<PAGE>
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, 1999 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:
$11,946,171.00 (1)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
457,911 shares no par common stock
issued as of February 28, 2000
Documents Incorporated By Reference
<PAGE>
- - ---------------
1
For purposes of this calculation only, shares are deemed to have market value of
$38.875, the average of bid and asked prices on February 28, 2000, and each of
the executive officers, directors and persons holding 5% or more of the
outstanding common stock is deemed to be an affiliate.
Portions of Registrant's Annual Report to Shareholders
for the Fiscal Year Ended December 31, 1999
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
May 16, 2000 are Incorporated by
<PAGE>
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 (925) 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 which moved to new quarters located at
5673 W. Las Positas Blvd. Ste. 208, 94588 in July of 1998. The telephone number
is (925) 224-7788.
Summit Bancshares, Inc. owns all of the capital stock of Summit Bank
(the "Bank"), its subsidiary bank, and its activities during 1999 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, as well as real estate developers. 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 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.
<PAGE>
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, now known as the
Department of Financial Institutions, 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 subsidiary. 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 sparsely 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
two major hospitals, approximately 327 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 390 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 1300 people and accommodates a large staff of
approximately 310 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 92 physicians.
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 a commercial development known as Hacienda Industrial
Park in the city of Pleasanton. It is also two blocks from Valleycare Medical
Center.
The Bank also obtains business clients from the various 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
- - -----------
<PAGE>
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, and 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 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 anti competitive 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
<PAGE>
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
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, 1999, loans to directors totaled
$1,090,004 or 7.2% 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 Department of Financial Institutions (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
<PAGE>
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 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.
<PAGE>
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) in June 1998. This statement,
among other things, establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and the resulting
designation. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133", which deferred the effective date of
implementation of SFAS 133 for one year. The provisions of SFAS 133, as
amended, are effective for all fiscal quarters or all fiscal years beginning
after June 15, 2000. SFAS 133 is not anticipated to have a significant impact
on the Company's consolidated financial condition or results of operations.
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 about
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 became effective for the Company's 1998 fiscal year and
required that comparative information from earlier years to be restated to
conform to the requirements of this standard. SFAS 131 had no effects 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 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
<PAGE>
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 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 might 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.
<PAGE>
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 1999, 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 4%. An institutions leverage ratio is determined by
dividing Tier 1 capital by total average assets. 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.
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, 1999 was 8.10% (See "Summit Bancshares,
Inc. 1999 Annual Report - Footnote #8).
EMPLOYEES
- - ---------
On December 31, 1999 the Bank employed 49 full time employees and 1
part time employees for a total equivalent of 49.4 full time employees. At the
present time there are no salaried employees of the Company.
<PAGE>
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, 1999.
Comparative figures for the years ended December 31, 1998 and 1997, are also
provided:
<TABLE>
<CAPTION>
ASSETS 1999 1998 1997
- - ------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
<S> <C> <C> <C> <C> <C> <C>
Cash and Due
From Banks $7,633 6.13% $7,231 6.49% $6,858 7.20%
Time Deposits with Other
Financial Institutions 28,179 22.62 10,948 9.82 7,896 8.20
Investment
Securities:
Taxable 16,250 13.05 13,397 12.02 10,923 11.39
Federal Funds
Sold 15,306 12.29 21,888 19.64 10,105 10.54
Loans, Net 52,086 41.82 53,992 48.45 56,746 59.17
Other Assets 5,100 4.09 3,994 3.58 3,360 3.50
--------------------------------------------------------------------------------
Total Assets $124,554 100% $111,450 100.00% 95,888 100.00%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
- - ----------------------------------
Deposits:
Demand $38,478 30.89% 31,301 28.09% $25,082 26.16%
Interest Bearing-
Transaction accounts 39,252 31.52 35,004 31.41 32,914 34.33
Savings 2,344 1.89 2,878 2.58 2,345 2.44
Time 28,815 23.13 28,106 25.22 22,750 23.73
Other Liabilities 802 .64 1,074 0.96 768 0.80
Shareholders Equity 14,863 11.93 13,087 11.74 12,029 12.54
--------------------------------------------------------------------------------
Total Liabilities &
Shareholder's Equity $124,554 100% $111,450 100.00% $95,888 100.00%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following is an analysis of Net Interest Income for 1999.
Comparative figures for 1998 and 1997 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, 1999
------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
------- ------- ----
<S> <C> <C> <C>
ASSETS
- - ------
Time Deposits with Other
Financial Institutions $28,179 $1,498 5.32%
Investment Securities (footnote #1) 16,250 881 5.42
Federal Funds Sold 15,306 771 5.04
Loans (Interest and Fees) 53,409 5,614* 10.51
---------------------------------------------
Total Earning Assets $113,144 $8,764 7.75%
-----------------------
-----------------------
Cash and Due from Banks 7,633
Premises and Equipment 919
Other Assets 4,181
TOTAL ASSETS $124,554
--------
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - -----------------------------------
Deposits:
Demand $38,478 $---- ----%
Savings 2,344 46 1.96
Interest-bearing Transaction 39,252 769 1.96
Time 28,815 1,338 4.64
---------------------------------------------
Total Deposits $108,890 $2,153 1.98%
-----------------------
-----------------------
Other Liabilities 886
Shareholders' Equity 14,779
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $124,554
--------
--------
AS A PERCENTAGE OF AVERAGE
TOTAL EARNING ASSETS:
Interest and Fee Income $8,764
Interest Expense 2,153
---------
NET INTEREST INCOME AND MARGIN $6,611 5.77%
------------------------------
------------------------------
</TABLE>
*Includes loan fees of $412,691
1.) Investment income rate is not calculated on a tax equivalent basis.
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
------------------------------------
Interest Rates
Average Income/ Earned/
Balance Expense Paid
------- ------- ----
<S> <C> <C> <C>
ASSETS
- - ------
Time Deposits with Other
Financial Institutions $10,948 $629 5.75%
Investment Securities (footnote #1) 13,397 769 5.74
Federal Funds Sold 21,888 1,178 5.38
Loans (Interest and Fees) 53,992 6,150* 11.39
--------------------------------------------
Total Earning Assets $100,225 $8,726 8.71%
----------------------
----------------------
Cash and Due from Banks 7,231
Premises and Equipment 582
Other Assets 3412
--------
TOTAL ASSETS $111,450
--------
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
- - -----------------------------------
Deposits:
Demand $31,301 $---- ----%
Savings 2,878 54 1.88
Interest-bearing Transaction 35,004 737 2.11
Time 28,106 1,476 5.25
--------------------------------------------
Total Deposits $97,289 $2,267 2.33%
----------------------
----------------------
Other Liabilities 1,074
Shareholders' Equity 13,087
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $111,450
--------
--------
AS A PERCENTAGE OF AVERAGE
TOTAL EARNING ASSETS:
Interest and Fee Income $8,726
Interest Expense 2,267
------------------
------------------
NET INTEREST INCOME AND MARGIN $6,459 6.38%
-----------------------------------
-----------------------------------
</TABLE>
*Includes loan fees of $516,000
1.) Investment income rate is not calculated on a tax equivalent basis.
<PAGE>
<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 $95,888
SHAREHOLDERS' EQUITY -------
-------
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
Following is an analysis of changes in Interest Income and Expense (in
thousands of dollars) for 1999 over 1998. A similar comparison for 1998 over
1997 is on the following page. Changes not solely attributed to volume or rates
have been allocated proportionately to volume and rate components.
<PAGE>
<TABLE>
<CAPTION>
1999 over 1998
INCREASE (DECREASE) IN --------------
INTEREST AND FEE INCOME Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Time Deposits with Other
Financial Institutions $168 $701 $869
Investment Securities 7 105 112
Federal funds Sold (18) (389) (407)
Loans, Net (1) (535) (536)
Total Increase in
Interest and Fee Income 156 (118) 38
INCREASE IN
INTEREST EXPENSE
- - ----------------
Savings Deposits (1) (7) (8)
Interest-bearing Transaction 2 30 32
Time Deposits 0 (138) (138)
Total Increase in 2 (116) (114)
Interest Expense
INCREASE IN
NET INTEREST INCOME $154 $ (1) $152
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 over 1997
INCREASE (DECREASE) IN --------------
INTEREST AND FEE INCOME Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Time Deposits with Other
Financial Institutions $300 $(121) $179
Investment Securities 265 (161) 104
Federal funds Sold 932 (310) 622
Loans, Net (27) (549) (576)
-------------------------------------------------------------
Total Increase in
Interest and Fee Income 1,470 (1,141) 329
-------------------------------------------------------------
INCREASE IN
INTEREST EXPENSE
- - ----------------
Savings Deposits 18 (9) 9
Interest-bearing Transaction 82 18 100
Time Deposits 516 (298) 218
-------------------------------------------------------------
Total Increase in
Interest Expense 616 (289) 327
-------------------------------------------------------------
INCREASE IN
NET INTEREST INCOME $854 $(852) $2
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
<PAGE>
INVESTMENT SECURITIES
- - ---------------------
The following table sets forth the book value as of December 31 for the
securities indicated:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. Treasury
Securities $0 $1,499,445
U.S. Agencies 19,465,133 14,000,225
TOTAL $19,465,133 $15,499,670
-----------------------------------
-----------------------------------
</TABLE>
The amortized cost and estimated fair values of investment in debt securities
for 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Agencies $19,465,133 $0 $310,361 $19,154,772
TOTAL $19,465,133 $0 $310,361 $19,154,772
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1999 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
---- -----
<C> <C> <C>
Due in one year or less $7,000,000 $4,848,301
Due after one year through
Five years $12,465,133 $14,306,471
TOTAL $19,465,133 $19,154,772
--------------- ----------------
--------------- ----------------
</TABLE>
There were no sales of investments in debt securities during 1999.
<PAGE>
The following table is a summary of the relative maturities and yields
of Summit Bancshares, Inc. investment securities as of December 31, 1999 and
1998. 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
--------------- ------------------ -----
<S> <C> <C> <C> <C> <C> <C>
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
December 31, 1999
-----------------
U.S. Agencies $7,000,000 35.96% $12,465,133 64.04% $19,465,133 5.51%
------------------------------------------------------------------------------------
TOTAL $7,000,000 35.96% $12,465,133 64.04% $19,465,133 5.51%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
December 31, 1998
-----------------
U.S. Treasury
Security 1,499,445 6.38% $0 1,499,445 6.38%
U.S. Agencies 5,000,000 4.91% 9,000,225 5.23% 14,000,225 5.12%
------------------------------------------------------------------------------------
TOTAL $6,499,445 5.16% $9,000,225 5.23% $15,499,670 5.20%
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
<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>
1999 1998
---- ----
<S> <C> <C>
Commercial and
Financial $33,368 $38,403
Real Estate, Including
Construction 17,090 10,733
Installment 6,887 5,196
Leases 0 0
----------------------------------
Less Unearned Lease Income 0 0
Less Allowance for
Loan Losses (1,273) (1,319)
----------------------------------
TOTAL $56,072 $53,013
----------------------------------
----------------------------------
</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, 1999.
<TABLE>
<CAPTION>
Loans with a Maturity of
------------------------
One Year One through Over Five Total
Or Less Five Years Years -----
------- ---------- -----
<S> <C> <C> <C> <C>
Commercial and $20,717 $9,639 $3,012 $33,368
Financial
Real Estate
Construction 6,461 1166 0 7,627
----------------------------------------------------------------------------
TOTAL $27,178 $10,805 $3,012 $40,995
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
All but seven loans for $4,834,522 reported above which have maturities of over
one year are at floating interest rates.
<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. 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 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, 1999, financial instruments whose contract
amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
-----------------------------------------------------
<S> <C>
Commitments to extend credit in the Future $27,301,683
Standby letters of credit 1,183,270
</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 5.9% of the Company's loans are concentrated with health care
professionals.
<PAGE>
NON-PERFORMING LOANS AND
- - ------------------------
SUMMARY OF LOAN LOSS EXPERIENCE
- - -------------------------------
(In thousands of dollars)
<TABLE>
<CAPTION>
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- -------------
<S> <C> <C> <C>
Non-Accrual Loans $158 $651 $176
90 days past due &
Still accruing 0 662 408
-----------------------------------------------------------------------
Total non-accrual
and 90 days past
due loans 158 1,313 584
Other real estate owned 0 212 1,222
-----------------------------------------------------------------------
Total non-performing
assets $158 $1,525 $1,806
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</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 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.
<PAGE>
An analysis of activity in the allowance for loan losses for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning
of period $1,319,451 $1,238,012 $1,070,318
------------------------------------------------------------------
Provision for
loan losses 0 100,000 270,000
------------------------------------------------------------------
Loans charged off
Commercial 74,230 25,000 96,934
Real Estate Construction 0 0 0
Installment 0 26,374 8,372
------------------------------------------------------------------
Total chargeoffs 74,230 51,374 105,306
------------------------------------------------------------------
Recoveries
Commercial 5105 0 0
Real Estate Construction 0 0 0
Installment 23,038 32,813 3,000
------------------------------------------------------------------
Total recoveries 28,143 32,813 3,000
Net Chargeoffs 46,087 18,561 102,306
------------------------------------------------------------------
Balance at end of period $1,273,364 $1,319,451 $1,238,012
------------------------------------------------------------------
Ratio of net chargeoffs
to average loans outstanding 0.09% 0.03% .18%
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
<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>
1999 1998 1997
---- ---- ----
Amount Percentage Amount Percentage Amount Percentage
<S> <C> <C> <C> <C> <C> <C>
3 months or less $17,644 75.3% $22,407 78.8% $12,171 64.6%
Over 3 through
6 months 2,366 10.10 3,854 13.5 4,230 22.5
Over 6 through
12 months 3,432 14.6 2,201 7.7 2,227 11.8
Over 12 months 0 0.0 0 0 200 1.1
--------------------------------------------------------------------------------------------
TOTAL $23,442 100.0% $18,828 100.0% $15,325 100.0%
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
RETURN ON EQUITY AND ASSETS
- - ---------------------------
The following table shows key financial ratios for the years ending
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Return on average assets 1.48% 1.59% 1.78%
Return on average
Shareholders' equity 12.37% 13.50% 14.20%
Dividend payout ratio 37.36% 49.69% 37.88%
Average shareholders'
equity as a percent of:
Average Assets 11.93% 11.74% 12.54%
Average Deposits 13.65% 13.54% 14.48%
</TABLE>
<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 1999. 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: 12/31/99
<TABLE>
<CAPTION>
less less less less
than than than than
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 $0 $0 $0 $0 $0 $0 $0
2. U.S. AGENCIES $19,465 7,000 12,465 0 0 0 0
3. FED FUNDS $21,760 21,760 0 0 0 0 0
4. PURCHASED CD's $27,889 4,251 16,716 6,922 0 0 0
-------------------------------------------------------------------------
TOTAL INVESTMENTS $69,114 $33,011 $29,181 $6,922 $0 $0 $0
B. LOANS $56,146 $48,858 $1,807 $6,922 $40 $0 $0
-------------------------------------------------------------------------
$56,146 $48,858 $1,807 $6,922 $40 $0 $0
C. TOTAL EARNING ASSETS $125,260 $81,869 $30,988 $7,384 $40 $0 $0
--------------------
ii. COST OF FUNDS (DEPOSITS)
------------------------
A. CERTIFICATES OF DEPOSIT $29,877 $20,891 $8,774 $211 $20 $2 $0
B. MONEY MARKET ACCOUNTS 44,403 6,055 17,071 21,276 0 0 0
C. TRANSACTION ACCOUNTS 6,951 298 894 2,356 1,694 1,709 0
D. SAVINGS ACCOUNTS 2,327 100 299 789 567 572 0
-------------------------------------------------------------------------
iii. INTEREST SENSITIVE ASSETS $125,260 $81,869 $30,988 $7,384 $3,210 $1,809 $0
IV. INTEREST SENSITIVE LIABILITIES $83,558 $27,344 $27,038 $24,632 $2,261 $2,281 $0
-------------------------------------------------------------------------
V. GAP $41,702 $54,525 $3,950 ($17,248) $949 ($472)
VI. CUMMULATIVE GAP $41,702 $54,525 $58,475 $41,227 $42,176 $41,704 $41,704
VII. GAP RATIO 1.50 2.74 .94 .81 1.42 0.79
VIII. CUMMULATIVE RATIO 1.50 2.74 1.85 1.52 1.52 1.50 1.50
IX. GAP AS A % OF TOTAL ASSETS 31.05 35.39 -1.13 -3.56 .71 -.35 0.00
X. CUMMULATIVE GAP AS A %OF 31.05 35.39 34.26 30.70 31.41 31.05 31.05
TOTAL ASSETS
</TABLE>
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
<PAGE>
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 $5,675.00 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.
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 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. The Bank
exercised one of it's options in January 1999 which brought the current base
rent to $2.32 per sq. ft. or $5,264 per month until January 1, 2002.
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
<PAGE>
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
previous lessee for a monthly rent of $4,350, triple net ending on March 31,
1999.
The Bank is currently reviewing plans to remodel this building with the
intention of making the property the future home of it's Walnut Creek office
whose lease is expiring on January 2, 2001.
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.
In June of 1998, the Pleasanton Branch moved to 5673 W. Las Positas Blvd. Ste.
208, 94588. The telephone number is (925) 224-7788. The rent at the Las Positas
address is $3,150 as of December 31, 1999.
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 1999
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 May 16, 2000.
The following individuals are the executive officers of the Company as
of December 31, 1999:
<TABLE>
<S> <C> <C> <C>
Name Age Position Since
Shirley W. Nelson 55 Chairman and Chief 1982
Executive Officer
George H. Hollidge 56 Secretary 1981
Kikuo Nakahara 66 Chief Financial 1985
Officer
</TABLE>
The following individuals are the executive officers of the Bank as of
December 31, 1999:
<TABLE>
<S> <C> <C> <C>
Name Age Position Since
Shirley W. Nelson 55 Chairman and Chief 1982
Executive Officer
C. Michael Ziemann 55 President and 1996
Chief Operating
Officer
Denise Dodini 47 Senior Vice 1994
President and
Senior Loan
Officer
</TABLE>
<PAGE>
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. She remained President of the Bank until January, 1996.
Prior to this assignment she was the Senior Vice President, Senior Loan
Officer. She is currently a member of the Board of Directors' Audit
Committee, 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 of
the Bank 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.
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, Justin Mazzon, American Blue Chip Investment
Management, 700 Larkspur Landing Circle, Larkspur, CA., the range of high and
low bids for such common stock for each calendar quarter since January 1998 is
as follows:
<PAGE>
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
----- ---- ---------
<S> <C> <C> <C>
1999
First Quarter $50 45 $----
Second Quarter 48 44 1/2 .75
Third Quarter 49 39 1/4 ----
Fourth Quarter 40 1/8 39 1/4 .75
---------
---------
1998
First Quarter $61 53 $----
Second Quarter 55 1/2 52 2/3 .75
Third Quarter 51 1/2 48 ----
Fourth Quarter 50 1/2 50 .75
$1.50
---------
---------
</TABLE>
As of February 28, 2000, there were 457,911 shares of common stock of the
Company issued.
(b) SHAREHOLDERS. As of February 28, 2000, there were 271
shareholders of record the common stock. There were no other classes of
securities outstanding.
(c) DIVIDENDS. On June 10, 1999 the Company paid a 75-cent per share
cash dividend in addition to a similar 75 cent per share dividend on December
3, 1999. 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 circumstances require approval of the California
Department of Financial Institutions, 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 Department of Financial
Institutions.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information of Summit Bancshares, Inc.
for the years from the period January 1, 1995 through December 31, 1999 should
be read in conjunction with the consolidated financial statements and the
accompanying notes included elsewhere in this Annual Report.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- - ------------------------------------------------------------------------------------------------------------
For the year ended December 31,
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Net Income $1,839,155 $1,767,392 $1,708,154 $1,411,871 $1,315,507
Earnings Per Common Share $4.03 $3.95 $3.97 $3.32 $3.10
Earnings Per Common $3.95 $3.81 $3.72 $3.11 $2.87
Share assuming dilution
Cash Dividends per Share $1.50 $1.50 $1.50 $1.50 $1.50
declared
AT YEAR END
(In Thousands)
Deposits $119,996 $109,889 $90,432 80,510 75,251
Loans (Net) 56,072 53,013 $60,833 51,408 49,645
Assets 135,904 124,656 $104,342 92,946 86,822
Shareholders' Equity 15,153 14,088 $12,879 11,939 11,102
Non-performing Loans to
Total Loans 0.28% 2.48% 0.96% 0.00% 0.82%
Allowance to
Non-performing Loans 805.69% 100.46% 212% N/A 252%
Allowance to
Non-Performing Assets 805.69% 86% 68% .82% 60%
Tier 1 Capital 19.67% 19.49% 13.71% 14.41% 12.19%
Total Tier Capital 20.89% 20.71% 14.92% 15.61% 13.29%
Leverage Ratio 11.61% 11.07% 9.12% 9.63% 9.24%
</TABLE>
<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, 1999 are incorporated by
reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statement of financial position as of December 31,
1999 and 1998 and the consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 1999, 1998,
and 1997, together with the report of independent public accountant appearing in
the Registrant's Annual Report to stockholders for the year ended December 31,
1999 are incorporated by reference herein.
<PAGE>
ITEM 9. CHANGES ON AND WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
------------------------------------------------------------
DISCLOSURES
-----------
On March 27, 2000 Summit Bancshares Inc. dismissed the services of
PricewaterhouseCoopers LLP as they informed the registrant that the local
office will no longer be providing accounting services for community banks
and that the last year in which they will provide services to the registrant
will be for the year 1999. PricewaterhouseCoopers LLP's last two years
reports did not contain an adverse opinion or disclaimer of opinion nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles. The decision to discontinue accounting services to the registrant
was made by PricewaterhouseCoopers LLP as a policy matter and not as result
of services performed for the registrant. During the registrant's two most
recent fiscal years and any subsequent interim period through February 28,
2000, there were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statements disclosure, or
auditing scope or procedure which disagreement(s), if not resolved to the
satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to the subject matter of the disagreement.
On the recommendation of the Company's Audit Committee, Arthur Andersen LLP will
be recommended to the Company's shareholders at its May 16, 2000 annual meeting
to be its new principal accountant to audit its financial statements. At no time
during the registrant's two most recent years did the registrant consult with
Arthur Andersen LLP regarding the application of accounting principles to a
specific transaction, either completed or proposed; or the type of audit opinion
that might be rendered on the registrant's financial statements, and neither a
written report was provided to the registrant or oral advice was provided that
the new accountant concluded was an important factor considered by the
registrant in reaching a decision as to the accounting, auditing or financial
reporting issue. In addition, there were no reportable events as defined in
Regulation S-K, Item 304(a) (1) (v) (A-D).
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 May 16, 2000 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 May 16, 2000. 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.
<PAGE>
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 May 16, 2000, 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 May 16, 2000, 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.
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, 1999 and
are incorporated by reference herein pursuant to Item 8.
Consolidated Statement of Financial Position - December 31, 1999 and
1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Statements of Changes in Shareholders' Equity (Consolidated and Parent
Company Only) for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
(b) 2. FINANCIAL STATEMENT SCHEDULES.
-----------------------------
Not Applicable
<PAGE>
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 Footnote #2
Bancshares Inc.
4.1 Specimen Stock Certificate Footnote #3
</TABLE>
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit Number Exhibit Page
-------------- ------- ----
<S> <C> <C>
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 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
<PAGE>
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
10.15 Lease-Walnut Creek Summit Bancshares,
Inc. owned Property
Footnote #18
10.16 Lease-Emeryville Renegotiated Footnote #19
11 Lease-Pleasanton New Premises -------
13 Portions of Annual Report to
Shareholders for the Year Ended
December 31, 1999
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.
7. Incorporated by reference to Exhibit 10.4 of Registrant's Annual
<PAGE>
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
The Company did not file any Reports on Form 8-K during the
quarter ended December 31, 1999.
<PAGE>
WEIGHTED AVERAGE SHARES
TWELVE MONTHS ENDED DECEMBER 31, 1999
12/31/99
<TABLE>
<CAPTION>
EARNINGS
PRIMARY PER SHARE
A. COMMON STOCK ANNUAL 456452.03 456452.03
(4TH QTR) 456691.61 456691.61
NO OF
DAYS
----------
452684.00 -31-98(BAL FWD)
<S> <C> <C> <C> <C> <C>
452684.00 TO 02/01/99 31.00 14033204.00
452134.00 TO 02/05/99 4.00 1808536.00
452117.00 TO 03/08/99 31.00 14015627.00
459617.00 TO 03/31/99 24.00 11030808.00
459617.00 TO 05/03/99 32.00 14707744.00
458847.00 TO 06/15/99 43.00 19730421.00
458347.00 TO 06/30/99 16.00 7333552.00
---------------------------------------------------------
458347.00 TO 07/07/99 7.00 3208429.00
456147.00 TO 07/14/99 7.00 3193029.00
455988.00 TO 07/21/99 7.00 3191916.00
455438.00 TO 09/30/99 71.00 32336098.00
455438.00 TO 10/28/99 28.00 12752264.00
457188.00 TO 12/27/99 60.00 27431280.00
458021.00 TO 12/31/99 4.00 1832084.00
---------------------------------------------------------
365.00 166604992.00
AVERAGE SHARES OUTSTANDING
FOR THE YEAR 456452.03
AVERAGE SHARES OUTSTANDING
FOR THE 4TH QUARTER 456591.61
</TABLE>
OPTIONS-FULLY DILUTED
---------------------
<TABLE>
<CAPTION>
USE HIGHER OF YEAR END PRICE OR AVERAGE PRICE
---------------------------------------------
<S> <C> <C>
YEAR END PRICE/QTR END 40.000
AVERAGE PRICE YTD 43.630
USE AVERAGE PRICE OF 43.630 8,849
--------
</TABLE>
<TABLE>
<CAPTION>
NO OF YEAR END OPTION NO OF
SHARES PRICE PRICE SHARES
--------- -------- ------- --------
<S> <C> <C> <C> <C>
MZ 2900.00 43.630 13.50 2,003
SN 978.00 43.630 13.25 681
DD 750.00 43.630 13.00 527
MZ 1045.00 43.630 13.00 734
AC 400.00 43.630 13.00 281
SN 4000.00 43.630 17.75 2,373
MZ 2000.00 43.630 17.75 1,186
DD 1000.00 43.630 17.75 593
AC 100.00 43.630 17.75 59
EA 2000.00 43.630 48.00 0
SS 1000.00 43.630 40.00 83
</TABLE>
<TABLE>
<S> <C> <C>
AVERAGE PRICE FOR THE YEAR 43.630
TOTAL SHARES 4TH QUARTER 465210.96 456691.61
TOTAL SHARES YEAR-TO-DATE 465,301 456452.03
NET INCOME 4TH QUARETER $491,588 $491,588
NET INCOME YEAR TO DATE, 1999 $1,839,155 $1,839,155
EARNINGS PER SHARE 4TH QUARTER $1.057 $1.076
EARNINGS PER SHARE, YTD $3.955 $4.029
</TABLE>
<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.
<TABLE>
<S> <C>
Date: March 30, 2000 By: /s/ Shirley W. Nelson
----------------------------------
Shirley W. Nelson, Chief
Chairman and CEO
(Principle Executive Officer)
Date: March 30, 2000 By: /s/ Kikuo Nakahara
----------------------------------
Kikuo Nakahara
(Chief Financial Officer)
</TABLE>
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Shirley W. Nelson Chairman of the Board, March 30, 2000
- - --------------------- Chief Executive Officer
SHIRLEY W. NELSON and President
<PAGE>
<S> <C> <C>
/s/ Kikuo Nakahara Chief Financial March 30, 2000
- - -------------------- Officer and Director
KIKUO NAKAHARA
/s/ George H. Hollidge Secretary and Director March 30, 2000
- - ----------------------
GEORGE H. HOLLIDGE
/s/ Stuart J. Kahn Director March 30, 2000
- - ----------------------
STUART J. KAHN
/s/ John Protopappas Director March 30, 2000
- - ----------------------
JOHN PROTOPAPPAS
/s/ Mary C. Warren Director March 30, 2000
- - ----------------------
MARY C. WARREN
/s/ Barbara J. Williams Director March 30, 2000
- - -----------------------
BARBARA J. WILLIAMS
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Income $1,839,155 $1,767,392 $1,708,154 $1,411,871 $1,315,507
Earnings per common share $4.03 $3.95 $3.97 $3.32 $3.10
Earnings per common share -
assuming dilution $3.95 $3.81 $3.72 $3.11 $2.87
Cash Dividends per Share,
declared $1.50 $1.50 $1.50 $1.50 $1.50
AT YEAR END (IN THOUSANDS)
Deposits $119,996 $109,889 $90,432 $80,510 $75,251
Loans (Net) 56,072 53,013 60,833 51,408 49,645
Assets 135,904 124,656 104,342 92,946 86,822
Shareholders' Equity 15,153 14,088 12,879 11,939 11,102
Non-performing Loans to
Total Loans 0.28% 2.48% 0.96% 0.00% 0.82%
Allowance to
Non-performing Loans 805.69% 100.46% 212.00% N/A 252%
Allowance to
Non-performing Assets 805.69% 86% 68% 82% 60%
Tier 1 Capital 19.67% 19.49% 18.75% 19.28% 18.12%
Total Tier Capital 20.89% 20.71% 19.97% 20.47% 17.02%
Leverage Ratio 11.61% 11.07% 12.43% 13.14% 13.24%
</TABLE>
* These ratios are for Summit Bank only.
<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 mid-sized businesses
and for professionals as well as individual consumers.
SUMMARY OF EARNINGS
The Company's net income for 1999 was $1,839,000 compared to $1,767,000 in 1998,
and $1,708,000 in 1997. The increase in 1999 net income over 1998 is attributed
to an increase in the sale of other real estate owned. The increase in 1998 net
income from 1997 is attributed to an increase in investment income. The net
income of $1,839,000 for 1999 represents $3.95 per share earnings compared to
$3.81 per share in 1998, and $3.72 per share in 1997.
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 reason 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 34% of the investment portfolio matures in
one year. Regarding loans, approximately 90% 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, less than 1% mature after one year while 54%
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 one year.
Net interest income for 1999 was $6,611,000, which is higher than the $6,458,000
posted in 1998 and as compared to $6,457,000 in 1997.
The performance in 1999 was primarily the result of a decrease in the average
prime rate, which decreased from 8.37% in 1998 to 7.88% in 1999. Average earning
assets increased 10.6% from $101,531,000 in 1998 to
<PAGE>
$112,344,000 in 1999; average total deposits also increased 10.8% from
$97,288,000 in 1998 to $107,817,000 in 1999, and as compared to $83,091,000 in
1997.
The performance in 1998 was primarily the result of a decrease in the average
prime rate, which decreased from 8.44% in 1997 to 8.37% in 1998. Average earning
assets increased 16.9% from $86,830,000 in 1997 to $101,531,000 in 1998; average
total deposits also increased 17.0% from $83,091,000 in 1997 to $97,288,000 in
1998, and as compared to $74,752,000 in 1996. $8,476,000 of the 1998 increase
was centered in interest bearing accounts.
Average loans outstanding decreased by 4.9% in 1999 to $52,609,000 as compared
to $55,299,000 in 1998 and $57,906,000 in 1997. Average outstanding investments
increased 29.2% to $59,735,000 in 1999 as compared to $46,232,000 in 1998 and
$28,924,000 in 1997. The average loan to deposit ratio decreased in 1999 to
48.8% as compared to 56.8% in 1998 and 69.7% in 1997. The yield on average
earning assets was 7.8% in 1999 as compared to 8.6% in 1998 and 9.7% in 1997.
The decrease in 1999 was primarily due to a decrease in the prime lending rate.
Interest expense decreased 5.0% to $2,153,000 in 1999 from $2,267,000 in 1998
and $1,940,000 in 1997. Average interest-bearing deposits increased 5.1% in 1999
to $69,338,000 as compared to $65,987,000 in 1998 and $57,512,000 in 1997 and
were primarily centered in the time certificates of deposit. Average
non-interest bearing deposits increased 23.0% in 1999 to $38,500,000 as compared
to $31,300,000 in 1998 and $25,579,000 in 1997. Overall cost of funds in 1999
was 2% as compared to 2.3% in 1998 and 2.6% in 1997.
NON-INTEREST INCOME AND EXPENSE
Non-interest income, consisting primarily of service charges on deposit
accounts, and other customer fees and charges including rents and gain on sale
of other real estate owned, was $667,000 in 1999, an increase from $596,000 in
1998, and an increase from $516,000 in 1997. Total service charge income from
deposit accounts decreased by 6.9% from $348,000 in 1998 to $324,000 in 1999,
while total income from other charges increased 38.9% from $247,000 in 1998 to
$343,000 in 1999, primarily centered in gain on sale of other real estate owned.
The deposit income decrease in 1999 was the result of decreases in service
charges related to return check charges.
The increase in other income charges in 1998 was related to the sale of other
real estate owned.
The deposit income increase in 1998 was the result of increases in service
charges related to return check charges.
Non-interest expenses increased 5.7% to $4,131,000 in 1999, from $3,908,000 in
1998 and $3,738,000 in 1997. Salary expense increased 9.4% from $2,249,000 in
1998 to $2,460,000 in 1999, and was due to normal staffing needs and additions
to marketing personnel. In addition, business development and entertainment
expense decreased from $102,000 in 1998 to $64,000 in 1999 while consulting fees
increased from $49,000 in 1998 to $60,000 in 1999. Postage expense also
increased from $42,000 in 1998 to $52,000 in 1999.
Non-interest expenses increased 4.5% to $3,908,000 in 1998, from $3,738,000 in
1997 and $3,408,000 in 1996. Salary expense increased 6.5% from $2,111,000 in
1997 to $2,249,000 in 1998, and was due to normal staffing needs and the first
full year of operations of our Pleasanton office. In addition, business
development and entertainment expense decreased from $111,000 in 1997 to
$102,000 in 1998. Foreclosures and OREO expense decreased from $129,000 to
$19,000, primarily due to the sale of other real estate owned properties. In
addition, consulting fees decreased from $84,000 in 1997 to $49,000 in 1998.
Postage expense also decreased from $56,000 in 1997 to $42,000 in 1998.
The Bank's allowance for loan losses as a percent of loans was 2.5% and 2.3% as
of December 31, 1998 and 1999, respectively. The average in the industry for
banks our size is approximately 1.81%. Total gross loans charged off in 1999 was
$74,000 compared to $51,000 in 1998 and $105,000 in 1997.
PROVISION FOR INCOME TAXES
<PAGE>
The provision for income taxes reflects a combined Federal and California
effective tax rate of 41.6% in 1999, compared to 42% in 1998, and 42.4% in 1997,
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, 1999 the Company had
$27,600,000 in cash and cash equivalents compared to $26,800,000 as of December
31, 1998, and $21,600,000 as of December 31, 1997. The ratio of net loans to
deposits as of December 31, 1999 was 46.7% compared to 48.2% as of December 31,
1998, and 67.3% as of December 31, 1997.
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 $88,708,000 as compared to $67,643,000
at December 31, 1998, and $46,590,000 at December 31, 1997. This is equivalent
to 65.3%, 54.3%, and 44.6% of total assets at the corresponding year-ends,
respectively. During 1999, the Company repurchased 4,746 shares of its common
stock for a total price of $210,163. 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. 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 5.9% 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 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 decrease in non-performing assets from December 31, 1998, to December 31,
1999 is due primarily to the sale of all other real estate owned property. At
December 31, 1999, two loans were on non-accrual status.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
<PAGE>
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.
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF FINANCIAL POSITION - DECEMBER 31, 1999 & 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 5,875,500 $ 8,126,067
Federal funds sold 21,760,000 18,640,000
Cash and cash equivalents (Note 1) 27,635,500 26,766,067
Time deposits with other financial institutions 27,888,634 24,135,487
Investment securities
(fair value of $19,154,772 at December 31, 1999
and $15,485,688 at December 31, 1998 - Note 2)
held-to-maturity 19,465,133 15,499,670
Loans, net of allowance for loan losses of
$1,273,364 at December 31, 1999 and
$1,319,451 at December 31, 1998
(Notes 3 and 4) 56,071,617 53,013,148
Other real estate owned (Note 3) 0 212,262
Premises and equipment, net (Note 5) 913,435 976,388
Interest receivable and other assets 3,929,371 4,052,554
Total Assets $ 135,903,690 $ 124,655,576
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 39,566,546 $ 38,076,664
Interest-bearing transaction accounts 48,225,818 35,350,968
Savings 2,327,328 2,135,736
Time certificates $100,000 and over 23,047,736 28,462,115
Other time certificates 6,828,925 5,863,876
Total Deposits 119,996,353 109,889,359
Interest payable and other liabilities 754,210 677,802
Total Liabilities 120,750,563 110,567,161
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;
458,021 shares outstanding at December 31, 1999 and
452,684 shares outstanding at December 31, 1998 3,741,923 3,829,340
Retained Earnings 11,411,204 10,259,075
Total Shareholders' Equity 15,153,127 14,088,415
Total Liabilities and Shareholders' Equity $ 135,903,690 $ 124,655,576
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,614,481 $ 6,148,945 $ 6,726,641
Interest on time deposits with other
financial institutions 1,497,909 628,672 449,653
Interest on U.S. government
treasury securities 880,612 769,404 664,781
Interest on federal funds sold 771,148 1,177,602 555,917
Total interest income 8,764,150 8,724,623 8,396,992
INTEREST EXPENSE:
Interest on savings deposits 46,293 54,397 44,628
Interest on interest-bearing
transaction accounts 767,751 736,665 637,360
Interest on time deposits 1,338,351 1,475,970 1,258,064
Interest on fed funds purchased 363 0 0
Total interest expense 2,152,758 2,267,032 1,940,052
Net interest income 6,611,392 6,457,591 6,456,940
Provision for loan losses (Note 3) 0 100,000 270,000
Net interest income after
provision for loan losses 6,611,392 6,357,591 6,186,940
NON-INTEREST INCOME:
Service charges on deposit accounts 323,864 348,413 304,315
Other customer fees and charges 343,496 247,433 211,280
Total non-interest income 667,360 595,846 515,595
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,460,532 2,249,011 2,111,100
Occupancy expense (Notes 5 and 11) 409,447 395,358 364,099
Equipment expense (Notes 5 and 11) 265,609 236,610 143,822
FDIC assessment 11,960 10,524 9,186
Insurance expense 64,227 54,087 59,722
Foreclosure and REO expense 17,211 18,574 129,058
Other 840,720 902,676 880,476
Total non-interest expense 4,131,484 3,908,508 3,738,525
Income before income taxes 3,147,268 3,044,929 2,964,010
Provision for income taxes (Note 6) 1,308,113 1,277,537 1,255,856
Net Income $ 1,839,155 $ 1,767,392 $ 1,708,154
EARNINGS PER SHARE (NOTE 7)
Earnings per common share $4.03 $3.95 $3.97
Earnings per common share - assuming dilution $3.95 $3.81 $3.72
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
Number Of
Shares Common Retained
Outstanding Stock Earnings Total
<S> <C> <C> <C> <C>
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
Issuance of Cash Dividends,
$1.50 per share (Note 10) 0 0 (677,841) (677,841)
Stock Options Exercised (Note 9) 17,269 175,565 0 175,565
Repurchase of Common Stock (1,150) (55,370) 0 (55,370)
Net Income 0 0 1,767,392 1,767,392
Balance at December 31, 1998 452,684 3,829,340 10,259,075 14,088,415
Issuance of Cash Dividends,
$1.50 per share (Note 10 ) 0 0 (687,026) (687,026)
Stock Options Exercised (Note 9) 10,083 122,746 0 122,746
Repurchase of Common Stock (4,746) (210,163) 0 (210,163)
Net Income 0 0 1,839,155 1,839,155
Balance at December 31, 1999 458,021 $ 3,741,923 $ 11,411,204 $ 15,153,127
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 & 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $8,068,500 $8,277,521 $7,640,907
Fees received 1,124,948 1,040,512 1,071,607
Interest paid (2,143,127) (2,239,367) (1,901,068)
Cash paid to suppliers and employees (3,446,155) (3,327,938) (3,070,585)
Income taxes paid (1,253,579) (1,449,594) (1,365,000)
Net cash provided by operating activities 2,350,587 2,301,134 2,375,861
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in time deposits with
other financial institutions (3,753,147) (18,491,487) 3,963,000
Maturity of investment securities 8,500,857 23,000,079 5,759,332
Purchase of investment securities (12,466,320) (26,003,098) (9,496,133)
Net (increase) decrease in loans to customer (2,878,982) 7,298,583 (9,179,696)
Recoveries on loans previously charged-off 28,143 32,813 3,000
(Increase) in CSV Life Insurance 0 (1,500,000) 0
(Increase) decrease in premises and equipment (203,991) (345,940) (173,394)
Proceeds from sale of other real estate owned 382,610 0 0
Net expeditures on other real estate owned (422,875) 0 0
Net cash provided by (used in) investing activities (10,813,705) (16,009,050) (9,123,891)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in demand, interest
bearing transaction, and savings deposits 14,556,324 9,223,693 7,177,240
Net increase (decrease) in time deposits (4,449,330) 10,233,923 2,744,918
Exercise of stock options 122,746 175,565 100,000
Repurchase of common stock (210,163) (55,370) (221,198)
Dividends paid (687,026) (677,843) (647,430)
Net cash provided by (used in) financing activities9,332,551 18,899,968 9,153,530
Net increase (decrease) in cash and cash equivalents 869,433 5,192,052 2,405,500
Cash and cash equivalents at the beginning of the year 26,766,067 21,574,015 19,168,515
Cash and cash equivalents at the end of the year $ 27,635,500 $ 26,766,067 $ 21,574,015
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net Income $1,839,155 $1,767,392 $1,708,154
Adjustments to reconcile net income to
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
net cash provided by operating activities:
Depreciation and amortization 266,944 242,171 194,887
Provision for loan losses 0 100,000 270,000
(Gain) loss on sale of other real estate owned (107,473) 0 0
(Increase) decrease in other assets 123,183 446,754 185,155
Increase (decrease) in unearned loan fees 152,370 (70,905) (39,095)
Increase (decrease) in other liabilities 76,408 (184,278) 56,760
Total adjustments 511,432 533,742 667,707
Net cash provided by operating activities $ 2,350,587 $ 2,301,134 $ 2,375,861
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31 ,1999
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 four 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 inter-company 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.
TIME DEPOSITS WITH OTHER FINANCIAL INSTITUTIONS
Time deposits with other financial institutions are carried at cost and have
maturities at origination ranging from 3 months to 2.5 years. The bank does not
invest more than $100,000 in one institution in order to maintain Federal
Deposit Insurance Corporation (FDIC) insurance on deposits in financial
institutions.
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,
<PAGE>
generally seven years for furniture and three to fifteen years for equipment.
Leasehold improvements are amortized over the life 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 non-accrual 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 non-accrual
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
A loan is considered impaired based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Allowances for losses on impaired loans are to be measured under one
of three methods. Because most of the Bank's loans are collateral dependent, the
calculation of the allowance on impaired loans is generally based on the fair
value of the collateral. Income recognition on impaired loans conforms to the
method the Bank uses for income recognition on non-accrual loans.
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 non-interest expense or income as appropriate. Operating expenses
related to other real estate owned are charged to non-interest 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.
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.
<PAGE>
2. INVESTMENT SECURITIES
The amortized cost and estimated fair values of investments in debt securities
held to maturity as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. agencies $ 19,465,133 $ 0 $ 310,361 $ 19,154,772
Total securities $ 19,465,133 $ 0 $ 310,316 $ 19,154,772
</TABLE>
The amortized cost and estimated fair values of investments in debt securities
held to maturity as of December 31, 1998, 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 $ 1,499,445 $ 8,993 $ 0 $ 1,508,438
U.S. agencies 14,000,225 0 22,975 13,977,250
Total securities $ 15,499,670 $ 8,993 $ 22,975 $ 15,485,688
</TABLE>
The amortized cost and estimated fair value of debt securities at December 31,
1999, 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 $ 7,000,000 $ 4,848,301
Due in one year through five years 12,465,133 14,306,471
Total $ 19,465,133 $ 19,154,772
</TABLE>
There were no sales of investments in debt securities during 1999 or 1998. At
December 31, 1999, securities carried at $2,000,000 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, 1999, and 1998 (net of unearned loan fees
of $317,126 and $164,755, respectively), is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Commercial loans $ 33,368,040 $ 38,403,388
Real estate loans 9,463,020 5,672,752
Real estate construction loans 7,626,535 5,060,291
Installment loans 6,887,386 5,196,168
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
57,344,981 54,332,599
Less: Allowance for loan losses (1,273,364) (1,319,451)
$ 56,071,617 $ 53,013,148
</TABLE>
The changes in the allowance for loan losses for the years ended December 31,
1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of period $ 1,319,451 $ 1,238,012 $ 1,070,318
Provision for loan losses 0 100,000 270,000
Recoveries 28,143 32,813 3,000
Loans charged-off (74,230) (51,374) (105,306)
Balance, end of period $ 1,273,364 $ 1,319,451 $ 1,238,012
</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.
NON-PERFORMING ASSETS
(000'S OMITTED)
DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Loans 90 days or more past due
and still accruing:
Commercial $ 0 $ 662 $ 408
Non-accrual loans:
Commercial 158 651 151
Real Estate 0 0 0
Consumer 0 0 25
Total $ 158 $ 651 $ 176
Other Real Estate Owned 0 212 1,222
Total Non-Performing Assets $ 158 $ 1,525 $ 1,806
</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. As
mentioned previously, loans that are delinquent ninety 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.
Impairment of loans having recorded investments of $158,000 at December 31,
1999, and $651,000 at December 31, 1998, 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 1999 and 1998 was $498,003 and
$705,000, respectively. Impaired loans as of December 31, 1999 consisted of two
government guaranteed loans,
<PAGE>
of which the non guaranteed portions has been written off. The total allowance
related to these loans was $0 and $155,000 at December 31, 1999, and 1998,
respectively. Interest income recognized on impaired loans was $73,025 and
$29,914 for the years ended December 31, 1999, and 1998, 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 collateralized by real estate
located within the two counties.
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, 1999,
and 1998, loans outstanding to directors, officers, and principal shareholders
and their known associates were $1,090,004 and $366,081, respectively. In 1999,
advances on such loans were $909,423 and collections were $185,500. In 1999, a
property acquired through foreclosure was sold to an officer of the company at
appraised value.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION/ NET BOOK
COST AMORTIZATION VALUE
<S> <C> <C> <C>
December 31, 1999
Land and building $ 497,912 $ 155,816 $ 342,096
Leasehold improvements 1,140,914 1,042,772 98,142
Furniture and equipment 1,193,950 720,754 473,196
Total $ 2,832,776 $ 1,919,342 $ 913,435
December 31, 1998
Land and building $ 497,912 $ 138,008 $ 359,904
Leasehold improvements 1,139,378 980,585 158,793
Furniture and equipment 992,416 534,725 457,691
Total $ 2,629,706 $ 1,653,318 $ 976,388
</TABLE>
Depreciation and amortization included in occupancy and equipment expenses were
$266,944, $242,171, and $194,887, for the years ended December 31, 1999, 1998,
and 1997, respectively.
<PAGE>
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current:
Federal $ 964,000 $ 1,008,000 $ 1,038,000
State 306,000 312,000 345,000
Total current 1,270,000 1,320,000 1,383,000
Deferred:
Federal 31,000 (25,000) (124,000)
State 7,000 (18,000) (3,000)
Total deferred 38,000 (43,000) (127,000)
Total taxes $ 1,308,000 $ 1,277,000 $ 1,256,000
</TABLE>
The components of the net deferred tax assets of the Company as of December 31,
1999, and 1998, were as follows:
<TABLE>
1999 1998
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 469,000 $ 496,000
State taxes 63,000 66,000
Depreciation 14,000 18,000
Other 100,000 86,000
Deferred Tax Liabilities:
Deferred compensation (21,000) 0
Accretion and Other (1000) (4,000)
Total $ 624,000 $ 662,000
</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>
1999 1998 1997
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 $1,070,000 34.00% $1,035,000 34.00% $1,008,000 34.00%
State franchise taxes,
net of federal income
tax benefit 207,000 6.60% 194,000 6.40% 212,000 7.20%
Other, net 31,000 1.00% 48,000 1.60% 36,000 1.20%
<PAGE>
Tax provision $1,308,000 41.60% $1,277,000 42.00% $1,256,000 42.40%
</TABLE>
7. SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
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 price 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, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
December 31, 1999 December 31, 1998 December 31, 1997
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income $1,839,155 $1,767,392 $1,708,154
Basic EPS
Income
Available to
Common
Stockholder $1,839,155 456,452 $4.03 $1,767,392 447,387 $3.95 $1,708,154 430,231 $3.97
Effect of
Dilutive Securities
Stock Options 8,849 16,301 29,084
Diluted EPS
Income
Available to
Common
Stockholders
+ Assumed
Conversion $1,839,155 465,301 $3.95 $1,767,392 463,688 $3.81 $1,708,154 459,315 $3.72
</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.
<PAGE>
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,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1999, the most recent notification from the 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.
<TABLE>
<CAPTION>
TO BE WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999
Total Capital
(to Risk Weighted Assets)
Consolidated $15,911,000 20.89% = $6,155,124 = 8.00% = $7,693,387 = 10.00%
Bank 11,410,000 14.90% = 6,127,843 = 8.00% = 7,659,002 = 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 14,972,000 19.67% = 3,077,355 = 4.00% = 4,616,032 = 6.00%
Bank 10,449,000 13.64% = 3,019,640 = 4.00% = 4,529,460 = 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated 14,972,000 11.61% = 5,160,002 = 4.00% = 6,450,101 = 5.00%
Bank 10,449,000 8.10% = 5,159,472 = 4.00% = 6,391,722 = 5.00%
AS OF DECEMBER 31, 1998
Total Capital
(to Risk Weighted Assets)
Consolidated $14,970,000 20.71% = $5,781,760 = 8.00% = $7,227,200 = 10.00%
Bank 10,758,000 15.48% = 5,559,200 = 8.00% = 6,949,000 = 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated 14,088,000 19.49% = 2,890,880 = 4.00% = 7,632,597 = 6.00%
Bank 9,884,000 14.22% = 2,779,600 = 4.00% = 4,169,400 = 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated 14,088,000 11.07% = 5,088,398 = 4.00% = 7,632,597 = 5.00%
Bank 9,884,000 8.01% = 4,936,659 = 4.00% = 7,404,988 = 5.00%
</TABLE>
<PAGE>
9. STOCK OPTION PLAN
The Company adopted the 1982 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 82,335 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.
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," 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 issued a grant of 1,000 shares under the 1992
Employee and Consultant Stock Option Plan during 1999. As the amount is deemed
insignificant, 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 significantly 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, 1999, 1998, and
1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
<S> <C> <C>
Balance, December 31, 1996 44,745 $11.06
Granted 0 0.00
Exercised (10,000) 10.92
Expired 0 0.00
Forfeited 0 13.00
Balance, December 31, 1997 34,745 $11.17
Granted 0 0.00
Exercised (16,969) 10.03
Expired 0 0.00
Forfeited (1,620) 12.94
Balance, December 31, 1998 16,156 $12.61
Granted 0 0.00
Exercised (10,083) 12.17
Expired 0 0.00
Forfeited 0.00
Balance, December 31, 1999 6,073 $13.28
</TABLE>
<PAGE>
As of December 31, 1999, 1998, and 1997, 5,245, 12,038, and 24,941 of the
options, respectively, were exercisable. The options outstanding at December 31,
1999, have exercise prices between $13.00 and $13.50, with a weighted average
exercise price of $13.28 and a weighted average remaining contractual life of
1.2 years.
The following table summarizes the stock option activity under the 1992 Employee
and Consultant Stock Option Plan during the years ended December 31, 1999, 1998,
and 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
<S> <C> <C>
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
Granted 2,000 48.00
Exercised (300) 17.75
Expired 0 0.00
Forfeited (700) 17.75
Balance, December 31, 1998 9,100 $24.40
Granted 1,000 40.00
Exercised 0 0.00
Expired 0 0.00
Forfeited 0 0.00
Balance, December 31, 1999 10,100 $25.94
</TABLE>
As of December 31, 1999, 1998, and 1997, 4,096, 2,840 and 2,430 of the options,
respectively, were exercisable. All of the options outstanding as of December
31, 1999, have an exercise price between $17.75 and $48.00 with a weighted
average exercise price of $25.94 and remaining contractual life of 6.0 years.
There have been no grants, exercises, expirations, or forfeitures during the
years ending December 31, 1999, 1998, and 1997 under the 1989 Non-Qualified
Stock Option Plan. As of December 31, 1999, 1998, and 1997, 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 Department
of Financial Institutions. 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, 1999, the Bank could pay dividends to
the Company of up to approximately $1,954,454 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 included in occupancy
and equipment expenses was $229,489, $224,171, and $206,766 for the years ended
December 31, 1999, 1998, and 1997.
<PAGE>
At December 31, 1999, the approximate future minimum payments for non-cancelable
leases with initial or remaining terms in excess of one year were as follows:
<TABLE>
<S> <C>
2000 227,434
2001 175,604
2002 80,459
2003 12,612
2004 0
</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, 1999, were $799,000.
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, $19,103 was contributed in 1999,
$20,277, in 1998, and $24,773, in 1997.
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
$69,336 in 1999, $51,782 in 1998, and $101,472 in 1997. 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.
SUPPLEMENTAL EMPLOYEE COMPENSATION BENEFITS AGREEMENTS
In September 1998, the Company entered into supplemental employee compensation
agreements with certain executive and senior officers. Under these agreements,
the Company is generally obligated to provide for each such employee or their
beneficiaries, during a period of up to 15 year after the employee's death,
disability or retirement, annual benefits as defined in each specific agreement.
The estimated present value of future benefits to be paid is to be accrued over
the vesting period of the participants. The Company is the beneficiary of the
life insurance policies that have been purchased as a method of financing the
benefits under the agreements. At December 31, 1999, the Company's cash
surrender value of these policies was approximately $1,537,500 and is included
in other assets.
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 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
<PAGE>
conditional obligations as it does for on-balance-sheet instruments. At December
31, 1999, financial instruments whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
<S> <C>
Commitments to extend credit in the future $ 27,301,683
Standby letters of credit 1,183,270
</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.
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, 1999 and December 31, 1998 and the
methods and assumptions used to evaluate them:
<TABLE>
<CAPTION>
1999 CARRYING VALUE FAIR VALUE
<S> <C> <C>
Cash and due from banks $ 5,875,500 $ 5,875,500
Federal funds sold 21,760,000 21,760,000
Investment securities 19,465,133 19,154,772
Time deposits with other financial institutions 27,888,634 27,720,691
Loans 56,071,617 55,467,772
Deposits
Demand 39,566,546 35,297,366
Interest bearing transaction accounts 48,225,818 45,908,692
Savings 2,327,328 2,327,328
Time certificates 29,876,661 29,876,440
1998 CARRYING VALUE FAIR VALUE
Cash and due from banks $ 8,126,067 $ 8,126,067
Federal funds sold 18,640,000 18,640,000
Investment securities 15,499,670 15,485,688
Time deposits with other financial institutions 24,135,487 24,262,421
Loans 53,013,148 54,375,155
Deposits
Demand 38,076,664 34,816,270
Interest bearing transaction accounts 35,350,968 34,597,719
Savings 2,135,736 1,894,052
Time certificates 34,325,991 34,390,974
</TABLE>
<PAGE>
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 re-pricing 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, 1999. 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 $1,183,270 and $27,301,683, 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, 1999,
and 1998, and the related statements of income and cash flows for the years
ended December 31, 1999, 1998, and 1997, for Summit Bancshares, Inc. (parent
company only):
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL POSITION
ASSETS: 1999 1998
<S> <C> <C>
Cash $ 3,116,913 $ 1,433,188
Loan participation with subsidiary 998,718 2,192,000
Land and building 342,096 359,904
Investment in subsidiary 10,449,375 9,884,635
Other assets 281,685 267,449
Total Assets $15,188,787 $14,137,176
LIABILITIES:
Accounts payable $ 10,624 $ 21,887
Income taxes payable 25,036 26,873
Total Liabilities 35,660 48,760
Shareholders' Equity:
Common Stock 3,741,923 3,829,340
Retained Earnings 11,411,204 10,259,076
Total Shareholders' Equity 15,153,127 14,088,416
Total Liabilities and Shareholders' Equity $15,188,787 $14,137,176
STATEMENTS OF INCOME (year ended December 31)
INCOME: 1999 1998 1997
Dividend from subsidiary $ 1,200,000 $ 1,000,000 $ 825,000
Interest on short-term investments and loan 155,117 171,627 261,554
Rental and other income 39,135 63,339 61,867
Total income 1,394,252 1,234,966 1,148,421
EXPENSE:
Miscellaneous expense 66,724 70,175 41,970
Total expense 66,724 70,175 41,970
Income before income tax and equity in
earnings of subsidiary 1,327,528 1,164,791 1,106,451
Provision for income taxes 53,113 68,537 117,056
Income before equity in
earnings of subsidiary 1,274,415 1,096,254 989,395
Equity in earnings of subsidiary 564,740 671,138 718,759
Net Income $ 1,839,155 $ 1,767,392 $ 1,708,154
</TABLE>
<PAGE>
SUMMIT BANCSHARES, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 155,117 $ 171,627 $ 261,554
Rental income 13,050 52,200 52,200
Other income 26,085 11,139 9,667
Cash paid to suppliers (74,415) (118,614) (43,009)
Income taxes paid (54,951) (64,938) (108,000)
Net cash provided by operating activities 64,886 51,414 172,412
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short term investments 0 0 100,000
Net (increase) decrease in loans 1,193,282 (1,297,106) 1,680,514
(Increase) decrease in land and building 0 0 0
Dividend received from subsidiary 1,200,000 1,000,000 825,000
Net cash provided by (used in) investing activities 2,393,282 (297,106) 2,605,514
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 122,746 175,565 100,000
Purchase of common stock (210,163) (55,370) (221,198)
Dividends paid (687,026) (677,843) (647,430)
Net cash provided by (used in) financing activities (774,443) (557,648) (768,628)
Net increase (decrease) in cash and cash equivalents 1,683,725 (803,340) 2,009,298
Cash at the beginning of the year 1,433,188 2,236,528 227,230
Cash at the end of the year $ 3,116,913 $ 1,433,188 $ 2,236,528
RECONCILIATION OF THE NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 1,839,155 $ 1,767,392 $ 1,708,154
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 17,808 17,808 17,808
Non-cash earnings from subsidiary (1,764,740) (1,671,138) (1,543,759)
(Increase) decrease in other assets (14,236) (82,847) (15,529)
Increase (decrease) in accounts payable (13,101) 20,199 5,738
Total adjustments (1,774,269) (1,715,978) (1,535,742)
Net cash provided by operating activities $ 64,886 $ 51,414 $ 172,412
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Summit Bancshares, Inc.
In our opinion, the accompanying consolidated statements of financial position
and the related statements of income, of changes in shareholders' equity and of
cash flows, present fairly, in all material respects, the financial position of
Summit Bancshares, Inc. and subsidiary at December 31, 1999 and December 31,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
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 audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers, LLP
February 25, 2000
<PAGE>
SUMMIT EQUITIES. INC.
(PARENT COMPANY ONLY)
DECEMBER 31, 1999
===============================================================================
<TABLE>
<S> <C> <C>
ASSETS
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)
================================================================================
<TABLE>
Year Ended
December 31, 1999
<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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,876
<INT-BEARING-DEPOSITS> 27,889
<FED-FUNDS-SOLD> 21,760
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 19,465
<INVESTMENTS-MARKET> 0
<LOANS> 56,072
<ALLOWANCE> 1,273
<TOTAL-ASSETS> 135,904
<DEPOSITS> 119,996
<SHORT-TERM> 0
<LIABILITIES-OTHER> 754
<LONG-TERM> 0
0
0
<COMMON> 3,742
<OTHER-SE> 11,411
<TOTAL-LIABILITIES-AND-EQUITY> 135,904
<INTEREST-LOAN> 5,614
<INTEREST-INVEST> 3,150
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,764
<INTEREST-DEPOSIT> 2,153
<INTEREST-EXPENSE> 2,153
<INTEREST-INCOME-NET> 6,611
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,131
<INCOME-PRETAX> 3,147
<INCOME-PRE-EXTRAORDINARY> 3,147
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,839
<EPS-BASIC> 4.03
<EPS-DILUTED> 3.95
<YIELD-ACTUAL> 0
<LOANS-NON> 158
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,319
<CHARGE-OFFS> 74
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,273
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,273
</TABLE>
