Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.   20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER:   0-11108


SUMMIT BANCSHARES, INC.


STATE OF CALIFORNIA         I.R.S. IDENTIFICATION
NUMBER  94-2767067

2969 BROADWAY, OAKLAND CALIFORNIA      94611

(510)   839-8800

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 outstanding of the registrant’s common stock was
1,854,328 shares of no par value common stock
as of JUNE 30, 2002

1

Table of Contents

Table of Contents

ITEM 1.   CONSOLIDATED FINANCIAL STATEMENTS

SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION JUNE 30, 2002 AND DECEMBER 31, 2001

The accompanying notes are an integral part of these consolidated financial statements

3

Table of Contents

SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
                                    (UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements

4

Table of Contents

SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements

6

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       CONSOLIDATED FINANCIAL STATEMENTS

In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2002 and the results of operations for the three months and six months ended June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001.

Certain information and footnote disclosures presented in the Company’s annual consolidated financial statements are not included in these interim financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2001 Annual Report to Shareholders, which is incorporated by reference in the Company’s 2001 annual report on Form 10-K. The results of operations for the three months and six months ended June 30, 2002 are not necessarily indicative of the operating results for the full year.

2.       COMPREHENSIVE INCOME

The Company had no items of other comprehensive income for the three month and six-month periods ended June 30, 2002 and 2001. Accordingly, total comprehensive income was equal to net income for each of those periods

3.       SEGMENT REPORTING

The Company is principally engaged in community banking activities through the three banking offices of its subsidiary bank. The community banking activities include accepting deposits, providing loans and lines of credit to local individuals and businesses, and investing in investment securities and money market instruments. The three banking offices have been aggregated in to a single reportable segment. Because the Company’s financial information is internally evaluated as a single operating segment, no separate segment information is presented. The combined results are reflected in these financial statements.

7

Table of Contents

4.       EARNINGS PER SHARE

The following table reconciles the numerator and denominator of the basic and diluted earnings per share computations:

8

Table of Contents

For the periods reported, the Company had no reconciling items between net income (loss) and income (loss) available to common shareholders.

5.   NEW ACCOUNTING PROUNOUNCEMENTS

The Financial Accounting Standards Board Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 138, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company adopted SFAS 133 on January 1, 2001. The implementation of this statement did not have a material impact on the Company’s financial position or result of operations.

9

Table of Contents

INTEREST RATE SENSITIVITY/INTEREST RATE RISK ANALYSIS

            The following table provides an interest rate sensitivity and interest rate risk analysis for the quarter ended June 30, 2002. The table presents each major category of interest-earning assets and interest bearing-liabilities.

10

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001

The registrant, Summit Bancshares, Inc. (the “Company”) is a financial holding company whose only operating subsidiary is Summit Bank (the “Bank”). The following discussion primarily concerns the financial condition and results of operations of the Company on a consolidated basis including the subsidiary Bank. All adjustments made in the compilation of this information are of a normal recurring nature.

FINANCIAL CONDITION

Liquidity Management

The consolidated loan-to-deposit ratio at June 30, 2002 was 70.7%, which was an increase from 63.3% for the same period in 2001. Total outstanding loans as of June 30, 2002 increased $13,352,407 compared to the same period a year ago while total deposits increased $5,494,706 versus the same time last year. The increase in loans and deposits was mainly due to Summit’s effort in marketing its products and the formation of the Real Estate Capital Markets Group. The average loan-to-deposit ratio at the end of the second quarter of 2002 was 66.2%, an increase from 60.7% for the same period last year. This increase was caused by an increase in average total deposits of $10,871,047 or 8.3% while average total loans increased $14,596,222 or 19.6%.

One of the Company’s customers manages accounts for medical offices and physicians. This customer has brought approximately 80 of the accounts they manage to the Company. As of June 30, 2002 the aggregate monthly average balance in these accounts was approximately $16,000,000.

This customer has notified the Bank that due to the expiration of a contract and its merger with an affiliated company, approximately $9,000,000 of the deposit relationship will be moving to the affiliate’s bank in Southern California. It is anticipated that these accounts will move by the end of the third quarter.

In anticipation of the transfer of those accounts, the Bank purchased brokered CDs to assist in the outflow of funds. The increase in the deposit accounts is partially reflective of the purchase of brokered CDs.

11

Table of Contents

Net liquid assets, which consists primarily of cash, due from banks, interest-bearing deposits with other financial institutions, investment securities and Federal Funds sold totaled $50,709,496 on June 30, 2002. This amount represented 38.0% of total deposits in comparison to the liquidity ratio of 46.7% as of June 30, 2001. This decrease is primarily a result of a proportionately higher rise in loan growth than the corresponding increase in deposits. It is management’s belief that the current liquidity level is sufficient to meet current needs. The Company is not aware of any current recommendations by the regulatory authorities, which, if they were implemented, would have a material effect on the Company.

The following table sets forth book value of investments by category and the percent of total investments at the dates specified.

Investment Comparative
($000.00 Omitted)

Interest bearing deposits are comprised of Time Certificates of Deposit with other banks and savings and loan institutions with no more than $100,000 in any institution.

Securities on June 30, 2002 were comprised of U.S. Gov’t agencies.

Changes in Financial Position

As of June 30, 2002, total deposits increased $4,704,517 from December 31, 2001 and net loans outstanding increased $7,218,192. The increase in loans was primarily due to an increase in real estate construction loans. Total deposits as of June 30, 2002 were $133,448,485, an increase of 4.3% from $127,953,779 as of June 30, 2001. Total loans as of June 30, 2002 were $94,360,335, an increase of 16.5% from $81,007,928 as of June 30, 2001.

The following table sets forth the amount of deposits by each category and the percent of total deposits at the dates specified.

12

Table of Contents

Deposit Comparative
($000.00 Omitted)

The following table sets forth the amount of loans outstanding by each category and the percent of total loans outstanding at the dates specified.

Loan Comparative
($000.00 Omitted)

Non-Performing Assets

The following table provides information with respect to the subsidiary Bank’s past due loans and components for non- performing assets at the dates indicated. Included in the following figures for June 30, 2002 is a $1,894,000 loan that subsequently paid off on July 19, 2002.

13

Table of Contents

The subsidiary Bank’s policy is to recognize interest income on an accrual basis unless the full collectibility of principal and interest is uncertain. Loans that are delinquent 90 days as to principal or interest are placed on a non-accrual basis, unless they are well secured and in the process of collection, and any interest earned but uncollected is reversed from income. Collectibility is determined by considering the borrower’s financial condition, cash flow, quality of management, the existence of collateral or guarantees and the state of the local economy.

Other real estate owned (“OREO”) is comprised of properties acquired through foreclosure. These properties are carried at the lower of the recorded loan balance or their estimated fair market value based on appraisal, less estimated disposal costs. When the loan balance plus accrued interest exceeds the fair value of the property, the difference is charged to the allowance for loan losses at the time of foreclosure. Subsequent declines in value from the recorded amount, if any, and gains or losses upon disposition are included in noninterest expense. Operating expenses related to other real estate owned are charged to non-interest expense in the period incurred.


Capital Position

As of June 30, 2002, Shareholders’ Equity was $18,654,000. This represents an increase of $917,000 or 5.2% over the same period last year. Since the inception of the repurchase program in 1989, the Company has authorized the repurchase of $3,500,000 of its stock. As of June 30, 2002, the Company has repurchased a total of 668,680 shares of the Company stock constituting 31.1% of the Company’s original stock prior to the repurchase program, at a total cost of $2,668,000, or an average price per share of $3.99. The Company plans to continue its repurchase program as an additional avenue for liquidity for its shareholders. The program has not significantly affected the Company’s liquidity or capital position or its ability to operate. In addition, the Company’s subsidiary Bank remains more than well-capitalized under current regulations.

14

Table of Contents

The following table shows the risk-based capital and leverage ratios as well as the minimum regulatory requirements for the same as of June 30, 2002:

RESULTS OF OPERATIONS


Net Interest Income

Total interest income including loan fees decreased to $4,769,000 for the first six months of 2002 from $5,889,000 for the same period in 2001.

Total interest income on loans and fees decreased to $3,912,000 for the first six months of 2002 from $4,312,000 for the same period last year. Although average loans outstanding during the first six months of 2002 increased $10,260,000 over the same period last year, the average prime lending rate decreased from an average of 8.40% in the first six months of 2001 to an average rate of 4.75% for the first six months of 2002, or a decrease of 365 basis points. Due to this factor, the yield on loans and fees decreased 114 basis points over the same period last year. The yield on investments decreased 197 basis points over the same period last year. This decrease was brought about by a decrease in yields in the marketplace due to the change in the prime-lending rate. Average outstanding investments decreased $2,462,000 for the period brought about by an increase in total loans.

Interest expense decreased from $1,604,000 at the end of the first six months of 2001 to $1,270,000 for the same period in 2002. Although average interest-bearing deposit accounts increased $3,763,000 during the first six months of 2002 versus the same period last year the average cost of funds decreased 86 basis points. This was brought about by changes in the marketplace brought influenced by the decrease in the prime lending rate.

As a result of these factors, net interest margin for the first six months of 2002 was 4.77% compared to 6.21% for the same period last year.

For the second quarter, total interest income including loan fees decreased from $2,761,000 in 2001 to $2,520,000 for the same period in 2002. This decrease is due to the decrease in the average prime rate, which for the second quarter 2001 was

15

Table of Contents

7.74% versus the average of 4.75% for the same period in 2002. Offsetting this decrease was an increase in average loans outstanding of $13,276,000 for the second quarter of 2002 versus the same period in 2001. Average outstanding investments decreased $2,353,000 during the second quarter of 2002 versus the same period last year, primarily due to the increase in loans.

For the second quarter of 2002, interest expense increased $29,000 compared to the same period in 2001. Average outstanding interest bearing deposits increased from $84,897,000 in 2001 to $93,504,000 in 2002. Average cost of funds for the same period was 2.59% compared to 4.04% in 2001. As a result, net interest income for the second quarter of 2002 decreased $270,000, or 13.4% compared to the same period in 2001.

Other Operating Income

Service charges on deposit accounts as of the end of the first six months of 2002 decreased to $117,000 versus $118,000 for the same period in 2001. This was primarily related to a decrease in service charges collected on returned checks.

Other customer fees and charges as of the end of the first six months of 2002 increased to $101,000 versus $57,000 for the same period in 2001. This was primarily related to an increase in service charge related to early withdrawal of time certificates of deposits

Service charges on deposit accounts as of the end of the second quarter of 2002 decreased to $54,000 versus $63,000 for the same period in 2001. This was primarily related to a decrease in service charges collected on returned checks and a decrease in analysis charges.

Other customer fees and charges increased $6,000 for the second quarter. This was primarily related to an increase in other miscellaneous income.

Loan Loss Provision

The allowance for loan losses is maintained at a level that management of the Company considers to be adequate for losses that inherent in the current loan portfolio. The allowance is increased by charges to operating expenses and reduced by net-charge-offs. The level of the allowance for loan losses is based on management’s evaluation of losses in the loan portfolio, as well as prevailing economic conditions.

Management employs a systematic methodology on a monthly basis to determine the adequacy of the allowance for current

16

Table of Contents

and future loan losses. The credit administrator grades each loan at the time of extension or renewal. Gradings are assigned a risk factor, which is calculated to assess the adequacy of the allowance for loan losses. Further, management considers other factors such as overall portfolio quality, trends in the level of delinquent and classified loans, specific problem loans, and current and anticipated economic conditions.

The following table summarizes the allocation of the allowance for loan losses by loan type for the years indicated and the percent of loans in each category to total loan dollar amounts in thousands:

The following table summarizes the activity in the Bank’s allowance for loan losses for the six months ended June 30, 2002 and 2001.

The balance in the allowance for loan losses at June 30, 2002 was 1.62% of total loans compared to 1.98% of total loans at June 30, 2001. This level is considered appropriate and is slightly greater than the industry average.

Other Operating Expenses

Total other operating expenses increased $94,000 as of the end of the first six months of 2002 compared to the same period last year. This increase was primarily due to an

17

Table of Contents

increase in salaries of $106,000 primarily centered in incentive accruals and an increase in staff over the same period last year. In addition, equipment expense increased $52,000 primarily related to the purchase of a new computer system, however, this was partially offset by an occupancy expense decrease of $45,000 centered in a reduction of leasehold expense. Other expenses also decreased $19,000 centered in business development expenses.

Total other operating expenses increased $20,000 as of the end of the second quarter of 2002. This increase was primarily due to an increase in salaries of $11,000 primarily centered in incentive accruals and an increase in equipment expense related to the purchase of a new computer system.

Provision for Income Taxes

The Company’s provision for income taxes as of the end of the first six months of 2002 decreased from $858,000 in 2001 to $539,000. For the same period, the Company’s total effective tax rate was 40.1% compared to 41.8% in 2001.

Net Income

Net income for the first six months of 2002 decreased to $779,000 from $1,196,000 for the same period in 2001, or a decrease of 34.9%.

ITEM   3.     Quantitative and Qualitative Disclosures About Market Risk

Interest rate and credit risks are the most significant market risks impacting the Company’s performance. Other types of market risk, such as foreign currency exchanges rate risk and the commodity price risk, do not arise in the normal course of the Company’s business activities. The Company relies on loan reviews, prudent loan underwriting standards and an adequate allowance for loan losses to mitigate credit risk.

Interest rate risk is managed by subjecting the Company’s balance sheet to hypothetical interest rate shocks. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset/liability position to obtain the maximum yield-cost spread on that structure.

Rate shock is an instantaneous and complete adjustment in market rates of various magnitudes on static or level balance sheet to determine the effect such a change in rates would

18

Table of Contents

have on the Company’s net interest income for the succeeding twelve months, and the fair values of financial instruments.

Management has assessed these risks and believes that there has been no material change since December 31, 2001.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The primary factor, which may affect future results, is the fluctuation of interest rates in the market place more commonly referred to as interest rate risk. Interest rate risk is the exposure of a bank’s current and future earnings and equity capital arising from adverse movements in interest rates. It results from the possibility that changes in interest rates may have an adverse effect on a bank’s earnings and its underlying economic value. Changes in interest rates affect a bank’s earnings by changing its net interest income and the level of other interest-sensitive income and operating expenses. As mentioned previously, the potential decrease in a declining interest rate environment would be minimized by an increase in assets. In addition, earnings and growth of the company are and will be affected by general economic conditions, both domestic and international, and by monetary and fiscal policies of the United States Government, particularly the Federal Reserve Bank.

PART  II  -  OTHER INFORMATION

19

Table of Contents

20