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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 FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1997 0-11108
SUMMIT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2767067
(State of Incorporation) (I.R.S. Employer Identification No.)
2969 BROADWAY, OAKLAND, CALIFORNIA 94611
(Address of principal executive offices and zip code)
(510) 839-8800
(Registrant's area code and telephone number)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, No Par Value
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 registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 day period.
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 the 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 /
State the aggregate market value of the common stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average of bid and asked
prices of such stock, as of a specified date within 60 days prior to the date
of filing:
$15,835,662.00 (1)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
437,455 shares no par common stock
issued as of February 27, 1998
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Documents Incorporated By Reference
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1
For purposes of this calculation only, shares are deemed to have market
value of $54.00, the average of bid and asked prices on February 27, 1998,
and each of the executive officers, directors and persons holding 5% or more
of the outstanding common stock is deemed to be an affiliate.
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Portions of Registrant's Annual Report to Shareholders
for the Fiscal Year Ended December 31, 1997
are Incorporated by Reference into
Part II of This Form 10-K Report
Portions of Registrant's Proxy Notice and Statement
of Annual Meeting of Shareholders to be Held on
April 22, 1998 are Incorporated by
Reference into Part III, Items 10, 11,
12, and 13 of this Form 10-K Report
PART I
The matters addressed in this Report on Form 10K, with the exception of
the historical information presented, may incorporate certain forward-looking
statements involving risks and uncertainties, including the risks discussed
under the heading "Certain Factors That May Affect Future Results" and
elsewhere in this Report.
ITEM 1. BUSINESS
Summit Bancshares, Inc. (the "Company") is a one-bank holding company
registered under the Bank Holding Company Act of 1956, as amended. It was
incorporated under the laws of the State of California on July 22, 1981. Its
principal office is located at 2969 Broadway, Oakland, California 94611, and
its telephone number is (510) 839-8800.
On March 1, 1985, the Bank opened a banking facility at 112 La Casa Via,
Walnut Creek, California 94596, which moved into new quarters located at 1700
N. Main, Walnut Creek, California 94598 in September, 1990. The telephone
number is (510) 935-9220. In addition, a full service branch began operation
in December, 1985, in the Watergate III Tower at 2000 Powell Street,
Emeryville, California 94608. The telephone number is (510) 428-1868. Also,
on January 28, 1998, the Bank opened a new full service branch at 5820
Stoneridge Mall Road, Suite 100, Pleasanton, California 94588.
Summit Bancshares, Inc. owns all of the capital stock of Summit Bank (the
"Bank"), its subsidiary bank, and its activities during 1997 were limited to
acting as the Bank's holding company.
The Bank has conducted the business of a commercial bank since July 1,
1982. The Bank provides commercial credit and other banking services to small
and mid-sized businesses and professionals, including professional firms of
physicians, attorneys, accountants, retailers and service firms, wholesalers
and distributors. Because of the concentration of medical facilities and
related organizations, the growth of real estate opportunities and
commercial/industrial businesses in the Bank's service area, the Bank
primarily focuses its marketing efforts on health service businesses, real
estate construction and commercial industrial loans; however, the Bank also
offers a broad
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spectrum of financial services to the business community at large. The Bank
offers various checking and savings accounts for both personal and business
purposes, time certificates of deposit, cashier's checks, money orders,
travelers checks, safe deposit boxes, installment collection services, night
depository, depository pickup and courier services, telephone transfers,
collection services for notes, Individual Retirement and Business Planning
(formerly Keogh) Accounts. The Bank has not requested and does not have
regulatory approval to offer trust services, although it may provide such
services in the future. The Bank assists customers requiring services not
offered by the Bank in obtaining such services from its correspondent banks
and other financial services firms. Although the Bank does not actively
solicit consumer business from the general public, it does offer banking
services and facilities compatible with the need of its consumer customers.
The banking offices in Walnut Creek and Pleasanton offer virtually the
same services listed above with the exception of safe deposit boxes. The
Emeryville Office offers all the same services as the Oakland Office.
On March 30, 1989, the State Banking Department approved the Bank's
application to establish a new subsidiary, Summit Equities, Inc, whose
purpose is to engage in real property investment activities as authorized by
Section 751.3 of the California Financial Code. On November 13, 1992 the FDIC
imposed regulations limiting real estate investment to those authorized by
national banks, thus no real estate transactions are allowed to be transacted
under this subsisdiary. The corporation is exploring other avenues or types
of approved investment activities. As of this date, the subsidiary has not
conducted any business.
SERVICE AREA
The primary geographic market served by the Bank is consider to be
Alameda County in its entirety and Contra Costa County except several cities
and sparsely populated areas in the northern and easternmost sections. Pinole
is partly excluded. Hercules, Rodeo, Crockett and Port Costa are excluded.
West Pittsburg and cities east of it are excluded. The sparseley populated
areas east of Mt. Diablo are excluded. These areas include a substantial
number of commercial businesses, a large health services complex and
substantial residential population. In Alameda County, the health services
complex includes three major hospitals, approximately 432 physicians and a
wide variety of health related and other professionals, and small and
medium-sized businesses. Contra Costa County includes three major hospitals,
approximately 410 physicians some of which are also affiliated with the
hospitals in Alameda County, and other professionals and small and
medium-sized businesses.
The Walnut Creek office is about 16 miles northeast of the head office in
Oakland and located in the central business district in Walnut Creek. The
site is approximately 1 mile west of John Muir Hospital, which is a 343-bed
hospital employing approximately 1200 people and accommodates a large staff
of approximately 290 visiting physicians. The surrounding service area
includes 4 convalescent hospitals, an acute psychiatric care facility, and
the 204-bed Kaiser Foundation Hospital, which employs over 1000 people in
downtown Walnut Creek and is staffed by approximately 89 physicians.
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The Emeryville office is a further extension of the Bank's plan to expand
into areas which will further utilize specialized services directed at
medium-sized businesses and professionals. Located west of Interstate 880 at
2000 Powell Street, it is servicing a commercial sector and an up-scale
employee population.
The Pleasanton office is about 30 miles southeast of the head office in
Oakland and located in the adjacent to the central shopping mall in the city
of Pleasanton. It is approximately one mile from the Hacienda Industrial
Park, the primary center for commercial and industrila growth in the area. It
is also one block from a major medical office complex.
The Bank also obtains business clients from the varioius areas within the
city of Oakland, adjacent to the John Muir and Kaiser areas of Walnut Creek,
in and in the industrial and commercial areas of Emeryville and Pleasanton.
The Bank's customers are primarily business and professional persons working
in the vicinity of each branch, officers and employees of businesses and
professional firms serviced by the Bank, and residents of areas close to the
Bank.
COMPETITION
The banking business in the Oakland/East Bay metropolitan area is very
competitive with respect to both loans and deposits, and is dominated by
relatively few major banks which have offices operating throughout
California. Among the advantages such banks have are their ability to finance
wide-ranging advertising campaigns, to offer certain services (for example,
trust services) which are not offered directly by the Bank, and to have
substantially higher legal lending limits due to their greater
capitalization. There are eleven other independent banks in Oakland, Walnut
Creek, Pleasanton, and none in Emeryville.
In competing for deposits, the Bank is subject to certain limitations not
applicable to non-bank financial institution competitors. Over the past
years, legislative changes have enabled the Bank to compete more effectively
for deposits with savings and loan institutions but still remains at a
competitive disadvantage when competing with money market funds.
To compete with major financial institutions and other independent banks
in its primary service areas, the Bank relies upon the experience of its
executive officers in serving business clients, its specialized services,
local promotional activity, personal contacts by its officers, directors, and
employees of the Company. For customers whose loan demands exceed the Bank's
legal lending limit, the Bank arranges for such loans on a participation
basis with correspondent banks as well as other independent banks.
REGULATION AND SUPERVISION
THE COMPANY. The Company is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is
registered as such with the Federal Reserve Board (FRB). A bank holding
company is required to file with the FRB annual
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reports and other information regarding its business operations and those of
its subsidiaries. It is also subject to examination by the FRB and is
required to obtain FRB approval before acquiring, directly or indirectly,
ownership or control of any voting shares of any bank, if after such
acquisition, it would directly or indirectly own or control more than 5% of
the voting stock of that bank. The BHC Act further provides that the FRB
shall not approve any such acquisition that would result in or further the
creation of a monopoly, or the effect of which may be to substantially lessen
competition, unless the anticompetitive effects of the proposed transaction
are clearly outweighed by the probable effect in meeting the convenience and
needs of the community to be served.
Furthermore, under the BHC Act, a bank holding company is, with limited
exceptions, prohibited from (i) acquiring direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a
bank, or (ii) engaging in any activity other than managing or controlling
banks. With the prior approval of the FRB, however, a bank holding company
may own shares of a company engaged in activities which the FRB has
determined to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
The FRB has by regulation determined that certain activities are so
closely related to banking as to be a proper incident thereto within the
meaning of the BHC Act. These activities include, but are not limited to:
operating an industrial loan company, industrial bank, Morris Plan Bank,
savings association, mortgage company, finance company, credit card company
or factoring company; performing certain data processing operations;
providing investment and financial advice; operating as a trust company in
certain instances, selling traveler's checks, United States savings bonds and
certain money orders; providing certain courier services; providing
management consulting advice to nonaffiliated depository institutions in some
instances; acting as insurance agent for certain types of credit-related
insurance; leasing property or acting as agent, broker or advisor for leasing
property on a "full pay-out basis"; acting as a consumer financial counselor,
including tax planning and return preparation; performing futures and options
advisory services, check guarantee services and discount brokerage
activities; operating a collection or credit bureau; or performing personal
property appraisals. The Company has no present intention to engage in any of
such permitted activities at this time.
The FRB also has determined that certain activities are not so closely
related to banking to be a proper incident thereto within the meaning of the BHC
Act. Such activities include: real estate brokerage and syndication; land
development; property management; underwriting of life insurance not related to
credit transactions; and with certain exceptions, securities underwriting and
equity funding. In the future, the FRB may add or delete from the list of
activities permissible for bank holding companies. Under the BHC Act, a bank
holding company and its subsidiaries are prohibited from acquiring any voting
shares of or interest in all or substantially all of the assets of any bank
located outside the state in which the operations of the bank holding company's
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banking subsidiaries are principally conducted, unless the acquisition is
specifically authorized by the law of the state in which the bank to be
acquired is located or unless the transaction qualifies under federal law as
an "emergency interstate acquisition" of a closed or failing bank. The
California interstate banking bill is described under "Interstate Banking"
(below).
A bank holding company and its subsidiaries are prohibited from certain
tie-in arrangements in connection with any extension of credit, sale or lease
of a property or furnishing of services. For example, with certain
exceptions, a bank may not condition an extension of credit on a promise by
its customer to obtain other services provided by it, its holding company or
other subsidiaries, or on a promise by its customer not to obtain other
services from a competitor. In addition, federal law imposes certain
restrictions on transactions between the Company and its subsidiaries,
including the Bank. As an affiliate of the Bank, the Company is subject, with
certain exceptions, to provisions of federal law imposing limitations on, and
requiring collateral for, extensions of credit by the Bank to its affiliates.
Directors of the Company, and the companies with which they are
associated, have had and will continue to have banking transactions with the
Bank in the ordinary course of the Bank's business. It is the firm intention
of the Company that any loans and commitments to loan included in such
transactions be made in accordance with applicable law, on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons of similar
creditworthiness, and on terms not involving more than the normal risk of
collectability or presenting other unfavorable features. At December 31,
1997, loans to directors totalled $.1 million or 1.3% of the Company's
shareholders' equity.
THE BANK. The Bank is a member of the FDIC which currently insures the
deposits of each member bank to a maximum of $100,000 per depositor. For this
protection, the Bank pays a semi-annual assessment and is subject to the
rules and regulations of the FDIC pertaining to deposit insurance and other
matters.
The Bank is subject to regulation, supervision and regular examination by
the California State Banking Department (the "Department"). Although the Bank
is a non-member of the Federal Reserve System, it is subject to regulation,
supervision, but not examination by the FRB. The regulations of these
agencies govern most aspects of the Bank's business, including the making of
periodic reports by the Bank and the Bank's activities, branching, mergers
and acquisitions, reserves against deposits and numerous other areas.
Subject to the regulations of the California Superintendent of Banks (the
"Superintendent"), the Bank may invest in capital stock, obligations or other
securities of other corporations, provided such corporations are not insurance
companies, agents or brokers. In addition, the Bank may acquire any or all of
the securities of a
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company that engages in activities that the Bank may engage in directly under
California law without the prior approval of the FRB. California
state-chartered banks are also specifically authorized to provide real estate
appraisal services, management consulting and advisory services and
electronic data processing services.
The Company's primary source of income (other than interest earned on
Company capital) is the receipt of dividends and management fees from the
Bank. The ability of the Bank to pay management fees and dividends to the
Company and its affiliates is subject to restrictions set forth in the
California Financial Code and, under certain circumstances, is subject to
approval of the Department. The board of directors of a state-chartered bank
may declare a dividend out of so much of net profits as such board deems
appropriate, subject to California law which restricts the amount available
for cash dividends to the lesser of retained earnings or the bank's net
income less cash dividends paid for its last three fiscal years.
In the event that a bank has no retained earnings or net income for the
prior three fiscal years, cash dividends may be paid out of net income for
such bank's last preceding fiscal year or current fiscal year upon the prior
approval of the Department. Although there are not specific regulations
restricting dividend payments by bank holding companies other than state
corporation law, supervisory concern focuses on the holding company's capital
position, its ability to meet its financial obligations as they come due and
the capacity to act as a source of financial strength to its subsidiary banks.
The FRB and the Superintendent have authority to prohibit a bank from
engaging in business practices which are considered to be unsafe or unsound.
Depending upon the financial condition of the Bank and upon other factors,
the FRB or Superintendent could assert that the payments of dividends or
other payments by the Bank to the Company might be such an unsafe or unsound
practice. Also, if the Bank were to experience either significant loan losses
or rapid growth in loans or deposits, or some other event resulting in a
depletion or deterioration of the Bank's capital account were to occur, the
Company might be compelled by federal banking authorities to invest
additional capital in the Bank necessary to return the capital account to a
satisfactory level.
IMPACT OF ECONOMIC CONDITIONS AND MONETARY POLICIES. The earnings and
growth of the Company are and will be affected by general economic
conditions, both domestic and international, and by the monetary and fiscal
policies of the United States Government and its agencies, particularly the
FRB. One function of the FRB is to regulate the national supply of bank
credit in order to mitigate recessionary and inflationary pressures. Among
the instruments of monetary policy used to implement those objectives are
open market transactions in United States Government securities and changes
in the discount rate on member bank borrowings. The monetary policies of the
FRB have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.
However, the effect, if any, of such policies on the future business and
earnings of the Company cannot be accurately predicted.
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ACCOUNTING CHANGES. Statement of Financial Accounting Standards No. 123
(SFAS No. 123) "Accounting for Stock Based Compensation," is effective for
transactions entered into for fiscal years beginning after December 15, 1995
and applies to awards made in fiscal years beginning after December 15, 1994.
This statement defines a fair-value method of accounting for stock-based
compensation. As permitted by SFAS No. 123, the Company accounts for stock
options under APB Opinion No. 25, under which no compensation cost has been
recognized. The company has made no awards under its stock option plans
subsequent to January 1, 1995. As such, pro forma net income and earnings per
share data as if compensation cost for these plans had been determined
consistent with SFAS No. 123 would not differ from the reported amounts in
the Company's income statement.
Statement of Financial Accounting Standards No. 128 "Accounting for Earnings
Per Share" is effective for fiscal years ended after December 15, 1997 and
requires restatement of prior periods earnings per share. Basic earnings per
share is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing diluted income available
to shareholders by the weighted average number of common shares and common
equivalent shares outstanding which include dilutive stock options. The
computation of common stock equivalent shares is based on the weighted
average market price of the Company's common stock throughout the period.
In June 1997, the Financial Accounting Standards Board (FASB) issued ("SFAS")
No. 130, "Reporting Comprehensive Income." This statement established
requirements for disclosure of comprehensive income and will become effective
for the Company's 1998 fiscal year, with reclassification of earlier
financial statements for comparative purposes. Comprehensive income generally
represents contributions by shareholders. The Company is evaluating
alternative formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's current reporting and
disclosures.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for disclosures abut
operating segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise. SFAS 131 will become effective for the
Company's 1998 fiscal year and requires that comparative information from
earlier years to be restated to conform to the requirements of this standard.
The Company is evaluating the requirements of SFAS 131 and the effects, if
any, on the Company's current reporting and disclosures.
LEGISLATION AND PROPOSED CHANGES. From time to time, legislation is enacted
which has the effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws and
regulations governing the operations and taxation of
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banks, bank holding companies and other financial institutions are frequently
made in Congress, in the California legislature and before various bank
regulatory agencies. No prediction can be made as to the likelihood of any
major changes or the impact such changes might have on the Company. Certain
changes of potential significance to the Company which have been enacted
recently or others which are currently under consideration by Congress or
various regulatory or professional agencies are discussed below.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT OF 1989. On
August 9, 1989, President Bush signed into law the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). FIRREA contains
provisions, which among other things: (1) establish two separate financial
industry insurance funds, both administered by the FDIC - the Bank Insurance
Fund and the Savings Association Fund; (2) abolish the Federal Home Loan Bank
Board and establish the Office of Thrift Supervision as an office of the
Treasury Department, with responsibility for examination and supervision of
all savings and loan associations; (3) increase the insurance premiums paid
by FDIC-insured institutions; (4) permit bank holding companies to acquire
healthy savings and loan associations; (5) enhance federal banking agencies'
enforcement authority over the operations of all insured depository
institutions and increase the civil and criminal penalties that may be
imposed in connection with violations of laws and regulations; (6) curtail
investments and certain activities of state-chartered savings and loan
associations; and (7) increase the capital requirements of savings and loan
associations. Management of the Company does not believe that the provisions
of FIRREA have had or will have a material adverse impact on the Company's
consolidated financial position or results of operations.
COMPETITIVE EQUALITY BANKING ACT. The Competitive Equality Banking Act of
1987 contained provisions which, among other things: (1) permanently closed
the loophole which formerly allowed for the creation of "non-bank banks"; (2)
limited the restrictions imposed on banks on the availability of funds
deposited by check; and (3) provided explicit leasing authority for national
banks. The enactment of this legislation has not had a material adverse
effect on the Company's consolidated financial condition or results of
operations.
INTERSTATE BANKING. In September, 1986, California adopted an interstate
banking law. The law allows California banks and bank holding companies to be
acquired by banking organizations in other states on a reciprocal basis
(i.e., provided the other state's laws permit California banking
organizations to acquire banking organizations in that state on substantially
the same terms and conditions applicable to banking organizations solely
within that state). The law took effect in two stages. The first stage, which
became effective July 1, 1987, allowed acquisitions on a reciprocal basis
within a region consisting of all 11 states (Alaska, Arizona, Colorado,
Hawaii, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington) which
currently permit acquisitions by California banking organizations of banks
and bank holding companies in such states. The second stage, which became
effective January 1, 1991, allows interstate acquisitions on a national
reciprocal basis. The Company believes that this legislation will further
increase competition
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as out-of-state financial institutions enter the California market. Most
recently U.S. Bancorp purchased California Bancshares, Inc., a community-
based holding company with approximately 21 independent banks in the
surrounding area in which the Bank operates. U. S. Bancorp was subsequently
purchased by First Bank headquartered in Minneapolis. It is anticipated that
such a purchase may in fact be beneficial to the Bank as it may open
opportunities to prospects that enjoy dealing with a community bank. If there
is a negative effect on the Bank it might be that this merger may increase
the resources available to the 21 independent banks being purchased.
CAPITAL ADEQUACY GUIDELINES. The FRB has issued capital adequacy
guidelines establishing a risk-based capital framework consisting of a
definition of capital comprised of a core component (essentially
shareholders' equity less goodwill) ("Tier 1 capital"), a supplementary
component ("Tier 2 capital"), a system for assigning assets & off-balance
sheet items to four weighted risk categories (with higher levels of capital
being required for the categories being perceived as representing greater
credit risk) and a schedule for achieving a minimum risk-based capital ratio
of 7.25% by the end of 1990 (which at least 3.625% should be in the form of
common shareholders' equity) and 8% by the end of 1992 (which at least 4%
should be in the form of common shareholders' equity). An institution's
risk-based capital would be determined by dividing its qualifying capital by
its risk-weighted assets.
The guidelines make regulatory capital requirements more sensitive to the
differences in risk profiles among banking institutions, take off-balance
sheet items into account when assessing capital adequacy and minimize
disincentives to holding liquid low-risk assets. In addition, the guidelines
may require some banking institutions to increase the level of their common
shareholders' equity. It is not anticipated that the guidelines will have a
material adverse effect on the Company's financial condition or results of
operations over the short term. At the end of 1997, the guidelines provided
for a minimum risk-based capital ratio of 8%, and this provision may limit
the Company's ability to increase its assets or require the Company to raise
additional equity to facilitate growth.
On August 2, 1990, the FRB adopted standards for compliance by banking
organizations with risk-based capital guidelines to include a minimum
leverage ratio of 3% of Tier 1 capital to total average assets (the "leverage
ratio") based upon the definition of Tier 1 capital for 1997. The FRB
emphasized that the leverage ratio constitutes a minimum requirement for
well-run banking organizations having diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and a favorable composite rating under the applicable regulatory
rating system. Banking organizations experiencing or anticipating significant
growth, as well as those organizations which do not exhibit the
characteristics of a strong well-run banking organization described above,
will be required to maintain minimum capital ranging from 100 to 200 basis
points in excess of the leverage ratio.
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The FRB leverage ratio establishes a new limit on the ability of banking
organizations to increase assets and liabilities without increasing capital
proportionately. In management's opinion, the leverage ratio will have no
material effect on its capital needs in the foreseeable future. The Bank's
leverage ratio at December 31, 1997 was 9.1% (See "Summit Bancshares, Inc.
1997 Annual Report - Footnote #8).
EMPLOYEES
On December 31, 1997 the Bank employed 38 full time employees and 3 part
time employees for a total equivalent of 40.4 full time employees. At the
present time there are no salaried employees of the Company.
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DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following table summarizes the distribution, by amount (in
thousands) and percentage of the daily average assets, liabilities, and
shareholders' equity of Summit Bancshares, Inc. (consolidated) for the year
ended December 31, 1997. Comparative figures for the years ended December 31,
1996 and 1995, are also provided:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
ASSETS AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ------ ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and Due
From Banks $ 6,858 7.20% $ 5,874 6.71% $ 5,494 6.88%
Time Deposits with Other
Financial Institutions 7,896 8.20 10,039 11.47 8,467 10.60
Investment
Securities:
Taxable 10,923 11.39 8,522 9.74 8,346 10.45
Non-taxable 0 0 0 0 836 1.05
Federal Funds
Sold 10,105 10.54 11,428 13.05 6,573 8.23
Loans, Net 56,746 59.17 47,253 53.99 45,818 57.38
Other Assets 3,360 3.50 4,417 5.04 4,320 5.41
------- ------ ------- ------ ------- ------
TOTAL ASSETS $95,888 100.00% $87,533 100.00% $79,854 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Demand $25,082 26.16% $22,037 25.18% $20,005 25.05%
Interest bearing
transaction accounts 32,914 34.33 29,751 33.99 28,714 35.96
Savings 2,345 2.44 2,287 2.61 2,701 3.38
Time 22,750 23.73 20,677 23.62 17,072 21.38
Other Liabilities 768 0.80 1,130 1.29 573 .72
Shareholders' Equity 12,029 12.54 11,651 13.31 10,789 13.51
------- ------ ------- ------ ------- ------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $95,888 100.00% $87,533 100.00% $79,854 100.00%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
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The following is an analysis of Net Interest Income for 1997.
Comparative figures for 1996 and 1995 are also presented on the following
pages. Non-accrual loans are included in the average balances. Balances are
expressed in thousands of dollars.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
------- ------- --------
<S> <C> <C> <C>
ASSETS
Time Deposits with Other
Financial Institutions $ 7,896 $ 450 5.70%
Investment Securities (footnote #1) 10,923 665 6.09
Federal Funds Sold 10,105 556 5.50
Loans (Interest and Fees) 56,746 6,726* 11.85
------- ------ -----
Total Earning Assets $85,670 $8,397 9.80%
------ -----
------ -----
Cash and Due from Banks 6,858
Premises and Equipment 826
Other Assets 2,534
-------
TOTAL ASSETS $95,888
-------
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $25,082 $ -- --%
Savings 2,345 45 1.92
Interest-bearing Transaction 32,914 637 1.93
Time 22,750 1,258 5.53
------- ------
Total Deposits $83,091 $1,940 2.33%
------ -----
------ -----
Other Liabilities 768
Shareholders' Equity 12,029
-------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $95,888
-------
-------
AS A PERCENTAGE OF AVERAGE
TOTAL EARNING ASSETS:
Interest and Fee Income $8,397
Interest Expense 1,940
------
NET INTEREST INCOME AND MARGIN $6,457 7.47%
------ -----
------ -----
</TABLE>
* Includes loan fees of $594,000
1.) Investment income rate is not calculated on a tax equivalent basis.
-14-
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
------- ------- --------
<S> <C> <C> <C>
ASSETS
Time Deposits with Other
Financial Institutions $10,039 $ 564 5.62%
Investment Securities (footnote #1) 8,522 511 6.00
Federal Funds Sold 11,428 602 5.27
Loans (Interest and Fees) 47,253 5,699* 12.07
------- ------
Total Earning Assets $77,242 $7,376 9.55%
------ -----
------ -----
Cash and Due from Banks 5,874
Premises and Equipment 872
Other Assets 3,545
-------
TOTAL ASSETS $87,533
-------
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $22,037 $ -- --%
Savings 2,287 43 1.88
Interest-bearing Transaction 29,751 628 2.11
Time 20,677 1,267 6.13
------- ------
Total Deposits $74,752 $1,938 2.59%
------ -----
------ -----
Other Liabilities 1,130
Shareholders' Equity 11,651
-------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $87,533
-------
-------
AS A PERCENTAGE OF AVERAGE
TOTAL EARNING ASSETS:
Interest and Fee Income $7,376
Interest Expense 1,938
------
NET INTEREST INCOME AND MARGIN $5,438 6.96%
------ -----
------ -----
</TABLE>
* Includes loan fees of $457,000
1.) Investment income rate is not calculated on a tax equivalent basis.
-15-
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
------- ------- --------
<S> <C> <C> <C>
ASSETS
Time Deposits with Other
Financial Institutions $ 8,467 $ 493 5.82%
Investment Securities (footnote #1) 9,182 559 6.09
Federal Funds Sold 6,573 374 5.69
Loans (Interest and Fees) 45,818 5,574* 12.07
------- ------
Total Earning Assets $70,040 $7,000 9.99%
------ -----
------ -----
Cash and Due from Banks 5,494
Premises and Equipment 827
Other Assets 3,493
-------
TOTAL ASSETS $79,854
-------
-------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $20,005 $ -- --%
Savings 2,701 53 1.96
Interest-bearing Transaction 28,714 620 2.16
Time 17,072 863 5.06
------- ------
Total Deposits $68,492 $1,536 2.24%
------ -----
------ -----
Other Liabilities 573
Shareholders' Equity 10,789
-------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $79,854
-------
-------
AS A PERCENTAGE OF AVERAGE
TOTAL EARNING ASSETS:
Interest and Fee Income $7,000
Interest Expense 1,536
------
NET INTEREST INCOME AND MARGIN $5,464 7.75%
------ -----
------ -----
</TABLE>
* Includes loan fees of $483,000
1.) Investment income rate is not calculated on a tax equivalent basis.
-16-
<PAGE>
Following is an analysis of changes in Interest Income and Expense (in
thousands of dollars) for 1997 over 1996. A similar comparison for 1996 over
1995 is on the following page. Changes not solely attributed to volume or
rates have been allocated proportionately to volume and rate components.
<TABLE>
<CAPTION>
1997 OVER 1996
---------------------------
VOLUME RATE TOTAL
------ ------ ------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
INTEREST AND FEE INCOME
Time Deposits with Other
Financial Institutions $(122) $ 8 $(114)
Investment Securities 144 10 154
Federal Funds Sold (72) 26 (46)
Loans, Net 1133 (106) 1027
------ ------ ------
Total Increase in
Interest and Fee Income 1083 (62) 1021
------ ------ ------
------ ------ ------
INCREASE IN
INTEREST EXPENSE
Savings Deposits 2 0 2
Interest-bearing Transaction 64 (55) 9
Time Deposits 126 (135) (9)
------ ------ ------
Total Increase in
Interest Expense 192 (190) 2
------ ------ ------
INCREASE IN
NET INTEREST INCOME $ 891 $ 128 $1019
------ ------ ------
------ ------ ------
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
1997 OVER 1996
---------------------------
VOLUME RATE TOTAL
------ ------ ------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
INTEREST AND FEE INCOME
Time Deposits with Other
Financial Institutions $ 88 ($17) $71
Investment Securities (40) (8) (48)
Federal Funds Sold 257 (29) 228
Loans, Net 172 (47) 125
------ ------ ------
Total Increase in
Interest and Fee Income 477 (101) 376
------ ------ ------
INCREASE IN
INTEREST EXPENSE
Savings Deposits (8) (2) (10)
Interest-bearing Transaction 22 (14) 8
Time Deposits 202 202 404
------ ------ ------
Total Increase in
Interest Expense 216 186 402
------ ------ ------
INCREASE IN
NET INTEREST INCOME $261 ($288) ($26)
------ ------ ------
------ ------ ------
</TABLE>
-18-
<PAGE>
INVESTMENT SECURITIES
The following table sets forth the book value as of December 31 for the
securities indicated:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
U. S. Treasury
Securities $ 5,496,831 $7,759,850 $6,018,457
U. S. Agencies 6,999,820 1,000,000 0
TOTAL $12,496,651 $8,759,850 $6,018,457
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The amortized cost and estimated fair values of investment in debt securities
for 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury
securities $ 5,496,831 $10,599 $ 0 $ 5,507,430
U.S. Agencies 6,999,820 8,406 0 7,008,226
TOTAL $12,496,651 $19,005 $ 0 $12,515,656
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 7,798,908 $ 7,817,913
Due after one year through
five years 4,697,743 4,697,743
----------- -----------
TOTAL $12,496,651 $12,515,656
----------- -----------
----------- -----------
</TABLE>
There were no sales of investments in debt securities during 1997.
-19-
<PAGE>
The following table is a summary of the relative maturities and yields
of Summit Bancshares, Inc. investment securities as of December 31, 1997 and
1996. Yields on securities have been computed by dividing interest income,
adjusted for amortization of premium and accretion of discount, by book
values of the related securities.
<TABLE>
<CAPTION>
MATURING MATURING AFTER ONE
WITHIN ONE YEAR THROUGH FIVE YEARS TOTAL
------------------ ------------------ -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ----- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
U. S. Treasury
Security $3,999,088 6.02% $1,497,743 6.38% $ 6,496,831 6.10%
U. S. Agencies 3,799,820 6.23 3,200,000 6.15 6,999,820 6.19
---------- ----- ---------- ----- ----------- -----
TOTAL $7,798,908 6.09% $4,697,743 6.22 $12,496,651 6.14%
---------- ----- ---------- ----- ----------- -----
---------- ----- ---------- ----- ----------- -----
DECEMBER 31, 1996
U. S. Treasury
Security $3,762,149 5.66% $3,997,701 6.01% $ 7,759,850 5.84%
U. S. Agencies 0 0 1,000,000 6.00 1,000,000 6.00
---------- ----- ---------- ----- ----------- -----
TOTAL 3,762,149 5.66% 4,997,701 6.01 $ 8,759,850 5.86%
---------- ----- ---------- ----- ----------- -----
---------- ----- ---------- ----- ----------- -----
</TABLE>
-20-
<PAGE>
LOAN PORTFOLIO
COMPOSITION OF LOANS
The following table shows the composition of loans (in thousands of
dollars) of Summit Bancshares, Inc. as of December 31 for each respective
year designated.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Commercial and
Financial $44,044 $35,789 $30,471
Real Estate, Including
Construction 12,321 10,571 14,625
Installment 5,706 6,119 5,524
Leases 0 0 51
------- ------- -------
62,071 52,478 50,671
Less Unearned Lease Income 0 0 (1)
Less Reserve for
Possible Loan Losses (1,238) (1,070) (1,025)
------- ------- -------
TOTAL $60,833 $51,408 $49,645
------- ------- -------
------- ------- -------
</TABLE>
MATURITY, DISTRIBUTION AND INTEREST RATE
SENSITIVITY OF LOANS
The following table shows the maturity distribution of loans (in
thousands of dollars) as of December 31, 1997.
<TABLE>
<CAPTION>
LOANS WITH A MATURITY OF
--------------------------------------------------
ONE YEAR ONE THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- ---------- --------- -------
<S> <C> <C> <C> <C>
Commercial and
Financial $21,757 $18,819 $3,468 $44,044
Real Estate
Construction 7,471 0 0 7,471
------- ------- ------ -------
TOTAL $29,228 $18,819 $3,468 $51,515
------- ------- ------ -------
------- ------- ------ -------
</TABLE>
All but six loans for $1,886,525 reported above which have maturities of
over one year are at floating interest rates.
-21-
<PAGE>
COMMITMENTS AND LINES OF CREDIT
The Company 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 commitments to extend credit,
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the statement
of financial position. The contract amount of those instruments reflects the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
notional amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. At December 31, 1997, financial instruments
whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
----------- ------
<S> <C> <C>
Financial instruments whose contract
amount represents credit risk:
Commitments to extend credit in the future $19,076,880
Standby letters of credit 1,067,554
</TABLE>
Commitments to extend credit 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. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable, inventory,
property, plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Most all
guarantees expire within a 1 year. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
A part of the subsidiary Bank's marketing strategy is to offer quality
financial services to the professional and small business communities. The
Company has been especially successful in targeting health care
professionals. This segment has traditionally provided high levels of
deposits and low loan losses. Approximately 11.8% of the Company's loans are
concentrated with health care professionals.
-22-
<PAGE>
NON-PERFORMING LOANS AND
SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands of dollars)
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Non-accrual loans $ 176 $ 0 $ 39
90 days past due but
still accruing 408 0 367
------ ------ ------
Total non-accrual
and 90 days past
due loans 584 0 406
Other real estate owned 1,222 1,291 1,303
------ ------ ------
Total Non-performing
assets $1,806 $1,291 $1,709
------ ------ ------
------ ------ ------
</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 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.
The total OREO amount, $1,222,000, is related to two 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 and is currently in escrow at a purchase price of $1,300,000 and is
scheduled to close by August, 1998. The remaining parcel is currently on the
market for sale.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. The reserve
is increased by provisions and reduced by net charge-offs. The Bank makes
credit reviews of the loan portfolio, considers current economic conditions,
loan loss experience, and other factors in determining the adequacy of the
reserve balance. The allowance for loan losses is based on estimates and
ultimate losses may vary from current estimates. As adjustments become
necessary, they are reported in earnings in the periods in which they become
known.
Any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been disclosed under Item III
of Industry Guide 3 do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact
future operating results, liquidity or capital resources, or (ii) represent
material credits about which management is aware of any information which
causes management to have serious doubts as to the ability of such borrowers
to comply with the loan repayment program.
-23-
<PAGE>
An analysis of activity in the allowance for loan losses for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Balance at beginning
of period $1,070,318 1,024,922 $931,878
---------- ---------- -----------
Provision for possible
loan losses 270,000 125,000 415,000
---------- ---------- -----------
Loan charged off
Commercial 96,934 16,952 302,640
Real Estate Construction 0 0 2,384
Installment 8,372 66,152 28,684
---------- ---------- -----------
Total chargeoffs 105,306 83,104 333,708
---------- ---------- -----------
Recoveries
Commercial 0 0 8,677
Real Estate Construction 0 0 0
Installment 3,000 3,500 3,075
---------- ---------- -----------
Total recoveries 3,000 3,500 11,752
---------- ---------- -----------
Net chargeoffs 102,306 79,604 321,956
---------- ---------- -----------
Balance at end of period
$1,238,012 $1,070,318 $1,024,922
---------- ---------- -----------
---------- ---------- -----------
Ratio of net charge-
offs to average
loans outstanding .18% .18% .70%
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
-24-
<PAGE>
TIME DEPOSITS IN THE AMOUNT OF $100,000 AND OVER
The following table sets forth by time remaining to maturity, Summit
Bank's issuance of time deposits in the amount of $100,000 or more (in
thousands of dollars) as of December 31 of the respective year designated:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
3 months or less $12,171 64.6% $10,621 69.5% $ 8,049 61.5%
Over 3 through
6 months 4,230 22.5 3,499 22.7 3,546 27.1
Over 6 through
12 months 2,227 11.8 1,205 7.8 1,403 10.7
Over 12 months 200 1.1 0 0 100 .7
------- ----- ------- ------ ------- -----
TOTAL $18,828 100.0% $15,325 100.0% $13,098 100.0%
------- ----- ------- ------ ------- -----
------- ----- ------- ------ ------- -----
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table shows key financial ratios for the years ending
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Return on average assets 1.78% 1.61% 1.65%
Return on average shareholders'
equity 14.20% 12.11% 12.19%
Dividend payout ratio 37.88% 48.70% 48.39%
Average shareholders' equity
as a percent of:
Average Assets 12.54% 13.31% 13.51%
Average Deposits 14.48% 15.59% 15.75%
</TABLE>
-25-
<PAGE>
INTEREST RATE SENSITIVITY/INTEREST RATE RISK ANALYSIS
The following table provides an interest rate sensitivity and interest
rate risk analysis for the year ended 1997. 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: 12/31/97
<TABLE>
<CAPTION>
REMAINING TIME BEFORE MATURITY OR INTEREST RATE ADJUSTMENT
GREATER GREATER GREATER GREATER
THAN THAN THAN THAN
3 MO 1 YR 3 YRS 5 YRS
($000.00) LESS LESS LESS LESS
OMITTED UP THAN THAN THAN THAN OVER
TOTAL 3 MO 1 YR 3 YRS 5 YRS 10 YRS 10 YRS
-------- ------- ------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
I. EARNING ASSETS
A. INVESTMENTS:
1. U. S. TREASURIES $ 5,497 $ 1,000 $ 2,999 $ 1,498 $ 0 $ 0 $ 0
2. U. S. AGENCIES 7,000 2,800 1,500 2,700 0 0 0
3. FED FUNDS 12,910 12,910 0 0 0 0 0
4. PURCHASED CDS 5,644 1,782 2,277 1,585 0 0 0
------- ------- -------- --------- -------- ------- -------
TOTAL INVESTMENTS $31,051 $18,492 $ 6,776 $ 5,783 $ 0 $ 0 $ 0
B. LOANS $60,873 $57,819 $ 1,476 $ 578 $ 305 $ 695 $ 0
C. TOTAL EARNING ASSETS $91,924 $76,310 $ 8,252 $ 6,361 $ 305 $ 695 $ 0
II. COST OF FUNDS (DEPOSITS)
A. CERTIFICATES OF DEPOSITS $24,093 $14,774 $ 8,943 $ 350 $ 20 $ 6 $ 0
B. MONEY MARKET ACCOUNTS 28,947 1,608 13,468 13,870 0 0 0
C. TRANSACTIONS ACCOUNTS 6,312 271 811 2,140 1,538 1,552 0
D. SAVINGS ACCOUNTS 2,265 0 47 1,109 552 557 0
------- ------- -------- -------- ------- ------- -------
TOTAL COST OF FUNDS $61,617 $16,653 $ 23,270 $ 17,469 $ 2,110 $ 2,115 $ 0
III. INTEREST SENSITIVE ASSETS $91,924 $76,310 $ 8,252 $ 6,361 $ 305 $ 695 $ 0
IV. INTEREST SENSITIVE LIABILITIES $61,617 $16,653 $ 23,270 $ 17,469 $ 2,110 $ 2,115 $ 0
------- ------- -------- --------- ------- ------- -------
V. GAP $30,307 $59,657 $(15,018) $(11,108) $(1,805) $(1,420) $ 0
VI. CUMULATIVE GAP $30,307 $59,657 $ 44,639 $ 33,531 $31,726 $30,307 $30,307
VII. GAP RATIO 1.49 4.58 0.35 0.36 0.14 0.33 1.49
VIII.CUMULATIVE RATIO 1.49 4589 2.12 1.58 1.53 1.49 1.49
IX. GAP AS % OF TOTAL ASSETS 29.45 57.98 (14.60) (10.80) (1.75) (1.38)
X. CUMULATIVE GAP AS A % OF
TOTAL ASSETS 29.45 57.98 43.39 32.59 30.83 29.45 29.45
</TABLE>
-26-
<PAGE>
ITEM 2. PROPERTIES
When the Bank first entered into its initial lease agreement it signed
a ten-year lease which commenced September 1, 1981 (with options to extend
the lease on the same terms and conditions for two additional five-year
periods). This space housed the permanent Head Offices for the Bank and the
Company at 2969 Broadway, Oakland, California 94611 at the intersection of
Broadway and 30th Street in the "Pill Hill" area. The premises consisted of
approximately 3,800 square feet located in a portion of a single story
building on the southwest corner at the intersection. The Bank spent
approximately $388,448 on leasehold improvements at this location.
Improvements consisted of a complete remodeling of the facility, including a
new roof, new facade, new floor, partitions and structural improvements.
In September, 1987 the Bank entered into an additional ten year lease
for 6,010 sq. ft. adjacent to its location in Oakland. The Bank utilizes
approximately 2,900 sq. ft. of this new area. The Bank's cost of leasehold
improvements in this new location was approximately $294,000. Improvements
consisted of a complete remodeling of the facility, including a new facade,
new floor, partitions and structural improvements. The initial lease in the
above paragraph has expired and has been rolled into this new lease. The
current monthly rent for the entire 9,810 sq. ft. is $5,226.00 subject to
yearly CPI adjustments.
Commencing on December 1, 1984, the Bank leased 720 square feet of
office space in a new building at 112 La Casa Via in Walnut Creek,
California. This location housed the Bank's initial branch office. The
building was fully serviced and the base rental was $1,274 per month subject
to cost-of-living adjustments on the anniversary of each rental year.
Necessary leasehold improvements were completed within the landlord's
authorized allowance. The term of this lease expired on November 30, 1989,
however, the Bank negotiated a month to month lease pending its move to new
quarters in September, 1990. Monthly rent was $1,502.83.
In September, 1989, the Bank entered into a new lease for 1,400 sq. ft.
of office space located at the corner of No. Main Street and Civic Drive in
downtown Walnut Creek. This new location is twice the physical size of the
old location and is closer to the financial district of Walnut Creek. The
Bank moved into this new location in September, 1990. The new lease is for a
term of 12 years commencing November 1, 1989 and terminates January 14, 2001.
The Bank's cost for leasehold improvement in this new location was
approximately $210,000. Improvements consisted of a complete remodeling of
the facility, including enclosing an existing drive through facility,
partitions and structural improvements. The lease provides for a monthly rent
of $4,769.80, fixed for 12 years and beginning January 1, 1991.
The Emeryville Branch began operations in December, 1985 on the ground
floor of the Watergate III Building at 2000 Powell Street. The Bank currently
occupies approximately 2,200 square feet of space at this location, at a base
rent of $2.00 per net rentable square foot ($4,390 per month). The term of
this lease expired August 31, 1992 with two successive options to extend the
lease by one three year option and one
-27-
<PAGE>
five year option. The Bank renewed the lease at a base rent of $1.95 per net
rentable square foot ($4,329 per month) with two three year options effective
1-1-93 which expired December 31, 1995. The Bank subsequently renewed the
lease at a base rent of $2.05 per net rentable square foot ($4,651 per month)
with two three year options effective 1-1-96.
In September, 1990 the Company purchased two contiguous parcels
totaling 10,000 sq. ft. adjacent to the Bank's Walnut Creek Office for a
price of $544,644. Included on one of the parcels is a single story, 2,500
sq. ft. concrete block building suitable for a restaurant. The Company
entered into a five year lease on April 1, 1991 with an individual who
operates a Japanese restaurant at this location for a monthly rent of $4,350,
triple net commencing April 1, 1992. The leasee in turn made improvements to
the building to bring it to today's standards. On April 1, 1996, the Bank
entered into a three year lease agreement with the son of the same Japanese
restaurant for a monthly rent of $4,350, triple net ending on March 31, 1999.
The Pleasanton Branch began operations on January 28, 1998 at 5820
Stoneridge Mall Rd. The Branch occupies an office on the ground floor at this
location with monthly rent of $1,669.00 commencing on December 1, 1997 for a
term of one year.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to claims and legal
proceedings arising in the ordinary course of business. Currently, the
Company has no outstanding suits brought against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Neither the Company nor the Bank submitted any matter covered by this
report to a vote of security holders, through the solicitation of proxies or
otherwise, during the fourth quarter of 1997.
EXECUTIVE OFFICERS OF SUMMIT BANCSHARES, INC.
Pursuant to General Instruction G(3), the information required by Item
401(b) and (e) of Regulation S-K concerning executive officers of the Company
and the Bank is presented here rather than in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 22, 1998.
The following individuals are the executive officers of the Company as
of February 27, 1998:
<TABLE>
<CAPTION>
Name Age Position Since
<S> <C> <C> <C>
Shirley W. Nelson 53 Chairman and Chief 1982
Executive Officer
George H. Hollidge 54 Secretary 1981
Kikuo Nakahara 65 Chief Financial 1985
Officer
</TABLE>
-28-
<PAGE>
The following individuals are the executive officers of the Bank as of
February 27, 1998:
<TABLE>
<CAPTION>
Name Age Position Since
<S> <C> <C> <C>
Shirley W. Nelson 53 Chairman, and 1982
Chief Executive
Officer
C. Michael Ziemann 53 President and 1996
Chief Operating
Officer
Denise Dodini 45 Senior Vice 1994
President and
Senior Loan
Officer
</TABLE>
The business experience of the executive officers follows:
SHIRLEY W. NELSON was President and Chief Executive Officer of the Bank
and Holding Company since May, 1983 and was elected in July, 1989 to the
position of Chairman. Prior to this assignment she was the Senior Vice
President, Senior Loan Officer. She is currently a member of the Board of
Directors' Audit Commitee, Asset and Liability Committee, Loan Committee, and
Personnel Committee.
KIKUO NAKAHARA is Managing Director of American Express Tax and
Business Services Inc. in Walnut Creek, California. Prior to this position he
was a partner of Greene & Nakahara, an accounting firm in Walnut Creek since
1993, and which merged with IDS Financial Services Inc. in 1994. From 1978 to
1993 he was managing Director of Greene, Nakahara and Lew Accountancy
Corporation in Oakland. He was a corporate member of Blue Shield and a
speaker at continuing education courses sponsored by the California Society
of Certified Public Accountants.
GEORGE H. HOLLIDGE has been President of Hollidge Transmissions, Inc.,
Oakland, transmission specialists, since 1980. Prior to 1980, Mr. Hollidge
was a partner in Hollidge Hydramatic, transmission specialists.
C. MICHAEL ZIEMANN has been President and Chief Operating Officer since
January 1, 1996. Prior to this position he was Chief Administrative Officer
subsequent to his position as CFO and Cashier to which he was appointed in
April, 1987. Prior to that he was active in the administration of the Bank
and was the manager of the Bank's Walnut Creek Office since April 1985. Prior
to joining the Bank, he held various positions during his 16 years with Bank
of America in operations, branch management, and regional administration
where he was a district administrator.
-29-
<PAGE>
DENISE DODINI has been the Senior Vice President - Senior Loan Officer
at the Bank since July, 1994. Prior to joining the Bank, Denise had fifteen
years of Banking experience with Bank of America, where she was involved in
consumer, commercial, real estate, and corporate lending. Denise joined the
Bank in October, 1989 as a Vice President, Loan Officer where she assisted
clients in the Oakland Office.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
(a) MARKET INFORMATION. The stock of the Company is not listed on any
stock exchange but is publicly traded in limited and infrequent transactions
in the "over the counter" market. According to information made available to
the Company by the Market Maker, Marc F. Arnett, Hoefer & Arnett, Investment
Bankers, 100 Pine Street, San Francisco, CA., the range of high and low bids
for such common stock for each calendar quarter since January 1994 is as
follows:
<TABLE>
<CAPTION>
Dividends
High Low Declared
<S> <C> <C> <C>
1997
First Quarter...... $33 3/4 32 3/4 $ --
Second Quarter..... 37 1/2 33 1/8 .75
Third Quarter...... 47 -- 37 -- --
Fourth Quarter..... 56 -- 43 -- .75
-----
$1.50
=====
1996
First Quarter...... $28 1/8 26 1/4 $ --
Second Quarter..... 29 1/2 28 -- .75
Third Quarter...... 34 1/2 29 1/2 --
Fourth Quarter..... 32 3/4 32 1/2 .75
-----
$1.50
=====
</TABLE>
As of February 27, 1998, there were 437,455 shares of common stock of
the Company issued.
(b) SHAREHOLDERS. As of February 27, 1998, there were 309 shareholders
of the common stock. There were no other classes of securities outstanding.
(c) DIVIDENDS. On June 6, 1997 the Company paid a 75 cent per share
cash dividend in addition to a similar 75 cent per share dividend on December
12, 1997. It is the present intention of the Company to issue semi-annual
cash dividends so long as said dividends do not inhibit future development.
Additionally, payment of cash dividends by the Company is dependent upon
payment of dividends by the Bank to the Company. Payment of cash dividends by
the Bank may under certain
-30-
<PAGE>
circumstances require approval of the California Superintendent of Banks, and
as a matter of law, the Bank may only declare cash dividends from the lesser
of its retained earnings or its undistributed net income from the last three
years. less any dividends paid during those three years. In the event that
the Bank does not have retained earnings or net income for the last three
fiscal years, the Bank may declare dividends only with the prior written
consent of the Superintendent.
-31-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information of Summit Bancshares, Inc.
for the years from the period January 1, 1993 through December 31, 1997
should be read in conjunction with the consolidated financial statements and
the accompanying notes included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Income $1,708,154 $1,411,871 $1,315,507 $907,603 $846,771
Earnings Per Common Share $3.97 $3.32 $3.10 $2.19 $2.03
Earning Per Common Share -
assuming dilution $3.72 $3.11 $2.87 $2.08 $1.99
Cash Dividends per Share, declared $1.50 $1.50 $1.50 $0.49 $0.24
AT YEAR END
(In Thousands)
Deposits $90,432 $80,510 $75,251 $67,862 $70,462
Loans (Net) $60,833 51,408 49,645 46,691 50,541
Assets $104,342 92,946 86,822 78,601 80,356
Shareholders' Equity $12,879 11,939 11,102 10,494 9,626
Non-performing Loans to Total Loans 0.96% 0.00% .82% 1.66% 1.88%
Allowance to Non-performing Loans 212% N/A 252% 120% 75%
Allowance to Non-performing Assets 68% .82% 60% 26% 29%
Tier 1 Capital 13.71% 14.41% 12.19% 13.33% 11.55%
Total Tier Capital 14.92% 15.61% 13.29% 14.44% 12.66%
Leverage Ratio 9.12% 9.63% 9.24% 10.40% 8.95%
</TABLE>
-32-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The section labeled Management's discussion of Analysis of Financial
Condition and Results of Operation appearing in the Registrant's Annual
Report to stockholders for the year ended December 31, 1997 are incorporated
by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statement of financial position as of December 31,
1997 and 1996 and the consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1997,
1996, and 1995, together with the report of independent public accountant
appearing in the Registrant's Annual Report to stockholders for the year
ended December 31, 1997 are incorporated by reference herein.
-33-
<PAGE>
ITEM 9. CHANGES ON AND WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by paragraphs (a), (c) (d), (f) and (g) of
this item is presented in the Company's Proxy Statement issued in connection
with the Annual Meeting of Shareholders to be held on April 22, 1998 under
"Election of Directors," which is incorporated in this Report by reference
thereto and will be filed within 120 days after the end of the Company's
fiscal year. The information concerning executive officers requested by
paragraphs (b) and (e) is set forth under Part I in a separate Item captioned
Executive Officers of Summit Bancshares, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item in presented in the Company's
Proxy Statement issued in connection with the Annual Meeting of Shareholders
to be held on April 22, 1998. under "Executive Compensation," which is
incorporated in this Report by reference thereto and will be filed within 120
days after the end of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is presented in the Company's
Proxy Statement issued in connection with the Annual Meeting of Shareholders
to be held on April 22, 1998, under "Principal Security Holders" and
"Security Ownership of Management," which is incorporated in this Report by
reference thereto and will be filed within 120 days after the end of the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is presented in the Company's
Proxy Statement issued in connection with the Annual Meeting of Shareholders
to be held April 22, 1998, under "Certain Relationships and Related
Transactions," which is incorporated in this Report by reference thereto and
will be filed within 120 days after the end of the Company's fiscal year.
-34-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS.
The following Financial Statements are included in the Registrant's
Annual Report to Shareholders for the year ended December 31, 1997
and are incorporated by reference herein pursuant to Item 8.
Consolidated Statement of Financial Position - December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995
Statements of Changes in Shareholders' Equity (Consolidated
and Parent Company Only) for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements
Report of Independent Accountants
(b) 2. FINANCIAL STATEMENT SCHEDULES.
Not Applicable
In accordance with the rules of Regulation S-X, the required schedules
are not submitted because they are not applicable to or required of the
Company.
(c) 3. INDEX TO EXHIBITS.
The following exhibits are incorporated by reference pursuant to Item 601
of Regulation S-K:
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Number Exhibit Page
<S> <C> <C>
3.1 Articles of Incorporation Footnote #1
of Summit Bancshares, Inc.
3.2 Bylaws of Summit
Bancshares, Inc. Footnote #2
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Number Exhibit Page
<S> <C> <C>
4.1 Specimen Stock Certificate Footnote #3
10.1 Lease - Broadway Property Footnote #4
10.2 Summit Bancshares, Inc.
Incentive Stock Option Plan Footnote #5
10.3 Organizational Stock
Agreement Footnote #6
10.4 Employment Agreement/
Shirley W. Nelson Footnote #7
10.5 Agreement for Sale
of Stock Footnote #8
10.6 Lease-Walnut Creek
Property Footnote #9
10.7 Lease-Emeryville
Property Footnote #10
10.8 Lease-Oakland Office
Expansion Footnote #11
10.9 Lease-Walnut Creek
New Premises Footnote #12
10.10 Lease-Emeryville
Renegotiated Footnote #13
10.11 Summit Bancshares, Inc.
1989 Non-Qualified Stock Option
Plan for Directors Footnote #14
10.12 Stock Option Agreement Form
Summit Bancshares, Inc.
Incentive Stock Option Plan Footnote #15
10.13 Stock Option Agreement Form
1989 Non-Qualified Stock Option
Plan for Directors Footnote #16
10.14 Amendment to By-Laws of
Summit Bancshares, Inc. Footnote #17
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Number Exhibit Page
<S> <C> <C>
10.15 Lease - Walnut Creek
Summit Bancshares, Inc.
owned Property. Footnote #18
10.16 Lease - Emeryville
Renegotiated Footnote #19
10.17 Lease - Pleasanton -------
New Premises
11 Statement Re: Computation
of Per Share Earnings
13 Portions of Annual Report to
Shareholders for the Year Ended
December 31, 1997
22 Wholly Owned Subsidiary of
Summit Bank - Summit Equities,
Inc.
25.1 Power of Attorney - see
Signature Page
27 Financial Data Schedule
</TABLE>
- ----------------
1. Incorporated by reference to Exhibit 2.1 of Registrant's Exhibits to
Form S-18 Registration Statement, as filed with the Securities and
Exchange Commission on December 21, 1981.
2. Incorporated by reference to Exhibit 2.2 of Registrant's Exhibits to
Form S-18 Registration Statement, as filed with the Securities and
Exchange Commission on December 21, 1981.
3. Incorporated by reference to Exhibit 3.1 of Registrant's Exhibits to
Form S-18 Registration Statement, as filed with the Securities and
Exchange Commission on December 21, 1981.
4. Incorporated by Reference to Exhibit 9.1 of Registrant's Exhibits to
Form S-18 Registration Statement, as filed with the Securities and
Exchange Commission on December 21, 1981.
5. Incorporated by reference to Exhibit 9.2 of Registrant's Exhibits to
Post-Effective Amendment No. 1 to Form S-18 Registration Statement, as
filed with the Securities and Exchange Commission on March 11, 1982.
6. Incorporated by reference to Exhibit 9.4 of Registrant's Exhibits to
Post-Effective Amendment No. 1 to Form S-18 Registration Statement, as
filed with the Securities and Exchange Commission on March 11, 1982.
-37-
<PAGE>
7. Incorporated by reference to Exhibit 10.4 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1983.
8. Incorporated by reference to Exhibit 10.6 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1984.
9. Incorporated by reference to Exhibit 10.9 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.
10. Incorporated by reference to Exhibit 10.10 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985.
11. Incorporated by reference to Exhibit 10.6 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
12. Incorporated by reference to Exhibit 10.9 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
13. Incorporated by reference to Exhibit 10.10 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
14. Incorporated by reference to Exhibit 10.11 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
15. Incorporated by reference to Exhibit 10.12 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
16. Incorporated by reference to Exhibit 10.13 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
17. Incorporated by reference to Exhibit 2.2 of Registrant's Exhibits
to Form S-18 Registration Statement, as filed with the Securities
and Exchange Commission on December 21, 1981.
18. Incorporated by reference to Exhibit 10.15 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
19. Incorporated by reference to Exhibit 10.16 of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(b) REPORTS ON FORM 8-K
None.
-38-
<PAGE>
WEIGHTED AVERAGE SHARES
TWELVE MONTHS ENDED DECEMBER 31, 1997
BASIC DILUTED
A. COMMON STOCK ANNUAL 430230.94 430230.94
(4TH QTR) 435587.00 435587.00
<TABLE>
<CAPTION>
NO OF
DAYS
------
<S> <C> <C> <C>
433209.00 12-31-96(BAL FWD)
433209.00 TO 1-06-97 6.00 2599254.00
432109.00 TO 1-14-97 8.00 3456872.00
429224.00 TO 4-14-97 89.00 38200936.00
427675.00 TO 8-11-97 120.00 51321000.00
427565.00 TO 9-25-97 45.00 19240425.00
426565.00 TO 9-29-97 4.00 1706260.00
435565.00 TO 12-30-97 91.00 39636415.00
436565.00 TO 1-1-98 2.00 873130.00
------ ------------
365.00 157034292.00
</TABLE>
AVERAGE SHARES OUTSTANDING
FOR THE YEAR 430230.94
AVERAGE SHARES OUTSTANDING
FOR THE 4TH QUARTER 435587.00
<TABLE>
<CAPTION>
OPTIONS-DILUTED
-----------------
AVERAGE PRICE FOR THE YEAR 39.130 29084.34
-------------
NO OF YEAR END OPTION NO OF
SHARES PRICE PRICE SHARES
--------- ----------------- --------- -------------
<S> <C> <C> <C>
MZ 1000.00 39.130 10.00 744
SN 15689.00 39.130 10.00 11,680
SN 8333.00 39.130 12.00 5,778
MZ 2900.00 39.130 13.50 1,899
TW 400.00 39.130 12.25 275
SN 978.00 39.130 13.25 647
DD 2500.00 39.130 13.00 1,669
MZ 1045.00 39.130 13.00 698
AC 400.00 39.130 13.00 267
TW 1500.00 39.130 13.00 1,002
SN 4000.00 39.130 17.75 2,186
MZ 2000.00 39.130 17.75 1,093
DD 1000.00 39.130 17.75 546
TW 1000.00 39.130 17.75 546
AC 100.00 39.130 17.75 55
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL SHARES 4TH QUARTER 468816.74 464671.34
TOTAL SHARES YEAR-TO-DATE 430230.94 459315.28
NET INCOME 4TH QUARTER $ 473,828 $ 473,828
NET INCOME YEAR TO DATE, 1997 $1,708,154 $1,708,154
EARNINGS PER SHARE 4TH QUARTER $ 1.011 $ 1.020
EARNINGS PER SHARE, YTD $ 3.970 $ 3.719
</TABLE>
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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 28, 1998 By: ------------------------
Shirley W. Nelson, Chief
Chairman and CEO
(Principle Executive Officer)
Date: March 28, 1998 By: ------------------------
Kikuo Nakahara
(Chief Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints SHIRLEY W. NELSON and KIKUO NAKAHARA, and each
or any one of them, as his or her true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him or her and in his
or her name, place and stead, in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agents or any of
them, or their substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report has been executed in Oakland, California, by the following
persons on behalf of the Registrant on the capacities and on the dates
indicated.
-41-
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
SHIRLEY W. NELSON Chairman of the Board, March 18, 1998
- ------------------ Chief Executive Officer --------------
SHIRLEY W. NELSON and President
KIKUO NAKAHARA Chief Financial March 18, 1998
- --------------- Officer and Director --------------
KIKUO NAKAHARA
GEORGE H. HOLLDIGE Secretary and Director March 18, 1998
- ------------------ --------------
GEORGE H. HOLLIDGE
JERRALD R. GOLDMAN, M.D. Director March 18, 1998
- ------------------------ --------------
JERRALD R. GOLDMAN
THOMAS H. STATE Director March 18, 1998
- --------------- --------------
THOMAS H. STATE
MARY C. WARREN Director March 18, 1998
- -------------- --------------
MARY C. WARREN
BARBARA J. WILLIAMS Director March 18, 1998
- ------------------- --------------
BARBARA J. WILLIAMS
-42-
<PAGE>
[LOGO]
OFFICE SERVICE AGREEMENT
This Agreement is dated October 8, 1997 and is entered into in Pleasanton, CA
by and between Rostex, Inc., dba HQ Business Centers (hereinafter "HQ") and
Summit Bank (hereinafter "Client").
HQ and Client agree that HQ shall grant to Client for and in consideration of
the agreements and fee(s) set forth herein, a license to use the Office(s) as
from time to time designated by HQ and, in common with HQ's other clients, a
license to use HQ's Business Center facilities and services, in accordance
with the terms hereof.
1. BASIC TERMS. This Section 1 contains the basic terms of this Agreement
and all provisions of this Agreement are to be read in accord therewith:
A. Base Services: HQ's Complete Executive Office Program, including the
use of executive offices complete with professional administrative
staff, telephone answering and such other inclusive services as defined
in Schedule "A".
B. Additional Services: Access to additional business services for
purchase as needed by Client, including secretarial, administrative,
telecommunications support and such other services are as defined in
Schedule "B".
C. HQ Business Center Pleasanton
D. Building 5820 Stoneridge Mall Road, Pleasanton, CA 94588
E. Office [(number(s)] 23 having a maximum occupancy of 2 person(s).
F. Commencement Date December 1, 1997
G. Initial Term 12 Months
H. End of Initial Term November 30, 1998
I. Monthly Base Services Fee $1669.00
J. Refundable Services Retainer $2503.50
2. OFFICE. Client shall, as part of the Base Services, be granted a
license to use the Office and shall have access to the Office twenty-four
(24) hours a day, seven (7) days a week. HQ agrees to provide office
cleaning, maintenance services, electric heating and air conditioning to the
Office for normal office use in such reasonable quantities and during such
reasonable hours as shall be determined by HQ or the Building. In addition,
Client will have reasonable use of HQ common area facilities. Client shall
use the Office and common areas of the HQ Business Center solely for general
office use in the conduct of the Client's business.
If, for any reason whatsoever, HQ is unable to provide use of the Office
or a mutually agreed upon alternative Office at the time herein agreed,
Client may either extend the Commencement time herein agreed, Client may
either extend the Commencement Date until the Office becomes available or, as
its sole remedy for such failure, cancel and terminate this Agreement if the
use of the Office is not available to Client within five (5) business days
after written notice to HQ by Client, in which case any prior payments shall
be fully refunded. No such failure to provide use of the Office shall subject
HQ to any liability for loss or damage, nor affect the validity of this
Agreement or the obligations of the Client hereunder.
HQ will have the right to relocate Client, AT HQ'S EXPENSE, to another
office in the HQ Business Center, and to substitute such other office for the
Office licensed hereby, provided such other office is substantially similar
in area and configuration to Client's contracted office and provided Client
shall incur no increase in the Monthly Base Services Fee.
3. SERVICES. HQ agrees, in consideration of the Monthly Base Services Fee,
to provide Base Services to Client as described in Schedule "A". From time to
time during the Term, HQ may, at its option, make other services available to
Client of the nature described in Schedule "B", at fees that are from time to
time established by HQ. In the event Client is in default of this Agreement,
HQ may, at its option, cease furnishing any and all services including
telephone services.
Client will not offer to any party in the HQ Business Center or the
Building, any of the services that HQ provides to its clients including, but
not limited to, the services described in Schedule "A" or "B".
HQ will answer all incoming telephone calls, unless otherwise mutually
agreed, during normal business hours, as determined by HQ. Answering service
will be limited to normal business communications, excluding inbound
telemarketing and advertising response which requires pre-approval by HQ and
shall be subject to fees established from time to time by HQ.
Client will use only telecommunications systems and services as provided
by HQ. Client will pay to HQ a monthly equipment rental fee for the use of
each telephone instrument and voice lines. In the event HQ discontinues the
offering of long distance service, Client will provide its own long distance
service through a locally accessed long distance carrier.
Client acknowledges that due to the imperfect nature of verbal, written
and electronic communications, neither HQ nor any of its officers, directors,
employees, shareholders, partners, agents or representatives shall be
responsible for damages, direct or consequential, that may result from the
failure of HQ to furnish any service, including but not limited to the
service of conveying messages, communications and other utility or services
required under this Agreement or agreed to by HQ. Client's sole remedy and
HQ's sole obligation for any failure to render any service, any error or
omission, or any delay or interruption with respect thereto, is limited to an
adjustment to Client's billing in an amount equal to the charge for such
service for the period during which the failure, delay or interruption
continues.
CLIENT EXPRESSLY WAIVES, AND AGREES NOT TO MAKE ANY CLAIM FOR DAMAGES,
DIRECT OR CONSEQUENTIAL, ARISING OUT OF ANY FAILURE TO FURNISH ANY UTILITY,
SERVICE OR FACILITY, ANY ERROR
Page 1 of 6 -C- 1995 HQ NETWORD SYSTEMS INC.
<PAGE>
OR OMISSION WITH RESPECT THERETO, OR ANY DELAY OR INTERRUPTION OF THE SAME.
4. DURATION OF AGREEMENT. Upon the End of Initial Term, or any extension
thereof, the term of this Agreement and the license herein granted shall be
automatically extended for the same period of time as the Initial Term, upon
the same terms and conditions as contained herein, unless either party gives
notice to the other in writing to the contrary at least sixty (60) days prior
to the End of Initial Term (90 days if Client has licensed the use of three
or more offices).
Tenant hereby agrees to pay HQ, the total monthly rent for each full
month, or part thereof, in which the tenant occupies the premises. Tenant is
deemed to occupy the premises during the required notice period herein,
whether or not tenant is physically in the premises. (Eg: 30 day notice
presented on the 15th day of month 1 requires payment of total monthly rent
for month 2).
Upon any termination of this Agreement, whether by lapse of time or
otherwise, or upon any revocation of Client's license herein granted, the
Client shall cease all use of the Office, the HQ Business Center and all
services immediately. For each and every month or portion thereof that Client
continues use of the Office after the termination of this Agreement by lapse
of time or otherwise, without the express written consent of HQ, Client shall
pay HQ an amount equal to double the Monthly Base Services Fee computed on a
per-month basis for each month or portion thereof that Client continues the
use of the Office.
5. PAYMENTS AND ESCALATIONS. Client agrees to pay to HQ the Monthly Base
Services Fee plus applicable sales or use taxes, in advance, on the first day
of each calendar month during the Initial Term and all extensions thereof,
without any deduction, offset, notice or demand. If the Commencement Date
shall be other than the first day of a month or end of the last day of a
month, fees for any such month shall be prorated. Charges for any Schedule
"B" service purchased by Client from HQ shall be due and payable on the 10th
of the month following the offer for any such service.
One year after the Commencement Date of this Agreement and each and
every anniversary date thereafter, the Monthly Base Service Fee will
automatically increase by FOUR PERCENT (4%) of the Monthly Base Services Fee
due for the month preceding such anniversary date.
All Monthly Base Services Fees and other sums payable hereunder shall be
payable at the office of HQ or at such other location or to any agent
designated in writing by HQ. In addition to any other sums due, Client shall
pay monthly late charges equal to five percent (5%) of all amounts that have
not been paid to HQ within five (5) days of their respective due dates. The
parties agree that such late charges are fair and reasonable compensation for
costs incurred by HQ where there is default in any payment due under this
Agreement.
Upon the execution of this Agreement, Client shall pay HQ or its agent
the Refundable Services Retainer. The Refundable Services Retainer need not
be kept separate and apart from other funds of HQ, no interest shall be paid
thereon, and may be used by HQ to provide Schedule "A" and "B" services under
this Agreement. In addition to the Refundable Services Retainer, Client will,
upon execution hereof, pay to HQ the Monthly Base Services Fee for the first
full month of the Initial Term.
Client agrees that the Refundable Services Retainer shall not be used by
Client as payment for the Monthly Base Services Fee for the last month of the
Initial Term, or any extension thereof, in the event Client defaults in the
performance of any of the terms hereof, HQ may terminate this Agreement and
the license herein granted and may also use, apply or retain the whole, or
any part, of the Refundable Services Retainer for the payment of any service
fee or any other payment due hereunder, or for payment of any other sum that
HQ may spend by reason of Client's default. If Client shall, at the end of
the term of this Agreement, have fully and faithfully complied with all of
the terms and provisions of this Agreement, and surrendered all keys, access
cards and building passes, the Refundable Services Retainer, or any balance
thereof, shall be returned to Client within forty-five (45) days thereafter.
6. DAMAGES AND INSURANCE. Client will not damage or deface the furnishings,
walls, floors or ceilings, nor make holes for the hanging of pictures or make
or suffer to be made any waste, obstruction or unlawful, improper or
offensive use of the Office or the common area facilities. Client will not
cause damage to any part of the Building or the property of HQ or disturb the
quiet enjoyment of any other licensee or occupant of the Building. At the
termination of this Agreement, the Office shall be in as good condition as
when Client commenced the use thereof, normal wear and tear excepted. Client
agrees to pay for repainting each Office used less than twelve (12) months by
Client, at a cost not to exceed One Hundred Fifty Dollars ($150.00) per
Office. HQ will have the right, at any time and from time to time, to enter
the Office to inspect the same, to make such repairs and alterations as HQ
reasonably deems necessary, and the cost of any such repair resulting from
the act or omission of Client shall be reimbursed to HQ by Client upon
demand. HQ shall have the right to show the Office to prospective Clients,
provided HQ will use reasonable efforts not to disrupt Client's business.
HQ and its respective directors, licensors, officers, agents, servants
and employees shall not, to the extent permitted by law, except upon the
affirmative showing of HQ's gross negligence or willful misconduct, be liable
for, and Client waives all right of recovery against such entities and
individuals for any damage or claim with respect to any injury to person or
damage to, or loss or destruction of any property of Client, its employees,
authorized persons and invitees due to any act, omission or occurrence in or
about the HQ Business Center or the Building. Without limitation of any other
provision hereof, each party hereto hereby agrees to indemnify, defend and
hold harmless the other party hereto, and such other party's officers,
directors, employees, shareholders, partners, agents and representatives from
and against any liability to third parties arising out of, in the case of
Client as an indemnifying party, Client's use and occupancy of the Office or
any negligent act or omission of Client or Client's officers, directors,
employees, shareholders, partners, agents, representatives, contractors,
customers or invitees and, in the case of HQ as an indemnifying party, any
act or omission constituting gross negligence or willful misconduct of HQ or
HQ's officers, directors, employees, shareholders, partners, agents or
representatives. Subject to the foregoing, Client assumes all risk of loss
with respect to all personal property of Client, its agents employees,
contractors, and invitees, within or about the HQ Business Center or the
Building. Client acknowledges that it is the Client's responsibility to
maintain insurance to cover the risks set forth in this paragraph.
HQ and Client each hereby waive any and all rights of recovery against
the other, or against the directors, licensors, officers, agents, servants
and employees of the other, for loss of or damage to its property or the
property of others under its control, to the extent such loss or damage is
covered by any insurance policy.
If the HQ Business Center is made unusable, in whole or in part, by fire
or other casualty not due to negligence of Client, HQ may, at its option,
terminate the Agreement upon notice to Client, effective upon such casualty,
or may elect to repair, restore or rehabilitate, or cause to be repaired,
restored or rehabilitated, the HQ Business Center, without expense to Client,
within ninety (90) days or within such longer period of time as may be
required because of events beyond HQ's control. The Monthly Base Services Fee
shall be abated on a per diem basis for the portions of the Office that are
unusable.
7. DEFAULT. Client shall be deemed to be in default under this Agreement:
(a) if Client defaults in the payment of the Monthly Base Services Fee or
other sums due hereunder or (b) if Client defaults in the prompt and full
performance of any other provision of this Agreement and any such default
continues in excess of five (5) business days after written notice by HQ.
Should Client be in default hereunder, HQ shall have the option to
pursue any one or more of the following remedies
Page 2 of 6
<PAGE>
without any additional notice or demand whatsoever and without limitation to
HQ in the exercise of any remedy.
(1) HQ may, if HQ so elects, without any additional notice of such
election or demand to Client, either forthwith terminate this Agreement and
the license to use any portion of the HQ Business Center, and may enter into
the Office and take and hold possession of the contents thereof, without
releasing Client, in whole or in part, from the Client's obligations
hereunder. In the event of such termination, HQ may, at its option, declare
the entire amount of the Monthly Base Services Fee which would become due
and payable during the remainder of the term, to be due and payable
immediately, in which event, Client agrees to pay the same at once.
(2) Pursue any other remedy now or hereafter available to HQ. HQ's
exercise of any right or remedy shall not prevent it from exercising any
other right or remedy.
Client agrees to pay all costs and expenses, including reasonable
attorneys' fees, expended or incurred by HQ in connection with the
enforcement of this Agreement, the collection of any sums due hereunder, any
action for declaratory relief in any way related to this Agreement, or the
protection or preservation of any rights of HQ hereunder.
8. RESTRICTION ON HIRING. Client agrees that during the term of this
Agreement and within one (1) year of the termination of this Agreement,
neither Client nor any of its principals, employees or affiliates will hire
directly or as an independent contractor, any person who is at that time, or
was during the term of this Agreement, an employee of HQ. In the event of a
breach of any obligation of Client contained in this paragraph. Client shall
be liable to HQ for, and shall pay to HQ, on demand, liquidated damages in
the sum of $10,000.00 for each employee with respect to whom such breach
shall occur, it being mutually agreed that the actual damage that would be
sustained by HQ as the result of any such breach would be, from the nature of
the case, extremely difficult to fix and that the aforesaid liquidated damage
amount is fair and reasonable.
9. MISCELLANEOUS.
A. This is the only Agreement between the parties. No other agreements
are effective. All amendments to this Agreement shall be in writing and
signed by all parties. Any other attempted amendment shall be void. The
invalidity or unenforceability of any provision hereof shall not affect the
remainder hereof.
B. All waivers must be in writing and signed by the waiving party. HQ's
failure to enforce any provision of this Agreement or its acceptance of fees
shall not be a waiver and shall not prevent HQ from enforcing any provision
of this Agreement in the future. No receipt of money by HQ shall be deemed to
waive any default of Client or to extend, reinstate or continue the term
hereof.
C. All Schedules and Addenda attached hereto are hereby incorporated
herein by this reference. The laws of the State in which the HQ Business
Center is located shall govern this Agreement.
D. All parties signing this Agreement as a partnership or co-signing
individuals shall be jointly and severally liable for all obligations of
Client.
E. Client represents and warrants to HQ that there are no agents,
brokers, finders or other parties except _____________ with whom Client has
dealt who are or may be entitled to any commission or fee with respect to
this Agreement.
F. Neither Client nor anyone claiming by, through or under Client shall
assign this Agreement or permit the use of any portion of the HQ Business
Center by any person other than Client; provided, however, Client may assign
this Agreement to an affiliated corporation of Client. In the event of any
such permitted assignment, Client shall not thereby be relieved of any of its
obligations under this Agreement.
G. The Rules and Regulations of the Building and of HQ as defined on
Schedule "C" hereto and any additional schedules that may be attached hereto
are expressly made a part of this Agreement and Client expressly covenants
and agrees to abide by all of such Rules and Regulations and such additional
terms, as well as such reasonable modifications to such Rules and Regulations
as may be hereafter adopted by HQ.
H. All notices hereunder shall be in writing. Notices to Client shall be
deemed to be duly given if mailed by registered or certified mail, postage
prepaid, addressed to Client at:
Summit Bank
2969 Broadway
Oakland, CA 94611
Notice to HQ shall be deemed to be duly given if mailed by registered or
certified mail, postage prepaid, to HQ at the Building and as follows:
HQ Pleasanton
5820 Stoneridge Mall Road, Suite 100
Pleasanton, CA 94588
I. THIS AGREEMENT IS NOT INTENDED TO CREATE A LEASE OR ANY OTHER
INTEREST IN REAL PROPERTY IN FAVOR OF THE CLIENT, BUT MERELY CREATES A
REVOCABLE LICENSE IN ACCORDANCE WITH THE TERMS HEREOF. This Agreement grants
Client the license to use the HQ Business Center and the Office for the
specific purposes herein set forth without diminution of the legal possession
or control thereof by HQ and shall be revocable at the option of HQ upon the
destruction of the HQ Business Center or the breach by Client of any term or
condition herein set forth. This Agreement is subject and subordinate to any
underlying lease or contract of the Building or of the premises comprising
the Office or the HQ Business Center as such lease or contract may be amended
from time to time (such underlying lease or contract together with any
amendments, is hereinafter referred to as the "Master Lease"). This agreement
shall terminate simultaneously with the termination of the HQ Business Center
operation for any reason. Client is not a party to nor shall Client have any
rights under the Master Lease.
J. Client acknowledges that HQ Business Centers will comply with U.S.
Postal Service regulations regarding Client mail and, upon termination of
this Agreement, it will be Client's responsibility to notify all parties of
termination of the use of the above described address, assigned telephone
number, telex and facsimile numbers. For a period of thirty (30) days after
the termination of this Agreement, HQ will, at Client's written request and
cost, provide Client's new telephone number and address to all incoming
callers and will hold or forward to Client once a week all mail, packages,
facsimiles and telexes.
K. HQ may assign this Agreement and/or any fees hereunder and Client
agrees to attorn to any such assignee.
Page 3 of 6
<PAGE>
HQ
Rostex, Inc., dba HQ Business Centers
- -------------------------------------------------
- -------------------------------------------------
- -------------------------------------------------
A(n) California Corporation
---------------------------------------------
By: S. Kermabon
---------------------------------------------
Sylvia J. Kermabon
---------------------------------------------
Its: Center Manager
---------------------------------------------
CLIENT
CORPORATION: Summit Bank
-------------------------------------
A(n) [ILLEGIBLE] Corporation
---------------------------------------------
By: [ILLEGIBLE]
---------------------------------------------
---------------------------------------------
Its: [ILLEGIBLE]
---------------------------------------------
PARTNERSHIP: ------------------------------------
A(n) Partnership
---------------------------------------------
By: ---------------------------------------------
---------------------------------------------
Its: General Partner
INDIVIDUALS:
---------------------------------------------
(signature)
---------------------------------------------
(print name)
Address: ----------------------------------------
- -------------------------------------------------
---------------------------------------------
(signature)
---------------------------------------------
(print name)
Address: ----------------------------------------
- -------------------------------------------------
- -------------------------------------------------------------------------------
PERSONAL GUARANTEE:
For value received, the undersigned does hereby unconditionally and
irrevocably guarantee the prompt payment and full performance of all terms,
covenants, conditions and agreements as contained herein.
BY: --------------------- BY: ---------------------- BY: ----------------------
- -------------------------------------------------------------------------------
SCHEDULE "A"
BASE SERVICES: see attached - Schedule "A"
in Addition to the following:
- - Individual Executive Office
- - Professional Receptionist, Message Center Secretaries, and Office Manager
- - Prestigious Business Address
- - Business Identity on Building Lobby Directory
- - Facsimile Number for Client's Use
- - Mail and Package Receipt
- - Utilities and Janitorial Service
- - Building Operating Expenses
SCHEDULE "B"
ADDITIONAL SERVICES
Secretarial Services and Errands
Binding Services
Postage for Outgoing Mail (plus 20%)
Express Delivery Services (plus 20%)
UPS Services (plus 20%)
Mail Reads and Mail Checks
Handling all Pick-up and Deliveries
Paging and Cross Connecting
Specialized Telephone Services
Specialized Equipment Rental
Printing
Office Supplies
Miscellaneous Purchasing Services
Catering
Local and Long Distance Telephone Services
Other Tenant Requested Services
Page 4 of 6
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income $1,708,154 $1,411,871 $1,315,507 $907,603 $846,771
Earnings per common share $3.97 $3.32 $3.10 $2.19 $2.03
Earnings per common share -
assuming dilution $3.72 $3.11 $2.87 $2.08 $1.99
Cash Dividends per Share,
declared $1.50 $1.50 $1.50 $0.49 $0.24
AT YEAR END (IN THOUSANDS)
- --------------------------------------------------------------------------------------------
Deposits $ 90,432 $ 80,510 $ 75,251 $ 67,862 $ 70,462
Loans (Net) 60,833 51,408 49,645 46,691 50,541
Assets 104,342 92,946 86,822 78,601 80,356
Shareholders' Equity 12,879 11,939 11,102 10,494 9,626
Non-performing Loans to
Total Loans 0.96% 0.00% 0.82% 1.66% 1.88%
Allowance to
Non-performing Loans 212% N/A 252% 120% 75%
Allowance to
Non-performing Assets 68% 82% 60% 26% 29%
Tier 1 Capital 13.71% 14.41% 12.19% 13.33% 11.55%
Total Tier 14.92% 15.61% 13.29% 14.44% 12.66%
Leverage Ratio 9.12% 9.63% 9.24% 10.40% 8.95%
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The matters addressed in this Annual Report, with the exception of the
historical information presented, may incorporate certain forward-looking
statements involving risks and uncertainties, including the risks discussed
under the heading "Certain Factors That May Affect Future Results" and
elsewhere in this Report.
This section is a review of Summit Bancshares, Inc.'s (the Company) results
as reflected in the Consolidated Financial Statements. It discusses the
principal items of income and expense and the factors affecting the Company's
financial position. This discussion should be read together with the
Selected Financial Data and Consolidated Financial Statements included
elsewhere in the Annual Report.
The Company's wholly owned subsidiary, Summit Bank (the "Bank"), has
conducted the business of a commercial bank since 1982. It provides
commercial credit and various checking and savings account products for small
and midsized businesses and for professionals as well as individual consumers.
SUMMARY OF EARNINGS
The Company's net income for 1997 was $1,708,000 compared to $1,412,000 in
1996 and $1,316,000 in 1995. The increase in 1997 net income from 1996 is
attributed to an increase in higher yielding assets brought about by an
increase in loans and improved interest margins. The increase in 1996 net
income from 1995 was mainly attributed to a decrease in the provision for
loan losses due to improved loan quality. The net income of $1,708,000 for
1997 represents $3.72 per share earnings, compared to $3.11 per share in 1996
and $2.87 per share in 1995.
<PAGE>
NET INTEREST INCOME
The primary source of income for the Company is Net Interest Income or "Gross
Margin" which is the difference between interest earned on loans and
investments and interest paid on deposits and other liabilities. In general,
net interest income is affected by a change in interest rates. As interest
rates rise or fall, so will the Company's net interest income, excluding
changes in total assets. The primary reasons for this is that the Company's
investment portfolio earns income on a fixed interest rate basis while a
majority of the lending portfolio earns income on a floating interest rate
basis. In addition, all investments are held to maturity and 61% of the
investment portfolio matures in one year. Regarding loans, approximately 59%
of the loans outstanding mature within one year, while the longest maturity
is twenty-five years. In a declining interest rate environment interest
income on loans will generally decline faster than the investment income and
vice versa. To offset any decline in interest income due to a declining
interest rate environment, the Company monitors closely its interest expense
on deposits. Of the total time certificates of deposit outstanding at year
end, all but 1% mature within one year while 65% mature within 90 days. Thus
the Company is able to minimize the effects of a declining interest rate
environment by repricing these instruments on a more frequent basis than if
the average maturity were longer than 1 year.
Net interest income for 1997 was $6,457,000, an increase of 18.7% over the
$5,439,000 posted in 1996, and as compared to $5,464,000 in 1995. The
increase in 1997 was primarily the result of an increase in the average prime
rate, which increased from 8.25% in 1996 to 8.44% in 1997. Average earning
assets increased 11.2%from $78,107,000 in 1996 to $86,830,000 in 1997;
average total deposits also increased 11.2% from $74,752,000 in 1996 to
$83,091,000 in 1997, and as compared to $68,492,000 in 1995. $4,475,000 of
the 1997 increase was centered in interest bearing accounts.
<PAGE>
The decrease in 1996 was primarily the result of a decrease in the average
prime rate, which decreased from 8.85% in 1995 to 8.25% in 1996. Average
earning assets increased 9.6% from $71,245,000 in 1995 to $78,107,000 in
1996; average total deposits also increased 9.1% from $68,492,000 in 1995 to
$74,752,000 in 1996, and as compared to $68,022,000 in 1994. $3,123,000 of
the 1996 increase was centered in interest bearing accounts.
Average loans outstanding increased by 19.8% in 1997 to $57,906,000 as
compared to $48,355,000 in 1996 and $47,083,000 in 1995. Average outstanding
investments decreased 3.5% to $28,924,000 in 1997 as compared to $29,989,000
in 1996 and $24,222,000 in 1995. The average loan to deposit ratio increased
in 1997 to 69.7% as compared to 65.2% in 1996 and 67.2% in 1995. The yield
on average earning assets was 9.7% in 1997 as compared to 9.3% in 1996 and
9.8% in 1995.
Interest expense increased 26% to $1,940,000 in 1997 from $1,938,000 in 1996
and $1,536,000 in 1995. Average interest-bearing deposits increased 9.1% in
1997 to $57,512,000 as compared to $52,715,000 in 1996 and $48,599,000 in
1995 and were primarily centered in the market rate accounts. Average
non-interest bearing deposits increased 14.7% in 1997 to $25,278,000 as
compared to $22,037,000 in 1996 and $19,893,000 in 1995. Overall cost of
funds in 1997 was 2.6% as compared to 2.5% in 1996 and 3.2% in 1995.
NON-INTEREST INCOME AND EXPENSE
Non-interest income, consisting primarily of service charges on deposit
accounts, and other customer fees and charges including rents, was $516,000
in 1997, a decrease from $539,000 in 1996 and $550,000 in 1995. Total
service charge income from deposit accounts decreased by 2.2% from $311,000
in 1996 to $304,000 in 1997, while total income from other charges decreased
7.4% from $228,000 in 1996 to $211,000 in 1997. This compares to 1995
figures of $368,000 in deposit accounts income and $181,000 in income from
other charges. The deposit income decrease in 1997 resulted primarily from a
decrease in service charges related to
<PAGE>
analysis, which were $12,000 less than 1996 receipts. The decrease in other
income charges in 1997 was related to a $14,000 decrease in wire transfer
fees.
The deposit income decrease in 1996 was primarily related to a decrease in
service charges related to return check charges which was $31,000 less than
1995 receipts and decrease in income from service charges on demand deposit
accounts. The increase in other income charges in 1996 was related to a 102%
increase in wire transfer fees due to volume and charges on early withdrawal
penalties.
Non-interest expenses increased 9.6% to $3,738,000 in 1997, from $3,408,000
in 1996 and $3,355,000 in 1995. Salary expense increased 12.4% from
$1,878,100 in 1996 to $2,111,000 in 1997, and was due to normal staffing
needs and an increase in profit-sharing and 401(k) contributions. In
addition, business development and entertainment expense increased from
$78,000 in 1996 to $111,000 in 1997, which was due to an aggressive sales
program. Foreclosures and OREO expense increased from $85,000 to $129,000,
primarily due to a write-down of $75,000 on one of the Bank's properties.
Marketing expense increased from $8,000 in 1996 to $46,000 in 1997, primarily
due to changes in the Bank's marketing brochures. This was also a primary
factor in the increase in postage expense from $37,000 in 1996 to $56,000 in
1997. Offsetting these increases were decreases in audit and accounting
expenses, which went from $46,000 in 1996 to $39,000 in 1997. In addition,
consulting fees decreased from $99,000 in 1996 to $84,000 in 1997. Legal
expenses also decreased from $127,000 in 1996 to $41,000 in 1997.
The non-interest expense increase in 1996 can be attributed to a 5.2%
increase in salary expense from $1,786,000 in 1995 to $1,878,000 in 1996 and
was due to normal staffing needs. In addition, director fees increased from
$76,000 in 1995 to $103,000 in 1996, which is comparable to fees paid to
directors of other banks of a similiar size, and consulting fees which
increased from $78,000 in 1995 to $99,000 in 1996 and was due to the
implementation of a sales culture program for all bank
<PAGE>
calling officers. These increases where partially offset by the decrease in
FDIC assessment which decrease from $84,000 in 1995 to $2,000 in 1996 and a
decrease in foreclosure expense related to the carrying value of foreclosed
properties.
The Bank's allowance for loan losses as a percent of loans was 2.0% and 2.1%
as of December 31, 1997 and 1996, respectively. The average in the industry
for banks our size is approximately 1.83%. Total gross loans charged off in
1997 were $105,000 compared to $83,000 in 1996 and $334,000 in 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes reflects a combined Federal and California
effective tax rate of 42.4% in 1997, compared to 41.2% in 1996 and 41.4% in
1995, as described in Note 6 to the Financial Statements.
LIQUIDITY AND CAPITAL
Liquidity is defined as the ability to meet present and future obligations
either through the sale or maturity of existing assets or by the acquisition
of funds through liability management. Additionally, the Bank's investment
portfolio is managed to provide liquidity as well as appropriate rates of
return. It is the Company's practice to hold securities until maturity
rather than actively trade its portfolio. As of December 31, 1997 the
Company had $21,574,000 in cash and cash equivalents compared to $19,169,000
as of December 31, 1996, and $16,428,000 as of December 31, 1995. The ratio
of net loans to deposits as of December 31, 1997, was 67.3% compared to 63.9%
as of December 31, 1996, and 66.0% as of December 31, 1995.
The Bank maintains a portion of its assets in loans, time deposits with other
financial institutions and investments with short-term maturities. More
specifically, loans, time deposits with other financial institutions and
investments due within one year totaled $46,590,000 at December 31,
<PAGE>
1997, as compared to $56,323,000 at December 31, 1996, and $52,455,000 at
December 31, 1995, which is equivalent to 44.6%, 60.6%, and 60.4% of total
assets at the corresponding year ends, respectively. During 1997, the Company
repurchased 6,644 shares of its common stock for a total price of $221,198.
The Company plans to continue its repurchase program as an additional avenue
for liquidity for its shareholders as long as it is economically appropriate
to do so. The program has not affected the Company's liquidity or capital
positions 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 regulatory requirements.
CREDIT CONCENTRATION
A part of the subsidiary Bank's marketing strategy is to offer quality
financial services to the professional and small business communities. The
Company has been especially successful in targeting health care
professionals.
This segment has traditionally provided high levels of deposits and low loan
losses. While approximately 11.8% of the Company's loans are concentrated
with health care professionals, the Bank has had only two charge-offs related
to this business segment totaling $133,206 since it was founded in 1982.
Health care reform has received close scrutiny over the past few years as the
Clinton administration continues to attempt to restructure the method by
which health care is provided to the public. To date it appears that such
reform is not likely to occur in the immediate future. However, over the
past few years, the doctors and health care providers in the Company's
communities have been adjusting to the emerging trends in this industry. This
includes higher percentages of patients on Medicare; closer scrutiny from
insurance carriers; and movement to managed care and "capitation" contracts.
Through this process, the Company has not experienced any noticeable
deterioration in credit quality. The Company cannot predict the ultimate
outcome of health care reform. However, the Company closely monitors the
status of
<PAGE>
reform and considers the potential impact of any reform on its current
customers and its underwriting of loans to healthcare professionals.
NON-PERFORMING ASSETS
The increase in non-performing assets from December 31, 1996, to December 31,
1997 is due primarily to an increase in loans 90 days or more past due and
still accruing and non-accrual loans. Other real estate owned consists of 3
vacant land parcels in the California counties of Alameda and Contra Costa.
All properties are being actively marketed. Current comparables favor a
complete recovery at the time of sale. At December 31, 1997, three loans were
on non-accrual status.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The primary factor which may affect future results is the fluctuation of
interest rates in the market place more commonly referred to as interest rate
risk. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
It results from the possibility that changes in interest rates may have an
adverse effect on a bank's earnings and its underlying economic value.
Changes in interest rates affect a bank's earnings by changing its net
interest income and the level of other interest-sensitive income and
operating expenses. As mentioned previously, the potential decrease in a
declining interest rate environment would be minimized by an increase in
assets. In addition, earnings and growth of the company are and will be
affected by general economic conditions, both domestic and international, and
by monetary and fiscal policies of the United States Government, particularly
the Federal Reserve Bank.
MARKET PRICE OF THE COMPANY'S STOCK AND DIVIDENDS
According to the Company's records, there were 314 record holders of its stock
at December 31, 1997. The following table reflects the cash dividends declared
as well as the high and low bid prices which were
<PAGE>
obtained from the Market Maker. These prices reflect retail mark-up and may
not represent actual transactions.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
----- ---- ---------
<S> <C> <C> <C>
1997
First Quarter 33-3/4 32-3/4 $ --
Second Quarter 37-1/2 33-1/8 .75
Third Quarter 47 37 --
Fourth Quarter 56 43 .75
Total $ 1.50
1996
First Quarter 28-1/8 26-1/4 $ --
Second Quarter 29-1/2 28 .75
Third Quarter 34-1/2 29-1/2 --
Fourth Quarter 32-3/4 32-1/2 .75
Total $ 1.50
</TABLE>
The Company presently intends to continue the policy of paying regular
semi-annual cash dividends. Future dividends will depend upon the earnings
of the Company and management's assessment of the future needs for funds.<PAGE>
<PAGE>
MARKET MAKERS
Justin S. Mazzon
American Blue Chip
Investment Management
700 Larkspur Landing Circle
Larkspur, CA 94939
(415) 925-4322
L. Jack Block
Senior Vice President
Van Kasper & Company
600 California Street, Ste #1700
San Francisco, CA 94108-2704
(415) 954-0689
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
FINANCIAL POSITION DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 8,664,015 $ 7,188,515
Federal funds sold 12,910,000 11,980,000
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents (Note 1) 21,574,015 19,168,515
Time deposits with other financial institutions 5,644,000 9,607,000
Investment securities (fair value of $12,515,656 at
December 31, 1997 and $8,830,810 at
December 31, 1996 - Note 2) held to maturity 12,496,651 8,759,850
Loans, net of allowance for loan losses of
$1,238,012 at December 31, 1997 and
$1,070,318 at December 31, 1996 (Notes 3 and 4) 60,832,859 51,408,038
Other real estate owned (Note 3) 1,222,080 1,291,459
Premises and equipment, net (Note 5) 872,619 896,856
Interest receivable and other assets 1,699,307 1,814,083
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS 104,341,531 92,945,801
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
Deposits:
Demand $ 31,062,481 $ 27,833,067
Interest-bearing transaction accounts 33,012,655 28,663,828
Savings 2,264,538 2,665,539
Time certificates $100,000 and over 18,828,044 15,324,980
Other time certificates 5,264,024 6,022,170
- ----------------------------------------------------------------------------------------------
Total Deposits 90,431,742 80,509,584
Interest payable and other liabilities 1,031,120 497,074
- ----------------------------------------------------------------------------------------------
Total Liabilities 91,462,862 81,006,658
Commitments and contingent liabilities (Note 11)
Shareholders' Equity (Notes 7, 8, 9 and 10):
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;
436,565 shares outstanding at December 31, 1997 and
433,209 shares outstanding at December 31, 1996 3,709,145 3,830,343
Retained Earnings 9,169,524 8,108,800
- ----------------------------------------------------------------------------------------------
Total Shareholders' Equity 12,878,669 11,939,143
- ----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $104,341,531 $ 92,945,801
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $6,726,641 $5,698,998 $5,574,272
Interest on time deposits with other
financial institutions 449,653 563,941 493,250
Interest on U.S. government
treasury securities 664,781 511,121 521,808
Interest on investment securities
exempt from federal income taxes 0 0 36,722
Interest on federal funds sold 555,917 602,366 374,010
- -----------------------------------------------------------------------------------------------
Total interest income 8,396,992 7,376,426 7,000,062
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings deposits 44,628 43,182 53,248
Interest on interest-bearing
transaction accounts 637,360 628,004 619,574
Interest on time deposits 1,258,064 1,266,581 863,034
- -----------------------------------------------------------------------------------------------
Total interest expense 1,940,052 1,937,767 1,535,856
Net interest income 6,456,940 5,438,659 5,464,206
- -----------------------------------------------------------------------------------------------
Provision for loan losses (Note 3) 270,000 125,000 415,000
- -----------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,186,940 5,313,659 5,049,206
- -----------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 304,315 311,227 368,293
Other customer fees and charges 211,280 227,503 181,530
- -----------------------------------------------------------------------------------------------
Total non-interest income 515,595 538,730 549,823
- -----------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,111,100 1,878,142 1,786,070
Occupancy expense (Notes 5 and 11) 364,099 362,169 360,020
Equipment expense (Notes 5 and 11) 143,822 90,702 97,189
FDIC assessment 9,186 2,000 83,797
Legal expense 41,062 126,788 116,872
Insurance expense 59,722 73,784 80,324
Foreclosure and REO expense 129,058 85,017 117,920
Other 880,476 789,587 712,510
- -----------------------------------------------------------------------------------------------
Total non-interest expense 3,738,525 3,408,189 3,354,702
Income before income taxes 2,964,010 2,444,200 2,244,327
- -----------------------------------------------------------------------------------------------
Provision for income taxes (Note 6) 1,255,856 1,032,329 928,820
- -----------------------------------------------------------------------------------------------
Net Income $1,708,154 $1,411,871 $1,315,507
- -----------------------------------------------------------------------------------------------
EARNINGS PER SHARE (NOTE 7)
Earnings per common share $3.97 $3.32 $3.10
- -----------------------------------------------------------------------------------------------
Earnings per common share - assuming dilution $3.72 $3.11 $2.87
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<CAPTION>
NUMBER OF
SHARES COMMON RETAINED
OUTSTANDING STOCK EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1994 427,485 $3,837,684 $6,656,072 $10,493,756
- ----------------------------------------------------------------------------------------------
Issuance of Cash Dividends,
$1.50 per share (Note 10) 0 0 (636,576) (636,576)
Repurchase of Common Stock (3,226) (70,426) 0 (70,426)
Net Income 0 0 1,315,507 1,315,507
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1995 424,259 3,767,258 7,335,003 11,102,261
- ----------------------------------------------------------------------------------------------
Issuance of Cash Dividends,
$1.50 per share (Note 10) 0 0 (638,074) (638,074)
Stock Options Exercised (Note 9) 10,780 118,373 0 118,373
Repurchase of Common Stock (1,830) (55,288) 0 (55,288)
Net Income 0 0 1,411,871 1,411,871
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1996 433,209 3,830,343 8,108,800 11,939,143
- -----------------------------------------------------------------------------------------------
Issuance of Cash Dividends,
$1.50 per share (Note 10) 0 0 (647,430) (647,430)
Stock Options Exercised (Note 9) 10,000 100,000 0 100,000
Repurchase of Common Stock (6,644) (221,198) 0 (221,198)
Net Income 0 0 1,708,154 1,708,154
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1997 436,565 $3,709,145 $9,169,524 $12,878,669
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
SUMMIT BANCSHARES, INC. AND STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------
<C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 261,554 $ 249,103 $ 85,249
Rental Income 52,200 52,200 52,200
Other Income 9,667 8,652 12,561
Cash paid to supplier (20,480) (20,784) (27,192)
Property taxes paid 0 0 0
Property tax refund 0 0 4,060
Income taxes paid (108,000) (134,276) (23,774)
Income tax refund 0 0 0
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 187,941 154,895 103,104
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in short term investments 100,000 1,000,000 295,000
Net (increase) decrease in loans 1,680,514 (730,461) (1,491,482)
Dividends received from subsidiary 825,000 400,000 1,700,000
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 2,605,514 669,539 503,518
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 100,000 118,373 0
(Increase) decrease in other assets (15,529) (43,554) 65,000
Purchase of common stock (221,198) (55,288) (70,426)
Dividends paid (647,430) (638,074) (636,576)
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (784,157) (618,543) (642,002)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 2,009,298 205,891 (35,380)
Cash at the beginning of the year 227,230 21,339 56,719
- ------------------------------------------------------------------------------------------
Cash at the end of the year $2,236,828 $ 227,230 $ 21,339
- ------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $1,708,154 $ 1,411,871 1,315,507
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 17,808 17,806 17,808
Non-cash earnings from subsidiary (1,543,759) (1,257,026) (1,259,957)
Decrease in accounts receivable 0 2,434 14,500
Increase (decrease) in accounts payable (3,318) 4,255 0
Increase (decrease) in income tax payable 9,056 (24,447) 15,246
- -------------------------------------------------------------------------------------------
Total adjustments (1,520,213) (1,256,976) (1,212,403)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 187,941 $ 154,895 $ 103,104
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------------------------
The accounting and reporting policies of Summit Bancshares, Inc. (the
Company), and its wholly owned subsidiary, Summit Bank (the Bank), a
California state-chartered bank, conform with generally accepted accounting
principles and general practice within the banking industry. The following
are descriptions of the more significant of these policies.
NATURE OF OPERATIONS
The Bank has conducted the business of a commercial bank since July 1, 1982.
The Bank operates three branches and provides commercial credit and other
banking services to small and mid-sized businesses and professionals,
including professional firms of physicians, attorneys, accountants, real
estate developers, retailers, and service firms, wholesalers, and
distributors.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles 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 period.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
the Bank. Significant intercompany transactions have been eliminated in
consolidation. Certain prior years' amounts have been reclassified to conform
with present year presentation.
INVESTMENT SECURITIES
All investment securities are classified as held to maturity and are carried
at cost, adjusted for amortization of premium and accretion of discount using
a method that approximates the effective interest method. Gains and losses on
sale or redemption of securities are determined using the specific
identification method.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, net of accumulated depreciation
and amortization. Depreciation on furniture and equipment is calculated on a
straight-line basis over the estimated useful life of the property, generally
seven years for furniture and three to fifteen years for equipment. Leasehold
improvements are amortized over the life
<PAGE>
of the related lease or the estimated life of the improvements, whichever is
shorter.
LOANS
Loans are stated at the principal amount outstanding. Interest income is
accrued daily using the simple interest method. Loans are placed on
nonaccrual status when management believes that there is serious doubt as to
the collection of principal or interest, or when they become contractually
past-due ninety days or more with respect to principal or interest, except
for loans that are well secured and in the process of collection. When loans
are placed on nonaccrual status, any accrued but uncollected interest is
reversed from current income, and additional income is recorded only as
payments are received and where future collection of principal is probable.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and amortized as yield adjustments over the
contractual lives of the related loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based upon estimates of potential loan
losses and is maintained at a level considered adequate to provide for losses
that can be reasonably anticipated. The allowance is increased by provisions
charged to expense and reduced by net charge-offs. The Bank considers its
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, current economic conditions, and other
factors in periodic valuations of the adequacy of the allowance balance. The
allowance for loan losses is based on estimates, and ultimate losses may vary
from current estimates.
OTHER REAL ESTATE OWNED
Other real estate owned 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
recorded loan balance 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 or income as
appropriate. Operating expenses related to other real estate owned are
charged to noninterest expense in the period incurred.
INCOME TAXES
Income taxes reported in the statements of income are computed at current tax
rates, including deferred taxes resulting from timing differences between the
recognition of items for tax and financial reporting purposes.
The Company records deferred taxes based on the liability method. The net
deferred tax liability or asset is determined based on the tax
<PAGE>
effects of the differences between the book and tax bases of the various
balance sheet assets and liabilities. Under this method, the computation of
the net deferred tax liability or asset gives current recognition to changes
in tax laws and rates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds sold are purchased and sold for one-day periods.
2. INVESTMENT SECURITIES
- ------------------------------------------------------------------------------
The amortized cost and estimated fair values of investments in debt
securities held-to-maturity as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,496,831 $10,599 $0 $ 5,507,430
U.S. Agencies 6,999,820 8,406 0 7,008,226
----------- ------- ------- -----------
Total Securities $12,496,651 $19,005 $0 $12,515,656
----------- ------- ------- -----------
----------- ------- ------- -----------
</TABLE>
The amortized cost and estimated fair values of investments in debt
securities held-to-maturity as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $7,759,850 $70,960 $0 $7,830,810
U.S. Agencies 1,000,000 0 0 1,000,000
---------- ---------- --------- ----------
Total Securities $8,759,850 $70,960 $0 $8,830,810
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturities are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------- ------------
<S> <C> <C>
Due in one year or less $ 7,798,908 $ 7,817,913
Due in one year through
five years 4,697,743 4,697,743
----------- ------------
Total $12,496,651 $12,515,656
----------- ------------
----------- ------------
</TABLE>
<PAGE>
There were no sales of investments in debt securities during 1997 or 1996. At
December 31, 1997, securities carried at $999,956 were pledged to secure
public deposits, as required by law.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------
A summary of loans as of December 31, 1997, and 1996 (net of unearned loan
fees of $235,660 and $273,755, respectively), is as follows:
<TABLE>
<CAPTION>
----------- -----------
1997 1996
----------- -----------
<S> <C> <C>
Commercial loans $44,043,942 $35,788,655
Real estate loans 4,850,194 3,062,950
Real estate construction loans 7,470,606 7,507,790
Installment loans 5,706,129 6,118,961
----------- -----------
62,070,871 52,478,356
Less: Allowance for loan losses (1,238,012) (1,070,318)
----------- -----------
$60,832,859 $51,408,038
----------- -----------
----------- -----------
</TABLE>
The changes in the allowance for loan losses for the years ended December 31,
1997, 1996, and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of period $1,070,318 $1,024,922 $ 931,878
Provision for loan losses 270,000 125,000 415,000
Recoveries 3,000 3,500 11,752
Loans charged-off (105,306) (83,104) (333,708)
---------- ---------- ----------
Balance, end of period $1,238,012 $1,070,318 $1,024,922
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
------------------------------
(000's Omitted)
December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Loans 90 days or more past due and still accruing:
Commercial $ 408 $ 0 $ 367
Non-accrual loans:
Commercial 151 0 39
Real Estate 0 0 0
Consumer 25 0 0
------ ------ ------
Total $ 176 $ 0 $ 39
Other Real Estate Owned 1,222 1,291 1,303
------ ------ ------
TOTAL NON-PERFORMING ASSETS $1,806 $1,291 $1,709
------ ------ ------
------ ------ ------
</TABLE>
<PAGE>
The subsidiary Bank's policy is to recognize interest income on an accrual
basis unless the full collectibility of principal and interest is uncertain.
As mentioned previously, loans that are delinquent ninety days as to
principal or interest are placed on a nonaccrual 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.
Impairment of loans having recorded investments of $176,000 at December 31,
1997, and $0 at December 31, 1996, has been recognized in conformity with
FASB Statement No. 114, as amended by FSAB Statement No. 118. The average
recorded investment in impaired loans during 1997 and 1996 was $88,000 and
$0, respectively. The total allowance related to these loans was $15,000 and
$0 at December 31, 1997, and 1996, respectively. Interest income recognized
on impaired loans was $13,133 and $0 for the years ended December 31, 1997,
and 1996, respectively.
The Bank grants commercial, construction, and installment loans to customers
mainly in the California counties of Alameda and Contra Costa. Although the
Bank has a diversified loan portfolio, a substantial portion of its
commercial loan portfolio is concentrated in loans to customers in or related
to the medical profession. The greater portion of these loans are secured by
real estate located within the two counties. The amount in other real estate
owned is comprised of three vacant land parcels.
4. RELATED PARTY TRANSACTIONS
- ------------------------------------------------------------------------------
The Bank has, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, officers, and principal
shareholders and their associates. In management's opinion and as required by
federal law, loans to related parties are granted on the same terms,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with others, and do not involve more than normal
risk of collectibility or present other unfavorable features. As of December
31, 1997, and 1996, loans outstanding to directors, officers, and principal
shareholders and their known associates were $161,349 and $372,087,
respectively. In 1997, advances on such loans were $184,979, and collections
were $395,717. In 1996 advances on such loans were $656,898 and collections
were $406,978.
5. PREMISES AND EQUIPMENT
- ------------------------------------------------------------------------------
Premises and equipment consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
----------------------------------------------
Depreciation/ Net Book
Cost Amortization Value
------------- ------------- ----------
<S> <C> <C> <C>
December 31, 1997:
Land and building $ 497,912 $ 120,200 $377,712
Leasehold improvements 1,128,862 899,484 229,378
Furniture and equipment 656,992 391,463 265,529
------------- ------------- ----------
Total $2,283,766 $1,411,147 872,619
------------- ------------- ----------
------------- ------------- ----------
December 31, 1996:
Land and building $ 497,912 $ 102,393 $395,519
Leasehold improvements 1,119,851 809,681 310,170
Furniture and equipment 492,609 301,442 191,167
------------- ------------- ----------
Total $2,110,372 $1,213,516 $896,856
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
Depreciation and amortization included in occupancy and equipment expenses
were $194,887, $141,061, and $142,154 for the years ended December 31, 1997,
1996, and 1995, respectively.
6. INCOME TAXES
- ------------------------------------------------------------------------------
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Current:
Federal $1,038,000 $ 783,000 $714,000
State 345,000 287,000 223,000
---------- ---------- --------
Total current 1,383,000 1,070,000 937,000
Deferred:
Federal (124,000) (36,000) (37,000)
State (3,000) (2,000) 29,000
---------- ---------- --------
Total deferred (127,000) (38,000) (8,000)
Total taxes $1,256,000 $1,032,000 $929,000
</TABLE>
The components of the net deferred tax asset of the Company as of December
31, 1997, and 1996, were as follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $419,000 $335,000
State taxes 81,000 78,000
Depreciation 68,000 65,000
Other 59,000 24,000
Deferred Tax Liabilities:
Accretion (2,000) (4,000)
-------- --------
Total $625,000 $498,000
</TABLE>
The provisions for income taxes applicable to operating income differ from
the amount computed by applying the statutory federal tax rate to operating
income before taxes. The reasons for these differences are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax expense,
based on the statutory
federal income tax rate $1,008,000 34.00% $ 831,000 34.00% $763,000 34.00%
Municipal income 0 .00% 0 .00% (13,000) (.60%)
State franchise taxes, net
of federal income tax
benefit 212,000 7.20% 188,000 7.70% 166,000 7.40%
Other, net 36,000 1.20% 13,000 .50% 13,000 .60%
----------- ------ ---------- ------- -------- ------
$1,256,000 42.40% $1,032,000 42.20% $929,000 41.40%
</TABLE>
7. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
- ------------------------------------------------------------------------------
Earnings per share (EPS) for the years ended December 31, 1997, 1996, and
1995, are shown in accordance with SFAS No. 128, Earnings per Share, which
was effective for fiscal years ended after December 15, 1997, and requires
restatement of prior periods EPS. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted EPS is computed by dividing
diluted income available to shareholders by the weighted average number of
common shares and common equivalent shares outstanding which include dilutive
stock options. The computation of common stock equivalent shares is based on
the weighted average market rice of the Company's common stock throughout the
period. The following is a reconciliation of the numerators and denominators
of the basic and diluted EPS computations for the years ended December 31,
1997, 1996, and 1995.
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------- ------------------------------- ------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $1,708,154 $1,411,871 $1,315,507
Basic EPS Income
Available to
Common Stockholder $1,708,154 430,231 $3.97 $1,411,871 424,920 $3.32 $1,315,507 424,868 $3.10
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock Options 29,084 29,069 32,731
Diluted EPS
Income Available to Common
Stockholders + Assumed
Conversion $1,708,154 459,315 $3.72 $1,411,871 453,989 $3.11 $1,315,507 457,599 $2.87
</TABLE>
8. REGULATORY CAPITAL
- ------------------------------------------------------------------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1997, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notification from Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt correction action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The consolidated and Bank's actual capital amounts and ratios are also
presented in the table.
<PAGE>
<TABLE>
<CAPTION>
TO BE WELL- CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
(to Risk Weighted Assets)
Consolidated $13,713,000 19.97% GREATER $5,494,000 GREATER 8.00% GREATER $6,868,000 GREATER 10.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Bank 10,029,000 14.92% GREATER 5,377,000 GREATER 8.00% GREATER 6,721,000 GREATER 10.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 12,879,000 18.75% GREATER 2,747,000 GREATER 4.00% GREATER 4,121,000 GREATER 6.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Bank 9,213,000 13.71% GREATER 2,689,000 GREATER 4.00% GREATER 4,033,000 GREATER 6.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Tier 1 Capital
(to Average Assets)
Consolidated 12,879,000 12.43% GREATER 4,144,000 GREATER 4.00% GREATER 5,180,000 GREATER 5.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Bank 9,213,000 9.12% GREATER 4,040,000 GREATER 4.00% GREATER 5,050,000 GREATER 5.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
As of December 31, 1996
Total Capital
(to Risk Weighted Assets)
Consolidated $12,679,000 20.47% GREATER $4,955,000 GREATER 8.00% GREATER $6,194,000 GREATER 10.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Bank 9,197,000 15.61% GREATER 4,714,000 GREATER 8.00% GREATER 5,893,000 GREATER 10.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 11,939,000 19.28% GREATER 2,478,000 GREATER 4.00% GREATER 3,716,000 GREATER 6.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Bank 8,494,000 14.41% GREATER 2,357,000 GREATER 4.00% GREATER 3,536,000 GREATER 6.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Tier 1 Capital
(to Average Assets)
Consolidated 11,939,000 13.14% GREATER 3,634,000 GREATER 4.00% GREATER 4,542,000 GREATER 5.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
Bank 8,494,000 9.63% GREATER 3,528,000 GREATER 4.00% GREATER 4,410,000 GREATER 5.00%
THAN OR THAN OR THAN OR THAN OR
EQUAL EQUAL EQUAL EQUAL
TO TO TO TO
</TABLE>
9. STOCK OPTION PLAN
- ------------------------------------------------------------------------------
The Company adopted an incentive stock option plan in 1982 and reserved
40,000 shares of the Company's common stock for issuance under this plan. In
1986, the directors and shareholders approved increasing the number of shares
in this plan to 90,000. The additional shares were registered in accordance
with federal and state securities laws in 1987. In 1987, the Company issued a
10% stock dividend which increased the number of shares in this plan to
99,000. Options may be granted at a price not less than the fair market value
of the stock at the date of grant, become exercisable in cumulative 10%
annual installments commencing one year after the date of grant, and expire
ten years from the date of grant.
In 1992, the shareholders approved the 1992 Employee and Consultant Stock
Option Plan (the "1992 Plan") which was designed to replace the 1982
Incentive Stock Option Plan that expired on February 28, 1992, after which no
new unallocated stock options may be granted. The 1992 Plan was designed to
carry forward the remaining 82,995 options issued but not exercised under the
1982 Incentive Plan at the then current market price. No new additional
shares of the Company have been reserved for issuance under the 1992 Plan.
<PAGE>
In addition to the above plan, shareholders approved, in 1989, the 1989
Non-Qualified Stock Option Plan for Directors, including Advisory Board
members, and reserved 35,000 shares of the Company's common stock for
issuance under this plan. The plan was established to give appropriate
recognition to this group of individuals for their continuing responsibility
for the Company's growth and profitability.
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock Based Compensation," is effective for transactions
entered into for fiscal years beginning after December 15, 1995, and applies
to awards made in fiscal years beginning after December 15, 1994. This
statement defines a fair-value method of accounting for stock-based
compensation. As permitted by SFAS No. 123, the Company accounts for stock
options under APB Opinion No. 25, under which no compensation cost has been
recognized. The Company has made no awards under its stock option plans
subsequent to January 1, 1995. As such, pro forma net income and earnings per
share data as if compensation cost for these plans had been determined
consistent with SFAS No. 123 would not differ from the reported amounts in
the Company's income statement.
The following table summarizes the stock option activity under the 1982
Incentive Stock Option Plan for the years ended December 31, 1997, 1996, and
1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
---------------- --------------
<S> <C> <C>
Balance, December 31, 1994 57,095 $11.09
Granted 0 0.00
Exercised 0 0.00
Expired 0 0.00
Forfeited (500) 13.00
--------------- --------------
Balance, December 31, 1995 56,595 $11.07
Granted 0 0.00
Exercised (10,680) 10.92
Expired 0 0.00
Forfeited (1,170) 13.00
--------------- --------------
Balance, December 31, 1996 44,745 $11.06
Granted 0 0.00
Exercised (10,000) 10.00
Expired 0 0.00
Forfeited 0 0.00
--------------- --------------
Balance, December 31, 1997 34,745 $11.17
</TABLE>
As of December 31, 1997, 1996, and 1995, 24,941, 29,429, and 33,623 of the
options, respectively, were exercisable. The options outstanding at December
31, 1997, have exercise prices between $10.00 and $13.50, with a weighted
average exercise price of $11.36 and a weighted average remaining contractual
life of 4.1 years.
<PAGE>
The following table summarizes the stock option activity under the 1992
Employee and Consultant Stock Option Plan during the years ended December 31,
1997, 1996, and 1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
---------------- -----------------
<S> <C> <C>
Balance, December 31, 1994 9,100 $17.75
Granted 0 0.00
Exercised 0 0.00
Expired 0 0.00
Forfeited (500) 17.75
---------------- -----------------
Balance, December 31, 1995 8,600 $17.75
Granted 0 0.00
Exercised (100) 17.75
Expired 0 0.00
Forfeited (400) 17.75
---------------- -----------------
Balance, December 31, 1996 8,100 $17.75
Granted 0 0.00
Exercised 0 0.00
Expired 0 0.00
Forfeited 0 0.00
---------------- -----------------
Balance, December 31, 1997 8,100 $17.75
</TABLE>
As of December 31, 1997, 1996, and 1995, 2,430, 1,620 and 860 of the options,
respectively, were exercisable. All of the options outstanding as of December
31, 1997, have an exercise price of $17.75 and a weighted average remaining
contractual life of 6.6 years.
There have been no grants, exercises, expirations, or forfeitures during the
years ending December 31, 1997, 1996, and 1995 under the 1989 Non-Qualified
Stock Option Plan. As of December 31, 1997, 1996, and 1995, no options were
outstanding under this Plan.
10. RESTRICTIONS
- ------------------------------------------------------------------------------
The Bank is regulated by the Federal Deposit Insurance Corporation, whose
regulations do not specifically limit payment of dividends, and the
California State Banking Department. California banking laws limit dividends
to the lesser of retained earnings or net income less dividends paid for the
last three years. Under these restrictions, at December 31, 1997, the Bank
could pay dividends to the Company of up to approximately $1,135,742 without
prior regulatory approval.
11. COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------------------------------------
The Company is obligated for rental payments under certain operating lease
and contract agreements. Total rental expense for all leases
<PAGE>
included in occupancy and equipment expenses was $206,766, $208,665, and
$208,215 for the years ended December 31, 1997, 1996, and 1995.
At December 31, 1997, the approximate future minimum payments for
noncancelable leases with initial or remaining terms in excess of one year
were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $180,795
1999 122,458
2000 122,458
2001 67,605
2002 38,045
</TABLE>
The Company is subject to various pending and threatened legal actions which
arose out of the normal course of business. In the opinion of management, the
disposition of claims currently pending will not have a material adverse
effect on the Company's financial position.
The Bank is required by federal regulations to maintain certain minimum
average balances with the Federal Reserve. Required deposits held with the
Federal Reserve at December 31, 1997, were $890,000.
12. PENSION PLAN
- ------------------------------------------------------------------------------
The Company provides pension benefits for all its eligible employees through
a 401(k) Profit Sharing Program which was adopted in 1984. Under the terms of
the plan, eligible employees are allowed to contribute, under the 401(k)
portion of the plan, up to 15% of their salaries. The Company in turn will
match the employee's contribution up to a maximum of 3% of the employee's
total annual compensation. Under this part of the plan, $24,773 was
contributed in 1997, $7,018 in 1996, and $4,425 in 1995.
In addition, the Company may contribute up to 15% of eligible employees'
annual compensation to the profit sharing portion of this plan. Such
contributions were $101,472 in 1997, $78,398 in 1996, and $92,156 in 1995.
Employees' interest in the contributions made by the Company on their behalf
become 100% vested in accordance with the seven year program. Any forfeited
amounts are redistributed among the remaining participants in the plan.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
- ------------------------------------------------------------------------------
The Company 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 commitments to extend credit,
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the statement
of financial position. The contract amount
<PAGE>
of those instruments reflects the extent of involvement the company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount
of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. At December 31, 1997, financial instruments whose contract
amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
--------------------------------------
<S> <C>
Commitments to extend credit in the
future $ 19,076,880
Standby letters of credit 1,067,554
</TABLE>
Commitments to extend credit 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. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable, inventory,
property, plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Most all
guarantees expire within one year. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
Approximately 11.8% of the Company's loans are concentrated with health care
professionals.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------
Statement of Financial Authority Standards (SFAS) No. 107, "Disclosure about
Fair Value of Financial Statements," requires the Bank to disclose the fair
value of financial instruments, both assets and liabilities recognized and
not recognized in the balance sheet, for which it is practical to estimate
fair value. Following is a summary of the estimated fair value for each class
of financial instrument as of December 31, 1997, and the methods and
assumptions used to evaluate them:
<PAGE>
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
----------- -----------
<S> <C> <C>
Cash and due from banks $ 8,664,015 $ 8,664,015
Federal funds sold 12,910,000 12,910,000
Investment securities 12,496,651 12,525,319
Due from bank-time 5,644,000 5,650,943
Loans 60,832,859 60,846,445
Deposits
Demand 31,062,481 27,924,250
Interest bearing transaction accounts 33,012,655 30,690,984
Savings 2,264,538 1,920,483
Time certificates 24,092,068 24,091,257
</TABLE>
Cash and due from banks have a relatively short period of time between their
origination and their expected realization and are valued at their carrying
amounts. The fair value of investment securities and due from banks-time were
estimated using quoted market prices or dealer quotes. The allowance for loan
losses and overdrafts are valued at the carrying amount. All other loans are
valued by loan type. Loans are spread monthly by maturity and repricing date.
To determine the fair value the interest rate used to discount the cash flows
is the current market rate for a like class of loans. Loan fees were not
taken into consideration. The fair value of noninterest-bearing,
interest-bearing transaction accounts and savings deposits is the amount
payable on demand as of December 31, 1997. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
The Bank has off-balance-sheet commitments comprising letters of credit and
loan commitments with a contract amount of $1,067,554 and $19,076,880,
respectively. The fair value of these off-balance-sheet commitments is not
material.
<PAGE>
15. SUMMIT BANCSHARES, INC. (PARENT COMPANY ONLY)
- ------------------------------------------------------------------------------
The following are the statements of financial position as of December 31,
1997, and 1996, and the related statements of income and cash flows for the
years ended December 31, 1997, 1996, and 1995, for Summit Bancshares, Inc.
(parent company only):
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL POSITION 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 2,236,528 $ 227,230
Short term investments 0 100,000
Loan participation with 894,894 2,575,408
subsidiary
Land and building 377,712 395,519
Investment in subsidiary 9,213,319 8,494,384
Other assets 184,777 169,425
- ------------------------------------------------------------------------------
Total Assets $12,907,230 $11,961,966
- ------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------
Accounts payable 5,287 $ 8,605
Income taxes payable 23,274 14,218
- ------------------------------------------------------------------------------
Total Liabilities 28,561 22,823
- ------------------------------------------------------------------------------
Shareholders' Equity:
Common Stock 3,709,145 3,830,343
Retained Earnings 9,169,524 8,108,800
- ------------------------------------------------------------------------------
Total Shareholders' Equity 12,878,669 11,939,143
- ------------------------------------------------------------------------------
Total Liabilities and 12,907,230 $11,961,966
Shareholders' Equity
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME (YEAR ENDED DECEMBER 31) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiary $ 825,000 $ 400,000 $1,700,000
Interest on short-term 261,554 249,103 97,810
investments and loan
Rental and other income 61,867 58,242 41,760
- ------------------------------------------------------------------------------------------
Total income 1,148,421 707,345 1,839,570
- ------------------------------------------------------------------------------------------
EXPENSE:
Miscellaneous expense 41,970 42,671 45,000
- ------------------------------------------------------------------------------------------
Total expense 41,970 42,671 45,000
- ------------------------------------------------------------------------------------------
Income before income tax and
equity in
earnings of subsidiary 1,106,451 664,674 1,794,570
Provision for income taxes 117,056 109,829 39,020
Income before equity in
earnings of subsidiary 989,395 554,845 1,755,550
Equity in undistributed income of 718,759 857,026 (440,043)
subsidiary
- ------------------------------------------------------------------------------------------
Net Income $1,708,154 $1,411,871 $1,315,507
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 7,640,907 $ 6,964,938 $ 6,502,009
Fees received 1,071,607 1,015,572 1,058,317
Interest paid (1,901,068) (1,970,531) (1,375,953)
Cash paid to suppliers and employees (3,383,985) (3,315,929) (3,245,453)
Income taxes paid (1,365,000) (1,351,000) (1,111,654)
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 2,062,461 1,343,050 1,827,268
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in time deposits with
other financial institutions 3,963,000 1,395,000 3,963,000
Maturity of investment securities 5,759,332 8,537,242 7,607,380
Purchase of investment securities (9,496,133) (11,270,730) (3,300,845)
Net (increase) in loans to customers (9,179,696) (2,311,654) (3,068,584)
Recoveries on loans previously charged-off 3,000 3,500 11,752
(Increase) in premises and equipment (173,394) (166,364) (112,869)
- ----------------------------------------------------------------------------------------
Net cash (used in) investing activities (9,123,891) (3,813,006) (2,826,166)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in demand, interest bearing
transaction, and savings deposits 7,177,240 2,830,177 1,939,493
Net increase in time deposits 2,744,918 2,428,493 5,449,345
Decrease in other assets 313,400 526,987 1,498,525
Exercise of stock options 100,000 118,373 0
Repurchase of common stock (221,198) (55,288) (70,426)
Dividends paid (647,430) (638,074) (636,576)
- ----------------------------------------------------------------------------------------
Net cash provided by financing activities 9,466,930 5,210,668 8,180,361
Net increase in cash and cash equivalents 2,405,500 2,740,712 7,151,461
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at the
beginning of the year 19,168,515 16,427,803 9,246,342
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $21,574,015 $19,168,515 $16,427,803
- ----------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $1,708,154 $1,411,871 $1,315,507
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 194,887 141,061 142,154
Provision for loan losses 270,000 125,000 415,000
(Increase) decrease in interest receivable (161,978) 45,134 (14,808)
Increase (decrease) in unearned loan fees (38,095) 20,220 25,249
Increase (decrease) in accrued interest payable 38,983 (32,764) 159,903
(Increase) decrease in prepaid expenses 32,733 (20,114) (33,272)
Increase (decrease) in accounts payable 126,921 (26,687) 367
Increase (decrease) in income taxes payable (109,144) (318,671) (182,834)
- ----------------------------------------------------------------------------------------
Total adjustments 354,307 (68,821) 511,759
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities $2,062,461 $1,343,050 $1,827,266
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SUMMIT BANCSHARES, INC.:
We have audited the consolidated statement of financial condition of Summit
Bancshares, Inc. (the Company) as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the
Company as of December 31, 1996, for the years ended December 31, 1995, and
1994, were audited by other auditors, whose report, dated January 10, 1997,
expressed an unqualified opinion on these statements.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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
subsidiary at December 31, 1997, and the results of their operations and
their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
San Francisco, California
January 20, 1998
<PAGE>
SUMMIT EQUITIES. INC.
(PARENT COMPANY ONLY)
DECEMBER 31, 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ASSETS
- ------------
- ------------
<TABLE>
<CAPTION>
<S> <C> <C>
CASH $10,864.21
TOTAL ASSETS $10,864.21
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS EQUITY
- -----------------------------------
- -----------------------------------
LIABILITIES
- ------------
- ------------
RESERVE FOR FED TAXES $ 0.00
RESERVE FOR STATE TAXES $ 0.00
TOTAL RESERVE FOR TAXES $ 0.00
----------
TOTAL LIABILITIES $ 0.00
-----------------
-----------------
SHAREHOLDERS EQUITY
- -------------------
- -------------------
COMMON STOCK $10,000.00
RETAINED EARNINGS $ 864.21
PROFIT/LOSS YEAR-TO-DATE $ 0.00
----------
$10,864.21
TOTAL SHAREHOLDERS EQUITY $10,864.21
------------------------- ----------
TOTAL LIABILITIES &
SHAREHOLDERS EQUITY $10,864.21
------------------- ----------
------------------- ----------
</TABLE>
<PAGE>
SUMMIT EQUITIES, INC.
(PARENT COMPANY ONLY)
DECEMBER 31, 1997
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INCOME
- ------------
- ------------
INTEREST INCOME - MMA & TCD $0.00
INTEREST INCOME - LOANS $0.00
OTHER INCOME $0.00
-----
TOTAL INCOME $0.00
------------
------------
EXPENSE
- -------
- -------
BUILDING DEPRECIATION $0.00
ANNUAL REPORT & MEETING EXPENSE $0.00
MISCELLANEOUS EXPENSE $0.00
LEGAL $0.00
PROPERTY/TAXES $0.00
-----
TOTAL EXPENSES $0.00
-------------- -----
--------------
INCOME BEFORE TAXES &
EARNINGS OF SUBSIDIARY $0.00
----------------------
----------------------
PROVISION FOR TAXES
- -------------------
- -------------------
FEDERAL INCOME TAX PROVISION $0.00
STATE INCOME TAX PROVISION $0.00
TOTAL TAX PROVISION $0.00
-----
NET INCOME $0.00
---------- -----
---------- -----
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8664015
<INT-BEARING-DEPOSITS> 5644000
<FED-FUNDS-SOLD> 12910000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 12496651
<INVESTMENTS-MARKET> 12515656
<LOANS> 62070871
<ALLOWANCE> 1238012
<TOTAL-ASSETS> 104341531
<DEPOSITS> 90431742
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1031120
<LONG-TERM> 0
0
0
<COMMON> 3709145
<OTHER-SE> 9169524
<TOTAL-LIABILITIES-AND-EQUITY> 104341531
<INTEREST-LOAN> 6726641
<INTEREST-INVEST> 1670351
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8396992
<INTEREST-DEPOSIT> 1940052
<INTEREST-EXPENSE> 1940052
<INTEREST-INCOME-NET> 6456940
<LOAN-LOSSES> 270000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3738525
<INCOME-PRETAX> 2964010
<INCOME-PRE-EXTRAORDINARY> 1708154
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1708154
<EPS-PRIMARY> 3.97
<EPS-DILUTED> 3.72
<YIELD-ACTUAL> 7.45
<LOANS-NON> 176000
<LOANS-PAST> 408
<LOANS-TROUBLED> 584
<LOANS-PROBLEM> 100
<ALLOWANCE-OPEN> 1070318
<CHARGE-OFFS> 105306
<RECOVERIES> 3000
<ALLOWANCE-CLOSE> 1238012
<ALLOWANCE-DOMESTIC> 1238012
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
