-----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, PP7eSXaOOdfrI3mqtl88oUlgDzqGg4ZqVXgdEd5Ws641fsC3G04mwK0YhzRwsrQc jYff7dJJOAcrfOB6HldA8g== 0001145443-02-000708.txt : 20021114 0001145443-02-000708.hdr.sgml : 20021114 20021114130609 ACCESSION NUMBER: 0001145443-02-000708 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11986 FILM NUMBER: 02823521 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-Q 1 d11492.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Mark One |X| Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2002; or |_| Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from to . -------------- -------------- Commission File Number 0-11986 SUMMIT BANCSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Texas 75-1694807 - ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 1300 Summit Avenue, Fort Worth, Texas 76102 ------------------------------------------- (Address of principal executive offices) (817) 336-6817 ---------------------------------------------------- (Registrant's telephone number, including area code) No Change ----------------------------------------- (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| The number of shares of common stock, $1.25 par value, outstanding at September 30, 2002 was 6,274,664 shares. SUMMIT BANCSHARES, INC. INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Balance Sheets at September 30, 2002 and 2001 and at December 31, 2001 4 Consolidated Statements of Income for the Nine Months Ended September 30, 2002 and 2001 and for the Year Ended December 31, 2001 5 Consolidated Statements of Income for the Three Months Ended September 30, 2002 and 2001 6 Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 2002 and 2001 and for the Year Ended December 31, 2001 7 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 and for the Year Ended December 31, 2001 8 Notes to Consolidated Financial Statements for the Nine Months Ended September 30, 2002 and 2001 and for the Year Ended December 31, 2001 9-20 The September 30, 2002 and 2001 and the December 31, 2001 financial statements included herein are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management of the registrant, necessary to a fair statement of the results for the interim periods. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months and Nine Months Ended September 30, 2002 and 2001 21-29 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Item 4. Controls and Procedures 29 2 PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Change in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 3 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30, (Unaudited) --------------------- December 31, 2002 2001 2001 --------- --------- --------- ASSETS (In Thousands) CASH AND DUE FROM BANKS - NOTE 1 $ 25,781 $ 28,992 $ 29,178 FEDERAL FUNDS SOLD & DUE FROM TIME 114 1,116 2,284 INVESTMENT SECURITIES - NOTE 2 Securities Available-for-Sale, at fair value 168,250 161,223 160,136 LOANS - NOTES 3, 11 AND 17 Loans, Net of Unearned Discount 474,401 421,048 430,754 Allowance for Loan Losses (6,334) (6,190) (6,015) --------- --------- --------- LOANS, NET 468,067 414,858 424,739 PREMISES AND EQUIPMENT - NOTE 4 10,011 8,024 8,131 ACCRUED INCOME RECEIVABLE 3,755 4,417 4,411 OTHER REAL ESTATE - NOTE 5 250 -0- -0- OTHER ASSETS 6,377 4,897 7,077 --------- --------- --------- TOTAL ASSETS $ 682,605 $ 623,527 $ 635,956 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS - NOTE 6 Noninterest-Bearing Demand $ 157,519 $ 139,981 $ 150,040 Interest-Bearing 413,391 395,874 393,763 --------- --------- --------- TOTAL DEPOSITS 570,910 535,855 543,803 SHORT TERM BORROWINGS - NOTE 7 43,871 23,590 28,366 NOTE PAYABLE - NOTE 8 -0- 300 -0- ACCRUED INTEREST PAYABLE 372 737 605 OTHER LIABILITIES 2,679 3,083 2,646 --------- --------- --------- TOTAL LIABILITIES 617,832 563,565 575,420 --------- --------- --------- COMMITMENTS AND CONTINGENCIES - NOTES 12, 14, 16 AND 18 SHAREHOLDERS' EQUITY - NOTES 13, 15 AND 19 Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 6,274,664, 6,317,773 and 6,262,961 shares issued and outstanding at September 30, 2002 and 2001 and at December 31, 2001, respectively 7,843 7,897 7,829 Capital Surplus 7,056 6,844 6,865 Retained Earnings 48,704 43,967 44,166 Accumulated Other Comprehensive Income - Unrealized Gain on Available-for-Sale Investment Securities, Net of Tax 2,483 2,217 1,694 Treasury Stock at Cost (60,322, 47,912 and 1,000 shares at September 30, 2002 and 2001 and at December 31, 2001, respectively) (1,313) (963) (18) --------- --------- --------- TOTAL SHAREHOLDERS' EQUITY 64,773 59,962 60,536 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 682,605 $ 623,527 $ 635,956 ========= ========= =========
The accompanying Notes should be read with these financial statements. 4 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Nine Months Ended (Unaudited) September 30, Year Ended ------------------ December 31, 2002 2001 2001 ------- ------- ------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $23,528 $26,643 $34,548 Interest and Dividends on Investment Securities: Taxable 5,284 5,949 7,966 Exempt from Federal Income Taxes 71 9 11 Interest on Federal Funds Sold and Due From Time 171 1,936 1,972 ------- ------- ------- TOTAL INTEREST INCOME 29,054 34,537 44,497 ------- ------- ------- INTEREST EXPENSE Interest on Deposits 6,065 12,411 14,967 Interest on Short Term Borrowings 466 491 559 Interest on Note Payable -0- 1 1 ------- ------- ------- TOTAL INTEREST EXPENSE 6,531 12,903 15,527 ------- ------- ------- NET INTEREST INCOME 22,523 21,634 28,970 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 2,365 860 1,755 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,158 20,774 27,215 ------- ------- ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 2,161 1,740 2,400 Gain on Sale of Investment Securities 165 -0- -0- Other Income 1,786 1,554 2,116 ------- ------- ------- TOTAL NON-INTEREST INCOME 4,112 3,294 4,516 ------- ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits - NOTE 14 8,508 7,753 10,564 Occupancy Expense - Net 855 996 1,294 Furniture and Equipment Expense 1,160 1,118 1,472 Other Real Estate Owned and Foreclosed Asset Expense - Net 148 174 224 Merger Related Expense - NOTE 9 -0- 598 598 Other Expense - NOTE 9 2,868 3,009 4,113 ------- ------- ------- TOTAL NON-INTEREST EXPENSE 13,539 13,648 18,265 ------- ------- ------- INCOME BEFORE INCOME TAXES 10,731 10,420 13,466 APPLICABLE INCOME TAXES - NOTE 10 3,679 3,601 4,664 ------- ------- ------- NET INCOME $ 7,052 $ 6,819 $ 8,802 ======= ======= ======= NET INCOME PER SHARE - NOTE 15 Basic $ 1.13 $ 1.08 $ 1.39 Diluted 1.10 1.05 1.36
The accompanying Notes should be read with these financial statements. 5 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three Months Ended September 30, ------------------ 2002 2001 ------- ------- (In Thousands, Except Per Share Data) INTEREST INCOME Interest and Fees on Loans $ 7,951 $ 8,592 Interest and Dividends on Investment Securities: Taxable 1,774 1,824 Exempt from Federal Income Taxes 34 3 Interest on Federal Funds Sold and Due From Time 80 478 ------- ------- TOTAL INTEREST INCOME 9,839 10,897 ------- ------- INTEREST EXPENSE Interest on Deposits 2,024 3,617 Interest on Short Term Borrowings 176 113 Interest on Note Payable -0- 1 ------- ------- TOTAL INTEREST EXPENSE 2,200 3,731 ------- ------- NET INTEREST INCOME 7,639 7,166 LESS: PROVISION FOR LOAN LOSSES - NOTE 3 1,350 370 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,289 6,796 ------- ------- NON-INTEREST INCOME Service Charges and Fees on Deposits 793 594 Gain on Sale of Investment Securities 163 -0- Other Income 574 551 ------- ------- TOTAL NON-INTEREST INCOME 1,530 1,145 ------- ------- NON-INTEREST EXPENSE Salaries and Employee Benefits - NOTE 14 2,768 2,621 Occupancy Expense - Net 285 372 Furniture and Equipment Expense 388 391 Other Real Estate Owned and Foreclosed Asset Expense - Net 40 47 Other Expense 734 942 ------- ------- TOTAL NON-INTEREST EXPENSE 4,215 4,373 ------- ------- INCOME BEFORE INCOME TAXES 3,604 3,568 APPLICABLE INCOME TAXES - NOTE 10 1,232 1,236 ------- ------- NET INCOME $ 2,372 $ 2,332 ======= ======= NET INCOME PER SHARE - NOTE 15 Basic $ 0.38 $ 0.37 Diluted 0.37 0.36
The accompanying Notes should be read with these financial statements. 6 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 AND FOR THE YEAR ENDED DECEMBER 31, 2001 (Unaudited)
Accumulated Other Comprehensive Income - Net Total Common Stock Unrealized Gain on Share- --------------------- Capital Retained Investment Treasury Holder's Shares Amount Surplus Earnings Securities Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) BALANCE AT January 1, 2001 6,362,278 $ 7,953 $ 6,678 $ 40,655 $ 285 $ -0- $ 55,571 Stock Options Exercised 33,600 42 166 208 Purchases of Stock Held in Treasury (2,474) (2,474) Retirement of Stock Held in Treasury (78,105) (98) (1,413) 1,511 -0- Cash Dividend - $.33 Per Share (2,094) (2,094) Net Income for the Nine Months Ended Sepember 30, 2001 6,819 6,819 Securities Available- for-Sale Adjustment 1,932 1,932 --------- Total Comprehensive Income - NOTE 22 8,751 --------- ------- ------- -------- ------- -------- -------- BALANCE AT September 30, 2001 6,317,773 7,897 6,844 43,967 2,217 (963) 59,962 Stock Options Exercised 4,600 6 21 27 Purchases of Stock Held in Treasury (225) (225) Retirement of Stock Held in Treasury (59,412) (74) (1,096) 1,170 -0- Cash Dividend - $.11 Per Share (688) (688) Net Income for the Three Months Ended December 31, 2001 1,983 1,983 Securities Available- for-Sale Adjustment (523) (523) --------- Total Comprehensive Income - NOTE 22 1,460 --------- ------- ------- -------- ------- -------- -------- BALANCE AT December 31, 2001 6,262,961 7,829 6,865 44,166 1,694 (18) 60,536 Stock Options Exercised 25,325 31 191 222 Purchases of Stock Held in Treasury (1,574) (1,574) Retirement of Stock Held in Treasury (13,622) (17) (262) 279 -0- Cash Dividend - $.36 Per Share (2,252) (2,252) Net Income for the Nine Months Ended September 30, 2002 7,052 7,052 Securities Available- for-Sale Adjustment 789 789 --------- Total Comprehensive Income - NOTE 22 7,841 --------- ------- ------- -------- ------- -------- -------- BALANCE AT September 30, 2002 6,274,664 $ 7,843 $ 7,056 $ 48,704 $ 2,483 $ (1,313) $ 64,773 ========= ======= ======= ======== ======= ======== ========
The accompanying Notes should be read with these financial statements. 7 SUMMIT BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 AND FOR THE YEAR ENDED DECEMBER 31, 2001
(Unaudited) For the Nine Months Ended (Unaudited) September 30, Year Ended ----------------------- December 31, 2002 2001 2001 --------- --------- --------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,052 $ 6,819 $ 8,802 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 817 782 1,058 Net Premium Amortization of Investment Securities 681 42 240 Provision for Loan Losses 2,365 860 1,755 Deferred Income Taxes Benefit (168) (575) (480) Net Gain on Sale of Investment Securities (165) -0- -0- Writedown of Other Real Estate -0- 11 11 Writedown of Foreclosed Assets -0- 301 300 Net Gain From Sale of Other Real Estate (17) (308) (308) Net Gain From Sale of Foreclosed Assets (319) -0- -0- Net Loss From Sale of Premises and Equipment 11 -0- 1 Net Decrease (Increase) in Accrued Income and Other Assets 694 1,839 (252) Net Decrease in Accrued Expenses and Other Liabilities (200) (154) (723) --------- --------- --------- Total Adjustments 3,699 2,798 1,602 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,751 9,617 10,404 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net Decrease in Federal Funds Sold and Due From Time 2,170 45,345 44,177 Proceeds from Matured and Prepaid Investment Securities o Held-to-Maturity -0- 15,000 15,000 o Available-for-Sale 40,307 76,401 85,127 Proceeds from Sales of Investment Securities 143,444 9,987 60,139 Purchase of Investment Securities o Available-for-Sale (191,187) (110,080) (168,860) Loans Originated and Principal Repayments, Net (46,481) (41,265) (51,670) Recoveries of Loans Previously Charged-Off 138 192 268 Proceeds from Sale of Premises and Equipment 31 126 126 Proceeds from Sale of Other Real Estate & Repossessed Assets 1,150 1,073 716 Purchases of Premises and Equipment (2,728) (808) (1,191) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (53,156) (4,029) (16,168) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Demand Deposits, Savings Accounts and Interest Bearing Transaction Accounts 26,547 13,450 34,868 Net Increase (Decrease) in Certificates of Deposit 560 (17,261) (30,731) Net Increase in Short Term Borrowings 15,505 3,680 8,456 Proceeds from Note Payable -0- 300 -0- Payments of Cash Dividends (2,252) (2,094) (2,782) Proceeds from Stock Options Exercised 222 208 235 Purchase of Treasury Stock (1,574) (2,474) (2,699) --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 39,008 (4,191) 7,347 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (3,397) 1,397 1,583 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 29,178 27,595 27,595 --------- --------- --------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 25,781 $ 28,992 $ 29,178 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest Paid $ 6,764 $ 13,257 $ 16,013 Income Taxes Paid 3,729 2,607 5,555 Bank Financed Sales of Other Real Estate -0- -0- 440
The accompanying Notes should be read with these financial statements. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMIT BANCSHARES, INC. AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 2001 (UNAUDITED) NOTE 1 - Summary of Significant Accounting Policies The accounting and reporting policies of Summit Bancshares, Inc. and Subsidiaries are in accordance with accounting principles generally accepted in the United States of America 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 Summit Bancshares, Inc. (hereinafter, collectively with its Subsidiaries, the "Corporation"), include its accounts and its direct and indirect wholly-owned subsidiaries, Summit Delaware Financial Corporation and Summit Bank, National Association (the "Bank"). All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements included herein are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management of the registrant, necessary to a fair statement of the results for the interim periods. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and Due From Banks The Bank is required to maintain certain noninterest-bearing cash balances at the Federal Reserve Bank based on its level of deposits. During the first nine months of 2002 the average cash balance maintained at the Federal Reserve Bank was $1,359,000. Compensating balances held at other correspondent banks, to minimize service charges, averaged approximately $18,671,000 during the same period. Investment Securities The Corporation has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). At the date of purchase, the Corporation is required to classify debt and equity securities into one of three categories: held-to-maturity, trading or available-for-sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held-to-maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings. Investments not classified as either held-to-maturity or trading are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, in a separate component of shareholders' equity until realized. The Corporation has the ability and intent to hold to maturity its investment securities classified as held-to-maturity; accordingly, no adjustment has been made for the excess, if any, of amortized cost over market. In determining the investment category classifications at the time of purchase of securities, management considers its asset/liability strategy, changes in interest rates and prepayment risk, the need to increase capital and other factors. Under certain circumstances (including the deterioration of the issuer's creditworthiness, a change in tax law, or statutory or regulatory requirements), the Corporation may change the investment security classification. In the periods reported for 2002 and 2001 the Corporation held no securities that would have been classified as trading securities. All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to income over the contractual maturity or estimated life of the individual investment on the level yield method. Gain or loss on sale of investments is based upon the specific identification method and the gain or loss is recorded in non-interest income. Income earned on the Corporation's investments in state and political subdivisions is not taxable. 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. Direct costs related to loan originations 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 9 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) non-accrual all payments received are applied to principal and no interest income is recorded until the loan is returned to accrual status or the principal has been reduced to zero. The Corporation has adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure." Under this standard, the allowance for loan losses related to loans that are identified for evaluation in accordance with Statement No. 114 (impaired loans) is based on discounted cash flows using the loan's initial effective rate or the fair value of the collateral for certain collateral dependent loans. The allowance for loan losses is comprised of amounts charged against income in the form of a provision for loan losses as determined by management. Management's evaluation is based on a number of factors, including the Subsidiary's loss experience in relation to outstanding loans and the existing level of the allowance, prevailing and prospective economic conditions, and management's continuing review of the discounted cash flow values of impaired loans and its evaluation of the quality of the loan portfolio. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals. Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change. Accordingly, the Corporation may ultimately incur losses which vary from management's current estimates. Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or are reasonably estimable. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets ranging from three to forty years. Maintenance and repairs are charged to non-interest expense. Renewals and betterments are added to the asset accounts and depreciated over the periods benefited. Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any gain or loss is reflected in the income and expense accounts. Other Real Estate Other real estate is foreclosed property held pending disposition and is valued at the lower of its fair value or the recorded investment in the related loan. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Corporation's recorded investment in the related loan, a writedown is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in non-interest expense. Federal Income Taxes The Corporation joins with its Subsidiaries in filing a consolidated federal income tax return. The Subsidiaries pay to the parent a charge equivalent to their current federal income tax based on the separate taxable income of the Subsidiaries. The Corporation and the Subsidiaries maintain their records for financial reporting and income tax reporting purposes on the accrual basis of accounting. Deferred income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Deferred income taxes are provided for accumulated temporary differences due to basic differences for assets and liabilities for financial reporting and income tax purposes. Realization of net deferred tax assets is dependent on generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the net deferred tax assets will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. Cash and Cash Equivalents For the purpose of presentation in the Statements of Cash Flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and Due from Banks." Reclassification Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. 10 NOTE 1 - Summary of Significant Accounting Policies (cont'd.) 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. Audited Financial Statements The consolidated balance sheet as of December 31, 2001, and the consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 2001 are headed "unaudited" in these financial statements. These statements were reported in the Securities Exchange Commission Form 10-K as of December 31, 2001 as "audited" but are required to be reflected in these statements as unaudited because of the absence of an independent auditor's report. NOTE 2 - Investment Securities A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands):
September 30, 2002 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities $ 4,000 $ 47 $ -0- $ 4,047 U.S. Government Agencies and Corporations 119,884 3,371 (71) 123,184 U.S. Government Agency Mortgage Backed Securities 34,173 319 (13) 34,479 Obligations of States and Political Subdivisions 4,789 113 (4) 4,898 Federal Reserve and Federal Home Loan Bank Stock 1,642 -0- -0- 1,642 -------- -------- -------- -------- Total Available-for-Sale Securities 164,488 3,850 (88) 168,250 -------- -------- -------- -------- Total Investment Securities $164,488 $ 3,850 $ (88) $168,250 ======== ======== ======== ========
All investment securities are carried on the consolidated balance sheet as of September 30, 2002 at fair value. The net unrealized gain of $3,762,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. 11 NOTE 2 - Investment Securities (cont'd.) A summary of amortized cost and estimated fair values of investment securities is as follows (in thousands):
September 30, 2002 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Investment Securities - Available-for-Sale U.S. Treasury Securities $ 10,040 $ 225 $ -0- $ 10,265 U.S. Government Agencies and Corporations 124,077 2,841 -0- 126,918 U.S. Government Agency Mortgage Backed Securities 22,291 290 -0- 22,581 Obligations of States and Political Subdivisions 125 2 -0- 127 Federal Reserve and Federal Home Loan Bank Stock 1,332 -0- -0- 1,332 -------- -------- -------- -------- Total Available-for-Sale Securities 157,865 3,358 -0- 161,223 -------- -------- -------- -------- Total Investment Securities $157,865 $ 3,358 $ -0- $161,223 ======== ======== ======== ========
All investment securities are carried on the consolidated balance sheet as of September 30, 2001 at fair value. The net unrealized gain of $3,358,000 is included in the Available-for-Sale Investment Securities balance. The unrealized gain, net of tax, is included in Shareholders' Equity. NOTE 3 - Loans and Allowance for Loan Losses The book values of loans by major type follow (in thousands):
September 30, ----------------------- December 31, 2002 2001 2001 --------- --------- --------- Commercial $ 197,346 $ 183,111 $ 184,716 Real Estate Mortgage - Commercial 131,874 101,573 107,600 Real Estate Mortgage - Residential 51,327 42,975 44,522 Real Estate Construction 59,996 61,040 60,548 Loans to Individuals 33,859 32,364 33,376 Less: Unearned Discount (1) (15) (8) --------- --------- --------- 474,401 421,048 430,754 Allowance for Loan Losses (6,334) (6,190) (6,015) --------- --------- --------- Loans - Net $ 468,067 $ 414,858 $ 424,739 ========= ========= =========
12 NOTE 3 - Loans and Allowance for Loan Losses (cont'd.) Transactions in the allowance for loan losses are summarized as follows (in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Balance, Beginning of Period $ 6,015 $ 5,399 $ 5,399 Provisions, Charged to Income 2,365 860 1,755 Loans Charged-Off (2,184) (261) (1,407) Recoveries of Loans Previously Charged-Off 138 192 268 -------- -------- -------- Net Loans (Charged-Off) Recovered (2,046) (69) (1,139) -------- -------- -------- Balance, End of Period $ 6,334 $ 6,190 $ 6,015 ======== ======== ========
The provisions for loan losses charged to operating expenses during the nine months ended September 30, 2002 and September 30, 2001 of $2,365,000 and $860,000, respectively, were considered adequate to maintain the allowance in accordance with the policy discussed in Note 1. For the year ended December 31, 2001, a provision of $1,755,000 was recorded. At September 30, 2002, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $4,081,000 (of which $4,081,000 were on non-accrual status). The related allowance for loan losses for these loans was $974,000. The average recorded investment in impaired loans during the nine months ended September 30, 2002 was approximately $4,133,000. For this period the Corporation recognized no interest income on these impaired loans. NOTE 4 - Premises and Equipment The investment in premises and equipment stated at cost and net of accumulated amortization and depreciation is as follows (in thousands):
September 30, --------------------- December 31, 2002 2001 2001 -------- -------- -------- Land $ 2,317 $ 2,317 $ 2,317 Buildings and Improvements 9,049 8,150 8,247 Furniture & Equipment 8,809 7,454 7,540 -------- -------- -------- Total Cost 20,175 17,921 18,104 Less: Accumulated Amortization and Depreciation (10,164) (9,897) (9,973) -------- -------- -------- Net Book Value $ 10,011 $ 8,024 $ 8,131 ======== ======== ========
NOTE 5 - Other Real Estate The carrying value of other real estate is as follows (in thousands):
September 30, --------------------- December 31, 2002 2001 2001 -------- -------- -------- Other Real Estate $ 250 $ -0- $ -0- ======== ======== ========
There were no direct writedowns of other real estate charged to income for the nine months ended September 30, 2002. There were direct writedowns of other real estate charged to income for the nine months ended September 30, 2001 of $11,000. For the year ended December 31, 2001, $11,000 was charged to income. 13 NOTE 6 - Deposits The book values of deposits by major type follow (in thousands):
September 30, --------------------- December 31, 2002 2001 2001 -------- -------- -------- Noninterest-Bearing Demand Deposits $157,519 $139,981 $150,040 Interest-Bearing Deposits: Interest-Bearing Transaction Accounts and Money Market Funds 182,130 170,793 175,965 Savings 118,211 99,121 105,308 Certificates of Deposits under $100,000 and IRA's 64,222 69,910 64,380 Certificates of Deposits $100,000 or more 48,512 55,322 47,644 Other 316 728 466 -------- -------- -------- Total 413,391 395,874 393,763 -------- -------- -------- Total Deposits $570,910 $535,855 $543,803 ======== ======== ========
NOTE 7 - Short Term Borrowings Securities sold under repurchase agreements generally represent borrowings with maturities ranging from one to thirty days. Information relating to these borrowings is summarized as follows (in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Securities Sold Under Repurchase Agreements: Average Balance $ 17,752 $ 17,935 $ 17,470 Period-End Balance 23,571 15,590 14,816 Maximum Month-End Balance During Period 24,469 20,374 20,374 Interest Rate: Average 0.91% 3.49% 2.94% Period-End 1.11% 2.10% 0.75% Federal Funds Purchased: Average Balance $ 1,412 $ 170 $ 567 Period-End Balance 6,000 8,000 8,550 Maximum Month-End Balance During Period 8,650 8,000 8,550 Interest Rate: Average 2.03% 3.54% 2.76% Period-End 2.21% 3.65% 1.92%
The Corporation has available a line of credit with the Federal Home Loan Bank of Dallas which allows it to borrow on a collateralized basis at a fixed term. At September 30, 2002, $12,000,000 of borrowings were outstanding under the line of credit at an average rate of 2.39%, $7,000,000 of which matures in October, 2002 and $5,000,000 maturing in May, 2003. For the nine months ended September 30, 2002, the Corporation had average borrowings of $17,345,000. In addition, at September 30, 2002, the subsidiary had $2,300,000 borrowed under a match funding agreement with Federal Home Loan Bank at a rate of 4.41% which matures in June 2003. For the nine months ended September 30, 2001, the subsidiary had no borrowings outstanding. At December 31, 2001, $5,000,000 of borrowings were outstanding at a rate of 1.92% which matured in January 2002. For the year ended December 31, 2001, the Corporation had average borrowings of $452,000. NOTE 8 - Notes Payable On September 15, 2002, the Corporation obtained lines of credit from a bank under which the Corporation may borrow $11,000,000 at prime rate. The lines of credit are secured by stock of the Bank and matures on September 15, 2003, whereupon, if balances are outstanding, the lines convert to term notes having five year terms. The Corporation will not pay a fee for any unused portion of the lines. As of September 30, 2002, no funds had been borrowed under these lines nor were any borrowings outstanding. As of September 30, 2001, $300,000 was borrowed under these lines. 14 NOTE 9 - Other Non-Interest Expense The significant components of other non-interest expense are as follows (in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Business Development $ 600 $ 458 $ 734 Legal and Professional Fees 501 477 634 Printing and Supplies 233 260 362 Regulatory Fees and Assessments 179 191 244 Other 1,355 1,623 2,139 -------- -------- -------- Total $ 2,868 $ 3,009 $ 4,113 ======== ======== ========
NOTE 10 - Income Taxes Federal income taxes included in the consolidated balance sheets were as follows (in thousands):
September 30, --------------------- December 31, 2002 2001 2001 -------- -------- -------- Current Tax Asset (Liability) $ 374 $ (1,505) $ 493 Net Deferred Tax Asset 1,195 1,277 1,432 -------- -------- -------- Total Included in Other Assets (Liabilities) $ 1,569 $ (228) $ 1,925 ======== ======== ========
The net deferred tax asset at September 30, 2002 of $1,195,000 included $(1,279,000), a deferred tax liability related to unrealized gains on Available-for-Sale Securities. The components of income tax expense were as follows (in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Federal Income Tax Expense: Current $ 3,847 $ 4,176 $ 5,144 Deferred (benefit) (168) (575) (480) -------- -------- -------- Total Federal Income Tax Expense $ 3,679 $ 3,601 $ 4,664 ======== ======== ======== Effective Tax Rates 34.3% 34.5% 34.6%
15 NOTE 10 - Income Taxes (cont'd.) The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to operating earnings are as follows (in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Federal Income Taxes at Statutory Rate of 34.3% $ 3,702 $ 3,576 $ 4,621 Effect of Tax Exempt Interest Income (44) (3) (3) Non-deductible Expenses 54 47 65 Other (33) (19) (19) -------- -------- -------- Income Taxes Per Income Statement $ 3,679 $ 3,601 $ 4,664 ======== ======== ========
Deferred income tax expense (benefit) results from differences between amounts of assets and liabilities as measured for income tax return and financial reporting purposes. The significant components of federal deferred tax assets and liabilities are in the following table (in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Federal Deferred Tax Assets: Allowance for Loan Losses $ 2,134 $ 1,881 $ 1,859 Valuation Reserves - Other Real Estate -0- 105 104 Interest on Non-accrual Loans 242 306 237 Deferred Compensation 585 527 555 Other -0- 26 9 -------- -------- -------- Gross Federal Deferred Tax Assets 2,961 2,845 2,764 -------- -------- -------- Federal Deferred Tax Liabilities: Depreciation and Amortization 283 278 286 Accretion 174 128 150 Unrealized Gains on Available-for-Sale Securities 1,279 1,142 873 Other 30 20 23 -------- -------- -------- Gross Federal Deferred Tax Liabilities 1,766 1,568 1,332 -------- -------- -------- Net Deferred Tax Asset $ 1,195 $ 1,277 $ 1,432 ======== ======== ========
NOTE 11 - Related Party Transactions The Bank has transactions made in the ordinary course of business with certain of its officers, directors and their affiliates. All loans included in such transactions are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons. Total loans outstanding to such parties amounted to approximately $6,315,000 at December 31, 2001. 16 NOTE 12 - Commitments and Contingent Liabilities In the normal course of business, there are various outstanding commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the financial statements. No losses are anticipated as a result of these transactions. Commitments are most frequently extended for real estate, commercial and industrial loans. At September 30, 2002, outstanding documentary and standby letters of credit totaled $8,408,000 and commitments to extend credit totaled $133,198,000. NOTE 13 - Stock Option Plans The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the 1997 Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted for two-for-one stock splits in 1995 and 1997) of common stock for grants thereunder. The Plans provide for the granting to executive management and other key employees of Summit Bancshares, Inc. and subsidiaries incentive stock options, as defined under the current tax law. The options under the Plans will be exercisable for ten years from the date of grant and generally vest ratably over a five year period. Options will be and have been granted at prices which will not be less than 100-110% of the fair market value of the underlying common stock at the date of grant. The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Since the option prices are considered to approximate fair market value at date of grant, no compensation expense has been reported. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" the Corporation's net income and earnings per share would have been reduced by insignificant amounts on a proforma basis for the year ended December 31, 2001, and the nine months ended September 30, 2002. The following is a summary of transactions during the periods presented: Shares Under Option ----------------------------------------- Nine Months Ended Year Ended September 30, 2002 December 31, 2001 ------------------ ----------------- Outstanding, Beginning of Period 445,959 359,559 Additional Options Granted During the Period 12,500 124,600 Forfeited During the Period (4,000) -0- Exercised During the Period (25,325) (38,200) -------- -------- Outstanding, End of Period 429,134 445,959 ======== ======== Options outstanding at September 30, 2002 ranged in price from $3.00 to $20.10 per share with a weighted average exercise price of $11.04 and 312,754 shares exercisable. At September 30, 2002, there remained 354,200 shares reserved for future grants of options under the 1997 Plan. NOTE 14 - Employee Benefit Plans 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 2001 and for the nine months ended September 30, 2002, the Corporation made 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. The amount expensed in support of the plan was $317,000 and $254,000 during the first nine months of 2002 and 2001, respectively, and $353,000 for the year 2001. Management Security Plan The Corporation provides key employees with retirement, death or disability benefits in addition to those provided by the 401(k) Plan. The expense charged to operations for such future obligations was $200,000 and $144,000 during the first nine months of 2002 and 2001, respectively, and $256,000 for the year 2001. Employment Contracts The Chief Executive Officer of the Corporation has entered into a severance agreement providing for salary and fringe benefits in the event of termination, other than for cause, and under certain changes in control of the Corporation. 17 Other Post Retirement Benefits The Corporation provides certain health care benefits for certain retired employees who bear all costs of these benefits. These benefits are covered under the "Consolidated Omnibus Budget Reconciliation Act" (COBRA). NOTE 15 - Earnings per Share The following data shows the amounts used in computing earnings per share and the weighted average number of shares of dilutive potential common stock (dollars in thousands):
Nine Months Ended September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Net income $ 7,052 $ 6,819 $ 8,802 ======== ======== ======== Weighted average number of common shares used in Basic EPS 6,252,288 6,338,469 6,317,991 Effect of dilutive stock options 179,614 157,701 153,032 -------- -------- -------- Weighted number of common shares and dilutive potential common stock used in Diluted EPS 6,431,902 6,496,170 6,471,023 ======== ======== ========
NOTE 16 - Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments, standby letters of credit and documentary letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Corporation's exposure to credit loss in the event of non-performance by the other party of these loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The total contractual amounts of financial instruments with off-balance sheet risk are as follows (in thousands):
September 30, Year Ended --------------------- December 31, 2002 2001 2001 -------- -------- -------- Financial Instruments Whose Contract Amounts Represent Credit Risk: Loan Commitments Including Unfunded Lines of Credit $133,198 $132,112 $131,337 Standby Letters of Credit 8,408 4,709 6,294
Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner occupied real estate and income-producing commercial properties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. NOTE 17 - Concentrations of Credit Risk The Bank grants commercial, consumer and real estate loans in its direct market which is defined as Fort Worth and its surrounding area. The Board of Directors of the Bank monitors concentrations of credit by purpose, collateral and industry at least quarterly. Certain limitations for concentration are set by the Board. Additional loans in excess of these limits must have prior approval of the directors' loan committee. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' abilities to honor their contracts is dependent upon the strength of the local and state economy. 18 NOTE 18 - Litigation The Bank is 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 19 - Stock Repurchase Plan On April 16, 2002, the Board of Directors approved a stock repurchase plan. The plan authorized management to purchase up to 318,973 shares of the Corporation's common stock over the next twelve months through the open market or in privately negotiated transactions in accordance with all applicable state and federal laws and regulations. In the nine months ended September 30, 2002, 72,944 shares were purchased through the open market by the Corporation through this and a similar, previously approved, repurchase plan. NOTE 20 - Subsequent Event On October 23, 2002, the Board of Directors of the Corporation approved a quarterly dividend of $.12 per share to be paid on November 15, 2002 to shareholders of record on November 1, 2002. NOTE 21 - Fair Values of Financial Instruments The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate those assets' fair values. Investment securities (including mortgage-backed securities): Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: For variable-rate loans, fair values are based on carrying values. The fair values for fixed rate loans such as mortgage loans (e.g., one-to-four family residential) and installment loans are estimated using discounted cash flow analysis. The carrying amount of accrued interest receivable approximates its fair value. Deposit liabilities: The fair value disclosed for interest bearing and noninterest-bearing demand deposits, passbook savings, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date or their carrying amounts. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The carrying amounts of borrowings under repurchase agreements approximate their fair values. The estimated fair values of the Corporation's financial instruments are as follows (in thousands):
September 30, ---------------------------------------------------- 2002 2001 ----------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- Financial Assets Cash and due from banks $ 25,781 $ 25,781 $ 28,992 $ 28,992 Federal funds sold and Due From Time 114 114 1,116 1,116 Securities 168,250 168,250 161,223 161,223 Loans 474,401 486,471 421,048 432,268 Allowance for loan losses (6,334) (6,334) (6,190) (6,190) Financial Liabilities Deposits 570,910 572,740 535,855 537,256 Short Term Borrowings 43,871 43,978 23,890 23,891 Off-balance Sheet Financial Instruments Loan commitments 133,198 132,112 Letters of credit 8,408 4,709
19 NOTE 22 - Comprehensive Income The Corporation has adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". This standard requires an entity to report and display comprehensive income and its components. Comprehensive income is as follows (in thousands):
Nine Months Ended September 30, Year Ended -------------------- December 31, 2002 2001 2001 ------- ------- ------- Net Income $ 7,052 $ 6,819 $ 8,802 Other Comprehensive Income: Unrealized gain on securities available-for-sale, net of tax 789 1,932 1,409 ------- ------- ------- Comprehensive Income $ 7,841 $ 8,751 $10,211 ======= ======= =======
20 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Summary Management's Discussion and Analysis of Financial Condition and Results of Operations of the Corporation analyzes the major elements of the Corporation's consolidated balance sheets and statements of income. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes. Net income for the third quarter of 2002 was $2,372,000, or $.37 diluted earnings per share, compared with $2,332,000, or $.36 diluted earnings per share, for the third quarter of 2001. Net income for the first nine months of 2002 was $7,052,000 or $1.10 diluted earnings per share, compared with $6,819,000 or $1.05 diluted earnings per share for the first nine months of the prior year. Net income for the first nine months of last year would have been $7,211,000 or $1.11 per diluted share if certain merger related expenses recorded in the first quarter of 2001 were excluded. Per share amounts are based on average diluted shares outstanding of 6,431,902 for the first nine months of 2002 and 6,496,170 for the comparable period of 2001 adjusted to reflect stock options granted. Outstanding loans at September 30, 2002 of $474.4 million represented an increase of $53.4 million, or 12.7%, over September 30, 2001 and an increase of $43.6 million, or 10.1%, from December 31, 2001. Total deposits at September 30, 2002 of $570.9 million represented an increase of $35.1 million, or 6.5%, over September 30, 2001 and an increase of $27.1 million, or 5.0%, from December 31, 2001. The following table summarizes the Corporation's performance for the nine months ended September 30, 2002 and 2001 (tax equivalent basis and dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2002 2001 2002 2001 ------- ------- ------- ------- Interest Income $ 9,869 $10,898 $29,123 $34,542 Interest Expense 2,200 3,731 6,531 12,903 ------- ------- ------- ------- Net Interest Income 7,669 7,167 22,592 21,639 Provision for Loan Losses 1,350 370 2,365 860 ------- ------- ------- ------- Net Interest Income After Provision for Loan Losses 6,319 6,797 20,227 20,779 Non-Interest Income 1,530 1,145 4,112 3,294 Non-Interest Expense 4,215 4,373 13,539 13,648 ------- ------- ------- ------- Income Before Income Tax 3,634 3,569 10,800 10,425 Income Tax Expense 1,262 1,237 3,748 3,606 ------- ------- ------- ------- Net Income $ 2,372 $ 2,332 $ 7,052 $ 6,819 ======= ======= ======= ======= Net Income per Share- Basic $ 0.38 $ 0.37 $ 1.13 $ 1.08 Diluted 0.37 0.36 1.10 1.05 Return on Average Assets 1.37% 1.47% 1.43% 1.46% Return on Average Stockholders' Equity 14.64% 15.59% 15.01% 15.73%
21 Summary of Earning Assets and Interest-Bearing Liabilities The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the third quarter of 2002 and 2001 (rates on tax equivalent basis):
Three Months Ended September 30, --------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------- ------------------------------------------ Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate ------------- ------------ -------------- ---------- -------------- ------------- (Dollars in Thousands) Earning Assets: Federal Funds Sold & Due From Time $ 18,991 $ 80 1.66% $ 53,844 $ 477 3.51% Investment Securities (Taxable) 151,925 1,774 4.63% 128,320 1,825 5.64% Investment Securities (Tax-exempt) 3,574 52 5.79% 206 4 7.55% Loans, Net of Unearned Discount(1) 471,888 7,963 6.70% 409,094 8,592 8.33% --------- --------- ---- --------- --------- ---- Total Earning Assets 646,378 9,869 6.06% 591,464 10,898 7.31% --------- --------- Non-interest Earning Assets: Cash and Due From Banks 25,641 24,405 Other Assets 19,942 17,404 Allowance for Loan Losses (6,572) (5,928) --------- --------- Total Assets $ 685,389 $ 627,345 ========= ========= Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Money Market Funds $ 184,680 626 1.35% $ 169,732 1,084 2.53% Savings 114,851 480 1.66% 100,462 779 3.08% Certificates of Deposit under $100,000 and IRA's 66,400 502 3.00% 78,303 1,028 5.21% Certificates of Deposit $100,000 or more 53,753 413 3.05% 56,075 715 5.06% Other Time 316 3 2.90% 773 11 5.84% Other Borrowings 41,035 176 1.70% 17,414 114 2.59% --------- --------- ---- --------- --------- ---- Total Interest-Bearing Liabilities 461,035 2,200 1.89% 422,759 3,731 3.50% --------- --------- Non-interest Bearing Liabilities: Demand Deposits 156,742 141,991 Other Liabilities 3,339 3,246 Shareholders' Equity 64,273 59,349 --------- --------- Total Liabilities and Shareholders' Equity $ 685,389 $ 627,345 ========= ========= Net Interest Income and Margin (Tax-equivalent Basis)(2) $ 7,669 4.71% $ 7,167 4.81% ========= =========
(1) Loan interest income includes various loan fees and loan volumes include loans on non-accrual. (2) Presented on tax equivalent basis ("T/E") using a federal income tax rate of 34% both years. 22 Summary of Earning Assets and Interest-Bearing Liabilities (cont'd.) The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the first nine months of 2002 and 2001 (rates on tax equivalent basis):
Nine Months Ended September 30, --------------------------------------------------------------------------------------- 2002 2001 -------------------------------------------- ------------------------------------- Average Average Average Average Balances Interest Yield/Rate Balances Interest Yield/Rate --------- --------- ---------- --------- --------- ---------- (Dollars in Thousands) Earning Assets: Federal Funds Sold & Due From Time $ 13,067 $ 170 1.74% $ 57,763 $ 1,936 4.48% Investment Securities (Taxable) 146,831 5,284 4.81% 133,185 5,950 5.97% Investment Securities (Tax-exempt) 2,479 109 5.87% 229 13 7.75% Loans, Net of Unearned Discount(1) 460,359 23,560 6.84% 395,972 26,643 9.00% --------- --------- ---- --------- --------- ---- Total Earning Assets 622,736 29,123 6.25% 587,149 34,542 7.87% --------- --------- Non-interest Earning Assets: Cash and Due From Banks 25,183 23,919 Other Assets 19,252 18,036 Allowance for Loan Losses (6,403) (5,676) --------- --------- Total Assets $ 660,768 $ 623,428 ========= ========= Interest-Bearing Liabilities: Interest-Bearing Transaction Accounts and Money Market Funds $ 179,378 1,852 1.38% $ 165,589 3,573 2.89% Savings 111,196 1,463 1.76% 100,502 2,803 3.73% Certificates of Deposit under $100,000 and IRA's 64,080 1,559 3.25% 81,582 3,473 5.69% Certificates of Deposit $100,000 or more 48,023 1,182 3.29% 59,147 2,527 5.71% Other Time 347 9 3.37% 776 35 6.09% Other Borrowings 37,756 466 1.65% 18,132 492 3.63% --------- --------- ---- --------- --------- ---- Total Interest-Bearing Liabilities 440,780 6,531 1.98% 425,728 12,903 4.05% --------- --------- Non-interest Bearing Liabilities: Demand Deposits 153,873 136,449 Other Liabilities 3,323 3,311 Shareholders' Equity 62,792 57,940 --------- --------- Total Liabilities and Shareholders' Equity $ 660,768 $ 623,428 ========= ========= Net Interest Income and Margin (Tax-equivalent Basis)(2) $ 22,592 4.85% $ 21,639 4.93% ========= =========
(1) Loan interest income includes various loan fees and loan volumes include loans on non-accrual. (2) Presented on tax equivalent basis ("T/E") using a federal income tax rate of 34% both years. 23 Net Interest Income Net interest income (tax equivalent) for the third quarter of 2002 was $7,669,000 which represented an increase of $502,000 or 7.0%, over the third quarter of 2001. In this same period, total interest income decreased $1,029,000 or 9.4% while total interest expense decreased $1,531,000 or 41.0% and reflects a 475 basis point decrease in the national prime rate for loans from January 2001, most of the decrease occurring in the twelve months of 2001. The following table summarizes the effects of changes in interest rates, average volumes of earning assets and interest bearing liabilities on net interest income (tax equivalent) for the periods ended September 30, 2002 and 2001: ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in Thousands)
3rd Qtr. 2002 vs. 3rd Qtr. 2001 Nine Months 2002 vs. Nine Months 2001 Increase (Decrease) Increase (Decrease) Due to Changes in: Due to Changes in: ----------------------------------- ------------------------------------ Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- ------- Interest Earning Assets: Federal Funds Sold $ (309) $ (89) $ (398) $(1,498) $ (267) $(1,765) Investment Securities (Taxable) 336 (387) (51) 610 (1,276) (666) Investment Securities (Tax-exempt) 64 (16) 48 130 (35) 95 Loans, Net of Unearned Discount 1,319 (1,948) (629) 4,332 (7,415) (3,083) ------- ------- ------- ------- ------- ------- Total Interest Income 1,410 (2,440) (1,030) 3,574 (8,993) (5,419) ------- ------- ------- ------- ------- ------- Interest-Bearing Liabilities: Deposits 15 (1,609) (1,594) (643) (5,704) (6,347) Other Borrowings 154 (92) 62 532 (557) (25) ------- ------- ------- ------- ------- ------- Total Interest Expense 169 (1,701) (1,532) (111) (6,261) (6,372) ------- ------- ------- ------- ------- ------- Net Interest Income $ 1,241 $ (739) $ 502 $ 3,685 $(2,732) $ 953 ======= ======= ======= ======= ======= =======
Allowance for Loan Losses and Non-Performing Assets The Corporation's allowance for loan losses was $6,334,000, or 1.34% of total loans, as of September 30, 2002 compared to $6,190,000, or 1.47% of total loans, as of September 30, 2001. Transactions in the provision for loan losses are summarized as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2002 2001 2002 2001 ------- ------- ------- ------ Balance, Beginning of Period $ 6,394 $ 5,745 $ 6,015 $ 5,399 Provisions, Charged to Income 1,350 370 2,365 860 Loans Charged-Off (1,492) (36) (2,184) (261) Recoveries of Loans Previously Charged-Off 82 111 138 192 ------- ------- ------- ------- Net Loans (Charged-Off) Recovered (1,410) 75 (2,046) (69) ------- ------- ------- ------- Balance, End of Period $ 6,334 $ 6,190 $ 6,334 $ 6,190 ======= ======= ======= =======
For the nine months ended September 30, 2002 and 2001, net charge-offs (recoveries) were .44% and .02% of loans, respectively, not annualized. The loan charge-offs recorded in the third quarter of 2002 were primarily related to five loans and reflect the weakness in the economy. 24 The following table summarizes the non-performing assets as of the end of the last five quarters (in thousands):
September 30, June 30, March 31, December 31, September 30, 2002 2002 2002 2001 2001 ------- ------- ------- ------- ------- Non-Accrual Loans $ 4,635 $ 3,870 $ 3,458 $ 4,115 $ 2,632 Renegotiated Loans -0- -0- -0- -0- -0- Other Real Estate Owned and Other Foreclosed Assets 288 56 97 444 511 ------- ------- ------- ------- ------- Total Non-Performing Assets $ 4,923 $ 3,926 $ 3,555 $ 4,559 $ 3,143 ======= ======= ======= ======= ======= As a Percent of: Total Assets 0.72% 0.58% 0.56% 0.72% 0.50% Total Loans and Other Real Estate/ Foreclosed Assets 1.04% 0.84% 0.78% 1.06% 0.75% Loans Past Due 90 days or More and Still Accruing $ 37 $ 13 $ 228 $ 16 $ 58
Non-accrual loans to total loans were .98% at September 30, 2002 and non-performing assets were 1.04% of loans and other real estate owned/foreclosed assets at the same date. As of September 30, 2002, non-accrual loans were comprised of $3,299,000 in commercial loans, $1,152,000 in real estate mortgage loans and $184,000 in consumer loans. During the quarter ended September 30, 2002, payments of just under $300,000 were collected on non-accrual loans but an additional $3,100,000 of loans were placed on non-accrual, $1,200,000 of which was one real estate borrower. As of September 30, 2002, there was one property recorded as other real estate with a value of $250,000. In addition, the Company has $38,000 of vehicles in Other Foreclosed Assets, reported in Other Assets on the Balance Sheet. The following table summarizes the relationship between non-performing loans, criticized loans and the allowance for loan losses (dollars in thousands):
September 30, June 30, March 31, December 31, September 30, 2002 2002 2002 2001 2001 ------- ------- ------- ------- ------- Non-Performing Loans $ 4,635 $ 3,870 $ 3,458 $ 4,115 $ 2,632 Criticized Loans 22,284 25,398 23,043 24,879 18,713 Allowance for Loan Losses 6,334 6,394 6,534 6,015 6,190 Allowance for Loan Losses as a Percent of: Non-Performing Loans 137% 165% 189% 146% 235% Criticized Loans 28% 25% 28% 24% 33%
25 Non-Interest Income The major component of non-interest income is service charges on deposits. Other service fees are the majority of other non-interest income. The following table reflects the changes in non-interest income during the periods presented (dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- -------------------------- 2002 2001 % Change 2002 2001 % Change ------ ------ -------- ------ ------ -------- Service Charges on Deposit Accounts $ 793 $ 594 33.5% $2,161 $1,740 24.2% Gain on Sale of Securities 163 -0- -0- 165 -0- -0- Non-recurring Income -0- -0- -0- 51 -0- -0- Other Non-interest Income 574 551 4.2 1,735 1,554 11.6 ------ ------ ---- ------ ------ ---- Total Non-interest Income $1,530 $1,145 33.6% $4,112 $3,294 24.8% ====== ====== ==== ====== ====== ====
The increase in other non-interest income in the third quarter of 2002 as compared to the same quarter last year is primarily due to increases in mortgage brokerage/origination fees, letter of credit fees and ATM service fees. Non-interest Expense Non-interest expenses include all expenses other than interest expense, provision for loan losses and income tax expense. The following table summarizes the changes in non-interest expense during the periods presented (dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2002 2001 % Change 2002 2001 % Change ------- ------- -------- ------- ------- -------- Salaries & Employee Benefits $ 2,768 $ 2,621 5.6% $ 8,508 $ 7,753 9.7% Occupancy Expense - Net 285 372 (23.4) 855 996 (14.2) Furniture and Equipment Expense 388 391 (0.8) 1,160 1,118 3.8 Other Real Estate and Foreclosed Asset Expense - Net 40 47 (14.9) 148 174 (14.9) Merger Related Expense -0- -0- -0- -0- 598 -0- Other Expenses: Business Development 207 145 42.8 600 458 31.0 Insurance - Other 60 41 46.3 137 104 31.7 Legal & Professional Fees 160 163 (1.8) 501 477 5.0 Taxes - Other 25 31 (19.4) 61 103 (40.8) Postage & Courier 92 104 (11.5) 264 266 (0.8) Printing & Supplies 76 75 1.3 233 260 (10.4) Regulatory Fees & Assessments 60 66 (9.1) 179 191 (6.3) Other Operating Expenses 54 317 (83.0) 893 1,150 (22.3) ------- ------- ----- ------- ------- ----- Total Other Expenses 735 942 (22.0) 2,868 3,009 (4.7) ------- ------- ----- ------- ------- ----- Total Non-interest Expense $ 4,215 $ 4,373 (3.6)% $13,539 $13,648 (0.8)% ======= ======= ===== ======= ======= =====
Total non-interest expense decreased 3.6% in the third quarter of 2002 over 2001, primarily due to the collection of a $319,000 insurance claim on damaged assets previously carried on the books as other foreclosed assets. This offset additional salary expenses from staffing additions made in the fourth quarter of 2001 and the first quarter of 2002, additional business development expenses due to advertising costs and an increase in insurance expense due to premium increases. As a percent of average assets, non-interest expenses were 2.44% in the third quarter of 2002 (annualized) and 2.77% in the same period of 2001. The "efficiency ratio" (non-interest expenses divided by total non-interest income plus net interest income) was 45.82% for the third quarter of 2002. The "efficiency ratio" for the third quarter, excluding the insurance claim, would have been 49.29%. 26 Interest Rate Sensitivity Interest rate sensitivity is the relationship between changes in market interest rates and net interest income due to the repricing characteristics of assets and liabilities. The following table, commonly referred to as a "static GAP report", indicates the interest rate sensitivity position at September 30, 2002 and may not be reflective of positions in subsequent periods (dollars in thousands):
Total Repriced Matures or Reprices within: Rate After --------------------------------------- Sensitive 1 Year or 30 Days 31-180 181 to One Year Non-interest or Less Days One Year or Less Sensitive Total --------- --------- --------- --------- --------- --------- Earning Assets: Loans $ 250,543 $ 24,880 $ 25,682 $ 301,105 $ 173,296 $ 474,401 Investment Securities 7,204 22,096 21,828 51,128 117,122 168,250 Federal Funds Sold and Due From Time 114 -0- -0- 114 -0- 114 --------- --------- --------- --------- --------- --------- Total Earning Assets 257,861 46,976 47,510 352,347 290,418 642,765 --------- --------- --------- --------- --------- --------- Interest Bearing Liabilities: Interest-Bearing Transaction Accounts and Savings 300,341 -0- -0- 300,341 -0- 300,341 Certificate of Deposits under $100,000 and IRA's 6,312 21,921 20,679 48,912 15,310 64,222 Certificate of Deposits > $100,000 6,806 14,153 17,547 38,506 10,322 48,828 Short Term Borrowings 29,571 7,000 7,300 43,871 -0- 43,871 --------- --------- --------- --------- --------- --------- Total Interest Bearing Liabilities 343,030 43,074 45,526 431,630 25,632 457,262 --------- --------- --------- --------- --------- --------- Interest Sensitivity Gap $ (85,169) $ 3,902 $ 1,984 $ (79,283) $ 264,786 $ 185,503 ========= ========= ========= ========= ========= ========= Cumulative Gap $ (85,169) $ (81,267) $ (79,283) ========= ========= ========= Cumulative Gap to Total Earning Assets (13.25%) (12.64%) (12.33%) Cumulative Gap to Total Assets (12.48%) (11.91%) (11.61%)
The preceding static GAP report reflects a cumulative liability sensitive position during the one year horizon. An inherent weakness of this report is that it ignores the relative volatility any one category may have in relation to other categories or market rates in general. For instance, the rate paid on NOW accounts typically moves slower than the three month T-Bill. Management attempts to capture this relative volatility by utilizing a simulation model with a "beta factor" adjustment which estimates the volatility of rate sensitive assets and/or liabilities in relation to other market rates. Beta factors are an estimation of the long term, multiple interest rate environment relation between an individual account and market rates in general. For instance, NOW, savings and money market accounts, which are repriceable within 30 days will have considerably lower beta factors than variable rate loans and most investment categories. Taking this into consideration, it is quite possible for a bank with a negative cumulative GAP to total asset ratio to have a positive "beta adjusted" GAP risk position. As a result of applying the beta factors established by management to the earning assets and interest bearing liabilities in the static GAP report via a simulation model, the negative cumulative GAP to total assets ratio at one year of (11.61%) was reversed to a positive 12.75% "beta adjusted" GAP position. Management feels that the "beta adjusted" GAP risk technique more accurately reflects the Corporation's GAP position. The Corporation manages its interest rate risk through structuring the balance sheet to maximize net interest income while maintaining an acceptable level of risk to changes in market interest rates. This process requires a balance between profitability, liquidity and interest rate risk. 27 To effectively measure and manage interest rate risk, the Corporation uses simulation analysis to determine the impact on net interest income and the market value of equity for changes in interest rates under various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. The overall interest rate risk position and strategies are reviewed by senior management, the Asset/Liability Management Committee and the Corporation's Board of Directors on an ongoing basis. Based on simulation analysis of the interest rate sensitivity inherent in the Corporation's net interest income and market value of equity, as of September 30, 2002 and as adjusted by instantaneous rate changes upward and downward of up to 100 basis points, the Corporation is somewhat asset sensitive. The analysis indicates an instantaneous 100 basis point move upward in interest rates would increase net interest income by 4.8% and increase the market value of equity by 3.3%. These sensitivities are all within the threshold set by the Corporation's Asset/Liability Committee. Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast to the actual effect of a change in market interest rates on the Corporation. The market value sensitivity analysis presented includes assumptions that the composition of the Corporation's interest sensitive assets and liabilities existing at period end will remain constant over the twelve month measurement period and that changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, 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 and does not provide a precise forecast of the effect actual changes in market interest rates will have on the Corporation. Capital The Federal Reserve Board has guidelines for capital to total assets (leverage) and capital standards for bank holding companies. The Comptroller of the Currency also has similar guidelines for national banks. These guidelines require a minimum level of Tier I capital to total assets of 3 percent. A banking organization operating at or near these levels is expected to have well-diversified risk, excellent asset quality, high liquidity, good earnings and in general be considered a strong banking organization. Organizations not meeting these characteristics are expected to operate well above these minimum capital standards. Thus, for all but the most highly rated organizations, the minimum Tier I leverage ratio is to be 3 percent plus minimum additional cushions of at least 100 to 200 basis points. At the discretion of the regulatory authorities, additional capital may be required. The Federal Reserve Board and Comptroller of the Currency also have risk-adjusted capital adequacy guidelines. Capital under these new guidelines is defined as Tier I and Tier II. At Summit Bancshares, Inc., the only components of Tier I and Tier II capital are shareholders' equity and a portion of the allowance for loan losses, respectively. The guidelines also stipulate that four categories of risk weights (0, 20, 50 and 100 percent), primarily based on the relative credit risk of the counterparty, be applied to the different types of balance sheet assets. Risk weights for all off-balance sheet exposures are determined by a two-step process whereby the face value of the off-balance sheet item is converted to a "credit equivalent amount" and that amount is assigned to the appropriate risk category. The regulatory minimum ratio for total qualifying capital is 8.00% of which 4.00% must be Tier I capital. At September 30, 2002, the Corporation's Tier I capital represented 12.21% of risk weighted assets and total qualifying capital (Tier I and Tier II) represented 13.45% of risk weighted assets. Both ratios are well above current regulatory guidelines. Also, as of September 30, 2002, the Corporation and its Subsidiary Bank met the criteria for classification as a "well-capitalized" institution under the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). 28 The Corporation and Subsidiary Bank's regulatory capital positions as of September 30, 2002, were as follows (dollars in thousands):
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ----------------- ---------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- CONSOLIDATED: As of September 30, 2002 Total Capital (to Risk Weighted Assets) $68,624 13.45% $40,806 8.00% Tier I Capital (to Risk Weighted Assets) 62,290 12.21% 20,403 4.00% Tier I Capital (to Average Assets) 62,290 9.13% 20,478 3.00% SUMMIT BANK, N.A.: As of September 30, 2002 Total Capital (to Risk Weighted Assets) $68,318 13.39% $40,803 8.00% $51,004 10.00% Tier I Capital (to Risk Weighted Assets) 61,984 12.15% 20,402 4.00% 30,602 6.00% Tier I Capital (to Average Assets) 61,984 9.08% 20,477 3.00% 34,128 5.00%
Forward-Looking Statements Certain statements contained in this document, which are not historical in nature, including statements regarding the Corporation's and/or management's intentions, strategies, beliefs, expectations, representations, plans, projections, or predictions of the future, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are intended to be covered by the safe harbor provisions for forward-looking statements contained in such Act. We are including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements are made based on assumptions involving certain known and unknown risks and uncertainties, many of which are beyond the Corporation's control, and other important factors that could cause actual results, performance or achievements to differ materially from the expectations expressed or implied by such forward-looking statements. These risk factors and uncertainties are listed from time to time in the Corporation's filings with the Securities and Exchange Commission, including but not limited to the annual report on Form 10-K for the year ended December 31, 2001. Item 3 - Quantitative and Qualitative Disclosures About Market Risk. Management considers interest rate risk to be a significant market risk for the Company. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for disclosure regarding this market risk. Item 4 - Controls and Procedures As of October 10, 2002, an evaluation was performed by the Corporation's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), with the participation of the Corporation's management, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, the Corporation's CEO and CFO have concluded that the Corporation's disclosure controls and procedures were effective as of October 10, 2002. The Corporation's CEO and CFO have indicated that there have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls subsequent to October 10, 2002, including any corrective actions with regard to significant deficiencies and material weaknesses. 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Change in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10 Second Amendment to Loan Agreement dated September 15, 2001 between the Corporation and Frost National Bank 11 Computation of Earnings Per Common Share 99.1 Certification of Chief Executive Officer of Summit Bancshares, Inc. 99.2 Certification of Chief Financial Officer of Summit Bancshares, Inc. (b) No Reports on Form 8-K were filed during the period ending September 30, 2002 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT BANCSHARES, INC. Registrant Date: 11-01-02 By: /s/ Philip E. Norwood ------------- ------------------------------------- Philip E. Norwood, Chairman, President and Chief Executive Officer Date: 11-01-02 By: /s/ Bob G. Scott ------------- ------------------------------------- Bob G. Scott, Executive Vice President and Chief Operating Officer (Chief Accounting Officer) 31 I, Philip E. Norwood, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Summit Bancshares, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared: b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluations, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11-01-02 By: /s/ Philip E. Norwood ------------ ------------------------------------- Philip E. Norwood Chairman, President and Chief Executive Officer 32 I, Bob G. Scott, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Summit Bancshares, Inc; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared: b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluations, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 7. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11-01-02 By: /s/ Bob G. Scott ------------ ------------------------------------- Bob G. Scott Executive Vice President and Chief Operating Officer (Chief Accounting Officer) 33 EXHIBIT INDEX Exhibit Page No. - ------- -------- 10 Second Amendment to Loan Agreement dated September 15, 2001 between the Corporation and Frost National Bank 11 Computation of Earnings Per Common Share 35 EX-10 3 ex-10.txt EXHIBIT 10 SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT ("Second Amendment") dated as of the 15th day of September, 2002, to the Loan Agreement (the "Loan Agreement"), made and entered into as of September 15, 2001, by and among SUMMIT BANCSHARES, INC., a Texas corporation, (hereinafter called "Borrower"), SUMMIT DELAWARE FINANCIAL CORPORATION, a Delaware corporation, (hereinafter called "SDFC") 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. W I T N E S S E T H: WHEREAS, Borrower executed the Loan Agreement to govern those two certain promissory notes from Lender, specifically, a $10,000,000.00 Acquisition Note and a $1,000,000.00 Liquidity Note (collectively, the "Notes"). WHEREAS, Borrower executed the First Amendment to Loan Agreement on March 8, 2002 ("First Amendment") which modified the Loan Agreement to evidence the Borrower's formation of SDFC to own the Bank; and WHEREAS, the Borrower now desires to 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: "2.02 (a) Acquisition Note. From Closing Date and continuing at all times through September 15, 2003 (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 Ten Million and NO/100 Dollars ($10,000,000.00) provided however, the minimum Advance must be at least $500,000.00. SECOND AMENDMENT TO LOAN AGREEMENT -- Page 1 The Borrower shall have the right to borrow, repay, and borrow again under the credit facility. Interest shall be due and payable quarterly and shall accrue at the election of the Borrower (which election shall be made on the date of the first Advance) at either LIBOR plus 200 basis points or the Prime Rate. The outstanding principal balance of the Acquisition Note on September 15, 2003 shall convert to a term facility (the "Term Period") and shall be payable in accordance with the terms of 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. Interest shall be due and payable quarterly and shall accrue at the Prime Rate. The outstanding principal balance of the Liquidity Note on September 15, 2003 shall convert to a term facility (the "Term Period") and shall be payable in accordance with the terms of the Liquidity Note. ARTICLE II Conditions of Effectiveness 2.1 Effective Date. This Second Amendment shall become effective as and when, and only when, Lender shall have received counterparts of this Second 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 new Liquidity Note, each payable to the order of Lender as set forth therein, each duly executed on behalf of the Borrower, dated effective September 15, 2002 in the principal amounts of $10,000,000.00 and $1,000,000.00, respectively. (b) Additional Loan Documents. Borrower and SDFC shall have executed and delivered to Lender such other documents as shall have been requested by Lender 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 of the Borrower. In order to induce Lender to enter into this Second Amendment, Borrower represents and warrants the following: (a) Borrower has the corporate power to execute and deliver this Second Amendment and the other Loan Documents executed by it and to perform all of its obligations in connection herewith and therewith. SECOND AMENDMENT TO LOAN AGREEMENT -- Page 2 (b) The execution and delivery by Borrower of this Second Amendment and other Loan Documents executed by it 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 Second 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 Second Amendment. (d) The representations and warranties of Borrower contained in the Loan Agreement, this Second Amendment 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. 3.2 Representations and Warranties of SDFC. In order to induce Lender to enter into this Second Amendment, SDFC represents and warrants the following: (a) SDFC has the corporate power to execute and deliver this Second Amendment and the other Loan Documents executed by it and to perform all of its obligations in connection herewith and therewith. (b) The execution and delivery by SDFC of this Second Amendment and other Loan Documents executed by it 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. SECOND AMENDMENT TO LOAN AGREEMENT -- Page 3 (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 SDFC, threatened against or affecting SDFC or any properties or rights of SDFC or involving this Second Amendment or the transactions contemplated hereby which, if adversely determined, would materially impair the right of SDFC, to carry on business substantially as now conducted or materially and adversely affect the financial condition of SDFC or materially and adversely affect the ability of SDFC to consummate the transactions contemplated by this Second Amendment. ARTICLE IV Ratification of Obligations and Liens 4.1 Ratification of Obligation. The Borrower and SDFC do each hereby acknowledge, ratify and confirm their obligations to Lender as evidenced by the Loan Agreement (as amended by the First Amendment and this Second Amendment) and all other Loan Documents, as modified by the transactions herein contemplated. 4.2 Valid Liens. Borrower and SDFC hereby acknowledge and agree that the liens and security interests of the Loan Documents, as modified by the transactions herein contemplated, 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 amended by the First Amendment), this Second Amendment, 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) as amended by this Second Amendment. The execution, delivery and effectiveness of this Second 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 Second 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 Second Amendment and under the Loan Agreement. SECOND AMENDMENT TO LOAN AGREEMENT -- Page 4 5.2 Loan Document. This Second Amendment, the Notes, the Guaranty Agreement, the Pledge Agreements and each other Loan Documents executed in connection 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 Second 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 Second 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 Second Amendment. 5.5 Release of Claims. Borrower by its execution of this Second 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 to 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 Second 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 SECOND 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 SECOND AMENDMENT, AND THE LOAN DOCUMENTS MAY BE AMENDED, REVISED, WAIVED, DISCHARGED, RELEASED OR TERMINATED ONLY BY A WRITTEN INSTRUMENT OR INSTRUMENTS, 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. SECOND AMENDMENT TO LOAN AGREEMENT -- Page 5 IN WITNESS WHEREOF, this Second Amendment is executed effective as of the date first written above. BORROWER: SUMMIT BANCSHARES, INC. By: /s/ Bob G. Scott ---------------------------------------- Its: Executive Vice President -------------------------------------- LENDER: THE FROST NATIONAL BANK By: /s/ Jerry L. Crutsinger ---------------------------------------- Jerry L. Crutsinger, Senior Vice President GUARANTOR: SUMMIT DELAWARE FINANCIAL CORPORATION By: /s/ Bob G. Scott ---------------------------------------- Its: Executive Vice President --------------------------------------- SECOND AMENDMENT TO LOAN AGREEMENT -- Page 6 EX-11 4 ex-11.txt COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE The details of computation of earnings per common share are disclosed in the Consolidated Statements of Income and Note 15 of the Notes to Consolidated Financial Statements for the Periods of Nine Months Ended September 30, 2002 and 2001 (unaudited) and the Year Ended December 31, 2001 (audited), contained in the Quarterly Report on Form 10-Q of registrant for the quarter Ended September 30, 2002. EX-99.1 5 ex-991.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF SUMMIT BANCSHARES, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended June 30, 2002 of Summit Bancshares, Inc. (the "Issuer"). I, Philip E. Norwood, the Chairman, President, and Chief Executive Officer of the Issuer certify that: (i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 1, 2002 /s/ Philip E. Norwood ---------------------------------------- Name: Philip E. Norwood Title: Chairman, President and CEO Subscribed and sworn to before me on this 1st day of November 2002. /s/ Karen S. Appel ---------------------------------------- Name: Karen S. Appel Title: Notary Public My commission expires: August 5, 2006 EX-99.2 6 ex-992.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER OF SUMMIT BANCSHARES, INC. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended June 30, 2002 of Summit Bancshares, Inc. (the "Issuer"). I, Bob G. Scott, the Executive Vice President, Chief Operating Officer, and Chief Financial Officer of the Issuer certify that: (i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: November 1, 2002 /s/ Bob G. Scott ---------------------------------------- Name: Bob G. Scott Title: Executive Vice President and COO/CFO Subscribed and sworn to before me on this 1st day of November, 2002. /s/ Karen S. Appel ---------------------------------------- Name: Karen S. Appel Title: Notary Public My commission expires: August 5, 2006 -----END PRIVACY-ENHANCED MESSAGE-----