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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

  FOR QUARTER ENDED: JUNE 30, 2002  

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


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Table of Contents

PART I - FINANCIAL INFORMATION
 
ITEM 1   PAGE
 
SUMMIT BANCSHARES, INC. AND SUBSIDIARY FINANCIAL STATEMENTS
 
    Consolidated Statement of Financial Position   3
    Consolidated Statements of Income   4
    Consolidated Statement of Changes in Shareholders’ Equity   5
    Consolidated Statement of Cash Flows   6
    Notes to Financial Statements   7
    Interest Rate Risk Reporting Schedule   10
 
ITEM 2
 
    Management’s Discussion and Analysis of Financial Condition and Results of Operations   11
 
ITEM 3
    Quantitative and Qualitative Disclosures About Market Risk   18
 
PART II - OTHER INFORMATION   19
 
ITEMS 1-6    

 


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

             
      Unaudited     Audited
ASSETS     06/30/02     12/31/01

Cash and due from banks   $  11,518,470   $  5,532,202
Federal funds sold     16,945,000     20,070,000
   
 
Cash and cash equivalents     28,463,470     25,602,202
Time deposits with other financial institutions     22,246,026     27,189,613
Investment securities (fair value of $2,044,637 at 
    June 30, 2002 and $2,074,688 at
    December 31, 2001 ) held to maturity
    2,021,767     2,029,750
Loans:   $ 95,915,357   $ 88,648,893
  Less: allowance for loan losses   $ 1,555,022   $ 1,506,750
   

 

Net loans     94,360,335     87,142,143
Premises and equipment, net     750,511     804,115
Interest receivable and other assets     5,264,409     4,884,324
   
 
             
Total Assets   $ 153,106,518   $ 147,652,147
   
 
             
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Deposits:            
Demand   $  45,508,471   $  38,484,086
Interest-bearing transaction accounts     38,669,401     48,553,348
Savings     3,232,923     2,566,402
Time certificates $100,000 and over     32,396,077     32,420,495
Other time certificates     13,641,613     6,719,637
   
 
Total Deposits     133,448,485     128,743,968
Interest payable and other liabilities     1,004,331     698,311
   
 
Total Liabilities     134,452,816     129,442,279
Shareholders’ Equity            
Preferred Stock, no par value:            
  2,000,000 shares authorized, no shares outstanding     0     0
Common Stock, no par value:            
  3,000,000 shares authorized;            
 1,854,328 shares outstanding at June 30, 2002 and
 1,850,492 shares outstanding at December 31, 2001
    3,764,953     3,752,486
Retained Earnings     14,888,749     14,457,382
   
 
Total Shareholders’ Equity     18,653,702     18,209,868
   
 
 
Total Liabilities and Shareholders’ Equity   $ 153,106,518   $ 147,652,147
   
 

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

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

                                    (UNAUDITED)

  THREE MONTHS   THREE MONTHS   SIX MONTHS   SIX MONTHS
  ENDED 6-30-02   ENDED 6-30-01   ENDED 6-30-02   ENDED 6-30-01
INTEREST INCOME:                      
Interest and fees on loans $ 2,107,595   $ 2,017,823   $ 3,912,208   $  4,311,542
Interest on time deposits with other                      
  financial institutions   283,013     365,439     595,201     757,290
Interest on U.S. government                      
  treasury securities   22,259     38,742     44,517     150,606
Interest on federal funds sold   106,841     338,804     217,287     669,855
 
 
 
 
Total interest income   2,519,708     2,760,808     4,769,213     5,889,293
                       
INTEREST EXPENSE:                      
Interest on deposits   769,837     740,851     1,269,714     1,604,570
 
 
 
 
Total interest expense   769,837     740,851     1,269,714     1,604,570
 
 
 
 
Net interest income   1,749,871     2,019,957     3,499,499     4,284,723
Provision for loan losses   15,000     35,000     32,000     132,000
 
 
 
 
Net interest income after                      
  provision for loan losses   1,734,871     1,984,957     3,467,499     4,152,723
                       
NON-INTEREST INCOME:                      
Service charges on deposit accounts   54,084     63,133     117,103     118,254
Other customer fees and charges   28,631     22,511     101,291     56,599
 
 
 
 
Total non-interest income   82,715     85,644     218,394     174,853
                       
NON-INTEREST EXPENSE:                      
Salaries and employee benefits   678,888     667,695     1,485,148     1,379,668
Occupancy expense   73,353     85,733     148,382     193,910
Equipment expense   92,535     61,995     172,716     119,631
Other   285,744     294,976     561,829     580,868
 
 
 
 
Total non-interest expense   1,130,520     1,110,399     2,368,075     2,274,077
Income before income taxes   687,066     960,202     1,317,818     2,053,499
Provision for income taxes   285,480     400,034     538,765     857,838
 
 
 
 
Net Income $ 401,586   $ 560,168   $ 779,053   $ 1,195,661
 
 
 
 
                       
EARNINGS PER SHARE:                      
Earnings per common share $ 0.22   $ 0.29   $ 0.42   $ 0.65
Earnings per common share assuming dilution $ 0.21   $ 0.30   $ 0.42   $ 0.64
Weighted average shares outstanding   1,854,328     1,846,224     1,853,141     1,841,864
Weighted avg. shrs. outsdg. assuming dilution   1,871,894     1,860,344     1,870,643     1,861,288
 
 
 
 

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

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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)



NUMBER OF
SHARES
OUTSTANDING
COMMON
STOCK
RETAINED
EARNINGS
TOTAL








Balance at December 31, 2000 1,837,548 $ 3,699,017 $ 13,136,106 16,835,123
Stock Options Exercised 12,944 53,469 0 53,469
Repurchase of Common Stock 0 0 0 0
Issuance of cash dividends of $.1875 per share 0 0 (347,047 ) (347,047 )
Net Income 0 0 1,195,660 1,195,660







Balance at June 30, 2001 1,850,492 $ 3,752,486 $ 13,984,719 $ 17,737,205







Balance at December 31, 2001 1,850,492 $ 3,752,486 $ 14,457,382 $ 18,209,868
Stock Options Exercised 3,836 12,467 0 12,467
Issuance of cash dividends of $.1875 per share 0 0 (347,686 ) (347,686 )
Net Income 0 0 779,053 779,053







Balance at June 30, 2000 1,854,328 $ 3,764,953 $ 14,688,749 $ 18,653,702








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

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

(UNAUDITED)

SIX MONTHS
ENDED 6-30-02
SIX MONTHS
ENDED 6-30-01
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 4,207,535 $ 5,200,382
Fees received 714,684 536,544
Interest paid (1,252,898 ) (1,609,465 )
Cash paid to suppliers and employees (2,268,251 ) (2,599,393 )
Income taxes paid (443,820 ) (1,423,764 )




Net cash provided by operating activities 957,250 104,304
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in time deposits with other financial institutions 4,943,587 (7,273,182 )
Maturity of investment securities 7,983 10,428,111
Purchase of investment securities 0 0
Net (increase) decrease in loans to customers (7,366,129 ) (2,514,252 )
Recoveries on loans previously charged-off 18,632 8,000
(Increase) decrease in premises and equipment (69,353 ) (191,057 )




Net cash provided by (used in) investing activities (2,465,280 ) 20,032,488
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in demand, interest bearing transaction, and savings deposits (2,193,041 ) 2,876,788
Net increase (decrease) in time deposits 6,897,558 (3,009,778 )
Exercise of stock options 12,467 53,468
Repurchase of common stock (decrease) 0 0
Dividends paid (decrease) (347,686 ) (347,048 )




Net cash provided by (used in) financing activities 4,369,298 (426,570 )




Net increase (decrease) in cash and cash equivalents 2,861,268 19,710,222
Cash and cash equivalents at the beginning of the year 25,602,202 18,809,372




Cash and cash equivalents at the end of 6-30-02 and 6-30-01 $ 28,463,470 $ 38,519,594




RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 779,053 $ 1,195,661
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 122,957 103,014
Provision for loan losses and OREO losses 32,000 132,000
(Increase) decrease in interest receivable (380,085 ) (1,871,848 )
Increase (decrease) in unearned loan fees 97,305 54,302
Increase (decrease) in Int Pay and Other Liab 306,020 491,175
Total adjustments 178,197 (1,091,357 )




Net cash provided by operating activities 957,250 $ 104,304





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

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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.

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Table of Contents

4.       EARNINGS PER SHARE

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

  Net Income
(Loss)
Weighted
Avg. Shares
Per Share
Amount
         For the quarter ended June 30, 2002
 
Basic Earnings (Loss) per share $402     1,854,328   $.22
Stock Options       17,566    
Diluted Earnings (Loss) per share $402     1,871,894   $.21


  Net Income
(Loss)
Weighted
Avg. Shares
Per Share
Amount
         For the quarter ended June 30, 2001
 
Basic Earnings (Loss) per share $560     1,846,224   $.30
Stock Options       14,120    
Diluted Earnings (Loss) per share $560     1,860,344   $.30


  Net Income
(Loss)
Weighted
Avg. Shares
Per Share
Amount
       For the six months ended June 30, 2002
 
Basic Earnings (Loss) per share $779     1,853,141   $.42
Stock Options       17,502    
Diluted Earnings (Loss) per share $779     1,870,643   $.42


  Net Income
(Loss)
Weighted
Avg. Shares
Per Share
Amount
         For the six months ended June 30, 2001
 
Basic Earnings (Loss) per share $1,196     1,841,864   $.65
Stock Options       19,424    
Diluted Earnings (Loss) per share $1,196     1,861,288   $.64


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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.

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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.

INTEREST RATE RISK REPORTING SCHEDULE

REPORTING INSTITUTION: SUMMIT BANK
  
REPORTING DATE: 6-30-02

REMAINING TIME BEFORE MATURITY OR INTEREST RATE ADJUSTMENT
($000.00)
OMITTED
TOTAL
UP
3
>3
<1
>1
<3
>3
<5
>5
<10
 
OVER
10 YEARS
                                 
I.
EARNING ASSETS                            
 
                           
A. INVESTMENTS:                            
1. U. S. TREASURIES $
0
$
0
$
0
$
0
$
0
$
0
  $
0
2. U. S. AGENCIES  
2,022
 
0
 
0
 
2,022
 
0
 
0
   
0
3. FED FUNDS SOLD  
16,945
 
16,945
 
0
 
0
 
0
 
0
   
0
4. PURCHASED CDS  
22,246
 
4,534
 
9,663
 
8,049
 
0
 
0
   
0
 
 
 
 
 
 
   
TOTAL INVESTMENTS $
41,213
$
21,479
$
9,663
$
10,071
$
0
$
0
  $
0
  
 
 
 
 
 
 
   
  
 
 
 
 
 
 
   
B. LOANS $
92,778
$
77,432
$
4,789
$
4,299
$
4,299
$
1,959
  $
0
 
TOTAL LOANS $
92,778
$
77,432
$
4,789
$
4,299
$
4,299
$
1,959
  $
0
C. TOTAL EARNING ASSETS $
133,991
$
98,911
$
14,452
$
14,370
$
4,299
$
1,959
  $
0
 
 
 
 
 
 
 
   
II.
COST OF FUNDS (DEPOSITS)  
 
 
 
 
 
   
 
 
 
 
 
 
 
   
A. CERTIFICATE OF DEPOSITS $
46,038
$
31,726
$
13,299
$
1,013
$
0
$
0
  $
0
B. MONEY MARKET ACCOUNTS  
35,203
 
21,122
 
7,334
 
6,747
 
0
 
0
   
0
C. TRANSACTION ACCOUNTS  
6,149
 
263
 
791
 
2,084
 
1,499
 
1,512
   
0
D. SAVINGS ACCOUNTS  
2,652
 
114
 
341
 
899
 
647
 
651
   
0
 
 
 
 
 
 
   
TOTAL COST OF FUNDS $
90,042
$
53,225
$
21,765
$
10,743
$
2,146
$
2,163
  $
0
 
 
 
 
 
 
 
   
III.
INTEREST SENSITIVE ASSETS $
133,991
$
98,911
$
14,452
$
14,370
$
4,299
$
1,959
  $
0
 
 
 
 
 
 
 
   
IV.
INTEREST SENSITIVE
     LIABILITIES
$
90,042
$
53,225
$
21,764
$
10,744
$
2,145
$
2,164
  $
0
 
 
 
 
 
 
   
V.
GAP $
43,949
$
45,686
$
(7,312
)
$
3,626
$
2,154
$
(205
)
  $
0
 
 
 
 
 
 
 
   
VI.
CUMULATIVE GAP $
43,949
$
45,686
$
38,374
$
42,000
$
44,154
$
43,949
  $
43,949
 
 
 
 
 
 
 
   
VII.
GAP RATIO  
1.49
 
1.86
 
0.66
 
1.34
 
2.00
 
0.91
   
0.00
 
 
 
 
 
 
 
   
VIII.
CUMULATIVE RATIO  
1.49
 
1.86
 
1.51
 
1.49
 
1.50
 
1.49
   
1.49
 
 
 
 
 
 
 
   
IX.
GAP AS A % OF TOTAL ASSETS  
29.43
 
30.59
 
-4.90
 
2.43
 
1.44
 
0.14
   
0.00
 
 
 
 
 
 
 
   
X.
CUMULATIVE GAP AS A % OF
     TOTAL ASSETS
 
29.43
 
30.59
 
25.70
 
28.12
 
29.57
 
29.43
   
29.43

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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.

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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)

  6-30-02 % 12-31-01 % 6-30-01 %
 
Fed funds sold $16,945 41% $20,070 41% $29,670 58%
Interest bearing Deposits 22,246 54% 27,189 55% 19,076 38%
Securities 2,022 5% 2,030 4% 2,037 4%

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.

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Deposit Comparative
($000.00 Omitted)

  6-30-02
% 12-31-01 % 6-30-01 %
 
Demand $45,508 34% $38,484 34% $36,017 28%
             
Savings 3,233 2% 2,566 2% 3,148 2%
             
Interest bearing Trans. Deposits 38,669 29% 48,553 33% 51,943 41%
             
Other time 46,038 35% 39,140 31% 36,846 29%

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)

  6-30-02
% 12-31-01 % 6-30-01
%
 
Commercial $29,499 31% $23,475 26% $30,997 38%
Real estate-const 24,881 26% 27,389 31% 20,918 26%
Real estate-other 35,399 37% 30,829 35% 21,834 27%
Installment/other 6,136 6% 6,956 8% 7,259 9%


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.

  Non-Performing Assets
($000.00 Omitted)
 
  6-30-02   12-31-01   6-30-01
 
Loans 90 days or more past due & still accruing $       2,182   $        145   $        131
Non-accrual loans 0   0   605
Other real estate owned 0   0   0
 
 
 
   Total non-performing assets $       2,182   $        145   $        736
 
 
 

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Non-performing assets to period end loans plus other real estate owned 2.27 % .17 % .90 %
 
Allowance to non-performing loans 71 % 1,039 % 218 %


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.

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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:

  Capital Ratio Minimum
Regulatory Requirement
 
Tier 1 Capital 15.99% 4.00%
Total Capital 17.16% 8.00%
Leverage Ratio 12.65% 4.00%

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

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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

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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:

 
  6-30-02   12-31-01   6-30-01
 
 
 
  Amount   Loan   Amount   Loan   Amount   Loan
        Percent         Percent         Percent
 
Commercial $ 615   39.6 %   $ 580   38.4 %   $ 600   37.3 %
Construction   350   22.5 %     340   22.6 %     338   21.0 %
Real Estate   300   19.3 %     300   19.9 %     345   21.5 %
Consumer   50   3.2 %     48   3.2 %     60   3.7 %
Unallocated   240   15.4 %     239   15.9 %     264   16.5 %
  $ 1,555   100.0 %   $ 1,507   100.0 %   $ 1,607   100.0 %

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

  Six months ended
 
  ($000.00 Omitted)
  6-30-02   6-30-01
               
Balance, beginning of the period $ 1,507     $ 1,468  
Provision for loan losses   32       132  
Recoveries   21       8  
Loans charged-off   (5 )     (1 )
 

   

 
Balance, end of the period $ 1,555     $ 1,607  

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

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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

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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

ITEM 1 - LEGAL PROCEEDINGS
  From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. Currently, the Company has no outstanding suits brought against it.
 
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
  None
 
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
  None
 
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  The Annual Meeting of Shareholders was held on April 4, 2002. There were present at the Meeting, in person or by proxy, the holders of 1,628,121 shares of Stock of the Company, representing 88% of the total votes eligible to be cast. At the meeting two proposals were presented. The first proposal offered a slate of Directors who were all

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    approved. The second and final proposal was the approved of Vavrinek, Trine Day and Co., LLP as the public accounting firm to perform the Company’s audit for the year 2002. This proposal was also approved. There was no further business to come before the shareholders.
 
ITEM 5 - OTHER INFORMATION
    None
 
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
  
  A)     Exhibits:
  
99.1 - Certification of CEO pursuant to Section 906 of Sarbanes-Oxley Act of 2002
  
99.2 - Certification of CFO pursuant to Section 906 of Sarbanes-Oxley Act of 2002
  
B) Reports on Form 8-K
  
None

  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: August 9, 2002 By:  /s/  Shirley W. Nelson                     
        Shirley W. Nelson
        Chairman and CEO
        (Principal Executive Officer)
 
  DATE: August 9, 2002 By:  /s/  Kikuo Nakahara                         
        Kikuo Nakahara
        Chief Financial Officer
        (Principal Financial Officer)
 
   

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