-----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, C7O5WBdztPzwTJjkwoJ/1AriIFj6O2flc7NyVwaMpVfwmASSwQ3gZ/T3bVnj8JRR 7innYCxalDTBpG3BE4c+Bg== 0000930661-00-000694.txt : 20000328 0000930661-00-000694.hdr.sgml : 20000328 ACCESSION NUMBER: 0000930661-00-000694 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 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: 579580 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, 1999 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 13, 2000 was approximately $81,096,000. The number of shares of common stock, $1.25 par value, outstanding at March 13, 2000 was 6,430,485 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement dated March 15, 2000 filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 for the 1999 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, 1999 the Corporation had consolidated total assets of $564,786,000, consolidated total loans of $355,414,000, consolidated total deposits of $480,546,000 and consolidated total shareholders' equity of $48,709,000. 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 on page 14. 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 principal 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 29, 2000 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 29, 2000 - -------------------------------------------------------------------------------------------------------------- (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 $228,024 $134,075 $181,238 $20,547 1300 Summit Avenue Fort Worth, TX 76102 Summit Community Bank, N.A. 1984 1984 $325,289 $233,310 $292,678 $24,439 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, 1999 the Corporation and the Subsidiary Banks - --------- collectively had a total of 172 full-time employees and 15 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 a 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 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 -3- 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 acquisition of a company engaged in bank-related activities or participation 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 commencement activities itself and its acquisition of a going concern already engaged in those activities. The Gramm-Leachy-Bliley Act (the "GLB" Act"), which the President signed into law on November 12, 1999, amended the BHC Act to permit the creation of a "financial holding company," a new type of bank holding company with powers exceeding those of a traditional bank holding company. A financial holding company may engage in, and hold shares of any company engaged in, any activity that the FRB determines by regulation or order to be financial in nature, or incidental to such financial activity or complimentary to a financial activity, and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Among the activities which will be considered to be financial in nature are lending, investing or safeguarding money or securities, underwriting insurance or annuities or acting as an insurance principal, agent or broker, providing financial or investment advice, issuing or selling interests in pools of assets a bank could hold, underwriting, dealing in or making a market in securities, engaging in any activity which, prior to enactment of the GLB Act, the FRB determined to be closely related to banking, and, subject to certain limitations, merchant banking activities. The amendments to the BHC Act made by the GLB Act, which become effective on March 11, 2000, will allow qualifying bank holding companies to provide a wide variety of financial services that have been reserved for insurance companies and securities firms. To become a financial holding company, a bank holding company must file with its Federal Reserve Bank a declaration that it elects to become a financial holding company along with a certification that all depository institutions controlled by the company are well-capitalized and well managed. Such a declaration will become effective 30 days after filing unless the FRB notifies the bank holding company prior to that time that its declaration is ineffective. Once the declaration becomes effective, the bank holding company can commence activities permitted to a financial holding company. The FRB serves as the primary "umbrella" regulator of a financial holding company. The primary regulatory of a financial holding company subsidiary will depend upon the activities in which the subsidiary is engaged. The Corporation cannot at this time fully evaluate the effect on the Corporation and the Subsidiary Banks of the changes made by the GLB Act, including possible new opportunities for expansion of the Corporation's activities and changes in competition for the Corporation and the Subsidiary Banks. 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 organization's 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. -4- 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 subsidiaries 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 restitution, reimbursement and 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 or 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 to 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. 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 and cumulative 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, 1999, the Corporation's ratios of "Tier 1" and qualifying total capital to risk-weighted assets were 13.34% and 14.59%, respectively. At such date, both ratios exceeded regulatory minimums. -5- The FRB 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 consolidated assets. The FRB guidelines require a minimum ratio of 3.0% "Tier 1" capital to 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%. 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, 1999, was 8.77% 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 and 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. The Corporation has control of the Subsidiary Banks for purposes of this statute. See below The Subsidiary Banks - Capital Adequacy Requirements below. 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 a consent to 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 a bank holding company, 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. If the FRB approves an acquisition which the Texas Banking Commissioner disapproves, the Commissioner may accept the FRB decision or attempt to have the decision overturned by a federal court. 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 -6- 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 of any class of voting stock of a bank holding company constitutes acquisition of control if either the company has securities registered under Section 12 of the Exchange Act, as does the Corporation, or 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 FRB that 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 company or otherwise exercising control or a "controlling influence" over the company. 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 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 Subsidiary Banks are 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 that affect the national supply of bank credit. Such policies influence the 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, dealing 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. In addition to expanding permitted activities for qualifying bank holding companies, the GLB Act also permits the creation of a "financial subsidiary" which can be used by a national bank to engage in many of the activities permitted for a financial holding company. The Corporation cannot at this time fully evaluate the effect on the Subsidiary Banks of this change made by the GLB Act. 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 were, however, -7- 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 was to have expired in September of 1999, did not prove to be 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 also determined that the "opt-out" legislation was 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 did 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. In 1995, Texas elected not to permit de novo branching, but the Texas legislation prohibiting de novo branching proved ineffective. In 1999, the Texas law was amended to permit entry into Texas by an out-of-state bank's establishing a de novo branch in Texas if the laws of the home state of the out-of-state bank permit a Texas bank to establish a de novo branch there. Out-of-state banks are also permitted to enter Texas by merger with an in-state bank if the resulting bank in such a merger would not control 20% or more of total in-state deposits and the in-state bank has been in existence and operation for at least five years. An out-of-state bank that has established or acquired a branch in Texas may establish or acquire additional in-state branches to the same extent that a Texas bank may acquire or establish branches in Texas. 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 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 suggest that the Subsidiary Bank is responsible for the obligations of its affiliates. The regulations and restrictions 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. In the aggregate, these loans may not exceed the bank's total unimpaired capital and surplus. In some circumstances 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 Finance Code, 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 -8- 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 are 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 the Subsidiary Banks maintain adequate levels of capital in accordance with 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 similar 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 4.0% 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) 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). 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 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, 1999, 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 limiting 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 prior FRB prior approval of any capital distributions by any bank holding company which controls the institution, requiring divestiture by the -9- 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. A critically undercapitalized 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 a fee 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 those banks with lower levels of capital and a higher degree of supervisory concern. Each of the Subsidiary Banks is 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 fourth quarter of 1999 were set by FDIC at .01184% annually for BIF members and .05920% annually for SAIF members. These rates may be adjusted quarterly to reflect changes in the assessment bases for the BIF and the SAIF. The Funds Act required that the FICO assessment rate on BIF members must be one-fifth the rate of assessment on SAIF members until the two insurance funds were merged or until January 1, 2000, whichever occurs first, and thereafter BIF members and SAIF members are to be assessed prorata for FICO. The two funds have not been merged so FICO assessments for BIF members and SAIF members did not become prorate until January 1, 2000. For the first quarter of 2000, FICO rates have been set at .02120% for both BIF and SAIF members and, for the second quarter of 2000, at .0208% for both BIF and SAIF members. 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) financial reporting and complying with designated safety and soundness laws and regulations; and (3) assessing the effectiveness of the institution's internal controls. 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. 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 -10- 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 judicial enforcement of their orders, 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. Also, there will be regulatory changes to deal with the expanded permissible activities permitted for financial holding companies and financial subsidiaries of national banks. The Corporation cannot predict at this time the effect of regulatory changes resulting from the enactment of the GLB Act. 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 December 31, 2004 and December 31, 2009, respectively. Summit National Bank owns a detached motor bank facility. 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 located in a building that is a joint venture between the Summit Community Bank, N.A. and an unrelated third party. The Fossil Creek office occupies approximately 28% of the building under a long-term lease with the joint venture. Summit Community Bank, N.A. owns approximately 1.5 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 2000 using a temporary facility. 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 Inc. This site is located at 500 Eighth Avenue, Fort Worth, Texas. -11- 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 1999. 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 18, 2000, their respective ages, and their present positions with the Corporation are as follows:
Position With Position Held Name Age the Corporation Since - ------------- --- ----------------- ------------- Philip E. Norwood 50 Chairman 1998 Jeffrey M. Harp 51 President 1998 Bob G. Scott 62 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: 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. Mr. Norwood served as a director and senior officer of Alta Mesa National Bank (currently a banking office of Summit Community Bank, N.A.) from April 1981 to December 1995. 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. He has served as a director and senior officer 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, Texas. 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:
High Low ------- ------- 1999 Fiscal Year: - ---------------- First Quarter $18.13 $17.38 Second Quarter 20.00 16.88 Third Quarter 19.38 17.00 Fourth Quarter 20.00 17.75 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
On March 13, 2000 the closing price reported for the Common Stock was $15.25. 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. Shareholders. At the close of business on March 13, 2000 there were 620 - ------------ 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 1998, the quarterly dividends paid by the Corporation on its Common Stock for the indicated periods.
1999 Dividends Per Share -------------- ------------------- First Quarter $0.080 Second Quarter 0.080 Third Quarter 0.080 Fourth Quarter 0.080 1998 -------------- First Quarter $0.060 Second Quarter 0.060 Third Quarter 0.060 Fourth Quarter 0.060
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 stock splits in 1997 and 1995:
Years Ended December 31, ------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------ ------------ ----------- ------------ ------------ Summary of Earnings: Interest Income $ 40,232 $ 37,065 $ 31,972 $ 27,577 $ 22,929 Interest Expense 13,772 13,478 11,301 9,771 8,277 ------------ ------------ ----------- ------------ ------------ Net Interest Income 26,460 23,587 20,671 17,806 14,652 Provision for Loan Losses 1,001 785 900 819 236 Securities Gains (Losses) (3) 35 (1) (14) (10) Non-interest Income 3,883 3,815 3,266 2,990 2,764 Non-interest Expense 15,224 14,173 12,318 10,917 9,973 ------------ ------------ ----------- ------------ ------------ Earnings Before Income Taxes 14,115 12,479 10,718 9,046 7,197 Income Tax Expense 4,893 4,333 3,678 3,103 2,468 ------------ ------------ ----------- ------------ ------------ Net Income $ 9,222 $ 8,146 $ 7,040 $ 5,943 $ 4,729 ============ ============ =========== ============ ============ Balance Sheet Data (at period-end): Total Assets $ 564,786 $ 532,764 $ 459,794 $ 395,248 $ 355,417 Investment Securities 156,440 148,012 105,627 117,013 119,368 Loans, Net of Unearned Discount 355,414 305,833 276,069 220,006 178,493 Allowance for Loan Losses 5,169 4,724 4,065 2,972 2,500 Demand Deposits 128,685 141,170 126,398 103,695 89,184 Total Deposits 480,546 465,500 401,724 345,023 310,109 Short Term Borrowings 32,091 17,839 14,689 13,209 13,528 Shareholders' Equity 48,709 46,235 41,112 35,080 30,125 Per Share Data: Net Income - Basic $ 1.44 $ 1.25 $ 1.09 $ .93 $ .76 Net Income - Diluted 1.39 1.20 1.04 .90 .72 Book Value - Period-End 7.66 7.14 6.32 5.43 4.78 Dividends Declared .32 .24 .18 .14 .11 Weighted Average Shares Outstanding (000) 6,411 6,497 6,479 6,399 6,278 Average Common Share Equivalents (000) 245 317 321 314 322 Selected Performance Ratios: Return on Average Assets 1.72% 1.70% 1.70% 1.60% 1.52% Return on Average Shareholders' Equity 19.66 18.62 18.49 18.50 17.14 Net Interest Margin (tax equivalent) 5.31 5.28 5.47 5.24 5.15 Efficiency Ratio 50.14 51.60 51.42 52.50 57.20 Asset Quality Ratios: Non-Performing Loans to Total Loans - Period-End .69% 1.65% .77% .50% .55% Non-Performing Assets to Total Assets - Period End .78 1.00 .49 .32 .31 Allowance for Loan Losses to Total Loans - Period-End 1.45 1.54 1.47 1.35 1.40 Allowance for Loan Losses to Non-Performing Loans - Period-End 211.0 94.0 193.0 270.0 252.0 Net Charge-Offs (Recoveries) to Average Loans .16 .04 (.08) .17 .09 Capital Ratios: Shareholders' Equity to Total Assets - Period-End 8.62% 8.68% 8.94% 8.88% 8.48% Average Shareholders' Equity to Average Assets 8.71 9.11 9.21 8.66 8.85 Total Risk-based Capital to Risk Weighted Assets - Period-End* 14.59 15.06 15.06 15.85 15.91 Leverage Ratio - Period-End* 8.77 8.52 8.83 8.82 8.42
*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 1999 and 1998 follows (in thousands except for per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- -------- -------- 1999: - ---- Interest Income $ 9,394 $ 9,721 $10,222 $10,895 Interest Expense 3,254 3,157 3,452 3,909 Net Interest Income 6,140 6,564 6,770 6,986 Provision for Loan Losses 220 418 140 223 Non-interest Income 1,031 902 894 1,053 Non-interest Expense 3,738 3,678 3,882 3,926 Income Tax Expense 1,117 1,159 1,259 1,358 Net Income 2,096 2,211 2,383 2,532 Per Share Data: Net Income: Basic $ .33 $ .34 $ .37 $ .40 Diluted .31 .33 .36 .39 Dividends Paid .08 .08 .08 .08 Stock Price Range: High 18.13 20.00 19.38 20.00 Low 17.38 16.88 17.00 17.75 Close 17.50 17.38 18.13 18.50 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
-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 1999 was $9.2 million, an increase of $1.1 million, or 13.2%, over the $8.1 million recorded for 1998. On a weighted average share basis, net income for 1999 was $1.39 per diluted share as compared to $1.20 per share for 1998, an increase of 15.8%. The major contribution to the improved earnings during 1999 was a 12.1% increase in net interest income. The increase in net interest income reflected an increase in average loans of 13.7% and an increase in average earning assets of 11.7%. Partially offsetting the increase in net interest income was an increase in non-interest expenses of only 7.4%. Further explanations of these changes are set forth below. Continuing to reflect the strong economy in the Corporation's market area, loans increased 16.2% over the previous year-end to $355 million at December 31, 1999. Total funding (deposits and short term borrowings) experienced somewhat less dramatic growth, increasing 6.1% over the same period to $513 million. Shareholders' equity was $49 million at year-end, an increase of 5.4%. Net income for 1998 was $8.1 million compared to net income of $7.0 million for 1997, an increase of 15.7%. The increase in earnings for 1998 was also attributable to a significant increase net interest income. The following table shows selected key performance ratios over the last three (3) years: 1999 1998 1997 ---- ---- ---- Return on Average Assets 1.72% 1.70% 1.70% Return on Average Shareholders' Equity 19.66 18.62 18.49 Shareholders' Equity to Assets - Average 8.71 9.11 9.21 Dividend Payout Ratio 22.25 19.15 16.56 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 total dividends paid by the total net income. 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 1999 was $26.5 million, an increase of $2.9 million, or 12.1% compared to the prior year. The net increase reflected a $3.2 million increase in interest income which was offset by a $.3 million increase in interest expense. The Corporation's yield on earning assets declined to 8.06% in 1999 from 8.30% for 1998. Rates paid on the Corporation's interest-bearing liabilities, decreased from 4.24% in 1998 to 3.86% in 1999. These shifts in yield on earning assets and cost of interest-bearing liabilities resulted in the net interest margin increasing from 5.28% in 1998 to 5.31% for 1999. Contributing to the improved net interest income for 1999 was the increase in noninterest-bearing demand deposits. In 1999, the average balance of demand deposits increased 12.5%. The average demand deposits as a percent of average total deposits increased to 28.2% in 1999 from 27.8% in 1998; 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, --------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------------- ------------------------------- ------------------------------ 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 $ 21,277 $ 1,081 5.08% $ 38,112 $ 2,053 5.39% $ 18,059 $ 1,008 5.58% Investment Securities (Taxable) 145,109 8,496 5.85 115,663 6,963 6.02 111,578 6,874 6.16 Investment Securities (Tax-exempt) 745 52 7.03 1,103 76 6.90 539 36 6.59 Loans, Net of Unearned Discount/(1)/ 331,963 30,620 9.22 292,060 28,002 9.59 248,303 24,069 9.69 --------- --------- ---- --------- -------- ---- --------- -------- ---- Total Earning Assets 499,094 40,249 8.06 446,938 37,094 8.30 378,479 31,987 8.45 --------- -------- -------- Other Assets: Cash and Due From Banks 23,981 22,226 24,909 Other Assets 20,110 16,261 13,568 Allowance for Loan Losses (4,886) (4,430) (3,470) --------- --------- --------- Total Assets $ 538,299 $ 480,995 $ 413,486 ========= ========= ========= Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts $ 156,054 5,041 3.23 $ 144,133 5,186 3.60 $ 128,880 4,599 3.57 Savings 85,571 3,440 4.02 68,011 2,972 4.37 50,756 2,134 4.21 Savings Certificates 55,169 2,543 4.61 52,261 2,631 5.03 49,203 2,434 4.95 Certificates of Deposit $100,000 or more 36,463 1,772 4.86 36,752 1,948 5.30 30,242 1,572 5.20 Other Time 778 39 5.06 877 49 5.59 622 34 5.38 Other Borrowings 22,404 934 4.17 15,742 692 4.40 11,668 528 4.53 --------- --------- ---- --------- -------- ---- --------- -------- ---- Total Interest-Bearing Liabilities 356,439 13,769 3.86 317,776 13,478 4.24 271,371 11,301 4.16 --------- -------- -------- Other Liabilities: Demand Deposits 131,002 116,428 101,813 Other Liabilities 3,953 3,030 2,212 Shareholders' Equity 46,905 43,761 38,090 --------- --------- --------- Total Liabilities and Shareholders' Equity $ 538,299 $ 480,995 $ 413,486 ========= ========= ========= Net Interest Income and Margin (T/E Basis)/(2)/ $ 26,480 5.31 $ 23,616 5.28 $ 20,686 5.47 ========= ======== ========
(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 5.31% for 1999, a three basis point increase from the previous year. This increase in the margin reflected a lower cost of funds of 38 basis points in 1999 offset by a lower yield on earning assets of 24 basis points, resulting in the net interest spread increasing from 4.06% to 4.20%. The somewhat rapid decline in market interest rates in late 1998 carried over into the first half of 1999 after which interest rates began to increase, recovering the decline in rates experienced in late 1998. In the fourth quarter of 1999 the net interest margin was 5.24%. -18- The table below analyzes the increase in net interest income for each of the years ended December 31, 1999 and 1998 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.
1999 vs. 1998 1998 vs. 1997 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 $ (861) $ (111) $ (972) $ 1,080 $ (35) $ 1,045 Investment Securities (Taxable) 1,729 (196) 1,533 248 (159) 89 Investment Securities (Tax-exempt) (25) 1 (24) 38 2 40 Loans, Net of Unearned Discount 3,712 (1,094) 2,618 4,185 (252) 3,933 ------ ------- ------ ------ ------ ------ Total Interest Income 4,555 (1,400) 3,155 5,551 (444) 5,107 ------ ------- ------ ------ ----- ------ Interest-Bearing Liabilities: Transaction Accounts & Savings 1,073 (750) 323 1,246 179 1,425 Certificates of Deposit and Other Time 127 (401) (274) 504 84 588 Other Borrowings 279 (37) 242 170 (6) 164 ----- ------- ------ ------ ----- ------ Total Interest Expense 1,479 (1,188) 291 1,920 257 2,177 ----- ------- ------ ------ ----- ------ Changes in Net Interest Income $3,076 $ (212) $2,864 $3,631 $(701) $2,930 ====== ======= ====== ====== ===== ======
Net interest income for 1999 increased $2,864,000, or 12.1% over the prior year. In this same period total interest income increased 8.5% and total interest expense increased 2.2%. 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):
1999 1998 1997 ------------------- ------------------ -------- Amount % Change Amount % Change Amount -------- --------- ------- --------- -------- Service Charges on Deposit Accounts $2,002 (.8)% $2,018 6.8% $1,890 Non-recurring Income 475 15.3 412 -- 151 Gain (Loss) on Sale of Investment Securities (3) -- 35 -- (1) Other Non-interest Income 1,406 1.5 1,385 13.1 1,225 ------ ------ ------ Total Non-interest Income $3,880 .8 $3,850 17.9 $3,265 ====== ====== ======
Service charges on deposits decreased in 1999 as a result of customers maintaining higher balances in accounts thereby avoiding service charges. The non-recurring income in 1999 included $155,000 from refunds of state franchise taxes paid in prior years, $105,000 gain on sale of land, $100,000 forfeited deposit related to sale of foreclosed property and $114,000 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 1998 also included refunds of state franchise tax of $137,000 and gains on sales of miscellaneous assets of $178,000. The increase in other non-interest income in 1999 is primarily due to an increase in income from debit card fees, mortgage brokerage/origination fees and fees earned on investment services to customers. Excluding non-recurring income and gains and losses on securities, non-interest income increased .1% in 1999 and 9.3% in 1998. 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):
1999 1998 1997 ------------------------ -------------------------- ------ Amount % Change Amount % Change Amount ------ -------- ------ -------- ------ Salaries and Employee Benefits $ 9,226 7.6% $ 8,576 14.0% $ 7,524 Occupancy Expense - Net 1,031 11.1 928 19.9 774 Furniture and Equipment Expense 1,202 4.5 1,150 25.1 919 Other Real Estate Owned Expense 107 -- (1) -- (63) Other Expenses: Business Development 602 (1.5) 611 3.9 588 Insurance - Other 121 18.6 102 5.2 97 Legal and Professional Fees 619 21.1 511 3.0 496 Other Taxes 169 (39.0) 277 52.2 182 Postage and Courier 316 10.5 286 .7 284 Printing and Supplies 379 (2.1) 387 3.8 373 Regulatory Fees and Assessments 183 8.3 169 5.6 160 Other Operating Expenses 1,269 7.8 1,177 19.6 984 ------- ------- ------- Total Other Expenses 3,658 3.9 3,520 11.3 3,164 ------- ------- ------- Total Non-interest Expense $15,224 7.4 $14,173 15.1 $12,318 ======= ======= =======
Total non-interest expense increased 7.4% in 1999 over 1998 reflecting increases in salaries and benefits, occupancy expenses, furniture and equipment expenses, other real estate owned expense, legal and professional fees and other operating expenses. As a percent of average assets, non-interest expenses were 2.83%, 2.95%, and 2.98%, in 1999, 1998 and 1997, respectively. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 50.14% for 1999. 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 1999 is due to routine salary merit increases, increased incentive bonus payments (reflecting the Corporation's improved financial performance) and additions to staff. The average number of full-time equivalent employees increased by 8 in 1999 to an average full-time equivalent of 174. At year end 1999 the full-time equivalent staff was 179 versus 169 at the same time the prior year. The increase in the number of employees is primarily due to the overall growth of the Corporation. The increase in occupancy expense includes rent for expanded space at two facilities. Also, increases of approximately 24%, in the aggregate, were experienced in repairs expense and ad valorem tax expense on current facilities. The increase in expenses for the other real estate owned reflects the higher balance of other real estate owned during the year, which averaged $1.7 million for the year. The increase in furniture and equipment expense is primarily a result of depreciation and service contract expense for expanded data processing equipment and software. Legal and professional fees increased in 1999 and reflects increases in attorney fees related to certain problem loans and due to fees paid to consultants for assistance in reviewing Y2K issues and in development of new products, such as cash management. Other taxes, primarily franchise taxes paid to the State of Texas, were lower due to somewhat more aggressive tax planning in 1999. Other operating expenses increased in 1999 due to an increase in various miscellaneous operating costs including telephone service fees, ATM support expenses and credit collection fees. 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 $4.9 million for federal income taxes for 1999, 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, 1999, 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, 1999 ------------------------------------------------------------------------- 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 $ 4,995 5.99% $ 4,000 6.17% $ -0- -- $ -0- -- $ 8,995 U.S. Treasury Securities - AFS 9,973 5.90 9,037 6.25 -0- -- -0- -- 19,010 ------- -------- ------- ------- -------- Total 14,968 5.93 13,037 6.22 -0- -0- 28,005 ------- -------- ------- ------- -------- U.S. Government Agencies - HTM -0- -- 15,013 6.96 3,030 7.28% -0- -- 18,043 U.S. Government Agencies - AFS 15,928 5.52 74,126 6.27 7,053 5.87 -0- -- 97,107 ------- -------- ------- ------- -------- Total 15,928 5.52 89,139 6.39 10,083 6.29 -0- 115,150 ------- -------- ------- ------- -------- U.S. Government Agency Mortgage Backed Securities - AFS -0- -- -0- -- 4,361 5.71 8,870 6.41 13,231 ------- -------- ------- ------- -------- Obligations of States and Political Subdivisions - HTM 286 5.08 -0- -- -0- -- -0- -- 286 Obligations of States and Political Subdivisions - AFS 110 7.42 240 7.65 -0- -- -0- -- 350 ------- -------- ------- ------- -------- Total 396 5.73 240 7.65 -0- -0- -- 636 ------- -------- ------- ------- -------- Other Securities - AFS -0- -- -0- -- -0- -- 1,215 5.60 1,215 ------- -------- ------- ------- -------- Total $31,292 5.72 $102,416 6.37 $14,444 6.12 $10,085 6.31 $158,237 ======= ======== ======= ======= ======== Held-to-Maturity ("HTM") $ 5,281 5.94% $ 19,013 6.80% $ 3,030 7.28% $ -0- -- $ 27,324 Available-for-Sale ("AFS") 26,011 5.67 83,403 6.27 11,414 5.81 10,085 6.31% 130,913
The yield on the investment securities portfolio of the Corporation at December 31, 1999 was 5.96% and the weighted average life of the portfolio on that date was approximately 2.8 years. At December 31, 1998 the yield of the portfolio was 5.94% and the weighted average life was 1.6 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, 1999 and 1998. As of December 31, 1999, there was a net unrealized loss of $2,382,000 in the portfolio of which $1,797,000 related to Available-for-Sale securities, or 1.4% 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, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- U.S. Treasury Securities $ 27,974 $ 41,672 $ 70,794 $ 77,678 $ 78,981 U.S. Government Agencies and Corporations 113,535 87,791 20,249 25,276 26,922 U.S. Government Agency Mortgage Backed Securities 13,079 16,440 12,527 13,805 13,141 Obligations of States and Political Subdivisions 637 1,037 1,142 -0- 70 Federal Reserve Bank and Federal Home Loan Bank Stock 1,215 1,072 915 254 254 -------- -------- -------- -------- -------- Total $156,440 $148,012 $105,627 $117,013 $119,368 ======== ======== ======== ======== ========
21 In 1999, approximately $71 million of investment securities were sold, resulting in a net loss on sale of securities of $3,000. 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 1999 Total 1998 Total 1997 Total 1996 Total 1995 Total --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ Commercial $156,847 44.2% $133,066 43.5% $127,800 46.3% $103,414 47.0% $ 81,542 45.7% Real Estate Mortgage 120,596 33.9 100,421 32.9 90,638 32.8 76,771 34.9 64.200 36.0 Real Estate Construction 43,875 12.3 40,456 13.2 26,290 9.5 12,862 5.8 10.189 5.7 Loans to Individuals, Net of Unearned Discount 34,096 9.6 31,890 10.4 31,341 11.4 26,959 12.3 22.562 12.6 -------- -------- -------- -------- ----- -------- ----- Total Loans, Net of Unearned Income $355,414 100.0% $305,833 100.0% $276,069 100.0% $220,006 100.0% $178.493 100.0% ======== ======== ======== ======== ========
The preceding loan distribution table reflects that total loans increased $49.6 million (16.2%) between year-end 1998 and 1999. Although this dollar increase was significant, the Corporation is continuing to apply stringent credit criteria on all loan applications. At December 31, 1999, loans were 74.0% of deposits compared to 65.7% at the previous year-end reflecting a somewhat slower growth in deposits compared to loans. Average loans were 71.4% of average deposits in 1999 compared to 69.8% in 1998. 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 $121 million real estate mortgage portfolio is loans to finance owner-occupied real estate. At December 31, 1999, $69 million of loans, approximately 57% of the real estate mortgage portfolio, had been made for this purpose. Also, approximately 33% 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, 1999, 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 $127,890 $27,783 $1,174 $156,847 Real Estate Construction 38,704 3,048 2,123 43,875 -------- ------- ------ -------- Totals $166,594 $30,831 $3,297 $200,722 ======== ======= ====== ========
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. -22- 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, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Average Loans Outstanding $331,963 $292,060 $248,303 $201,506 $156,374 ======== ======== ======== ======== ======== Analysis of Allowance for Loan Losses: Balance, Beginning of Year $ 4,724 $ 4,065 $ 2,972 $ 2,500 $ 2,410 Charge-Offs: Commercial 376 128 148 424 321 Real Estate Mortgage 3 39 -0- 2 -0- Real Estate Construction 230 6 -0- -0- -0- Loans to Individuals 118 170 98 36 26 -------- -------- -------- -------- -------- Total Charge-Offs 727 343 246 462 347 -------- -------- -------- -------- -------- Recoveries: Commercial 93 87 379 58 74 Real Estate Mortgage 44 111 56 54 114 Real Estate Construction -0- -0- -0- -0- -0- Loans to Individuals 34 19 4 3 13 -------- -------- -------- -------- -------- Total Recoveries 171 217 439 115 201 -------- -------- -------- -------- -------- Net Charge-Offs (Recoveries) 556 126 (193) 347 146 -------- -------- -------- -------- -------- Provision Charged to Operating Expense 1,001 785 900 819 236 -------- -------- -------- -------- -------- Balance, End of Year $ 5,169 $ 4,724 $ 4,065 $ 2,972 $ 2,500 ======== ======== ======== ======== ======== Ratio of Net Charge-Offs (Recoveries) to Average Loans Outstanding .16% .04% (.08)% .17% .09% ======== ======== ======== ======== ========
-23- The increase in provision for loan losses in 1999 over 1998 primarily recognizes the significant increase in loans and a higher loan charge-off rate. The following table reflects the allowance for loan losses compared to total loans at the end of each year (dollars in thousands):
December 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Total Loans $355,414 $305,833 $276,069 $220,006 $178,493 Allowance for Loan Losses 5,169 4,724 4,065 2,972 2,500 Allowance for Loan Losses as a Percent of Total Loans 1.45% 1.54% 1.47% 1.35% 1.40% Allowance for Loan Losses As a Percent of Non-Performing Loans 211.0 94.0 193.0 270.0 252.0
The following table illustrates the allocation of the allowance for loan losses to the various loan categories (dollars in thousands); see the table on page 22 for the percent of specific types of loans to total loans:
December 31, ----------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------- --------------- --------------- --------------- --------------- % % % % % Amount Total Amount Total Amount Total Amount Total Amount Total ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Allowance For Loan Losses: Commercial $2,686 52.0% $2,713 57.4% $1,729 42.5% $1,072 36.1% $1,249 50.0% Real Estate Mortgage 1,050 20.3 818 17.3 699 17.2 556 18.7 524 21.0 Real Estate Construction 371 7.2 452 9.6 184 4.5 81 2.7 63 2.5 Loans to Individuals 375 7.3 372 7.9 272 6.7 165 5.6 132 5.3 Unallocated Portion 687 13.2 369 7.8 1,181 29.1 1,098 36.9 532 21.2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $5,169 100.0% $4,724 100.0% $4,065 100.0% $2,972 100.0% $2,500 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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, 1999, 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 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. 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, ------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Non-accrual Loans $2,450 $5,049 $2,112 $1,102 $ 990 Renegotiated Loans 3 6 -0- -0- -0- Other Real Estate 1,947 281 151 166 113 ------ ------ ------ ------ ------ Total Non-Performing Assets $4,400 $5,336 $2,263 $1,268 $1,103 ====== ====== ====== ====== ====== As a Percent of: Total Assets .78% 1.00% .49% .32% .31% Total Loans and Other Real Estate 1.23 1.74 .82 .58 .62 Loans Past Due 90 Days or More and Still Accruing $ -0- $ 3 $ 78 $ 36 $ -0-
Non-accrual loans at December 31, 1999, were comprised of $2,254,000 in commercial loans, $66,000 in real estate mortgages and $130,000 in consumer loans. Within the non-accrual commercial loans is one loan of $1,755,000 that is performing as to payment of principal and interest, however, the borrower is experiencing financial difficulty due to their line of business. Other Real Estate is primarily two properties - a new assisted living facility that has a book value of $1,451,000 and a single family residence with a book value of $425,000. It is anticipated that the residence will be sold in the second quarter of 2000. 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, --------------------------------- 1999 1998 1997 1996 1995 ----- ----- ----- ----- ----- Gross Amount of Interest That Would Have Been Recorded at Original Rate $ 427 $ 537 $ 272 $ 111 $ 102 Interest Included in Income 68 312 154 30 42 ----- ----- ----- ----- ----- Interest Not Recorded in Income $ 359 $ 225 $ 118 $ 81 $ 60 ===== ===== ===== ===== =====
Loans of each Subsidiary Bank are graded on a system similar to that used by the banking industry 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, ----------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- ------- Non-Performing Loans $ 2,453 $ 5,055 $2,112 $1,102 $ 990 Criticized Loans 11,804 10,468 9,295 4,589 7,621 Allowance for Loan Losses 5,169 4,724 4,065 2,972 2,500 Allowance for Loan Losses as a Percent of: Non-Performing Loans 211.0% 94.0% 193.0% 270.0% 252.0% Criticized Loans 44.0 45.0 44.0 65.0 33.0
Independent third party loan reviews of the Subsidiary Banks were completed at various times in 1999. In addition, regulatory examinations were completed in late 1999. Based on the findings of these reviews and exams management considers the Subsidiary Banks 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 12.5% in 1999. These deposits represented 28.2% of total deposits. Average interest-bearing deposits increased $32.0 million, or 10.6%. 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):
1999 1998 1997 --------------------- --------------------- --------------------- Amount Rate Paid Amount Rate Paid Amount Rate Paid --------- ---------- --------- ---------- --------- ---------- Noninterest-Bearing Demand Deposits $131,002 $116,428 $101,813 Interest-Bearing Deposits: Interest-Bearing Transaction Accounts 156,054 3.23% 144,133 3.60% 128,880 3.57% Savings 85,571 4.02 68,011 4.37 50,756 4.21 Savings Certificates 55,169 4.61 52,261 5.03 49,203 4.95 Certificates of Deposit of $100,000 or More 36,463 4.86 36,752 5.30 30,242 5.20 Other Time Deposits 778 5.06 877 5.59 622 5.38 -------- -------- -------- Total Interest-Bearing Deposits 334,035 3.84 302,034 4.23 259,703 4.15 -------- -------- -------- Total Deposits $465,037 $418,462 $361,516 ======== ======== ========
The remaining maturity on certificates of deposit of $100,000 or more as of December 31, 1999, 1998 and 1997 is presented below (in thousands):
% of % of % of Maturity 1999 Total 1998 Total 1997 Total - -------- ---- ----- ---- ----- ---- ----- 3 months or less $18,144 46.4% $14,227 38.4% $15,480 43.4% 3 to 6 months 7,846 20.1 7,943 21.4 6,894 19.3 6 to 12 months 11,776 30.1 8,471 22.8 11,383 31.9 Over 12 months 1,312 3.4 6,458 17.4 1,933 5.4
-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, -------------------------------- 1999 1998 1997 ---- ---- ---- Securities sold under repurchase agreements: Average Balance $20,488 $15,742 $11,668 Year-end Balance 28,091 17,839 14,689 Maximum month-end balance during year 30,309 19,354 15,263 Interest Rate: Average 4.04% 4.40% 4.53% Year-end 3.38 3.83 4.55
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, 1999 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 $201,975 $ 17,972 $ 15,610 $235,557 $119,857 $355,414 Investment Securities 7,513 25,316 12,922 45,751 110,689 156,440 Federal Funds Sold 18,012 -0- -0- 18,012 -0- 18,012 -------- -------- -------- -------- -------- -------- Total Earning Assets 227,500 43,288 28,532 299,320 230,546 529,866 -------- -------- -------- -------- -------- -------- Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 253,032 -0- -0- 253,032 -0- 253,032 Certificates of Deposits > $100,000 13,415 12,575 11,777 37,767 1,311 39,078 Other Time Deposits 18,592 19,570 17,438 55,600 4,151 59,751 Repurchase Agreements 32,091 -0- -0- 32,091 -0- 32,091 -------- -------- -------- -------- -------- -------- Total Interest- Bearing Liabilities 317,130 32,145 29,215 378,490 5,462 383,952 -------- -------- -------- -------- -------- -------- Interest Sensitivity Gap $(89,630) $ 11,143 $ (683) $(79,170) $225,084 $145,914 ======== ======== ======== ======== ======== ======== Cumulative Gap $(89,630) $(78,487) $(79,170) ======== ======== ======== Cumulative Gap To Total Earning Assets (16.92%) (14.81%) (14.94%) Cumulative Gap To Total Assets (15.87%) (13.90%) (14.02%)
-27- In the preceding table under the "After 1 Year" category, $45,102,000 in investment securities will reprice or mature within one to three years and another $55,921,000 will reprice or mature within three to five years. The average maturity of the investment portfolio is approximately 2.8 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 (14.02%) was reversed to a positive 8.05% "beta adjusted" gap position. Management feels that the "beta adjusted" gap risk technique more accurately reflects the Corporation's gap position. In addition to gap analysis, the Corporation uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. Contractual maturities and repricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Assumptions based on past experience are incorporated into the model for nonmaturity deposit accounts. Based on the December 31, 1999 simulation analysis, it is estimated that a 200 basis point rise in rates over the next 12 month period would have an impact of approximately 4.1% on net interest income for the period, while a 200 basis point decline in rates over the same period would have an impact of approximately (6.3)% on net interest income for the period. The change is relatively small, despite the liability sensitive gap position. The results are primarily from the behavior of demand, money market and savings deposits. The Corporation has found that, historically, interest rates on these deposits change more slowly in a rising rate environment than in a declining rate environment. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The analysis does not contemplate any actions that the Corporation might undertake in response to changes in market interest rates. Accordingly, this analysis, is not intended to be and does not provide, a forecast of the effect actual changes in market rates will have on the Corporation. The following table reflects the spreads and margins for the past three (3) years:
1999 1998 1997 ---- ---- ---- Yield on Earning Assets (T/E) 8.06% 8.30% 8.45% Cost of Funds 3.86 4.24 4.16 Net Interest Spread (T/E) 4.20 4.06 4.29 Net Interest Margin (T/E) 5.31 5.28 5.47
T/E = Tax Equivalent Capital Resources. At December 31, 1999 shareholders' equity totaled $48.7 million, an increase of $2.5 million or 5.4% for the year. This increase reflects retained earnings, i.e., earnings net of dividends to shareholders, and the impact of the repurchase shares of common stock of the Corporation. In 1999, $3.2 million of stock was repurchased. 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 a portion of the allowance for loan losses, respectively. These two components combine to become Total Capital. 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 1997, 1998 and 1999 included unfunded loan commitments and letters of credit. The minimum ratio for qualifying Total Capital is 8%, of which 4% must be Tier 1 capital. -28- 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. The table below illustrates the Corporation's and its Subsidiary Banks' compliance with the regulatory guidelines as of December 31, 1999 (dollars in thousands):
The Summit Summit Consolidated National Community Corporation Bank Bank, N.A. ------------ --------- ---------- Total Assets $564,786 $227,171 $332,140 Risk Weighted Assets 373,989 149,896 220,352 Equity Capital (Tier 1) $ 49,894 $ 21,441 $ 25,619 Qualifying Allowance For Loan Losses 4,675 1,772 2,755 -------- -------- -------- Total Capital $ 54,569 $ 23,213 $ 28,374 ======== ======== ======== Leverage Ratio 8.77% 9.71% 7.70% Risk Capital Ratio: Tier 1 Capital 13.34% 14.30% 11.63% Total Capital 14.59 15.49 12.88
The Corporation had an unrealized loss on Available-for-Sale securities, net of deferred taxes, of $1,186,000 as of December 31, 1999. 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, 1999. Also, as of December 31, 1999, the Corporation and its Subsidiary Banks met the criteria for classification as a "well-capitalized" institution under the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). 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, 1999, federal funds sold and investment securities maturing within 30 days represented $25,525,000 million or 4.5% 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 91.7% of total deposits at December 31, 1999, were "core" deposits. Core deposits for this purpose are defined as total deposits less public funds and certificates of deposit greater than $100,000. Also, the Corporation loan to deposit ratio averaged a somewhat conservative 71.4% for the year. 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 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. 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, 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, 1999 and 1998 34 Consolidated Statements of Income of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1999, 1998 and 1997 35 Statements of Changes in Shareholders' Equity of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1999, 1998 and 1997 (Consolidated and Parent Company Only) 36 Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1999, 1998 and 1997 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 1999, in conformity with generally accepted accounting principles. /s/ Stovall, Grandey, & Whatley STOVALL, GRANDEY, & WHATLEY Fort Worth, Texas January 20, 2000 -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, ------------------------------- 1999 1998 --------- ---------- ASSETS (In Thousands) CASH AND DUE FROM BANKS - NOTE 1 $ 19,092 $ 26,735 FEDERAL FUNDS SOLD 18,012 38,706 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 129,116 121,417 Securities Held-to-Maturity, at cost (fair value of $26,739,000 and $26,959,000 at December 31, 1999 and 1998, respectively) 27,324 26,595 LOANS - NOTE 3 Loans, Net of Unearned Discount 355,414 305,833 Allowance for Loan Losses (5,169) (4,724) -------- -------- LOANS, NET 350,245 301,109 PREMISES AND EQUIPMENT - NOTE 4 8,562 9,082 ACCRUED INCOME RECEIVABLE 4,503 3,823 OTHER REAL ESTATE - NOTE 5 1,947 281 OTHER ASSETS - NOTE 10 5,985 5,016 -------- -------- TOTAL ASSETS $564,786 $532,764 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $128,685 $141,170 Interest-Bearing 351,861 324,330 -------- -------- TOTAL DEPOSITS 480,546 465,500 SHORT TERM BORROWINGS - NOTE 7 32,091 17,839 ACCRUED INTEREST PAYABLE 576 1,037 OTHER LIABILITIES 2,864 2,153 -------- -------- TOTAL LIABILITIES 516,077 486,529 -------- -------- 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; 6,361,247 and 6,471,827 shares issued and outstanding at December 31, 1999 and 1998, respectively 7,952 8,090 Capital Surplus 6,469 6,329 Retained Earnings 35,474 31,271 Accumulated Other Comprehensive Income - Unrealized Gain (Loss) on Available-for-Sale Investment Securities, Net of Tax (1,186) 560 Treasury Stock at Cost (800 shares at December 31, 1998) -0- (15) -------- -------- TOTAL SHAREHOLDERS' EQUITY 48,709 46,235 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $564,786 $532,764 ======== ========
The accompanying Notes should be read with these financial statements. -34- SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $30,620 $28,000 $24,063 Interest and Dividends on Investment Securities: Taxable 8,495 6,963 6,878 Exempt from Federal Income Taxes 35 50 23 Interest on Federal Funds Sold 1,082 2,052 1,008 ------- ------- ------- TOTAL INTEREST INCOME 40,232 37,065 31,972 ------- ------- ------- INTEREST EXPENSE Interest on Deposits - NOTE 6 12,837 12,786 10,773 Interest on Short Term Borrowings 926 692 528 Interest on Note Payable 9 -0- -0- ------- ------- ------- TOTAL INTEREST EXPENSE 13,772 13,478 11,301 ------- ------- ------- NET INTEREST INCOME 26,460 23,587 20,671 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 1,001 785 900 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,459 22,802 19,771 ------- ------- ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 2,002 2,018 1,890 Net Gain (Loss) on Sale of Investment Securities (3) 35 (1) Other Income 1,881 1,797 1,376 ------- ------- ------- TOTAL NON-INTEREST INCOME 3,880 3,850 3,265 ------- ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits 9,226 8,576 7,524 Occupancy Expense - Net 1,031 928 774 Furniture and Equipment Expense 1,202 1,150 919 Other Real Estate Owned Expense - Net 107 (1) (63) Other Expense - NOTE 9 3,658 3,520 3,164 ------- ------- ------- TOTAL NON-INTEREST EXPENSE 15,224 14,173 12,318 ------- ------- ------- INCOME BEFORE INCOME TAXES 14,115 12,479 10,718 APPLICABLE INCOME TAXES - NOTE 10 4,893 4,333 3,687 ------- ------- ------- NET INCOME $ 9,222 $ 8,146 $ 7,040 ======= ======= ======= INCOME PER SHARE - NOTE 14 Basic $ 1.44 $ 1.25 $ 1.09 Diluted 1.39 1.20 1.04
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, 1999, 1998 AND 1997
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, 1997 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) -0- 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 -0- 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 Stock Options Exercised 63,320 79 140 219 Purchases of Stock Held in Treasury (3,169) (3,169) Retirement of Stock Held in Treasury (173,900) (217) (2,967) 3,184 -0- Cash Dividend - $.32 Per Share (2,052) (2,052) Net Income for Year Ended 1999 9,222 9,222 Securities Available- for-Sale Adjustment (1,746) (1,746) -------- Total Comprehensive Income 7,476 --------- ------ ------ ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1999 6,361,247 $7,952 $6,469 $35,474 $(1,186) $ -0- $48,709 ========= ====== ====== ======= ======= ======= =======
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, - --------------------------- ------------------------------------------------ 1999 1998 1997 ------------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 9,222 $ 8,146 $ 7,040 -------- --------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 1,081 1,037 840 Net Premium Amortization (Accretion) of Investment Securities (39) (31) 97 Provision for Loan Losses 1,001 785 900 Deferred Federal Income Taxes (Benefit) (385) (465) (233) Net (Gain) Loss on Sale of Investment Securities 3 (35) 1 Writedown of Other Real Estate -0- -0- 4 Net Gain from Sale of Other Real Estate (36) (2) (21) Net (Gain) Loss on Sale of Premises and Equipment (105) (3) 12 Increase in Accrued Income and Other Assets (33) (523) (2,330) Increase in Accrued Expenses and Other Liabilities 250 921 333 -------- --------- --------- TOTAL ADJUSTMENTS 1,737 1,684 (397) -------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,959 9,830 6,643 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net (Increase) Decrease in Federal Funds Sold 20,694 (2,946) (15,410) Proceeds from Matured and Prepaid Investment Securities . Held-to-Maturity 4,280 21,627 21,486 . Available-for-Sale 63,531 63,334 14,906 Proceeds from Sales of Investment Securities 71,214 11,992 4,506 Purchase of Investment Securities . Held-to-Maturity (6,037) (20,644) (12,884) . Available-for-Sale (144,026) (118,148) (16,702) Loans Originated and Principal Repayments, Net (52,828) (30,482) (56,363) Recoveries of Loans Previously Charged-off 171 217 439 Proceeds from Sale of Premises and Equipment 567 6 1 Proceeds from Sale of Other Real Estate 559 82 32 Purchases of Premises and Equipment (1,023) (2,206) ( 1,664) -------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (42,898) (77,168) (61,653) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net Increase in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 7,488 60,585 41,081 Net Increase in Certificates of Deposit 7,558 3,191 15,620 Net Increase in Short Term Borrowings 14,252 3,150 1,480 Payments of Cash Dividends (2,052) (1,560) (1,166) Proceeds from Stock Options Exercised 219 168 143 Purchase of Treasury Stock (3,169) (1,948) -0- -------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 24,296 63,586 57,158 -------- --------- --------- (7,643) (3,752) 2,148 CASH AND DUE FROM BANKS - BEGINNING OF YEAR 26,735 30,487 28,339 -------- --------- --------- CASH AND DUE FROM BANKS - END OF YEAR $ 19,092 $ 26,735 $ 30,487 ======== ========= ========= SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest Paid $ 14,232 $ 13,120 $ 11,260 Income Taxes Paid 5,198 4,815 3,876 Other Real Estate Acquired in Settlement of Loans 2,188 210 -0-
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 in consolidation. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting 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 1999 the average cash balance maintained at the Federal Reserve Bank was approximately $1,000,000. Compensating balances held at correspondent banks to minimize service charges averaged approximately $18,004,000 in 1999. 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 1999 and 1998 the Corporation held no securities that would have been classified as trading securities. All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to 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. -38- 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 collectibility of the principal is unlikely. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Corporation may ultimately incur losses which vary from management's current estimates. Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or are reasonably estimable. Premises and Equipment - ---------------------- Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets. 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 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". -39- Reclassification - ---------------- Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 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, 1999 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losse Value --------- -------- ------- --------- Investment Securities - Held-to-Maturity U.S. Treasury Securities $ 8,995 $ 17 $ (2) $ 9,010 U.S. Government Agencies and Corporations 18,043 -0- (600) 17,443 Obligations of States and Political Subdivisions 286 -0- -0- 286 ------- ---- ------ ------- Total Held-to-Maturity Securities 27,324 17 (602) 26,739 ------- ---- ------ -------- Investment Securities - Available-for-Sale U.S. Treasury Securities 19,010 33 (64) 18,979 U.S. Government Agencies and Corporations 97,107 68 (1,683) 95,492 U.S. Government Agency Mortgage Backed Securities 13,231 35 (187) 13,079 Obligations of States and Political Subdivisions 350 1 -0- 351 Federal Reserve Bank and Federal Home Loan Bank Stock 1,215 -0- -0- 1,215 ------- ---- ------- -------- Total Available-for-Sale Securities 130,913 137 (1,934) 129,116 ------- ---- ------- -------- Total Investment Securities $ 158,237 $154 $(2,536) $155,855 ======== ==== ======= ========
In the above schedule, the amortized cost of Total Held-to-Maturity Securities of $27,324,000 and the estimated fair value of Total Available-for-Sale Securities of $129,116,000 are reflected in Investment Securities on the consolidated balance sheet as of December 31, 1999 for a total of $156,440,000. A net unrealized loss of $1,797,000 is included in the Available-for-Sale Investment Securities balance. The unrealized loss, net of tax, is included in Shareholders' Equity. -40-
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 Subdivisions 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 Subdivisions 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 previous 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. A summary of the amortized cost and estimated fair value of debt securities by contractual maturity as of December 31, 1999, 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, 1999 --------------------------------------------------- Held-to-Maturity Available-for-Sale ----------------- -------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ------- --------- --------- Due in One Year or Less $ 5,281 $ 5,287 $ 26,011 $ 26,014 Due after One Year through Five Years 19,013 18,609 83,403 81,982 Due after Five Years through Ten Years 3,030 2,843 11,414 11,008 Due after Ten Years -0- -0- 10,085 10,112 -------- ------- --------- --------- Total $ 27,324 $26,739 $ 130,913 $ 129,116 ======== ======= ========= =========
Included in the investment securities is $13,231,000 and $15,745,000 at December 31, 1999 and December 31, 1998, 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, 1999, based on estimated prepayments of the underlying mortgages. Investment securities with carrying values of $63,826,000 and $44,567,000 at December 31, 1999 and 1998, 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 $63,375,000 and $44,849,000 at December 31, 1999 and 1998, respectively. Proceeds from sales of investment securities were $71,214,000 during 1999, $11,992,000 during 1998 and $4,506,000 during 1997. In 1999, gross losses from sale of securities of $5,000 were realized but were partially offset by gross gains of $2,000. In 1998, gross gains from sale of securities of $35,000 were realized. 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, 1999 and 1998, respectively. -41- 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, -------------------- 1999 1998 ---------- -------- Commercial $156,847 $133,066 Real Estate Mortgage 120,596 100,421 Real Estate Construction 43,875 40,456 Loans to Individuals 34,261 32,388 Less: Unearned Discount (165) (498) -------- -------- 355,414 305,833 Allowance for Loan Losses (5,169) (4,724) -------- -------- Loans, Net $350,245 $301,109 ======== ========
At December 31, 1999 and 1998 the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $2,403,000 and $4,596,000, respectively. These loans were on non- accrual status. The related allowance for loan losses for these loans was $837,000 and 1,052,000, respectively. The average recorded investment in impaired loans during the year ended December 31, 1999 was approximately $3,083,000. For 1999 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 $2,453,000, $5,055,000, and $2,112,000 at December 31, 1999, 1998 and 1997 respectively. If interest on these loans had been recorded in accordance with their original terms such income would have approximated $427,000 for 1999, $537,000 for 1998 and $272,000 for 1997. Interest income on those loans included in net income was $68,000 for 1999, $312,000 for 1998 and $154,000 for 1997. Transactions in the allowance for loan losses are summarized as follows (in thousands):
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Balance, Beginning of Year $4,724 $4,065 $2,972 Provision, Charged to Income 1,001 785 900 Loans Charged Off (727) (343) (246) Recoveries of Loans Previously Charged Off 171 217 439 ------ ------ ------ Net Charge-Offs/(Recoveries) 556 126 (193) ------ ------ ------ Balance, End of Year $5,169 $4,724 $4,065 ====== ====== ======
-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, -------------------------------------------- 1999 1998 1997 ------------- -------------- ------------- Land $ 2,320 $ 2,783 $ 1,446 Buildings and Improvements 7,715 7,537 7,532 Furniture and Equipment 8,003 7,234 6,661 ------- ------- ------- Total Cost 18,038 17,554 15,639 Less: Accumulated Depreciation and Amortization 9,476 8,472 7,723 ------- ------- ------- Net Book Value $ 8,562 $ 9,082 $ 7,916 ======= ======= =======
Depreciation and amortization charged to expense amounted to $1,081,000, $1,037,000 and $840,000 for the years ended December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, the Corporation and subsidiaries had certain noncancelable operating leases which cover premises with future minimum annual rental payments as follows (in thousands): 2000 $526 2001 527 2002 527 2003 536 2004 546 Thereafter 3,564 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, ------------------------ 1999 1998 1997 -------- ------ ------ Total Rental Income $ 390 $ 359 $ 365 Less: Rental Expense 413 350 272 ----- ----- ----- Net Rental Income (Expense) $ (23) $ 9 $ 93 ===== ===== ===== NOTE 5 - Other Real Estate The carrying value of other real estate was as follows (in thousands): December 31, ------------------------ 1999 1998 1997 -------- ------ ------ Other Real Estate $1,947 $ 281 $ 185 Valuation Reserve -0- -0- (34) ------ ----- ----- Net Other Real Estate $1,947 $ 281 $ 151 ====== ===== ===== Direct writedowns of other real estate charged to income were: 1999 - $-0-, 1998 - -$-0-, and 1997 - $4,000. -43- NOTE 6 - Deposits and Related Expense At December 31, 1999, 1998 and 1997, deposits and related interest expense for the related years ended December 31, consisted of the following (in thousands):
Deposits Interest Expense ------------------------------- ------------------ 1999 1998 1997 1999 1998 1997 --------- --------- --------- -------- -------- -------- Noninterest-Bearing Demand Deposits $128,685 $141,170 $126,398 Interest-Bearing Deposits: Interest-Bearing Transaction Accounts 154,304 151,557 133,139 $ 5,043 $ 5,186 $ 4,599 Savings 98,728 81,503 54,107 3,440 2,972 2,135 Savings Certificates - Time 58,973 53,394 51,685 2,543 2,631 2,434 Certificates of Deposit $100,000 or More 39,078 37,099 35,690 1,772 1,948 1,572 Other 778 777 705 39 49 33 -------- -------- -------- ------- ------- ------- Total 351,861 324,330 275,326 $12,837 $12,786 $10,773 -------- -------- -------- ======= ======= ======= Total Deposits $480,546 $465,500 $401,724 ======== ======== ========
The Corporation has no brokered deposits and there are no major concentrations of deposits. NOTE 7 - Short Term Borrowings Securities sold under repurchase agreements generally represent borrowings with maturities ranging from one to thirty days. Information relating to these borrowings is summarized as follows (dollars in thousands): December 31, ------------------------------- 1999 1998 1997 --------- --------- --------- Securities Sold Under Repurchase Agreements: Average Balance $20,488 $15,742 $11,668 Year-end Balance 28,091 17,839 14,689 Maximum Month-End Balance During Year 30,309 19,354 15,263 Interest Rate: Average 4.04% 4.40% 4.53% Period-End 3.38 3.83 4.55 The Corporation, through one of its subsidiaries, has available a line of credit with the Federal Home Loan Bank of Dallas which allows the subsidiary to borrow on a collateralized basis at a fixed term. At December 31, 1999, the subsidiary had borrowed $4,000,000, bearing an interest rate of 5.43% and having a maturity of April 2000 under the line of credit. NOTE 8 - Notes Payable 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, 1999 and 1998, was $650,000 and $762,000, respectively. This note matures December 15, 2004 and is secured by banking premises. The interest rate at December 31, 1999 was 8.50% 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, 1999, the Corporation obtained lines of credit from a bank under which the Corporation may borrow $9,000,000 at prime rate. The lines of credit are secured by stock of one of the Subsidiary Banks and mature in July 2000, whereupon, if balances are outstanding, the lines convert to term notes having five year terms. The Corporation will not pay a fee for any unused portion of the lines. There were no borrowings outstanding on these lines of credit at December 31, 1999. -44- NOTE 9 - Other Non-Interest Expense The significant components of other non-interest expense are presented below (in thousands):
Year Ended December 31, ------------------------------- 1999 1998 1997 ---------- --------- -------- Business Development $ 602 $ 611 $ 588 Legal and Professional Fees 619 511 496 Printing and Supplies 379 387 373 Regulatory Fees and Assessments 183 169 160 Other 1,875 1,842 1,547 ------ ------ ------ Total $3,658 $3,520 $3,164 ====== ====== ======
NOTE 10 - Income Taxes The consolidated provision for income taxes consists of the following (in thousands):
Year Ended December 31, ------------------------------- 1999 1998 1997 ---------- --------- -------- Federal Income Tax Expense Current $5,278 $4,798 $3,911 Deferred (385) (465) (233) ------ ------ ------ Total Federal Income Tax Expense $4,893 $4,333 $3,678 ====== ====== ====== Effective Tax Rates 34.7% 34.7% 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, ---------------------------- 1999 1998 1997 -------- -------- -------- Federal Income Taxes at Statutory Rate of 34% $4,847 $4,278 $3,644 Effect of Tax Exempt Interest Income (12) (19) (12) Nondeductible Expenses 64 58 47 Other (6) 16 (1) ------ ------ ------ Income Taxes Per Income Statement $4,893 $4,333 $3,678 ====== ====== ======
Federal income taxes included in the consolidated balance sheets were as follows (in thousands):
December 31, --------------- 1999 1998 -------- ----- Current Tax Asset (Liability) $ (70) $ 10 Deferred Tax Asset 2,257 973 ------ ----- Total Included in Other Assets $2,187 $ 983 ====== =====
-45- 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, ------------------------ 1999 1998 1997 ------- ------- ------ Federal Deferred Tax Assets: Allowance for Loan Losses $1,357 $1,107 $ 831 Valuation Reserves - Other Real Estate -0- 1 36 Interest on Non-accrual Loans 189 199 66 Deferred Compensation 458 414 359 Unrealized Losses on Available-for-Sale Securities 611 -0- -0- Other 19 18 43 ------ ------ ------ Gross Federal Deferred Tax Assets 2,634 1,739 1,335 ------ ------ ------ Federal Deferred Tax Liabilities: Depreciation and Amortization 321 301 228 Accretion 56 78 165 Unrealized Gains on Available-for-Sale Securities -0- 289 125 Other -0- 98 145 ------ ------ ------ Gross Federal Deferred Tax Liabilities 377 766 663 ------ ------ ------ Net Deferred Tax Asset $2,257 $ 973 $ 672 ====== ====== ======
NOTE 11 - Related Party Transactions During 1999 and 1998 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, 1999: 24 Directors and Officers $2,848 $2,545 $(1,905) $3,488 For the Year ended December 31, 1998: 22 Directors and Officers $3,443 $1,494 $(2,089) $2,848
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. -46- The following is a summary of transactions (adjusted for stock splits) for the years presented:
Year Ended December 31, --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- --------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Shares Ex. Price Shares Ex. Price Shares Ex. Price -------- --------- -------- --------- ---------- --------- Outstanding, Beginning of Year 461,717 $ 7.24 543,112 $ 6.77 464,100 $ 4.57 Granted 49,500 17.97 3,000 19.25 118,752 14.58 Exercised (63,320) 3.47 (78,995) 3.76 (35,260) 4.04 Canceled (2,400) 12.00 (5,400) 17.54 (4,480) 6.62 ------- ------- -------- Outstanding, End of Year 445,497 $ 8.95 461,717 $ 7.24 543,112 $ 6.77 ======= ======= ======== Exercisable at End of Year 348,635 $ 7.13 354,825 $ 5.66 375,510 $ 4.60 Weighted Average Fair Value of Options Granted During the Year $17.97 $19.25 $14.58
The options outstanding at December 31, 1999, have exercise prices between $3.00 and $19.25 with a weighted average exercise price of $8.95 and a weighted average remaining contractual life of 5.78 years. At December 31, 1999, there remained 484,800 shares reserved for future grants of options under the 1997 Plan. Stock options have been adjusted retroactively for the effects of stock splits. 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, 1999 and 1998. The fair value of the options granted in 1999 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 5.28% and 5.48% respectively; expected dividend yield of 2.0% and 2.0%, respectively; expected volatility of 29.1% and 29.7%, respectively; and expected life of 5.8 years. 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. The amounts of financial instruments with off-balance sheet risk are as follows (in thousands):
December 31, December 31, 1999 1998 Contract Contract Amount Amount ------------ ------------ Financial Instruments Whose Contract Amounts Represent Credit Risk: Loan commitments including unfunded lines of credit $112,728 $106,806 Standby letters of credit 2,545 2,155
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. -47- 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 deposit, 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) Year Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Net income $ 9,222 $ 8,146 $ 7,040 ========== ========== ========== Weighted average number of common shares used in Basic EPS 6,410,762 6,496,595 6,478,795 Effect of dilutive stock options 244,787 316,702 321,081 ---------- ---------- ---------- Weighted number of common shares and dilutive potential common stock used in Diluted EPS 6,655,549 6,813,297 6,799,876 ========== ========== ========== The incremental shares for the assumed exercise of the outstanding options was determined by application of the treasury stock method. NOTE 15 - Employee Benefit Plans Pension Plan - ------------ The Corporation had a defined benefit pension plan covering substantially all of its employees. The benefits were based on years of service and the employee's compensation history. The employee's compensation used in the benefit calculation were 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 were distributed to the plan participants in mid-1999 under terms of the plan. During 1999 and 1998 the Corporation expensed $321,000 and $545,000 in support of 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 1999 or 1998. In 2000, the Corporation will make matching contributions to the participant's deferrals of compensation up to 100% of the employee contributions not to exceed 6% of the employee's annual compensation. Management Security Plan - ------------------------ In 1992, the Corporation established a Management Security Plan to provide key employees with retirement, death or disability benefits. The expense charged to operations in 1999, 1998, and 1997 for such future obligations was $223,000, $237,000, and $276,000, 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). -48- 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. 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 2000 the Subsidiary Banks can legally initiate dividend payments of $11,191,000 plus an additional amount equal to their net profits, as defined, for 2000 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, 1999, the Board of Directors approved a stock repurchase plan. The plan authorized management to purchase up to 322,232 shares of the Corporation's common stock over the following twelve months through the open market or in privately negotiated transactions in accordance with all applicable state and federal laws and regulations. In 1999, 173,100 shares were purchased on the open market. Under similar programs approved by the Board in the years 1994 through 1998, 291,180 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 various regulatory capital requirements administered by the federal banking agencies. These requirements 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 1999 and 1998, 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, of which 4% must be Tier I capital. 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 financial institutions is 3%, with a higher minimum ratio dependent upon the condition of the individual financial institution. The 3% minimum was established to make certain that all financial institutions have a minimum capital level to support their assets, regardless of risk profile. -49- 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 ratio 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, 1999. The Corporation's regulatory capital position was as follows:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- CONSOLIDATED: As of December 31, 1999 Total Capital (to Risk Weighted Assets) $54,569 14.59% $29,919 8.0% Tier I Capital (to Risk Weighted Assets) 49,894 13.34 14,960 4.0 Tier I Capital (to Average Assets) 49,894 8.77 17,068 3.0 As of December 31, 1998 Total Capital (to Risk Weighted Assets) $49,825 15.06% $26,467 8.0% Tier I Capital (to Risk Weighted Assets) 45,690 13.81 13,233 4.0 Tier I Capital (to Average Assets) 45,690 8.90 15,393 3.0 SUMMIT NATIONAL BANK: As of December 31, 1999 Total Capital (to Risk Weighted Assets) $23,213 15.49% $11,992 8.0% $14,986 10.0% Tier I Capital (to Risk Weighted Assets) 21,441 14.30 5,996 4.0 8,994 6.0 Tier I Capital (to Average Assets) 21,441 9.71 6,626 3.0 11,044 5.0 As of December 31, 1998 Total Capital (to Risk Weighted Assets) $21,084 16.30% $10,346 8.0% $12,932 10.0% Tier I Capital (to Risk Weighted Assets) 19,467 15.05 5,173 4.0 7,759 6.0 Tier I Capital (to Average Assets) 19,467 9.19 6,356 3.0 10,593 5.0 SUMMIT COMMUNITY BANK, N.A.: As of December 31, 1999 Total Capital (to Risk Weighted Assets) $28,374 12.88% $17,628 8.0% $22,035 10.0% Tier I Capital (to Risk Weighted Assets) 25,619 11.63 8,814 4.0 13,221 6.0 Tier I Capital (to Average Assets) 25,619 7.70 9,980 3.0 16,633 5.0 As of December 31, 1998 Total Capital (to Risk Weighted Assets) $25,281 12.78% $15,820 8.0% $19,775 10.0% Tier I Capital (to Risk Weighted Assets) 22,809 11.53 7,910 4.0 11,865 6.0 Tier I Capital (to Average Assets) 22,809 7.66 8,932 3.0 14,886 5.0
NOTE 21 - Subsequent Events On January 18, 2000 the Board of Directors of the Corporation approved a quarterly dividend of $.10 per share to be paid on February 15, 2000 to shareholders of record on February 1, 2000. 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. -50- Reportable segments are based on products and services, geography, legal structure, management structure and any other means 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. 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. Fair values for fixed rate FHLB Borrowings are estimated using a discounted cash flow calculation. The estimated fair values of the Corporation's financial instruments are as follows (in thousands):
Year Ended December 31, -------------------------------------------------------- 1999 1998 --------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Financial Assets Cash and due from banks $ 19,092 $ 19,092 $ 26,735 $ 26,735 Federal funds sold 18,012 18,012 38,706 38,706 Securities 156,440 155,855 148,012 148,376 Loans 355,414 353,451 305,833 306,790 Financial Liabilities Deposits 480,546 480,643 465,500 465,858 Short Term Borrowings 32,091 32,108 17,839 17,845 Off-balance Sheet Financial Instruments Loan commitments 112,728 106,806 Letters of credit 2,545 2,155
-51- 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):
Year Ended December 31, --------------------------- 1999 1998 1997 ------- ------- ------- Net Income $ 9,222 $8,146 $7,040 Other Comprehensive Income: Unrealized Gain (Loss) on Available-for-Sale Securities, Net of Tax (1,746) 317 15 ------- ------ ------ Comprehensive Income $ 7,476 $8,463 $7,055 ======= ====== ======
-52- NOTE 25 - Condensed Parent Company Financial Statements
BALANCE SHEETS December 31, ------------------------ 1999 1998 -------- -------- ASSETS (In Thousands) CASH IN SUBSIDIARY BANKS Demand $ 79 $ 100 Time 301 833 INVESTMENTS IN SUBSIDIARIES Bank Subsidiaries 45,953 42,877 Non-Bank Subsidiary 321 371 NOTE RECEIVABLE FROM SUBSIDIARY 587 495 PREMISES AND EQUIPMENT - NET 1,526 1,654 OTHER ASSETS 2,045 1,996 ------- ------- TOTAL ASSETS $50,812 $48,326 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Note Payable to Subsidiary $ 650 $ 762 Other Liabilities 1,453 1,329 SHAREHOLDERS' EQUITY 48,709 46,235 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,812 $48,326 ======= =======
STATEMENTS OF INCOME Year Ended December 31, ---------------------------------- 1999 1998 1997 ------ ------- ------- (In Thousands) INCOME Dividends from Subsidiaries $5,000 $ 3,200 $ 3,000 Interest 52 76 33 Other Income 206 188 322 ------ ------- ------- TOTAL INCOME 5,258 3,464 3,355 ------ ------- ------- EXPENSES Interest 64 70 76 Salaries and Employee Benefits 760 752 845 Occupancy and Furniture-Net (18) (6) (44) Other Expense 277 347 262 ------ ------- ------- TOTAL EXPENSE 1,083 1,163 1,139 ------ ------- ------- INCOME BEFORE INCOME TAX BENEFIT AND EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 4,175 2,301 2,216 INCOME TAX BENEFIT 275 291 262 ------ ------- ------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 4,450 2,592 2,478 EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 4,772 5,554 4,562 ------ ------- ------- NET INCOME $9,222 $ 8,146 $ 7,040 ====== ======= =======
-53-
STATEMENTS OF CASH FLOWS Year Ended December 31, ------------------------------------ 1999 1998 1997 ------- ------- ------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 9,222 $ 8,146 $ 7,040 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 132 137 134 Deferred Federal Income Taxes (Benefit) (11) (81) (71) Undistributed Earnings of Subsidiaries (4,772) (5,554) (4,562) Increase in Other Assets (21) (188) (167) Increase (Decrease) in Other Liabilities 108 107 (8) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,658 2,567 2,366 CASH FLOWS FROM INVESTING ACTIVITIES Net Funding to Non-Bank Subsidiary (92) (105) (440) Purchases of Premises and Equipment (5) (13) (46) ------- ------- ------- NET CASH USED BY INVESTING ACTIVITIES (97) (118) (486) CASH FLOWS FROM FINANCING ACTIVITIES Principal Payments on Notes Payable (112) (97) (92) Payments of Cash Dividends (2,052) (1,560) (1,166) Receipts from Stock Options Exercised 219 168 143 Purchase of Treasury Stock (3,169) (1,948) -0- ------- ------- ------- NET CASH USED BY FINANCING ACTIVITIES (5,114) (3,437) (1,115) ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (553) (988) 765 CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 933 1,921 1,156 ------- ------- ------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 380 $ 933 $ 1,921 ======= ======= =======
-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, 1999. -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 15, 2000, relating to the 2000 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 page 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 20 of the Corporation's Proxy Statement dated, March 15, 2000 relating to the 2000 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 15, 2000, relating to the 2000 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 15, 2000, relating to the 2000 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 22 of the Corporation's Proxy Statement dated March 15, 2000, relating to the 2000 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, 1999 and 1998 Consolidated Statements of Income of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1999, 1998 and 1997 Statements of Changes in Shareholders' Equity of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1999, 1998 and 1997 (Consolidated and Parent Company Only) Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and Subsidiaries for the Years Ended December 31, 1999, 1998 and 1997 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 (incorporated herein by reference to Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998).* 3(b) Amended and Restated Bylaws of the Corporation dated April 21, 1998 (incorporated herein by reference to Exhibit 3(b) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 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 Amendment 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.* 10(r) Third Amendment dated July 15, 1998 to Loan Agreement dated July 12, 1995, between the Corporation and the Frost National Bank.* -58- 10(s) Third Amendment dated October 22, 1999 to Lease Agreeement dated February 13, 1992 by and between EOP-Summit Limited Partnership (as successors in interest to Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership), as landlord, and Summit Bancshares, Inc., as tenant.** 10(t) Fourth Amendment dated July 15, 1999, 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 20, 2000 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 20th day of March, 2000. SIGNATURE TITLE --------- ----- /s/ Philip E. Norwood Chairman and Director - --------------------------- Philip E. Norwood (Principal Executive Officer) /s/ Bob G. Scott Chief Operating Officer, Executive Vice - --------------------------- Bob G. Scott President, Secretary and Treasurer (principal financial officer and principal accounting officer) /s/ Jeffrey M. Harp President and Director - --------------------------- Jeffrey M. Harp /s/ D. Jerrell Farr Director - --------------------------- D. Jerrell Farr /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/ James L. Murray Director - --------------------------- James L. Murray /s/ Byron B. Searcy Director - --------------------------- Byron B. Searcy -61- EXHIBIT INDEX Exhibit Page No. - ------- -------- 3(a) Restated Articles of Incorporation of the Corporation as of July 21, 1998 (incorporated herein by reference to Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1998).* 3(b) Amended and Restated Bylaws of the Corporation dated April 21, 1998 1998 (incorporated herein by reference to Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 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 Amendment 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.* 10(s) Third Amendment dated October 22, 1999 to Lease Agreeement dated February 13, 1992 by and between EOP-Summit Limited Partnership (as successors in interest to Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership), as landlord, and Summit Bancshares, Inc., as tenant.** 10(t) Fourth Amendment dated July 15, 1999, 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-10.S 2 THIRD AMENDMENT EXHIBIT 10 (s) THIRD AMENDMENT This Third Amendment (the "Amendment") is made and entered into as of the 22/nd/ day of October, 1999, by and between EOP- SUMMIT LIMITED PARTNERSHIP, a Delaware limited partnership ("Lessor") and Summit Bancshares, Inc. ("Lessee"). WITNESSETH A. WHEREAS, Lessor and Lessee are parties to that certain lease dated February, 1992 for space currently containing approximately 4978 rentable square feet (the "Original Premises") described as Suite No(s). 604 on the sixth (6th) floor of the buildings commonly known as Summit Office Park and the address of which is 1200-1300 Summit Ave., Fort Worth, TX (the "Building"), which lease has been previously amended by First Amendment dated May 3, 1994 (the "First Amendment") and Second Amendment dated July 8, 1998 (the "Second Amendment") which, among other things, extended the term of the lease (the First Amendment, Second Amendment and lease are collectively referred to herein as the "Lease"); and B. WHEREAS, Lessee has requested that additional space consisting of approximately 1,829 rentable square feet on the sixth (6th) floor of the 1300 Summit Building shown on Exhibit A hereto ("Expansion Space") be added to the Premises; and C. WHEREAS, the Lease Term shall expire on February 15, 2000 ("Prior Termination Date") and the parties desire to extend the term of the lease subject to the terms and conditions hereinafter set forth; and 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. EXPANSION AND EFFECTIVE DATE. Effective as of the Expansion Effective ---------------------------- Date (as hereinafter defined), the Premises as defined in the Lease, is hereby increased from 4,978 rentable square feet on the sixth (6th) floor to 6,807 rentable square feet on the sixth (6th) floor by the addition of the Expansion Space, and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease. The Lease Term for the Expansion Space shall commence on the Expansion Effective Date and end on the Extended Termination Date. The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Lessee shall not be entitled to receive any allowance, abatements or other financial concessions granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Space. 1 A. The Expansion Effective Date shall be the later to occur of (i) December 1, 1999 ("Target Expansion Effective Date"), and (ii) the date upon which Lessor's improvement work in the Expansion Space has been substantially completed; provided, however, that if Lessor shall be delayed in substantially completing the Lessor's work in the Expansion Space as a result of the occurrence of any of the following (a "Delay"): 1. Lessee's failure to furnish information or to respond to any request by Lessor for any approval or information within any time period prescribed or, if no time period is prescribed, then within two (2) Business Days of such request; or 2. Lessee's insistence on materials, finishes or installations that have long lead times after having first been informed by Lessor that such materials, finishes or installations will cause a Delay; or 3. Changes in any plans and specifications; or 4. The performance by a person or entity employed by Lessee in the completion of any work (all such work and such persons or entities being subject to the prior approval of Lessor); or 5. Any request by Lessee that Lessor delay the completion of any of the Lessor's work; or 6. Any breach or default by Lessee in the performance of Lessee's obligations under this Amendment or the Lease; or 7. Any delay resulting from Lessee's having taken possession of the Expansion Space for any reason prior to substantial completion of the Lessor's work; or 8. Any other delay chargeable to Lessee, its agents, employees or independent contractors; then, for the purposes of determining the Expansion Effective Date, the date of substantial completion shall be deemed to be the day that said Lessor's work would have been substantially completed absent any such Delay(s). The Expansion Space shall be deemed to be substantially completed on the date that Lessor reasonably determines that all Lessor's work has been performed (or would have been performed absent of any Delays), other than any details of construction, mechanical adjustment or any other matter, the noncompletion of which does not materially interfere with Lessee's use of the Expansion Space. The adjustment of the Expansion Effective date and, accordingly, the postponement of Lessee's obligation to pay Rent on the 2 Expansion Space, shall be Lessee's sole remedy and shall constitute full settlement of all claims that Lessee might otherwise have against Lessor by reason of the Expansion Space not being ready for occupancy by Lessee on the Target Expansion Effective Date. B. In addition to the postponement, if any, of the Expansion Effective Date as a result of the applicability of Paragraph I.A. of this Amendment, the Expansion Effective Date shall be delayed to the extent that Lessor fails to deliver possession of the Expansion Space for any other reason (other than Delays by Lessee), including but not limited to, holding over by prior occupants. Any such delay in the Expansion Effective Date shall not subject Lessor to any liability for any loss or damage resulting therefrom. If the Expansion Effective Date is delayed, the Termination Date under the Lease shall not be similarly extended. II. EXTENSION. The Lease Term is hereby extended for a period of --------- fifty-eight (58) months and thirteen (13) days and shall expire on December 31, 2004 ("Extended Termination Date"), unless sooner terminated in accordance with the terms of the Lease. That portion of the Lease Term commencing the day immediately following the Prior Termination Date ("Extension Date") and ending on the Extended Termination Date shall be referred to herein as the "Extended Term". III. ORIGINAL PREMISES BASE MONTHLY RENT. ----------------------------------- A. Original Premises up to the Prior Termination Date. The Base Monthly Rent, Additional Rent and all other charges under the Lease shall be payable as provided therein with respect to the Original Premises through and including the day prior to the Prior Termination Date. B. Original Premises From and After Extension Date. As of the Extension Date, the schedule of monthly installments of Base Monthly Rent payable with respect to the Original Premises from and after the Extension Date is the following: Lessee shall pay Lessor the sum of Three Hundred Twenty-Seven Thousand Four Hundred Fourteen and 62/100's Dollars ($327,414.62) in fifty-nine (59) installments as follows: 1. One (1) installment of $2,600.12 payable for the period from February 16, 2000 to February 28, 2000. 2. Fifty-Eight (58) equal installments of $5,600.25 each payable on or before the first day of each month during the period beginning March 1, 2000 and ending December 31, 2004. 3 All such Base Monthly Rent shall be payable by Lessee in accordance with the terms of Paragraph V hereof. IV. EXPANSION SPACE BASE MONTHLY RENT. --------------------------------- A. As of the Expansion Effective Date and in addition to the Original Premises Base Monthly Rent, the schedule of monthly installments of Base Monthly Rent payable with respect to the Expansion Space from and after the Expansion Effective Date is the following: Lessee shall pay Lessor the sum of One Hundred Fifty-One Thousand Eighty-Two and 97/100 Dollars ($151,082.97) as Base Monthly Rent for the Expansion Space for the Extended Term in sixty-one (61) monthly installments as follows: 1. Sixty-One (61) equal installments of $2,476.77 each payable for the period from December 1, 1999 to December 31, 2004; Lessor and Lessee acknowledge that the foregoing schedule is based on the assumption that the Expansion Effective Date is the Target Expansion Effective Date. If the Expansion Effective Date is postponed, the beginning date set forth above with respect to the payment of any installment(s) of Base Monthly Rent shall be appropriately adjusted on a per diem basis and set forth in a confirmation letter to be prepared by Lessor. All such Base Monthly Rent shall be payable by Lessee in accordance with the terms of Paragraph VI hereof. V. ORIGINAL PREMISES ADDITIONAL RENT Effective as of the Extension Date, --------------------------------- Exhibit A "ADDITIONAL RENT" of the Lease is deleted in its entirety and the following shall be in effect for the Original Premises for the Extended Term: A. With the lease year commencing January 1, 2000, Lessee shall pay to Lessor as additional rent the amount (the "Excess") by which the sum of the Lessee's Pro Rata Share of (1) the Taxes (hereinafter defined) for the applicable calendar year and (2) the Expenses (hereinafter defined) for the applicable calendar year exceeds $6.50 per rentable square foot (the "Expense Stop"); provided Lessee shall not be entitled to a credit of Lessee's Pro Rata Share is less than $6.50 per rentable square foot. For purposes hereof, (i) "Expenses" shall mean all Basic Costs (as hereinafter defined but excluding Taxes and all janitorial costs except those associated with the common areas of the Building, and (ii) "Lessee's Pro Rata Share" for the Original Premises means 2.08% 4 As soon as is practical following the end of each calendar year, commencing December 31, 2000, Lessor shall furnish to Lessee a statement (the "Annual Statement") of Lessor's actual Basic Costs 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. B. Basic Costs shall mean all costs and expenses paid or incurred in each calendar year in connection with operating, maintaining, repairing, managing and owning the Building and the Property, including, but not limited to, the following: 1. All labor costs for all persons performing services required or utilized in connection with the operation, repair, replacement and maintenance of and control of access to the Building and the Property, including, but not limited to, amounts incurred for wages, salaries and other compensation for services, payroll, social security, insurance, uniforms, training, disability benefits, pensions, hospitalization, retirement plans, group insurance or any other similar or like expenses or benefits. 2. All management fees, the cost of equipping and maintaining a management office at the Building, accounting services, legal fees not attributable to leasing and collection activity, and all other administrative costs relating to the Building and the Property. If management services are not provided by a third party, Lessor shall be entitled to a management fee comparable to that due and payable to third parties provided Lessor or management companies owned by, or management divisions of, Lessor perform actual management services of a comparable nature and type as normally would be performed by third parties. 3. All rental and/or purchase costs of materials, supplies, tools and equipment used in the operation, repair, replacement, and maintenance and the control of access to the Building and the Property. 4. All amounts charged to Lessor by contractors and/or suppliers for services, replacement parts, components, materials, equipment and supplies furnished in connection with the operation, repair, maintenance, replacement of and control of access to any part of the Building, or Property generally, including the heating, air conditioning, ventilating, plumbing, electrical, elevator and other systems and equipment. At Lessor's option, major repair items may be amortized over a period of up to five (5) years. 5. All premiums and deductibles paid by Lessor for fire and extended coverage insurance, earthquake and extended coverage insurance, liability and extended coverage insurance, rental loss insurance, elevator insurance, boiler insurance 5 and other insurance customarily carried from time to time by lessors of comparable office buildings or required to be carried by Lessor's Mortgagee. 6. Charges for all utilities, including, but not limited to, water, electricity, gas and sewer, but excluding those charges for which Lessor is otherwise reimbursed by lessees. 7. "Taxes," which for purposes hereof, shall mean: (a) all real estate taxes and assessments on the Property, the Building or the Premises, and taxes and assessments levied in substitution of supplementation in whole or in part of such taxes, (b) all personal property taxes for the Building's personal property, including license expense, (c) all taxes imposed on services of Lessor's agents and employees, (d) all costs and fees incurred in connection with seeking reductions in or refunds in Taxes including, without limitations, any costs incurred by Lessor to challenge the tax valuation of the Building, but excluding income taxes. For the purpose of determining real estate taxes and assessments for any given calendar year, the amount to be included in Taxes for such year shall be as follows: (1) with respect to any special assessment that is payable in installments, Taxes for such year shall include the amount of the installment (and any interest) due and payable during such year; and (2) with respect to all other real estate taxes, Taxes for such year shall, at Lessor's election, include either the amount accrued, assessed or otherwise imposed for such year or the amount due and payable for such year, provided that Lessor's election shall be applied consistently throughout the Lease Term. If a reduction in Taxes is obtained for any year of the Lease Term during which Lessee paid its Pro Rata Share of Basic Costs, then Basic Costs for such year will be retroactively adjusted and Lessor shall provide Lessee with a credit, if any, based upon such adjustments. Likewise, if a reduction is subsequently obtained for the tax component of Basic Costs, Basic Costs shall be restated and the Excess for all subsequent years recomputed. Lessee shall pay Lessor Lessee's Pro Rata Share of any such increase in the Excess within thirty (30) days after Lessee's receipt of a statement therefor from Lessor. 8. All landscape expenses and costs of maintaining, repairing, resurfacing and striping of the parking area and garages of the Property, if any. 9. Cost of all maintenance service agreements, including those for equipment, alarm service, window cleaning, drapery or Venetian blind cleaning, janitorial services, pest control, uniform supply, plant maintenance, landscaping, any parking equipment and rubbish removal and/or disposal fees. 10. Cost of all other repairs, replacements and general maintenance of the Property and Building, neither specified above nor directly billed to lessees. 6 11. The amortized cost of capital improvements made to the Building or the Property which are: (a) primarily for the purpose of reducing operating expense costs or otherwise improving the operating efficiency of the Property or Building; or (b) required to comply with any laws, rules or regulations of any governmental authority or a requirement of Lessor's insurance carrier. The cost of such capital improvement shall be amortized over a period of five (5) years and shall, at Lessor's option, include interest at a rate that is reasonably equivalent to the interest rate that Lessor would be required to pay to finance the cost of the capital improvement in question as of the date such capital improvement is performed, provided if the payback period of any capital improvement is less than five (5) years, Lessor may amortize the cost of such capital improvement over the payback period. 12. Any other expense or charge of any nature whatsoever which, in accordance with general industry practice with respect to the operation of a first-class office building, would be construed as an operating expense. 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 percent (95%) of the total Rentable Area of the Building at any time during any calendar year of the Lease Term, actual Basic Costs 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. C. If Basic Costs for any calendar year increase by more than five percent (5%) over Basic Costs for the immediately preceding calendar year, Lessee, within ninety (90) days after receiving the Annual Statement for a particular calendar year, shall have the right to provide Lessor with written notice (the "Review Notice") of its intent to review Lessor's books and records relating to the Basic Costs for such calendar year. Within a reasonable time after receipt of a timely Review Notice, Lessor shall make such books and records available to Lessee or Lessee's agent for its review at either Lessor's home office or the office of the Building, provided that if Lessee retains an agent to review Lessor's books and records for any calendar year, such agent must be CPA firm licensed to do business in the state in which the Building is located. If Lessee fails to give Lessor written notice of objection within thirty (30) days after its review or fails to provide Lessor with a Review Notice within the ninety (90) day period provided above, Lessee shall be deemed to have approved Lessor's Annual Statement in all respects and shall thereafter be barred from raising any claims with respect thereto. Any information obtained by Lessee pursuant to the provisions of this Section shall be treated as confidential. 7 VI. EXPANSION SPACE ADDITIONAL RENT Effective as of the Expansion ------------------------------- Effective Date, Lessee shall pay to Lessor Additional Rent for the Expansion Space for the Extended Term in accordance with the following: A. With the lease year commencing January 1, 2000, Lessee shall pay to Lessor as additional rent the amount (the "Excess") by which the sum of the Lessee's Pro Rata Share of (1) the Taxes (hereinafter defined) for the applicable calendar year and (2) the Expenses (hereinafter defined) for the applicable calendar year exceeds $6.70 per rentable square foot (the "Expense Stop"); provided Lessee shall not be entitled to a credit of Lessee's Pro Rata Share is less than $6.70 per rentable square foot. For purposes hereof, (i) "Expenses" shall mean all Basic Costs (as hereinafter defined but excluding Taxes), and (ii) "Lessee's Pro Rata Share" for the Expansion Space means .765% As soon as is practical following the end of each calendar year, commencing December 31, 2000, Lessor shall furnish to Lessee a statement (the "Annual Statement") of Lessor's actual Basic Costs 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 Lessor, as additional rent, the Excess stated in the Annual Statement. B. Basic Costs shall mean all costs and expenses paid or incurred in each calendar year in connection with operating, maintaining, repairing, managing and owning the Building and the Property, including, but not limited to, the following: 1. All labor costs for all persons performing services required or utilized in connection with the operation, repair, replacement and maintenance of and control of access to the Building and the Property, including, but not limited to, amounts incurred for wages, salaries and other compensation for services, payroll, social security, insurance, uniforms, training, disability benefits, pensions, hospitalization, retirement plans, group insurance or any other similar or like expenses or benefits. 2. All management fees, the cost of equipping and maintaining a management office at the Building, accounting services, legal fees not attributable to leasing and collection activity, and all other administrative costs relating to the Building and the Property. If management services are not provided by a third party, Lessor shall be entitled to a management fee comparable to that due and payable to third parties provided Lessor or management companies owned by, or management division of, Lessor perform actual management 8 services of a comparable nature and type as normally would be performed by third parties. 3. All rental and/or purchase costs of materials, supplies, tools and equipment used in the operation, repair, replacement, and maintenance and the control of access to the Building and the Property. 4. All amounts charged to Lessor by contractors and/or suppliers for services, replacement parts, components, materials, equipment and supplies furnished in connection with the operation, repair, maintenance, replacement of and control of access to any part of the Building, or Property generally, including the heating, air conditioning, ventilating, plumbing, electrical, elevator and other systems and equipment. At Lessor's option, major repair items may be amortized over a period of up to five (5) years. 5. All premiums and deductibles paid by Lessor for fire and extended coverage insurance, earthquake and extended coverage insurance, liability and extended coverage insurance, rental loss insurance, elevator insurance, boiler insurance and other insurance customarily carried from time to time by lessors of comparable office buildings or required to be carried by Lessor's Mortgagee. 6. Charges for all utilities, including, but not limited to, water, electricity, gas and sewer, but excluding those charges for which Lessor is otherwise reimbursed by Lessees. 7. "Taxes," which for purposes hereof, shall mean: (a) all real estate taxes and assessments on the Property, the Building or the Premises, and taxes and assessments levied in substitution of supplementation in whole or in part of such taxes, (b) all personal property taxes for the Building's personal property, including license expense, (c) all taxes imposed on services of Lessor's agents and employees, (d) all costs and fees incurred in connection with seeking reductions in or refunds in Taxes including, without limitations, any costs incurred by Lessor to challenge the tax valuation of the Building, but excluding income taxes. For the purpose of determining real estate taxes and assessments for any given calendar year, the amount to be included in Taxes for such year shall be as follows: (1) with respect to any special assessment that is payable in installments, Taxes for such year shall include the amount of the installment (and any interest) due and payable during such year; and (2) with respect to all other real estate taxes, Taxes for such year shall, at Lessor's election, include either the amount accrued, assessed or otherwise imposed for such year or the amount due and payable for such year, provided that Lessor's election shall be applied consistently throughout the Lease Term. If a reduction in Taxes is obtained for any year of the Lease Term during which Lessee paid its Pro Rata Share of Basic Costs, then Basic 9 Costs for such year will be retroactively adjusted and Lessor shall provide Lessee with a credit, if any, based upon such adjustments. Likewise, if a reduction is subsequently obtained for the tax component of Basic Costs, Basic Costs shall be restated and the Excess for all subsequent years recomputed. Lessee shall pay Lessor Lessee's Pro Rata Share of any such increase in the Excess within thirty (30) days after Lessee's receipt of a statement therefor from Lessor. 8. All landscape expenses and costs of maintaining, repairing, resurfacing and striping of the parking area and garages of the Property, if any. 9. Cost of all maintenance service agreements, including those for equipment, alarm service, window cleaning, drapery or Venetian blind cleaning, janitorial services, pest control, uniform supply, plant maintenance, landscaping, any parking equipment and rubbish removal and/or disposal fees. 10. Cost of all other repairs, replacements and general maintenance of the Property and Building, neither specified above nor directly billed to lessees. 11. The amortized cost of capital improvements made to the Building or the Property which are: (a) primarily for the purpose of reducing operating expense costs or otherwise improving the operating efficiency of the Property or Building; or (b) required to comply with any laws, rules or regulations of any governmental authority or a requirement of Lessor's insurance carrier. The cost of such capital improvement shall be amortized over a period of five (5) years and shall, at Lessor's option, include interest at a rate that is reasonably equivalent to the interest rate that Lessor would be required to pay to finance the cost of the capital improvement in question as of the date such capital improvement is performed, provided if the payback period of any capital improvement is less than five (5) years, Lessor may amortize the cost of such capital improvement over the payback period. 12. Any other expense or charge of any nature whatsoever which, in accordance with general industry practice with respect to the operation of a first-class office building, would be construed as an operating expense. 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 percent (95%) of the total Rentable Area of the Building at any time during any calendar year of the Lease Term, actual Basic Costs 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. 10 C. If Basic Costs for any calendar year increase by more than five percent (5%) over Basic Costs for the immediately preceding calendar year, Lessee, within ninety (90) days after receiving the Annual Statement for a particular calendar year, shall have the right to provide Lessor with written notice (the "Review Notice") of its intent to review Lessor's books and records relating to the Basic Costs for such calendar year. Within a reasonable time after receipt of a timely Review Notice, Lessor shall make such books and records available to Lessee or Lessee's agent for its review at either Lessor's home office or the office of the Building, provided that if Lessee retains an agent to review Lessor's books and records for any calendar year, such agent must be CPA firm licensed to do business in the state in which the Building is located. If Lessee fails to give Lessor written notice of objection within thirty (30) days after its review or fails to provide Lessor with a Review Notice within the ninety (90) day period provided above, Lessee shall be deemed to have approved Lessor's Annual Statement in all respects and shall thereafter be barred from raising any claims with respect thereto. Any information obtained by Lessee pursuant to the provisions of this Section shall be treated as confidential. VII. IMPROVEMENTS TO EXPANSION SPACE. ------------------------------- A. Condition of Expansion Space. Lessee has inspected the Expansion Space and agrees to accept the same "as is" without any agreements, representations, understandings or obligations on the part of the Lessor to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment. B. Cost of Improvements to Expansion Space. Provided Lessee is not in default, Lessee shall be entitled to receive an improvement allowance (the "Expansion Improvement Allowance") in an amount not to exceed Twelve Thousand Nine Hundred Sixteen and no/100 Dollars ($12,916.00) (i.e., $7.06 per rentable square foot of the Expansion Space) to be applied toward the cost of performing initial construction, alteration or improvement of the Expansion Space, including but not limited to the cost of space planning, design and related architectural and engineering services. In the event the total cost of the initial improvements to the Expansion Space exceeds the Expansion Improvement Allowance, Lessee shall pay for such excess upon demand. The entire unused balance of the Expansion Improvement Allowance, if any, shall accrue to the sole benefit of Lessor. Lessor shall pay such Expansion Improvement Allowance directly to the contractors retained to perform the construction, design or related improvement work to the Expansion Space. C. Responsibility for Improvements to Expansion Space. Lessor shall enter into a direct contract for the initial improvements to the Expansion Space with a general contractor selected by Lessor. Lessee shall devote such time in consultation with Lessor or Lessor's architect as may be required to provide all information Lessor 11 deems necessary in order to enable Lessor to complete, and obtain Lessee's written approval of, the plans for the initial improvements to the Expansion Space in a timely manner. All plans for the initial improvements to the Expansion Space shall be subject to Lessor's consent, which consent shall not be unreasonably withheld. If the cost of such improvements exceeds the Expansion Improvement Allowance, then prior to commencing any construction of improvements to the Expansion Space, Lessor shall submit to Lessee a written estimate setting forth the anticipated cost, including but not limited to the cost of space planning, design and related architectural and engineering services, labor and materials, contractor's fees, and permit fees. Within a reasonable time thereafter, Lessee shall either notify Lessor in writing of its approval of the cost estimate or specify its objections thereto and any desired changes to the proposed improvements. In the event Lessee notifies Lessor of such objections and desired changes, Lessee shall work with Lessor to reach a mutually acceptable alternative cost estimate. VIII. EARLY ACCESS TO EXPANSION SPACE. During any period that Lessee shall ------------------------------- be permitted to enter the Expansion Space prior to the Expansion Effective Date (e.g., to perform alterations or improvements, if any), Lessee shall comply with all terms and provisions of the Lease, except those provisions requiring payment of Base Rental or Additional Base Rental as to the Expansion Space. If Lessee takes possession of the Expansion Space prior to the Expansion Effective Date for any reason whatsoever (other than the performance of the work in the Expansion Space with Lessor's prior approval), such possession shall be subject to all the terms and conditions of the Lease and this Amendment, and Lessee shall pay Base Rental and Additional Base Rental as applicable to the Expansion Space to Lessor on a per diem basis for each day of occupancy prior to the Expansion Effective Date. IX. OTHER PERTINENT PROVISIONS. Lessor and Lessee agree that, effective as -------------------------- of the date hereof (unless different effective date(s) is/are specifically referenced in this Section), the Lease shall be amended in the following additional respects: A. ARTICLE 29, "Notices" of the Lease shall be modified and amended by deleting the section containing the address for Lessor and substituting the following therefor: "Lessor EOP-Summit Limited Partnership c/o Equity Office Properties Trust 1300 Summit Avenue Suite 220 Fort Worth, Texas 76102 With a copy to Lessor: 12 c/o Equity Office Properties Trust Two North Riverside Plaza Suite 2200 Chicago, Illinois 60606 Attention: Regional Counsel - Southwest Region Payment of Rent only shall be made payable to: Equity Office Properties at the following address: Equity Office Properties, L.L.C. d/b/a Summit Office Park P.O. Box 844552 Dallas, Texas 75284-4552" B. Effective as of the Expansion Effective Date and subject to the terms and conditions of ARTICLE C.l.E. of the Second Amendment, Lessee agrees to lease from Lessor and Lessor agrees to lease to Lessee a total of two (2) additional covered, reserved Spaces and four (4) unreserved surface Spaces (the "Additional Spaces") in the Parking Area. C. Effective as of the Expansion Effective Date, ARTICLE C.ll. of the Second Amendment "Suite 634 Rights" shall be deleted in its entirety, and shall be of no further force and effect. X. MISCELLANEOUS. -------------- A. This 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, unless specifically set forth in this Amendment. 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 Amendment, the provisions of this Amendment shall govern and control. D. Submission of this Amendment by Lessor is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Lessee. Lessor shall not 13 be bound by this Amendment until Lessor has executed and delivered the same to Lessee. E. The capitalized terms used in this 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 Amendment. F. Lessee hereby represents to Lessor that Lessee has dealt with no broker other than Kelly Geren & Searcy in connection with this Amendment. 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 other than Kelly Geren & Searcy claiming to have represented Lessee in connection with this Amendment. Lessor hereby represents to Lessee that Lessor has dealt with no broker other than the Richard D. Minker Co. in connection with this 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 other than the Richard D. Minker Co. claiming to have represented Lessor in connection with this Third Amendment. 14 IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Amendment as of the day and year first above written. WITNESSES; ATTESTATION 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 general partner By: /s/ Brad Fricks ----------------------- Name: Brad Fricks ----------------------- Title: Vice-President- Leasing ----------------------- LESSEE: SUMMIT BANCSHARES, INC. By: /s/ Bob G. Scott -------------------------------------- Name: Bob G. Scott -------------------------------------- Title: Executive Vice President -------------------------------------- 15 EXHIBIT A EXPANSION SPACE This Exhibit is attached to and made a part of the lease dated as of the 22nd October, 1999, by and between EOP SUMMIT LIMITED PARTNERSHIP, a Delaware limited partnership ("LESSOR") and SUMMIT BANCSHARES, INC. ("LESSEE") for space in the Building located at 1300 Summit Avenue, Suite 634, Fort Worth, Texas. 1300 SUMMIT OFFICE PARK Tenant Name: Summit Bancshares, Inc. Suite Number: 634 Square Feet: 1,829 rentable IN WITNESS WHEREOF, LESSOR AND LESSEE have entered into this Lease as of the date first written above. 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 general partner By: /s/ Brad Fricks ------------------------ Name: Brad Fricks ------------------------ Title: Vice-President- Leasing ------------------------ LESSEE: SUMMIT BANCSHARES, INC. By: /s/ Bob G. Scott ------------------------- Name: Bob G. Scott ------------------------- Title: Executive Vice President ------------------------- 16 EX-10.T 3 FOURTH AMENDMENT EXHIBIT 10 (t) FOURTH AMENDMENT TO LOAN AGREEMENT ---------------------------------- THIS FOURTH AMENDMENT ("Fourth Amendment") dated as of the 15th day of July, 1999, 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, Borrower executed the Third Amendment to Loan Agreement on July 15, 1998 ("Third 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 (a) 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, 2000 ( 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 n July 15, 2000 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, 2005. 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 called 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, 2000 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, 2005. Principal and interest of the Liquidity Note shall be due and payable as provided in the Liquidity Note. 1.2 Amendment to Negative Covenants. The Borrower and Lender agree to -------------------------------- amend, and do hereby amend, Sections 5.04, 5.06, 5.10 of the Negative Covenants in the Loan Agreement such that after the amendment such Sections shall read in their entirety as follows: "5.04 Tangible Net Worth. The Borrower shall not permit its ------------------ consolidated Tangible Net Worth to at any time be less than Thirty Five Million and No/100 Dollars ($35,000,000.00) plus the Tangible Net Worth of any subsidiaries acquired after Closing Date. The Borrower shall not permit the Bank's Tangible Net Worth at any Time to be less than Fifteen Million and No/100 Dollars ($15,000,000.00)." "5.06 Dividends. Borrower shall not declare or pay any dividends, --------- make any payment on account of any class of the capital stock of Borrower now or hereafter outstanding, or make any distribution of cash or property to holders of any shares of such stock which exceed $3,500,000.00 in the aggregate during any fiscal year, provided however, without Lender's prior written consent, Borrower will not declare any dividend so long as Borrower is in default in payment of the Obligations. Payment by Borrower for shares purchased under a stock repurchase plan by which Borrower purchases its own shares on the open market will not be considered a distribution to shareholders." "5.10 Limitation on Debt. Borrower shall not, nor allow any ------------------ Subsidiary to, create, incur, assume, become liable in any manner in respect of, or suffer to exist, any debt for borrowed money except: (a) debt, excluding debt created under this Agreement, not in excess of $1,000,000.00 at any one time outstanding; (b) debt created under this Agreement; (c) debt secured by a purchase money security interest; and (d) $10,000,000.00 of federal funds purchased excluding intercompany transactions (meaning transaction between or among Borrower and its Subsidiaries, or any of them). 1.3 Amendment to Loan Agreement. The Borrower and Lender agree to add, ---------------------------- and do hereby add, Section 5.13 in the Loan Agreement such that after the amendment such Section shall read in its entirety as follows: "5.13 Loan Loss Reserve. Borrower shall cause the Bank to maintain at ----------------- all times a reserve for loan losses in an amount not less than 1.0% of total loans (on a consolidated basis), to be calculated at the end of each fiscal quarter." ARTICLE II ---------- Conditions of Effectiveness --------------------------- 2.1 Effective Date. This Fourth Amendment shall become effective as of --------------- July 15, 1999, when, and only when, Lender shall have received counterparts of this Fourth 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, 1999 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 Fourth Amendment, Borrower represents and warrants the following: (a) Borrower has the corporate power to execute and deliver this Fourth 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 Fourth 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 or 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 provincial 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 Fourth Amendment or the transactions contemplated hereby which, if adversely determined, would materially impair the right of Borrower, to carry on 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 Fourth Amendment. (d) The representations and warranties of Borrower contained in the Loan Agreement, this Fourth Amendment, the Notes, and any other 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, the Third Amendment and this Fourth Amendment), the Notes and all other Loan Documents. 4.2 Valid Liens. Borrower hereby acknowledges and agrees that the liens ------------ and security interests of the Loan Documents are valid and subsisting 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, Second Amendment and the Third Amendment), this Fourth 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 Fourth Amendment. The execution, delivery and effectiveness of this Fourth 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 Fourth 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 Fourth Amendment and under the Loan Agreement. 5.2 Loan Document. This Fourth 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 Fourth 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 Fourth 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 Fourth Amendment. 5.5 Release of Claims. Borrower by its execution of this Fourth ------------------ 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 Fourth 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 FOURTH 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 FOURTH 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 Fourth 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 ----------------------------- EX-21 4 SUBSIDIARIES EXHIBIT 21 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES 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 5 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 20, 2000, relating to the consolidated balance sheets of SUMMIT BANCSHARES, INC. and subsidiaries as of December 31, 1999 and 1998 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, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of SUMMIT BANCSHARES, INC. /s/ Stovall, Grandey & Whatley STOVALL, GRANDEY & WHATLEY Fort Worth, Texas March 17, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF SUMMIT BANCSHARES, INC., AS OF DECEMBER 31, 1999, AND THE RELATED STATEMENTS OF INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE PERIOD ENDING DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1999 DEC-31-1999 19,092 0 18,012 0 129,116 27,324 26,739 355,414 5,169 564,786 480,546 32,091 3,440 0 7,952 0 0 40,757 564,786 30,620 8,530 1,082 40,232 12,837 13,772 26,460 1,001 (3) 15,224 14,115 9,222 0 0 9,222 1.44 1.39 5.31 2,450 0 3 11,804 4,724 727 171 5,169 4,482 0 687
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