SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
|X| Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003 or
|_| Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from _________________ to _________________.
Commission File Number 0-11986
SUMMIT BANCSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-1694807
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
1300 Summit Avenue, Fort Worth, Texas 76102
-------------------------------------------
(Address of principal executive offices)
(817) 336-6817
----------------------------------------------------
(Registrant's telephone number, including area code)
No Change
----------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The number of shares of common stock, $1.25 par value, outstanding at March 31,
2003 was 6,179,317 shares.
SUMMIT BANCSHARES, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003
and 2002 and at December 31, 2002 4
Consolidated Statements of Income for the
Three Months Ended March 31, 2003 and 2002
and for the Year Ended December 31, 2002 5
Consolidated Statements of Changes in
Shareholders' Equity for the Three Months Ended
March 31, 2003 and 2002 and for the Year Ended
December 31, 2002 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002 and
for the Year Ended December 31, 2002 7
Notes to Consolidated Financial Statements for
the Three Months Ended March 31, 2003 and 2002
and for the Year Ended December 31, 2002 8-19
The March 31, 2003 and 2002 and the December 31, 2002 financial statements
included herein are unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments), which
are, in the opinion of management of the registrant, necessary to a fair
statement of the results for the interim periods.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations for the
Three Months Ended March 31, 2003 and 2002 20-26
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)
March 31, (Unaudited)
---------------------- December 31,
2003 2002 2002
--------- --------- ---------
ASSETS (In Thousands)
CASH AND DUE FROM BANKS - NOTE 1 $ 31,961 $ 23,788 $ 28,903
FEDERAL FUNDS SOLD & DUE FROM TIME 76 4,246 262
INVESTMENT SECURITIES - NOTE 2
Securities Available-for-Sale, at fair value 163,639 141,479 173,512
LOANS - NOTES 3 AND 11
Loans, Net of Unearned Discount 489,352 453,818 469,145
Allowance for Loan Losses (7,365) (6,534) (6,706)
--------- --------- ---------
LOANS, NET 481,987 447,284 462,439
PREMISES AND EQUIPMENT - NOTE 4 11,652 8,659 11,486
ACCRUED INCOME RECEIVABLE 3,606 3,678 3,978
OTHER REAL ESTATE - NOTE 5 -0- -0- 1,142
OTHER ASSETS 4,972 5,772 6,011
--------- --------- ---------
TOTAL ASSETS $ 697,893 $ 634,906 $ 687,733
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS - NOTE 6
Noninterest-Bearing Demand $ 165,220 $ 151,236 $ 167,745
Interest-Bearing 421,699 394,685 414,204
--------- --------- ---------
TOTAL DEPOSITS 586,919 545,921 581,949
SHORT TERM BORROWINGS - NOTE 7 41,317 24,492 37,255
ACCRUED INTEREST PAYABLE 373 501 354
OTHER LIABILITIES 2,704 2,488 3,237
--------- --------- ---------
TOTAL LIABILITIES 631,313 573,402 622,795
--------- --------- ---------
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; 6,179,317,
6,269,861 and 6,158,542 shares issued and outstanding at March 31, 2003 and
2002 and at December 31, 2002, respectively 7,724 7,837 7,698
Capital Surplus 7,330 6,909 7,122
Retained Earnings 48,974 45,683 47,660
Accumulated Other Comprehensive Income - Unrealized Gain
on Available-for-Sale Investment Securities, Net of Tax 2,908 1,171 2,861
Treasury Stock at Cost (18,500, 5,000 and 20,000 shares at
March 31, 2003 and 2002 and at December 31, 2002,
respectively) (356) (96) (403)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 66,580 61,504 64,938
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 697,893 $ 634,906 $ 687,733
========= ========= =========
The accompanying Notes should be read with these financial statements.
4
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended (Unaudited)
March 31, Year Ended
-------------------------- December 31,
2003 2002 2002
------------ ---------- ------------
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and Fees on Loans $ 7,489 $ 7,664 $ 31,283
Interest and Dividends on Investment Securities:
Taxable 1,711 1,848 7,046
Exempt from Federal Income Taxes 47 18 116
Interest on Federal Funds Sold and Due From Time 4 19 212
--------- --------- ---------
TOTAL INTEREST INCOME 9,251 9,549 38,657
--------- --------- ---------
INTEREST EXPENSE
Interest on Deposits 1,660 1,997 7,881
Interest on Short Term Borrowings 156 135 624
Interest on Note Payable -0- -0- 7
--------- --------- ---------
TOTAL INTEREST EXPENSE 1,816 2,132 8,512
--------- --------- ---------
NET INTEREST INCOME 7,435 7,417 30,145
LESS: PROVISION FOR LOAN LOSSES - NOTE 3 300 545 3,140
--------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,135 6,872 27,005
--------- --------- ---------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 758 645 2,934
Gain on Sale of Investment Securities -0- -0- 165
Other Income 590 605 2,368
--------- --------- ---------
TOTAL NON-INTEREST INCOME 1,348 1,250 5,467
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and Employee Benefits - NOTE 14 2,905 2,867 11,078
Occupancy Expense - Net 293 252 1,136
Furniture and Equipment Expense 429 404 1,577
Other Real Estate Owned Expense - Net (15) 69 234
Other Expense - NOTE 9 1,185 1,051 4,284
--------- --------- ---------
TOTAL NON-INTEREST EXPENSE 4,797 4,643 18,309
--------- --------- ---------
INCOME BEFORE INCOME TAXES 3,686 3,479 14,163
APPLICABLE INCOME TAXES - NOTE 10 1,253 1,193 4,846
--------- --------- ---------
NET INCOME $ 2,433 $ 2,286 $ 9,317
========= ========= =========
NET INCOME PER SHARE - NOTE 15
Basic $ 0.39 $ 0.37 $ 1.50
Diluted 0.39 0.36 1.46
The accompanying Notes should be read with these financial statements.
5
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
AND FOR THE YEAR ENDED DECEMBER 31, 2002
(Unaudited)
Accumulated
Other
Comprehensive
Income - Net
Unrealized Gain Total
Common Stock (Loss) on Share-
------------------------ Capital Retained Investment Treasury Holders'
Shares Amount Surplus Earnings Securities Stock Equity
-----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
Balance at January 1, 2002 6,262,961 $ 7,829 $ 6,865 $ 44,166 $ 1,694 $ (18) $ 60,536
Stock Options Exercised 7,900 9 44 53
Purchases of Stock Held
in Treasury (96) (96)
Retirement of Stock Held
in Treasury (1,000) (1) (17) 18 -0-
Cash Dividend - $.12 Per Share (752) (752)
Net Income for the
Three Months Ended
March 31, 2002 2,286 2,286
Securities Available-
for-Sale Adjustment (523) (523)
-----------
Total Comprehensive
Income NOTE 22 1,763
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2002 6,269,861 7,837 6,909 45,683 1,171 (96) 61,504
Stock Options Exercised 31,625 40 213 253
Purchases of Stock Held
in Treasury (3,306) (3,306)
Retirement of Stock Held
in Treasury (142,944) (179) (2,820) 2,999 -0-
Cash Dividend - $.36 Per Share (2,234) (2,234)
Net Income for the
Nine Months Ended
December 31, 2002 7,031 7,031
Securities Available-
for-Sale Adjustment 1,690 1,690
-----------
Total Comprehensive
Income NOTE 22 8,721
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 6,158,542 7,698 7,122 47,660 2,861 (403) 64,938
Stock Options Exercised 40,775 51 208 259
Purchases of Stock Held
in Treasury (356) (356)
Retirement of Stock Held
in Treasury (20,000) (25) (378) 403 -0-
Cash Dividend - $.12 Per Share (741) (741)
Net Income for the
Three Months Ended
March 31, 2003 2,433 2,433
Securities Available-
for-Sale Adjustment 47 47
-----------
Total Comprehensive
Income NOTE 22 2,480
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2003 6,179,317 $ 7,724 $ 7,330 $ 48,974 $ 2,908 $ (356) $ 66,580
=========== =========== =========== =========== =========== =========== ===========
The accompanying Notes should be read with these financial statements.
6
(Unaudited)
For the Three Months Ended (Unaudited)
March 31, Year Ended
-------------------------- December 31,
2003 2002 2002
------------ ---------- ------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,433 $ 2,286 $ 9,317
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 298 265 1,094
Net Premium Amortization of Investment Securities 360 210 1,026
Provision for Loan Losses 300 545 3,140
Deferred Income Taxes Benefit (212) (267) (62)
Net Gain on Sale of Investment Securites -0- -0- (165)
Net Gain From Sale of Other Real Estate -0- -0- (358)
Net Loss From Sale of Premises and Equipment -0- 9 1
Net Decrease in Accrued Income and Other Assets 1,619 2,217 632
Net (Decrease) Increase in Accrued Expenses and
and Other Liabilities (533) (262) 340
--------- --------- ---------
Total Adjustments 1,832 2,717 5,648
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,265 5,003 14,965
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Decrease (Increase) in Federal Funds Sold and Due From Time 186 (1,962) 2,022
Proceeds from Matured and Prepaid Investment Securities
-Available-for-Sale 13,439 18,262 51,818
Proceeds from Sales of Investment Securities -0- -0- 143,444
Purchase of Investment Securities
-Available-for-Sale (3,855) (609) (207,732)
Loans Originated and Principal Repayments, Net (20,287) (23,103) (42,962)
Recoveries of Loans Previously Charged-Off 439 16 372
Proceeds from Sale of Premises and Equipment 17 27 31
Proceeds from Sale of Other Real Estate & Repossessed Assets 1,142 347 1,293
Purchases of Premises and Equipment (482) (820) (4,479)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (9,401) (7,842) (56,193)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Demand Deposits, Savings Accounts
and Interest Bearing Transaction Accounts 87 8,171 34,838
Net Increase (Decrease) in Certificates of Deposit 4,883 (6,053) 3,308
Net Increase (Decrease) in Short Term Borrowings 4,062 (3,874) 8,889
Payments of Cash Dividends (741) (752) (2,986)
Proceeds from Stock Options Exercised 259 53 306
Purchase of Treasury Stock (356) (96) (3,402)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 8,194 (2,551) 40,953
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 3,058 (5,390) (275)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 28,903 29,178 29,178
--------- --------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 31,961 $ 23,788 $ 28,903
========= ========= =========
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest Paid $ 1,797 $ 2,236 $ 8,763
Income Taxes (Refunded) Paid (325) (444) 4,762
Other Real Estate Acquired and Other Assets Acquired
in Settlement of Loans -0- -0- 1579
The accompanying Notes should be read with these financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2002 (UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
The accounting and reporting policies of Summit Bancshares, Inc. 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, Summit Bank, National Association (the "Bank")
and SIA Insurance Agency. All significant intercompany balances and transactions
have been eliminated in consolidation.
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
three months of 2003, the average cash balance maintained at the Federal Reserve
Bank was $1,954,000. Compensating balances held at other correspondent banks, to
minimize service charges, averaged approximately $18,833,000 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 2003 and 2002, 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, deferred fees 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. Loan origination fee income, net of direct loan origination costs, is
deferred and amortized over the life of the related loan. The accrual of
interest on a loan is discontinued when, in the opinion of management, there is
doubt about the ability of the borrower to pay interest or principal. Interest
previously earned, but uncollected on such loans, is written off. After loans
are placed on non-accrual all payments received are applied to principal and no
interest income is recorded until the loan is returned to accrual status or the
principal has been reduced to zero.
8
NOTE 1 - Summary of Significant Accounting Policies (cont'd.)
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 Bank'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
Land is carried at cost. 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 write-down 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 2002 financial statements
to conform to the 2003 presentation.
Earnings Per Common and Common Equivalent Shares
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 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.
9
NOTE 1 - Summary of Significant Accounting Policies (cont'd.)
Stock Based Compensation
The Corporation accounts for stock-based compensation in accordance with
the intrinsic value based method recommended by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date over the amount an employee must pay to
acquire the stock. The impact on the financial statements of using this method
is disclosed in Note 13, "Stock Option Plans" to the financial statements.
Audited Financial Statements
The consolidated balance sheet as of December 31, 2002, and the
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 2002 are headed "unaudited" in these
financial statements. These statements were reported in the Securities Exchange
Commission Form 10-K as of December 31, 2002 as "audited" but are required to be
reflected in these statements as unaudited because of the absence of an
independent auditor's report.
NOTE 2 - Investment Securities
A summary of amortized cost and estimated fair values of investment
securities is as follows (in thousands):
March 31, 2003
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Investment Securities - Available-for-Sale
U.S. Treasury Securities $ 998 $ 9 $ -0- $ 1,007
U.S. Government Agencies
and Corporations 114,306 3,793 -0- 118,099
U.S. Government Agency Mortgage
Backed Securities 33,788 426 (6) 34,208
Obligations of States and Political Subdivisions 5,014 185 -0- 5,199
Community Reinvestment Act Investment Fund 3,000 -0- -0- 3,000
Federal Reserve and Federal Home Loan Bank Stock 2,126 -0- -0- 2,126
------------ ------------ ------------ ------------
Total Available-for-Sale Securities 159,232 4,413 (6) 163,639
------------ ------------ ------------ ------------
Total Investment Securities $ 159,232 $ 4,413 $ (6) $ 163,639
============ ============ ============ ============
All investment securities are carried on the consolidated balance sheet as
of March 31, 2003 at fair value. The net unrealized gain of $4,407,000 is
included in the Available-for-Sale Investment Securities balance. The unrealized
gain, net of tax, is included in Shareholders' Equity.
Included in the Other Securities category at March 31, 2003 is $1,806,000
of Federal Home Loan Bank Stock and $320,000 of Federal Reserve Stock which are
classified as restricted investment securities, carried at cost, and evaluated
for impairment. No impairment losses were recorded as of March 31, 2003. The
Corporation is required to have stock holdings of Federal Home Loan Bank Stock
equal to 5% of its outstanding advancements from the FHLB. The Corporation is
also required to have stock holdings of Federal Reserve Stock equal to 6% of its
Capital Stock and Surplus.
10
NOTE 2 - Investment Securities (cont'd.)
A summary of amortized cost and estimated fair values of investment
securities is as follows (in thousands):
March 31, 2002
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Investment Securities - Available-for-Sale
U.S. Treasury Securities $ 5,019 $ 117 $-0- $ 5,136
U.S. Government Agencies
and Corporations 113,852 1,661 (131) 115,382
U.S. Government Agency Mortgage
Backed Securities 17,258 139 -0- 17,397
Obligations of States and Political Subdivisions 1,953 2 (14) 1,941
Federal Reserve and Federal Home Loan Bank Stock 1,623 -0- -0- 1,623
------------ ------------ ------------ ------------
Total Available-for-Sale Securities 139,705 1,919 (145) 141,479
------------ ------------ ------------ ------------
Total Investment Securities $ 139,705 $ 1,919 $ (145) $ 141,479
============ ============ ============ ============
All investment securities were carried on the consolidated balance sheet
as of March 31, 2002 at fair value. The net unrealized gain of $1,774,000 was
included in the Available-for-Sale Investment Securities balance. The unrealized
gain, net of tax, was included in Shareholders' Equity.
Included in the Other Securities category at March 31, 2002 was $1,303,000
of Federal Home Loan Bank Stock and $320,000 of Federal Reserve Stock which are
classified as restricted investment securities, carried at cost, and evaluated
for impairment. No impairment losses were recorded as of March 31, 2002. The
Corporation is required to have stock holdings of Federal Home Loan Bank Stock
equal to 5% of its outstanding advancements from the FHLB. The Corporation is
also required to have stock holdings of Federal Reserve Stock equal to 6% of its
Capital Stock and Surplus.
NOTE 3 - Loans and Allowance for Loan Losses
The book values of loans by major type follow (in thousands):
March 31,
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Commercial $ 202,448 $ 189,511 $ 195,120
Real Estate Mortgage - Commercial 135,353 120,352 130,755
Real Estate Mortgage - Residential 53,388 47,913 48,447
Real Estate Construction 64,679 61,812 59,941
Loans to Individuals 33,484 34,235 34,882
Less: Unearned Discount -0- (5) -0-
------------ ------------ ------------
489,352 453,818 469,145
Allowance for Loan Losses (7,365) (6,534) (6,706)
------------ ------------ ------------
Loans - Net $ 481,987 $ 447,284 $ 462,439
============ ============ ============
11
NOTE 3 - Loans and Allowance for Loan Losses (cont'd.)
Transactions in the allowance for loan losses are summarized as follows
(in thousands):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Balance, Beginning of Period $ 6,706 $ 6,015 $ 6,015
Provisions, Charged to Income 300 545 3,140
Loans Charged-Off (80) (42) (2,821)
Recoveries of Loans Previously
Charged-Off 439 16 372
------------ ------------ ------------
Net Loans Recovered (Charged-Off) 359 (26) (2,449)
------------ ------------ ------------
Balance, End of Period $ 7,365 $ 6,534 $ 6,706
============ ============ ============
The provisions for loan losses charged to operating expenses during the
three months ended March 31, 2003 and March 31, 2002 of $300,000 and $545,000,
respectively, were considered adequate to maintain the allowance in accordance
with the policy discussed in Note 1. For the year ended December 31, 2002, a
provision of $3,140,000 was recorded.
At March 31, 2003, the recorded investment in loans that are considered to
be impaired under Statement of Financial Accounting Standards No. 114 was
$1,596,000 (of which $1,596,000 were on non-accrual status). The related
allowance for loan losses for these loans was $815,000. The average recorded
investment in impaired loans during the three months ended March 31, 2003 was
approximately $1,637,000. For this period, the Corporation recognized no
interest income on these impaired loans.
NOTE 4 - Premises and Equipment
The investment in premises and equipment stated at cost and net of
accumulated amortization and depreciation is as follows (in thousands):
March 31,
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Land $ 2,317 $ 2,317 $ 2,317
Buildings and Improvements 10,154 8,265 9,830
Furniture & Equipment 9,347 7,754 9,168
------------ ------------ ------------
Total Cost 21,818 18,336
21,315
Less: Accumulated Amortization and Depreciation 10,166 9,677 9,829
------------ ------------ ------------
Net Book Value $ 11,652 $ 8,659 $ 11,486
============ ============ ============
NOTE 5 - Other Real Estate
The carrying value of other real estate is as follows (in thousands):
March 31,
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Other Real Estate $-0- $-0- $ 1,142
============ ============ ============
There were no direct write-downs of other real estate charged to income
for the three months ended March 31, 2003 or March 31, 2002. There were also no
direct write-downs of other real estate charged to income for the year ended
December 31, 2002.
Included in Other Assets at March 31, 2003 and March 31, 2002 were
$125,000 and $97,000 of Other Foreclosed Assets. The 2003 assets were comprised
of motor vehicles and the 2002 assets were comprised of an inventory of
textbooks. There were no direct write-downs of these assets as of March 31, 2003
or for any period during 2002.
12
NOTE 6 - Deposits
The book values of deposits by major type follow (in thousands):
March 31,
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Noninterest-Bearing Demand Deposits $ 165,220 $ 151,236 $ 167,745
Interest-Bearing Deposits:
Interest-Bearing Transaction
Accounts and Money Market Funds 185,055 178,617 184,458
Savings 115,962 109,631 113,948
Certificates of Deposit under $100,000 and IRA's 62,959 61,339 63,432
Certificates of Deposit $100,000 or more 57,407 44,782 52,050
Other 316 316 316
------------ ------------ ------------
Total 421,699 394,685 414,204
------------ ------------ ------------
Total Deposits $ 586,919 $ 545,921 $ 581,949
============ ============ ============
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 and Federal Funds Purchased is summarized as follows (in thousands):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Securities Sold Under Repurchase Agreements:
Average Balance $ 21,138 $ 14,400 $ 20,141
Period-End Balance 17,017 13,437 22,955
Maximum Month-End Balance During Period 22,597 14,466 29,560
Interest Rate:
Average 0.54% 0.74% 0.87%
Period-End 0.61 0.77 0.59
Federal Funds Purchased:
Average Balance $ 4,908 $ 2,865 $ 1,178
Period-End Balance -0- -0- -0-
Maximum Month-End Balance During Period 1,075 1,657 8,650
Interest Rate:
Average 1.53% 2.01% 2.03%
Period-End -0- -0- -0-
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. The borrowings are collateralized by a blanket floating lien on all first
mortgage loans, the FHLB capital stock owned by the Corporation and any funds on
deposit with FHLB. At March 31, 2003, the Corporation had $22.0 million of
borrowings outstanding under the line of credit at a rate of 1.65%, $5.0 million
of which matures in May 2003, $10.0 matures in July 2003 and the remaining $7.0
million matures in October 2003. For the three months ended March 31, 2003, the
Corporation had average borrowings under the line of credit of $19.7 million. In
addition, at March 31, 2003, the Corporation had $2.3 million borrowed under a
match funding agreement with Federal Home Loan Bank at a rate of 4.41% which
matures in June 2003. For the three months ended March 31, 2002, the Corporation
had $10.0 million of borrowings outstanding under the line of credit at a rate
of 2.08% which matured in July 2002. For the three months ended March 31, 2002,
the Corporation had average borrowings under the line of credit of $18.5
million. In addition, at March, 31, 2002, the Corporation had $1,055,000
borrowed under the match funding agreement mentioned above. At December 31,
2002, $12.0 million of borrowings were outstanding at a rate of 2.11%, comprised
of the $5.0 million and $7.0 million increments described above. For the year
ended December 31, 2002, the Corporation had average borrowings of $16.5
million. The Corporation, at December 31, 2002, also had the same $2.3 million
borrowed under the match funding agreement with the Federal Home Loan Bank at
the rate of 4.41%.
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 mature 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 March 31, 2003, no funds had been borrowed under these lines
nor were any borrowings outstanding.
13
NOTE 9 - Other Non-Interest Expense
The significant components of other non-interest expense are as follows
(in thousands):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Business Development $ 173 $ 168 $ 797
Legal and Professional Fees 169 173 774
Printing and Supplies 106 80 353
Regulatory Fees and Assessments 62 58 239
Other 675 572 2,121
------------ ------------ ------------
Total $ 1,185 $ 1,051 $ 4,284
============ ============ ============
NOTE 10 - Income Taxes
Federal income taxes included in the consolidated balance sheets were as
follows (in thousands):
March 31,
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Current Tax Asset (Liability) $ (1,418) $ (1,409) $ 347
Net Deferred Tax Asset 1,056 1,968 893
------------ ------------ ------------
Total Included in Other (Liabilities) Assets $ (362) $ 559 $ 1,240
============ ============ ============
The net deferred tax asset at March 31, 2003 of $1,056,000, included
$(1,498,000), a deferred tax liability related to unrealized gains on
Available-for-Sale Securities.
The components of income tax expense were as follows (in thousands):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Federal Income Tax Expense
Current $ 1,465 $ 1,460 $ 4,908
Deferred (benefit) (212) (267) (62)
------------ ------------ ------------
Total Federal Income Tax Expense $ 1,253 $ 1,193 $ 4,846
============ ============ ============
Effective Tax Rates 34.00% 34.30% 34.20%
14
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):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Federal Income Taxes at Statutory
Rate of 34.5% $ 1,271 $ 1,207 $ 4,858
Effect of Tax Exempt Interest Income (23) (11) (68)
Non-deductible Expenses 17 15 67
Other (12) (18) (11)
------------ ------------ ------------
Income Taxes Per Income Statement $ 1,253 $ 1,193 $ 4,846
============ ============ ============
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):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Federal Deferred Tax Assets:
Allowance for Loan Losses $ 2,526 $ 2,111 $ 2,300
Valuation Reserves - Other Real Estate -0- 106 2
Interest on Non-accrual Loans 290 258 273
Deferred Compensation 551 560 552
------------ ------------ ------------
Gross Federal Deferred Tax Assets 3,367 3,035 3,127
------------ ------------ ------------
Federal Deferred Tax Liabilities:
Depreciation and Amortization 575 286 542
Accretion 191 150 182
Unrealized Gains on Available-for-Sale Securities 1,498 603 1,474
Other 47 28 36
------------ ------------ ------------
Gross Federal Deferred Tax Liabilities 2,311 1,067 2,234
------------ ------------ ------------
Net Deferred Tax Asset $ 1,056 $ 1,968 $ 893
============ ============ ============
NOTE 11 - Related Party Transactions
The Bank has made transactions 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 $8,864,000 at December 31, 2002.
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 March 31, 2003, outstanding documentary and standby letters of credit
totaled $9,720,000 and commitments to extend credit totaled $123,766,000.
15
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 its subsidiary incentive stock
options, as defined under the current tax law. The options under the Plans will
be exercisable for ten years from the date of grant and generally vest ratably
over a five year period. Options will be and have been granted at prices which
will not be less than 100-110% of the fair market value of the underlying common
stock at the date of grant.
The following is a summary of transactions during the periods presented:
Shares Under Option
--------------------------------------------------
Three Months Ended Year Ended
March 31, 2003 December 31, 2002
------------------ -----------------
Outstanding, Beginning of Period 418,934 453,459
Additional Options Granted During the Period -0- 11,000
Forfeited During the Period (4,950) (6,000)
Exercised During the Period (40,775) (39,525)
--------------- ---------------
Outstanding, End of Period 373,209 418,934
=============== ===============
Options outstanding at March 31, 2003 ranged in price from $3.00 to $21.05
per share with a weighted average exercise price of $12.78 and 290,499 shares
exercisable. At March 31, 2003, there remained 355,150 shares reserved for
future grants of options under the 1997 Plan.
The Corporation accounts for this plan under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation cost has
been recognized for options granted. The following table illustrates the effect
on net income and earnings per share if the Corporation had applied the fair
value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to stock-based compensation.
Three Months Ended Year Ended
March 31, 2003 December 31, 2002
------------------ -----------------
Net Income, as Reported $ 2,433 $ 9,317
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (30) (124)
--------------- ---------------
Pro Forma Net Income $ 2,403 $ 9,193
=============== ===============
Earnings Per Share:
Basic - as Reported $ 0.39 $ 1.50
Basic - Pro Forma 0.39 1.48
Diluted - as Reported 0.39 1.46
Diluted - Pro Forma 0.38 1.44
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 2002, 2001 and 2000, 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 $105,000 and $99,000 during
the first three months of 2003 and 2002, respectively, and $427,000 for the year
2002.
Supplemental Executive Retirement Plan
In 2002, the Corporation established a Supplemental Executive Retirement
Plan to provide key employees with retirement, death or disability benefits. For
currently employed employees, the plan replaces the previous Management Security
Plan. The current plan is a defined contribution plan. The expense charged to
earnings for such future obligations was $46,000 for the first three months of
2003 and $180,000 for the year 2002. There was no expense recorded for the plan
during the first three months of 2002.
16
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 for other than cause and under certain changes in control.
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):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Net income $ 2,433 $ 2,286 $ 9,317
============ ============ ============
Weighted average number of common
shares used in Basic EPS 6,166,000 6,263,193 6,224,028
Effect of dilutive stock options 110,486 154,753 171,533
------------ ------------ ------------
Weighted number of common shares
and dilutive potential common
stock used in Diluted EPS 6,276,486 6,417,946 6,395,561
============ ============ ============
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):
March 31,
----------------------------------------
2003 2002
--------------- ---------------
Financial Instruments Whose Contract Amounts Represent Credit Risk:
Loan Commitments Including Unfunded Lines of Credit $ 123,766 $ 133,196
Standby Letters of Credit 9,720 7,315
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 makes 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 bank's 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.
17
NOTE 18 - Litigation
The Corporation 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 15, 2003, the Board of Directors approved a stock repurchase
plan. The plan authorized management to purchase up to 308,900 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 three months ended March 31, 2003, 18,500 shares were purchased by
the Corporation through a similar repurchase plan through the open market.
NOTE 20 - Subsequent Event
On April 15, 2003, the Board of Directors of the Corporation approved a
quarterly dividend of $.12 per share to be paid on May 15, 2003 to shareholders
of record on May 1, 2003.
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):
March 31,
----------------------------------------------------------
2003 2002
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial Assets
Cash and due from banks $ 31,961 $ 31,961 $ 23,788 $ 23,788
Federal funds sold and Due From Time 76 76 4,246 4,248
Securities 163,639 163,639 141,479 141,479
Loans 489,352 492,835 453,818 469,231
Allowance for loan losses (7,365) (7,365) (6,534) (6,534)
Financial Liabilities
Deposits 586,919 588,636 545,921 547,253
Short Term Borrowings 41,317 41,308 24,492 24,457
Off-balance Sheet Financial Instruments
Loan commitments 123,766 133,196
Letters of credit 9,720 7,315
18
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):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2003 2002 2002
------------ ------------ ------------
Net Income $ 2,433 $ 2,286 $ 9,317
Other Comprehensive Income:
Unrealized gain (loss) on securities
available-for-sale, net of tax 47 (523) 1,167
------------ ------------ ------------
Comprehensive Income $ 2,480 $ 1,763 $ 10,484
============ ============ ============
19
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Summary
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Corporation analyzes the major elements of the Corporation's
consolidated balance sheets and statements of income. This discussion should be
read in conjunction with the consolidated financial statements and accompanying
notes.
Net income for the first quarter of 2003 was $2,433,000 or $.39 diluted
earnings per share, compared with $2,286,000, or $.36 diluted earnings per
share, for the first quarter of 2002. On a per share basis, diluted earnings per
share increased 8.3% over the first quarter of the prior year. Per share amounts
are based on average diluted shares outstanding of 6,276,486 for the first three
months of 2003 and 6,417,946 for the comparable period of 2002 adjusted to
reflect stock options granted.
Outstanding loans at March 31, 2003 of $489.4 million represented an
increase of $35.5 million, or 7.8%, over March 31, 2002 and an increase of $20.2
million, or 4.3%, from December 31, 2002.
Total deposits at March 31, 2003 of $586.9 million were up $41.0 million,
or 7.5% from $545.9 million at March 31, 2002. Growth was experienced in every
category of deposits with the largest growth coming in demand deposits and
certificates of deposit over $100,000 which were up $14.0 million and $12.6
million, respectively. Demand deposits made up 28.2% of total deposits at March
31, 2003. Deposits were also up $5.0 million, or .8% from December 31, 2002.
The following table summarizes the Corporation's performance for the three
months ended March 31, 2003 and 2002 (tax equivalent basis and dollars in
thousands):
Three Months Ended
March 31,
----------------------------------------
2003 2002
--------------- ---------------
Interest Income $ 9,285 $ 9,566
Interest Expense 1,816 2,132
--------------- ---------------
Net Interest Income 7,469 7,434
Provision for Loan Loss 300 545
--------------- ---------------
Net Interest Income After
Provision for Loan Loss 7,169 6,889
Non-Interest Income 1,348 1,250
Non-Interest Expense 4,797 4,643
--------------- ---------------
Income Before Income Tax 3,720 3,496
Income Tax Expense 1,287 1,210
--------------- ---------------
Net Income $ 2,433 $ 2,286
=============== ===============
Net Income per Share-
Basic $ 0.39 $ 0.37
Diluted 0.39 0.36
Return on Average Assets 1.43% 1.45%
Return on Average Stockholders' Equity 14.89% 15.00%
20
Summary of Earning Assets and Interest-Bearing Liabilities
The following schedule presents average balance sheets that highlight
earning assets and interest-bearing liabilities and their related rates earned
and paid for the first quarter of 2003 and 2002 (rates on tax equivalent basis):
Three Months Ended March 31,
------------------------------------------------------------------------------------
2003 2002
---------------------------------------- ----------------------------------------
Average Average Average Average
Balances Interest Yield/Rate Balances Interest Yield/Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Earning Assets:
Federal Funds Sold & Due From Time $ 1,286 $ 4 1.18% $ 3,554 $ 19 2.18%
Investment Securities (Taxable) 165,615 1,711 4.19% 150,269 1,848 4.99%
Investment Securities (Tax-exempt) 4,994 71 5.77% 1,894 28 5.98%
Loans, Net of Unearned Discount(1) 476,298 7,499 6.39% 446,440 7,671 6.97%
----------- ----------- ----------- ----------- ----------- -----------
Total Earning Assets 648,193 9,285 5.81% 602,157 9,566 6.44%
----------- -----------
Non-interest Earning Assets:
Cash and Due From Banks 25,639 24,102
Other Assets 21,686 18,823
Allowance for Loan Losses (6,996) (6,207)
----------- -----------
Total Assets $ 688,522 $ 638,875
=========== ===========
Interest-Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Money Market Funds $ 177,053 462 1.06% $ 173,484 565 1.32%
Savings 116,568 397 1.38% 108,793 475 1.77%
Certificates of Deposit under $100,000
and IRA's 63,026 426 2.74% 62,552 544 3.53%
Certificates of Deposit
$100,000 or more 54,350 373 2.78% 45,724 409 3.63%
Other Time 316 2 2.25% 411 4 3.78%
Other Borrowings 48,012 156 1.32% 36,033 135 1.52%
----------- ----------- ----------- ----------- ----------- -----------
Total Interest-Bearing Liabilities 459,325 1,816 1.60% 426,997 2,132 2.02%
----------- -----------
Non-interest Bearing Liabilities:
Demand Deposits 160,011 146,785
Other Liabilities 2,933 3,263
Shareholders' Equity 66,253 61,830
----------- -----------
Total Liabilities and
Shareholders' Equity $ 688,522 $ 638,875
=========== ===========
Net Interest Income and Margin
(Tax-equivalent Basis)(2) $ 7,469 4.67% $ 7,434 5.01%
=========== ===========
(1) Loan interest income includes 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.
21
Net Interest Income
Net interest income (tax equivalent) for the first quarter of 2003 was
$7,469,000 which represented an increase of $35,000 or .5%, over the first
quarter of 2002. In this same period, total interest income declined 2.9% and
total interest expense declined 14.8% and reflects a 50 basis point decrease in
market interest rates from the first of January 2002 to March 2003.
The following table summarizes the effects of changes in interest rates,
average volumes of earning assets and interest bearing liabilities on net
interest income (tax equivalent) for the periods ended March 31, 2003 and 2002:
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in Thousands)
1st Qtr. 2003 vs. 1st Qtr. 2002 1st Qtr. 2002 vs. 1st Qtr. 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 $ (12) $ (3) $ (15) $ (807) $ (28) $ (835)
Investment Securities (Taxable) 188 (325) (137) 199 (496) (297)
Investment Securities (Tax-exempt) 46 (3) 43 31 (8) 23
Loans, Net of Unearned Discount 513 (685) (172) 1,537 (2,950) (1,413)
----------- ----------- ----------- ----------- ----------- -----------
Total Interest Income 735 (1,016) (281) 960 (3,482) (2,522)
----------- ----------- ----------- ----------- ----------- -----------
Interest-Bearing Liabilities:
Deposits 126 (463) (337) (402) (2,290) (2,692)
Other Borrowings 45 (24) 21 195 (271) (76)
----------- ----------- ----------- ----------- ----------- -----------
Total Interest Expense 171 (487) (316) (207) (2,561) (2,768)
----------- ----------- ----------- ----------- ----------- -----------
Net Interest Income $ 564 $ (529) $ 35 $ 1,167 $ (921) $ 246
=========== =========== =========== =========== =========== ===========
Allowance for Loan Losses and Non-Performing Assets
The Corporation's allowance for loan losses was $7,365,000, or 1.50% of
total loans, as of March 31, 2003 compared to $6,534,000, or 1.44% of total
loans, as of March 31, 2002.
Transactions in the provision for loan losses are summarized as follows
(in thousands):
Three Months Ended
March 31,
----------------------------------------
2003 2002
--------------- ---------------
Balance, Beginning of Period $ 6,706 $ 6,015
Provisions, Charged to Income 300 545
Loans Charged-Off (80) (42)
Recoveries of Loans Previously
Charged-Off 439 16
--------------- ---------------
Net Loans Recovered
(Charged-Off) 359 (26)
--------------- ---------------
Balance, End of Period $ 7,365 $ 6,534
=============== ===============
For the three months ended March 31, 2003 and 2002, net recoveries
(charge-offs) were .07% and (.01%) of loans, respectively, not annualized.
22
The following table summarizes the non-performing assets as of the end of the
last five quarters (in thousands):
March 31, December 31, September 30, June 30, March 31,
2003 2002 2002 2002 2002
------------- ------------- ------------- ------------- -------------
Non-Accrual Loans $ 2,226 $ 2,135 $ 4,635 $ 3,870 $ 3,458
Renegotiated Loans -0- -0- -0- -0- -0-
Other Real Estate Owned and
Other Foreclosed Assets 125 1,268 288 56 97
------------- ------------- ------------- ------------- -------------
Total Non-Performing Assets $ 2,351 $ 3,403 $ 4,923 $ 3,926 $ 3,555
============= ============= ============= ============= =============
As a Percent of:
Total Assets 0.34% 0.49% 0.72% 0.58% 0.55%
Total Loans and Other Real Estate/
Foreclosed Assets 0.48% 0.72% 1.04% 0.84% 0.78%
Loans Past Due 90 days or
More and Still Accruing $ 80 $ 16 $ 37 $ 13 $ 228
Non-accrual loans to total loans were .45% at March 31, 2003 and
non-performing assets were .48% of loans and other real estate owned/foreclosed
assets at the same date.
As of March 31, 2003, non-accrual loans were comprised of $1,632,000 in
commercial loans, $345,000 in real estate mortgage loans and $249,000 in
consumer loans.
As of March 31, 2003, there was no other real estate owned. However, the
Corporation has $125,000 in Other Foreclosed Assets which represents several
motor vehicles. These assets are in process of liquidation; however the process
is expected to take several months. The cost of liquidation will be recorded as
a current period expense.
The following table summarizes the relationship between non-performing
loans, criticized loans and the allowance for loan losses (dollars in
thousands):
March 31, December 31, September 30, June 30, March 31,
2003 2002 2002 2002 2002
------------- ------------- ------------- ------------- -------------
Non-Performing Loans $ 2,226 $ 2,135 $ 4,635 $ 3,870 $ 3,458
Criticized Loans 23,061 23,067 22,284 25,398 23,043
Allowance for Loan Losses 7,365 6,706 6,334 6,394 6,534
Allowance for Loan Losses
as a Percent of:
Non-Performing Loans 331% 314% 137% 165% 189%
Criticized Loans 32% 29% 28% 25% 28%
23
Non-Interest Income
The major component of non-interest income is service charges on deposits.
Other service fees are the majority of other non-interest income.
The following table reflects the changes in non-interest income during the
periods presented (dollars in thousands):
Three Months Ended
March 31,
--------------------------------------------
2003 2002 %Change
------------ ------------ ------------
Service Charges on Deposit Accounts $ 758 $ 645 17.5%
Non-recurring Income -0- 51 --
Other Non-interest Income 590 554 6.5
------------ ------------ ------------
Total Non-interest Income $ 1,348 $ 1,250 7.8%
============ ============ ============
The increase in other non-interest income in the first quarter of 2003 is
primarily due to increases in mortgage brokerage/origination fees, letter of
credit fees and debit card service fees. The non-recurring income in the first
quarter of 2002 represented the gain on sale of assets previously held in other
assets.
Non-interest Expense
Non-interest expenses include all expenses other than interest expense,
provision for loan losses and income tax expense.
The following table summarizes the changes in non-interest expense during
the periods presented (dollars in thousands):
Three Months Ended
March 31,
--------------------------------------------
2003 2002 %Change
------------ ------------ ------------
Salaries & Employee Benefits $ 2,905 $ 2,867 1.3%
Occupancy Expense - Net 293 252 16.3
Furniture and Equipment Expense 429 404 6.2
Other Real Estate Expense - Net (15) 69 --
Other Expenses:
Business Development 173 168 3.0
Insurance - Other 60 33 81.8
Legal & Professional Fees 169 173 (2.3)
Item Processing 170 74 129.7
Taxes - Other 10 14 (28.6)
Postage & Courier 86 87 (1.1)
Printing & Supplies 106 80 32.5
Regulatory Fees & Assessments 62 58 6.9
Other Operating Expenses 349 364 (4.1)
------------ ------------ ------------
Total Other Expenses 1,185 1,051 12.7
------------ ------------ ------------
Total Non-interest Expense $ 4,797 $ 4,643 3.3%
============ ============ ============
Total non-interest expense increased 3.3% in the first quarter of 2003
over 2002, reflecting increases in salaries and benefits, occupancy and
equipment, data processing and supplies expenses. As a percent of average
assets, non-interest expenses were 2.83% in the first quarter of 2003
(annualized) and 2.94% in the same period of 2002. The "efficiency ratio"
(non-interest expenses divided by total non-interest income plus net interest
income) was 54.41% for the first quarter of 2003 compared to 53.47% for the
first quarter of 2002.
The increase in occupancy expense and supplies expense are both primarily
associated with the opening of a new branch facility in January 2003.
The increase in equipment expense and item processing expense are both
related to the core system conversion the Corporation experienced in the fourth
quarter of 2002. New equipment was purchased and item processing was outsourced
at the time of conversion.
24
Interest Rate Sensitivity
Interest rate sensitivity is the relationship between changes in market
interest rates and net interest income due to the repricing characteristics of
assets and liabilities.
The following table, commonly referred to as a "static GAP report",
indicates the interest rate sensitivity position at March 31, 2003 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 $ 253,267 $ 38,925 $ 32,694 $ 324,886 $ 164,466 $ 489,352
Investment Securities 10,045 21,498 40,346 71,889 91,750 163,639
Federal Funds Sold and
Due From Time 76 -0- -0- 76 -0- 76
--------- --------- --------- --------- --------- ---------
Total Earning Assets 263,388 60,423 73,040 396,851 256,216 653,067
--------- --------- --------- --------- --------- ---------
Interest Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Savings 301,017 -0- -0- 301,017 -0- 301,017
Certificates of Deposit under
$100,000 and IRA's 8,022 21,066 15,195 44,283 18,676 62,959
Certificates of Deposit
$100,000 or More 5,282 20,686 10,055 36,023 21,700 57,723
Short Term Borrowings 17,017 17,300 7,000 41,317 -0- 41,317
--------- --------- --------- --------- --------- ---------
Total Interest Bearing
Liabilities 331,338 59,052 32,250 422,640 40,376 463,016
--------- --------- --------- --------- --------- ---------
Interest Sensitivity
Gap $ (67,950) $ 1,371 $ 40,790 $ (25,789) $ 215,840 $ 190,051
========= ========= ========= ========= ========= =========
Cumulative Gap $ (67,950) $ (66,579) $ (25,789)
========= ========= =========
Periodic Gap to
Total Assets (9.74%) 0.20% 5.84%
Cumulative Gap to
Total Assets (9.74%) (9.54%) (3.70%)
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 (3.70%) was reversed to a positive 23.80% "beta adjusted" GAP position.
Management feels that the "beta adjusted" GAP risk technique more
accurately reflects the Corporation's GAP position.
25
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 March 31, 2003, the Corporation's Tier I
capital represented 12.09% of risk weighted assets and total qualifying capital
(Tier I and Tier II) represented 13.34% of risk weighted assets. Both ratios are
well above current regulatory guidelines.
Also, as of March 31, 2003, the Corporation and the 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").
The Corporation and the Banks' regulatory capital positions as of March
31, 2003, were as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ----------- ----------- ----------- -----------
CONSOLIDATED:
As of March 31, 2003
Total Capital (to Risk Weighted Assets) $ 70,264 13.34% $ 42,133 8.00%
Tier I Capital (to Risk Weighted Assets) 63,672 12.09 21,066 4.00
Tier I Capital (to Average Assets) 63,672 9.04 21,135 3.00
SUMMIT BANK, N.A.:
As of March 31, 2003
Total Capital (to Risk Weighted Assets) $ 68,968 13.10% $ 42,132 8.00% $ 52,665 10.00%
Tier I Capital (to Risk Weighted Assets) 62,376 11.84 21,066 4.00 31,599 6.00
Tier I Capital (to Average Assets) 62,376 8.85 21,134 3.00 35,223 5.00
Forward-Looking Statements
The Corporation may from time to time make forward-looking statements
(within the meaning of the Private Securities Litigation Reform Act of 1995)
with respect to earnings per share, credit quality, expected Year 2003
compliance program, corporate objectives and other financial and business
matters. The Corporation cautions the reader that these forward-looking
statements are subject to numerous assumptions, risks and uncertainties,
including economic conditions; actions taken by the Federal Reserve Board;
legislative and regulatory actions and reforms; competition; as well as other
reasons, all of which change over time. Actual results may differ materially
from forward-looking statements.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Change in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings Per Common Share
99.1 Certification of Chief Executive Officer of Summit
Bancshares, Inc.
99.2 Certification of Chief Financial Officer of Summit
Bancshares, Inc.
(b) On April 11, 2003, a report on Form 8-K was filed reporting
the press release of April 10, 2003, as Summit Bancshares,
Inc. announced the results of operations and financial
condition for the first quarter of 2003.
27
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: 04-23-03 By: /s/ Philip E. Norwood
------------- -----------------------------------
Philip E. Norwood, Chairman, President
and Chief Executive Officer
Date: 04-23-03 By: /s/ Bob G. Scott
------------- -----------------------------------
Bob G. Scott, Executive Vice President
and Chief Operating Officer
(Chief Accounting Officer)
28
EXHIBIT INDEX
Exhibit Page No.
------- --------
11 Computation of Earnings Per Common Share 30
29
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: 05-01-03 By: /s/ Philip E. Norwood
------------- -----------------------
Philip E. Norwood
Chairman, President and Chief
Executive Officer
30
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: 05-01-03 By:/s/ Bob G. Scott
------------- ----------------------------
Bob G. Scott
Executive Vice President and
Chief Operating Officer
(Chief Accounting Officer)
31