surety or ---- sureties, with fixed or open penalty, as the corporation may direct, to indemnify the corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction or theft of the certificate; and (4) Other Requirements. Satisfies any other reasonable ------------------ requirements imposed by the corporation. (b) Effect of Failure to Notify Corporation. When a certificate has --------------------------------------- been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the corporation within a reasonable time after he has notice of it, and the corporation registers a transfer of the shares represented by the certificate before receiving such notification, the holder of record is precluded from making any claim against the corporation for the transfer or for a new certificate. 6.07 Registration of Transfer. The corporation shall register the ------------------------ transfer of a certificate for shares presented to it for transfer if: (a) Endorsement. The certificate is properly endorsed by the ----------- registered owner or by his duly authorized attorney; (b) Guarantee and Effectiveness of Signature. The signature of ---------------------------------------- such person has been guaranteed by a national banking association or member of the New York Stock Exchange or Midwest Stock Exchange, and reasonable assurance is given that such endorsements are effective; (c) Adverse Claims. The corporation has no notice of an adverse -------------- claim or has discharged any duty to inquire into such a claim; and (d) Collection of Taxes. Any applicable law relating to the ------------------- collection of taxes has been complied with. 6.08 Registered Shareholders. The corporation shall be entitled to treat ----------------------- the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law. 6.09 Preemptive Rights. No shareholder or other person shall have any ----------------- preemptive rights whatsoever. 12 ARTICLE 7: General Provisions ------------------ 7.01 Dividends and Reserves. ---------------------- (a) Declaration and Payment. Subject to statute and the Articles of ----------------------- Incorporation, dividends may be declared by the Board of Directors at any regular or special meeting and may be paid in cash, in property or in shares of the corporation. The declaration and payment shall be at the discretion of the Board of Directors. (b) Record Date. The Board of Directors may fix in advance a record ----------- date for the purpose of determining shareholders entitled to receive payment of any dividend, the record date to be not more than sixty days prior to the payment date of such dividend, or the Board of Directors may close the stock transfer books for such purpose for a period of not more than sixty days prior to the payment date of such dividend. In the absence of any action of the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring the dividend shall be the record date. (c) Reserves. By resolution the Board of Directors may create such -------- reserve or reserves out of the earned surplus of the corporation as the directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the corporation, or for any other purpose they think beneficial to the corporation. The directors may modify or abolish any such reserve in the manner in which it was created. 7.02 Books and Records. The corporation shall keep correct and complete ----------------- books and records of account and shall keep minutes of the proceedings of its shareholders and Board of Directors, and shall keep at its registered office or principal place of business or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each. 7.03 Report to Shareholders. Upon the written request of any ---------------------- shareholder, the corporation shall mail within ninety days of such request to such shareholder its annual statements for its last fiscal year showing in reasonable detail its assets and liabilities and results of its operations and the most recent interim statements, if any, which have been filed in a public record or otherwise published. 7.04 Checks and Notes. All checks or demands for money and notes of the ---------------- corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 7.05 Fiscal Year. The fiscal year of the corporation shall be fixed by ----------- resolution of the Board of Directors. 7.06 Seal. The Board of Directors may provide a suitable corporate seal ---- (of which there 13 may be one or more) which shall contain the name of the corporation and the name of the state of Texas. The seal may be used by impressing it or reproducing a facsimile of it or otherwise. 7.07 Indemnification; Insurance. The corporation shall indemnify to the -------------------------- full extent permitted by law any person who is made a named defendant or respondent in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a director, advisory director or officer of the corporation, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such director, advisory director or officer in connection with any such action, suit or proceeding. The corporation shall pay or reimburse expenses to directors, advisory directors and officers, and may pay or reimburse expenses to other persons, as permitted by law. The corporation may purchase and maintain insurance, create a trust fund, establish any form of self-insurance, secure its indemnity obligation by grant of a security interest or other lien on the assets of the corporation, establish a letter of credit, guaranty or surety arrangement, or other arrangement on behalf of directors, advisory directors, officers or other persons, against any lability asserted against such persons in their capacities as directors, advisory directors, officers or otherwise, of the corporation, whether or not the corporation would have the power to indemnify such directors, advisory directors, officers or other persons against such liability, as permitted by law. 7.08 Resignation. Any director, officer or agent may resign by giving ----------- written notice to the President or the Secretary. The resignation shall take effect at the time specified therein or immediately if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 7.09 Amendment of Bylaws. These Bylaws may be altered, amended or ------------------- repealed, or new bylaws may be adopted (subject to the shareholders repealing or changing the action of the Board of Directors, or making new bylaws, at an annual or special meeting called and held as provided in these Bylaws) at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting, provided notice of the proposed alteration, amendment or repeal is contained in the notice of such meeting. 7.10 Construction. Whenever the context so requires, the masculine shall ------------ include the feminine and neuter, and the similar shall include the plural, and conversely. If any portion of these Bylaws shall be invalid or inoperative, then, so far as it is reasonable and possible, the remainder of these Bylaws shall be considered valid and operative, and effect shall be given to the intent manifested by the portion held invalid or inoperative. The table of contents and headings used in these Bylaws have been inserted for convenience only and do not constitute matter to be construed in interpretation. 7.11 Relation to Articles of Incorporation. These Bylaws are subject to, ------------------------------------- and governed by, the Articles of Incorporation. 14 * * * * * * * * * * * * * * * * * * * * * Subject to the amendments to the Bylaws of the Corporation as set forth above, the Bylaws of the Corporation, as now amended, shall be and remain in full force and effect. I hereby certify that the foregoing Bylaws are the true and correct Bylaws of the corporation as amended and restated the 21st day of April, 1998. /s/ Bob G. Scott ---------------------------------- _______________________, Secretary 15 EX-10.(Q) 4 SECOND AMENDMENT EXHIBIT 10 (Q) SECOND AMENDMENT This Second Amendment (the "Second Amendment") is made and entered into as of the 8th day of July, 1998 (the "Effective Date"), by and between EOP-SUMMIT LIMITED PARTNERSHIP, a Delaware limited partnership ("Lessor"), and SUMMIT BANCSHARES, INC. ("Lessee"). WITNESSETH A. WHEREAS, Lessor (as successor in interest to Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership) and Lessee are parties to that certain lease dated February 1992, for space currently containing approximately 4,978 rentable square feet (the "Premises") described as Suite No 604 on the 6th floor of the building commonly known as Summit Office Park and the address of which is 1200-1300 Summit Avenue, Ft. Worth, Texas (the "Building"), which lease has been previously amended by First Amendment dated May 3, 1994 (the "First Amendment") which, among other things, extended the lease for an additional three-year period (the First Amendment and the lease are collectively referred to herein as the "Lease"); and B. WHEREAS, the Lease Term shall expire on February 15, 2000 and Lessee has requested an option to extend the Lease Term and Lessor has agreed to grant Lessee such option; and C. WHEREAS, Lessee and Lessor mutually desire that the Lease be amended on and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee agree as follows: I. Renewal Option. Lessor and Lessee agree that the Lease shall be -------------- amended in accordance with the following terms and conditions: A. Lessee, provided it is not in default and has not sublet the Premises or assigned the Lease, shall have two options to extend the Lease Term (the "Second Renewal Option" and the "Third Renewal Option"), each for an additional period of five years (the "Second Renewal Term" and the "Third Renewal Term"). If properly exercised in accordance with this Second Amendment, the Second Renewal Term shall commence on the day following the Extended Termination Date (as defined in the First Amendment) and the Third Renewal Term shall commence on the day following the last day of the Second Renewal Term. If Lessee elects to exercise the Second Renewal Option, Lessee shall provide Lessor with written notice of such election at least six months prior to the Extended Termination Date and if Lessee elects to exercise the Third Renewal Option, Lessee shall provide Lessor with written notice of such election at least six months prior to the expiration of the Second Renewal Term. B. The Base Monthly Rent rate during the Second Renewal Term shall be $13.50 per rentable square foot of the Premises. The Base Monthly Rental rate per rentable square foot of the Premises during the Third Renewal Term shall equal the prevailing market rate for such space as determined in Lessor's reasonable judgment. C. During the Second Renewal Term and the Third Renewal Term Lessee shall pay to Lessor as additional rental the amount (the "Excess") by which the sum of Lessee's Proportionate Share of Real Estate Taxes for the applicable calendar year and Operating Expenses for the applicable calendar year exceeds $6.50 per rentable square foot (the "Expense Stop"); provided Lessee shall not be entitled to a credit if Lessee's Proportionate Share is less than $ 6.50 per rentable square foot. As soon as is practical following the end of each calendar year during the Second Renewal Term and Third Renewal Term, Lessor shall furnish to Lessee a statement (the "Annual Statement") of Lessor's actual Operating Expenses and the actual Excess for the previous calendar year. Not later than thirty (30) days after Lessee's receipt of the Annual Statement, Lessee will pay to Lessor, as Additional Rent, the Excess stated in the Annual Statement. D. If the Building is not at least ninety-five percent (95%) occupied during any calendar year of the Lease Term or if Lessor is not supplying services to at least ninety-five (95%) of the total Rentable Area of the Building at any time during any calendar year of the Lease Term, actual Operating Expenses for purposes hereof shall be determined as if the Building had been ninety-five percent (95%) occupied and Lessor had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building during such year. E. During the Second Renewal Term and the Third Renewal Term, Lessor agrees to provide six (6) covered, reserved parking spaces in the on-site garage. Lessee will pay Lessor rent on each of the reserved spaces which, on the date of this Amendment is $25.00 per space per month. The rent for the parking spaces may be increased by Lessor annually by the same amount the rent charged to other tenants in the Building is increased. Lessor will make these parking spaces available to Lessee prior to the Second Renewal Term at the referenced monthly rate upon Lessee's written request. F. If Lessee is entitled to and properly exercises the Second Renewal Option and/or the Third Renewal Option, Lessor shall prepare appropriate instruments (each a "Renewal Amendment") to reflect changes in the Base Monthly Rental, Lease Term, Extended Termination Date and other appropriate terms. Lessee shall execute and return such Renewal Amendment(s) within fifteen days after Lessee's receipt thereof from Lessor. II. Suite 634 Rights. ---------------- A. Lessee shall have the following rights (the "Suite 634 Rights") with respect to Suite 634 in the Building (the "Option Space"), consisting of approximately 1,829 rentable square feet as shown on Exhibit "A" attached hereto: (i) A one-time expansion right to take the Option Space (the "Expansion Right") beginning September 1, 1999 by giving Lessor the Notice of Exercise (defined below) by March 1, 1999. The Base Monthly Rent applicable to the Option Space shall be the then current market rate for the Building as determined is Lessor's reasonable discretion. (ii) If Lessee does not exercise the Expansion Right, then Lessee shall have a one time right of first refusal to lease the Option Space ("Right of First Refusal"). The Right of First Refusal shall be exercised as follows: when Lessor has a prospective tenant ("Prospect") interested in leasing all or any part the Option Space, Lessor shall advise Lessee (the "Advice") of the terms under which Lessor is prepared to lease the Option Space (or portion thereof if the Prospect is interested in leasing less than all of the Option Space) to such Prospect. Lessee shall have five (5) days after the date of the Advice to give Lessor the Notice of Exercise. If Lessee exercises its Right of First Refusal, it shall lease the Option Space under the terms and conditions contained in the Advice. The term for the Option Space under the Right of First Refusal shall commence upon the commencement date stated in the Advice. B. To exercise either of the Suite 634 Rights, Lessee shall provide Lessor with written notice of exercise ("Notice of Exercise") to Lessor's notice address as provided in the Lease. Lessee has no Suite 634 Rights if: a. Lessee is in default under the Lease at the time of the Notice of Exercise or the Advice (if applicable); or b. The Premises, or any portion thereof, is sublet at the time of the Notice of Exercise or the Advice (if applicable); or c. The Lease has been assigned; or d. The Lease is not occupying the Premises on the date of the Notice of Exercise ("Notice of Exercise") or the Advice if applicable. C. The Option Space shall be considered a part of the Premises, provided that all of the terms herein and in the Lease (and in the Advice, if applicable) shall govern Lessee's leasing of the Option Space. The Option Space (including improvements and personalty, if any) shall be accepted by Lessee in its condition and as-built configuration existing on the earlier of the date Lessee takes possession of the Option Space or the date the term for such Option Space commences. D. The Right of First Refusal with respect to the Option Space shall terminate on the earlier to occur of (i) Lessee's failure to exercise its Right of First Refusal within the five (5) day period provided in paragraph A above, and (ii) the date Lessor would have provided Lessee an Advice if Lessee had not been in violation of one or more of the conditions as set forth in Paragraph A above. E. If Lessee exercises either of its Suite 634 Rights, Lessor shall prepare an amendment (the "Expansion Amendment") adding the Option Space to the Premises and reflecting the changes in the Base Monthly Rent, Rentable Area of the Premises, Lessee's Proportionate Share and other appropriate terms. A copy of the Expansion Amendment shall be (i) sent to Lessee within a reasonable time after Lessor's receipt of the Notice of Exercise, and (ii) executed by Lessee and returned to Lessor within ten (10) days thereafter. Ill. Effective Date. This Second Amendment shall become effective as -------------- of the Effective Date and shall continue in effect until otherwise amended by the parties in writing or until expiration or sooner termination of the Lease. IV. Miscellaneous. ------------- A. This Second Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Lessee be entitled to any Rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Lessee in connection with entering into the Lease. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect. C. In the case of any inconsistency between the provisions of the Lease and this Second Amendment, the provisions of this Second Amendment shall govern and control. D. Submission of this Second Amendment by Lessor is not an offer to enter into this Second Amendment but rather is a solicitation for such an offer by Lessee. Lessor shall not be bound by this Second Amendment until Lessor has executed and delivered the same to Lessee. E. The capitalized terms used in this Second Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Second Amendment. F. Lessee hereby represents to Lessor that Lessee has dealt with no broker in connection with this Second Amendment other than Kelly, Geren & Searcy, Inc., on Lessee's behalf and the Richard D. Minker Co., on Lessor's behalf ("Brokers"). Lessee agrees to indemnify and hold Lessor, its members, principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents, and the respective principals and members of any such agents (collectively, the "Lessor Related Parties") harmless from all claims of any brokers claiming to have represented Lessee in connection with this Second Amendment other than Brokers. Lessor hereby represents to Lessee that Lessor has dealt with no broker in connection with this Second Amendment. Lessor agrees to indemnify and hold Lessee, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents (collectively, the "Lessee Related Parties") harmless from all claims of any brokers claiming to have represented Lessor in connection with this Second Amendment. IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Second Amendment as of the Effective Date. LESSOR: EOP-SUMMIT LIMITED PARTNERSHIP, a Delaware limited partnership By: EOP-SUMMIT, L.L.C., a Delaware limited liability company, its general partner By: EOP Operating Limited Partnership, a Delaware limited partnership, its sole member By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing partner By: /s/ John Gallander -------------------------- Name: John Gallender ------------------------ Title: VP, Leasing ----------------------- LESSEE: SUMMIT BANCSHARES, INC. By: /s/ Bob G. Scott ---------------------------------- Name: Bob G. Scott -------------------------------- Title: Executive Vice President ------------------------------- EX-10.(R) 5 THIRD AMENDMENT TO LOAN AGREEMENT EXHIBIT 10 (R) THIRD AMENDMENT TO LOAN AGREEMENT --------------------------------- THIS THIRD AMENDMENT ("Third Amendment") dated as of the 15th day of July, 1998, to the Loan Agreement (the "Loan Agreement"), made and entered into as of July 12, 1995, by and among SUMMIT BANCSHARES, INC., a Texas corporation, (hereinafter called "Borrower") and THE FROST NATIONAL BANK, a national banking association (hereinafter called "Lender"). All capitalized terms not otherwise defined herein shall have the meaning ascribed to each of them in the Loan Agreement. WITNESSETH: WHEREAS, Borrower executed the Loan Agreement to govern those two certain promissory notes from Lender, specifically a $8,000,000.00 Acquisition Note and a $1,000,000.00 Liquidity Note (collectively, the "Notes"). WHEREAS, Borrower executed the First Amendment to Loan Agreement on July 15, 1996 ("First Amendment") which renewed and extended the maturity date of the Notes: and WHEREAS, Borrower executed the Second Amendment to Loan Agreement on July 15, 1997 ("Second Amendment") which renewed and extended the maturity date of the Notes; and WHEREAS, the Borrower desires to again renew and extend the unpaid principal balance of the Notes: and WHEREAS, the Lender agrees to renew and extend the Notes all as hereinafter provided. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender do hereby agree as follows: ARTICLE I --------- AMENDMENT TO LOAN AGREEMENT --------------------------- 1.1 Amendment to Notes. As of the effective date hereof, the Borrower has ------------------- zero outstanding under the Acquisition Note and the Liquidity Note. The Borrower desires to renew these credit facilities by the execution of another Acquisition Note and Liquidity Note extending the original payment terms and the maturity date by one year. Accordingly, Sections 2.02 (s) and (b) of the Loan Agreement shall be, and are hereby, amended to read in their entirety as follows: (a) Acquisition Note. From Closing Date and continuing at all times ----------------- through July 15, 1999 ( the "Revolving Credit Period") the Loan evidenced by the Acquisition Note shall be a revolving credit facility which will allow the Borrower to request such amounts as Borrower may elect from time to time (each such amount being herein called an "Advance") so long as the aggregate amount of Advances outstanding at any time under the Acquisition Note does not exceed Eight Million and No/100 Dollars ($8,000,000.00) provided however, the minimum Advance must be at least $500,000.00. The Borrower shall have the right to borrow, repay, and borrow again under the credit facility. The outstanding principal balance of the Acquisition Note on July 15, 1999 shall convert to a term facility (the "Term Period") and shall be payable in 20 equal quarterly installments of principal plus all accrued and unpaid interest, with all unpaid principal plus all accrued and unpaid interest being due and payable on July 15, 2004. Principal and interest of the Acquisition Note shall be due and payable as provided in the Acquisition Note. (b) Liquidity Note. The Liquidity Note shall be due and payable as --------------- follows: during the Revolving Credit Period the Loan evidenced by the Liquidity Note shall be a revolving credit facility which will allow the Borrower to request such amounts as Borrower may elect from time to time (each such amount being herein call an "Advance") so long as the aggregate amount of Advances outstanding at any time under the Liquidity Note does not exceed One Million and No/100 Dollars ($1,000,000.00) provided however, the minimum Advance must be at least $50,000.00. The Borrower shall have the right to borrow, repay and borrow again under the credit facility. The outstanding principal balance of the Liquidity Note on July 15, 1999 shall convert to a term facility (the "Term Period") and shall be payable in 20 equal quarterly installments of principal plus all accrued and unpaid interest, with all unpaid principal plus all accrued and unpaid interest being due and payable on July 15, 2004. Principal and interest of the Liquidity Note shall be due and payable as provided in the Liquidity Note. ARTICLE II ---------- CONDITIONS OF EFFECTIVENESS --------------------------- 2.1 Effective Date. This Third Amendment shall become effective as of --------------- July 15, 1998, when, and only when, Lender shall have received counterparts of this Third Amendment executed and delivered by Borrower and when each of the following conditions shall have been met, all in form, substance, and date satisfactory to Lender. (a) Renewal Notes. Borrower shall have executed and delivered to -------------- Lender a new Acquisition Note and Liquidity Note, payable to the order of Lender as set forth therein, duly executed on behalf of the Borrower, dated effective July 15, 1997 in the principal amounts of $8,000,000.00 and $1,000,000.00, respectively. (b) Additional Loan Documents. Borrower shall have executed and -------------------------- delivered to Lender such other documents as shall have been requested by Lender to renew, and extend, the Loan Documents to secure payment of the Obligations of Borrower, all in form satisfactory to Lender and its counsel. ARTICLE III ----------- REPRESENTATIONS AND WARRANTIES ------------------------------ 3.1 Representations and Warranties. In order to induce Lender to enter ------------------------------- into this Third Amendment, Borrower represents and warrants the following: (a) Borrower has the corporate power to execute and deliver this Third Amendment, the Notes, and other Loan Documents and to perform all of its obligations in connection herewith and therewith. (b) The execution and delivery by Borrower of this Third Amendment, the Notes, and other Loan Documents and the performance of its obligations in connection herewith and therewith: (I) have been duly authorized or will be duly ratified and affirmed by all requisite corporate action; (ii) will not violate any provision of law, any order of any court or agency of government of the Articles of Incorporation or Bylaws of such entity; (iii) will not be in conflict with, result in a breach of or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument; and (iv) will not require any registration with, consent or approval of or other action by any federal, state provincia l or other governmental authority or regulatory body. (c) There is no action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency or regulatory authority now pending or, to the knowledge of Borrower, threatened against or affecting Borrower or any properties or rights of Borrower or involving this Third Amendment or the transactions contemplated hereby which, if adversely determined, would materially impair the right of Borrower, to carry business substantially as now conducted or materially and adversely affect the financial condition of Borrower or materially and adversely affect the ability of Borrower to consummate the transactions contemplated by this Third Amendment. (d) The representations and warranties of Borrower this Third Amendment, the Notes, and any other contained in the Loan Agreement, Loan Document securing Borrower's Obligations and indebtedness to Lender are correct and accurate on and as of the date hereof as though made on and as of the date hereof , except to the extent that the facts upon which such representations are based have been changed by the transactions herein contemplated. ARTICLE IV ---------- RATIFICATION OF OBLIGATIONS AND LIENS ------------------------------------- 4.1 Ratification of Obligation. The Borrower does here acknowledge, --------------------------- ratify and confirm that it is obligated and indebted to Lender as evidenced by the Loan Agreement (as amended by the First Amendment, the Second Amendment and this Third Amendment), the Notes and all other Loan Documents. 4.2 Valid Liens. Borrower hereby acknowledges and agrees that the liens ------------ and security interests and are superior to all liens and security interests other than those exceptions approved by Lender in writing. Nothing herein contained shall affect or impair the validity or priority of the liens and security interests and are superior to all liens and security interests other than those exceptions approved by Lender in writing. Nothing herein contained shall affect or impair the validity or priority of the liens and security interests under the Loan Documents. 4.3 Ratification of Agreements. The Loan Agreement (as previously amended --------------------------- by the First Amendment and the Second Amendment), this Third Amendment, the Notes, and each other Loan Document, as hereby amended, is acknowledged, ratified and confirmed in all respects as being valid, existing, and of full force and effect. Any reference to the Loan Agreement in any Loan Document shall be deemed to be a reference to the Loan Agreement (as previously amended) and as amended by this Third Amendment. The execution, delivery and effectiveness of this Third Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under the Loan Agreement, nor constitute a waiver of any provision of the Loan Agreement. The Borrower acknowledges, ratifies and confirms that the collateral securing the Loan secures all of the indebtedness of the Borrower, including without limitation, the Notes. ARTICLE V --------- MISCELLANEOUS ------------- 5.1 Survival of Agreements. All representations, warranties, covenants ----------------------- and agreements of Borrower, herein or in any other Loan Document shall survive the execution and delivery of this Third Amendment, and the other Loan Documents and the performance hereof and thereof, including without limitation the making or granting of the Loan and the delivery of the Notes and all other Loan Documents, and shall further survive until all of Borrower's Obligations to Lender are paid in full. All statements and agreements contained in any certificate or instrument delivered by Borrower hereunder or under the Loan Documents to Lender shall be deemed to constitute the respective representations and warranties by Borrower and/or respective agreements and covenants of Borrower under this Third Amendment and under the Loan Agreement. 5.2 Loan Document. This Third Amendment, the Notes, and each other Loan -------------- Documents executed in connections herewith are each a Loan Document and all provisions in the Loan Agreement, as amended, pertaining to Loan Documents apply hereto and thereto. 5.3 Governing Law. This Third Amendment shall be governed by and construed -------------- in all respects in accordance with the laws of the State of Texas and any applicable laws of the United States of America, including construction, validity and performance. 5.4 Counterparts. This Third Amendment may be separately executed in any ------------- number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Third Amendment. 5.5 Release of Claims. Borrower by its execution of this Third Amendment, ------------------ hereby declares that it has no set-offs, counterclaims, defenses or other causes of action against Lender arising out of the Loan, the renewal, modification and extension of the Loan, any documents mentioned herein or otherwise; and, to the extent any such setoffs, counterclaims, defenses or other causes of action which may exist, whether known or unknown, such items are hereby expressly waived and released by Borrower. 5.6 Attorneys' Fees. Borrower hereby agrees to pay Lender, upon demand, ---------------- the reasonable attorneys' fees and expenses of Lender's counsel, filing and recording fees and other reasonable expenses incurred by Lender in connection with this Third Amendment. Borrower also agrees to provide to Lender such other documents and instruments as Lender may reasonably request in connection with the renewal, extension and modification of the Loans mentioned herein. 5.7 ENTIRE AGREEMENT. THIS THIRD AMENDMENT, TOGETHER WITH ANY LOAN ----------------- DOCUMENTS EXECUTED IN CONNECTION HEREWITH , CONTAINS THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND ALL PRIOR AGREEMENTS RELATIVE THERETO WHICH ARE NOT CONTAINED HEREIN OR THEREIN ARE TERMINATED. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS THIRD AMENDMENT, AND THE LOAN DOCUMENTS MAY BE AMENDED, REVISED, WAIVED, DISCHARGED, RELEASED OR TERMINATED ONLY BY A WRITTEN INSTRUMENT OR INSTRUCTIONS, EXECUTED BY THE PARTY AGAINST WHICH ENFORCEMENT OF THE AMENDMENT, REVISION, WAIVER, DISCHARGE, RELEASE OR TERMINATION IS ASSERTED. ANY ALLEGED AMENDMENT, REVISION, WAIVER, DISCHARGE, RELEASE OR TERMINATION WHICH IS NOT SO DOCUMENTED SHALL NOT BE EFFECTIVE AS TO ANY PARTY. IN WITNESS WHEREOF, this Third Amendment is executed effective as of the date first written above. BORROWER: SUMMIT BANCSHARES, INC. By: /s/ Philip E. Norwood ---------------------------------- Its: Chairman -------------------------------- By: /s/ Bob G. Scott --------------------------------- Its: Executive Vice President --------------------------------- LENDER: THE FROST NATIONAL BANK By: /s/ Jerry L. Crutsinger -------------------------------- Its: Vice President -------------------------------- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE CORPORATION Subsidiaries State of Incorporation - ------------ ---------------------- Summit National Bank, Fort Worth, Texas National Association Summit Community Bank, N.A., Fort Worth, Texas National Association Summit Bancservices, Inc., Fort Worth, Texas Texas EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS TO INCORPORATION BY REFERENCE The Board of Directors SUMMIT BANCSHARES, INC. We consent to incorporation by reference in the registration statement on Form S-8 of SUMMIT BANCSHARES, INC. (File #33-68974) of our report dated January 22, 1999, relating to the consolidated balance sheets of SUMMIT BANCSHARES, INC. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of SUMMIT BANCSHARES, INC. /s/ Stovall, Grandey & Whatley STOVALL, GRANDEY & WHATLEY Fort Worth, Texas March 17, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF SUMMIT BANCSHARES, INC., AS OF DECEMBER 31, 1998, AND THE RELATED STATEMENTS OF INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE PERIOD ENDING DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1998 26,735 0 38,706 0 121,417 26,595 26,959 305,833 4,724 532,764 465,500 17,839 3,190 0 8,090 0 0 38,145 532,764 28,000 7,013 2,052 37,065 12,786 13,478 23,587 785 35 14,173 12,479 8,146 0 0 8,146 1.25 1.20 5.28 5,049 3 6 10,468 4,065 343 217 4,724 4,355 0 369
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