SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002 Commission File Number 0-11986
SUMMIT BANCSHARES, INC.
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(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
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(Address of principal executive offices)
(817) 336-6817
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None Not Applicable
---------------- -------------------------------------------
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 par value
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(Title of Class)
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 authorized to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the shares of voting stock held by non-affiliates
of the registrant at March 10, 2003 was approximately $101,118,000.
The number of shares of common stock, $1.25 par value, outstanding at March 10,
2003 was 6,179,017 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement dated March 12, 2003 filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934 for the 2003 Annual
Meeting of Shareholders of Summit Bancshares, Inc., are incorporated by
reference into Part III.
PART I
ITEM 1. BUSINESS.
The Corporation. Summit Bancshares, Inc. (the "Corporation"), a corporation
incorporated under the laws of the state of Texas in 1979, is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"). The Corporation maintains its principal office at 1300 Summit
Avenue, Suite 604, Fort Worth, Texas 76102. The Corporation's principal activity
is the ownership and management of its direct and indirect wholly-owned
subsidiaries, Summit Delaware Financial Corporation and Summit Bank, National
Association (the "Bank"). All significant intercompany balances and transactions
have been eliminated in consolidation.
The Corporation's website address is summitbank.net. Through its website, the
Corporation makes available its annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with
the Securities and Exchange Commission.
At December 31, 2002, the Corporation had consolidated total assets of
$687,733,000, consolidated total loans of $469,145,000, consolidated total
deposits of $581,949,000 and consolidated total shareholders' equity of
$64,938,000.
The Corporation provides advice and services to the Bank and coordinates its
activities in the areas of financial accounting controls and reports, internal
audit programs, regulatory compliance, financial planning and employee benefit
programs. However, the Bank operates under the day-to-day management of its own
officers and directors.
The Corporation's major source of income is dividends received from the Bank
which are restricted as discussed on page 12. Dividend payments by the Bank are
determined on the basis of its earnings, deposits and capital.
The Corporation's business is neither seasonal in nature nor in any manner
related to or dependent upon patents, licenses, franchises or concessions and
the Corporation has not spent material amounts on research activities.
The Bank. The services offered by the Bank are generally those offered by
commercial banks of comparable size in their respective areas. Certain of the
principal services offered by the Bank are described below:
Commercial Banking. The Bank provides general commercial banking services
for corporate and other business clients principally located in Tarrant
County, Texas. Loans are made for a wide variety of purposes, including
interim construction and mortgage financing on real estate and financing
of equipment and inventories.
Consumer Banking. The Bank provides a full range of consumer banking
services, including interest and non-interest-bearing checking accounts,
various savings programs, installment and real estate loans, money
transfers, on-site ATM facilities and safe deposit facilities.
Securities Services. Summit Bancshares, Inc. through an agreement with LM
Financial Partners, Inc. offers investment brokerage services. LM
Financial Partners, Inc., a subsidiary of Legg Mason, Inc., is a
registered broker-dealer and member of the National Association of
Securities Dealers, Inc. (Investment executives are available at the
Subsidiary and can provide information about tax-free municipals,
government securities, stocks, mutual funds or annuities.)
Subsequent to year end, the agreement to offer investment brokerage
services was transferred from LM Financial Partners, Inc. to Raymond James
Financial Services, Inc.
Certain information with respect to the Bank as of February 28, 2003 is set
forth in the following table:
As of February 28, 2003
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(In Thousands)
Organiza- Acqui- Share-
Name and Address of tion sition Total Total Total holders'
the Bank Date Date Assets Loans Deposits Equity
- ------------------- ---- ---- ------ ----- -------- ------
Summit Bank, N.A.
1300 Summit Avenue
Fort Worth, TX 76102 1975 1980 $687,375 $476,406 $573,459 $66,085
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Competition. There is significant competition among bank holding companies in
Tarrant County, Texas and the Corporation believes that such competition among
such bank holding companies will continue in the future.
Additionally, the Bank encounters intense competition in the commercial banking
business, primarily from other banks represented in their respective market
areas, many of which have far greater assets and financial resources. The Bank
also encounters intense competition in the commercial banking businesses from
savings and loan associations, credit unions, factors, insurance companies,
commercial and captive finance companies and certain other types of financial
institutions located in its own and in other major metropolitan areas in the
United States, many of which are larger in terms of capital, resources and
personnel.
Employees. As of December 31, 2002 the Corporation and the Bank collectively had
a total of 198 full-time employees and 14 part-time employees.
REGULATION AND SUPERVISION
The Corporation and the Bank are subject to federal and state law applicable to
businesses generally and also to federal and state laws specifically applicable
to financial institutions and financial institution holding companies. The laws
and regulations governing financial institutions and their parent holding
companies are intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation, and the banking
system as a whole and not for the protection of shareholders or creditors. Those
laws give regulatory authorities broad enforcement powers over banks and bank
holding companies including the power to require remedial actions and to impose
substantial fines and other penalties for violation of laws, regulations, or
orders of regulatory authorities.
The following description of statutory and regulatory provisions is not intended
to be a complete description of those provisions and is qualified in its
entirety by reference to the applicable statutes and regulations. Any change in
applicable statutes or regulations or the policies of regulatory authorities may
have a material effect on the business, operations, and prospects of the
Corporation and the Bank. The Corporation is unable to predict the nature or
extent of the affect on its business and earnings that fiscal or monetary
policies, economic controls, or changes in federal or state statutes or
regulations or regulatory policies may have in the future.
The Corporation
General. The Corporation is a bank holding company within the meaning of the BHC
Act and as such is subject to regulation, supervision, and examination by the
Board of Governors of the Federal Reserve System (the "FRB"). Under federal law,
bank holding companies are subject to restrictions on the types of activities in
which they may engage and to a wide range of supervisory requirements and
actions, including periodic examinations and reporting requirements and
regulatory enforcement actions for any violations of laws, regulations, or
policies. The FRB has authority to order a bank holding company to cease and
desist from unsafe or unsound practices, to assess civil money penalties against
holding companies and affiliated individuals who violate the BHC Act or FRB
regulations or orders, and to order termination by a bank holding company of any
activities or ownership or control of any bank or nonbank subsidiary which the
FRB believes constitutes a serious risk to the financial safety, soundness, or
stability of a subsidiary bank and is inconsistent with sound banking principles
or the purposes of various provisions of law.
The Corporation is a legal entity, separate and distinct from its subsidiaries.
As a result, the Corporation's right to participate in the distribution of
assets of any subsidiary upon liquidation or reorganization of the subsidiary
will be subject to the prior claims of depositors and creditors of the
subsidiary. In the event of a liquidation or reorganization of the Bank, the
claims of depositors and creditors of the Bank will have priority over the
rights of the Corporation and its shareholders and creditors.
Scope of Permissible Activities. The BHC Act prohibits a bank holding company,
with certain limited exceptions, from directly or indirectly engaging in, or
from directly or indirectly acquiring ownership or control of more than 5% of
any class of voting shares of any company engaged in, any activities other than
banking or managing or controlling banks or certain other subsidiaries or other
activities determined by the FRB to be so closely related to banking as to be a
proper incident thereto. Some of the activities which have been determined by
FRB regulation to be closely related to banking are making or servicing loans,
performing certain data processing services, acting as an investment or
financial advisor to certain investment trusts or investment companies, and
providing certain securities brokerage services. In approving or disapproving a
bank holding company's acquisition of a company engaged in bank-related
activities or participation itself in bank-related activities, the FRB considers
a number of factors and weighs the expected benefits to the public (such as
greater convenience and increased competition or gains in efficiency) against
possible adverse effects (such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices). In
considering these factors, the FRB may differentiate between a bank holding
company's commencement of activities itself and its acquisition of a going
concern already engaged in those activities.
The Gramm-Leach-Bliley Act (the "GLB Act"), which became law on November 12,
1999, amended the BHC Act to permit the creation of a "financial holding
company," a new type of bank holding company with powers exceeding those of a
traditional bank holding company. The amendments to the BHC Act made by the GLB
Act, which became effective on March 11, 2000, allow qualifying bank holding
companies to provide a wide variety of financial services previously reserved
for insurance companies and securities firms. A financial holding company may
engage in, and acquire and retain shares of any company engaged in, any activity
which the FRB determines by regulation or order to be financial in nature, or
incidental to such financial activity or complimentary to a financial activity,
and not to pose a substantial risk to the safety or soundness of depository
institutions or the financial system generally. Among the activities which will
be considered to be financial in nature are lending, investing or safeguarding
money or securities, underwriting insurance or annuities or acting as an
insurance principal, agent, or broker, providing financial or investment advice,
issuing or selling interests in pools of assets permissible for a bank to hold
directly, underwriting, dealing in, or making a market in securities and
engaging in any activity which, prior to enactment of the GLB Act, the FRB
determined to be closely related to banking. Subject to
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certain restrictions, the GLB Act and applicable regulations also allow a
financial holding company to make investments in nonfinancial companies as a
part of a bona fide securities underwriting or merchant or investment banking
activities. These investments are referred to as "merchant banking investments."
Before making a merchant banking investment, a financial holding company must be
or have an affiliate registered under the Securities Exchange Act of 1934 or an
insurance affiliate satisfying certain requirements, and such an investment may
be held only for a period of time to enable its sale or disposition on a
reasonable basis consistent with the financial viability of the financial
holding company's merchant banking investment activities which in most instances
may not exceed 10 years. A financial holding company engaged in merchant banking
or other nonfinancial equity investment activity is subject to increased capital
requirements.
To become a financial holding company, a bank holding company must file with its
Federal Reserve Bank a declaration electing to become a financial holding
company along with a certification that all depository institutions controlled
by the company are well-capitalized and well-managed. Such a declaration will
become effective 30 days after filing unless the FRB notifies the bank holding
company prior to that time that its declaration is ineffective. Once the
declaration becomes effective, the bank holding company can commence activities
permitted to a financial holding company unless the FRB imposes supervisory
limitations on the company. Once the election becomes effective, the Company may
continue to claim the benefits of financial holding company status so long as
each depository institution it controls remains well-capitalized and
well-managed. The FRB serves as the primary "umbrella" regulator of a financial
holding company. The primary regulatory authority of a financial holding company
subsidiary will depend upon the activities in which the subsidiary is engaged.
The Corporation elected to become a financial holding company, and its election
became effective on February 4, 2002. The Corporation cannot at this time fully
evaluate the effect on the Corporation and the Bank of the changes made by the
GLB Act, including possible new opportunities for expansion of the Corporation's
activities by its becoming a financial holding company and changes in
competition for the Corporation and the Bank.
Safety and Soundness. Bank holding companies may not engage in unsafe or unsound
banking practices. With some exceptions for well-capitalized and well-managed
companies, FRB regulations require a bank holding company to give the FRB prior
notice of any redemption or repurchase of its own equity securities if the
consideration to be paid, together with the consideration paid for any
repurchases or redemptions in the preceding twelve-month period, is equal to 10%
or more of the company's consolidated net worth. The FRB may disapprove a
redemption or repurchase if it finds the transaction would constitute an unsafe
or unsound practice or would violate any law or regulation. A holding company
may not impair the financial soundness of a subsidiary bank by causing it to
make funds available to nonbanking subsidiaries or their customers when such a
transaction would not be prudent. In some circumstances, the FRB may take the
position that paying a dividend would constitute an unsafe or unsound banking
practice. The stated policy of the FRB is generally that a bank holding company
should pay cash dividends on common stock only out of income available over the
past year and only if prospective earnings retention is consistent with the
organization's future needs and financial condition. This policy states that a
bank holding company should not maintain a level of cash dividends that
undermines the company's ability to serve as a source of strength to its banking
subsidiaries.
The FRB may exercise various administrative remedies to enforce safety and
soundness standards, including issuing orders requiring parent bank holding
companies and their nonbanking subsidiaries to refrain from actions believed by
the FRB to constitute a serious risk to the financial safety, soundness or
stability of a subsidiary bank.
Source of Strength to the Bank. FRB regulations require a bank holding company
to serve as a source of financial and managerial strength to its subsidiary
banks and commit resources to their support. This concept has become known as
the "source of strength" doctrine. The FRB takes the position that a bank
holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
adversity and should maintain the financial flexibility and capital-raising
capacity necessary to obtain resources for assisting its subsidiary banks if
required. A bank holding company which fails to meet its obligations to serve as
a source of strength to its subsidiary banks may be considered by the FRB to be
engaged in an unsafe and unsound banking practice and in violation of FRB
regulations. Further, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") requires a bank holding company to guarantee, up to certain
limits, an undercapitalized subsidiary bank's compliance with any capital
restoration plan approved by the bank's primary federal regulatory authority.
See Imposition of Liability for Undercapitalized Subsidiaries below.
Enforcement. The Financial Institution Reform, Recovery and Enforcement Act of
1989 ("FIRREA") expanded the FRB's authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which are unsafe or unsound
banking practices or constitute violations of laws or regulations. Bank
regulatory authorities may issue cease and desist orders which may, among other
things, require affirmative action to correct conditions resulting from such a
violation or practice, including restitution, reimbursement, and indemnification
or guaranty against loss. Under FIRREA, a bank holding company or financial
institution may also be ordered to restrict its growth, dispose of certain
assets, or take other appropriate action as determined by the ordering agency.
FIRREA increased the amount of civil money penalties that the FRB and other
regulatory agencies may assess for certain activities conducted on a knowing or
reckless basis, if those activities cause a substantial loss to a depository
institution. The penalties may reach as much as $1,000,000 per day. FIRREA also
expanded the scope of individuals and entities against whom such penalties may
be assessed.
Further, FIRREA contains a "cross-guarantee" provision which makes commonly
controlled insured depository institutions liable to the Federal Deposit
Insurance Corporation (the "FDIC") for any losses incurred, or which the FDIC
reasonably anticipates incurring, in connection with the failure of an
affiliated insured depository institution or assistance provided such an
institution in danger of failure. By law, the "cross-guarantee" liability to the
FDIC of an insured depository institution has priority over the rights of the
institution's shareholders including those of any parent holding company.
4
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to certain other services offered by a holding company or its
affiliates.
Reporting and Examination. The Corporation is required to file quarterly and
annual reports with the Federal Reserve Bank of Dallas (the "Federal Reserve
Bank") and to provide such additional information as the Federal Reserve Bank
may require pursuant to the BHC Act. The Federal Reserve Bank may examine the
Corporation and any nonbank subsidiary and charge the Corporation for the cost
of such an examination. The Corporation is also subject to reporting and
disclosure requirements under state and federal securities laws.
Capital Adequacy Requirements. The FRB monitors the capital adequacy of bank
holding companies using a combination of risk-based guidelines and leverage
ratios. Under the risk-based capital guidelines, asset categories are assigned
different risk weights based generally on perceived credit risk. These risk
weights are multiplied by corresponding asset balances to determine a
"risk-weighted" asset base. Certain off-balance sheet items are added to the
risk-weighted asset base by converting them to balance sheet components. For the
purposes of the guidelines, a bank holding company's qualifying total capital is
defined as the sum of its "Tier 1" and "Tier 2" capital elements, with the "Tier
2" element being limited to an amount not exceeding 100% of the "Tier 1"
element. "Tier 1" capital includes, with certain limitations, common
stockholders' equity, qualifying perpetual noncumulative and cumulative
preferred stock, and minority interests in consolidated subsidiaries. "Tier 2"
capital includes, with some limitations, certain other preferred stock as well
as qualifying debt instruments and all or part of the allowance for possible
loan losses. In calculating the "Tier 1" capital of a financial holding company,
certain deductions must be made for the company's nonfinancial equity
investments which have the effect of increasing the minimum capital requirement
for a company engaged in nonfinancial investment activity.
The FRB guidelines require a minimum ratio of qualifying total capital to total
risk-weighted assets of 8.0% (of which at least 4.0% must be in the form of
"Tier 1" capital). At December 31, 2002, the Corporation's ratios of "Tier 1"
and qualifying total capital to risk-weighted assets were 12.2% and 13.4%,
respectively. At such date, both ratios exceeded regulatory minimums.
The FRB uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is defined as a company's
"Tier 1" capital divided by its adjusted average total consolidated assets. The
FRB guidelines require a minimum ratio of 3.0% "Tier 1" capital to total assets
for bank holding companies having the highest regulatory rating. For other bank
holding companies, the minimum ratio of "Tier 1" capital to total assets is
4.0%. Companies with supervisory, financial or managerial weaknesses, as well as
those anticipating or experiencing significant growth, are expected to maintain
capital ratios well above the minimum levels. The Corporation's leverage ratio
at December 31, 2002 was 9.0% which exceeded the regulatory minimum.
A bank holding company which fails to meet the applicable capital standards will
be at a disadvantage in several respects. For example, FRB policy discourages
the payment of dividends by a bank holding company if payment would adversely
affect capital adequacy and borrowing by a company with inadequate capital for
the purpose of paying dividends. In some circumstances, a failure to meet the
capital guidelines may also result in enforcement action by the FRB.
Imposition of Liability for Undercapitalized Subsidiaries. FDICIA requires bank
regulators to take "prompt corrective action" to resolve insured depository
institutions problems. In the event an institution becomes "undercapitalized,"
it must submit a capital restoration plan to its federal regulatory agency. The
regulatory agency will not accept the plan unless it meets certain criteria. One
requirement for acceptance of a capital restoration plan is that each company
"having control of" the undercapitalized institution must guarantee, up to
certain limits, the subsidiary's compliance with the capital restoration plan.
The Corporation has control of the Bank for purposes of this statute. See The
Bank - Capital Adequacy Requirements below. Under FDICIA, the aggregate
liability of all companies controlling a particular insured depository
institution and guaranteeing the institution's compliance with a capital
restoration plan is generally limited to the lesser of 5% of the institution's
assets at the time it became undercapitalized or the amount necessary to bring
the institution into compliance with applicable capital standards.
FDICIA grants greater powers to regulatory authorities in situations where an
institution becomes "significantly" or "critically" undercapitalized or fails to
submit a timely and acceptable capital restoration plan or to implement an
accepted capital restoration plan. A bank holding company controlling an
undercapitalized insured depository institution may be required to obtain prior
FRB approval of proposed dividends or a consent to merger or to divest itself of
the troubled institution or other affiliates.
In the event of a proceeding for a bank holding company under Chapter 11 of the
U.S. Bankruptcy Code, the trustee (or the debtor-in-possession) will, by law, be
deemed to have assumed, and required immediately to cure any deficit under, any
commitment made by the company to a federal regulatory agency to maintain the
capital of an insured depository institution, and any claim based upon such a
commitment will have a priority of payment.
Acquisition by Bank Holding Companies. The BHC Act prohibits a bank holding
company, with some limited exceptions, from acquiring direct or indirect control
of more than 5% of the outstanding shares of any class of voting stock, or
substantially all of the assets of, any bank or bank holding company, or merging
or consolidating with another bank holding company, without the prior approval
of the FRB. In approving acquisitions of a bank or bank holding company by a
bank holding company, the FRB is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors. The FRB is required in every case to consider the
effectiveness of the company in combating money laundering. The Attorney General
of the United States may, within 30 days after approval of an acquisition by the
FRB, bring an action challenging such acquisition under the federal antitrust
laws, in which case the effectiveness of such approval is stayed pending a final
ruling by the courts. In some circumstances, any such action must be brought by
the Attorney General in less than 30 days after FRB approval.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") permits adequately capitalized and managed bank
holding companies to acquire banks located in other states, regardless of
whether the acquisition would be prohibited by applicable state law. An
out-of-state bank holding company seeking to acquire ownership or control of a
state or national
5
bank located in Texas, or any bank holding company owning or controlling a state
bank or a national bank located in Texas, must obtain the prior approval of both
the FRB and the Banking Commissioner of Texas. If the FRB approves an
acquisition which the Texas Banking Commissioner disapproves, the Commissioner
may accept the FRB decision or attempt to have the decision overturned by a
federal court. Under the Interstate Banking Act, a bank holding company and its
insured depository institution affiliates may not complete an acquisition which
would cause it to control more than 10% of total deposits in insured depository
institutions nationwide or to control 30% or more of total deposits in insured
depository institutions in the home state of the bank sought to be acquired.
However, state deposit concentration caps adopted by various states, such as
Texas, which limit control of in-state insured deposits to a greater extent than
the Interstate Banking Act will be given effect. Texas has adopted a deposit
concentration cap of 20% of in-state insured deposits so that the Texas state
deposit concentration cap will lower the otherwise applicable 30% federal
deposit concentration cap. State law may establish a minimum age (not to exceed
five years) of local banks subject to interstate acquisition. The minimum age
established by Texas is five years.
Acquisition of Bank Holding Companies. The Change in Bank Control Act of 1978
prohibits a person or group of persons from acquiring "control" of a bank
holding company unless the FRB has been given prior notice and has not
disapproved the acquisition. Acquisition of 25% or more of any class of voting
shares of a bank holding company constitutes acquisition of "control." The FRB
presumes that the acquisition of 10% or more of any class of voting stock of a
bank holding company constitutes acquisition of control if either the company
has securities registered under Section 12 of the Exchange Act, as does the
Corporation, or if no other person will own or control a greater percentage of
that class of voting securities immediately after the transaction. That
presumption can be rebutted by showing the FRB that the acquisition will not in
fact result in acquiring control. Any entity will be required to obtain the
approval of the FRB under the BHC Act before acquiring 25% or more (or more than
5% in the case of an acquiror that is a bank holding company) of the outstanding
common stock of the Corporation or otherwise exercising control or a
"controlling influence" over the Corporation.
The Bank
General. The Bank is a national banking association organized under the National
Bank Act, as amended, (the "National Bank Act") and is subject to regulatory
supervision and examination by the Office of the Comptroller of the Currency
(the "OCC"). Pursuant to such regulation, the Bank is subject to various
restrictions and supervisory requirements, and potentially to enforcement
actions. The OCC regularly examines national banks with respect to, among other
matters, capital adequacy, reserves, loan portfolio, investments and management
practices. The Bank must furnish quarterly and annual reports to the OCC, and
the OCC may exercise cease and desist and other enforcement powers over the Bank
if its actions represent unsafe or unsound practices or violations of law. Since
the deposits of the Bank are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Company (the "FDIC"), the Bank is also subject to
regulation and supervision by the FDIC and, under some circumstances, to special
examination by the FDIC. Because the FRB regulates the Corporation and the Bank
is a member of the Federal Reserve System, the FRB has supervisory authority
which affects the Bank.
Banks are subject to the credit policies of governmental authorities that affect
the national supply of bank credit. Such policies influence the overall growth
of bank loans, investments, and deposits and may affect interest rates charged
on loans and paid on deposits. The monetary policies of the FRB have had a
significant effect on the results of operations of commercial banks in the past
and may be expected to continue to do so in the future.
Scope of Permissible Activities. The National Bank Act provides the rights,
privileges, and powers of national banks and defines the activities in which
national banks may engage. Permitted activities for a national bank include
making, arranging, purchasing, or selling loans, purchasing, holding, and
conveying real estate under certain conditions, dealing in investment securities
in certain circumstances, and, generally, engaging in the "business of banking"
and activities that are "incidental" to banking. Activities deemed "incidental"
to the business of banking include the borrowing and lending of money, receiving
deposits (including deposits of public funds), holding or selling stock or other
property acquired in connection with security on a loan, discounting and
negotiating evidences of debt, acting as guarantor (if the bank has a
"substantial interest in the performance of the transaction"), issuing letters
of credit to or on behalf of its customers, operating a safe deposit business,
providing check guarantee plans, issuing credit cards, operating a loan
production office, selling loans under repurchase agreements, selling money
orders at offices other than bank branches, providing consulting services to
banks, and verifying and collecting checks. A national bank may conduct many of
its authorized activities by electronic means.
In addition to expanding permitted activities for qualifying bank holding
companies, the GLB Act also permits the creation of a "financial subsidiary"
which can be used by a national bank to engage in many of the activities
permitted for a financial holding company.
Branching. National banks located in Texas may establish a branch anywhere in
Texas with prior OCC approval. For this purpose, a national bank is located in
Texas if it has either its main office or a branch in Texas. In acting on a
branch application, the OCC considers a number of factors, including financial
history, capital adequacy, earnings prospects, character of management, needs of
the community and consistency with corporate powers.
The Interstate Banking Act, which expanded the authority of bank holding
companies to engage in interstate bank acquisitions regardless of state law
prohibitions, also allows banks to merge across state lines and thereafter have
interstate branches by continuing to operate, as a main office or a branch, any
office of any bank involved in the merger. States were, however, permitted to
"opt-out" of interstate mergers by enacting laws meeting certain requirements.
The Texas Legislature "opted out" of the interstate branching provisions during
its 1995 Session. However, the Texas "opt-out" legislation, which by its terms
was to have expired in September of 1999, proved to be ineffective to prohibit
interstate mergers involving banks in Texas because it did not meet the
requirement of the Interstate Banking Act. The Texas Banking Commissioner
determined that, under federal law, the "opt-out" legislation was ineffective to
prohibit interstate mergers and began accepting applications for interstate
merger and branching transactions for state-chartered
6
institutions even before the September, 1999, expiration date of the Texas
"opt-out" legislation as enacted. As a consequence, the Texas "opt-out"
legislation did not have the effect of prohibiting interstate merger and
branching transactions otherwise allowed under federal law.
The Interstate Banking Act also allows a bank to open new branches in a state in
which it does not already have banking operations if the laws of that state
permit a de novo branch of an out-of-state bank. A "de novo branch" is a branch
office of a bank originally established as a branch and not one becoming a
branch by acquisition or merger. In 1995, Texas elected not to permit de novo
branching, but the Texas legislation prohibiting de novo branching proved
ineffective. In 1999, the Texas law was amended to permit entry into Texas by an
out-of-state bank establishing a de novo branch in Texas if the laws of the home
state of the out-of-state bank permit a Texas bank to establish a de novo branch
there. Out-of-state banks are also permitted to enter Texas by merger with an
in-state bank if the resulting bank in such a merger would not control 20% or
more of total in-state deposits and the in-state bank has been in existence and
operation for at least five years. An out-of-state bank that has established or
acquired a branch in Texas may establish or acquire additional in-state branches
to the same extent that a Texas bank may acquire or establish branches in Texas.
Restrictions on Transactions with Affiliates. The Bank is subject to federal
statutes which limit transactions with the Corporation and other affiliates. One
set of restrictions is found in Section 23A of the Federal Reserve Act limits
loans to, purchases of assets from, and investments in "affiliates" of the Bank.
The term "affiliates" would include the Corporation and any of its subsidiaries.
Section 23A imposes limits on the amount of such transactions and also requires
certain levels of collateral for loans to an affiliate. In addition, Section 23A
limits the amount of loans or extensions of credit to third parties which are
collateralized by the securities or obligations of the Corporation or its
subsidiaries.
Another set of restrictions is found in Section 23B of the Federal Reserve Act
which, among the other things, requires that certain transactions between the
Bank and its affiliates must be on terms substantially the same, or at least as
favorable to the Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated companies. In the absence of
such comparable transactions, any transaction between the Bank and an affiliate
must be on terms and under circumstances, including credit underwriting
standards and procedures that, in good faith, would be offered to or would apply
to nonaffiliated companies. The Bank is also subject to prohibitions against
advertising that suggest that the Bank is responsible for the obligations of its
affiliates.
An important purpose of Sections 23A and 23B is to protect against a depository
institution's suffering losses in transactions with affiliates. The GLB Act
increased range or types of affiliates a banking organization is permitted to
have. A premise of the GLB Act in increasing the range of permitted affiliates
was that Section 23A and 23B would limit the risk to depository institutions
from the broader range of affiliations permitted by the Act. The FRB has
recently adopted Regulation W, a new rule effective April 1, 2003, that will
comprehensively implement Sections 23A and 23B in placing limits on the ability
of a bank to extend credit to, or engage in certain other transactions, with an
affiliate. The FRB has stated that, given the enhanced role of Sections 23A and
23B in risk management after the GLB Act, supervisory reviews of intercompany
transactions for compliance with those statutes and Regulation W must be
frequent and rigorous.
The statutes and regulations placing restrictions on transactions with
affiliates may limit the Corporation's ability to obtain funds from the Bank for
the Corporation's cash needs, including funds for payment of dividends and
operating expenses.
Under the Federal Reserve Act and FRB Regulation O, there are restrictions on
loans to directors, executive officers, principal shareholders and their related
interests (collectively referred to herein as "insiders") which apply to all
banks with deposits insured by the FDIC and their subsidiaries and holding
companies. These restrictions include limits on loans to one borrower and
conditions that must be met before such loans can be made. There is also an
aggregate limitation on all loans to insiders and their related interests. In
the aggregate, these loans may not exceed the bank's total unimpaired capital
and surplus. In some circumstances the OCC may determine that a lesser amount is
appropriate. Insiders are subject to enforcement actions for knowingly accepting
loans in violation of applicable restrictions.
Federal law and regulations also prohibit or limit "golden parachute payments"
by FDIC- insured depository institutions and their holding companies. Golden
parachute payments are defined generally as payments made by an insured
depository institution or its holding company to a director, officer, employee,
or other affiliated person contingent upon termination of the person's
employment by the depository institution or its holding company when the
institution or holding company is in troubled condition as determined by
regulatory authorities. Indemnification payments by insured depository
institutions and their holding companies are also prohibited or limited in
certain instances.
Interest Rate Limits and Lending Regulations. The Bank is subject to various
state and federal statutes relating to the extension of credit and the making of
loans. The National Banking Act generally defers to state law for the maximum
rate of interest which may be charged by a national bank. The maximum legal rate
of interest that the Bank may charge on a loan depends on a variety of factors
such as the type of borrower, purpose of the loan, amount of the loan and date
the loan is made. Texas statutes establish maximum legal rates of interest for
various lending situations. Penalties are provided by law for charging interest
in excess of the maximum lawful rate.
Loans made by banks located in Texas are subject to numerous other federal and
state laws and regulations, including the Truth-in-Lending Act, the Texas
Finance Code, the Equal Credit Opportunity Act, the Real Estate Settlement
Procedures Act, and the Home Mortgage Disclosure Act. These laws provide
remedies for the borrower and penalties for the lender for failure of the lender
to comply with such laws. The scope and requirements of these and similar laws
and regulations have expanded in recent years, and claims by borrowers under
these laws and regulations may increase.
Restrictions on Bank Dividends. Substantially all of the Corporation's cash
revenues are derived from dividends paid by the Bank. Dividends payable by
the Bank are restricted under the National Bank Act. See ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY AND
7
RELATED STOCKHOLDER MATTERS - Dividends. The Bank's ability to pay dividends is
further restricted by the requirement that the Bank maintain an adequate level
of capital in accordance with guidelines promulgated from time to time by the
OCC. Moreover, the prompt corrective action provisions of FDICIA and
implementing regulations prohibit a bank from paying dividends or management
fees if, following the payment, the bank would be in any of the three capital
categories for undercapitalized institutions. See Capital Adequacy Requirements
below.
Examinations. The OCC periodically examines and evaluates national banks. Based
upon such evaluations, the OCC may require revaluation of certain assets of a
bank and require the bank to establish specific reserves to allow for the
difference between the regulatory-determined value and the book value of such
assets. The OCC is authorized to assess the institution an annual fee based on,
among other things, the costs of conducting the examinations.
Capital Adequacy Requirements. OCC regulations require national banks to
maintain minimum risk-based capital ratios similar to those for bank holding
companies discussed above. The OCC also uses a leverage ratio as an additional
tool to evaluate the capital adequacy of a national bank. The leverage ratio of
a national bank is defined as the ratio of its Tier 1 capital to its adjusted
total assets. The applicable regulations establish five capital levels, ranging
from "well capitalized" to "critically undercapitalized." A national bank is
considered "well capitalized" if it has a total risk-based capital ratio of
10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a
leverage ratio of 5.0% or greater, and if it is not subject to an order, written
agreement, capital directive, or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure. A national bank is
considered "adequately capitalized" if it has a total risk-based capital ratio
of 8.0% or greater, a Tier 1 risk-based capital ratio of at least 4.0% and
leverage capital ratio of 4.0% or greater (or a leverage ratio of 3.0% or
greater if the institution was given the highest rating in its most recent
report of examination) and the bank does not meet the definition of a "well
capitalized" bank. A national bank is considered "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based
capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0%
(or a leverage ratio that is less than 3.0% if the institution received the
highest rating in its most recent report of examination). A "significantly
undercapitalized" national bank is one which has a total risk-based capital
ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less
than 3.0%, or a leverage ratio that is less than 3.0%. A "critically
undercapitalized" national bank is one which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
At December 31, 2002, the Bank was "well capitalized." See ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Capital Resources.
Corrective Measures for Capital Deficiencies. FDICIA requires the federal
banking regulators to take "prompt corrective action" with respect to
capital-deficient insured depository institutions with the overall goal of
limiting losses to the depository insurance fund. FDICIA contains broad
restrictions on certain activities of undercapitalized institutions involving
asset growth, acquisitions, branch establishment and expansion into new lines of
business.
With certain exceptions, national banks will be prohibited from making capital
distributions, including dividends, or paying management fees to a holding
company if the payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be required
to file capital restoration plans with the OCC. Such a plan will not be accepted
unless, among other things, the banking institution's holding company guarantees
the plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy. Undercapitalized national banks also will be subject to restrictions
on growth, acquisitions, branching, and engaging in new lines of business unless
they have an approved capital plan that permits otherwise. A bank which is not
well capitalized may not accept brokered deposits without prior regulatory
approval and will be subject to limitations on interest rates which it offers on
deposits. The OCC also may, among other things, require an undercapitalized
national bank to issue shares or obligations, which could be voting stock, to
recapitalize the institution or, under certain circumstances, to divest itself
of any subsidiary.
The OCC and other Federal banking agencies are authorized by FDICIA to take
various enforcement actions against any significantly undercapitalized national
bank and action may be taken against any national bank that fails to submit an
acceptable capital restoration plan or fails to implement a plan accepted by the
OCC. These powers include, among other things, requiring the institution to be
recapitalized, prohibiting asset growth or requiring asset reduction,
restricting interest rates paid, requiring FRB prior approval of any capital
distributions by any bank holding company which controls the institution,
requiring divestiture by the institution of its subsidiaries or by the holding
company of the institution itself, requiring new election of directors and
requiring the dismissal of directors and officers.
A significantly and critically undercapitalized national bank may be subject to
more extensive control and supervision. A critically undercapitalized
institution may be prohibited from, among other things, entering into any
material transaction not in the ordinary course of business, amending its
charter or bylaws or engaging in certain transactions with affiliates. In
addition, critically undercapitalized institutions generally will be prohibited
from making payments of principal or interest on outstanding subordinated debt.
Within 90 days of a national bank's becoming critically undercapitalized, the
OCC must appoint a receiver or conservator unless certain findings are made with
respect to the prospect for the institution's continued viability.
Deposit Insurance Assessments. The FDIC is required by the Federal Deposit
Insurance Act to assess all banks a fee in order to fund adequately the Bank
Insurance Fund (the "BIF") so as to provide for the resolution of any insured
bank that is declared insolvent by its primary regulator. FDICIA required the
FDIC to establish a risk-based deposit insurance premium schedule. The
risk-based assessment system is used to calculate deposit insurance assessments
made on BIF member banks to maintain the designated reserves for the fund. In
addition, the FDIC can impose special assessments to repay borrowings from the
U.S. Treasury, the Federal Financing Bank and BIF member banks. Under the
risk-based system, banks are assessed insurance premiums according to how much
risk they are deemed to present to the BIF. Such premiums currently range from
zero percent of insured deposits to 0.27% of insured deposits. Banks with higher
levels of capital and involving a low degree of supervisory concern are assessed
lower premiums
8
than those banks with lower levels of capital and a higher degree of supervisory
concern. The Bank is currently being assessed at the lowest rate of zero
percent.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), beginning in
1997 banks insured under the BIF were required to pay a part of the interest on
bonds issued by the Financing Corporation ("FICO") in the late 1980s to
recapitalize the defunct Federal Savings and Loan Insurance Corporation. Before
the Funds Act, FICO payments were made only by depository institutions which
were members of the Savings Association Insurance Fund (the "SAIF"). Under the
Funds Act, until January 1, 2000, BIF members were assessed for FICO payments at
only one-fifth the rate of assessment on SAIF members. However, as also provided
in the Funds Act, beginning January 1, 2000, all BIF- and SAIF- insured
institutions will pay FICO assessments at the same rate. For the first quarter
of 2003, FICO rates have been set at .0168% for both BIF and SAIF members. The
FICO assessment rates for both BIF and SAIF members for 2002 were:
Fourth Quarter .0170%
Third Quarter .0172%
Second Quarter .0176%
First Quarter .0182%
Internal Operating Requirements. FDICIA requires FDIC-insured depository
institutions with over $500 million in assets to file an annual report with the
FDIC and its primary federal regulator and any appropriate state banking agency
within 90 days after the end of its fiscal year. The report must contain
financial statements audited by an independent public accountant; a statement of
management's responsibilities for (1) preparing the financial statements and for
maintaining internal controls; (2) financial reporting and complying with
designated safety and soundness laws and regulations; and (3) assessing the
effectiveness of the institution's internal controls and compliance with safety
and soundness laws and regulations. The independent public accountant also must
report separately on the institution's internal controls and certain of the
statements made by management in the report. The requirement of an annual audit
of the Bank can be satisfied by an annual audit of the Corporation. The annual
report must be available for public inspection. Each institution to which the
annual report requirement applies must also have an independent audit committee
entirely made up of outside directors. The audit committee's duties must include
reviewing with management and the independent public accountants the basis for
the annual report. The requirement of audit committees for the Bank can be
satisfied by the services of an audit committee of the Corporation.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA") and
the regulations issued by the OCC to implement that law are intended to
encourage banks to help meet the credit needs of their service area, including
low and moderate income neighborhoods, consistent with the safe and sound
operations of the banks. These regulations also provide for regulatory
assessment of a bank's record in meeting the needs of its service area when
considering applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of another bank.
FIRREA requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of its subsidiary bank or banks is reviewed in connection
with the filing of an application to acquire ownership or control of shares or
assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction. A less
than satisfactory CRA rating can limit the extent to which a bank and its
affiliates can take advantage of the expanded range of activities permitted by
the GLB Act.
Customer Privacy. The GLB Act enacted new measures to protect the security,
confidentiality, and integrity of information concerning customers of financial
institutions. The federal banking agencies were directed by the GLB Act to adopt
rules to carry out those measures, and were given broad authority to enforce the
privacy provisions of the Act and rules adopted to carry out those provisions.
The agencies have adopted guidelines for safeguarding customer information which
became effective July 1, 2001. The agencies' guidelines require each financial
institution to establish an information security program which will identify and
assess risks that may threaten the confidentiality of customer information. The
institution must develop a written plan containing policies and procedures to
manage and control those risks and implement and test the plan. The plan must be
adjusted on a continuing basis for changes in technology, the sensitivity of
customer information, and internal and external threats to information security.
A financial institution's policy for protecting the confidentiality and security
of nonpublic personal information must be disclosed to the customer at the time
the customer relationship is established and at least annually thereafter.
Expanding Enforcement Authority
One of the major effects of FDICIA was the increased ability of banking
regulators to monitor the activities of banks and their holding companies. The
Federal banking agencies have extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. For example, the FDIC may terminate
the deposit insurance of any institution which it determines has engaged in an
unsafe or unsound practice. The agencies can also assess civil money penalties,
issue cease and desist or removal orders, seek judicial enforcement of their
orders, and publicly disclose such actions.
9
Changing Regulatory Structure
Legislative and regulatory proposals regarding changes in banking, regulations
of banks, thrifts and other financial institutions, are being considered by the
executive branch of the federal government, Congress, and various state
governments, including Texas. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial service industry.
The Corporation cannot predict accurately whether any of these proposals will be
adopted or, if adopted, how these proposals will affect the Corporation or the
Bank. Also, there will be regulatory changes to deal with the expanded
permissible activities permitted for financial holding companies and financial
subsidiaries of national banks. The Corporation cannot predict at this time the
effect of regulatory changes resulting from the enactment of the GLB Act. The
USA Patriot Act of 2001, which was signed into law on October 26, 2001, imposed
upon financial institutions new requirements for obtaining information,
reporting, and record keeping designed to prevent money laundering.
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the
FRB, have a significant effect on the operating results of bank holding
companies and their subsidiaries. Among the means available to the FRB to affect
the money supply are open market operations in U.S. Government securities,
control of borrowings at the "discount window," changes in the discount rate on
member bank borrowing, changes in reserve requirements against member bank
deposits and against certain borrowings by banks and their affiliates and the
placing of limits on interest rates that member banks may pay on time and
savings deposits. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments, and deposits, and
their use may affect interest rates charged on loans or paid for deposits. FRB
monetary policies have materially affected the operating results of commercial
banks in the past and are expected to continue to do so in the future. The
Corporation cannot predict the nature of future monetary policies and the effect
of such policies on the business and earnings of the Corporation and the Bank.
ITEM 2. PROPERTIES.
The principal offices of the Corporation are located at 1300 Summit Avenue, Fort
Worth, Texas 76102. The Corporation and Summit Bank, N.A., the subsidiary, lease
space at this address from an unrelated third-party through leases that expire
December 31, 2004 and December 31, 2009, respectively. Summit Bank, N.A. owns a
detached motor bank facility.
Summit Bank, N.A. owns the building at 3859 Camp Bowie Boulevard, Fort Worth,
Texas. There are no encumbrances on this property.
The Alta Mesa office of Summit Bank, N.A. is located at 3000 Alta Mesa
Boulevard, Fort Worth, Texas. The building is owned by Summit Bank, N.A. with
the bank office using approximately 25% of the facility. The remainder of the
building is fully leased. There are no encumbrances on the property.
The Northeast office and motor bank facility of Summit Bank, N.A., at 9001
Airport Freeway, North Richland Hills, Texas, is leased from a third-party under
a lease agreement expiring in April 2008. Summit Bank, N.A. owns a tract of land
adjacent to the Northeast office to be used for building of a new motor bank
facility that would be owned by the bank.
The Fossil Creek office of Summit Bank, N.A., at 3851 NE Loop 820, Fort Worth,
Texas is located in a building that is a joint venture between Summit Bank, N.A.
and an unrelated third party. The Fossil Creek office occupies approximately 28%
of the building under a long-term lease with the joint venture.
Summit Bank, N.A. owns the building at 8501 Davis Boulevard, North Richland
Hills, Texas. This banking facility opened on January 13, 2003.
Summit Bank, N.A. owns an improved tract of land that serves as the site of its
operations center. This site is located at 500 Eighth Avenue, Fort Worth, Texas.
ITEM 3. LEGAL PROCEEDINGS.
In the opinion of management, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to the Corporation's business,
to which it or its subsidiary is a party or of which any of their property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise, during the fourth quarter of 2002.
10
ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION.
The executive officers of the Corporation, each elected to serve at the pleasure
of the Board of Directors until the next annual meeting of the Board of
Directors to be held on April 15, 2003, their respective ages, and their present
positions with the Corporation are as follows:
Position With Position Held
Name Age the Corporation Since
---- --- --------------- -----
Philip E. Norwood 53 Chairman/President/CEO 1998/2001
Bob G. Scott 65 Executive Vice President and 1998
Chief Operating Officer
The business experience of each of these executive officers during the past five
(5) years is set forth below:
Mr. Norwood currently serves as Chairman of the Board, President and CEO of
Summit Bancshares, Inc. and Chairman of the Board, President and CEO of Summit
Bank, N.A. He began serving as Chairman of the Board of the Corporation in 1998
and has served as President and CEO since 1993. He has also served as a Director
of the Corporation since 1984. During the month of May 2001, Summit Bank, N.A.
evolved as a result of the successful merger of the two previous subsidiaries,
Summit Community Bank, N.A. and Summit National Bank. It was at that time that
Mr. Norwood began serving as the Chairman of the Board, President and CEO of
Summit Bank, N.A. Beginning January 1998 through the merger, he served as
Chairman of the Board of Summit Community Bank, N.A.. He also served Summit
Community Bank, N.A. as President from 1994 and as a Director from January 1990.
Additionally, Mr. Norwood served as a Director of Summit National Bank from
March 1983 to January 1996 and President from January 2001 until the merger.
Mr. Scott became Executive Vice President, Chief Operating Officer, Secretary
and Treasurer in January 1998 and continues to serve in these capacities. He
served as Senior Vice President and Chief Financial Officer from June 1994 to
January 1998. From February 1992 to June 1994 Mr. Scott was a Senior Vice
President with Alexander and Alexander of Texas, Inc. Prior to February 1992,
Mr. Scott was a financial officer with Team Bancshares, Inc., Fort Worth, Texas
and with Texas American Bancshares, Inc., Fort Worth, Texas.
No family relationships exist among the executive officers and directors of the
Corporation.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information. Since May 3, 1993, the Corporation's Common Stock has been
traded on the Nasdaq Stock Market under the symbol "SBIT." The following table
sets forth the high and low stock prices as quoted for the Corporation's Common
Stock for the periods indicated:
High Low
---- ---
2002 Fiscal Year:
First Quarter $21.15 $18.00
Second Quarter 25.30 20.30
Third Quarter 24.59 20.22
Fourth Quarter 21.21 18.77
2001 Fiscal Year:
First Quarter $22.50 $17.09
Second Quarter 19.85 17.13
Third Quarter 21.10 18.70
Fourth Quarter 19.00 17.25
On March 10, 2003, the closing price reported for the Common Stock was $19.27.
The foregoing quotations reflect prices quoted by market makers of the
Corporation's Common Stock, without retail markup, markdown or commissions, and
may not necessarily represent actual transactions.
Shareholders. At the close of business on March 10, 2003, there were 533
shareholders of record of Common Stock of the Corporation. The number of
beneficial shareholders is unknown to the Corporation at this time.
Dividends. The Corporation has paid regular cash dividends on its common stock
on a quarterly basis since 1993. The following table sets forth, for each
quarter since the beginning of 2001, the quarterly dividends paid by the
Corporation on its Common Stock for the indicated periods:
2002 Dividends Per Share
---- -------------------
First Quarter $0.12
Second Quarter 0.12
Third Quarter 0.12
Fourth Quarter 0.12
2001
----
First Quarter $0.11
Second Quarter 0.11
Third Quarter 0.11
Fourth Quarter 0.11
Although the Board of Directors intends to continue to pay quarterly cash
dividends in the future, there can be no assurance that cash dividends will
continue to the paid in the future or, if paid, that such cash dividends will be
comparable to cash dividends previously paid by the Corporation, since future
dividend policy is subject to the discretion of the Board of Directors of the
Corporation and will depend upon a number of factors, including future earnings
of the Corporation, the financial condition of the Corporation, the
Corporation's cash needs, general business conditions and the amount of
dividends paid to the Corporation by the Bank.
The principal source of the Corporation's cash revenues is dividends received
from the Bank. Pursuant to the National Bank Act, no national bank may pay
dividends from its paid-in capital. All dividends must be paid out of current or
retained net profits, after deducting reserves for losses and bad debts. The
National Bank Act further restricts the payment of dividends out of net profits
by prohibiting a national bank from declaring a dividend on its shares of common
stock until the surplus fund equals the amount of capital stock or, if the
surplus fund does not equal the amount of capital stock, until one-tenth of a
bank's net profits for the preceding half year in the case of quarterly or
semi-annual dividends, or the preceding two half-year periods in the case of
annual dividends, are transferred to the surplus fund. The approval of the OCC
is required prior to the payment of a dividend if the total of all dividends
declared by a national bank in any calendar year would exceed the total of its
net profits for that year combined with its net profits for the two preceding
years. Under FDICIA, the Bank may not pay a dividend if, after paying the
dividend, the Bank would be undercapitalized.
In addition, the appropriate regulatory authorities are authorized to prohibit
banks and bank holding companies from paying dividends which would constitute an
unsafe and unsound banking practice. The Bank and the Corporation are not
currently subject to any regulatory restrictions on their dividends.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical data for the past five years
(in thousands except ratios and per share data):
Years Ended December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- --------- --------- --------
Summary of Earnings:
Interest Income $ 38,657 $ 44,497 $ 47,609 $ 40,232 $ 37,065
Interest Expense 8,512 15,527 18,870 13,772 13,478
-------- -------- --------- --------- --------
Net Interest Income 30,145 28,970 28,739 26,460 23,587
Provision for Loan Losses 3,140 1,755 2,606 1,001 785
Securities Gains (Losses) 165 -0- (2) (3) 35
Non-interest Income 5,302 4,516 3,780 3,883 3,815
Non-interest Expense 18,309 18,265 16,170 15,224 14,173
-------- -------- --------- --------- --------
Earnings Before Income Taxes 14,163 13,466 13,741 14,115 12,479
Income Tax Expense 4,846 4,664 4,765 4,893 4,333
-------- -------- --------- --------- --------
Net Income $ 9,317 $ 8,802 $ 8,976 $ 9,222 $ 8,146
======== ======== ========= ========= ========
Balance Sheet Data (at period-end):
Total Assets $687,733 $635,956 $ 619,121 $ 564,786 $532,764
Investment Securities 173,512 160,136 149,647 156,440 148,012
Loans, Net of Unearned Discount 469,145 430,754 380,016 355,414 305,833
Allowance for Loan Losses 6,706 6,015 5,399 5,169 4,724
Demand Deposits 167,745 150,040 146,083 128,685 141,170
Total Deposits 581,949 543,803 539,666 480,546 465,500
Short Term Borrowings 37,255 28,366 19,910 32,091 17,839
Shareholders' Equity 64,938 60,536 55,571 48,709 46,235
Per Share Data:
Net Income - Basic $ 1.50 $ 1.39 $ 1.41 $ 1.44 $ 1.25
Net Income - Diluted 1.46 1.36 1.38 1.39 1.20
Book Value - Period-End 10.58 9.67 8.73 7.66 7.14
Dividends Declared and Paid 0.48 0.44 0.40 0.32 0.24
Weighted Average Shares Outstanding (000) 6,224 6,318 6,364 6,411 6,497
Average Common Share Equivalents (000) 172 153 160 245 317
Selected Performance Ratios:
Return on Average Assets 1.39% 1.41% 1.54% 1.72% 1.70%
Return on Average Shareholders' Equity 14.74 15.01 17.57 19.66 18.62
Net Interest Margin (tax equivalent) 4.80 4.93 5.25 5.31 5.28
Efficiency Ratio 51.26 54.55 49.71 50.14 51.60
Asset Quality Ratios:
Non-Performing Loans to Total Loans - Period-End 0.46% 0.96% 0.58% 0.69% 1.65%
Non-Performing Assets to Total Assets - Period-End 0.50 0.72 0.61 0.78 1.00
Allowance for Loan Losses to Total Loans - Period-End 1.43 1.40 1.42 1.45 1.54
Allowance for Loan Losses to Non-Performing
Loans - Period-End 314.0 146.0 247.0 211.0 94.0
Net Charge-Offs to Average Loans 0.53 0.28 0.64 0.16 0.04
Capital Ratios:
Shareholders' Equity to Total Assets - Period-End 9.44% 9.52% 8.98% 8.62% 8.68%
Average Shareholders' Equity to Average Assets 9.45 9.40 8.74 8.71 9.11
Total Risk-based Capital to Risk Weighted Assets
- Period-End* 13.41 14.34 14.97 14.59 15.06
Leverage Ratio - Period-End* 8.96 9.20 8.88 8.77 8.52
*Calculated in accordance with Federal Reserve guidelines currently in effect.
13
Quarterly Results (Unaudited)
A summary of the unaudited results of operations for each quarter of 2002 and
2001 follows (in thousands except for per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002
Interest Income $9,549 $9,666 $9,839 $9,603
Interest Expense 2,132 2,199 2,200 1,981
Net Interest Income 7,417 7,467 7,639 7,622
Provision for Loan Losses 545 470 1,350 775
Gain on Sale of Securities -0- 2 163 -0-
Non-interest Income 1,245 1,330 1,367 1,360
Non-interest Expense 4,638 4,681 4,215 4,775
Income Tax Expense 1,193 1,254 1,232 1,167
Net Income 2,286 2,394 2,372 2,265
Per Share Data:
Net Income:
Basic $ 0.37 $ 0.38 $ 0.38 $ 0.37
Diluted 0.36 0.37 0.37 0.36
Dividends Paid 0.12 0.12 0.12 0.12
Stock Price Range:
High 21.15 25.30 24.59 21.21
Low 18.00 20.30 20.22 18.77
Close 20.80 24.29 21.05 19.50
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
Interest Income $12,086 $11,554 $10,897 $9,960
Interest Expense 4,900 4,272 3,731 2,624
Net Interest Income 7,186 7,282 7,166 7,336
Provision for Loan Losses 180 310 370 895
Non-interest Income 1,038 1,111 1,145 1,222
Non-interest Expense 4,823 4,452 4,373 4,617
Income Tax Expense 1,110 1,255 1,236 1,063
Net Income 2,111 2,376 2,332 1,983
Per Share Data:
Net Income:
Basic $ 0.33 $ 0.38 $ 0.37 $ 0.31
Diluted 0.32 0.37 0.36 0.31
Dividends Paid 0.11 0.11 0.11 0.11
Stock Price Range:
High 22.50 19.85 21.10 19.00
Low 17.09 17.13 18.70 17.25
Close 17.88 18.82 18.96 18.08
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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, accompanying
notes and selected financial data appearing elsewhere in this report.
Performance Summary. Net income for 2002 was $9.3 million, an increase of
$515,000, or 5.9%, compared to $8.8 million recorded for 2001. On a weighted
average share basis, net income for 2002 was $1.46 per diluted share as compared
to $1.36 per share for 2001, an increase of 7.4%. The increase in earnings
during 2002 reflects a $786,000 increase in non-interest income, primarily due
to increases in deposit account service charges, letter of credit fees and
mortgage brokerage fees. Net income for 2001 included an expense of $598,000 for
merger related charges which were incurred during the first quarter of that
year. Excluding these expenses after-tax earnings for 2001 would have been $9.2
million, or $1.42 per diluted shares. Net income for 2002 was reduced by an
increase in provision for loan losses as compared to the prior year due to
increased loan charge-offs. See discussion on page 21, "Allowance for Loan
Losses."
Continuing to reflect a positive economy in the Corporation's market area, loans
increased 8.9% over the previous year-end to $469.1 million at December 31,
2002. Total funding (deposits and short term borrowings) experienced growth
also, increasing 8.2% over the same period to $619.2 million. Shareholders'
equity was $64.9 million at year-end, an increase of 7.3%.
Net income for 2001 was $8.8 million compared to net income of $9.0 million for
2000, a decrease of 1.9%. The decrease in earnings for 2001 was primarily
attributable to the merger related expenses mentioned above.
The following table shows selected key performance ratios over the last three
years:
2002 2001 2000
---- ---- ----
Return on Average Assets (ROA) 1.39% 1.41%* 1.54%
Return on Average Shareholders' Equity (ROE) 14.74 15.01* 17.57
Shareholders' Equity to Assets - Average 9.45 9.40 8.74
Dividend Payout Ratio 32.05 31.61 28.38
*Excluding merger related expenses ROA and ROE for 2001 would have been 1.47%
and 15.68%, respectively.
The ratio, return on assets, is calculated by dividing net income by average
total assets for the year. The return on equity ratio is calculated by dividing
net income by average shareholders' equity for the year. The equity to assets
ratio is calculated by dividing average shareholders' equity by average total
assets for the year. The dividend payout is determined by dividing the total
dividends paid by the total net income.
Net Interest Income. Net interest income is the difference between interest
earned on earning assets and interest paid for the funds, primarily deposits,
supporting those assets. The largest category of earning assets consists of
loans to businesses and individuals. The second largest is investment
securities. Net interest income is the principal source of the Corporation's
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities supporting those assets, affect net interest
income. Interest rates primarily are determined by national and international
market trends, as well as competitive pressures in the Corporation's operating
markets. For analytical purposes, income from tax-exempt assets, primarily
securities issued by or loans made to state and local governments, is adjusted
by an increment which equates tax-exempt income to interest from taxable assets.
Net interest income (tax equivalent) for 2002 was $30.2 million, an increase of
$1.3 million, or 4.4% compared to the prior year. The net increase reflected a
$5.7 million decrease in interest income which was offset by a $7.0 million
decrease in interest expense. The Corporation's yield on earning assets
decreased to 6.15% for 2002 from 7.57% for 2001. Rates paid on the Corporation's
interest-bearing liabilities decreased from 3.67% for 2001 to 1.91% for 2002.
These shifts in yield on earning assets and cost of interest-bearing liabilities
resulted in the net interest margin decreasing from 4.93% for 2001 to 4.80% for
2002. The increase in net interest income was due to the 15.0% growth in average
loans and the 13.0% growth in average demand deposits during 2002, offsetting
the 13 basis point decline in net interest margin. Average demand deposits as a
percent of average total deposits increased to 27.9% in 2002 from 25.5% in 2001.
This ratio remains very positive compared to the Corporation's peers.
The significant changes in yields earned on earning assets and the rates paid on
interest bearing liabilities reflects the decline in market rates as measured by
the decline in average prime rates for 2002 and 2001 (as posted by the Wall
Street Journal) of 224 basis points.
15
Summary of Earning Assets and Interest-Bearing Liabilities
Although the year-end detail provides satisfactory indicators of general trends,
the daily average balance sheets are more meaningful for analysis purposes than
year-end data because averages reflect the day-to-day fluctuations that are
common to bank balance sheets. Also, average balances for earning assets and
interest-bearing liabilities can be related directly to the components of
interest income and interest expense on the statements of income. This provides
the basis for analysis of rates earned and paid, and sources of increases and
decreases in net interest income as derived from changes in volumes and rates.
The following schedule presents average balance sheets for the most recent three
years in a format that highlights earning assets and interest-bearing
liabilities.
Years Ended December 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Earning Assets:
Federal Funds Sold and
Due From Time $ 12,989 $ 212 1.63% $ 44,689 $ 1,972 4.41% $ 24,659 $ 1,571 6.37%
Investment Securities
(Taxable) 150,704 7,046 4.68 139,875 7,966 5.70 148,598 9,253 6.23
Investment Securities
(Tax-exempt)(2) 3,060 177 5.77 231 17 7.36 348 26 7.50
Loans, Net of Unearned
Discount(1) 463,106 31,326 6.76 402,763 34,548 8.58 373,997 36,768 9.83
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total Earning Assets 629,859 38,761 6.15 587,558 44,503 7.57 547,602 47,618 8.70
--------- --------- ---------
Other Assets:
Cash and Due From Banks 25,728 24,259 24,140
Other Assets 19,760 17,922 19,122
Allowance for Loan Losses (6,438) (5,816) (6,167)
--------- --------- ---------
Total Assets $ 668,909 $ 623,923 $ 584,697
========= ========= =========
Interest-Bearing Liabilities:
Interest-Bearing Transaction
Accounts $ 180,060 2,378 1.32 $ 167,853 4,298 2.56 $ 158,476 6,168 3.89
Savings 112,977 1,909 1.69 101,295 3,367 3.32 93,594 4,472 4.78
Certificates of Deposit
under $100,000 and IRA's 64,042 2,041 3.19 77,968 4,198 5.39 67,605 3,808 5.63
Certificates of Deposit
$100,000 or More 48,286 1,542 3.19 56,848 3,061 5.38 50,625 2,978 5.88
Other Time 339 11 3.18 723 43 5.91 778 44 5.70
Other Borrowings 39,453 631 1.60 18,518 560 3.02 25,748 1,400 5.44
--------- --------- ---- --------- --------- ---- --------- --------- ----
Total Interest-Bearing
Liabilities 445,157 8,512 1.91 423,205 15,527 3.67 396,826 18,870 4.76
--------- --------- ---------
Other Liabilities:
Demand Deposits 156,868 138,880 135,165
Other Liabilities 3,695 3,188 1,607
Shareholders' Equity 63,189 58,650 51,099
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $ 668,909 $ 623,923 $ 584,697
========= ========= =========
Net Interest Income and
Margin (T/E Basis)(2) $ 30,249 4.80% $ 28,976 4.93% $ 28,748 5.25%
========= ========= =========
(1) Loan interest income includes fees and loan volumes include loans on
non-accrual.
(2) Presented on a tax equivalent basis ("T/E") using a federal income tax
rate of 34% in all three years.
Net interest margin, the net return on earning assets which is computed by
dividing net interest income by average total earning assets, was 4.80% for
2002, a 13 basis point decrease from the previous year. This decrease in the
margin reflected a lower yield on earning assets in 2002 of 142 basis points
compared to the prior year offset by a lower cost of funds of 176 basis points
compared to the prior year. In addition, the Corporation's non-interest
fundings, demand deposits and shareholders' equity, earn less in the current low
interest rate environment.
16
The table below analyzes the increase in net interest income for each of the
years ended December 31, 2002 and 2001 on a fully tax equivalent basis.
Non-accruing loans have been included in assets for these computations, thereby
reducing yields on total loans. The changes in interest due to both rate and
volume in the rate/volume analysis table below have been allocated to volume or
rate change in proportion to the absolute amounts of the change in each.
2002 vs. 2001 2001 vs. 2000
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
---------------------------- ---------------------------
(Dollars in Thousands) Volume Rate Total Volume Rate Total
------- -------- ------- ------- ------- -------
Interest Earning Assets:
Federal Funds Sold and Due From Time $(1,399) $ (361) $(1,760) $ 1,276 $ (875) $ 401
Investment Securities (Taxable) 617 (1,537) (920) (543) (744) (1,287)
Investment Securities (Tax-exempt) 208 (48) 160 (9) -0- (9)
Loans, Net of Unearned Discount 5,176 (8,398) (3,222) 2,828 (5,048) (2,220)
------- -------- ------- ------- ------- -------
Total Interest Income 4,602 (10,344) (5,742) 3,552 (6,667) (3,115)
------- -------- ------- ------- ------- -------
Interest-Bearing Liabilities:
Transaction Accounts & Savings 701 (4,079) (3,378) 733 (3,708) (2,975)
Certificates of Deposit and Other Time (1,232) (2,476) (3,708) 946 (474) 472
Other Borrowings 633 (562) 71 (393) (447) (840)
------- -------- ------- ------- ------- -------
Total Interest Expense 102 (7,117) (7,015) 1,286 (4,629) (3,343)
------- -------- ------- ------- ------- -------
Changes in Net Interest Income $ 4,500 $ (3,227) $ 1,273 $ 2,266 $(2,038) $ 228
======= ======== ======= ======= ======= =======
Net interest income for 2002 increased $1,273,000, or 4.4% over the prior year.
In this same period, total interest income decreased 12.9% and total interest
expense decreased 45.2%.
Non-interest Income. Non-interest income is an important contributor to net
earnings. The major component of the Corporation's non-interest income is
various charges and fees earned on deposit accounts and related services. The
following table summarizes the changes in non-interest income during the past
three years (dollars in thousands):
2002 2001 2000
------------------- ------------------- ------
Amount % Change Amount % Change Amount
------ -------- ------ -------- ------
Service Charges on
Deposit Accounts $ 2,934 22.3% $ 2,400 20.1% $ 1,998
Non-recurring Income 51 100.0 -0- (100.0) 65
Gain (Loss) on Sale of Investment
Securities 165 100.0 -0- 100.0 (2)
Other Non-interest Income 2,317 9.5 2,116 23.2 1,717
------- ------- -------
Total Non-interest Income $ 5,467 21.1% $ 4,516 19.5% $ 3,778
======= ======= =======
Service charges on deposits increased in 2002 primarily as a result of increased
account analysis income on commercial accounts due to the reduction in the
earnings credit rate on those accounts and also an increase in insufficient
funds charges on deposit accounts.
The non-recurring income in 2002 was from the sale of common stock previously
held in Other Assets. The non-recurring income in 2000 was primarily interest
recovered on loans either charged-off in prior years or loans that were on
non-accrual status in prior years.
The increase in other non-interest income in 2002 is primarily due to an
increase in income from letter of credit fees and mortgage brokerage fees. The
increase in other non-interest income in 2001 is primarily due to an increase in
investment services income, letter of credit fees and collection fees.
17
Non-interest Expense. Non-interest expense includes all expenses of the
Corporation other than interest expense, provision for loan losses and income
tax expense. The following table summarizes the changes in the non-interest
expenses for the past three years (dollars in thousands):
2002 2001 2000
------------------- ------------------- -------
Amount % Change Amount % Change Amount
------- -------- ------- -------- -------
Salaries and Employee Benefits $11,078 4.9% $10,564 11.4% $ 9,480
Occupancy Expense - Net 1,136 (12.2) 1,294 30.3 993
Furniture and Equipment Expense 1,577 7.1 1,472 5.8 1,391
Other Real Estate Owned Expense 234 4.5 224 (30.9) 324
Merger Related Expense -0- (100.0) 598 100.0 -0-
Other Expenses:
Business Development 797 8.6 734 22.1 601
Insurance - Other 197 52.7 129 11.2 116
Legal and Professional Fees 774 22.1 634 (26.8) 866
Other Taxes 83 (33.6) 125 7.8 116
Postage and Courier 358 2.9 348 4.8 332
Printing and Supplies 353 (2.5) 362 (1.9) 369
Regulatory Fees and Assessments 239 (2.0) 244 3.0 237
Other Operating Expenses 1,483 (3.5) 1,537 14.3 1,345
------- ------- -------
Total Other Expenses 4,284 4.2 4,113 3.3 3,982
------- ------- -------
Total Non-interest Expense $18,309 0.2% $18,265 13.0% $16,170
======= ======= =======
Total non-interest expense increased $44,000 or .2% in 2002 over 2001 reflecting
increases in salaries and benefits, equipment expenses, business development
expenses, insurance expenses and legal and professional expenses. These
increases in expenses were offset by the merger related expenses incurred to
merge the Corporation's subsidiaries in 2001. As a percent of average assets,
non-interest expenses were 2.74%, 2.93% and 2.77% in 2002, 2001 and 2000,
respectively. The "efficiency ratio" (non-interest expenses divided by total
non-interest income plus net interest income) was 51.26% for 2002 and 54.55% for
2001; when merger related expenses are excluded from non-interest expenses the
efficiency ratio for 2001 was 52.76%. The efficiency ratio measures what
percentage of total revenues are absorbed by non-interest expense. These
measures of operating efficiency compare very favorably to other financial
institutions in the Corporation's peer groups.
The increase in salaries and employee benefits for 2002 is due to salary merit
increases, additions to staff and an increase in the cost of employee insurance.
In 2002, the Corporation did not pay incentive bonuses to its employees. In 2001
and 2000, the bonus expense was $534,000 and $593,000, respectively. Also in
2002, merit increases were not made to Vice Presidents and above. The average
number of full-time equivalent employees increased by 16 in 2002 to an average
full-time equivalent of 201.5. At year-end 2002, the full-time equivalent staff
was 205 versus 194 at the same time the prior year. These increases include the
addition of six staff members in January 2002 that had previously been employed
by a competing community bank that had been acquired by a large regional bank.
The increase in equipment expense is primarily because of an increase in
depreciation expense due to a 38.2% increase in furniture and equipment assets
during 2002. This increase included the investment in new hardware and software
related to a core system data processing conversion made in October.
The increase in expenses for business development were primarily associated with
advertising cost related to the continuation of a name/brand identity
advertising campaign launched after the merger of the Corporation's subsidiaries
in 2001 and certain deposit product advertising campaigns launched in 2002.
Insurance expense increased in 2002 primarily due to the additional cost of
directors and officers liability insurance which went up $35,000 over the
previous year.
The increase in legal and professional fees expense in 2002 were primarily
related to increases during the year in classified loans and costs incurred for
product development.
The increase in occupancy expense in 2001 is primarily a result of a reduction
in rental income as lease space at one of the banking facilities was vacant for
a portion of the year and a lower rental rate was received from a major new
tenant compared to the rate earned from the vacating tenant.
Federal Income Tax Expense. The Corporation has adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." See Note 10 of the
Corporation's Notes to Consolidated Financial Statements for details of tax
expense. The Corporation expensed $4,846,000, $4,664,000 and $4,765,000 for
federal income taxes for the years ending December 31, 2002, 2001 and 2000,
respectively. These amounts resulted in an effective tax rate of 34.2% for 2002,
34.6% for 2001 and 34.7% for 2000.
18
Investment Securities. The following table presents the consolidated investment
securities portfolio at amortized cost as of December 31, 2002, all of which are
classified as Available-for-Sale (see Note 1 of the Notes to Consolidated
Financial Statements for a discussion of this designation), by stated maturity
and with the weighted average interest yield for each range of maturities. The
yields on tax-exempt obligations are computed on a fully taxable equivalent
basis using statutory rates for federal income taxes.
December 31, 2002
----------------------------------------------------------------------------------------------------
Due 1 to Due 5 to Due After
Due 1 Year or Less 5 Years 10 Years 10 Years
------------------ ------------------ ------------------ -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Total
-------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
U.S. Treasury Securities $ 996 6.45% -0- --% -0- --% -0- --% $ 996
U.S. Government Agencies
and Corporations 25,221 5.28 92,552 4.28 3,290 3.81 -0- -- 121,063
U.S. Government Agency
Mortgage Backed Securities -0- -- 1,318 5.31 15,729 4.43 20,641 3.68 37,688
Obligations of States and
Political Subdivisions -0- -- 1,692 5.13 3,085 3.68 -0- -- 4,777
Other Securities -0- -- -0- -- -0- -- 4,652 4.41 4,652
-------- ------ -------- ------ -------- ------ -------- ------ --------
Total $ 26,217 5.33% $ 95,562 4.31% $ 22,104 4.23% $ 25,293 3.82% $169,176
======== ====== ======== ====== ======== ====== ======== ====== ========
The yield on the investment securities portfolio of the Corporation at December
31, 2002 was 4.42% and the weighted average life of the portfolio on that date
was approximately 2.3 years. At December 31, 2001, the yield of the portfolio
was 4.98% and the weighted average life was 1.9 years.
Note 2 to the Corporation's Notes to Consolidated Financial Statements shown in
this report reflects the estimated fair values for various categories of
investment securities as of December 31, 2002 and 2001. As of December 31, 2002,
there was a net unrealized gain of $4,336,000 in the portfolio, or 2.6% of the
amortized cost of those securities.
The following table summarizes the book value of investment securities held by
the Corporation as of December 31 for the past five years (in thousands):
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
U.S. Treasury Securities $ 1,018 $ 6,207 $ 17,162 $ 27,974 $ 41,672
U.S. Government Agencies
and Corporations 124,786 131,149 120,559 113,535 87,791
U.S. Government Agency
Mortgage Backed Securities 38,157 19,822 10,409 13,079 16,440
Obligations of States and
Political Subdivisions 4,899 1,616 240 637 1,037
Other Securities 4,652 1,342 1,277 1,215 1,072
-------- -------- -------- -------- --------
Total $173,512 $160,136 $149,647 $156,440 $148,012
======== ======== ======== ======== ========
In 2002, approximately $143.4 million of investment securities were sold,
resulting in $165,000 of gains from these sales.
19
Loans. The following schedule classifies loans according to type as of December
31 for the past five years (dollars in thousands):
December 31,
---------------------------------------------------------------------------------------------------------
% of % of % of % of % of
2002 Total 2001 Total 2000 Total 1999 Total 1998 Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial
and Industrial $195,120 41.6% $184,716 42.9% $167,818 44.2% $156,847 44.2% $133,066 43.5%
Real Estate
-Commercial 130,755 27.9 107,600 25.0 94,066 24.7 85,825 24.1 72,434 23.7
Real Estate
-Residential 48,447 10.3 44,522 10.3 37,996 10.0 34,771 9.8 27,987 9.2
Real Estate
Construction 59,941 12.8 60,548 14.1 47,183 12.4 43,875 12.3 40,456 13.2
Loans to
Individuals,
Net of Unearned
Discount 34,882 7.4 33,368 7.7 32,953 8.7 34,096 9.6 31,890 10.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Loans, Net
of Unearned
Income $469,145 100.0% $430,754 100.0% $380,016 100.0% $355,414 100.0% $305,833 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The preceding loan distribution table reflects that total loans increased $38.4
million (8.9%) between year-end 2002 and 2001. Although this dollar increase was
significant, the Corporation is continuing to apply stringent credit criteria on
all loan applications. At December 31, 2002, loans were 80.6% of deposits
compared to 79.2% at the previous year-end reflecting a somewhat slower growth
in deposits compared to loans. Average loans were 82.3% of average deposits in
2002 compared to 74.1% in 2001.
Primarily, the commercial loan customers of the Corporation are small to
medium-sized businesses and professionals and executives. The Corporation offers
a variety of commercial loan products that include revolving lines of credit,
letters of credit, working capital loans and loans to finance accounts
receivable, inventory and equipment. Generally, these commercial loans have
floating rates of interest with terms of maturity of three years or less.
A significant portion of the $131 million commercial real estate mortgage
portfolio is loans to finance owner-occupied real estate. The growth in 2002 was
partially attributable to significant new customer relationships formed during
the year. At December 31, 2002, $94 million of loans, approximately 72% of the
commercial real estate mortgage portfolio, had been made for this purpose. Also,
approximately 53% of the loans in the commercial real estate mortgage portfolio
have variable rates of interest with a significant portion of the remaining
portfolio having balloon terms at five to seven years and/or rate adjustment
clauses.
Real estate construction loans are made primarily to finance construction of
single family residences in the Corporation's market area of Tarrant County.
Construction loans generally are secured by first liens on real estate and have
floating interest rates. The Corporation's lending activities in this area are
primarily with borrowers that have been in the building trade for many years and
with which the Corporation has long standing relationships. The Corporation's
lending officers meet quarterly with consultants that carefully track the
residential building activities within the market. The Corporation will adjust
its construction lending activities based on the trends of housing starts and
absorption rates in the market.
The Corporation also lends to consumers for purchases of various consumer goods,
such as automobiles and boats and for home improvements. The terms of these
loans typically are five years or less and are well secured with liens on
products purchased or other assets. These loans are primarily made to customers
who have other relationships with the Corporation. The Corporation does not
issue credit cards and does not have any credit card loans outstanding.
As of December 31, 2002, the Corporation had no concentration, by Standard
Industrial Classification Code ("SIC"), in any single industry that exceeded ten
percent of total loans.
The following table presents commercial loans and real estate construction loans
at December 31, 2002, based on scheduled principal repayments and the total
amount of loans due after one year classified according to sensitivity to
changes in interest rates (in thousands):
Over
One Year
One Year Through Over Five
or Less Five Years Years Total
------- ---------- ----- -----
Commercial and Industrial $172,543 $20,667 $1,910 $195,120
Real Estate Construction 52,811 6,129 1,001 59,941
-------- ------- ------ --------
Totals $225,354 $26,796 $2,911 $255,061
======== ======= ====== ========
20
Of the loans maturing after one year, all have fixed rates of interest, with
many having rate adjustment clauses during the remaining term of the loan that
allow for periodic adjustments to rates.
Allowance for Loan Losses. The allowance for loan losses is established through
charges to earnings in the form of a provision for loan losses. Loans, or
portions thereof, which are considered to be uncollectible are charged against
this allowance and subsequent recoveries, if any, are credited to the allowance.
The allowance represents the amount which, in management's judgment, will be
adequate to absorb future charge-offs of existing loans which may become
uncollectible. The adequacy of the allowance is determined by management's
periodic evaluation of the loan portfolio and by the employment of third party
loan review specialists. All known problem loans, unknown inherent risks
generally associated with bank lending, past loan loss experience, delinquency
ratios and current and projected economic conditions are taken into account in
evaluating the adequacy of the allowance.
The Corporation has adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended
by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosure" ("SFAS No. 118").
These standards specify how allowances for certain impaired loans should be
determined and the accounting for in-substance foreclosures.
Loans are generally placed on non-accrual status when principal or interest is
past due 90 days or more and the loan is not both well-secured and in the
process of collection, or immediately, if in the opinion of management, full
collection of principal or interest is doubtful. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely.
The following table presents average loans, net of unearned income, and an
analysis of the allowance for loan losses (dollars in thousands):
Years Ended December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Average Loans Outstanding $ 463,106 $ 402,763 $ 373,997 $ 331,963 $ 292,060
========= ========= ========= ========= =========
Analysis of Allowance for
Loan Losses:
Balance, Beginning of Year $ 6,015 $ 5,399 $ 5,169 $ 4,724 $ 4,065
--------- --------- --------- --------- ---------
Charge-Offs:
Commercial 2,330 1,280 2,429 376 128
Real Estate Mortgage 213 4 -0- 3 39
Real Estate Construction 10 -0- -0- 230 6
Loans to Individuals 268 123 171 118 170
--------- --------- --------- --------- ---------
Total Charge-Offs 2,821 1,407 2,600 727 343
--------- --------- --------- --------- ---------
Recoveries:
Commercial 296 80 140 93 87
Real Estate Mortgage 22 164 10 44 111
Real Estate Construction -0- -0- -0- -0- -0-
Loans to Individuals 54 24 74 34 19
--------- --------- --------- --------- ---------
Total Recoveries 372 268 224 171 217
--------- --------- --------- --------- ---------
Net Charge-Offs 2,449 1,139 2,376 556 126
Provision Charged to Operating Expense 3,140 1,755 2,606 1,001 785
--------- --------- --------- --------- ---------
Balance, End of Year $ 6,706 $ 6,015 $ 5,399 $ 5,169 $ 4,724
========= ========= ========= ========= =========
Ratio of Net Charge-Offs
to Average Loans Outstanding 0.53% 0.28% 0.64% 0.16% 0.04%
========= ========= ========= ========= =========
The increase in provision for loan losses in 2002 from 2001 primarily recognizes
a higher loan charge-off rate in 2002 compared to 2001. In 2002, no single loan
greater than $550,000 was charged-off. In the fourth quarter of 2001, a
charge-off of $713,000 was made on one loan and $245,000 on another. These
charge-offs, although above those of earlier years, are not thought to reflect a
change in the Corporation's lending strategy. Loan charge-offs in the last three
years, which have been higher in dollars and as a percent of loans outstanding,
are attributable to slowdowns in the local and national economies and to the
rapid growth of the Corporation over the last several years.
21
The following table reflects the allowance for loan losses compared to total
loans at the end of each year (dollars in thousands):
December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Total Loans $ 469,145 $ 430,754 $ 380,016 $ 355,414 $ 305,833
Allowance for Loan Losses 6,706 6,015 5,399 5,169 4,724
Allowance for Loan Losses
as a Percent of Total Loans 1.43% 1.40% 1.42% 1.45% 1.54%
Allowance for Loan Losses
as a Percent of Non-Performing Loans 314.0 146.0 247.0 211.0 94.0
The following table illustrates the allocation of the allowance for loan losses
to the various loan categories (dollars in thousands); see the table on page 20
for the percent of specific types of loans to total loans:
December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Allowance For
Loan Losses:
Commercial
and Industrial $ 3,231 48.2% $ 3,336 55.5% $ 2,066 38.3% $ 2,686 52.0% $ 2,713 57.4%
Real Estate
Mortgage 1,697 25.3 1,613 26.8 1,095 20.3 1,050 20.3 818 17.3
Real Estate
Construction 493 7.4 635 10.6 381 7.1 371 7.2 452 9.6
Loans to
Individuals 411 6.1 365 6.0 374 6.9 375 7.3 372 7.9
Unallocated
Portion 874 13.0 66 1.1 1,483 27.4 687 13.2 369 7.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $ 6,706 100.0% $ 6,015 100.0% $ 5,399 100.0% $ 5,169 100.0% $ 4,724 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The allocation is determined by providing specific reserves against each loan
that is "criticized" as being weak plus a general allocation against the
remaining balance of the portfolio based on experience factors. The general
allocation is based upon the Corporation's loss experience over a period of
years and is adjusted for subjective factors such as economic trends,
performance trends and concentrations of credit. At December 31, 2002, the
general allocation rate of the allowance was .86%. Management of the Corporation
believes that the allowance for loan losses at December 31, 2002 is adequate to
cover losses inherent in the portfolio. There can be no assurance that the
Corporation will not sustain loan losses in future periods which could be
substantial in relation to the size of the current allowance. The total
allowance is available to absorb losses from any segment of loans.
Non-Performing Assets. Non-performing assets consist of non-accrual loans,
renegotiated loans, other real estate and other foreclosed assets. Non-accrual
loans are those on which the accrual of interest has been suspended and on which
the interest is recorded as earned when it is received. Loans are generally
placed on non-accrual status when principal or interest is past due 90 days or
more and the loan is not both well-secured and in the process of collection, or
immediately, if in the opinion of management, full collection of principal or
interest is doubtful. At the time a loan is placed on non-accrual status,
interest previously recorded but not collected is reversed and charged against
current interest income.
Renegotiated loans are loans on which the interest and/or the principal has been
reduced due to a deterioration in the borrower's financial condition. Even
though these loans are actually performing, they are included in non-performing
assets because of the loss of revenue related to the reduction of interest
and/or principal.
Other real estate is real estate acquired through foreclosure or through partial
settlement of debts and which is awaiting sale and disposition. At the time of
acquisition, other real estate is recorded at the lower of estimated fair value
or the loan balance or settlement agreement with any write-down charged to the
allowance for loan losses. Any further write-downs, expenses related to the
property and any gain or loss resulting from the sale of the property are
recorded in current operating expenses.
The Corporation is required, by the regulatory authorities, to have other real
estate evaluated periodically. In the event the new evaluation value is less
than the carrying value of the property, the excess is written off to expense.
Some properties are written down below their evaluation values when management
feels the economic value of the property has declined below the evaluation
value.
22
The following table summarizes the non-performing assets and loans 90 days past
due and still accruing (dollars in thousands):
December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Non-accrual Loans $2,135 $4,115 $2,182 $2,450 $5,049
Renegotiated Loans -0- -0- -0- 3 6
Other Real Estate & Other Foreclosed Assets 1,268 444 1,595 1,947 281
------ ------ ------ ------ ------
Total Non-Performing
Assets $3,403 $4,559 $3,777 $4,400 $5,336
====== ====== ====== ====== ======
As a Percent of:
Total Assets 0.49% 0.72% 0.61% 0.78% 1.00%
Total Loans and Other
Real Estate & Other Foreclosed Assets 0.72 1.06 0.99 1.23 1.74
Loans Past Due 90 Days or
More and Still Accruing $ 16 $ 16 $ 10 $ -0- $ 3
Non-accrual loans at December 31, 2002, were comprised of $1,463,000 in
commercial loans, $473,000 in real estate mortgages and $199,000 in consumer
loans. Other Real Estate and Other Foreclosed Assets includes one office
building, one residential property and a motor home. Subsequent to year-end, the
office building and residential property were sold. It is anticipated the motor
home will be sold in early 2003 as well.
The impact on interest income from the above non-accrual loans and renegotiated
loans for the past five years is provided below (in thousands):
Years Ended December 31,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Gross Amount of Interest
That Would Have Been
Recorded at Original Rate $ 171 $ 340 $ 600 $ 427 $ 537
Interest Included in Income 99 195 206 68 312
------- ------- ------- ------- -------
Interest Not Recorded
in Income $ 72 $ 145 $ 394 $ 359 $ 225
======= ======= ======= ======= =======
Loans are graded on a system similar to that used by the banking industry
regulators. The first level of criticized loans is "Other Assets Especially
Mentioned" (OAEM). These loans are fundamentally sound but have potential
weaknesses which may, if not corrected, weaken the asset or inadequately protect
the bank's credit position at some future date. The second level is
"Substandard," which are loans inadequately protected by current sound net
worth, paying capacity or pledged collateral of the borrower. The last level of
criticized loans, before they are charged off, is "Doubtful." Doubtful loans are
considered to have inherent weaknesses because collection or liquidation in full
is highly questionable. In addition to the above grading system, the Corporation
maintains a separate "watch list" which further aids the Corporation in
monitoring loan quality. Watch list loans show warning elements where the
present status portrays one or more deficiencies that require attention in the
short run or where pertinent ratios of the loan account have weakened to a point
where more frequent monitoring is warranted.
Non-accrual loans normally include weaker Substandard loans and loans that are
considered to be Doubtful.
23
An independent third party loan review was completed in mid 2002. In addition, a
regulatory examination was completed in early 2002. Based on the findings of
these reviews and exams, management considers the loan portfolio to be
adequately reserved.
Criticized loans, loans classified as OAEM, Substandard or Doubtful as noted
above, have increased since 2000. A significant portion of this increase is due
to enhanced classification procedures and the employment of a Chief Credit
Officer in the third quarter of 2001 to assist in monitoring loan quality. The
Corporation remains diligent in its efforts to identify any loan that might
reflect weakness of the borrower as soon as possible. Management is not aware of
any potential loan problems, that have not been disclosed, to which serious
doubts exist as to the ability of the borrower to substantially comply with the
present repayment terms.
The following table summarizes the relationship between non-performing loans,
criticized loans and the allowance for loan losses (dollars in thousands):
December 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Non-Performing Loans $ 2,135 $ 4,115 $ 2,182 $ 2,453 $ 5,055
Criticized Loans 23,067 24,879 11,536 11,804 10,468
Allowance for Loan Losses 6,706 6,015 5,399 5,169 4,724
Allowance for Loan Losses
as a Percent of:
Non-Performing Loans 314.0% 146.0% 247.0% 211.0% 94.0%
Criticized Loans 29.0 24.0 47.0 44.0 45.0
Deposits. The primary source of the Corporation's funds is deposits. The
majority of the Corporation's deposits are considered "core" deposits, that is,
deposits that are not subject to material changes due to customer withdrawal
because of market rate changes. The Corporation does not accept brokered
deposits. Average demand deposits increased $18.0 million, or 13.0% in 2002.
These deposits represented 27.9% of total deposits. Average interest-bearing
deposits increased $1.0 million, or .2%. The deposit types' daily average
balance and related average rates paid during each of the last three years are
as follows (dollars in thousands):
2002 2001 2000
--------------------- --------------------- ---------------------
Amount Rate Paid Amount Rate Paid Amount Rate Paid
------ --------- ------ --------- ------ ---------
Noninterest-Bearing Demand Deposits $156,868 $138,880 $ 135,165
Interest-Bearing Deposits:
Interest-Bearing Transaction
Accounts 180,060 1.32% 167,853 2.56% 158,476 3.89%
Savings 112,977 1.69 101,295 3.32 93,594 4.78
Certificates of Deposit
under $100,000 and IRA's 64,042 3.19 77,968 5.39 67,605 5.63
Certificates of Deposit of $100,000 or More 48,286 3.19 56,848 5.38 50,625 5.88
Other Time Deposits 339 3.18 723 5.90 778 5.70
-------- -------- ----------
Total Interest-Bearing Deposits 405,704 1.94% 404,687 3.70% 371,078 4.71%
-------- -------- ----------
Total Deposits $562,572 $543,567 $ 506,243
======== ======== ==========
The remaining maturity on certificates of deposit of $100,000 or more as of
December 31, 2002, 2001 and 2000 is presented below (in thousands):
% of % of % of
Maturity 2002 Total 2001 Total 2000 Total
- -------- ---- ----- ---- ----- ---- -----
3 months or less $12,076 23.2% $19,522 41.0% $16,267 27.0%
3 to 6 months 9,962 19.2 12,405 26.0 15,334 25.5
6 to 12 months 14,808 28.4 13,527 28.4 24,191 40.2
Over 12 months 15,204 29.2 2,190 4.6 4,403 7.3
24
Borrowings. Securities sold under repurchase agreements generally represent
borrowings with maturities ranging from one to thirty days. These borrowings are
with significant commercial customers of the Corporation that require short-term
liquidity for their funds. Information relating to these borrowings is
summarized as follows:
December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Securities Sold Under Repurchase Agreements:
Average Balance $ 20,141 $ 17,470 $ 20,797
Year-End Balance 22,955 14,816 19,910
Maximum Month-End Balance During Year 29,560 20,374 25,019
Interest Rate:
Average 0.87% 2.94% 5.19%
Year-End 0.59 0.75 5.44
Federal Funds Purchased:
Average Balance $ 1,178 $ 567 $ 22
Year-End Balance -0- 8,550 -0-
Maximum Month-End Balance During Year 8,650 8,550 950
Interest Rate:
Average 2.03% 2.76% 5.96%
Year-End -0- 1.92 -0-
The Corporation has available a line of credit with the Federal Home Loan Bank
of Dallas, which allows it to borrow on a collateralized basis at a fixed term.
The borrowings are collateralized by a blanket floating lien on all first
mortgage loans, the FHLB capital stock owned by the Corporation and any funds on
deposit with the FHLB. At December 31, 2002, $12.0 million of borrowings were
outstanding under the line of credit at an average rate of 2.11%, $5.0 million
of which matures in May 2003 and $7.0 million maturing in October 2003. For the
year ended December 31, 2002, the Corporation had average borrowings of $16.5
million. In addition, at December 31, 2002, the Corporation had $2.3 million
borrowed under a match funding agreement with the Federal Home Loan Bank at a
rate of 4.41% which matures in June 2003. At December 31, 2001, the Corporation
had $5.0 million of borrowings 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.
Interest Rate Sensitivity. The objectives of monitoring and managing the
interest rate risk of the balance sheet are to contribute to earnings by
minimizing adverse changes in net interest income as a result of changes in the
direction and level of interest rates and to provide liquidity to satisfy cash
flow requirements to meet customers' fluctuating demands.
Interest rate sensitivity is the relationship between changes in the market
interest rates and changes in net interest income due to the repricing
characteristics of assets and liabilities.
An asset-sensitive position in a given period will result in more assets than
liabilities being subject to repricing; therefore, market interest-rate changes
will be reflected more quickly in asset rates. If interest rates decline, such a
position will have an adverse effect on net interest income. Conversely, in a
liability-sensitive position, where liabilities reprice more quickly than assets
in a given period, a decline in market rates will benefit net interest income.
A mix of earning assets and interest-bearing liabilities in which relatively
equal volumes reprice each period represents a matched interest sensitivity
"GAP" position; any excess of these assets or liabilities results in an interest
sensitive GAP.
25
The following table, commonly referred to as a "static GAP report," indicates
the interest rate-sensitivity position at December 31, 2002 and may not be
reflective of positions in subsequent periods (dollars in thousands):
Repriced
Due in After 1
30 Due in Due in Total Year or
Days 31-180 181 Days Rate Non-Rate
Or Less Days to One Year Sensitive Sensitive Total
--------- --------- --------- --------- --------- ---------
Earning Assets:
Loans $ 253,996 $ 36,411 $ 29,542 $ 319,949 $ 149,196 $ 469,145
Investment Securities 10,720 16,060 30,395 57,175 116,337 173,512
Federal Funds Sold & Due
From Time 262 -0- -0- 262 -0- 262
--------- --------- --------- --------- --------- ---------
Total Earning Assets 264,978 52,471 59,937 377,386 265,533 642,919
Interest-Bearing Liabilities:
Interest-Bearing Transaction
Accounts and Savings 298,406 -0- -0- 298,406 -0- 298,406
Certificates of Deposit of
under $100,000 and IRA's 5,289 24,918 17,249 47,456 15,976 63,432
Certificates of Deposit of
$100,000 or More 3,063 18,975 14,808 36,846 15,204 52,050
Other Time Deposits 150 -0- 100 250 66 316
Short Term Borrowings 22,955 5,000 9,300 37,255 -0- 37,255
--------- --------- --------- --------- --------- ---------
Total Interest-
Bearing Liabilities 329,863 48,893 41,457 420,213 31,246 451,459
--------- --------- --------- --------- --------- ---------
Interest Sensitivity GAP $ (64,885) $ 3,578 $ 18,480 $ (42,827) $ 234,287 $ 191,460
========= ========= ========= ========= ========= =========
Cumulative GAP $ (64,885) $ (61,307) $ (42,827)
========= ========= =========
Periodic GAP To
Total Assets (9.43)% 0.52% 2.68%
Cumulative GAP To
Total Assets (9.43)% (8.91)% (6.23)%
In the preceding table under the "After 1 Year" category, $72,108,000 in
investment securities will reprice or mature within one to three years and
another $31,325,000 will reprice or mature within three to five years. The
average maturity of the investment portfolio is approximately 2.3 years. Also,
the above table reflects the call dates versus maturity dates and periodic
principal amortization of investment securities.
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
certain interest-bearing transaction 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 the Corporation's
management to the earning assets and interest-bearing liabilities in the static
GAP report via a simulation model, the cumulative GAP to total assets ratio at
one year of (6.23%) was reversed to a positive 22.97% "beta adjusted" GAP
position. Management feels that the "beta adjusted" GAP risk technique more
accurately reflects the Corporation's GAP position.
In addition to GAP analysis, the Corporation uses an interest rate risk
simulation model and shock analysis to test the interest rate sensitivity of net
interest income and the balance sheet, respectively. Contractual maturities and
repricing opportunities of loans are incorporated in the model as are prepayment
assumptions, maturity data and call options within the investment portfolio.
Assumptions based on past experience are incorporated into the model for
nonmaturity deposit accounts. Based on the December 31, 2002 simulation
analysis, it is estimated that a 100 basis point rise in rates over the next 12
month period would have an impact of approximately 4.8% on net interest income
for the period, while a 100 basis point decline in rates over the same period
would have an
26
impact of approximately (8.0%) on net interest income for the period. The
results are primarily from the behavior of demand, money market and savings
deposits. The Corporation has found that historically, interest rates on these
deposits change more slowly in a rising rate environment than in a declining
rate environment. This assumption is incorporated into the simulation model and
is generally not fully reflected in a GAP analysis. The analysis does not
contemplate any actions that the Corporation might undertake in response to
changes in market interest rates. Accordingly, this analysis is not intended to
be and does not provide a forecast of the effect actual changes in market rates
will have on the Corporation.
The following table reflects the spreads and margins for the past three years:
2002 2001 2000
-------- -------- --------
Yield on Earning Assets (T/E) 6.15% 7.57% 8.70%
Cost of Funds 1.91 3.67 4.76
Net Interest Spread (T/E) 4.24 3.90 3.94
Net Interest Margin (T/E) 4.80 4.93 5.25
T/E = Tax Equivalent
Capital Resources. At December 31, 2002, shareholders' equity totaled $64.9
million, an increase of $4.4 million or 7.3% for the year. This increase
reflects retained earnings, i.e., earnings net of dividends to shareholders, and
the impact of the repurchase of shares of common stock of the Corporation. In
2002, $3.4 million of stock was repurchased.
Bank regulatory authorities have established risk-based capital guidelines for
U.S. banking organizations. The objective of these efforts is to provide a more
consistent system for comparing capital positions of banking organizations and
to reflect the level of risk associated with holding various categories of
assets. The guidelines define Tier 1 capital and Tier 2 capital. The only
components of Tier 1 and Tier 2 capital, for the Corporation, are equity capital
and a portion of the allowance for loan losses, respectively. These two
components combine to become Total Capital. 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, whereas 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. Off-balance sheet items at December
2002, 2001 and 2000 included unfunded loan commitments and letters of credit.
The minimum ratio for qualifying Total Capital is 8%, of which 4% must be Tier 1
capital.
The Federal Reserve Board and the Comptroller of the Currency also have a
capital to total assets (leverage) guideline. These guidelines establish a
minimum level of Tier 1 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 1 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 table below illustrates the Corporation's and the Bank's compliance with the
regulatory guidelines as of December 31, 2002 and December 31, 2001 (dollars in
thousands):
December 31, 2002 December 31, 2001
----------------------- -----------------------
The The
Consolidated Summit Consolidated Summit
Corporation Bank,N.A. Corporation Bank,N.A.
----------- --------- ----------- ---------
Total Assets $687,733 $687,719 $635,956 $635,944
Risk Weighted Assets 510,639 510,625 449,408 449,406
Equity Capital (Tier 1) $ 62,076 $ 61,403 $ 58,842 $ 57,218
Qualifying Allowance For
Loan Losses 6,387 6,387 5,622 5,622
-------- -------- -------- --------
Total Capital $ 68,463 $ 67,790 $ 64,464 $ 62,840
======== ======== ======== ========
Leverage Ratio 8.96% 8.96% 9.20% 9.15%
Risk Capital Ratio:
Tier 1 Capital 12.16% 12.02% 13.10% 12.73%
Total Capital 13.41 13.28 14.34 13.98
The Corporation had an unrealized gain on Available-for-Sale securities, net of
deferred taxes, of $2,861,000 and $1,694,000 as of December 31, 2002 and 2001,
respectively. Under regulatory requirements, the unrealized gain or loss on
Available-for-Sale securities is not included in the calculation of risk-based
capital. The decline in the percentages between the years is primarily due to
the growth in loans during 2002. Loans are generally classified in the 100% risk
category for the purpose of these calculations.
27
As can be seen in the preceding table, the Corporation and the Bank exceed the
risk-based capital and leverage requirements set by the regulators as of
December 31, 2002 and 2001.
Also, as of December 31, 2002 and 2001, the Corporation and the Bank met the
criteria for classification as a "well-capitalized" institution under the rules
of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
Liquidity. Liquidity is defined as the Corporation's ability to meet deposit
withdrawals, provide for the legitimate credit needs of customers and take
advantage of certain investment opportunities as they arise. While maintaining
adequate liquid assets to fulfill these functions, it must also maintain
compatible levels of maturity and rate concentrations between its sources of
funds and earning assets. The liability structure of the Corporation is
short-term in nature and the asset structure is likewise oriented towards short
maturities.
The Corporation's primary "internal" source of liquidity is its federal funds
sold and its marketable investment securities, particularly those with shorter
maturities. Federal funds sold and investment securities maturing within 30 days
represented $10.9 million or 1.6% of total assets as of December 31, 2002.
Additionally, the Corporation's ability to sell loan participations, purchase
federal funds and obtain advances from the Federal Home Loan Bank serve as
secondary sources of liquidity. The Bank has approved federal funds lines at
other banks.
The liquidity of the Corporation is enhanced by the fact that 90.7% of total
deposits at December 31, 2002 were "core" deposits. Core deposits for this
purpose are defined as total deposits less public funds and certificates of
deposit greater than $100,000. Also, the Corporation's loan to deposit ratio
averaged a somewhat conservative 82.3% for the year.
The Parent Company's income, which provides funds for the payment of dividends
to shareholders and for other corporate purposes, is derived from the investment
in the Bank. See Note 16 - Dividends from the Bank for limitations on dividends
payable by the Bank.
Impact of Inflation. The effects of inflation on the local economy and on the
Corporation's operating results have been relatively modest for the past several
years. Since substantially all of the Corporation's assets and liabilities are
monetary in nature, such as cash, investments, loans and deposits, their values
are less sensitive to the effects of inflation than to changing interest rates,
which do not necessarily change in accordance with inflation rates. The
Corporation attempts to control the impact of interest rate fluctuations by
managing the relationship between its interest rate sensitive assets and
liabilities.
Forward-Looking Statements. Certain statements contained in this Annual Report
on Form 10-K that are not statements of historical fact constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"), even though they are not specifically
identified as such. In addition, certain statements in future filings by the
Corporation with the Securities and Exchange Commission, in press releases, and
in oral and written statements made by or with the approval of the Corporation
which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss,
earnings or loss per share, the payment or nonpayment of dividends, capital
structure and other financial items; (ii) statements of plans and objectives of
the Corporation or its management or Board of Directors, including those
relating to products or services; (iii) statements of future economic
performance ; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted" and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those in such statements. Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) local, regional and
international economic conditions and the impact they may have on the
Corporation and its customers; (ii) the effects of and changes in trade,
monetary and fiscal policies and laws, including interest rate policies of the
Federal Reserve Board; (iii) inflation, interest rate, market and monetary
fluctuations; (iv) political instability; (v) acts of war or terrorism; (vi) the
timely development and acceptance of new products and services and perceived
overall value of these products and services by users; (vii) changes in consumer
spending, borrowings and savings habits; (viii) technology changes; (ix)
acquisitions and integration of acquired businesses; (x) the ability to increase
market share and control expenses; (xi) changes in the competitive environment
among financial holding companies; (xii) the effect of changes in laws and
regulations (including laws and regulations concerning taxes, banking,
securities and insurance) with which the Corporation and its subsidiaries must
comply; (xiii) the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as the Financial Accounting
Standards Board; (xiv) changes in the Corporation's organization, compensation
and benefit plans; (xv) the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; (xvi) costs or difficulties related to the
integration of the businesses of the Corporation being greater than expected;
and (xvii) the Corporation's success at managing the risks involved in the
foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made. The Corporation undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made, or to reflect the occurrence of unanticipated
events.
Critical Accounting Policies. The Securities and Exchange Commission ("SEC") has
issued guidance for the disclosure of "critical accounting policies." The SEC
defines "critical accounting policies" as those that are most important to the
portrayal of a company's financial condition and results, and require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
28
The Corporation follows financial accounting and reporting policies that are in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). The more significant of these policies are summarized in Note
1, Summary of Significant Accounting and Reporting Policies, on page 37. Not all
these significant accounting policies require management to make difficult,
subjective or complex judgments. However, the policies noted below could be
deemed to meet the SEC's definition of critical accounting policies.
Management considers the policies related to the allowance for possible loan
losses as the most critical to the financial statement presentation. The total
allowance for possible loan losses includes activity related to allowances
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." The
allowance for possible loan losses is established through a provision for
possible loan losses charged to current operations. The amount maintained in the
allowance reflects management's continuing assessment of the potential losses
inherent in the portfolio based on evaluations of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio quality,
present economic, political and regulatory conditions and unidentified losses
inherent in the current loan portfolio. Certain non-homogenous loans are
accounted for under the provisions of SFAS No. 114. This standard requires an
allowance to be established as a component of the allowance for loan losses for
certain loans when it is probable that all amounts due pursuant to the
contractual terms of the loan will not be collected. In these situations a
reserve is recorded when the carrying amount of the loan exceeds the discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans. Income on impaired loans
is recognized based on the collectibility of the principal amount. See "Loans
and Allowance for Loan Losses" beginning on page 37 for further discussion of
the risk factors considered by management.
ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the market risk of the Corporation's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Sensitivity and Liquidity." The
Corporation's principal market risk exposure is to interest rates.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements and Supplementary Data: Page
----
Independent Auditor's Report 31
Management's Responsibility for Financial Reporting 32
Consolidated Balance Sheets of Summit Bancshares, Inc. and
Subsidiaries as of December 31, 2002 and 2001 33
Consolidated Statements of Income of Summit Bancshares, Inc.
and Subsidiaries for the Years Ended December 31, 2002,
2001 and 2000 34
Statements of Changes in Shareholders' Equity of Summit
Bancshares, Inc. and Subsidiaries for the Years Ended
December 31, 2002, 2001 and 2000 (Consolidated and Parent
Company Only) 35
Consolidated Statement of Cash Flows of Summit Bancshares,
Inc. and Subsidiaries for the Years Ended December 31,
2002, 2001 and 2000 36
30
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Summit Bancshares, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Summit
Bancshares, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
related statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ending December 31, 2002. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Summit Bancshares, Inc. and
Subsidiaries, as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Stovall, Grandey, & Whatley, L.L.P.
STOVALL, GRANDEY, & WHATLEY, L.L.P.
Fort Worth, Texas
January 22, 2003
31
Management's Responsibility for Financial Reporting
The management of the Corporation is responsible for the preparation of the
financial statements, related financial data and other information in this
annual report. The consolidated financial statements have been prepared in
accordance with general accepted accounting principles generally accepted in the
United States of America and include amounts based on management's estimates and
judgment where appropriate. Financial information appearing throughout this
annual report is consistent with the financial statements.
In meeting its responsibility both for the integrity and fairness of these
financial statements and information, management depends on the accounting
systems and related internal accounting controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures and that assets are safeguarded and that
proper and reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of
a system of internal controls should not exceed the related benefits. As an
integral part of the system of internal controls, the Corporation retains
auditors who monitor compliance with and evaluate the effectiveness of the
system of internal controls and coordinate audit coverage with the independent
auditors.
The Audit Committee of the Board of Directors of the Corporation and its
Subsidiaries, which are composed entirely of directors independent of
management, meet regularly with management, regulatory examiners, internal
auditors, the loan review consultants and independent auditors to discuss
financial reporting matters, internal controls, regulatory reports, internal
auditing and the nature, scope and results of audit efforts. Internal audit and
loan review personnel report directly to the Audit Committee. The banking
regulators, internal auditors and independent auditors have direct access to the
Audit Committee.
The consolidated financial statements have been audited by Stovall, Grandey &
Whatley, L.L.P., independent auditors, who render an independent opinion on
management's financial statements. Their appointment was recommended by the
Audit Committee and approved by the Board of Directors and by the shareholders.
The audit by the independent auditors provides an additional assessment of the
degree to which the Corporation's management meets its responsibility for
financial reporting. Their opinion on the financial statements is based on
auditing procedures, which include their consideration of the internal control
structure and performance of selected tests of transactions and records, as they
deem appropriate. These auditing procedures are designed to provide an
additional reasonable level of assurance that the financial statements are
fairly presented in accordance with generally accepted accounting principles in
all material respects.
/s/ Philip E. Norwood /s/ Bob G. Scott
PHILIP E. NORWOOD BOB G. SCOTT
CHAIRMAN OF THE BOARD, EXECUTIVE VICE PRESIDENT
PRESIDENT AND CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER
32
PART I - FINANCIAL INFORMATION
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
2002 2001
-------------- --------------
(In Thousands) (In Thousands)
ASSETS
CASH AND DUE FROM BANKS - NOTE 1 $ 28,903 $ 29,178
FEDERAL FUNDS SOLD & DUE FROM TIME 262 2,284
INVESTMENT SECURITIES - NOTE 2
Securities Available-for-Sale, at fair value 173,512 160,136
LOANS - NOTES 3 AND 11
Loans, Net of Unearned Discount 469,145 430,754
Allowance for Loan Losses (6,706) (6,015)
--------- ---------
LOANS, NET 462,439 424,739
PREMISES AND EQUIPMENT - NOTE 4 11,486 8,131
ACCRUED INCOME RECEIVABLE 3,978 4,411
OTHER REAL ESTATE - NOTE 5 1,142 -0-
OTHER ASSETS 6,011 7,077
--------- ---------
TOTAL ASSETS $ 687,733 $ 635,956
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS - NOTE 6
Noninterest-Bearing Demand $ 167,745 $ 150,040
Interest-Bearing 414,204 393,763
--------- ---------
TOTAL DEPOSITS 581,949 543,803
SHORT TERM BORROWINGS - NOTE 7 37,255 28,366
ACCRUED INTEREST PAYABLE 354 605
OTHER LIABILITIES 3,237 2,646
--------- ---------
TOTAL LIABILITIES 622,795 575,420
--------- ---------
COMMITMENTS AND CONTINGENCIES - NOTES 4, 8, 13, 15 AND 17
SHAREHOLDERS' EQUITY - NOTES 12, 14 AND 18
Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 6,158,542 and
6,262,961 shares issued and outstanding at
December 31, 2002 and 2001, respectively 7,698 7,829
Capital Surplus 7,122 6,865
Retained Earnings 47,660 44,166
Accumulated Other Comprehensive Income - Unrealized Gain
on Available-for-Sale Investment Securities, Net of Tax 2,861 1,694
Treasury Stock at Cost (20,000 and 1,000 shares at
December 31, 2002 and 2001, respectively) (403) (18)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 64,938 60,536
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 687,733 $ 635,956
========= =========
The accompanying Notes should be read with these financial statements.
33
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In Thousands, Except Per Share Data)
INTEREST INCOME
Interest and Fees on Loans $ 31,283 $ 34,548 $ 36,768
Interest and Dividends on Investment Securities:
Taxable 7,046 7,966 9,253
Exempt from Federal Income Taxes 116 11 17
Interest on Federal Funds Sold and Due From Time 212 1,972 1,571
-------- -------- --------
TOTAL INTEREST INCOME 38,657 44,497 47,609
-------- -------- --------
INTEREST EXPENSE
Interest on Deposits 7,881 14,967 17,470
Interest on Short Term Borrowings 624 559 1,400
Interest on Note Payable 7 1 -0-
-------- -------- --------
TOTAL INTEREST EXPENSE 8,512 15,527 18,870
-------- -------- --------
NET INTEREST INCOME 30,145 28,970 28,739
LESS: PROVISION FOR LOAN LOSSES - NOTE 3 3,140 1,755 2,606
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 27,005 27,215 26,133
-------- -------- --------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 2,934 2,400 1,998
Gain (Loss) on Sale of Investment Securities 165 -0- (2)
Other Income 2,368 2,116 1,782
-------- -------- --------
TOTAL NON-INTEREST INCOME 5,467 4,516 3,778
-------- -------- --------
NON-INTEREST EXPENSE
Salaries and Employee Benefits - NOTE 15 11,078 10,564 9,480
Occupancy Expense - Net 1,136 1,294 993
Furniture and Equipment Expense 1,577 1,472 1,391
Other Real Estate Owned Expense - Net 234 224 324
Merger Related Expense -0- 598 -0-
Other Expense - NOTE 9 4,284 4,113 3,982
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 18,309 18,265 16,170
-------- -------- --------
INCOME BEFORE INCOME TAXES 14,163 13,466 13,741
APPLICABLE INCOME TAXES - NOTE 10 4,846 4,664 4,765
-------- -------- --------
NET INCOME $ 9,317 $ 8,802 $ 8,976
======== ======== ========
NET INCOME PER SHARE - NOTE 14
Basic $ 1.50 $ 1.39 $ 1.41
Diluted 1.46 1.36 1.38
The accompanying Notes should be read with these financial statements.
34
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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, 2000 6,361,247 $ 7,952 $ 6,469 $ 35,474 $ (1,186) $ -0- $ 48,709
Stock Options Exercised 81,238 101 209 310
Purchases of Stock Held
in Treasury (1,348) (1,348)
Retirement of Stock Held
in Treasury (80,207) (100) (1,248) 1,348 -0-
Cash Dividend -
$.40 Per Share (2,547) (2,547)
Net Income for the
Year Ended 2000 8,976 8,976
Securities Available-
for-Sale Adjustment 1,471 1,471
----------
Total Comprehensive
Income - NOTE 23 10,447
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
December 31, 2000 6,362,278 7,953 6,678 40,655 285 -0- 55,571
Stock Options Exercised 38,200 48 187 235
Purchases of Stock Held
in Treasury (2,699) (2,699)
Retirement of Stock Held
in Treasury (137,517) (172) (2,509) 2,681 -0-
Cash Dividend -
$.44 Per Share (2,782) (2,782)
Net Income for the
Year Ended 2001 8,802 8,802
Securities Available-
for-Sale Adjustment 1,409 1,409
----------
Total Comprehensive
Income - NOTE 23 10,211
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
December 31, 2001 6,262,961 7,829 6,865 44,166 1,694 (18) 60,536
Stock Options Exercised 39,525 49 257 306
Purchases of Stock Held
in Treasury (3,402) (3,402)
Retirement of Stock Held
in Treasury (143,944) (180) (2,837) 3,017 -0-
Cash Dividend -
$.48 Per Share (2,986) (2,986)
Net Income for the
Year Ended 2002 9,317 9,317
Securities Available-
for-Sale Adjustment 1,167 1,167
----------
Total Comprehensive
Income - NOTE 23 10,484
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
December 31, 2002 6,158,542 $ 7,698 $ 7,122 $ 47,660 $ 2,861 $ (403) $ 64,938
========== ========== ========== ========== ========== ========== ==========
The accompanying Notes should be read with these financial statements.
35
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,317 $ 8,802 $ 8,976
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 1,094 1,058 1,054
Net Premium Amortization (Accretion) of Investment Securities 1,026 240 (142)
Provision for Loan Losses 3,140 1,755 2,606
Deferred Income Tax Benefit
(62) (480) (194)
Net (Gain) Loss on Sale of Investment Securities (165) -0- 2
Write-down of Other Real Estate -0- 11 426
Write-down of Foreclosed Assets -0- 300 -0-
Net Gain From Sale of Other Real Estate (358) (308) (151)
Net Loss From Sale of Premises and Equipment 1 1 -0-
Net Decrease (Increase) in Accrued Income and Other Assets 632 (252) (1,280)
Net Increase (Decrease) in Accrued Expenses and Other Liabilities 340 (723) 232
--------- --------- ---------
Total Adjustments 5,648 1,602 2,553
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,965 10,404 11,529
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Decrease (Increase) in Federal Funds Sold 2,022 44,177 (28,449)
Proceeds from Matured and Prepaid Investment Securities
o Held-to-Maturity -0- 15,000 1,285
o Available-for-Sale 51,818 85,127 82,218
Proceeds from Sales of Investment Securities 143,444 60,139 59,922
Purchase of Investment Securities
o Available-for-Sale (207,732) (168,860) (134,263)
Loans Originated and Principal Repayments, Net (42,962) (51,670) (27,367)
Recoveries of Loans Previously Charged-Off 372 268 224
Proceeds from Sale of Premises and Equipment 31 126 23
Proceeds from Sale of Other Real Estate 1,293 716 666
Purchases of Premises and Equipment (4,479) (1,191) (639)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (56,193) (16,168) (46,380)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Demand Deposits, Savings
Accounts and Interest-Bearing Transaction Accounts 34,838 34,868 14,728
Net Increase (Decrease) in Certificates of Deposit 3,308 (30,731) 44,392
Net Increase (Decrease) in Short-Term Borrowings 8,889 8,456 (12,181)
Payments of Cash Dividends (2,986) (2,782) (2,547)
Proceeds from Stock Options Exercised 306 235 310
Purchase of Treasury Stock (3,402) (2,699) (1,348)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,953 7,347 43,354
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS (275) 1,583 8,503
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 29,178 27,595 19,092
--------- --------- ---------
CASH AND DUE FROM BANKS AT END OF YEAR $ 28,903 $ 29,178 $ 27,595
========= ========= =========
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest Paid $ 8,763 $ 16,013 $ 18,355
Income Taxes Paid 4,762 5,555 5,097
Other Real Estate Acquired and Other Assets Acquired
in Settlement of Loans 1,579 -0- 1,538
Bank Financed Sales of Other Real Estate -0- 440 1,250
The accompanying Notes should be read with these financial statements.
36
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting and Reporting Policies
The accounting and reporting policies of Summit Bancshares, Inc. are in
accordance with accounting principles generally accepted in the United States of
America and the prevailing practices within the banking industry. A summary of
the more significant policies follows:
Basis of Presentation and Principles of Consolidation
The consolidated financial statements of Summit Bancshares, Inc. (hereinafter,
collectively with its subsidiaries, the "Corporation"), include its accounts and
its direct and indirect wholly-owned subsidiaries, Summit Delaware Financial
Corporation, Summit Bank, National Association (the "Bank") and SIA Insurance
Agency. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Cash and Due From Banks
The Bank is required to maintain certain noninterest-bearing cash balances the
Federal Reserve Bank based on their levels of deposits. During 2002, the average
cash balance maintained at the Federal Reserve Bank was approximately
$1,926,000. Compensating balances held at correspondent banks, to minimize
service charges, averaged approximately $18,736,000 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,
deferred fees and the allowance for loan losses. Unearned discount on
installment loans is recognized as income over the terms of the loans by a
method approximating the interest method. Interest income on all other loans is
recognized based upon the principal amounts outstanding, the simple interest
method. Loan origination fee income, net of direct loan origination costs, is
deferred and amortized over the life of the related loan. The accrual of
interest on a loan is discontinued when, in the opinion of management, there is
doubt about the ability of the borrower to pay interest or principal. Interest
previously earned, but uncollected on such loans, is written off. After loans
are placed on non-accrual, all payments received are applied to principal and no
interest income is recorded until the loan is returned to accrual status or the
principal has been reduced to zero.
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
37
NOTE 1 - Summary of Significant Accounting Policies (cont'd.)
evaluation in accordance with Statement No. 114 (impaired loans) is based on
discounted cash flows using the loan's initial effective rate or the fair value
of the collateral for certain collateral dependent loans.
The allowance for loan losses is comprised of amounts charged against income in
the form of a provision for loan losses as determined by management.
Management's evaluation is based on a number of factors, including the Bank's
loss experience in relation to outstanding loans and the existing level of the
allowance, prevailing and prospective economic conditions, and management's
continuing review of the discounted cash flow values of impaired loans and its
evaluation of the quality of the loan portfolio. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely.
The evaluation of the adequacy of loan collateral is often based upon estimates
and appraisals. Because of changing economic conditions, the valuations
determined from such estimates and appraisals may also change. Accordingly, the
Corporation may ultimately incur losses which vary from management's current
estimates. Adjustments to the allowance for loan losses will be reported in the
period such adjustments become known or are reasonably estimable.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation expense is computed on
the straight-line method based upon the estimated useful lives of the assets
ranging from three to forty years. Maintenance and repairs are charged to
non-interest expense. Renewals and betterments are added to the asset accounts
and depreciated over the periods benefited. Depreciable assets sold or retired
are removed from the asset and related accumulated depreciation accounts and any
gain or loss is reflected in the income and expense accounts.
Other Real Estate
Other real estate is foreclosed property held pending disposition and is valued
at the lower of its fair value or the recorded investment in the related loan.
At foreclosure, if the fair value, less estimated costs to sell, of the real
estate acquired is less than the Corporation's recorded investment in the
related loan, a write-down is recognized through a charge to the allowance for
loan losses. Any subsequent reduction in value is recognized by a charge to
income. Operating expenses of such properties, net of related income, and gains
and losses on their disposition are included in non-interest expense.
Federal Income Taxes
The Corporation joins with its subsidiaries in filing a consolidated federal
income tax return. The subsidiaries pay to the parent a charge equivalent to
their current federal income tax based on the separate taxable income of the
subsidiaries.
The Corporation and the subsidiaries maintain their records for financial
reporting and income tax reporting purposes on the accrual basis of accounting.
Deferred income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income
taxes are provided for accumulated temporary differences due to basic
differences for assets and liabilities for financial reporting and income tax
purposes.
Realization of net deferred tax assets is dependent on generating sufficient
future taxable income. Although realization is not assured, management believes
it is more likely than not that all of the net deferred tax assets will be
realized. The amount of the net deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
are reduced.
Cash and Cash Equivalents
For the purpose of presentation in the Statements of Cash Flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"Cash and Due from Banks."
Reclassification
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 presentation.
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.
Stock Based Compensation
The Corporation accounts for stock-based compensation in accordance with the
intrinsic value based method recommended by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date over the amount an employee must pay to acquire
the stock. The impact on the financial statements of using this method is
disclosed in Note 12, "Stock Option Plans" to the financial statements.
38
NOTE 2 - Investment Securities
A summary of amortized cost and estimated fair values of investment securities
is as follows (in thousands):
December 31, 2002
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Investment Securities --Available-for-Sale
U.S. Treasury Securities $ 996 $ 22 $ -0- $ 1,018
U.S. Government Agencies
and Corporations 121,063 3,723 -0- 124,786
U.S. Government Agency Mortgage
Backed Securities 37,688 477 (8) 38,157
Obligations of States and Political Subdivisions 4,777 125 (3) 4,899
Community Reinvestment Act Investment Fund 3,000 -0- -0- 3,000
Other Securities 1,652 -0- -0- 1,652
----------- ----------- ----------- -----------
Total Available-for-Sale Securities 169,176 4,347 (11) 173,512
----------- ----------- ----------- -----------
Total Investment Securities $ 169,176 $ 4,347 $ (11) $ 173,512
=========== =========== =========== ===========
All Investment Securities are now carried on the consolidated balance sheet as
of December 31, 2002 at fair value. The unrealized gain of $4,336,000 is
included in the Available-for-Sale Investment Securities balance. The unrealized
gain, net of tax, is included in Shareholders' Equity.
Included in the Other Securities category at December 31, 2002 is $1,332,000 of
Federal Home Loan Bank Stock and $320,000 of Federal Reserve Stock which are
classified as restricted investment securities, carried at cost, and evaluated
for impairment. No impairment losses were recorded in 2002. The Corporation is
required to have stock holdings of Federal Home Loan Bank Stock equal to 5% of
its outstanding advancements from the FHLB. The Corporation is also required to
have stock holdings of Federal Reserve Stock equal to 6% of its Capital Stock
and Surplus.
39
NOTE 2 - Investment Securities (cont'd.)
A summary of amortized cost and estimated fair values of investment securities
is as follows (in thousands):
December 31, 2001
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
Investment Securities - Available-for-Sale
U.S. Treasury Securities $ 6,028 $ 179 $ -0- $ 6,207
U.S. Government Agencies
and Corporations 129,027 2,258 (136) 131,149
U.S. Government Agency Mortgage
Backed Securities 19,540 282 -0- 19,822
Obligations of States and Political Subdivisions 1,631 2 (17) 1,616
Other Securities 1,342 -0- -0- 1,342
---------- ---------- ---------- ----------
Total Available-for-Sale Securities 157,568 2,721 (153) 160,136
---------- ---------- ---------- ----------
Total Investment Securities $ 157,568 $ 2,721 $ (153) $ 160,136
========== ========== ========== ==========
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. All Investment
Securities were then carried on the consolidated balance sheet as of December
31, 2001 at fair value. The unrealized gain of $2,568,000 is included in the
Available-for-Sale Investment Securities balance. The unrealized gain, net of
tax, is included in Shareholders' Equity.
Included in the Other Securities category at December 31, 2001 was $1,082,000 of
Federal Home Loan Bank Stock and $260,000 of Federal Reserve Stock which are
classified as restricted investment securities, carried at cost, and evaluated
for impairment. No impairment losses were recorded in 2001. The Corporation is
required to have stock holdings of Federal Home Loan Bank Stock equal to 5% of
its outstanding advancements from the FHLB. The Corporation is also required to
have stock holdings of Federal Reserve Stock equal to 6% of its Capital Stock
and Surplus.
A summary of the amortized cost and estimated fair value of debt securities by
contractual maturity as of December 31, 2002, is shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties.
December 31, 2002
------------------------
Available-for-Sale
------------------------
Amortized Fair
Cost Value
---------- ----------
Due in One Year or Less $ 26,217 $ 26,765
Due after One Year through Five Years 95,562 98,783
Due after Five Years through Ten Years 22,104 22,417
Due after Ten Years 25,293 25,547
---------- ----------
Total $ 169,176 $ 173,512
========== ==========
Included in the investment securities is $20,895,000 and $17,042,000 at December
31, 2002 and December 31, 2001, respectively, of mortgage backed securities
having stated maturities after five years. The estimated maturities on these
securities are between two and seven years as of December 31, 2002, based on
estimated prepayments of the underlying mortgages. Forty-seven percent of these
securities have rates that will reset within one year and annually thereafter.
Investment securities with carrying values of $45,877,000 and $46,043,000 at
December 31, 2002 and 2001, respectively, were pledged to secure federal, state
and municipal deposits and for other purposes as required or permitted by law.
Also, the fair value of those pledged securities totaled $47,415,000 and
$47,241,000 at December 31, 2002 and 2001, respectively.
Proceeds from sales of investment securities were $143,444,000 during 2002,
$60,139,000 during 2001 and $59,922,000 during 2000. In 2002, gains from sales
of securities of $165,000 were realized. In 2001, sales were made at book value
resulting in no gain or loss. Net losses from sale of securities of $2,000 were
realized in 2000. The total amount of proceeds from securities sales have been
from sales of securities included in the Available-for-Sale category.
40
The Corporation does not own any investment securities of any one issuer
(excluding U.S. Government or U.S. Government Agency Securities) of which
aggregate adjusted cost exceeds 10% of the consolidated shareholders' equity at
December 31, 2002 and 2001, respectively.
NOTE 3 - Loans and Allowance for Loan Losses
The loan portfolio consists of various types of loans made principally to
borrowers located in Tarrant County, Texas. The book values of loans by major
type follow (in thousands):
December 31,
-----------------------
2002 2001
--------- ---------
Commercial and Industrial $ 195,120 $ 184,716
Real Estate Mortgage - Commercial 130,755 107,600
Real Estate Mortgage - Residential 48,447 44,522
Real Estate Construction 59,941 60,548
Loans to Individuals 34,882 33,376
Less: Unearned Discount -0- (8)
--------- ---------
469,145 430,754
Allowance for Loan Losses (6,706) (6,015)
--------- ---------
Loans - Net $ 462,439 $ 424,739
========= =========
At December 31, 2002 and 2001, the total recorded investment in loans on
non-accrual amounted to $2,135,000 and $4,115,000, respectively, and the total
recorded investment in loans past due ninety days and still accruing interest
amounted to $16,000 at the end of each period. At December 31, 2002 and 2001,
the recorded investment in loans that are considered to be impaired under
Statement of Financial Accounting Standards No. 114 was $1,388,000 and
$3,777,000, respectively. These loans were on non-accrual status. The related
allowance for loan losses for these loans was $477,000 and $853,000,
respectively. The average recorded investment in impaired loans during the year
ended December 31, 2002 was approximately $3,441,000. For 2002, the Corporation
recognized no interest income on any loan classified as impaired.
Loans on which accrued interest has been discontinued or reduced amounted to
approximately $2,135,000, $4,115,000 and $2,182,000 at December 31, 2002, 2001
and 2000, respectively. If interest on these loans had been recorded in
accordance with their original terms such income would have approximated
$171,000 for 2002, $340,000 for 2001 and $600,000 for 2000. Interest income on
those loans included in net income was $99,000 for 2002, $195,000 for 2001 and
$206,000 for 2000.
Transactions in the allowance for loan losses are summarized as follows (in
thousands):
Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Balance, Beginning of Period $ 6,015 $ 5,399 $ 5,169
Provisions, Charged to Income 3,140 1,755 2,606
Loans Charged-Off (2,821) (1,407) (2,600)
Recoveries of Loans Previously
Charged-Off 372 268 224
--------- --------- ---------
Net Loans Charged-Off (2,449) (1,139) (2,376)
--------- --------- ---------
Balance, End of Period $ 6,706 $ 6,015 $ 5,399
========= ========= =========
41
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):
Years Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
Land $ 2,317 $ 2,317 $ 2,320
Buildings and Improvements 9,830 8,247 7,845
Furniture & Equipment 9,168 7,540 8,134
------- ------- -------
Total Cost 21,315 18,104 18,299
Less: Accumulated Depreciation and Amortization 9,829 9,973 10,175
------- ------- -------
Net Book Value $11,486 $ 8,131 $ 8,124
======= ======= =======
Depreciation and amortization charged to expense amounted to $1,094,000,
$1,058,000 and $1,054,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
The Corporation has invested in a joint venture with a third party to own one of
the Corporation's bank facilities. The investment in the joint venture is
accounted for on the equity basis and had a book value of $1,374,000 at December
31, 2002.
At December 31, 2002, the Corporation and subsidiaries had certain
non-cancelable operating leases which cover premises with future minimum annual
rental payments as follows (in thousands):
2003 $859
2004 1,024
2005 940
2006 940
2007 940
Thereafter 3,260
It is expected that in the normal course of business, leases that expire will be
renewed or replaced by leases on other property.
Rental income and rental expense of premises included in the consolidated
financial statements is computed as follows (in thousands):
Years Ended December 31,
-------------------------
2002 2001 2000
----- ----- -----
Total Rental Income $ 463 $ 383 $ 475
Less: Rental Expense 577 591 511
----- ----- -----
Net Rental Income (Expense) $(114) $(208) $ (36)
===== ===== =====
NOTE 5 - Other Real Estate
The carrying value of other real estate is as follows (in thousands):
December 31,
------------------------------------------
2002 2001 2000
-------- ------ --------
Other Real Estate $ 1,142 $ -0- $ 286
======== ====== ========
There were no direct write-downs of other real estate in 2002. Direct
write-downs of other real estate charged to income amounted to $11,000 and
$426,000 for the years ended December 31, 2001 and 2000, respectively.
Included in Other Assets at December 31, 2002 and 2001, were $125,000 and
$444,000 of Other Foreclosed Assets. The 2002 assets were comprised of motor
vehicles and the 2001 assets were comprised of an inventory of textbooks. There
were no direct write-downs on Other Foreclosed Assets in 2002 and 2000. However,
there was a direct write-down of $300,000 on the textbooks in 2001.
42
NOTE 6 - Deposits and Related Expense
At December 31, 2002, 2001 and 2000, deposits and related interest expense for
the related years ended December 31, consisted of the following (in thousands):
Deposits Interest Expense
-------------------------------- -----------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
Noninterest-Bearing
Demand Deposits $167,745 $150,040 $146,083
-------- -------- --------
Interest-Bearing Deposits:
Interest-Bearing Transaction
Accounts and Money
Market Funds 184,458 175,965 156,348 $ 2,378 $ 4,298 $ 6,168
Savings 113,948 105,308 94,014 1,909 3,367 4,472
Certificates of Deposit
under $100,000 and IRA's 63,432 64,380 82,248 2,041 4,198 3,808
Certificates of Deposit of
$100,000 or More 52,050 47,644 60,195 1,542 3,061 2,978
Other 316 466 778 11 43 44
-------- -------- -------- -------- -------- --------
Total 414,204 393,763 393,583 $ 7,881 $ 14,967 $ 17,470
======== ======== ======== ======== ======== ========
Total Deposits $581,949 $543,803 $539,666
======== ======== ========
The Corporation has no brokered deposits and there are no major concentrations
of deposits. Demand deposit overdrafts that have been reclassified as loan
balances were $1,095,000, $594,000 and $267,000 as of December 31, 2002, 2001
and 2000, respectively.
The remaining maturity on certificates of deposit of $100,000 or more as of
December 31, 2002, 2001 and 2000 is presented below (in thousands):
% of % of % of
Maturity 2002 Total 2001 Total 2000 Total
------- ------- ------- ------- ------- -------
3 months or less $12,076 23.2% $19,522 41.0% $16,267 27.0%
3 to 6 months 9,962 19.2 12,405 26.0 15,334 25.5
6 to 12 months 14,808 28.4 13,527 28.4 24,191 40.2
Over 12 months 15,204 29.2 2,190 4.6 4,403 7.3
NOTE 7 - Short Term Borrowings
Securities sold under repurchase agreements generally represent borrowings with
maturities ranging from one to thirty days. Information relating to these
borrowings is summarized as follows (in thousands):
December 31,
-------------------------------
2002 2001 2000
------- ------- -------
Securities Sold Under Repurchase Agreements:
Average Balance $20,141 $17,470 $20,797
Year-End Balance 22,955 14,816 19,910
Maximum Month-End Balance During Year 29,560 20,374 25,019
Interest Rate:
Average 0.87% 2.94% 5.19%
Year-End 0.59 0.75 5.44
Federal Funds Purchased:
Average Balance $ 1,178 $ 567 $ 22
Year-End Balance -0- 8,550 -0-
Maximum Month-End Balance During Year 8,650 8,550 950
Interest Rate:
Average 2.03% 2.76% 5.96%
Year-End -0- 1.92 -0-
The Corporation has available a line of credit with the Federal Home Loan Bank
of Dallas, which allows it to borrow on a collateralized basis at a fixed term.
The borrowings are collateralized by a blanket floating lien on all first
mortgage loans, the FHLB capital stock owned by the Corporation, and any funds
on deposit with FHLB. At December 31, 2002, $12.0 million of borrowings were
outstanding
43
under the line of credit at an average rate of 2.11%, $5.0 million of which
matures in May 2003 and $7.0 million maturing in October 2003. For the year
ended December 31, 2002, the Corporation had average borrowings of $16.5
million. In addition, at December 31, 2002, the Corporation had $2.3 million
borrowed under a match funding agreement with the Federal Home Loan Bank at a
rate of 4.41% which matures in June 2003. At December 31, 2001, the Corporation
had $5.0 million of borrowings outstanding at a rate of 1.92% which matured in
January 2002. For the year ended December 31, 2001, the Corporation had average
borrowings of $452,000.
NOTE 8 - Notes Payable
On September 15, 2002, the Corporation obtained lines of credit from a bank
under which the Corporation may borrow $11,000,000 at prime rate. The lines of
credit are secured by stock of the Bank and mature on September 15, 2003,
whereupon, if balances are outstanding, the lines convert to term notes having
five year terms. The Corporation will not pay a fee for any unused portion of
the lines. There were no borrowings outstanding on these lines of credit at
December 31, 2002.
NOTE 9 - Other Non-Interest Expense
The significant components of other non-interest expense are as follows (in
thousands):
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Business Development $ 797 $ 734 $ 601
Legal and Professional Fees 774 634 866
Printing and Supplies 353 362 369
Regulatory Fees and Assessments 239 244 237
Other 2,121 2,139 1,909
--------- --------- ---------
Total $ 4,284 $ 4,113 $ 3,982
========= ========= =========
NOTE 10 - Income Taxes
The consolidated provisions for income taxes consist of the following (in
thousands):
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Federal Income Tax Expense
Current $ 4,908 $ 5,144 $ 4,959
Deferred (benefit) (62) (480) (194)
--------- --------- ---------
Total Federal Income Tax Expense $ 4,846 $ 4,664 $ 4,765
========= ========= =========
Effective Tax Rates 34.2% 34.6% 34.7%
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):
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Federal Income Taxes at Statutory
Rate of 34.0% $ 4,858 $ 4,621 $ 4,716
Effect of Tax Exempt Interest Income (68) (3) (6)
Non-deductible Expenses 67 65 66
Other (11) (19) (11)
--------- --------- ---------
Income Taxes Per Income Statement $ 4,846 $ 4,664 $ 4,765
========= ========= =========
44
Federal income taxes included in the consolidated balance sheets were as follows
(in thousands):
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Current Tax Asset $ 347 $ 493 $ 68
Deferred Tax Asset 893 1,432 1,693
--------- --------- ---------
Total Included in Other Assets $ 1,240 $ 1,925 $ 1,761
========= ========= =========
The net deferred tax asset at December 31, 2002 of $893,000 included
$(1,474,000), a deferred tax liability related to unrealized gains on
Available-for-Sale Securities.
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):
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
Federal Deferred Tax Assets:
Allowance for Loan Losses $ 2,300 $ 1,859 $ 1,494
Valuation Reserves - Other Real Estate 2 104 5
Interest on Non-accrual Loans 273 237 238
Deferred Compensation 552 555 505
Other -0- 9 20
--------- --------- ---------
Gross Federal Deferred Tax Assets 3,127 2,764 2,262
--------- --------- ---------
Federal Deferred Tax Liabilities:
Depreciation and Amortization 542 286 318
Accretion 182 150 104
Unrealized Gains on Available-for-Sale Securities 1,474 873 147
Other 36 23 -0-
--------- --------- ---------
Gross Federal Deferred Tax Liabilities 2,234 1,332 569
--------- --------- ---------
Net Deferred Tax Asset $ 893 $ 1,432 $ 1,693
========= ========= =========
NOTE 11 - Related Party Transactions
During 2002 and 2001, the Bank had transactions which were made in the ordinary
course of business with certain of their and the Corporation's officers,
directors and their affiliates. All loans included in such transactions were
made on substantially the same terms, including interest rate and collateral, as
those prevailing at the time for comparable transactions with other persons and
all loans are current as to principal and interest payments. A summary of these
transactions follows (in thousands):
Balance at
Beginning Amounts Balance at
of Year Additions Collected End of Year
---------- --------- --------- -----------
For the Year ended December 31, 2002:
23 Directors and Officers $ 6,315 $ 5,659 $ (3,110) $ 8,864
For the Year ended December 31, 2001:
23 Directors and Officers $ 3,241 $ 4,321 $ (1,247) $ 6,315
45
NOTE 12 - Stock Option Plans
The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the 1997
Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted for
two-for-one stock splits in 1995 and 1997) of common stock for grants
thereunder. The Plans provide for the granting to executive management and other
key employees of Summit Bancshares, Inc. and its subsidiary incentive stock
options, as defined under the current tax law. The options under the Plans will
be exercisable for ten years from the date of grant and generally vest ratably
over a five year period. Options will be and have been granted at prices which
will not be less than 100-110% of the fair market value of the underlying common
stock at the date of grant.
The following is a summary of transactions during the periods presented:
Years Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
-------- --------- -------- --------- -------- ---------
Outstanding, Beginning of Period 453,459 $ 12.78 359,559 $ 9.96 445,497 $ 8.95
Granted 11,000 20.03 132,100 18.52 15,000 16.77
Exercised (39,525) 7.73 (38,200) 6.16 (81,238) 3.71
Canceled (6,000) 17.46 -0- -0- (19,700) 17.47
-------- -------- -------- -------- -------- --------
Outstanding, End of Year 418,934 $ 13.38 453,459 $ 12.78 359,559 $ 9.96
======== ======== ======== ======== ======== ========
Exercisable at End of Year 321,274 $ 11.80 322,179 $ 10.51 302,327 $ 8.74
Weighted Average Fair Value of
Options Granted During the Year 0 $ 5.68 0 $ 4.55 0 $ 5.34
The options outstanding at December 31, 2002, have exercise prices between $3.00
and $21.05 with a weighted average exercise price of $13.38 and a weighted
average remaining contractual life of 5.29 years. At December 31, 2002, there
remained 350,200 shares reserved for future grants of options under the 1997
Plan. Stock options have been adjusted retroactively for the effects of stock
splits.
The Corporation accounts for this plan under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," under which no compensation cost has been recognized for
options granted. The following table illustrates the effect on net income and
earnings per share if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to stock-based compensation. The fair value of the options granted in 2002 and
2001 were estimated as of the date of grant using an accepted options pricing
model with the following weighted-average assumptions: risk-free interest rate
of 3.98% and 4.08%, respectively; expected dividend yield of 2.89% and 3.60%,
respectively; expected volatility of 26.93% and 27.33%, respectively; and
expected life of 5.29 years.
Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Net Income, as Reported $ 9,317 $ 8,802 $ 8,976
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (124) (187) (139)
--------- --------- ---------
Pro Forma Net Income $ 9,193 $ 8,615 $ 8,837
========= ========= =========
Earnings Per Share
Basic - as Reported $ 1.50 $ 1.39 $ 1.41
Basic - Pro Forma 1.48 1.36 1.39
Diluted - as Reported 1.46 1.36 1.38
Diluted - Pro Forma 1.44 1.33 1.36
--------- --------- ---------
NOTE 13 - 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.
46
The total contractual amounts of financial instruments with off-balance sheet
risk are as follows (in thousands):
December 31,
--------------------
2002 2001
Contract Contract
Amount Amount
-------- --------
Financial Instruments Whose Contract Amounts Represent Credit Risk:
Loan Commitments Including Unfunded Lines of Credit $125,545 $131,337
Standby Letters of Credit 8,902 6,294
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Standby letters of credit are conditional commitments by the
Corporation to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Since many of the loan commitments and letters of credit 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 Corporation originates real estate, commercial and consumer loans primarily
to customers in the Tarrant County area. Although the Corporation has a
diversified loan portfolio, a substantial portion of its customers' ability to
honor their contracts is dependent upon the local economy and the real estate
market.
The Corporation maintains funds on deposit at correspondent banks which at times
exceed the federally insured limits. Management of the Corporation monitors the
balance in the account and periodically assesses the financial condition of
correspondent banks.
NOTE 14 - Earnings per Share
The following data shows the amounts used in computing earnings per share
("EPS") and the weighted average number of shares of dilutive potential common
stock (dollars in thousands):
Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Net income $ 9,317 $ 8,802 $ 8,976
========= ========= =========
Weighted average number of common
shares used in Basic EPS 6,224,028 6,317,991 6,364,492
Effect of dilutive stock options 171,533 153,032 159,467
--------- --------- ---------
Weighted number of common shares
and dilutive potential common
stock used in Diluted EPS 6,395,561 6,471,023 6,523,959
========= ========= =========
The incremental shares for the assumed exercise of the outstanding options were
determined by application of the treasury stock method.
NOTE 15 - Employee Benefit Plans
401(k) Plan
The Corporation implemented a 401(k) plan in December 1997 covering
substantially all employees. 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 for the years 2002, 2001
and 2000.
The Corporation expensed $427,000, $353,000 and $334,000 during 2002, 2001 and
2000, respectively, in support of the plan.
Supplemental Executive Retirement Plan
In 2002, the Corporation established a Supplemental Executive Retirement Plan to
provide key employees with retirement, death or disability benefits. For
currently employed employees, the plan replaces the previous Management Security
Plan. The current plan is a defined contribution plan and the expense charged to
earnings for 2002 was $180,000.
47
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
under certain changes in control or for other than cause.
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).
Compensated Absences
Employees of the Corporation are entitled to paid vacation, paid sick days and
other personal days off, depending on job classification, length of service and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and accordingly, no liability has been recorded in the
accompanying financial statements. The Corporation's policy is to recognize the
costs of compensated absences when actually paid to employees.
NOTE 16 - Dividends from Subsidiaries
The primary source of funds for the Parent Company is cash dividends received
from the Bank. The amount of dividends that the Bank may pay in any one year,
without approval of the Comptroller of the Currency, is the sum of the retained
net profits for the preceding two years plus its total of the net profits for
the current year. Under this formula, in 2003, the Bank can legally initiate
dividend payments of $12,351,000 plus an additional amount equal to their net
profits, as defined, for 2003 to the date of any such dividend payment. The Bank
is also restricted from paying dividends that would cause the Bank to be
under-capitalized.
Internal dividend policies limit dividends paid by the Bank if its equity
capital levels fall below certain minimums determined by the Bank's Boards of
Directors.
NOTE 17- Litigation
The Corporation is involved in legal actions arising in the ordinary course of
business. It is the opinion of management, after reviewing such actions with
outside legal counsel, that the settlement of these matters will not materially
affect the Corporation's financial position.
NOTE 18 - 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 2002 and 2001, 162,944 and 138,517 shares, respectively,
were purchased by the Corporation through the open market.
Under similar programs approved by the Board in the years 1994 through 2001,
683,004 shares in the aggregate were purchased in those years, reflecting
two-for-one stock splits in years 1995 and 1997.
NOTE 19 - Regulatory Capital Compliance
The Corporation and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. These requirements assign risk
factors to all assets, including off-balance sheet items such as loan
commitments and standby letters of credit. Failure to meet minimum capital
requirements can cause certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on the Corporation's consolidated financial statement. Capital is separated into
two categories, Tier 1 and Tier 2, which combine for Total Capital. At December
2002 and 2001, the Corporation's and Bank's Tier 1 capital consists of their
respective shareholders' equity and Tier 2 consists of the allowance for loan
losses subject to certain limitations. The guidelines require Total Capital of
8% of risk-weighted assets, of which 4% must be Tier I capital.
In conjunction with risk-based capital guidelines, the regulators have issued
capital leverage guidelines. The leverage ratio consists of Tier 1 capital as a
percent of total assets. The minimum leverage ratio for all financial
institutions is 3%, with a higher minimum ratio dependent upon the condition of
the individual financial institution. The 3% minimum was established to make
certain that all financial institutions have a minimum capital level to support
their assets, regardless of risk profile.
In addition to the minimum guidelines stated above, the regulatory authorities
have established minimums for an institution to be classified as "well
capitalized." A financial institution is deemed to be well capitalized if the
institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or
greater and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure. The Corporation and the Bank
currently exceed all minimum capital requirements and are considered to be "well
capitalized," the highest rating, by the regulatory authorities. Management is
not aware of any conditions or events that would have changed the Corporation's
capital rating since December 31, 2002.
48
The Corporation and the Banks' regulatory capital positions as of December 31,
2002 and 2001 were as follows (dollars in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
CONSOLIDATED:
As of December 31, 2002
Total Capital (to Risk Weighted Assets) $68,463 13.41% $40,851 8.00%
Tier I Capital (to Risk Weighted Assets) 62,076 12.16 20,425 4.00
Tier I Capital (to Average Assets) 62,076 8.96 20,792 3.00
As of December 31, 2001
Total Capital (to Risk Weighted Assets) $64,464 14.34% $35,953 8.00%
Tier I Capital (to Risk Weighted Assets) 58,842 13.10 17,976 4.00
Tier I Capital (to Average Assets) 58,842 9.20 18,762 3.00
SUMMIT BANK, N.A.:
As of December 31, 2002
Total Capital (to Risk Weighted Assets) $67,790 13.28% $40,851 8.00% $51,063 10.00%
Tier I Capital (to Risk Weighted Assets) 61,403 12.02 20,425 4.00 30,637 6.00
Tier I Capital (to Average Assets) 61,403 8.86 20,792 3.00 34,653 5.00
As of December 31, 2001
Total Capital (to Risk Weighted Assets) $62,840 13.98% $35,952 8.00% $44,941 10.00%
Tier I Capital (to Risk Weighted Assets) 57,218 12.73 17,976 4.00 26,964 6.00
Tier I Capital (to Average Assets) 57,218 9.15 18,767 3.00 31,278 5.00
NOTE 20- Subsequent Event
On January 15, 2003, the Board of Directors of the Corporation approved a
quarterly dividend of $.12 per share to be paid on February 14, 2003 to
shareholders of record on January 31, 2003.
NOTE 21- Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 "Business Combination" (FAS 141) and
Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of FAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the Corporation
was required to adopt FAS 142 effective January 1, 2002. The adoption of this
new accounting pronouncement did not have an impact on the Corporation's
consolidated financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment and
Disposal of Long-lived Assets" (FAS 144). This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 supercedes FAS 121, "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of" and the accounting and reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of the business previously defined
in that opinion. FAS 144 also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Corporation
does not believe that FAS 144 will have a material impact on its consolidated
financial statements.
49
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (FAS 146). This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The principal
difference between this Statement and Issue 94-3 relates to its requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized
at the date of an entity's commitment to an exit plan. A fundamental conclusion
reached by the Board in this Statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability. Therefore, this Statement eliminates the definition
and requirements for recognition of exit costs in Issue 94-3. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that initiated after December 31, 2002, with early application
encouraged. The Corporation does not believe FAS 146 will have a material impact
on its consolidated financial statements.
In October 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 147, "Acquisitions of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9" (FAS 147). This Statement removes acquisitions of
financial institutions from the scope of both Statement 72 and Interpretation 9
and requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets." In addition, this Statement amends FASB Statement 144,
"Accounting for the Impairment or Disposal of Long-lived Assets," to include in
its scope long-term customer relationship intangible assets of financial
institutions such as depositor and borrower relationship intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used. FAS 147 is effective on October 1, 2002. The Corporation does not
believe FAS 147 will have a material impact on its consolidated financial
statements.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure - an amendment of FASB Statement No. 123" (FAS 148).
FAS 148 amends FAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirement of FAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on the reported results. FAS 148
is effective for entities with fiscal years ending after December 15, 2002. The
adoption of this new accounting pronouncement will not have a material impact on
the Corporation's consolidated financial statements.
NOTE 22 - Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value tables or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements.
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.
50
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
Years Ended December 31,
---------------------------------------------------
2002 2001
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Financial Assets:
Cash and Due From Banks $ 28,903 $ 28,903 $ 29,178 $ 29,178
Federal Funds Sold 262 262 2,284 2,284
Securities 173,512 173,512 160,136 160,136
Loans 469,145 474,082 430,754 439,537
Reserve for Loan Losses (6,706) (6,706) (6,015) (6,015)
Financial Liabilities:
Deposits 582,617 584,439 543,803 545,136
Short Term Borrowings 37,255 37,312 28,366 28,357
Off-Balance Sheet Financial Instruments:
Loan Commitments 125,545 131,337
Letters of Credit 8,902 6,294
NOTE 23 - 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):
Years Ended December 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Net Income $ 9,317 $ 8,802 $ 8,976
Other Comprehensive Income:
Unrealized gain on securities
Available-for-Sale, net of tax 1,167 1,409 1,471
--------- --------- ---------
Comprehensive Income $ 10,484 $ 10,211 $ 10,447
========= ========= =========
51
NOTE 24- Condensed Parent Company Financial Statements
BALANCE SHEETS December 31,
------------------
2002 2001
------- -------
(In Thousands)
ASSETS
CASH IN SUBSIDIARY BANK
Demand $ 668 $ 1,621
INVESTMENT IN SUBSIDIARY 64,274 58,922
OTHER ASSETS 4 3
------- -------
TOTAL ASSETS $64,946 $60,546
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
OTHER LIABILITIES $ 8 $ 10
SHAREHOLDERS' EQUITY 64,938 60,536
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $64,946 $60,546
======= =======
STATEMENTS OF INCOME
For the Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In Thousands)
INCOME
Dividends from Subsidiaries $ 5,300 $ 6,090 $ 5,125
Interest -0- 29 90
Other Income -0- 70 219
-------- -------- --------
TOTAL INCOME 5,300 6,189 5,434
-------- -------- --------
EXPENSES
Interest 7 19 52
Salaries and Employee Benefits 2 -0- 736
Occupancy and Furniture - Net -0- -0- (91)
Other Expense 247 209 416
-------- -------- --------
TOTAL EXPENSE 256 228 1,113
-------- -------- --------
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES 5,044 5,961 4,321
INCOME TAX BENEFIT 88 44 286
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 5,132 6,005 4,607
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 4,185 2,797 4,369
-------- -------- --------
NET INCOME $ 9,317 $ 8,802 $ 8,976
======== ======== ========
52
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
2002 2001 2000
------- ------- -------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,317 $ 8,802 $ 8,976
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization -0- -0- 120
Deferred Federal Income Taxes (Benefit) -0- -0- (18)
Undistributed Earnings of Subsidiaries (4,185) (2,797) (4,369)
Net (Increase) Decrease in Other Assets (1) 1,377 (449)
Net (Decrease) Increase in Other Liabilities (2) (1,687) 245
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,129 5,695 4,505
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment on Advance (Net Funding) to Subsidiary -0- 703 (116)
Purchases of Premises and Equipment -0- -0- (65)
------- ------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES -0- 703 (181)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal Payments on Notes Payable -0- (533) (117)
Payments of Cash Dividends (2,986) (2,782) (2,547)
Receipts from Stock Options Exercised 306 235 310
Purchase of Treasury Stock (3,402) (2,699) (1,348)
------- ------- -------
NET CASH USED BY FINANCING ACTIVITIES (6,082) (5,779) (3,702)
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (953) 619 622
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,621 1,002 380
------- ------- -------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 668 $ 1,621 $ 1,002
======= ======= =======
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in accountants and no disagreements with accountants
on any matter of accounting principles or practices or financial statement
disclosures during the twenty-four (24) month period ended December 31, 2002.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "PROPOSAL NO. 1: ELECTION OF
DIRECTORS" on pages 3 through 6 of the Corporation's Proxy Statement dated March
12, 2003, relating to the 2003 Annual Meeting of Shareholders of the
Corporation, the information set forth under the caption "STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 12 through 13 of such Proxy
Statement, and the information set forth under the caption "EXECUTIVE OFFICERS
OF THE CORPORATION" on page 11 of Part I of this report is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "EXECUTIVE COMPENSATION AND OTHER
INFORMATION" on pages 14 through 20 of the Corporation's Proxy Statement dated,
March 12, 2003 relating to the 2003 Annual Meeting of Shareholders of the
Corporation, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to shareholders of the Corporation who are known to
be beneficial owners of more than five percent (5%) of the outstanding shares of
Common Stock of the Corporation set forth under the caption "STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 12 through 13 of the
Corporation's Proxy Statement dated March 12, 2003, relating to the 2003 Annual
Meeting of Shareholders of the Corporation, is incorporated herein by reference.
The information relating to the beneficial ownership of the outstanding shares
of Common Stock of the Corporation by its directors and executive officers set
forth under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" on pages 12 through 13 of the Corporation's Proxy Statement dated
March 12, 2003, relating to the 2003 Annual Meeting of Shareholders of the
Corporation, is incorporated herein by reference.
The following table provides information about the Corporation's equity
compensation plans as of December 31, 2002:
Number of Shares
Number of Shares Weighted Average Available for Future
To Be Issued Upon Exercise Exercise Price of Issuance Under Equity
of Outstanding Options Outstanding Options Compensation Plans
---------------------- ------------------- ------------------
Equity compensation plans approved
by shareholders 418,934 $13.38 350,200
The 1993 Incentive Stock Option Plan of Summit Bancshares, Inc. and the 1997
Incentive Stock Option Plan of Summit Bancshares, Inc. were approved by the
Corporation's shareholders.
As of December 31, 2002, there are no equity compensation plans of the
Corporation not approved by the shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "CERTAIN TRANSACTIONS" on page 22 of
the Corporation's Proxy Statement dated March 12, 2003, relating to the 2003
Annual Meeting of Shareholders of the Corporation, is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES.
On March 17, 2003 (the "Evaluation Date"), an evaluation was performed by the
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") of the
effectiveness of the design and operation of the Corporation's disclosure
controls and procedures. Based on that evaluation, the CEO and CFO concluded
that the Corporation's disclosure controls and procedures were effective as of
the Evaluation Date. Subsequent to the Evaluation Date there have been no
significant changes in the Corporation's internal controls or in other factors
that could significantly affect internal controls and the procedures for
financial reporting.
55
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The following financial statements are
included in Part II, Item 8:
Independent Auditor's Report
Consolidated Balance Sheets of Summit Bancshares, Inc. and
Subsidiaries as of December 31, 2002 and 2001
Consolidated Statements of Income of Summit Bancshares, Inc. and
Subsidiaries for the Years Ended December 31, 2002, 2001 and 2000
Statements of Changes in Shareholders' Equity of Summit Bancshares,
Inc. and Subsidiaries for the Years Ended December 31, 2002, 2001
and 2000 (Consolidated and Parent Company Only)
Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and
Subsidiaries for the Years Ended December 31, 2002, 2001 and 2000
Notes to Financial Statements
(2) Financial Statement Schedules. Financial statement schedules are
omitted because of the absence of conditions under which they are
required or because the required information is given in the
financial statements or notes thereto.
(3) Exhibits. The following exhibits are filed as a part of this report:
3(a) Restated Articles of Incorporation of the Corporation as of
July 21, 1998 (incorporated herein by reference to Exhibit
3(a) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1998).*
3(b) Amended and Restated Bylaws of the Corporation dated January
13, 2003.**
4(a) Summit Bancshares, Inc.'s Rights Agreement dated April 17,
1990 (incorporated herein by reference to Exhibit 1 to the
Corporation's Current Report on Form 8-K dated April 18, 1990
filed on April 24, 1990).*
10(a) Lease Agreement dated August 28, 1985 by and between Alta Mesa
National Bank, as lessor, and the Corporation, as lessee
(incorporated herein by reference to Exhibit 10(a) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1985).*
10(b) Lease Agreement dated October 1, 1986 by and between the
Corporation, as lessor, and Alta Mesa National Bank, as lessee
(incorporated herein by reference to Exhibit 10(f) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1986).*
10(c) Lease Agreement dated February 14, 1992 by and between
Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership, as landlord, and Summit Bancshares, Inc., as
tenant (incorporated herein by reference to Exhibit 10(l) to
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1992).*
10(d) First Amendment dated May 3, 1994 to Lease Agreement dated
February 14, 1992 by and between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited Partnership, as landlord,
and Summit Bancshares, Inc., as tenant (incorporated herein by
reference to Exhibit 10(k) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1994).*
10(e) Management Security Plan of Summit Bancshares, Inc. effective
September 1, 1992; Management Security Plan Agreement between
Summit Bancshares, Inc. and F. S. Gunn; and Management
Security Plan Agreement between Summit Bancshares, Inc. and
James L. Murray (incorporated herein by reference to Exhibit
10(k) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1992).*
56
10(f) 1993 Incentive Stock Option Plan of Summit Bancshares, Inc.
(incorporated herein by reference to Exhibit 10(n) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993).*
10(g) Lease Agreement dated July 6, 1989 by and between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited Partnership, as
landlord, and Summit National Bank as tenant (incorporated
herein by reference to Exhibit 10(r) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1995).*
10(h) 1997 Incentive Stock Option Plan of Summit Bancshares, Inc.
(incorporated herein by reference to Annex I to the
Corporation's Proxy Statement for Annual Meeting of
Shareholders, dated March 17, 1997).*
10(i) Second Lease Amendment and Extension Agreement to the Lease
Agreement dated July 6, 1989, as amended by the Amendment of
Lease dated August 12, 1993, by and between EOP-Summit Limited
Partnership (as successor in interest to Zell/Merrill Lynch
Real Estate Opportunity Partners Limited Partnership), as
landlord, and Summit National Bank, as tenant (incorporated
herein by reference to Exhibit 10(n) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1997).*
10(j) Agreement of Limited Partnership of IDI Summit, Ltd. dated
November 6, 1997, between Summit Community Bank, N.A. and
Innovative Developers, Inc. (incorporated herein by reference
to Exhibit 10(o) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1997).*
10(k) Lease Agreement dated November 6, 1997 between Summit
Community Bank, N.A., as tenant, and IDI - Summit, Ltd., as
landlord (incorporated herein by reference to Exhibit 10(p) to
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1997).*
10(l) Second Amendment dated July 8, 1998 to Lease Agreement dated
February 13, 1992 by and between Zell/Merrill Lynch Real
Estate Opportunity Partners Limited Partnership, as landlord,
and Summit Bancshares, Inc., as tenant (incorporated herein by
reference to Exhibit 10(q) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1998).*
10(m) Third Amendment dated October 22, 1999 to Lease Agreeement
dated February 13, 1992 by and between EOP-Summit Limited
Partnership (as successors in interest to Zell/Merrill Lynch
Real Estate Opportunity Partners Limited Partnership), as
landlord, and Summit Bancshares, Inc., as tenant (incorporated
herein by reference to Exhibit 10(s) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1999).*
10(n) Severance Agreement between the Corporation and Philip E.
Norwood, dated as of October 24, 2000 (incorporated herein by
reference to Exhibit 10(v) to the Corporation Annual Report on
Form 10-K for the year ended December 31, 2000).*
10(o) Loan Agreement dated September 15, 2001 to Loan Agreement
dated July 12, 1995, between Corporation and the Frost
National Bank (incorporated herein by reference to Exhibit
10(x) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 2001).*
10(p) Formation of Summit Delaware Financial Corporation
(incorporated herein by reference to Exhibit 10(v) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001).*
10(q) First Amendment dated March 8, 2002 to Loan Agreement dated
September 15, 2001, between Corporation and the Frost National
Bank.**
10(r) Second Amendment dated September 15, 2002 to Loan Agreement
dated September 15, 2001, between Corporation and the Frost
National Bank (incorporated herein by reference to Exhibit 10
to the Corporation's Quarterly Report on Form 10-Q dated
September 30, 2002).*
57
10(s) Supplemental Executive Retirement Plan of Summit Bancshares,
Inc. effective January 1, 2002. **
10(t) Lease Agreement dated November 21, 2002 between Summit Bank,
N.A., as tenant, and Hulen South Tower Ltd., as landlord. **
21 Subsidiaries of the Corporation.
23 Consent of Stovall, Grandey & Whatley, independent certified
public accountants.
99.1 Certification of Chief Executive Officer of Summit Bancshares,
Inc.
99.2 Certification of Chief Financial Officer of Summit Bancshares,
Inc.
(b) Reports on Form 8-K.
The Corporation did not file during the last quarter covered by this
report any reports on Form 8-K.
* A copy of this Exhibit is available to any shareholders, at the actual
cost of reproduction upon written request to the Corporation.
** File herewith.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 13, 2003 By: /s/ Philip E. Norwood
---------------------
Philip E. Norwood, Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on this 13th day of March, 2003.
SIGNATURE TITLE
--------- -----
/s/ Philip E. Norwood Chairman, President, CEO and Director
- ------------------------ (Principal Executive Officer)
Philip E. Norwood
/s/ Bob G. Scott Chief Operating Officer, Executive Vice President,
- ------------------------ Secretary and Treasurer (principal financial officer
Bob G. Scott and principal accounting officer)
Director
- ------------------------
D. Jerrell Farr
/s/ Elliott S. Garsek Director
- ------------------------
Elliott S. Garsek
/s/ Ronald J. Goldman Director
- ------------------------
Ronald J. Goldman
/s/ F.S. Gunn Director
- ------------------------
F.S. Gunn
/s/ Robert L. Herchert Director
- ------------------------
Robert L. Herchert
/s/ Jay J. Lesok Director
- ------------------------
Jay J. Lesok
/s/ William W. Meadows Director
- ------------------------
William W. Meadows
/s/ James L. Murray Director
- ------------------------
James L. Murray
/s/ Byron B. Searcy Director
- ------------------------
Byron B. Searcy
/s/ Roderick D. Stepp Director
- ------------------------
Roderick D. Stepp
59
I, Philip E. Norwood, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Bancshares, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared:
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluations, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: 03-22-03 By: /s/ Philip E. Norwood
-----------------------
Philip E. Norwood
Chairman, President and
Chief Executive Officer
60
I, Bob G. Scott, certify that:
1. I have reviewed this annual report on Form 10-K of Summit Bancshares, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared:
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluations, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: 03-22-03 By: /s/ Bob G. Scott
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Bob G. Scott
Executive Vice President and
Chief Operating Officer
(Chief Accounting Officer)
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