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, 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
March 31, 2002 was 6,269,861 shares.
SUMMIT BANCSHARES, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2002
and 2001 and at December 31, 2001 4
Consolidated Statements of Income for the
Three Months Ended March 31, 2002 and 2001
and for the Year Ended December 31, 2001 5
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 2002
and 2001 and for the Year Ended December 31, 2001 6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2001 and for
the Year Ended December 31, 2001 7
Notes to Consolidated Financial Statements for the Three
Months Ended March 31, 2002 and 2001 and for the
Year Ended December 31, 2001 8-19
The March 31, 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
Ended March 31, 2002 and 2001 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,
2002 2001 2001
---------------- ---------------- ----------------
ASSETS (In Thousands)
CASH AND DUE FROM BANKS - NOTE 1 $ 23,788 $ 28,494 $ 29,178
FEDERAL FUNDS SOLD & DUE FROM TIME 4,246 111,229 2,284
INVESTMENT SECURITIES - NOTE 2
Securities Available-for-Sale, at fair value 141,479 134,206 160,136
Securities Held-to-Maturity, at cost (fair value
of $10,084,000 on March 31, 2001) -0- 10,018 -0-
LOANS - NOTES 3 AND 11
Loans, Net of Unearned Discount 453,818 387,798 430,754
Allowance for Loan Losses (6,534) (5,537) (6,015)
---------------- ---------------- ----------------
LOANS, NET 447,284 382,261 424,739
PREMISES AND EQUIPMENT - NOTE 4 8,659 7,930 8,131
ACCRUED INCOME RECEIVABLE 3,678 4,732 4,411
OTHER REAL ESTATE - NOTE 5 -0- 283 -0-
OTHER ASSETS 5,772 5,931 7,077
---------------- ---------------- ----------------
TOTAL ASSETS $ 634,906 $ 685,084 $ 635,956
================ ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS - NOTE 6
Noninterest-Bearing Demand $ 151,236 $ 131,995 $ 150,040
Interest-Bearing 394,685 474,782 393,763
---------------- ---------------- ----------------
TOTAL DEPOSITS 545,921 606,777 543,803
SHORT TERM BORROWINGS - NOTE 7 24,492 16,831 28,366
ACCRUED INTEREST PAYABLE 501 1,137 605
OTHER LIABILITIES 2,488 2,987 2,646
---------------- ---------------- ----------------
TOTAL LIABILITIES 573,402 627,732 575,420
---------------- ---------------- ----------------
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; 6,269,861, 6,379,478 and 6,262,961 shares
issued and outstanding at March 31, 2002 and 2001 and at
December 31, 2001, respectively 7,837 7,974 7,829
Capital Surplus 6,909 6,730 6,865
Retained Earnings 45,683 42,066 44,166
Accumulated Other Comprehensive Income - Unrealized Gain
on Available-for-Sale Investment Securities, Net of Tax 1,171 1,159 1,694
Treasury Stock at Cost (5,000, 30,005 and 1,000 shares at
March 31, 2002 and 2001, and at December 31, 2001,
respectively) (96) (577) (18)
---------------- ---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 61,504 57,352 60,536
---------------- ---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 634,906 $ 685,084 $ 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 Three Months Ended (Unaudited)
March 31, Year Ended
------------------------------------- December 31,
2002 2001 2001
--------------- --------------- ---------------
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and Fees on Loans $ 7,664 $ 9,084 $ 34,548
Interest and Dividends on Investment Securities:
Taxable 1,848 2,145 7,966
Exempt from Federal Income Taxes 18 3 11
Interest on Federal Funds Sold and Due From Time 19 854 1,972
--------------- --------------- ---------------
TOTAL INTEREST INCOME 9,549 12,086 44,497
--------------- --------------- ---------------
INTEREST EXPENSE
Interest on Deposits 1,997 4,689 14,967
Interest on Short Term Borrowings 135 211 559
Interest on Note Payable -0- -0- 1
--------------- --------------- ---------------
TOTAL INTEREST EXPENSE 2,132 4,900 15,527
--------------- --------------- ---------------
NET INTEREST INCOME 7,417 7,186 28,970
LESS: PROVISION FOR LOAN LOSSES - NOTE 3 545 180 1,755
--------------- --------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,872 7,006 27,215
--------------- --------------- ---------------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 645 554 2,400
Other Income 605 484 2,116
--------------- --------------- ---------------
TOTAL NON-INTEREST INCOME 1,250 1,038 4,516
--------------- --------------- ---------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits - NOTE 14 2,867 2,539 10,564
Occupancy Expense - Net 252 309 1,294
Furniture and Equipment Expense 404 361 1,472
Other Real Estate Owned Expense - Net 69 (6) 224
Merger Related Expense - NOTE 9 -0- 598 598
Other Expense - NOTE 9 1,051 1,022 4,113
--------------- --------------- ---------------
TOTAL NON-INTEREST EXPENSE 4,643 4,823 18,265
--------------- --------------- ---------------
INCOME BEFORE INCOME TAXES 3,479 3,221 13,466
APPLICABLE INCOME TAXES - NOTE 10 1,193 1,110 4,664
--------------- --------------- ---------------
NET INCOME $ 2,286 $ 2,111 $ 8,802
=============== =============== ===============
NET INCOME PER SHARE - NOTE 15
Basic $ 0.37 $ 0.33 $ 1.39
Diluted 0.36 0.32 1.36
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, 2002 AND 2001
AND FOR THE YEAR ENDED DECEMBER 31, 2001
(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, 2001 6,362,278 $ 7,953 $ 6,678 $ 40,655 $ 285 $ -0- $ 55,571
Stock Options Exercised 17,200 21 52 73
Purchases of Stock Held
in Treasury (577) (577)
Cash Dividend -
$.11 Per Share (700) (700)
Net Income for the
Three Months Ended
March 31, 2001 2,111 2,111
Securities Available-
for-Sale Adjustment 874 874
-------------
Total Comprehensive
Income NOTE 22 2,985
-------------- ------------ ----------- ------------ ------------ ------------ -------------
BALANCE AT
March 31, 2001 6,379,478 7,974 6,730 42,066 1,159 (577) 57,352
Stock Options Exercised 21,000 27 135 162
Purchases of Stock Held
in Treasury (2,122) (2,122)
Retirement of Stock Held
in Treasury (137,517) (172) (2,509) 2,681 -0-
Cash Dividend -
$.33 Per Share (2,082) (2,082)
Net Income for the
Nine Months Ended
December 31, 2001 6,691 6,691
Securities Available-
for-Sale Adjustment 535 535
-------------
Total Comprehensive
Income NOTE 22 7,226
-------------- ------------ ----------- ------------ ------------ ------------ -------------
BALANCE AT
December 31, 2001 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
============== ============ =========== ============ ============ ============ =============
The accompanying Notes should be read with these financial statements.
6
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
AND FOR THE YEAR ENDED DECEMBER 31, 2001
(Unaudited)
For the Three Months Ended (Unaudited)
March 31, Year Ended
--------------------------------------- December 31,
2002 2001 2001
------------------ ----------------- -----------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,286 $ 2,111 $ 8,802
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 265 267 1,058
Net Premium Amortization (Accretion)
of Investment Securities 210 (70) 240
Provision for Loan Losses 545 180 1,755
Deferred Income Taxes Benefit (267) (127) (480)
Writedown of Other Real Estate -0- 3 11
Writedown of Foreclosed Assets -0- -0- 300
Net Gain From Sale of Other Real Estate -0- -0- (308)
Net Loss From Sale of Premises and Equipment 9 -0- 1
Net Decrease (Increase) in Accrued Income and Other Assets 2,217 1,147 (252)
Net Increase (Decrease) in Accrued Expenses and
and Other Liabilities (262) 150 (723)
------------------ ----------------- -----------------
Total Adjustments 2,717 1,550 1,602
------------------ ----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,003 3,661 10,404
------------------ ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (Increase) Decrease in Federal Funds Sold
and Due From Time (1,962) (64,768) 44,177
Proceeds from Matured and Prepaid Investment Securities
o Held-to-Maturity -0- 12,000 15,000
o Available-for-Sale 18,262 31,996 85,127
Proceeds from Sales of Investment Securities -0- -0- 60,139
Purchase of Investment Securities
o Available-for-Sale (609) (37,179) (168,860)
Loans Originated and Principal Repayments, Net (23,103) (7,858) (51,670)
Recoveries of Loans Previously Charged-Off 16 48 268
Proceeds from Sale of Premises and Equipment 27 124 126
Proceeds from Sale of Other Real Estate & Repossessed Assets 347 244 716
Purchases of Premises and Equipment (820) (197) (1,191)
------------------ ----------------- -----------------
NET CASH USED BY INVESTING ACTIVITIES (7,842) (65,590) (16,168)
------------------ ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Demand Deposits, Savings
Accounts and Interest Bearing Transaction Accounts 8,171 63,457 34,868
Net Increase (Decrease) in Certificates of Deposit (6,053) 3,654 (30,731)
Net Increase (Decrease) in Short Term Borrowings (3,874) (3,079) 8,456
Payments of Cash Dividends (752) (700) (2,782)
Proceeds from Stock Options Exercised 53 73 235
Purchase of Treasury Stock (96) (577) (2,699)
------------------ ----------------- -----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,551) 62,828 7,347
------------------ ----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS (5,390) 899 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 $ 23,788 $ 28,494 $ 29,178
================== ================= =================
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest Paid $ 2,236 $ 4,854 $ 16,013
Income Taxes Paid (Refunded) (444) -0- 5,555
Bank Financed Sales of Other Real Estate -0- -0- 440
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, 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. (the
"Corporation") 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"). Effective May 14, 2001, Summit Community Bank, N.A. was merged with and
into Summit National Bank and Summit National Bank changed its name to Summit
Bank, National Association. Also Summit Bancservices, Inc. was liquidated
effective May 14, 2001 and its assets were contributed by the Corporation to
Summit Bank, N.A. All operations of Summit Bancservices have been continued in
the Bank. 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 balances at the Federal
Reserve Bank based on its level of deposits. During the first three months of
2002 the average cash balance maintained at the Federal Reserve Bank was
$1,252,000. Compensating balances held at other correspondent banks, to minimize
service charges, averaged approximately $17,818,000 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
8
Note 1 - Summary of Significant Accounting Policies (cont'd.)
-----
statements. The accrual of interest on a loan is discontinued when, in the
opinion of management, there is doubt about the ability of the borrower to pay
interest or principal. Interest previously earned, but uncollected on such
loans, is written off. After loans are placed on non-accrual all payments
received are applied to principal and no interest income is recorded until the
loan is returned to accrual status or the principal has been reduced to zero.
The Corporation has adopted Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure." Under this
standard, the allowance for loan losses related to loans that are identified for
evaluation in accordance with Statement No. 114 (impaired loans) is based on
discounted cash flows using the loan's initial effective rate or the fair value
of the collateral for certain collateral dependent loans.
The allowance for loan losses is comprised of amounts charged against
income in the form of a provision for loan losses as determined by management.
Management's evaluation is based on a number of factors, including the
Subsidiary'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.
9
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):
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 are carried on the consolidated
balance sheet as of March 31, 2002 at fair value. The net unrealized gain of
$1,774,000 is included in the Available-for-Sale Investment Securities balance.
The unrealized gain, net of tax, is included in Shareholders' Equity.
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, 2001
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- -------------- --------------
Investment Securities - Held-to-Maturity
U.S. Treasury Securities $ 3,000 $ 18 $ -0- $ 3,018
U.S. Government Agencies
and Corporations 7,018 48 -0- 7,066
-------------- -------------- -------------- --------------
Total Held-to-Maturity Securities 10,018 66 -0- 10,084
-------------- -------------- -------------- --------------
Investment Securities - Available-for-Sale
U.S. Treasury Securities 23,049 222 -0- 23,271
U.S. Government Agencies
and Corporations 78,629 1,576 -0- 80,205
U.S. Government Agency Mortgage
Backed Securities 29,222 29 (73) 29,178
Obligations of States and Political Subdivisions 240 3 -0- 243
Federal Reserve and Federal Home Loan Bank Stock 1,309 -0- -0- 1,309
-------------- -------------- -------------- --------------
Total Available-for-Sale Securities 132,449 1,830 (73) 134,206
-------------- -------------- -------------- --------------
Total Investment Securities $ 142,467 $ 1,896 $ (73) $ 144,290
============== ============== ============== ==============
In the above schedule the amortized cost of Total Held-to-Maturity
Securities of $10,018,000 and the fair value of Total Available-for-Sale
Securities of $134,206,000 are reflected in Investment Securities on the
consolidated balance sheet as of March 31, 2001 for a total of $144,224,000. A
net unrealized gain of $1,757,000 is included in the Available-for-Sale
Investment Securities balance. The unrealized gain, net of tax, is included in
Shareholders' Equity. During the second quarter of 2001, $7 million of
securities previously classified as Held-to-Maturity Securities were
reclassified to Available-for-Sale Securities related to the merger of the two
bank subsidiaries. The unrealized gain on the reclassified securities of $52,000
was added to the Available-for-Sale Investment Securities balance.
NOTE 3 - Loans and Allowance for Loan Losses
------
The book values of loans by major type follow (in thousands):
March 31,
---------------------------------- December 31,
2002 2001 2001
--------------- --------------- ---------------
Commercial $ 189,511 $ 173,409 $ 184,716
Real Estate Mortgage - Commercial 120,352 93,883 107,600
Real Estate Mortgage - Residential 47,913 37,213 44,522
Real Estate Construction 61,812 49,244 60,548
Loans to Individuals 34,235 34,078 33,376
Less: Unearned Discount (5) (29) (8)
--------------- --------------- ---------------
453,818 387,798 430,754
Allowance for Loan Losses (6,534) (5,537) (6,015)
--------------- --------------- ---------------
Loans - Net $ 447,284 $ 382,261 $ 424,739
=============== =============== ===============
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,
2002 2001 2001
------------ ------------ ----------------
Balance, Beginning of Period $ 6,015 $ 5,399 $ 5,399
Provisions, Charged to Income 545 180 1,755
Loans Charged-Off (42) (90) (1,407)
Recoveries of Loans Previously
Charged-Off 16 48 268
------------ ------------ ----------------
Net Loans (Charged-Off) Recovered (26) (42) (1,139)
------------ ------------ ----------------
Balance, End of Period $ 6,534 $ 5,537 $ 6,015
============ ============ ================
The provisions for loan losses charged to operating expenses during the
three months ended March 31, 2002 and March 31, 2001 of $545,000 and $180,000,
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 March 31, 2002, the recorded investment in loans that are considered
to be impaired under Statement of Financial Accounting Standards No. 114 was
$3,218,000 (of which $3,218,000 were on non-accrual status). The related
allowance for loan losses for these loans was $1,242,000. The average recorded
investment in impaired loans during the three months ended March 31, 2002 was
approximately $3,330,000. 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,
2002 2001 2001
------------ ----------- ---------------
Land $ 2,317 $ 2,317 $ 2,317
Buildings and Improvements 8,265 7,867 8,247
Furniture & Equipment 7,754 7,900 7,540
------------ ----------- ---------------
Total Cost 18,336 18,084 18,104
Less: Accumulated Amortization and Depreciation 9,677 10,154 9,973
------------ ----------- ---------------
Net Book Value $ 8,659 $ 7,930 $ 8,131
============ =========== ===============
NOTE 5 - Other Real Estate
------
The carrying value of other real estate is as follows (in thousands):
March 31,
----------------------------- December 31,
2002 2001 2001
------------ ------------ ----------------
Other Real Estate $ -0- $ 283 $ -0-
============ ============ ================
There were no direct writedowns of other real estate charged to income
for the three months ended March 31, 2002. There were direct writedowns of other
real estate charged to income for the three months ended March 31, 2001 of
$3,000. For the year ended December 31, 2001, $11,000 was charged to income.
12
NOTE 6 - Deposits
------
The book values of deposits by major type follow (in thousands):
March 31,
------------------------------- December 31,
2002 2001 2001
------------- ------------- ----------------
Noninterest-Bearing Demand Deposits $ 151,236 $ 131,995 $ 150,040
Interest-Bearing Deposits:
Interest-Bearing Transaction
Accounts and Money Market Funds 178,617 217,081 175,965
Savings 109,631 110,826 105,308
Certificates of Deposit under $100,000 and IRA's 61,339 83,562 64,380
Certificates of Deposit $100,000 or more 44,782 62,535 47,644
Other 316 778 466
------------- ------------- ----------------
Total 394,685 474,782 393,763
------------- ------------- ----------------
Total Deposits $ 545,921 $ 606,777 $ 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 and Federal Funds Purchased is summarized as follows (in
thousands):
Three Months Ended
March 31, Year Ended
------------------------------- December 31,
2002 2001 2001
------------- ------------- ----------------
Securities Sold Under Repurchase Agreements:
Average Balance $ 14,400 $ 18,724 $ 17,470
Period-End Balance 13,437 16,831 14,816
Maximum Month-End Balance During Period 14,466 20,374 20,374
Interest Rate:
Average 0.74% 4.58% 2.94%
Period-End 0.77% 4.23% 0.75%
Federal Funds Purchased:
Average Balance $ 2,865 $ -0- $ 567
Period-End Balance -0- -0- 8,550
Maximum Month-End Balance During Period 1,657 -0- 8,550
Interest Rate:
Average 2.01% 0.00% 2.76%
Period-End 0.00% 0.00% 1.92%
The Corporation has available a line of credit with the Federal Home
Loan Bank of Dallas which allows the subsidiary to borrow on a collateralized
basis at a fixed term. At March 31, 2002, the subsidiary had $10,000,000 of
borrowings outstanding under the line of credit at a rate of 2.08% which will
mature in July 2002. For the three months ended March 31, 2002, the Corporation
had average borrowings under the line of credit of $18,500,000. In addition, at
March 31, 2002, the subsidiary had $1,055,000 borrowed under a match funding
agreement with Federal Home Loan Bank at a rate of 4.41% which matures in June
2003. For the three months ended March 31, 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, 2001, 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, 2002,
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, 2002, 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,
2002 2001 2001
------------- ---------------- ----------------
Business Development $ 168 $ 137 $ 734
Legal and Professional Fees 173 158 634
Printing and Supplies 80 78 362
Regulatory Fees and Assessments 58 63 244
Other 572 586 2,139
------------- ---------------- -----------------
Total $ 1,051 $ 1,022 $ 4,113
============= ================ =================
The Merger-Related Expenses recorded in the first quarter of 2001
include expenses related to the merger of the Corporation's subsidiaries as
reported in Note 1 Basis of Presentation and Principles of Consolidation. The
expenses include the cost of severance payments to a former chief executive
officer of one of the units, legal and professional fees and expenses related to
the name change of Summit Bank, N.A.
NOTE 10 - Income Taxes
-------
Federal income taxes included in the consolidated balance sheets were
as follows (in thousands):
March 31,
------------------------------------ December 31,
2002 2001 2001
--------------- ---------------- ----------------
Current Tax Asset (Liability) $ (1,409) $ (1,169) $ 493
Net Deferred Tax Asset 1,968 1,369 1,432
--------------- ---------------- ----------------
Total Included in Other Assets $ 559 $ 200 $ 1,925
=============== ================ ================
The net deferred tax asset at March 31, 2002 of $1,968,000 included
$(603,000), 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,
2002 2001 2001
--------------- ---------------- ----------------
Federal Income Tax Expense
Current $ 1,460 $ 1,237 $ 5,144
Deferred (benefit) (267) (127) (480)
--------------- ---------------- ----------------
Total Federal Income Tax Expense $ 1,193 $ 1,110 $ 4,664
=============== ================ ================
Effective Tax Rates 34.30% 34.40% 34.60%
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,
2002 2001 2001
--------------- ---------------- ----------------
Federal Income Taxes at Statutory
Rate of 34.3% $ 1,207 $ 1,106 $ 4,621
Effect of Tax Exempt Interest Income (11) (1) (3)
Non-deductible Expenses 15 13 65
Other (18) (8) (19)
--------------- ---------------- ----------------
Income Taxes Per Income Statement $ 1,193 $ 1,110 $ 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):
Three Months Ended
March 31, Year Ended
------------------------------------ December 31,
2002 2001 2001
--------------- ---------------- ----------------
Federal Deferred Tax Assets:
Allowance for Loan Losses $ 2,111 $ 1,580 $ 1,859
Valuation Reserves - Other Real Estate 106 6 104
Interest on Non-accrual Loans 258 267 237
Deferred Compensation 560 502 555
Other -0- 19 9
--------------- ---------------- ----------------
Gross Federal Deferred Tax Assets 3,035 2,374 2,764
--------------- ---------------- ----------------
Federal Deferred Tax Liabilities:
Depreciation and Amortization 286 302 286
Accretion 150 106 150
Unrealized Gains on Available-for-Sale Securities 603 597 873
Other 28 -0- 23
--------------- ---------------- ----------------
Gross Federal Deferred Tax Liabilities 1,067 1,005 1,332
--------------- ---------------- ----------------
Net Deferred Tax Asset $ 1,968 $ 1,369 $ 1,432
=============== ================ ================
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 $6,315,000 at December 31, 2001.
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, 2002, outstanding documentary and standby letters of
credit totaled $7,315,000 and commitments to extend credit totaled $133,196,000.
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 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 three months ended March 31, 2002.
The following is a summary of transactions during the periods
presented:
Shares Under Option
----------------------------------------------------
Three Months Ended Year Ended
March 31, 2002 December 31, 2001
------------------------ ----------------------
Outstanding, Beginning of Period 445,959 359,559
Additional Options Granted During
the Period 7,500 124,600
Forfeited During the Period -0- -0-
Exercised During the Period (7,900) (38,200)
------------------------ ----------------------
Outstanding, End of Period 445,559 445,959
======================== ======================
Options outstanding at March 31, 2002 ranged in price from $3.00 to
$20.10 per share with a weighted average exercise price of $10.82 and 323,779
shares exercisable. At March 31, 2002, there remained 355,200 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 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 $99,000 and $90,000
during the first three months of 2002 and 2001, respectively, and $353,000 for
the year 2001.
Management Security Plan
------------------------
In 1992, the Corporation established a Management Security Plan to
provide key employees with retirement, death or disability benefits in addition
to those provided by the Pension Plan. The expense charged to operations for
such future obligations was $67,000 and $39,000 during the first three 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 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).
16
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,
2002 2001 2001
--------------- ---------------- ----------------
Net income $ 2,286 $ 2,111 $ 8,802
============= ============= ================
Weighted average number of common
shares used in Basic EPS 6,263,193 6,368,562 6,317,991
Effect of dilutive stock options 154,753 157,721 153,032
------------- ------------- ----------------
Weighted number of common shares
and dilutive potential common
stock used in Diluted EPS 6,417,946 6,526,283 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):
March 31,
-------------------------------
2002 2001
------------- -------------
Financial Instruments Whose Contract Amounts Represent Credit Risk:
Loan Commitments Including Unfunded Lines of Credit $ 133,196 $ 121,642
Standby Letters of Credit 7,315 5,369
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.
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.
17
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 three months ended March 31, 2002, 5,000 shares were purchased
by the Corporation through a similar repurchase plan through the open market.
NOTE 20 - Subsequent Event
-------
On April 16, 2002, the Board of Directors of the Corporation approved a
quarterly dividend of $.12 per share to be paid on May 15, 2002 to shareholders
of record on May 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):
March 31,
------------------------------------------------------------------
2002 2001
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ ------------
Financial Assets
Cash and due from banks $ 23,788 $ 23,788 $ 28,494 $ 28,494
Federal funds sold and Due From Time 4,246 4,248 111,229 111,245
Securities 141,479 141,479 144,224 144,290
Loans 453,818 469,231 387,798 391,146
Allowance for loan losses (6,534) (6,534) (5,537) (5,537)
Financial Liabilities
Deposits 545,921 547,253 606,777 608,239
Short Term Borrowings 24,492 24,457 16,831 16,829
Off-balance Sheet Financial Instruments
Loan commitments 133,196 121,642
Letters of credit 7,315 5,369
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,
2002 2001 2001
--------------- ---------------- ----------------
Net Income $ 2,286 $ 2,111 $ 8,802
Other Comprehensive Income:
Unrealized gain (loss) on securities
available-for-sale, net of tax (523) 874 1,409
------------- ----------- ----------------
Comprehensive Income $ 1,763 $ 2,985 $ 10,211
============= =========== ================
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 2002 was $2,286,000 or $.36 diluted
earnings per share, compared with $2,111,000, or $.32 diluted earnings per
share, for the first quarter of 2001. On a per share basis, diluted earnings per
share increased 12.5% over the first quarter of the prior year. Per share
amounts are based on average diluted shares outstanding of 6,417,946 for the
first three months of 2002 and 6,526,283 for the comparable period of 2001
adjusted to reflect stock options granted.
Outstanding loans at March 31, 2002 of $453.8 million represented an
increase of $66.0 million, or 17.0%, over March 31, 2001 and an increase of
$23.1 million, or 5.4%, from December 31, 2001.
Total deposits at March 31, 2002 of $545.9 million were down from
$606.8 million at March 31, 2001 as the prior year balances included $72 million
of extraordinary deposits that were retained in the company balances for only a
short time. Excluding these funds, deposits were up $11.1 million, or 2.1%. The
growth was in demand deposits which were up $19.2 million or 14.6% from the
prior year and at March 31, 2002, made up 27.7% of total deposits. Deposits were
up $2.1 million, or .4% from December 31, 2001.
The following table summarizes the Corporation's performance for the
three months ended March 31, 2002 and 2001 (tax equivalent basis and dollars in
thousands).
Three Months Ended
March 31,
-------------------------------
2002 2001
------------ ------------
Interest Income $ 9,566 $ 12,088
Interest Expense 2,132 4,900
------------ ------------
Net Interest Income 7,434 7,188
Provision for Loan Loss 545 180
------------ ------------
Net Interest Income After
Provision for Loan Loss 6,889 7,008
Non-Interest Income 1,250 1,038
Non-Interest Expense 4,643 4,823
------------ ------------
Income Before Income Tax 3,496 3,223
Income Tax Expense 1,210 1,112
------------ ------------
Net Income $ 2,286 $ 2,111
============ ============
Net Income per Share-
Basic $ 0.37 $ 0.33
Diluted 0.36 0.32
Return on Average Assets 1.45% 1.38%
Return on Average Stockholders' Equity 15.00% 15.15%
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 2002 and 2001 (rates on tax equivalent basis).
Three Months Ended March 31,
-----------------------------------------------------------------------------------------
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 $ 3,554 $ 19 2.18% $ 64,286 $ 854 5.39%
Investment Securities (Taxable) 150,269 1,848 4.99% 137,519 2,145 6.33%
Investment Securities (Tax-exempt) 1,894 28 5.98% 240 5 7.65%
Loans, Net of Unearned Discount(1) 446,440 7,671 6.97% 381,849 9,084 9.65%
------------- ------------ ------------ ------------- ----------- ----------
Total Earning Assets 602,157 9,566 6.44% 583,894 12,088 8.40%
------------ -----------
Non-interest Earning Assets:
Cash and Due From Banks 24,102 23,317
Other Assets 18,823 18,506
Allowance for Loan Losses (6,207) (5,464)
------------- -------------
Total Assets $ 638,875 $ 620,253
============= ============
Interest-Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Money Market Funds $ 173,484 565 1.32% $ 167,548 1,394 3.38%
Savings 108,793 475 1.77% 98,511 1,085 4.47%
Certificates of Deposit under $100,000
and IRA's 62,552 544 3.53% 83,365 1,248 6.07%
Certificates of Deposit
$100,000 or more 45,724 409 3.63% 61,842 950 6.23%
Other Time 411 4 3.78% 778 12 6.29%
Other Borrowings 36,033 135 1.52% 18,724 211 4.58%
------------- ------------ ------------ ------------- ----------- ----------
Total Interest-Bearing Liabilities 426,997 2,132 2.02% 430,768 4,900 4.61%
------------ -----------
Non-interest Bearing Liabilities:
Demand Deposits 146,785 129,967
Other Liabilities 3,263 3,005
Shareholders' Equity 61,830 56,513
Total Liabilities and ------------- ------------
Shareholders' Equity $ 638,875 $ 620,253
============= ============
Net Interest Income and Margin
(Tax-equivalent Basis)(2) $ 7,434 5.01% $ 7,188 4.99%
============ ===========
(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 2002 was
$7,434,000 which represented an increase of $246,000 or 3.4%, over the first
quarter of 2001. In this same period, total interest income declined 20.9% and
total interest expense declined 56.5% and reflects a 475 basis point decrease in
market interest rates from the first of January 2001 to March 2002.
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, 2002 and 2001.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in Thousands)
1st Qtr. 2002 vs. 1st Qtr. 2001 1st Qtr. 2001 vs. 1st Qtr. 2000
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
-------------------------------------------- ----------------------------------------
Volume Rate Total Volume Rate Total
------------- ------------ ------------ ------------ ------------- ---------
Interest Earning Assets:
Federal Funds Sold $ (807) $ (28) $ (835) $ 737 $ (67) $ 670
Investment Securities (Taxable) 199 (496) (297) (434) 300 (134)
Investment Securities (Tax-exempt) 31 (8) 23 (7) 3 (4)
Loans, Net of Unearned Discount 1,537 (2,950) (1,413) 345 58 403
------------- ------------ ------------ ------------ ------------- ---------
Total Interest Income 960 (3,482) (2,522) 641 294 935
------------- ------------ ------------ ------------ ------------- ---------
Interest-Bearing Liabilities:
Deposits (402) (2,290) (2,692) 615 334 949
Other Borrowings 195 (271) (76) (125) (15) (140)
------------- ------------ ------------ ------------ ------------- ---------
Total Interest Expense (207) (2,561) (2,768) 490 319 809
------------- ------------ ------------ ------------ ------------- ---------
Net Interest Income $ 1,167 $ (921) $ 246 $ 151 $ (25) $ 126
============= ============ ============ ============ ============= =========
Allowance for Loan Losses and Non-Performing Assets
---------------------------------------------------
The Corporation's allowance for loan losses was $6,534,000, or 1.44% of
total loans, as of March 31, 2002 compared to $5,537,000, or 1.43% of total
loans, as of March 31, 2001.
Transactions in the provision for loan losses are summarized as follows
(in thousands):
Three Months Ended
March 31,
------------------------------------
2002 2001
--------------- ----------------
Balance, Beginning of Period $ 6,015 $ 5,399
Provisions, Charged to Income 545 180
Loans Charged-Off (42) (90)
Recoveries of Loans Previously
Charged-Off 16 48
------------- -------------
Net Loans (Charged-Off)
Recovered (26) (42)
------------- -------------
Balance, End of Period $ 6,534 $ 5,537
============= =============
For the Three Months ended March 31, 2002 and 2001, net charge-offs
were .01% 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,
2002 2001 2001 2001 2001
------------- ------------- -------------- ------------- ---------------
Non-Accrual Loans $ 3,458 $ 4,115 $ 2,632 $ 2,611 $ 2,904
Renegotiated Loans -0- -0- -0- -0- -0-
Other Real Estate Owned and
Other Foreclosed Assets 97 444 511 643 1,348
------------- ------------- -------------- ------------- ---------------
Total Non-Performing Assets $ 3,555 $ 4,559 $ 3,143 $ 3,254 $ 4,252
============= ============= ============== ============= ===============
As a Percent of:
Total Assets 0.56% 0.72% 0.50% 0.52% 0.62%
Total Loans and Other Real Estate/
Foreclosed Assets 0.78% 1.06% 0.75% 0.81% 1.10%
Loans Past Due 90 days or
More and Still Accruing $ 228 $ 16 $ 58 $ 315 $ 32
Non-accrual loans to total loans were .76% at March 31, 2002 and
non-performing assets were .78% of loans and other real estate owned/foreclosed
assets at the same date.
As of March 31, 2002, non-accrual loans were comprised of $2,775,000 in
commercial loans, $146,000 in real estate mortgage loans, $350,000 in real
estate construction loans and $187,000 in consumer loans.
As of March 31, 2002, there was no other real estate owned. Also the
Company has $97,000 in Other Foreclosed Assets which represents an inventory of
textbooks. These assets are in process of liquidation, however the process is
expected to take several months. The cost of liquidation is recorded as a
current period expense and all proceeds from sale of inventory reduces the
carrying-value of the inventory.
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,
2002 2001 2001 2001 2001
------------- ------------- -------------- ------------- ---------------
Non-Performing Loans $ 3,458 $ 4,115 $ 2,632 $ 2,611 $ 2,904
Criticized Loans 23,043 24,879 18,713 11,677 11,586
Allowance for Loan Losses 6,534 6,015 6,190 5,745 5,537
Allowance for Loan Losses
as a Percent of:
Non-Performing Loans 189% 146% 235% 220% 191%
Criticized Loans 28% 24% 33% 49% 48%
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,
---------------------------------------------
2002 2001 % Change
------------ ------------ --------------
Service Charges on Deposit Accounts $ 645 $ 554 16.4%
Non-recurring Income 51 -0- -
Other Non-interest Income 554 484 14.5
------------ ------------ -----------
Total Non-interest Income $ 1,250 $ 1,038 20.4
============ ============ ===========
The increase in other non-interest income in the first quarter of 2002
is primarily due to increases in mortgage brokerage/origination fees and ATM
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,
-----------------------------------------------
2002 2001 % Change
------------ ------------- ----------------
Salaries & Employee Benefits $ 2,867 $ 2,539 12.9%
Occupancy Expense - Net 252 309 (18.4)
Furniture and Equipment Expense 404 361 11.9
Other Real Estate Expense - Net 69 (6) -
Merger Related Expense -0- 598 -
Other Expenses:
Business Development 168 137 22.6
Insurance - Other 33 33 -
Legal & Professional Fees 173 158 9.5
Taxes - Other 14 36 ( 61.1)
Postage & Courier 87 86 1.2
Printing & Supplies 80 78 2.6
Regulatory Fees & Assessments 58 63 (7.9)
Other Operating Expenses 438 431 1.6
------------ ------------- ------------
Total Other Expenses 1,051 1,022 2.8
------------ ------------- ------------
Total Non-interest Expense $ 4,643 $ 4,823 (3.7)
============ ============= ============
Total non-interest expense decreased 3.7% in the first quarter of 2002
over 2001, primarily due to $598,000 of merger related expenses incurred in the
first quarter of 2001 in merging the Company's two banking subsidiaries.
Excluding these charges, non-interest expenses were up 9.9% in the first quarter
of 2002 over 2001, reflecting increases in salaries and benefits, furniture and
equipment and business development expenses. As a percent of average assets,
non-interest expenses were 2.94% in the first quarter of 2002 (annualized) and
3.16% in the same period of 2001. The "efficiency ratio" (non-interest expenses
divided by total non-interest income plus net interest income) was 53.47% for
the first quarter of 2002.
The decrease in occupancy expense is primarily due to rent income being
down in 2001 because of a vacancy at one bank facility that has third party
rental space. The property has subsequently been rented.
The Merger Related Expenses included in 2001 expenses, accrued and
incurred, related to the merger of the Company's two banking subsidiaries and
its non-banking subsidiary to form one unit. The expenses include the cost of
severance payment to a former chief executive officer of one of the units, legal
and professional fees and expenses related to the name change of Summit Bank,
N.A.
Other Real Estate Expense in the first quarter of 2002 includes $69,000
of expense related to Other Foreclosed Assets. These expenses are the costs to
liquidate the inventory of textbooks.
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, 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 $ 269,604 $ 23,192 $ 16,981 $ 309,777 $ 144,041 $ 453,818
Investment Securities 3,814 23,188 26,592 53,594 87,885 141,479
Federal Funds Sold and
Due From Time 4,246 -0- -0- 4,246 -0- 4,246
--------------- ------------ ------------ ------------- ------------- ------------
Total Earning Assets 277,664 46,380 43,573 367,617 231,926 599,543
--------------- ------------ ------------ ------------- ------------- ------------
Interest Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Savings 288,248 -0- -0- 288,248 -0- 288,248
Certificates of Deposit
under $100,000 and IRA's 8,733 25,241 19,674 53,648 8,007 61,655
Certificates of Deposit
$100,000 or More 9,553 22,176 10,223 41,952 2,830 44,782
Short Term Borrowings 13,437 10,000 -0- 23,437 1,055 24,492
--------------- ------------ ------------ ------------- ------------- ------------
Total Interest Bearing
Liabilities 319,971 57,417 29,897 407,285 11,892 419,177
--------------- ------------ ------------ ------------- ------------- ------------
Interest Sensitivity
Gap $ (42,307) $ (11,037) $ 13,676 $ (39,668) $ 220,034 $ 180,366
=============== ============ ============ ============= ============= ============
Cumulative Gap $ (42,307) $ (53,344) $ (39,668)
=============== ============ ============
Cumulative Gap to
Total Earning Assets (7.06%) (8.90%) (6.62%)
Cumulative Gap to
Total Assets (6.66%) (8.40%) (6.25%)
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 (6.25%) was reversed to a positive 18.38% "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, 2002, the Corporation's Tier I
capital represented 12.48% of risk weighted assets and total qualifying capital
(Tier I and Tier II) represented 13.73% of risk weighted assets. Both ratios are
well above current regulatory guidelines.
Also, as of March 31, 2002, the Corporation and its Subsidiary Banks
met the criteria for classification as a "well-capitalized" institution under
the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").
The Corporation and Subsidiary Banks' regulatory capital positions as
of March 31, 2002, 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, 2002
Total Capital (to Risk Weighted Assets) $ 66,382 13.73% $ 38,677 8.00%
Tier I Capital (to Risk Weighted Assets) 60,333 12.48% 19,339 4.00%
Tier I Capital (to Average Assets) 60,333 9.44% 19,166 3.00%
SUMMIT BANK, N.A.:
As of March 31, 2002
Total Capital (to Risk Weighted Assets) $ 65,585 13.57% $ 38,675 8.00% $ 48,343 10.00%
Tier I Capital (to Risk Weighted Assets) 59,536 12.32% 19,337 4.00% 29,006 6.00%
Tier I Capital (to Average Assets) 59,536 9.32% 19,169 3.00% 31,949 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 2002
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
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: 04-23-02 By: /s/ Philip E. Norwood
------------- ----------------------
Philip E. Norwood,
Chairman, President and
Chief Executive Officer
Date: 04-23-02 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