<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED: SEPTEMBER 30, 1998
COMMISSION FILE NUMBER: 0-11108
SUMMIT BANCSHARES, INC.
STATE OF CALIFORNIA I.R.S. IDENTIFICATION
NUMBER 94-2767067
2969 BROADWAY, OAKLAND CALIFORNIA 94611
(510) 839-8800
Indicate by the check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES_____X____ NO__________
The number of shares outstanding of the registrant's common stock was
438,035 shares of no par value common stock
issued as of September 30, 1998
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 PAGE
<S> <C>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY FINANCIAL STATEMENTS
Consolidated Balance Sheets ...................... 3
Consolidated Statements of Income ................ 4
Consolidated Statement of Cash Flows ............. 5
Consolidated Statement of Changes in Shareholders'
Equity............................................ 6
Notes to Financial Statements..................... 7-8
Interest Rate Risk Reporting Schedule............. 9-12
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations .............. 13-22
PART II - OTHER INFORMATION
ITEMS 1-6 ....................................................... 23
</TABLE>
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 09/30/98 12/31/97
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,500,807 $ 8,664,015
Federal funds sold 26,740,000 12,910,000
------------ -------------
Cash and cash equivalents 32,240,807 21,574,015
Time deposits with other financial institutions 13,945,742 5,644,000
Investment securities (fair value of $13,516,393 at
September 30, 1998 and $12,515,656 at
December 31, 1997 ) held to maturity 13,499,259 12,496,651
Loans, net of allowance for loan losses of
$1,318,201 at September 30,1998 and
$1,240,649 at December 31, 1997 54,110,592 60,832,859
Other real estate owned 1,359,342 1,222,080
Premises and equipment, net 1,031,759 872,619
Interest receivable and other assets 4,212,964 1,699,307
------------ -------------
Total Assets $120,400,465 $104,341,531
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 36,466,099 $ 31,062,481
Interest-bearing transaction accounts 33,991,313 33,012,655
Savings 2,986,083 2,264,538
Time certificates $100,000 and over 28,045,455 18,828,044
Other time certificates 3,684,349 5,264,024
------------ -------------
Total Deposits 105,173,299 90,431,742
Interest payable and other liabilities 1,358,855 1,031,120
------------ -------------
Total Liabilities 106,532,154 91,462,862
SHAREHOLDERS' EQUITY
Preferred Stock, no par value:
2,000,000 shares authorized, no shares outstanding 0 0
Common Stock, no par value
3,000,000 shares authorized;
438,035 shares outstanding at September 30, 1998 and
436,565 shares outstanding at December 31, 1997 3,721,630 3,709,145
Retained Earnings 10,146,681 9,169,524
------------ -------------
Total Shareholders' Equity 13,868,311 12,878,669
Total Liabilities and Shareholders' Equity $120,400,465 $104,341,531
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED 9-30-98 ENDED 9-30-97 ENDED 9-30-98 ENDED 9-30-97
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,494,579 $ 1,734,955 $ 4,637,926 $ 4,862,668
Interest on time deposits with other
financial institutions 128,126 109,901 311,401 361,721
Interest on U.S. government
treasury securities 197,020 164,809 574,862 476,864
Interest on federal funds sold 403,006 123,935 891,124 403,649
----------- ------------- ------------ --------------
Total interest income 2,222,731 2,133,600 6,415,313 6,104,902
INTEREST EXPENSE:
Interest on deposits 605,167 490,047 1,622,908 1,412,622
----------- ------------- ------------ --------------
Total interest expense 605,167 490,047 1,622,908 1,412,622
----------- ------------- ------------ --------------
Net interest income 1,617,564 1,643,553 4,792,405 4,692,280
Provision for loan losses - 65,000 100,000 165,000
----------- ------------- ------------ --------------
Net interest income
after provision for loan losses 1,617,564 1,578,553 4,692,405 4,527,280
NON-INTEREST INCOME:
Service charges on deposit accounts 115,837 114,789 348,861 327,930
Other customer fees and charges 21,079 25,532 50,991 56,495
----------- ------------- ------------ --------------
Total non-interest income 136,916 140,321 399,852 384,425
NON-INTEREST EXPENSE:
Salaries and employee benefits 589,643 541,675 1,608,950 1,549,253
Occupancy expense 103,257 95,497 305,341 278,115
Equipment expense 65,147 36,239 166,275 107,389
Other 227,039 276,504 747,488 843,132
----------- ------------- ------------ --------------
Total non-interest expense 985,086 949,915 2,828,054 2,777,889
Income before income taxes 769,394 768,959 2,264,204 2,133,816
Provision for income taxes 324,863 330,128 948,156 900,177
----------- ------------- ------------ --------------
Net Income $444,531 $438,831 $1,316,048 $1,233,639
----------- ------------- ------------ --------------
----------- ------------- ------------ --------------
EARNINGS PER SHARE:
Earnings per common share $1.01 $1.02 $3.01 $2.87
Earnings per common share assuming
dilution $0.95 $0.95 $2.80 $2.66
Weighted average shares outstanding 438,035 429,483 437,636 429,483
Weighted avg. shrs. outsdg. assuming
dilution 469,973 463,020 469,574 463,020
----------- ------------- ------------ --------------
----------- ------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED 9-30-97 ENDED 9-30-98
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 5,511,818 $ 6,050,029
Fees received 800,017 706,317
Interest paid (1,395,529) (1,623,415)
Cash paid to suppliers and employees (2,464,407) (2,717,211)
Income taxes paid (850,000) (1,049,365)
------------- --------------
Net cash provided by operating activities 1,601,899 1,366,355
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in time deposits with
other financial institutions 3,268,000 (8,301,742)
Maturity of investment securities 3,011,047 10,997,392
Purchase of investment securities (6,296,420) (12,000,000)
Net (increase) decrease in loans to customers (10,436,646) 6,679,776
Recoveries on loans previously charged-off 2,250 31,462
(Increase) decrease in premises and equipment (143,920) (337,513)
------------- --------------
Net cash provided by (used in) investing activities (10,595,689) (2,930,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in demand, interest
bearing transaction, and savings deposits 5,781,923 7,103,821
Net increase (decrease) in time deposits 465,852 7,637,736
(Increase) decrease in other assets 361,447 (2,184,089)
Exercise of stock options 0 18,755
Repurchase of common stock (221,198) (6,270)
Dividends paid (320,756) (338,891)
------------- --------------
Net cash provided by (used in) financing activities 6,067,268 12,231,062
------------- --------------
Net increase (decrease) in cash and cash equivalents (2,926,522) 10,666,792
Cash and cash equivalents at the
beginning of the year 19,168,515 21,574,015
------------- --------------
Cash and cash equivalents at the end of the year $ 16,241,993 $ 32,240,807
------------- --------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 1,233,639 $ 1,316,047
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 145,025 178,938
Provision for loan losses and OREO losses 165,000 100,000
(Increase) decrease in interest receivable (150,183) (31,434)
Increase (decrease) in unearned loan fees (27,309) (27,385)
Increase (decrease) in accrued interest payable 17,093 (507)
(Increase) decrease in prepaid expenses (20,678) (85,872)
Increase (decrease) in accounts payable 189,136 17,777
Increase (decrease) in income taxes payable 50,176 (101,209)
------------- --------------
Total adjustments 368,260 50,308
------------- --------------
Net cash provided by operating activities $ 1,601,899 $ 1,366,355
------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES COMMON RETAINED
OUTSTANDING STOCK EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 436,565 $3,709,145 $9,169,524 12,878,669
Stock Options Exercised 1,580 18,755 0 18,755
Repurchase of Common Stock (110) (6,270) 0 (6,270)
Issuance of cash dividends of $.75 per share 0 0 (338,891) (338,891)
Net Income 0 0 1,316,048 1,316,048
Balance at September 30, 1998 438,035 3,721,630 10,146,681 13,868,311
Balance at December 31, 1996 433,209 3,830,343 8,108,800 11,939,143
Stock Options Exercised 9,000 90,000 - 90,000
Repurchase of Common Stock (6,644) (221,197) 0 (221,197)
Issuance of cash dividends of $.75 per share 0 0 (320,756) (320,756)
Net Income 0 0 1,233,639 1,233,639
Balance at September 30, 1997 435,565 3,699,146 9,021,683 12,720,829
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position at September
30, 1998 and the results of operations for the nine months ended September
30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998
and 1997.
Certain information and footnote disclosures presented in the Corporation's
annual consolidated financial statements are not included in these interim
financial statements. Accordingly, the accompanying unaudited interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Corporation's 1997 Annual Report to Shareholders, which is incorporated by
reference in the Company's 1997 annual report on Form 10-K. The results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of the operating results for the full year.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). The Bank was required to adopt SFAS 128 in the fourth quarter of
1997 and restated at that time earnings per share data for prior periods to
conform with SFAS 128. Earlier application is not permitted.
SFAS 128 replaces current earnings per share reporting requirements and
requires a dual presentation of basic and diluted earnings per share.
Earnings per share excludes dilution and is computed by dividing net income
by the weighted average common shares outstanding of 438,035 and 457,477
during the nine months ended September 30, 1998 and 1997, respectively.
Diluted earnings per share reflects the potential dilution that could occur
if common shares were issued pursuant to the exercise of options under the
Bank's Stock Option Plans. Diluted earnings per share under SFAS 128 would
not have been significantly different than primary earnings per share
currently reported for the periods.
7
<PAGE>
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components; and No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures
about its products, services, geographic areas, and major customers. Adoption
of these statements will not impact the Bank's consolidated financial
position, results of operations or cash flows, and any effect will be limited
to the form and content of its disclosures. Both statements are effective in
1998, with earlier application permitted.
8
<PAGE>
INTEREST RATE SENSITIVITY/INTEREST RATE RISK ANALYSIS
The following table provides an interest rate sensitivity and
interest rate risk analysis for the quarter ended September 30, 1998.
The table presents each major category of interest-earning assets and
interest bearing-liabilities.
INTEREST RATE RISK REPORTING SCHEDULE
REPORTING INSTITUTION: SUMMIT BANK REPORTING DATE: 9-30-98
<TABLE>
<CAPTION>
REMAINING TIME BEFORE MATURITY OR INTEREST RATE ADJUSTMENT
($000.00)
OMITTED UP > 3 > 1 > 3 > 5 OVER
TOTAL 3 < 1 < 3 < 5 < 10 10 YEARS
<S> <C> <C> <C> <C> <C> <C> <C>
I. EARNING ASSETS
A. INVESTMENTS:
1. U. S. TREASURIES $2,499 $1,000 $1,499 $0 $0 $0 $0
2. U. S. AGENCIES 11,000 2,000 9,000 1,800 0 0 0
3. FED FUNDS SOLD 26,740 26,740 0 0 0 0 0
4. PURCHASED CDS 13,946 693 7,329 5,924 0 0 0
---------- --------- --------- -------- ------ ------- -------
TOTAL INVESTMENTS $54,185 $30,433 $17,828 $7,724 $0 $0 $0
B. LOANS $53,097 $51,432 $753 $814 $106 $3,463 $0
---------- --------- --------- -------- ------ ------- -------
TOTAL LOANS $53,097 $51,432 $753 $814 $106 $3,463 $0
C. TOTAL EARNING ASSETS $107,282 $81,865 $18,581 $8,538 $106 $3,463 $0
II. COST OF FUNDS (DEPOSITS)
A. CERTIFICATE OF DEPOSITS $31,730 $23,025 $8,603 $82 $20 $0 $0
B. MONEY MARKET ACCOUNTS 28,575 3,897 10,986 13,692 0 0 0
C. TRANSACTION ACCOUNTS 6,200 266 797 2,102 1,511 1,524 0
D. SAVINGS ACCOUNTS 2,986 128 384 1,012 728 734 0
---------- --------- --------- -------- ------ ------- -------
TOTAL COST OF FUNDS $69,491 $27,316 $20,770 $16,888 $2,259 $2,258 $0
III. INTEREST SENSITIVE ASSETS $107,282 $81,865 $18,581 $8,538 $106 $3,463 $0
IV. INTEREST SENSITIVE LIABILITIES $69,491 $27,316 $20,770 $16,888 $2,259 $2,258 $0
---------- --------- --------- -------- ------ ------- -------
V. GAP $37,791 $54,549 ($2,189) ($8,350) ($2,153) $1,205 $0
VI. CUMULATIVE GAP $37,791 $54,549 $52,360 $44,010 $41,857 $43,062 $43,062
VII. GAP RATIO 1.54 3.00 0.89 0.51 0.05 0.00
VIII. CUMULATIVE RATIO 1.54 3.00 2.09 1.65 1.60 1.54 1.54
IX. GAP AS A % OF TOTAL ASSETS 32.10 46.33 -1.86 -8.62 -1.83 -1.92 0.00
X. CUMULATIVE GAP AS A % OF 32.10 46.33 49.47 35.85 34.02 32.10 32.10
TOTAL ASSETS
</TABLE>
9
<PAGE>
WEIGHTED AVERAGE SHARES
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
FULLY PRIMARY
A. COMMON STOCK ANNUAL 437636.36 437636.36
(3RD QTR) 438035.00 438035.00
NO OF
DAYS
<S> <C> <C> <C> <C> <C>
436565.00 12-31-97(BAL FWD) ---------
436565.00 TO 1-14-98 13.00 5675345.00
436455.00 TO 1-26-98 12.00 5237460.00
437455.00 TO 4-01-98 65.00 28434575.00
437455.00 TO 5-27-98 57.00 24934935.00
438035.00 TO 6-30-98 34.00 14893190.00
438035.00 TO 9-30-98 92.00 40299220.00
0.00
0.00
--------- ------------
273.00 119474725.00
AVERAGE SHARES OUTSTANDING
FOR THE YEAR 437636.36
AVERAGE SHARES OUTSTANDING
FOR THE 3RD QUARTER 438035.00
</TABLE>
10
<PAGE>
OPTIONS-FULLY
USE HIGHER OF YEAR END PRICE OR AVERAGE PRICE
<TABLE>
<S> <C>
YEAR END PRICE/QTR END 52.875
AVERAGE PRICE 53.341
</TABLE>
<TABLE>
<S> <C> <C>
USE YEAR END PRICE OF 52.875 31850.59
------------
</TABLE>
<TABLE>
<CAPTION>
NO OF YEAR END OPTION NO OF
SHARES PRICE PRICE SHARES
----------- ----------------- --------- ------------
<S> <C> <C> <C> <C>
MZ 2900.00 52.875 13.50 2,160
SN 15689.00 52.875 10.00 12,722
SN 8333.00 52.875 12.00 6,442
TW 400.00 52.875 12.25 307
SN 978.00 52.875 13.25 733
DD 2500.00 52.875 13.00 1,885
MZ 1045.00 52.875 13.00 788
AC 400.00 52.875 13.00 302
TW 1500.00 52.875 13.00 1,131
SN 4000.00 52.875 17.75 2,657
MZ 2000.00 52.875 17.75 1,329
DD 1000.00 52.875 17.75 664
TW 1000.00 52.875 17.75 664
AC 100.00 52.875 17.75 66
</TABLE>
OPTIONS-PRIMARY
---------------
<TABLE>
<S> <C> <C>
AVERAGE PRICE FOR THE YEAR 53.341 31937.82
------------
</TABLE>
<TABLE>
<CAPTION>
NO OF YEAR END OPTION NO OF
SHARES PRICE PRICE SHARES
----------- ----------------- --------- ------------
<S> <C> <C> <C> <C>
SN 15689.00 53.341 10.00 12,748
SN 8333.00 53.341 12.00 6,458
MZ 2900.00 53.341 13.50 2,166
TW 400.00 53.341 12.25 308
SN 978.00 53.341 13.25 735
DD 2500.00 53.341 13.00 1,891
MZ 1045.00 53.341 13.00 790
AC 400.00 53.341 13.00 303
TW 1500.00 53.341 13.00 1,134
SN 4000.00 53.341 17.75 2,669
MZ 2000.00 53.341 17.75 1,334
DD 1000.00 53.341 17.75 667
TW 1000.00 53.341 17.75 667
AC 100.00 53.341 17.75 67
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL SHARES 3RD QUARTER 469885.59 469972.82
TOTAL SHARES YEAR-TO-DATE 469486.94 469574.18
NET INCOME 3RD QUARTER $444,531 $444,531
NET INCOME YEAR TO DATE, 1998 $1,316,047 $1,316,047
EARNINGS PER SHARE 3RD QUARTER $0.946 $0.946
EARNINGS PER SHARE, YTD $2.803 $2.803
</TABLE>
12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The registrant, Summit Bancshares, Inc. (the "Company") is a bank holding
company whose only operating subsidiary is Summit Bank (the "Bank"). The
following discussion primarily concerns the financial condition and results
of operations of the Company on a consolidated basis including the subsidiary
Bank. All adjustments made in the compilation of this information are of a
normal recurring nature.
FINANCIAL CONDITION
LIQUIDITY MANAGEMENT
The consolidated loan-to-deposit ratio at September 30, 1998 was 51.4% which
was a decrease from 72.3% for the same period in 1997. Total outstanding
loans as of September 30, 1998 decreased $7,453,000 compared to the same
period a year ago while total deposits increased $18,416,000 versus the same
time last year. The decrease in loans was mainly due to Summit maintaining
it's lending standards during a period of increased competition that resulted
in a lowering of lending standards throughout the marketplace. The increase
in deposits is mainly due to Bank's effort in marketing its products. The
average loan-to-deposit ratio for the third quarter of 1998 was 49.5%, down
from 71.5% for the same period last year. This decrease was caused by an
increase in average total deposits of $1,770,000 or 21.3% while average total
loans decreased $6,281,000 or 11.2%. Management continues to seek growth and
acquisition of quality credits.
Net liquid assets, which consists primarily of cash, due from banks,
interest-bearing deposits with other financial institutions, investment
securities and federal funds sold totaled $59,686,000 on September 30, 1998.
This amount represented 56.75% of total deposits in comparison to the
liquidity ratio of 39.9% as of September 30, 1997. This increase is
primarily a result of a decline in loan growth and an increase in deposits.
It is management's belief that the current liquidity level is appropriate
given current economic conditions and is sufficient to meet current needs.
13
<PAGE>
The Company is not aware of any current recommendations by the regulatory
authorities, which, if they were implemented, would have a material effect on
the Company.
The following table sets forth book value of investments by category and the
percent of total investments at the dates specified.
INVESTMENT COMPARATIVE
($000.00 Omitted)
<TABLE>
<CAPTION>
9-30-98 % 12-31-97 % 9-30-97 %
<S> <C> <C> <C> <C> <C> <C>
Fed funds sold $26,740 49% $12,910 42% $6,340 26%
Interest bearing
deposits 13,946 26% 5,644 18% 6,339 26%
Securities 13,499 25% 12,497 40% 12,045 48%
</TABLE>
Interest bearing deposits are comprised of Time Certificates of Deposit with
other banks and savings and loan institutions with no more than $100,000 in any
institution.
Securities on September 30, 1998 were comprised of $2,499,000 in U. S. Gov't
notes and $11,000,000 in U.S. Gov't agencies.
CHANGES IN FINANCIAL POSITION
As of September 30, 1998, total deposits increased $14,741,000 from December 31,
1997 while at the same time total loans outstanding decreased $6,722,000. Total
deposits as of September 30, 1998 were $105,173,000, an increase of 21.1% from
$86,757,000 as of September 30, 1997. Total loans as of September 30, 1998 were
$54,111,000, a decrease of 13.78% from $62,758,000 as of September 30, 1997.
The following table sets forth the amount of deposits by each category and the
percent of total deposits at the dates specified.
DEPOSIT COMPARATIVE
($000.00 Omitted)
<TABLE>
<CAPTION>
9-30-98 % 12-31-97 % 9-30-97 %
<S> <C> <C> <C> <C> <C> <C>
Demand $36,466 35% $31,062 34% $28,365 33%
Savings 2,986 3% 2,265 3% 2,894 3%
Interest bearing 33,991 32% 33,013 36% 33,685 39%
Trans. Deposits
Other time 31,730 30% 24,092 27% 21,813 25%
</TABLE>
14
<PAGE>
The following table sets forth the amount of loans outstanding by each
category and the percent of total loans outstanding at the dates specified.
LOAN COMPARATIVE
($000.00 Omitted)
<TABLE>
<CAPTION>
9-30-98 % 12-31-97 % 9-30-97 %
<S> <C> <C> <C> <C> <C> <C>
Commercial $40,767 74% $44,044 71% $43,521 69%
Real estate-const 4,429 8% 7,471 12% 10,017 16%
Real estate-other 5,512 10% 4,850 8% 3,540 6%
Installment/other 4,721 8% 5,706 9% 5,680 9%
</TABLE>
NON-PERFORMING ASSETS
The following table provides information with respect to the subsidiary
Bank's past due loans and components for non-performing assets at the dates
indicated.
NON-PERFORMING ASSETS
($000.00 Omitted)
<TABLE>
<CAPTION>
9-30-98 12-31-97 9-30-97
<S> <C> <C> <C>
Loans 90 days or more past
due & still accruing $ 0 $ 408 $ 404
Non-accrual loans 406 176 157
Other real estate owned 1,359 1,222 1,222
------ ------ ------
Total non-performing assets $1,765 $1,806 $1,783
------ ------ ------
------ ------ ------
Non-performing assets to
period end loans plus
other real estate owned 3.11% 2.85% 2.84%
Allowance to non-performing
loans 325% 212% 213%
Allowance to non-performing
assets 75% 68% 67%
</TABLE>
The subsidiary Bank's policy is to recognize interest income on an accrual
basis unless the full collectibility of principal and interest is uncertain.
Loans that are
15
<PAGE>
delinquent 90 days as to principal or interest are placed on a non-accrual
basis, unless they are well secured and in the process of collection, and any
interest earned but uncollected is reversed from income. Collectibility is
determined by considering the borrower's financial condition, cash flow,
quality of management, the existence of collateral or guarantees and the
state of the local economy.
Other real estate owned ("OREO")is comprised of properties acquired through
foreclosure. These properties are carried at the lower of the recorded loan
balance or their estimated fair market value based on appraisal. When the
loan balance plus accrued interest exceeds the fair value of the property,
the difference is charged to the allowance for loan losses at the time of
acquisition. Subsequent declines in value from the recorded amount, if any,
and gains or losses upon disposition are included in noninterest expense.
Operating expenses related to other real estate owned are charged to
non-interest expense in the period incurred.
The decrease in non-performing assets from September 30, 1997 to September
30, 1998 is due primarily to a decrease in loans 90 days past due and
non-accrual loans of $324,000 and an increase of $137,000 in OREO. Of the
$406,000 total loans 90 days or more past due and still accruing in 1998,
$54,000 is guaranteed by Small Business Administration.
The total OREO amount, $1,359,000, is related to three properties. One of the
properties is vacant land in the Oakland Hills, the second property is two
continguous parcels in the Danville/Diablo Mountain area of Alameda County.
The third property is located on flame drive in Pacheco and consists of three
lots. The parcel in Danville was sold after the end of the quarter for a
modest profit, reducing the OREO balance to $212,000. The Bank is actively
marketing the other two parcels.
16
<PAGE>
CAPITAL POSITION
As of September 30, 1998, Shareholders' Equity was $13,868,000. This
represents an increase of $1,147,000 or 9.0% over the same period last year.
Since the inception of the repurchase program in 1989, the Company has
authorized the repurchase of $2,500,000 of its stock. As of September 30,
1998, the Company has repurchased a total of 158,872 shares of the Company
stock constituting 29.5% of the Company's original stock prior to the
repurchase program, at a total cost of $2,313,438, or an average price per
share of $14.56. The Company plans to continue its repurchase program as an
additional avenue for liquidity for its shareholders. The program has not
affected the Company's liquidity or capital position or its ability to
operate as the Company's capital growth has exceeded its asset growth. In
addition, the Company's subsidiary Bank remains more than well-capitalized
under current regulations.
The following table shows the risk-based capital and leverage ratios as well
as the minimum regulatory requirements for the same as of September 30, 1998:
<TABLE>
<CAPTION>
Minimum
Capital Ratio Regulatory Requirement
<S> <C> <C>
Tier 1 Capital 18.22% 4.00%
Total Capital 20.48% 8.00%
Leverage Ratio 11.85% 3.00%
</TABLE>
The Company is not aware of any current recommendations by the regulatory
authorities which if they were implemented would have a material effect on
the Company.
17
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Total interest income including loan fees increased from $6,105,000 for the
first nine months of 1997 to $6,415,000 for the same period in 1998. Although
loan income decreased, the increase in deposits caused an increase in
investment income. Loan fees showed a decrease of $104,051 compared to the
same period last year reflective of the decrease in loan growth. The yield
on loans and fees decreased 71 basis points over the same period last year.
The increase in interest income from investments was due to an increase in
volume as the yield decreased 10 basis points compared to the same period in
1997. Average total investments was $12,822,000 higher than the same period
last year due to deposit growth.
Interest expense increased from $1,413,000 at the end of the first nine
months of 1997 to $1,623,000 in 1998. This increase was due to an increase
in average interest-bearing deposit accounts of $8,105,000 during the first
nine months of 1998 versus the same period last year. The average cost of
funds for the period ending September 30, 1998 was 18 basis points more than
the same period last year. As a result of these factors, net interest margin
for the first nine months of 1998 was 6.52% compared to 7.31% for the same
period last year.
For the third quarter, total interest income including loan fees increased
from $2,134,000 in 1997 to $2,223,000 for the same period in 1998. This
increase is due to an increase in securities income. Average loan volume for
the third quarter of 1998 showed a decrease of $6,281,000 from the same
period last year. Yield on loans for the third quarter of 1998 was 11.47%
compared to 11.96% for the same period last year. For the third quarter of
1998, total interest income on investments increased $311,000. This increase
was attributable to an average investment volume increase of $25,232,000 and
an interest yield decrease from 5.78% in the third quarter of 1997 to 5.46%
for the same period in 1998.
18
<PAGE>
For the third quarter of 1998, interest expense increased $115,000 compared
to the same period in 1997. Average outstanding interest bearing deposits
increased from $58,131,000 in the third quarter of 1997 to $69,424,000 in the
third quarter of 1998. Average cost of funds for the same period was 3.73% in
1998 compared to 3.37% in 1997. As a result of these factors, net interest
income for the third quarter of 1998 increased $39,000, or 2.47%, compared to
the same period in 1997.
OTHER OPERATING INCOME
Service charges on deposit accounts as of the end of the first nine months of
1998 increased to $349,000 versus $328,000 for the same period in 1997. The
increase was due to increased fees collected in service charges related to
the collection of NSF fees on commercial accounts.
Service charges on deposit accounts for the third quarter of 1998 increased
$1,100 compared to the same period last year due to increased collection of
fees associated with the collection of NSF fees on commercial accounts. Other
customer fees and charges decreased $4,500 for the present quarter associated
with increased fees from merchant activities.
LOAN LOSS PROVISION
The allowance for loan losses is maintained at a level that management of the
Company considers to be adequate for losses that can be reasonably
anticipated. The allowance is increased by charges to operating expenses and
reduced by net-charge-offs. The level of the allowance for loan losses is
based on management's evaluation of potential losses in the loan portfolio,
as well as prevailing and anticipated economic conditions.
19
<PAGE>
Management employs a systematic methodology on a monthly basis to determine
the adequacy of the allowance for current and future loan losses. Each loan
is graded at the time of extension or renewal by the credit administrator.
Gradings are assigned a risk factor which is calculated to assess the
adequacy of the allowance for loan losses. Further, management considers
other factors such as overall portfolio quality, trends in the level of
delinquent and classified loans, specific problem loans, and current and
anticipated economic conditions.
The following table summarizes the activity in the Bank's allowance for
credit losses for the nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------
(000.00 Omitted)
9-30-98 9-30-97
<S> <C> <C>
Balance, beginning of the period $1,238 $1,070
Provision for loan losses 100 165
Recoveries 31 2
Loans charged-off (51) (43)
------ ------
Balance, end of the period $1,318 $1,194
</TABLE>
The balance in the allowance for loan losses at September 30, 1998 was 2.38%
of total loans compared to 1.90% of total loans at September 30, 1997.
OTHER OPERATING EXPENSES
Total other operating expenses increased $50,000 as of the end of the first
nine months of 1998 compared to the same period last year. This increase was
primarily due to an increase in salaries and employee expense. The Bank's
commitment to grow increased the number of employees from 39 to 46 primarily
in the sales area. The increase was also attributed to increase in regular
raises in pay, increased cost of benefits and bonuses related to sales.
For the third quarter of 1998, operating expenses increased $35,000 compared
to the same period last year for the same reasons mentioned above.
20
<PAGE>
PROVISION FOR INCOME TAXES
The Company's provision for income taxes as of the end of the first nine
months of 1998 increased from $900,000 in 1997 to $948,000. This increase is
attributable to increased income from regular business operations. For the
same period in 1998 the Company's total effective tax rate was 41.9% compared
to 41.8% in 1997.
For the third quarter of 1998, the provision for income taxes decreased
$6,000 compared to the third quarter of 1997. The effective tax rate for this
period was 42.3% versus 42.9% for the same period last year.
NET INCOME
Net income for the first nine months of 1998 increased to $1,316,000 from
$1,234,000 for the same period in 1997, or an increase of 6.6%. Third quarter
net income increased $6,000 or 1.47% over the same period last year.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In regard to the year 2000 issue, the Company has conducted a review of its
computer systems to identify the systems that could be affected and has
developed an implementation plan to resolve the issue. The year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time sensitive software may recognize a date using "00" as the year 1900
rather than 2000. This could result in a major system failure or
miscalculations including but not limited to, a temporary inability to
process transactions, send statements, or engage in similar day to day
business activities. The Extent of the potential impact of the Year 2000
Problem is not yet known and if not timely corrected, it could affect the
global economy.
Management has assessed the extent of vulnerability of the Bank's computer
systems to the problem, and expects its year 2000 date conversion project to
be completed on a timely basis.
To date, the Company has completed approximately 50 percent of the testing
deemed to be required on the Bank's computer systems. Included in this
process, was an upgrade to the Banker II system that performs the Bank's core
processing. This upgrade has been installed and tested by several other banks
that use the Banker II systems with no apparent problems.
21
<PAGE>
During the execution of this project, the Company will incur internal staff
costs as well as other expenses related to enhancements necessary to prepare
the systems for the year 2000.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose a
significant operational problem for the Company. However, because most
computer systems are, by their very nature, interdependent, it is possible
that no-compliant third party computers could impact the Company's computer
systems. Therefore, the Company has taken steps to communicate with the
third parties, such as wire transfer systems, telephone systems, electric
companies and other companies with which it deals to coordinate Year 2000
compliance but could be adversely affected if it or the unrelated third
parties are unsuccessful. The Company is also assessing the impact, if any,
the Year 2000 may have on its large loan (credit risk) and deposit customers.
The expense of the year 2000 project as well as the related potential effect
on the Company's earning is not expected to have a material effect on its
financial position or results of operations. As of September 30, 1998, the
costs related to the Year 2000 project are approximately $60,000.
Contingency Plans
Management, in conjunction with its Year 2000 and Disaster Recovery program,
is in the process of modifying its disaster recovery plans to include the
response to a Year 2000 problem in a most likely worst case scenario.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No material developments from that which was
reported in the Form 10-K dated March 31, 1998 for
the year ended December 31, 1997.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT BANCSHARES, INC.
REGISTRANT
DATE: BY:
------------------- ----------------------------
SHIRLEY W. NELSON
CHAIRMAN AND CEO
(PRINCIPAL EXECUTIVE OFFICER)
DATE: BY:
------------------- ----------------------------
KIKUO NAKAHARA
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
The remainder of this page is intentionally left blank
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,500,807
<INT-BEARING-DEPOSITS> 13,499,259
<FED-FUNDS-SOLD> 26,740,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 13,499,259
<INVESTMENTS-MARKET> 0
<LOANS> 54,110,592
<ALLOWANCE> 1,318,201
<TOTAL-ASSETS> 120,400,465
<DEPOSITS> 105,173,299
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,358,855
<LONG-TERM> 0
0
0
<COMMON> 3,721,630
<OTHER-SE> 10,146,681
<TOTAL-LIABILITIES-AND-EQUITY> 120,400,465
<INTEREST-LOAN> 4,637,926
<INTEREST-INVEST> 1,777,387
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,415,313
<INTEREST-DEPOSIT> 1,622,908
<INTEREST-EXPENSE> 1,622,908
<INTEREST-INCOME-NET> 4,792,405
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,828,054
<INCOME-PRETAX> 2,264,204
<INCOME-PRE-EXTRAORDINARY> 2,264,204
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,316,048
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 2.80
<YIELD-ACTUAL> 0
<LOANS-NON> 406
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,238,000
<CHARGE-OFFS> 51,000
<RECOVERIES> 31,000
<ALLOWANCE-CLOSE> 1,318,000
<ALLOWANCE-DOMESTIC> 1,318,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
