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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-11986
SUMMIT BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 75-1694807
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(State of Incorporation) (I.R.S. Employer
Identification No.)
1300 SUMMIT AVENUE, FORT WORTH, TEXAS 76102
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(Address of principal executive offices)
(817) 336-6817
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None Not Applicable
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(Title of Class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.25 PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was authorized to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the shares of voting stock held by non-affiliates
of the registrant at March 17, 1999 was approximately $92,933,000.
The number of shares of common stock, $1.25 par value, outstanding at March 17,
1999 was 6,505,627 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement dated March 19, 1999 filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934 for the 1998 Annual
Meeting of Shareholders of Summit Bancshares, Inc., are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS.
THE CORPORATION. Summit Bancshares, Inc. (the "Corporation"), a corporation
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incorporated under the laws of the state of Texas in 1979, is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the
"BHC Act"). The Corporation maintains its principal office at 1300 Summit
Avenue, Suite 604, Fort Worth, Texas 76102. The Corporation's principal
activity is the ownership and management of its subsidiaries. The Corporation
owns all of the issued and outstanding shares of capital stock of two national
banking associations, Summit National Bank and Summit Community Bank, N.A. (the
"Subsidiary Banks") and a nonbank subsidiary, Summit Bancservices, Inc., all
located in Fort Worth, Texas. In January 1997 Camp Bowie National Bank at the
time, a wholly-owned subsidiary, changed its name to Summit Community Bank, N.A.
and in March 1997 Alta Mesa National Bank merged with Summit Community Bank,
N.A. Alta Mesa National Bank was a former wholly-owned subsidiary of the
Corporation.
At December 31, 1998 the Corporation had consolidated total assets of
$532,764,000, consolidated total loans of $305,833,000, consolidated total
deposits of $465,500,000 and consolidated total shareholders' equity of
$46,235,000.
The Corporation provides advice and services to the Subsidiary Banks and
coordinates their activities in the areas of financial accounting controls and
reports, internal audit programs, regulatory compliance, financial planning and
employee benefit programs. However, each Subsidiary Bank operates under the
day-to-day management of its own officers and directors.
The Corporation's major source of income is dividends received from the
Subsidiary Banks which are restricted as discussed below. Dividend payments by
the Subsidiary Banks are determined on an individual basis, generally in
relation to each Subsidiary Bank's earnings, deposits and capital.
The Corporation's business is neither seasonal in nature nor in any manner
related to or dependent upon patents, licenses, franchises or concessions and
the Corporation has not spent material amounts on research activities.
THE SUBSIDIARY BANKS. The services offered by the Subsidiary Banks are
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generally those offered by commercial banks of comparable size in their
respective areas. Certain of the principle services offered by the Subsidiary
Banks are described below.
COMMERCIAL BANKING. The Subsidiary Banks provide general commercial
banking services for corporate and other business clients principally
located in Tarrant County, Texas. Loans are made for a wide variety of
purposes, including interim construction and mortgage financing on real
estate and financing of equipment and inventories.
CONSUMER BANKING. The Subsidiary Banks provide a full range of consumer
banking services, including interest and non-interest-bearing checking
accounts, various savings programs, installment and real estate loans,
money transfers, on-site ATM facilities and safe deposit facilities.
SECURITIES SERVICES. Summit Bancshares, Inc. through an agreement with LM
Financial Partners, Inc. offers investment brokerage services. LM
Financial Partners, Inc., a subsidiary of Legg Mason, Inc. is a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc. Investment executives are available at each of the Subsidiary Banks
and can provide information about tax-free municipals, government
securities, stocks, mutual funds, or annuities.
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Certain information with respect to each Subsidiary Bank as of February 28, 1999
is set forth in the following table. Interbank balances have not been
eliminated in the table as such balances are not material to total deposits or
total assets.
<TABLE>
<CAPTION>
As of February 28, 1999
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(In Thousands)
Organiza- Acqui- Share-
Name and Address of tion sition Total Total Total holders'
Subsidiary Bank Date Date Assets Loans Deposits Equity
------------------------ --------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SUMMIT NATIONAL BANK 1975 1980 $216,687 $116,652 $183,525 $19,859
1300 Summit Avenue
Fort Worth, TX 76102
SUMMIT COMMUNITY BANK, 1984 1984 $302,596 $200,059 $275,025 $23,110
N.A.
3859 Camp Bowie Blvd.
Fort Worth, TX 76107
</TABLE>
COMPETITION. There is significant competition among bank holding companies in
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Tarrant County, Texas and the Corporation believes that such competition among
such bank holding companies will continue in the future.
Additionally, the Subsidiary Banks encounter intense competition in their
commercial banking businesses, primarily from other banks represented in their
respective market areas, many of which have far greater assets and financial
resources. The Subsidiary Banks also encounter intense competition in their
commercial banking businesses from savings and loan associations, credit unions,
factors, insurance companies, commercial and captive finance companies and
certain other types of financial institutions located in its own and in other
major metropolitan areas in the United States, many of which are larger in terms
of capital, resources and personnel.
EMPLOYEES. As of December 31, 1998 the Corporation and the Subsidiary Banks
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collectively had a total of 163 full-time employees and 11 part-time employees.
REGULATION AND SUPERVISION
The Corporation and the Subsidiary Banks are subject to federal and state law
applicable to businesses generally and also to federal and state laws
specifically applicable to financial institutions and financial institution
holding companies. The laws and regulations governing financial institutions
and their parent holding companies are intended primarily for the protection of
depositors, the deposit insurance funds of the Federal Deposit Insurance
Corporation, and the banking system as a whole and not for the protection of
shareholders or creditors. Those laws give regulatory authorities broad
enforcement powers over banks and bank holding companies including the power to
require remedial actions and to impose substantial fines and other penalties for
violation of laws or regulations.
The following description of statutory and regulatory provisions does not
purport to be complete and is qualified in its entirety by reference to the
applicable statutes and regulations. Any change in applicable statutes or
regulations or the policies of regulatory authorities may have a material effect
on the business, operations, and prospects of the Corporation and the Subsidiary
Banks. The Corporation is unable to predict the nature or extent of the affect
on its business and earnings that fiscal or monetary policies, economic
controls, or changes in federal or state statutes or regulations or regulatory
policies may have in the future.
THE CORPORATION
GENERAL. The Corporation is a bank holding company within the meaning of the BHC
Act and as such is subject to regulation, supervision, and examination by the
Board of Governors of the Federal Reserve System (the "FRB"). Under federal law
bank holding companies are subject to restrictions on the types of activities in
which they may engage and to wide range of supervisory requirements and actions,
including periodic examinations and reporting requirements and regulatory
enforcement actions for any violations of laws, regulations, or policies. The
FRB has authority to order a bank holding company to cease and desist from
unsafe or unsound practices, to assess civil money penalties against companies
and affiliated individuals who
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violate the BHC Act or FRB regulations or orders, and to order termination by a
bank holding company of any activities in which it is engaged which are not
permitted activities for a bank holding company.
The Corporation is a legal entity, separate and distinct from its subsidiaries.
As a result, the Corporation's right to participate in the distribution of
assets of any subsidiary upon liquidation or reorganization of the subsidiary
will be subject to the prior claims of depositors and creditors of the
subsidiary. In the event of a liquidation or reorganization of a Subsidiary
Bank, the claims of depositors and creditors of the Bank will have priority over
the rights of the Corporation and its shareholders and creditors.
SCOPE OF PERMISSIBLE ACTIVITIES. The BHC Act prohibits a bank holding company,
with certain limited exceptions, from directly or indirectly engaging in, or
from directly or indirectly acquiring ownership or control of more than 5% of
any class of voting shares of any company engaged in, any activities other than
banking or managing or controlling banks or certain other subsidiaries or other
activities determined by the FRB to be so closely related to banking as to be a
proper incident thereto. Some of the activities which have been determined by
FRB regulation to be closely related to banking are making or servicing loans,
performing certain data processing services, acting as an investment or
financial advisor to certain investment trusts or investment companies, and
providing certain securities brokerage services. In approving or disapproving a
bank holding company's acquiring a company engaged in bank-related activities or
engaging itself in bank-related activities, the FRB considers a number of
factors and weighs the expected benefits to the public (such as greater
convenience and increased competition or gains in efficiency) against possible
adverse effects (such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices.) In
considering these factors, the FRB may differentiate between a bank holding
company's commencing activities itself and its acquiring a going concern already
engaged in those activities.
SAFETY AND SOUNDNESS. Bank holding companies may not engage in unsafe or
unsound banking practices. For example, with some exceptions for well-
capitalized and well-managed companies, FRB regulations require a bank holding
company to give the FRB prior notice of any redemption or repurchase of its own
equity securities if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding twelve-
month period, is equal to 10% or more of the company's consolidated net worth.
The FRB may disapprove a redemption or repurchase if it finds the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. A holding company may not impair the financial soundness of a
subsidiary bank by causing it to make funds available to nonbanking subsidiaries
or their customers when such a transaction would not be prudent. In some
circumstances, the FRB could take the position that paying a dividend would
constitute an unsafe or unsound banking practice. The policy of the FRB is
generally that a bank holding company should pay cash dividends on common stock
only out of income available over the past year and only if prospective earnings
retention is consistent with the organizations future needs and financial
condition. This policy provides that a bank holding company should not maintain
a level of cash dividends that undermines the company's ability to serve as a
source of strength to its banking subsidiaries.
The FRB may exercise various administrative remedies, including issuing orders
requiring parent bank holding companies and their nonbanking subsidiaries to
refrain from actions believed by the FRB to constitute a serious risk to the
financial safety, soundness, or stability of a subsidiary bank.
SOURCE OF STRENGTH TO SUBSIDIARY BANKS. FRB regulations require a bank holding
company to serve as a source of financial and managerial strength to its
subsidiary banks and commit resources to their support. This concept has become
known as the "source of strength" doctrine. The FRB takes the position that a
bank holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
adversity and should maintain the financial flexibility and capital-raising
capacity necessary to obtain resources for assisting its subsidiary banks if
required. A bank holding company which fails to meet its obligations to serve as
a source of strength to its subsidiary banks may be considered by the FRB to be
engaged in an unsafe and unsound banking practice and in violation of FRB
regulations. Further, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") requires a bank holding company to guarantee, up to certain
limits, an undercapitalized subsidiary bank's compliance with any capital
restoration plan approved by the bank's primary federal regulatory authority.
See Imposition of Liability for Undercapitalized Subsidiaries below.
ENFORCEMENT. The Financial Institution Reform, Recovery and Enforcement Act of
1989 ("FIRREA") expanded the FRB's authority to prohibit activities of bank
holding companies and their nonbanking subsidiary which are unsafe or unsound
banking practices or constitute violations of laws or regulations. Bank
regulatory authorities may issue cease and desist orders which may, among other
things, require affirmative action to correct conditions resulting from such a
violation or practice, including
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restitution, reimbursement, or indemnification or guaranty against loss. Under
FIRREA, a bank holding company or financial institution may also be ordered to
restrict its growth, dispose of certain assets, or take other appropriate action
as determined by the ordering agency.
FIRREA increased the amount of civil money penalties that the FRB and other
regulatory agencies may assess for certain activities conducted on a knowing and
reckless basis, if those activities cause a substantial loss to a depository
institution. The penalties may reach as much as $1,000,000 per day. FIRREA also
expanded the scope of individuals and entities against whom such penalties may
be assessed.
FIRREA contains a "cross-guarantee" provision that makes commonly controlled
insured depository institutions liable to the Federal Deposit Insurance
Corporation (the "FDIC") for any losses incurred, or reasonably anticipated to
be incurred, in connection with the failure of an affiliated insured depository
institution.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to certain other services offered by a holding company or its
affiliates.
REPORTING AND EXAMINATION. The Corporation is required to file quarterly and
annual reports with the Federal Reserve Bank of Dallas (the "Federal Reserve
Bank") and provide such additional information as the Federal Reserve Bank may
require pursuant to the BHC Act. The Federal Reserve Bank may examine the
Corporation and any nonbank subsidiary and charge the Corporation for the cost
of such an examination. The Corporation is also subject to reporting and
disclosure requirements under state and federal securities laws.
CAPITAL ADEQUACY REQUIREMENTS. The FRB monitors the capital adequacy of bank
holding companies using a combination of risk-based guidelines and leverage
ratios to evaluate their capital adequacy. Under the risk-based capital
guidelines, asset categories are assigned different risk weights based generally
on perceived credit risk. These risk weights are multiplied by corresponding
asset balances to determine a "risk-weighted" asset base. Certain off-balance
sheet items are added to the risk-weighted asset base by converting them to
balance sheet components. For the purposes of the guidelines, a bank holding
company's qualifying total capital is defined as the sum of its "Tier 1" and
"Tier 2" capital elements, with the "Tier 2" element being limited to an amount
not exceeding 100% of the "Tier 1" element. "Tier 1" capital includes, with
certain limitations, common stockholders' equity, qualifying perpetual
noncumulative preferred stock, and minority interests in consolidated
subsidiaries. "Tier 2" capital includes, with some limitations, certain other
preferred stock as well as qualifying debt instruments and all or part of the
allowance for possible loan losses.
The FRB guidelines require a minimum ratio of qualifying total capital to total
risk-weighted assets of 8.0% (of which at least 4.0% must be in the form of
"Tier 1" capital). At December 31, 1998, the Corporation's ratios of "Tier 1"
and qualifying total capital to risk-weighted assets were 13.8% and 15.1%,
respectively. At such date, both ratios exceeded regulatory minimums.
The FRB also uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is defined as a
company's "Tier 1" capital divided by its adjusted average total assets. The
FRB guidelines require a minimum ratio of 3.0% "Tier 1" capital to adjusted
average total assets for bank holding companies having the highest regulatory
rating. For all other bank holding companies, the minimum ratio of "Tier 1"
capital to total assets is 4.0%, and companies with supervisory, financial, or
managerial weaknesses, as well as those anticipating or experiencing significant
growth, are expected to maintain capital ratios well above the minimum levels.
The Corporation's leverage ratio at December 31, 1998, was 8.5% which exceeded
the regulatory minimum.
A bank holding company which fails to meet the applicable capital standards will
be at a disadvantage in several respects. For example, FRB policy discourages
the payment of dividends by a bank holding company if payment would adversely
affect capital adequacy or borrowing by a company with inadequate capital for
the purpose of paying dividends. In some circumstances, a failure to meet the
capital guidelines may also result in enforcement action by the FRB.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. FDICIA requires bank
regulators to take "prompt corrective action" to resolve insured depository
institutions problems. In the event an institution becomes "undercapitalized,"
it must submit a capital restoration plan to its federal regulatory agency. The
regulatory agency will not accept the plan unless it meets certain criteria.
One requirement for acceptance of a capital restoration plan is that each
company "having control of" the undercapitalized institution must guarantee, up
to certain limits, the subsidiary's compliance with the capital restoration
plan.
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The Corporation has control of the Subsidiary Banks for purpose of this statute.
See below The Subsidiary Banks - Capital Adequacy Requirements.
Under FDICIA, the aggregate liability of all companies controlling a particular
institution is generally limited to the lesser of 5% of the institution's assets
at the time it became undercapitalized or the amount necessary to bring the
institution into compliance with application capital standards. FDICIA grants
greater powers to regulatory authorities in situations where an institution
becomes "significantly" or "critically" undercapitalized or fails to submit a
timely and acceptable capital restoration plan or to implement an accepted
capital restoration plan. A bank holding company controlling such an
institution may be required to obtain prior FRB approval of proposed dividends
or consent to a merger or to divest the troubled institution or other
affiliates.
In the event of a proceeding for a bank holding company under Chapter 11 of the
U.S. Bankruptcy Code, the trustee (or the debtor-in-possession) will, by law, be
deemed to have assumed, and required immediately to cure any deficit under, any
commitment made by the company to a federal regulatory agency to maintain the
capital of an insured depository institution, and any claim based upon such a
commitment will have a priority of payment.
ACQUISITION BY BANK HOLDING COMPANIES. The BHC Act prohibits a bank holding
company, with some limited exceptions, from acquiring direct or indirect control
of more than 5% of the outstanding shares of any class of voting stock or
substantially all of the assets of any bank or bank holding company, or merging
or consolidating with another bank holding company, without the prior approval
of the FRB. In approving bank or bank holding company acquisitions by bank
holding companies, the FRB is required to consider the financial and managerial
resources and future prospects of the bank holding company and the banks
concerned, the convenience and needs of the communities to be served, and
various competitive factors. The Attorney General of the United States may,
within 30 days after approval of an acquisition by the FRB, bring an action
challenging such acquisition under the federal antitrust laws, in which case the
effectiveness of such approval is stayed pending a final ruling by the courts.
In some circumstances, any such action must be brought in less than 30 days
after FRB approval.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") permits adequately capitalized and managed bank
holding companies to acquire banks located in other states, regardless of
whether the acquisition would be prohibited by applicable state law. An out-of-
state bank holding company seeking to acquire ownership or control of a state or
national bank located in Texas or any bank holding company owning or controlling
a state bank or a national bank located in Texas must obtain the prior approval
of both the FRB and the Banking Commissioner of Texas. Under the Interstate
Banking Act, a bank holding company and its insured depository institution
affiliates may not complete an acquisition which would cause it to control more
than 10% of total deposits in insured depository institutions nationwide or to
control 30% or more of total deposits in insured depository institutions in the
home state of the bank sought to be acquired. However, state deposit
concentration caps adopted by various states, such as Texas, which limit control
of in-state insured deposits to a greater extent than the Interstate Banking Act
will be given effect. Texas has adopted a deposit concentration cap of 20% of
in-state insured deposits; therefore, the Texas state deposit concentration cap
will lower the otherwise applicable 30% federal deposit concentration cap.
State law may establish a minimum age (not to exceed five years) of local banks
subject to interstate acquisition. The minimum age established by Texas is five
years.
ACQUISITION OF BANK HOLDING COMPANIES. The Change in Bank Control Act of 1978
prohibits a person or group of persons from acquiring "control" of a bank
holding company unless the FRB has been given prior notice and has not
disapproved the acquisition. Acquisition of 25% or more of any class of voting
shares of a bank holding company constitutes acquisition of "control." The FRB
presumes that the acquisition of 10% or more, but less than 25%, of any class of
voting stock of a bank holding company constitutes acquisition of control if the
company has securities registered under Section 12 of the Exchange Act, such as
does the Corporation, or if no other person will own or control a greater
percentage of that class of voting securities immediately after the transaction.
That presumption can be rebutted by showing the acquisition will not in fact
result in control. Any company would be required to obtain the approval of the
FRB under the BHC Act before acquiring 25% (5% in the case of an acquiror that
is a bank holding company) or more of the outstanding common stock of the
Corporation or otherwise obtaining control or a "controlling influence" over the
Corporation.
THE SUBSIDIARY BANKS
GENERAL. The Subsidiary Banks are national banking associations organized under
the National Bank Act, as amended, (the "National Bank Act") and are subject to
regulatory supervision and examination by the Office of the Comptroller of the
Currency (the "OCC"). Pursuant to such regulation, the Banks are subject to
various restrictions and supervisory requirements, and potentially to
enforcement actions. The OCC regularly examines national banks with respect to,
among other matters, capital
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adequacy, reserves, loan portfolio, investments and management practices. The
Subsidiary Banks must also furnish quarterly and annual reports to the OCC, and
the OCC may exercise cease and desist and other enforcement powers over the
Subsidiary Banks if their actions represent unsafe or unsound practices or
violations of law. Since the deposits of the Subsidiary Banks are insured by the
Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Company (the
"FDIC"), the Bank is also subject to regulation and supervision by the FDIC.
Because the FRB regulates the Corporation, the FRB has supervisory authority
which affects the Subsidiary Banks.
Banks are subject to the credit policies of governmental authorities which
affect the national supply of bank credit. Such policies influence overall
growth of bank loans, investments, and deposits and may affect interest rates
charged on loans and paid on deposits. The monetary policies of the FRB have
had a significant effect on the results of operations of commercial banks in the
past and may be expected to continue to do so in the future.
SCOPE OF PERMISSIBLE ACTIVITIES. The National Bank Act provides the rights,
privileges, and powers of national banks and defines the activities in which
national banks may engage. Permitted activities for a national bank include
making, arranging, purchasing, or selling loans, purchasing, holding, and
conveying real estate under certain conditions, deal in investment securities in
certain circumstances, and, generally, engaging in the "business of banking" and
activities that are "incidental" to banking. Activities deemed "incidental" to
the business of banking include the borrowing and lending of money, receiving
deposits (including deposits of public funds), holding or selling stock or other
property acquired in connection with security on a loan, discounting and
negotiating evidences of debt, acting as guarantor (if the bank has a
"substantial interest in the performance of the transaction"), issuing letters
of credit to or on behalf of its customers, operating a safe deposit business,
providing check guarantee plans, issuing credit cards, operating a loan
production office, selling loans under repurchase agreements, selling money
orders at offices other than bank branches, providing consulting services to
banks, and verifying and collecting checks.
BRANCHING. National banks located in Texas may establish a branch anywhere in
Texas with prior OCC approval. For this purpose, a national bank is located in
Texas if it has either its main office or a branch in Texas. In acting on a
branch application, the OCC considers a number of factors, including financial
history, capital adequacy, earnings prospects, character of management, needs of
the community and consistency with corporate powers.
The Interstate Banking Act, which expanded the authority of bank holding
companies to engage in interstate bank acquisitions regardless of state law
prohibitions, also allows banks to merge across state lines and thereafter have
interstate branches by continuing to operate, as a main office or a branch, any
office of any bank involved in the merger. States are, however, permitted to
"opt-out" of interstate mergers by enacting laws meeting certain requirements.
The Texas Legislature "opted out" of the interstate branching provisions during
its 1995 Session. However, the Texas "opt-out" legislation, which by its terms
will expire in September of 1999, has not been effective to prohibit interstate
mergers involving banks in Texas. In granting an application for an interstate
merger involving a national bank located in Texas, the OCC concluded that the
Texas "opt-out" legislation was ineffective because it did not meet the
requirement of the Interstate Banking Act. The Texas Banking Commissioner has
also determined that the "opt-out" legislation is ineffective under federal law
to prohibit interstate mergers and has, therefore, accepted applications for
interstate merger and branching transaction for state-chartered institutions.
As a consequence, the Texas "opt-out" legislation does not have the effect of
prohibiting interstate merger and branching transactions otherwise allowed under
federal law.
The Interstate Banking Act further allows a bank to open new branches in a state
in which it does not already have banking operations if the laws of that state
permit a de novo branch of an out-of-state bank. A "de novo branch" is a branch
office of a bank originally established as a branch and not one becoming a
branch by acquisition or merger. Texas has elected not to permit de novo
branching. The Texas legislation prohibiting de novo branching expires in
September of 1999.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES. The Subsidiary Banks are subject
to federal statutes which limit transactions with the Corporation and other
affiliates. One set of restrictions is found in Section 23A of the Federal
Reserve Act, which limits loans to, purchases of assets from, and investments in
"affiliates" of the Subsidiary Banks. The term "affiliates" would include the
Corporation and any of its subsidiaries. Section 23A imposes limits on the
amount of such transactions and also requires certain levels of collateral for
such loans. In addition, Section 23A limits the amount of loans or extensions
of credit to third parties which are collateralized by the securities or
obligations of the Corporation or its subsidiaries.
Another set of restrictions is found in Section 23B of the Federal Reserve Act.
Among the other things, Section 23B requires that certain transactions between a
Subsidiary Bank and its affiliates must be on terms substantially the same, or
at least as
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favorable to the Subsidiary Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated companies. In the absence of
such comparable transactions, any transaction between a Subsidiary Bank and an
affiliate must be on terms and under circumstances, including credit
underwriting standards and procedures, that in good faith would be offered to or
would apply to nonaffiliated companies. Each Subsidiary Bank is also subject to
certain prohibitions against advertising that suggests that the Subsidiary Bank
is responsible for the obligations of its affiliates.
The regulations and restriction on transactions with affiliates may limit the
Corporation's ability to obtain funds from its Subsidiary Banks for its cash
needs, including funds for payment of dividends and operating expenses.
Under the Federal Reserve Act and FRB Regulation O, there are restrictions on
loans to directors, executive officers, principal shareholders and their related
interests (collectively referred to herein as "insiders") which apply to all
banks with deposits insured by the FDIC and their subsidiaries and holding
companies. These restrictions include limits on loans to one borrower and
conditions that must be met before such loans can be made. There is also an
aggregate limitation on all loans to insiders and their related interests.
These loans cannot exceed the bank's total unimpaired capital and surplus, and
the OCC may determine that a lesser amount is appropriate. Insiders are subject
to enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
INTEREST RATE LIMITS AND LENDING REGULATIONS. The Subsidiary Banks are subject
to various state and federal statutes relating to the extension of credit and
the making of loans. The maximum legal rate of interest that the Subsidiary
Banks may charge on a loan depends on a variety of factors such as the type of
borrower, purpose of the loan, amount of the loan and date the loan is made.
Texas statutes establish maximum legal rates of interest for various lending
situations. Penalties are provided by law for charging interest in excess of
the maximum lawful rate.
Loans made by banks located in Texas are subject to numerous other federal and
state laws and regulations, including Truth-in-Lending Act, the Texas Credit
Title, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures
Act, and the Home Mortgage Disclosure Act. These laws provide remedies for the
borrower and penalties for the lender for failure of the lender to comply with
such laws. The scope and requirements of these laws and regulations have
expanded in recent years, and claims by borrowers under these laws and
regulations may increase.
RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS. Substantially all of the
Corporation's cash revenues is derived from dividends paid by the Subsidiary
Banks. Dividends payable by the Subsidiary Banks are restricted under the
National Bank Act. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters - Dividends." The Subsidiary Banks' ability to pay
dividends is further restricted by the requirement that they maintain adequate
levels of capital in accordance with capital adequacy guidelines promulgated
from time to time by the OCC. Moreover, the prompt corrective action provisions
of FDICIA and implementing regulations prohibit a bank from paying dividends or
management fees if, following the payment, the bank would be in any of the three
capital categories for undercapitalized institutions. See "Capital Adequacy
Requirements" below.
EXAMINATIONS. The OCC periodically examines and evaluates national banks.
Based upon such evaluations, the OCC may require revaluation of certain assets
of a bank and require the bank to establish specific reserves to allow for the
difference between the regulatory-determined value and the book value of such
assets. The OCC is authorized to assess the institution an annual fee based on,
among other things, the costs of conducting the examinations.
CAPITAL ADEQUACY REQUIREMENTS. OCC regulations require national banks to
maintain minimum risk-based capital ratios such as to those for bank holding
companies discussed above. The applicable regulations establish five capital
levels, ranging from "well capitalized" to "critically undercapitalized." A
national bank is considered "well capitalized" if it has a total risk-based
capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or
greater, and a leverage ratio of 5.0% or greater, and if it is not subject to an
order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
A national bank is considered "adequately capitalized" if it has a total risk-
based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of at
least 4% and leverage capital ratio of 4.0% or greater (or a leverage ratio of
3.0% or greater if the institution was given the highest rating in its most
recent report of examination, subject to appropriate federal banking agency
guidelines) and the bank does not meet the definition of a well capitalized
bank. A national bank is considered "undercapitalized" if it has a total risk-
based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio
that is less than 4.0%, or a leverage ratio that is less than 4.0% (or a
leverage ratio that is less than 3.0% if the institution received the highest
rating in its most recent report of examination, subject to appropriate federal
banking agency guidelines). A "significantly undercapitalized" institution is
one which has a total risk-based capital ratio that is less than 6.0%, a Tier 1
risk-based capital ratio that
-8-
<PAGE>
is less than 3.0%, or a leverage ratio that is less than 3.0%. A "critically
undercapitalized" institution is one which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
At December 31, 1998, each of the Subsidiary Banks was well capitalized. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources."
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. FDICIA requires the federal
banking regulators to take "prompt corrective action" with respect to capital-
deficient institutions with the overall goal of reducing losses to the
depository insurance fund. FDICIA contains broad restrictions on certain
activities of undercapitalized institutions involving asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, national banks will be prohibited from making capital
distributions, including dividends, or paying management fees to a holding
company if the payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be required
to file capital restoration plans with the OCC. Such a plan will not be accepted
unless, among other things, the banking institution's holding company guarantees
the plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy. Undercapitalized national banks also will be subject to
restrictions on growth, acquisitions, branching, and engaging in new lines of
business unless they have an approved capital plan that permits otherwise. The
OCC also may, among other things, require an undercapitalized national bank to
issue shares or obligations, which could be voting stock, to recapitalize the
institution or, under certain circumstances, to divest itself of any subsidiary.
The OCC and other Federal banking agencies are authorized by FDICIA to take
various enforcement actions against any significantly undercapitalized national
bank and any national bank that fails to submit an acceptable capital
restoration plan or fails to implement a plan accepted by the OCC. These powers
include, among other things, requiring the institution to be recapitalized,
prohibiting asset growth or requiring asset reduction, restricting interest
rates paid, requiring FRB prior approval of any capital distributions by any
bank holding company which controls the institution, requiring divestiture by
the institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of
directors and officers.
Significantly and critically undercapitalized national banks may be subject to
more extensive control and supervision. Such an institution may be prohibited
from, among other things, entering into any material transaction not in the
ordinary course of business, amending its charter or bylaws, or engaging in
certain transactions with affiliates. In addition, critically undercapitalized
institutions generally will be prohibited from making payments of principal or
interest on outstanding subordinated debt. Within 90 days of a national bank's
becoming critically undercapitalized, the OCC must appoint a receiver or
conservator unless certain findings are made with respect to the prospect for
the institution's continued viability.
DEPOSIT INSURANCE ASSESSMENTS. The FDIC is required by the Federal Deposit
Insurance Act to assess all banks in order to fund adequately the Bank Insurance
Fund (the "BIF") so as to resolve any insured bank that is declared insolvent by
its primary regulator. FDICIA required the FDIC to establish a risk-based
deposit insurance premium schedule. The risk-based assessment system is used to
calculate deposit insurance assessments made on BIF member banks to maintain the
designated reserves for the fund. In addition, the FDIC can impose special
assessments to repay borrowings from the U.S. Treasury, the Federal Financing
Bank, and BIF member banks. Under the risk-based system, banks are assessed
insurance premiums according to how much risk they are deemed to present to the
BIF. Such premiums currently range from zero percent of insured deposits to
0.27% of insured deposits. Banks with higher levels of capital and involving a
low degree of supervisory concern are assessed lower premiums than banks with
lower levels of capital or involving a higher degree of supervisory concern.
Each of the Subsidiary Banks are currently being assessed at the lowest rate of
zero percent.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), beginning in
1997 banks insured under the BIF were required to pay a part of the interest on
bonds issued by the Financing Corporation ("FICO") in the late 1980s to
recapitalize the defunct Federal Savings and Loan Insurance Corporation. Before
the Funds Act, FICO payments were made only by depository institutions which
were members of the Savings Association Insurance Fund (the "SAIF"). FICO
assessment rates for the second semi-annual assessment period of 1998 were set
by FDIC at .0122% annually for BIF members and .0610% annually for SAIF members.
These rates may be adjusted quarterly to reflect changes in the assessment bases
for the BIF and the SAIF. By law, the FICO assessment rate on BIF members must
be one-fifth the rate on SAIF members until the two insurance funds are merged
or until January 1, 2000, whichever occurs first.
-9-
<PAGE>
INTERNAL OPERATING REQUIREMENTS. FDICIA requires financial institutions with
over $500 million in assets to file an annual report with the FDIC and its
primary federal regulator and any appropriate state banking agency within 90
days after the end of its fiscal year. The report must contain financial
statements audited by an independent public accountant; a statement of
management's responsibilities for (1) preparing the financial statements and for
maintaining internal controls; (2) for financial reporting and complying with
designated safety and soundness laws and regulations; and (3) a separate
assessment by management of the effectiveness of the internal controls and the
institutions' internal controls for financial reporting. The independent public
accountant also must report separately on the institution's internal controls
and certain of the statements made by management in the report. The requirement
of an annual audit of the Subsidiary Banks can be satisfied by an annual audit
of the Corporation.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act of 1977 ("CRA") and
the regulations issued by the OCC to implement that law are intended to
encourage banks to help meet the credit needs of their service area, including
low and moderate income neighborhoods, consistent with the safe and sound
operations of the banks. These regulations also provide for regulatory
assessment of a bank's record in meeting the needs of its service area when
considering applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of another bank.
FIRREA requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of its subsidiary banks is reviewed in connection with the
filing of an application to acquire ownership or control of shares or assets of
a bank or to merge with any other bank holding company. An unsatisfactory record
can substantially delay or block the transaction. In 1995, the bank regulatory
agencies adopted final regulations implementing the CRA. These regulations
affect extensive changes to existing procedures for determining compliance with
the CRA and the full effect of these new regulations cannot be determined at
this time.
EXPANDING ENFORCEMENT AUTHORITY. One of the major effects of FDICIA was the
increased ability of banking regulators to monitor the activities of banks and
their holding companies. The Federal banking agencies have extensive authority
to police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For
example, the FDIC may terminate the deposit insurance of any institution which
it determines has engaged in an unsafe or unsound practice. The agencies can
also assess civil money penalties, issue cease and desist or removal orders,
seek injunctions, and publicly disclose such actions.
CHANGING REGULATORY STRUCTURE. Legislative and regulatory proposals regarding
changes in banking, regulations of banks, thrifts and other financial
institutions, are being considered by the executive branch of the federal
government, Congress, and various state governments, including Texas. Certain
of these proposals, if adopted, could significantly change the regulation of
banks and the financial service industry. The Corporation cannot predict
accurately whether any of these proposals will be adopted or, if adopted, how
these proposals will affect the Corporation or the Subsidiary Banks.
EFFECT ON ECONOMIC ENVIRONMENT. The policies of regulatory authorities,
including the monetary policy of the FRB, have a significant effect on the
operating results of bank holding companies and their subsidiaries. Among the
means available to the FRB to affect the money supply are open market operations
in U.S. Government securities, control of borrowings at the "discount window,"
changes in the discount rate on member bank borrowing, changes in reserve
requirements against member bank deposits and against certain borrowings by
banks and their affiliates and the placing of limits on interest rates that
member banks may pay on time and savings deposits. These means are used in
varying combinations to influence overall growth and distribution of bank loans,
investments, and deposits, and their use may affect interest rates charged on
loans or paid for deposits. FRB monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The Corporation cannot predict the nature of future
monetary policies and the effect of such policies on the business and earnings
of the Corporation and the Subsidiary Banks.
ITEM 2. PROPERTIES.
The principal offices of the Corporation are located at 1300 Summit Avenue, Fort
Worth, Texas 76102. The Corporation and Summit National Bank, a subsidiary,
lease space at this address from an unrelated third-party through leases that
expire February 15, 2000 and December 31, 2009, respectively. The Corporation
has options to extend its lease for two additional five year terms. Summit
National Bank owns a detached motor bank facility.
-10-
<PAGE>
Summit Community Bank, N.A. owns the building at its principal office at 3859
Camp Bowie Boulevard, Fort Worth, Texas. There are no encumbrances on this
property.
The Alta Mesa office of Summit Community Bank, N.A. is located at 3000 Alta Mesa
Boulevard, Fort Worth, Texas. The building is owned by the Corporation with the
bank office using approximately 25% of the facility. The remainder of the
building is fully leased. There are no third-party encumbrances on the
property.
The Northeast office and motor bank facility of Summit Community Bank, N.A., at
9001 Airport Freeway, North Richland Hills, Texas, is leased from a third-party
under a lease agreement expiring in April 2008. Summit Community Bank, N.A.
owns a tract of land adjacent to the Northeast office to be used for building of
a new motor bank facility that would be owned by the bank.
The Fossil Creek office of Summit Community Bank, N.A., at 3851 NE Loop 820,
Fort Worth, Texas is currently housed in a temporary facility. A new building
is being built to house this office. The new building, to be completed in April
1999, is to be a joint venture between the Summit Community Bank, N.A. and an
unrelated third party, with the Fossil Creek office occupying approximately 28%
of the building under a long-term lease with the joint venture.
Summit Community Bank, N.A. owns approximately five acres near the intersection
of Tarrant County Parkway and Davis Boulevard in Northeast Tarrant County. This
unimproved property is to be used to establish a new branch office in mid 1999
using a temporary facility. The property not used for a banking facility would
be sold.
A subsidiary of the Corporation owns an improved tract of land that serves as
the site of the operations center which is the principal office of Summit
Bancservices. This site is located at 500 Eighth Avenue, Fort Worth, Texas.
ITEM 3. LEGAL PROCEEDINGS.
In the opinion of management, there are no material pending legal proceedings,
other than ordinary routine litigation incidental to the Corporation's business,
to which it or any of its subsidiaries is a party or of which any of their
property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders through the solicitation
of proxies or otherwise, during the fourth quarter of 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION.
The executive officers of the Corporation, each elected to serve at the pleasure
of the Board of Directors until the next annual meeting of the Board of
Directors to be held on April 20, 1999, their respective ages, and their present
positions with the Corporation are as follows:
<TABLE>
<CAPTION>
Position Held
Position With Since
Name Age the Corporation -------------
- ------------------- --- ----------------------------
<S> <C> <C> <C>
Philip E. Norwood 49 Chairman 1998
Jeffrey M. Harp 50 President 1998
Bob G. Scott 61 Executive Vice President and 1998
Chief Operating Officer
</TABLE>
The business experience of each of these executive officers during the past five
(5) years is set forth below:
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<PAGE>
Mr. Norwood became Chairman of the Board of Summit Bancshares, Inc. and Chairman
of Summit Community Bank, N.A. in January 1998 and President of Summit Community
Bank, N.A. in July 1994 and continues to serve in these capacities. From
October 1993 to January 1998 Mr. Norwood served as President and Chief Executive
Officer of the Corporation. He has served as a director of the Corporation
since March 1984. From January 1990 to October 1993 Mr. Norwood served as Secre
tary of the Corporation, from December 1992 to October 1993 he served as
Executive Vice President of the Corporation, and from March 1984 to January 1990
he served as Secretary and Treasurer of the Corporation. From April 1981 to
December 1992 Mr. Norwood served as President of Alta Mesa National Bank
(currently a banking office of Summit Community Bank, N.A.). From December 1992
to December 1995 Mr. Norwood served as Chief Executive Officer of Alta Mesa
National Bank. Mr. Norwood served as a director of Alta Mesa National Bank from
April 1981 to March 1997 and as a director of Summit Community Bank, N.A. since
January 1990. Mr. Norwood served as a director of Summit National Bank from
March 1983 to January 1996.
Mr. Harp became President of the Corporation in January 1998 and continues to
serve in that capacity. From October 1993 to January 1998 Mr. Harp served as
Chief Operating Officer and Secretary of the Corporation. He served as
Executive Vice President of the Corporation from December 1992 to January 1998,
and Treasurer from January 1990 to January 1998. He has served as director of
the Corporation since January 1990. He has served as President of Summit
National Bank since January 1991, and served as Executive Vice President of
Summit National Bank from February 1985 to December 1990. He has served as a
director of Summit National Bank since January 1990. He served as a director of
Alta Mesa National Bank and Summit Community Bank, N.A. from January 1990 to
January 1996.
Mr. Scott became Executive Vice President, Chief Operating Officer, Secretary
and Treasurer in January 1998 and continues to serve in these capacities. He
served as Senior Vice President and Chief Financial Officer from June 1994 to
January 1998. From February 1992 to June 1994 Mr. Scott was a Senior Vice
President with Alexander and Alexander of Texas, Inc. Prior to February 1992,
Mr. Scott was a financial officer with Team Bancshares, Inc., Fort Worth, Texas
and with Texas American Bancshares, Inc., Fort Worth.
No family relationships exist among the executive officers and directors of the
Corporation.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. Since May 3, 1993 the Corporation's Common Stock has been
- ------------------
traded on the Nasdaq Stock Market under the symbol "SBIT." The following table
sets forth the high and low stock prices as quoted for the Corporation's Common
Stock for the periods indicated:
<TABLE>
<CAPTION>
Bid
----------------
High Low
------- -------
<S> <C> <C>
1998 Fiscal Year:
- ----------------
First Quarter $23.75 $19.00
Second Quarter 25.25 20.00
Third Quarter 21.75 14.25
Fourth Quarter 20.00 14.00
1997 Fiscal Year:
- ----------------
First Quarter $13.75 $11.25
Second Quarter 13.75 12.63
Third Quarter 17.25 13.50
Fourth Quarter 21.50 17.13
</TABLE>
This data has been restated to reflect a two-for-one stock split effected on
December 9, 1997.
On March 17, 1999 the closing price reported for the Common Stock was $17.75.
The foregoing quotations reflect prices quoted by market makers of the
Corporation's Common Stock, without retail markup, markdown or commissions, and
may not necessarily represent actual transactions.
Prior to May 3, 1993 there was no established public trading market for the
issued and outstanding shares of Common Stock of the Corporation. Accordingly,
there exists no published information with respect to market prices before that
date. From time to time, however, moderate numbers of shares of Common Stock
were transferred on the books of the Corporation.
SHAREHOLDERS. At the close of business on March 17, 1999 there were 634
- ------------
shareholders of record of Common Stock of the Corporation. The number of
beneficial shareholders is unknown to the Corporation at this time.
-13-
<PAGE>
DIVIDENDS. The Corporation has paid regular cash dividends on its common stock
- ---------
on a quarterly basis since the beginning of 1993. The following table sets
forth, for each quarter since the beginning of 1997, the quarterly dividends
paid by the Corporation on its Common Stock for the indicated periods. Data has
been restated to reflect a two-for one stock split effective on December 9,
1997.
<TABLE>
<CAPTION>
1998 Dividends Per Share
---------------- -------------------
<S> <C>
First Quarter $0.060
Second Quarter 0.060
Third Quarter 0.060
Fourth Quarter 0.060
1997
----------------
First Quarter $0.045
Second Quarter 0.045
Third Quarter 0.045
Fourth Quarter 0.045
</TABLE>
Although the Board of Directors intends to continue to pay quarterly cash
dividends in the future, there can be no assurance that cash dividends will
continue to the paid in the future or, if paid, that such cash dividends will be
comparable to cash dividends previously paid by the Corporation, since future
dividend policy is subject to the discretion of the Board of Directors of the
Corporation and will depend upon a number of factors, including future earnings
of the Corporation, the financial condition of the Corporation, the
Corporation's cash needs, general business conditions and the amount of
dividends paid to the Corporation by the Subsidiary Banks.
The principal source of the Corporation's cash revenues is dividends received
from the Subsidiary Banks. Pursuant to the National Bank Act, no national bank
may pay dividends from its paid-in capital. All dividends must be paid out of
current or retained net profits, after deducting reserves for losses and bad
debts. The National Bank Act further restricts the payment of dividends out of
net profits by prohibiting a national bank from declaring a dividend on its
shares of common stock until the surplus fund equals the amount of capital stock
or, if the surplus fund does not equal the amount of capital stock, until one-
tenth of a bank's net profits for the preceding half year in the case of
quarterly or semi-annual dividends, or the preceding two half-year periods in
the case of annual dividends, are transferred to the surplus fund. The approval
of the OCC is required prior to the payment of a dividend if the total of all
dividends declared by a national bank in any calendar year would exceed the
total of its net profits for that year combined with its net profits for the two
preceding years. Under FDICIA, a Subsidiary Bank may not pay a dividend if,
after paying the dividend, the Subsidiary Bank would be undercapitalized.
In addition, the appropriate regulatory authorities are authorized to prohibit
banks and bank holding companies from paying dividends which would constitute an
unsafe and unsound banking practice. The Subsidiary Banks and the Corporation
are not currently subject to any regulatory restrictions on their dividends.
-14-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical data for the past five years
(in thousands except ratios and per share data). All share and per share
information has been restated to reflect the two-for-one splits in 1997 and
1995:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Summary of Earnings:
Interest Income $ 37,065 $ 31,972 $ 27,577 $ 22,929 $ 18,143
Interest Expense 13,478 11,301 9,771 8,277 5,625
-------- -------- -------- -------- --------
Net Interest Income 23,587 20,671 17,806 14,652 12,518
Provision (Credit) for Loan Losses 785 900 819 236 (114)
Securities Gains (Losses) 35 (1) (14) (10) (152)
Non-interest Income 3,815 3,266 2,990 2,764 2,729
Non-interest Expense 14,173 12,318 10,917 9,973 9,075
-------- -------- -------- -------- --------
Earnings Before Income Taxes 12,479 10,718 9,046 7,197 6,134
Income Tax Expense 4,333 3,678 3,103 2,468 2,094
-------- -------- -------- -------- --------
Net Income $ 8,146 $ 7,040 $ 5,943 $ 4,729 $ 4,040
======== ======== ======== ======== ========
Balance Sheet Data (at period-end):
Total Assets $532,764 $459,794 $395,248 $355,417 $291,011
Investment Securities 148,012 105,627 117,013 119,368 114,722
Loans, Net of Unearned Discount 305,833 276,069 220,006 178,493 138,966
Allowance for Loan Losses 4,724 4,065 2,972 2,500 2,410
Demand Deposits 141,170 126,398 103,695 89,184 72,992
Total Deposits 465,500 401,724 345,023 310,109 259,539
Long-term Debt and Notes Payable -0- -0- -0- -0- 250
Shareholders' Equity 46,235 41,112 35,080 30,125 25,334
Per Share Data:
Net Income - Basic $ 1.25 $ 1.09 $ .93 $ .76 $ .64
Net Income - Diluted 1.20 1.04 .90 .72 .61
Book Value - Period-End 7.14 6.32 5.43 4.78 4.01
Dividends Declared .24 .18 .14 .11 .09
Weighted Average Shares Outstanding (000) 6,497 6,479 6,399 6,278 6,172
Average Common Share Equivalents (000) 317 321 314 322 309
Selected Performance Ratios:
Return on Average Assets 1.70% 1.70% 1.60% 1.52% 1.43%
Return on Average Shareholders' Equity 18.62 18.49 18.50 17.14 16.55
Net Interest Margin (tax equivalent) 5.28 5.47 5.24 5.15 4.85
Efficiency Ratio 51.60 51.42 52.50 57.20 59.96
Asset Quality Ratios:
Non-Performing Loans to Total Loans - Period-End 1.65% .77% .50% .55% .46%
Allowance for Loan Losses to Total Loans - Period-End 1.54 1.47 1.35 1.40 1.73
Allowance for Loan Losses to Non-Performing Loans
- Period-End 94.0 193.0 270.0 252.0 375.0
Net Charge-Offs (Recoveries) to Average Loans .04 (.08) .17 .09 .05
Capital Ratios:
Shareholders' Equity to Total Assets - Period-End 8.68% 8.94% 8.88% 8.48% 8.71%
Average Shareholders' Equity to Average Assets 9.11 9.21 8.66 8.85 8.64
Total Risk-based Capital to Risk Weighted Assets
- at Period-End* 15.06 15.06 15.85 15.91 18.09
Leverage Ratio - at Period-End* 8.52 8.83 8.82 8.42 8.69
</TABLE>
* Calculated in accordance with Federal Reserve guidelines currently in effect.
-15-
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1998 and
1997 follows (in thousands except for per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998:
- -----
Interest Income $8,873 $9,067 $9,448 $9,677
Interest Expense 3,249 3,288 3,459 3,482
Net Interest Income 5,624 5,779 5,989 6,195
Provision for Loan Losses 158 250 131 246
Non-interest Income 870 956 913 1,111
Non-interest Expense 3,506 3,435 3,540 3,692
Income Tax Expense 966 1,047 1,136 1,184
Net Income 1,864 2,003 2,095 2,184
Per Share Data:
Net Income:
Basic $ .29 $ .30 $ .33 $ .33
Diluted .27 .29 .31 .33
Dividends Paid .06 .06 .06 .06
Stock Price Range:
High 23.75 25.25 21.75 20.00
Low 19.00 20.00 14.25 14.00
Close 23.38 21.25 15.75 18.50
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997:
- -----
Interest Income $7,326 $7,870 $8,249 $8,527
Interest Expense 2,540 2,713 2,952 3,096
Net Interest Income 4,786 5,157 5,297 5,431
Provision for Loan Losses 155 197 281 267
Non-interest Income 762 820 825 858
Non-interest Expense 2,846 3,076 3,128 3,268
Income Tax Expense 875 932 931 940
Net Income 1,672 1,772 1,782 1,814
Per Share Data:
Net Income:
Basic $ .26 $ .27 $ .28 $ .28
Diluted .25 .26 .26 .27
Dividends Paid .045 .045 .045 .045
Stock Price Range:
High 13.75 13.75 17.25 21.50
Low 11.25 12.63 13.50 17.13
Close 12.38 13.75 17.13 21.00
</TABLE>
-16-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Corporation analyzes the major elements of the Corporation's
consolidated balance sheets and statements of income. This discussion should be
read in conjunction with the consolidated financial statements, accompanying
notes, and selected financial data appearing elsewhere in this report.
PERFORMANCE SUMMARY. Net income for 1998 was $8.1 million, an increase of $1.1
million, or 15.7%, over the $7.0 million recorded for 1997. On a weighted
average share basis, net income for 1998 was $1.20 per diluted share as compared
to $1.04 per share for 1997, an increase of 15.4%. The major contribution to
the improved earnings during 1998 was a 14.1% increase in net interest income.
Also contributing to the increase in net income was a decrease in the provision
for loan losses of $115,000 and an increase of $585,000 in non-interest income.
Partially offsetting these increases was an increase in non-interest expenses of
$1,855,000. Further explanations of these changes are set forth below.
Continuing to reflect the strong and growing economy in the Corporation's market
area, loans increased 10.8% over the previous year-end to $306 million at
December 31, 1998. Deposits experienced even more dramatic growth, particularly
in the fourth quarter, increasing 15.9% over the same period to $466 million.
Shareholders' equity was $46 million at year-end, an increase of 12.5%.
Net income for 1997 was $7.0 million compared to net income of $5.9 million for
1996, an increase of 18.5%. The increase in earnings for 1997 was also
attributable to a significant increase net interest income.
The following table shows selected key performance ratios over the last three
(3) years:
1998 1997 1996
------ ------ ------
Return on Average Assets 1.70% 1.70% 1.60%
Return on Average Shareholders' Equity 18.62 18.49 18.50
Shareholders' Equity to Assets - Average 9.11 9.21 8.66
Dividend Payout Ratio - Per Diluted Share 20.00 17.31 15.55
The ratio, return on assets, is calculated by dividing net income by average
total assets for the year. The return on equity ratio is calculated by dividing
net income by average shareholders' equity for the year. The equity to assets
ratio is calculated by dividing average shareholders' equity by average total
assets for the year. The dividend payout is determined by dividing the dividend
paid per share by the diluted earnings per share.
NET INTEREST INCOME. Net interest income is the difference between interest
earned on earning assets and interest paid for the funds supporting those
assets. The largest category of earning assets consists of loans to businesses
and individuals. The second largest is investment securities. Net interest
income is the principal source of the Corporation's earnings. Interest rate
fluctuations, as well as changes in the amount and type of earning assets and
liabilities supporting those assets, affect net interest income. Interest rates
primarily are determined by national and international market trends, as well as
competitive pressures in the Corporation's operating markets. For analytical
purposes, income from tax-exempt assets, primarily securities issued by or loans
made to state and local governments, is adjusted by an increment which equates
tax-exempt income to interest from taxable assets.
Net interest income (tax equivalent) for 1998 was $23.6 million, an increase of
$2.9 million, or 14.2% compared to the prior year. The net increase reflected a
$5.1 million increase in interest income which was offset by a $2.2 million
increase in interest expense. The Corporation's yield on earning assets
declined to 8.30% in 1998, from 8.45% for 1997. Rates paid on the Corporation's
interest-bearing liabilities, increased from 4.16% in 1997 to 4.24% in 1998.
These negative shifts in yield on earning assets and cost of interest-bearing
liabilities resulted in the net interest margin declining from 5.47% in 1997 to
5.28% for 1998. However, an18.1% increase in average earning assets more than
offset the decline in net interest margin. Also, contributing to the improved
net interest income for 1998 was the increase in noninterest-bearing demand
deposits. In 1998, the average balance of demand deposits increased 14.4%.
Although the average demand deposits as a percent of average total deposits
declined to 27.8% in 1998 from 28.2% in 1997 this ratio remains very positive
compared to the Corporation's peers.
-17-
<PAGE>
SUMMARY OF EARNING ASSETS AND INTEREST BEARING LIABILITIES
Although the year-end detail provides satisfactory indicators of general trends,
the daily average balance sheets are more meaningful for analysis purposes than
year-end data because averages reflect the day-to-day fluctuations that are
common to bank balance sheets. Also, average balances for earning assets and
interest-bearing liabilities can be related directly to the components of
interest income and interest expense on the statements of income. This provides
the basis for analysis of rates earned and paid, and sources of increases and
decreases in net interest income as derived from changes in volumes and rates.
The following schedule presents average balance sheets for the most recent three
years in a format that highlights earning assets and interest-bearing
liabilities.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ---------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- ---------- ----------- --------- --------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Federal Funds Sold $ 38,112 $ 2,053 5.39% $ 18,059 $ 1,008 5.58% $ 16,696 $ 906 5.32%
Investment Securities
(Taxable) 115,663 6,963 6.02 111,578 6,874 6.16 122,212 7,398 6.05
Investment Securities
(Tax-exempt) 1,103 76 6.90 539 36 6.59 24 2 8.17
Loans, Net of Unearned
Discount/(1)/ 292,060 28,002 9.59 248,303 24,069 9.69 201,506 19,285 9.57
-------- -------- -------- -------- -------- -------
Total Earning Assets 446,938 37,094 8.30 378,479 31,987 8.45 340,438 27,591 8.11
-------- -------- -------
Other Assets:
Cash and Due From Banks 22,226 24,909 21,027
Other Assets 16,261 13,568 12,243
Allowance for Loan Losses (4,430) (3,470) (2,811)
-------- -------- --------
Total Assets $480,995 $413,486 $370,897
======== ======== ========
Interest-Bearing
Liabilities:
Interest-Bearing
Transaction
Accounts $144,133 5,186 3.60 $128,880 4,599 3.57 $116,811 3,853 3.30
Savings 68,011 2,972 4.37 50,756 2,134 4.21 46,324 1,871 4.04
Savings Certificates 52,261 2,631 5.03 49,203 2,434 4.95 48,058 2,292 4.77
Certificates of Deposit
$100,000 or more 36,752 1,948 5.30 30,242 1,572 5.20 24,405 1,208 4.95
Other Time 877 49 5.59 622 34 5.38 428 19 4.42
Other Borrowings 15,742 692 4.40 11,668 528 4.53 12,318 528 4.33
-------- -------- -------- -------- -------- -------
Total Interest-Bearing
Liabilities 317,776 13,478 4.24 271,371 11,301 4.16 248,344 9,771 3.93
-------- -------- -------
Other Liabilities:
Demand Deposits 116,428 101,813 88,022
Other Liabilities 3,030 2,212 2,399
Shareholders' Equity 43,761 38,090 32,132
-------- -------- --------
Total Liabilities and
Shareholders' Equity $480,995 $413,486 $370,897
======== ======== ========
Net Interest Income and
Margin (T/E Basis)/(2)/ $ 23,616 5.28 $ 20,686 5.47 $17,820 5.24
======== ======== =======
</TABLE>
(1) Loan interest income includes fees and loan volumes include loans on non-
accrual.
(2) Presented on a tax equivalent basis ("T/E") using a federal income tax rate
of 34% in all three years.
Net interest margin, the net return on earning assets which is computed by
dividing net interest income by average total earning assets, was 5.28% for
1998, a nineteen basis point decline from the previous year. This decline in
the margin reflected a lower yield on earning assets contributed to by a
declining interest rate market in the fourth quarter of 1998 and a more
competitive economic market that resulted in somewhat lower pricing of some
loans. Also, competitive market conditions resulted in higher rates being paid
on deposit products, along with a shift by the Corporation's customers to
higher interest rate deposit products.
-18-
<PAGE>
The table below analyzes the increase in net interest income for each of the
years ended December 31, 1998 and 1997 on a fully tax equivalent basis. Non-
accruing loans have been included in assets for these computations, thereby
reducing yields on total loans. The changes in interest due to both rate and
volume in the rate/volume analysis table below have been allocated to volume or
rate change in proportion to the absolute amounts of the change in each.
<TABLE>
<CAPTION>
1998 1997
vs. 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------ -----------------------------
(Dollars in Thousands) Volume Rate Total Volume Rate Total
--------- ------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal Funds Sold $1,080 $ (35) $1,045 $ 64 $ 38 $ 102
Investment Securities (Taxable) 248 (159) 89 (656) 132 (524)
Investment Securities
(Tax-exempt) 38 2 40 34 -0- 34
Loans, Net of Unearned
Discount 4,185 (252) 3,933 4,539 245 4,784
------ ----- ------ ------ ----- ------
Total Interest Income 5,551 (444) 5,107 3,981 415 4,396
------ ----- ------ ------ ----- ------
Interest-Bearing
Liabilities:
Deposits 1,793 220 2,013 962 573 1,535
Other Borrowings 170 (6) 164 (25) 16 (9)
------ ----- ------ ------ ----- ------
Total Interest Expense 1,963 214 2,177 937 589 1,526
------ ----- ------ ------ ----- ------
Changes in Net Interest
Income $3,588 $(658) $2,930 $3,044 $(174) $2,870
====== ===== ====== ====== ===== ======
</TABLE>
Net interest income for 1998 increased $2,930,000, or 14.2% over the prior year.
In this same period total interest income increased 15.9% and total interest
expense increased 19.3%.
NON-INTEREST INCOME. Non-interest income is an important contributor to net
earnings. The major component of the Corporation's non-interest income is
various charges and fees earned on deposit accounts and related services. The
following table summarizes the changes in non-interest income during the past
three years (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------------- ------
Amount % Change Amount % Change Amount
------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
Service Charges on
Deposit Accounts $2,018 6.8% $1,890 14.9% $1,645
Non-recurring Income 412 -- 151 (25.2) 202
Gain (Loss) on Sale of Investment
Securities 35 -- (1) -- (14)
Other Non-interest Income 1,385 13.1 1,225 7.2 1,143
------ ------ ------
Total Non-interest Income $3,850 17.9 $3,265 9.7 $2,976
====== ====== ======
</TABLE>
Service charges on deposits increased in 1998 as a result of an increase in the
various service fees charged on deposit accounts and an increase in the number
of accounts.
The non-recurring income in 1998 included $137,000 from refunds of state
franchise taxes paid in prior years, $178,000 from gains on sales of assets
taken in satisfaction of debts in prior years and $97,000 of interest recovered
on loans either charged-off in prior years or loans that were on non-accural
status in prior years. Non-recurring income in 1997 and 1996 is primarily
interest recovered on loans charged-off in prior years and gains on sales of
miscellaneous assets.
The increase in other non-interest income in 1998 is primarily due to income
from two new products, debit cards and mortgage brokerage/origination, partially
offset by lower fees earned on investment services to customers.
Excluding non-recurring income and gains and losses on securities, non-interest
income increased 9.3% in 1998 and 11.7% in 1997.
-19-
<PAGE>
NON-INTEREST EXPENSE. Non-interest expense includes all expenses of the
Corporation other than interest expense, provision for loan losses and income
tax expense. The following table summarizes the changes in the non-interest
expenses for the past three years (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- -------------------- ------
Amount % Change Amount % Change Amount
------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $ 8,576 14.0% $ 7,524 11.4% $ 6,753
Occupancy Expense - Net 928 19.9 774 2.6 772
Furniture and Equipment Expense 1,150 25.1 919 14.9 800
Other Real Estate Owned Expense (1) -- (63) -- 10
Other Expenses:
Business Development 611 3.9 588 38.0 426
Insurance - Other 102 5.2 97 (3.0) 100
Legal and Professional Fees 511 3.0 496 12.2 442
Other Taxes 277 52.2 182 80.2 101
Postage and Courier 286 .7 284 8.4 262
Printing and Supplies 387 3.8 373 23.1 303
Regulatory Fees and Assessments 169 5.6 160 19.4 134
Other Operating Expenses 1,177 19.6 984 20.9 814
------- ------- -------
Total Other Expenses 3,520 11.3 3,164 22.5 2,582
------- ------- -------
Total Non-interest Expense $14,173 15.1 $12,318 12.8 $10,917
======= ======= =======
</TABLE>
Total non-interest expense increased 15.1% in 1998 over 1997 reflecting
increases in salaries and benefits, occupancy expenses, furniture and equipment
expenses, other taxes and other operating expenses. As a percent of average
assets, non-interest expenses were 2.95% in 1998 and the "efficiency ratio"
(non-interest expenses divided by total non-interest income plus net interest
income) was 51.60% for 1998. The efficiency ratio measures what percentage of
total revenues are absorbed by non-interest expense. These measures of
operating efficiency compare very favorably to other financial institutions in
the Corporation's peer groups.
The increase in salaries and employee benefits for 1998 is due to salary merit
increases and additions to staff. The average number of full-time equivalent
employees increased by 21 in 1998 to an average full-time equivalent of 166. At
year end 1998 the full-time equivalent staff was 169 versus 160 at the same time
the prior year. The increases for salaries and number of employees include
additions for a branch office opened in 1997. Also, several lending officers
and customer service officers and employees were added in the last half of 1997
and were on staff for the full year of 1998.
The increase in occupancy expense includes the rent for a new branch office that
was opened in the fourth quarter of 1997. Also, increases of approximately 13%,
in the aggregate, were experienced in utilities expense, repairs expense and ad
valorem tax expense in current facilities.
The increase in furniture and equipment expense is primarily a result of
depreciation and service contract expense for a new computer network system
installed in mid 1997 as well as, new item processing equipment added in late
1997. Also, expenses related to a new branch office opened in 1997 are
reflected.
Other taxes, primarily franchise taxes paid to the State of Texas were higher
due to higher levels of taxable capital at all entities and the loss of certain
tax credits that were available in prior years. As noted in the discussion of
non-interest income, tax refunds were received for the tax years of 1995 through
1997 by filing amended returns to reflect new interpretations of taxable
capital. These new interpretations should assist in maintaining somewhat lower
taxes in future years.
Other operating expenses increased in 1998 due to an increase in various
miscellaneous operating costs including telephone service fees, ATM support
expenses, third party data processing support fees, and travel expenses.
-20-
<PAGE>
FEDERAL AND STATE INCOME TAX EXPENSE. The Corporation has adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." See Note
10 of the Corporation's Notes to Consolidated Financial Statements for details
of tax expense. The Corporation provided $4.3 million for federal income taxes
for 1998, resulting in an effective tax rate of 34.7%.
INVESTMENT SECURITIES. The following table presents the consolidated investment
securities portfolio at amortized cost as of December 31, 1998, classified as to
--------------
whether the security is to be Held-to-Maturity or is Available-for-Sale (see
Note 1 of the Notes to Consolidated Financial Statements for a discussion of
these designations), by stated maturity and with the weighted average interest
yield for each range of maturities. The yields on tax-exempt obligations are
computed on a fully taxable equivalent basis using statutory rates for federal
income taxes.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------
Due 1 to Due 5 to Due After
Due 1 Year or Less 5 Years 10 Years 10 Years
------------------- ----------------------- ------------------ ----------------------------
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total
---------- ------- ----------- --------- ---------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities - HTM $ 3,002 6.02% $ 8,988 6.32% $ -0- -- $ -0- -- $ 11,990
U.S. Treasury Securities - AFS 12,047 5.99 16,992 6.19 -0- -- -0- -- 29,039
------- ------- ------- ------- --------
Total 15,049 6.00 25,980 6.24 -0- -0- 41,029
------- ------- ------- ------- --------
U.S. Government Agencies - HTM -0- -- 13,020 5.96 1,011 6.00% -0- -- 14,031
U.S. Government Agencies - AFS 29.779 5.09 28,433 5.86 15,305 5.79 -0- -- 73,517
------- ------- ------- ------- --------
Total 29,779 5.09 41,453 5.89 16,316 5.81 -0- 87,548
------- ------- ------- ------- --------
U.S. Government Agency Mortgage
Backed Securities - AFS 740 5.66 -0- -- 2,955 5.96 12,790 5.57 16,485
------- ------- ------- ------- --------
Obligations of States and
Political Subdivisions - HTM 281 6.29 293 6.47 -0- -- -0- -- 574
Obligations of States and
Political Subdivisions - AFS 105 6.81 350 7.27 -0- -- -0- -- 455
------- ------- ------- ------- --------
Total 386 6.43 643 6.91 -0- -0- -- 1,029
------- ------- ------- ------- --------
Other Securities - AFS -0- -- -0- -- -0- -- 1,072 6.00 1,072
------- ------- ------- ------- --------
Total $45,954 5.41 $68,076 6.03 $19,271 5.83 $13,862 5.60 $147,163
======= ======= ======= ======= ========
Held-to-Maturity ("HTM") $ 3,283 6.04% $22,301 6.11% $ 1,011 6.00% $ -0- -- $ 26,595
Available-for-Sale ("AFS") 42,671 5.36 45,775 5.99 18,260 5.82 13,862 5.60% 120,568
</TABLE>
The yield on the investment securities portfolio of the Corporation at December
31, 1998 was 5.94% and the weighted average life of the portfolio on that date
was approximately 1.6 years. At December 31, 1997 the yield of the portfolio
was 6.08% and the weighted average life was 2.2 years. In late 1998 the
Corporation purchased $30,000,000 par value of U.S. Agency Discount notes.
These securities had a maturity of 30 to 120 days and provided a yield greater
than Federal funds while providing the necessary liquidity. The inclusion of
these notes in the portfolio reduced the average life of the portfolio.
Note 2 to the Corporation's Notes to Consolidated Financial Statements shown in
this report reflects the estimated fair values for various categories of
investment securities as of December 31, 1998 and 1997. As of December 31,
1998, there was a net unrealized gain of $1,213,000 in the portfolio of which
$849,000 related to Available-for-Sale securities, or .7% of the amortized cost
of those securities.
The following table summarizes the book value of investment securities held by
the Corporation as of December 31 for the past five years (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 41,672 $ 70,794 $ 77,678 $ 78,981 $ 85,601
U.S. Government Agencies
and Corporations 87,791 20,249 25,276 26,922 18,277
U.S. Government Agency
Mortgage Backed Securities 16,440 12,527 13,805 13,141 10,196
Obligations of States and
Political Subdivisions 1,037 1,142 -0- 70 394
Federal Reserve Bank and Federal
Home Loan Bank Stock 1,072 915 254 254 254
-------- -------- -------- -------- --------
Total $148,012 $105,627 $117,013 $119,368 $114,722
======== ======== ======== ======== ========
</TABLE>
-21-
<PAGE>
In 1998, approximately $12 million of investment securities were sold, resulting
in a net gain on sale of securities of $35,000. Management of the Corporation
views these trades as an opportunity to restructure the portfolio for future
benefits.
LOANS. The following schedule classifies loans according to type as of December
31 for the past five years (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
% of % of % of % of % of
------------
1998 Total 1997 Total 1996 Total 1995 Total 1994 Total
------------ ------ --------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $133,066 43.5% $127,800 46.3% $103,414 47.0% $ 81,542 45.7% $ 69,610 50.1%
Real Estate Mortgage 100,421 32.9 90,638 32.8 76,771 34.9 64,200 36.0 51,684 37.2
Real Estate Construction 40,456 13.2 26,290 9.5 12,862 5.8 10,189 5.7 3,656 2.6
Loans to Individuals,
Net of Unearned
Discount 31,890 10.4 31,341 11.4 26,959 12.3 22,562 12.6 14,016 10.1
-------- -------- -------- -------- ----- -------- -----
Total Loans, Net of
Unearned Income $305,833 100.0% $276,069 100.0% $220,006 100.0% $178,493 100.0% $138,966 100.0%
======== ======== ======== ======== ========
</TABLE>
The preceding loan distribution table reflects that total loans increased $29.8
million (10.8%) between year-end 1997 and 1998. Although this dollar increase
was significant, the Corporation is continuing to apply stringent credit
criteria on all loan applications. At December 31, 1998, loans were 65.7% of
deposits compared to 68.7% at the previous year-end reflecting an above average
increase in deposits in the fourth quarter of 1998. However, average loans were
69.8% of average deposits in 1998 compared to 68.7% in 1997.
Primarily, the commercial loan customers of the Subsidiary Banks are small to
medium-sized businesses and professionals and executives. The banks offer a
variety of commercial loan products that include revolving lines of credit,
letters of credit, working capital loans and loans to finance accounts
receivable, inventory and equipment. Generally, these commercial loans have
floating rates of interest with terms of maturity of three years or less.
A significant portion of the $100 million real estate mortgage portfolio is
loans to finance owner-occupied real estate. At December 31, 1998, $62 million
of loans, approximately 62% of the real estate mortgage portfolio, had been made
for this purpose. Also, approximately 34% of the loans in the real estate
mortgage portfolio have variable rates of interest with a significant portion of
the remaining portfolio having balloon terms at five to seven years and/or rate
adjustment clauses.
Real estate construction loans are made primarily to finance construction of
single family residences in the Corporation's market area of Tarrant County.
Construction loans generally are secured by first liens on real estate and have
floating interest rates. The Corporation's lending activities in this area are
primarily with borrowers that have been in the building trade for many years and
with which the banks have long standing relationships. The Corporation's
lending officers meet quarterly with consultants that carefully track the
residential building activities within the market. The Corporation will adjust
its construction lending activities based on the trends of housing starts and
absorption rates in the market.
The Corporation also lends to consumers for purchases of various consumer goods,
such as automobiles, boats and home improvements. The terms of these loans
typically are five years or less and are well secured with liens on products
purchased or other assets. These loans are primarily made to customers who have
other relationships with the banks. The Corporation does not issue credit cards
and does not have any credit card loans outstanding.
The following table presents commercial loans and real estate construction loans
at December 31, 1998, based on scheduled principal repayments and the total
amount of loans due after one year classified according to sensitivity to
changes in interest rates (in thousands):
<TABLE>
<CAPTION>
Over
One Year
One Year Through Over Five
or Less Five Years Years Total
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Commercial $107,623 $22,688 $2,755 $133,066
Real Estate Construction 36,016 2,305 2,135 40,456
-------- ------- ------ --------
Totals $143,639 $24,993 $4,890 $173,522
======== ======= ====== ========
</TABLE>
-22-
<PAGE>
Of the loans maturing after one year, all have fixed rates of interest, with
many having rate adjustment clauses during the remaining term of the loan that
allow for periodic adjustments to rates.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
charges to earnings in the form of a provision for loan losses. Loans, or
portions thereof, which are considered to be uncollectible are charged against
this allowance and subsequent recoveries, if any, are credited to the allowance.
The allowance represents the amount which, in management's judgement, will be
adequate to absorb future charge-offs of existing loans which may become
uncollectible. The adequacy of the allowance is determined by management's
periodic evaluation of the loan portfolio and by the employment of third party
loan review specialists. All known problem loans, unknown inherent risks
generally associated with bank lending, past loan loss experience, delinquency
ratios and current and projected economic conditions are taken into account in
evaluating the adequacy of the allowance.
The Corporation has adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"), as amended
by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosure" ("SFAS No. 118").
These standards specify how allowances for certain impaired loans should be
determined and the accounting for in-substance foreclosures.
Loans are generally placed on non-accrual status when principal or interest is
past due 90 days or more and the loan is not both well-secured and in the
process of collection, or immediately, if in the opinion of management, full
collection of principal or interest is doubtful. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely.
The following table presents average loans net of unearned income and an
analysis of the consolidated allowance for loan losses (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Average Loans Outstanding $ 292,060 $ 248,303 $ 201,506 $ 156,374 $ 132,079
========== ========== ========== ========== ==========
Analysis of Allowance for
Loan Losses:
Balance, Beginning of Year $ 4,065 $ 2,972 $ 2,500 $ 2,410 $ 2,594
Charge-Offs:
Commercial 128 148 424 321 101
Real Estate Mortgage 39 -0- -0- -0- 180
Real Estate Construction 6 -0- -0- -0- -0-
Loans to Individuals 170 98 36 26 32
---------- ---------- ---------- --------- ----------
Total Charge-Offs 343 246 462 347 313
---------- ---------- ---------- --------- ----------
Recoveries:
Commercial 87 379 58 74 129
Real Estate Mortgage 111 56 54 114 79
Real Estate Construction -0- -0- -0- -0- -0-
Loans to Individuals 19 4 3 13 35
---------- ---------- ---------- --------- ----------
Total Recoveries 217 439 115 201 243
---------- ---------- ---------- --------- ----------
Net Charge-Offs (Recoveries) 126 (193) 347 146 70
---------- ---------- ---------- --------- ----------
Provision Charged (Credited)
to Operating Expense 785 900 819 236 (114)
---------- ---------- ---------- --------- ----------
Balance, End of Year $ 4,724 $ 4,065 $ 2,972 $ 2,500 $ 2,410
========== ========== ========== ========= ==========
Ratio of Net Charge-Offs (Recoveries)
to Average Loans Outstanding .04% (.08)% .17% .09% .05%
========== ========== ========== ========= ==========
</TABLE>
-23-
<PAGE>
The decrease in provision for loan losses in 1998 over 1997 primarily recognizes
the significant increase in reserve to loans ratio in the prior year (1.47% vs
1.35%) and a lower rate of growth in loans.
The following table reflects the allowance for loan losses compared to total
loans at the end of each year (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total Loans $305,833 $276,069 $220,006 $178,493 $138,966
Allowance for Loan Losses 4,724 4,065 2,972 2,500 2,410
Allowance for Loan Losses
as a Percent of Total Loans 1.54% 1.47% 1.35% 1.40% 1.73%
Allowance for Loan Losses As
a Percent of Non-Performing Loans 94.0 193.0 270.0 252.0 375.0
</TABLE>
The following table illustrates the allocation of the allowance for loan losses
to the various loan categories (dollars in thousands); see the tables on page 22
for the percent of specific types of loans to total loans:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
% % % % %
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allowance For
Loan Losses:
Commercial $2,713 57.4% $1,729 42.5% $1,072 36.1% $1,249 50.0% $ 953 39.5%
Real Estate
Mortgage 818 17.3 699 17.2 556 18.7 524 21.0 648 26.9
Real Estate
Construction 452 9.6 184 4.5 81 2.7 63 2.5 28 1.2
Loans to Individuals 372 7.9 272 6.7 165 5.6 132 5.3 198 8.2
Unallocated Portion 369 7.8 1,181 29.1 1,098 36.9 532 21.2 583 24.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $4,724 100.0% $4,065 100.0% $2,972 100.0% $2,500 100.0% $2,410 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The allocation is determined by providing specific reserves against each
criticized loan plus a general allocation against the remaining balance of the
portfolio based on experience factors. Management of the Corporation believes
that the allowance for loan losses at December 31, 1998, is adequate to cover
losses inherent in the portfolio. There can be no assurance that the
Corporation will not sustain loan losses in future periods which could be
substantial in relation to the size of the current allowance. The total
allowance is available to absorb losses from any segment of loans.
NON-PERFORMING ASSETS. Non-performing assets consist of non-accrual loans,
renegotiated loans and other real estate. Non-accrual loans are those on which
the accrual of interest has been suspended and on which the interest is recorded
as earned when it is received. Loans are generally placed on non-accrual status
when principal or interest is past due 90 days or more, and the loan is not both
well-secured and in the process of collection, or immediately, if in the opinion
of management, full collection of principal or interest is doubtful. At the
time a loan is placed on non-accrual status, interest previously recorded but
not collected is reversed and charged against current interest income.
Renegotiated loans are loans on which the interest and/or the principal has been
reduced due to a deterioration in the borrower's financial condition. Even
though these loans are actually performing, they are included in non-performing
assets because of the loss of revenue related to the reduction of interest
and/or principal.
Other real estate is real estate acquired through foreclosure or through partial
settlement of debts and which is awaiting sale and disposition. At the time of
acquisition, other real estate is recorded at the lower of estimated fair value
or the loan balance or settlement agreement with any write-down charged to the
allowance for loan losses. Any further write-downs, expenses related to the
property, and any gain or loss resulting from the sale of the property are
recorded in current operating expenses.
-24-
<PAGE>
The following table summarizes the non-performing assets and loans 90 days past
due and still accruing as of December 31, (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual Loans $5,049 $2,112 $1,102 $ 990 $ 643
Renegotiated Loans 6 -0- -0- -0- -0-
Other Real Estate 281 151 166 113 649
------ ------ ------ ------ ------
Total Non-Performing
Assets $5,336 $2,263 $1,268 $1,103 $1,292
====== ====== ====== ====== ======
As a Percent of:
Total Assets 1.00% .49% .32% .31% .44%
Total Loans and Other
Real Estate 1.74 .82 .58 .62 .93
Loans Past Due 90 Days or
More and Still Accruing $ 3 $ 78 $ 36 $ -0- $ 32
</TABLE>
The Subsidiary Banks are required, by the regulatory authorities, to have other
real estate evaluated periodically. In the event the new evaluation value is
less than the carrying value of the property, the excess is written off to
expense. Some properties are written down below their evaluation values when
management feels the economic value of the property has declined below the
evaluation value.
Non-accrual loans at December 31, 1998, were comprised of $2,393,000 in
commercial loans, $451,000 in real estate mortgages, $2,108,000 in interim
construction loans and $97,000 to consumers. Within the non-accrual commercial
loans is one loan of $1,914,000 that is performing as to payment of principal
and interest, however, the borrower is experiencing financial difficulty due to
their line of business - health insurance underwriting. The non-accrual interim
construction loans includes a commercial construction loan for $1,609,000 to a
borrower that is in bankruptcy. In January 1999, the property was foreclosed.
The property has been appraised at a value above the loan value, therefore the
foreclosed asset was recorded at the loan value at foreclosure.
The impact on interest income from the above non-accrual loans and renegotiated
loans for the past five (5) years is provided below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Gross Amount of Interest
That Would Have Been
Recorded at Original Rate $ 537 $ 272 $ 111 $ 102 $ 35
Interest Included in Income 312 154 30 42 25
------ ------ ------ ------ ------
Interest Not Recorded
in Income $ 225 $ 118 $ 81 $ 60 $ 10
====== ====== ====== ====== ======
</TABLE>
Loans of each Subsidiary Bank are graded on a system similar to that used by the
regulators. The first level of criticized loans is "Other Assets Especially
Mentioned" (OAEM). These loans are normally fundamentally sound but have
potential weaknesses which may, if not corrected, weaken the asset or
inadequately protect the bank's credit position at some future date. The second
level is "Substandard", which are loans inadequately protected by current sound
net worth, paying capacity or pledged collateral. The last level of criticized
loans, before they are charged off, is "Doubtful". Doubtful loans are
considered to have inherent weaknesses because collection or liquidation in full
is highly questionable.
Non-accrual loans normally include weaker Substandard loans and loans that are
considered to be Doubtful.
-25-
<PAGE>
The following table summarizes the relationship between non-performing loans,
criticized loans and the allowance for loan losses (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Non-Performing Loans $ 5,055 $ 2,112 $ 1,102 $ 990 $ 643
Criticized Loans 10,468 9,295 4,589 7,621 4,497
Allowance for Loan Losses 4,724 4,065 2,972 2,500 2,410
Allowance for Loan Losses
as a Percent of:
Non-Performing Loans 94.0% 193.0% 270.0% 252.0% 375.0%
Criticized Loans 45.0 44.0 65.0 33.0 54.0
</TABLE>
Independent third party loan reviews of the Subsidiary Banks were completed at
various times in 1998. In addition, regulatory examinations were completed in
early 1999. Based on the findings of these reviews and exams the Subsidiary
Banks appear to be adequately reserved.
Management is not aware of any potential loan problems, that have not been
disclosed, to which serious doubts exist as to the ability of the borrower to
substantially comply with the present repayment terms.
DEPOSITS. The primary source of the Corporation's funds is the deposits of the
Subsidiary Banks. The majority of the Corporation's deposits are considered
"core" deposits, that is, deposits that are not subject to material changes due
to customer withdrawal because of market rate changes. The Corporation does not
accept brokered deposits. Average demand deposits increased $14.6 million, or
14.4% in 1998. These deposits represented 27.8% of total deposits. Average
interest-bearing deposits increased $42.3 million, or 16.3%. The deposit types'
daily average balance and related average rates paid during each of the last
three (3) years are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------------------- ---------
Amount Rate Paid Amount Rate Paid Amount Rate Paid
------ --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing Demand Deposits $116,428 $101,813 $ 88,022
Interest-Bearing Deposits:
Interest-Bearing Transaction
Accounts 144,133 3.60% 128,880 3.57% 116,811 3.30%
Savings 68,011 4.37 50,756 4.21 46,324 4.04
Savings Certificates 52,261 5.03 49,203 4.95 48,058 4.77
Certificates of Deposit of $100,000 or More 36,752 5.30 30,242 5.20 24,405 4.95
Other Time Deposits 877 5.59 622 5.38 428 4.42
-------- -------- --------
Total Interest-Bearing Deposits 302,034 4.23 259,703 4.15 236,026 3.92
-------- -------- --------
Total Deposits $418,462 $361,516 $324,048
======== ======== ========
</TABLE>
The remaining maturity on certificates of deposit of $100,000 or more as of
December 31, 1998, 1997 and 1996 is presented below (in thousands):
<TABLE>
<CAPTION>
% of % of % of
Maturity 1998 Total 1997 Total 1996 Total
- ------------------ -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
3 months or less $14,227 38.4% $15,480 43.4% $10.215 40.1%
3 to 6 months 7,943 21.4 6,894 19.3 7,342 28.9
6 to 12 months 8,471 22.8 11,383 31.9 6.350 25.0
Over 12 months 6,458 17.4 1,933 5.4 1,527 6.0
</TABLE>
-26-
<PAGE>
BORROWINGS. Securities sold under repurchase agreements generally represent
borrowings with maturities ranging from one to thirty days. These borrowings
are with significant commercial customers of the banks that require short-term
liquidity for their funds. Information relating to these borrowings is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Securities sold under repurchase agreements:
Average $ 15,742 $ 11,668 $ 12,181
Year-end 17,839 14,689 13,209
Maximum month-end balance during year 19,354 15,263 14,453
Interest Rate:
Average 4.40% 4.53% 4.33%
Year-end 3.83 4.55 4.35
</TABLE>
INTEREST RATE SENSITIVITY. The objectives of monitoring and managing the
interest rate risk of the balance sheet are to contribute to earnings by
minimizing adverse changes in net interest income as a result of changes in the
direction and level of interest rates and to provide liquidity to satisfy cash
flow requirements to meet customers' fluctuating demands.
Interest rate sensitivity is the relationship between changes in the market
interest rates and changes in net interest income due to the repricing
characteristics of assets and liabilities.
An asset-sensitive position in a given period will result in more assets than
liabilities being subject to repricing; therefore, market interest-rate changes
will be reflected more quickly in asset rates. If interest rates decline, such
a position will have an adverse effect on net interest income. Conversely, in a
liability-sensitive position, where liabilities reprice more quickly than assets
in a given period, a decline in market rates will benefit net interest income.
A mix of earning assets and interest-bearing liabilities in which relatively
equal volumes reprice each period represents a matched interest sensitivity
"gap" position; any excess of these assets or liabilities results in an interest
sensitive gap.
The following table, commonly referred to as a "static gap report", indicates
the interest rate-sensitivity position at December 31, 1998 and may not be
reflective of positions in subsequent periods (dollars in thousands):
<TABLE>
<CAPTION>
Repriced
Due in After 1
30 Due in Due in Total Year or
Days 31-180 181 Days Rate Non-Rate
Or Less Days to One Year Sensitive Sensitive Total
--------- --------- ----------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $ 160,376 $ 20,763 $ 16,639 $ 197,778 $ 108,055 $305,833
Investment Securities 12,694 30,145 21,133 63,972 84,040 148,012
Federal Funds Sold 38,706 -0- -0- 38,706 -0- 38,706
--------- --------- -------- --------- --------- --------
Total Earning Assets 211,776 50,908 37,772 300,456 192,095 492,551
--------- --------- -------- --------- --------- --------
Interest-Bearing Liabilities:
Interest-Bearing
Transaction Accounts
and Savings 233,060 -0- -0- 233,060 -0- 233,060
Certificates of
Deposits > $100,000 8,286 13,935 8,504 30,725 6,374 37,099
Other Time Deposits 4,923 22,000 14,349 41,272 12,899 54,171
Repurchase Agreements 17,839 -0- -0- 17,839 -0- 17,839
--------- --------- -------- --------- --------- --------
Total Interest-
Bearing Liabilities 264,108 35,935 22,853 322,896 19,273 342,169
--------- --------- -------- --------- --------- --------
Interest Sensitivity Gap $ (52,332) $ 14,973 $ 14,919 $ (22,440) $ 172,822 $150,382
========= ========= ======== ========= ========= ========
Cumulative Gap $ (52,332) $ (37,359) $(22,440)
========= ========= ========
Cumulative Gap To
Total Earning Assets (10.62%) (7.58%) (4.56%)
Cumulative Gap To
Total Assets (9.82%) (7.01%) (4.21%)
</TABLE>
-27-
<PAGE>
In the preceding table under the "After 1 Year" category, $80,806,000 in
investment securities will reprice or mature within one to three years and
another $653,000 will reprice or mature within three to five years. The average
maturity of the investment portfolio is approximately 1.6 years. Also, the
above table reflects the call dates versus maturity dates and periodic principal
amortization of investment securities.
The preceding static gap report reflects a cumulative liability sensitive
position during the one year horizon. An inherent weakness of this report is
that it ignores the relative volatility any one category may have in relation to
other categories or market rates in general. For instance, the rate paid on
certain interest-bearing transaction accounts typically moves slower than the
three month T-Bill. Management attempts to capture this relative volatility by
utilizing a simulation model with a "beta factor" adjustment which estimates the
volatility of rate sensitive assets and/or liabilities in relation to other
market rates.
Beta factors are an estimation of the long term, multiple interest rate
environment relation between an individual account and market rates in general.
For instance, NOW, savings and money market accounts, which are repriceable
within 30 days will have considerably lower beta factors than variable rate
loans and most investment categories. Taking this into consideration, it is
quite possible for a bank with a negative cumulative gap to total asset ratio to
have a positive "beta adjusted" gap risk position.
As a result of applying the beta factors established by the Corporation's
management to the earning assets and interest-bearing liabilities in the static
gap report via a simulation model, the cumulative gap to total assets ratio at
one year of (4.21%) was reversed to a positive 14.72% "beta adjusted" gap
position.
Management feels that the "beta adjusted" gap risk technique more accurately
reflects the Corporation's gap position. Also, based on the Corporation's
analysis of its interest rate sensitivity position at year end 1998, a 100-basis
point change in interest rates would not have a significant impact on its net
interest income over a twelve month period.
The following table reflects the spreads and margins for the past three (3)
years:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Yield on Earning Assets (T/E) 8.30% 8.45% 8.11%
Cost of Funds 4.24 4.16 3.93
Net Interest Spread (T/E) 4.06 4.29 4.18
Net Interest Margin (T/E) 5.28 5.47 5.24
</TABLE>
CAPITAL RESOURCES. At December 31, 1998 shareholders' equity totaled $46.2
million, an increase of $5.1 million or111 12.5% for the year. This increase was
primarily from retained earnings, i.e., earnings net of dividends to
shareholders and the impact of the repurchase of shares of the Corporation.
Bank regulatory authorities have established risk-based capital guidelines for
U.S. banking organizations. The objective of these efforts is to provide a more
consistent system for comparing capital positions of banking organizations and
to reflect the level of risk associated with holding various categories of
assets. The guidelines define Tier 1 capital and Tier 2 capital. The only
components of Tier 1 and Tier 2 capital, for the Corporation, are equity capital
and equity capital plus a portion of the allowance for loan losses,
respectively. The guidelines also stipulate that four categories of risk weights
(0, 20, 50, and 100 percent), primarily based on the relative credit risk of the
counterparty, be applied to the different types of balance sheet assets. Risk
weights for all off-balance sheet exposures are determined by a two step process
whereas the face value of the off-balance sheet item is converted to a "credit
equivalent amount" and that amount is assigned to the appropriate risk category.
Off-balance sheet items at December 1996, 1997 and 1998 included unfunded loan
commitments and letters of credit. The minimum ratio for qualifying total
capital is 8.00 percent, of which 4.00 percent must be Tier 1 capital.
The Federal Reserve Board and the Comptroller of the Currency also have a
capital to total assets (leverage) guideline. These guidelines establish a
minimum level of Tier 1 capital to total assets of 3 percent. A banking
organization operating at or near these levels is expected to have well-
diversified risk, excellent asset quality, high liquidity, good earnings and in
general be considered a strong banking organization. Organizations not meeting
these characteristics are expected to operate well above these minimum capital
standards. Thus, for all but the most highly rated organizations, the minimum
Tier 1 leverage ratio is to be 3 percent plus minimum additional cushions of at
least 100 to 200 basis points. At the discretion of the regulatory authorities,
additional capital may be required.
-28-
<PAGE>
The table below illustrates the Corporation's and its Subsidiary Banks'
compliance with the regulatory guidelines as of December 31, 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
The Summit Summit
Consolidated National Community
Corporation Bank Bank, N.A.
------------- ---------- -----------
<S> <C> <C> <C>
Total Assets $532,764 $219,601 $307,715
Risk Weighted Assets 330,836 129,321 197,747
Equity Capital (Tier 1) $ 45,675 $ 19,467 $ 22,809
Qualifying Allowance For
Loan Losses 4,136 1,617 2,472
-------- -------- --------
Total Tier 2 Capital $ 49,811 $ 21,084 $ 25,281
======== ======== ========
Leverage Ratio 8.52% 8.80% 7.35%
Risk Capital Ratio:
Tier 1 13.81% 15.05% 11.53%
Total Tier 2 Capital 15.06 16.30 12.78
</TABLE>
The Corporation had an unrealized gain on Available-for-Sale securities, net of
deferred taxes, of $560,000 as of December 31, 1998. Under regulatory
requirements, the unrealized gain or loss on Available-for-Sale securities is
not included in the calculation of risk-based capital.
As can be seen in the preceding table, the Corporation and its Subsidiary Banks
exceed the risk-based capital and leverage requirements set by the regulators as
of December 31, 1998.
Also, as of December 31, 1998, the Corporation and its Subsidiary Banks met the
criteria for classification as a "well-capitalized" institution under the rules
of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
IMPACT OF INFLATION. The effects of inflation on the local economy and on the
Corporation's operating results have been relatively modest for the past several
years. Since substantially all of the Corporation's assets and liabilities are
monetary in nature, such as cash, investments, loans and deposits, their values
are less sensitive to the effects of inflation than to changing interest rates,
which do not necessarily change in accordance with inflation rates. The
Corporation attempts to control the impact of interest rate fluctuations by
managing the relationship between its interest rate sensitive assets and
liabilities.
LIQUIDITY. Liquidity is defined as the Corporation's ability to meet deposit
withdrawals, provide for the legitimate credit needs of customers, and take
advantage of certain investment opportunities as they arise. While maintaining
adequate liquid assets to fulfill these functions, it must also maintain
compatible levels of maturity and rate concentrations between its sources of
funds and earning assets. The liability structure of the Corporation is short-
term in nature and the asset structure is likewise oriented towards short
maturities.
The Corporation's primary "internal" source of liquidity is its federal funds
sold and its marketable investment securities, particularly those with shorter
maturities. At December 31, 1998, federal funds sold and investment securities
maturing within 30 days represented $51.4 million or 9.6% of total assets.
Additionally, the Corporation's ability to sell loan participations and purchase
federal funds serves as secondary sources of liquidity. Each of the Subsidiary
Banks have approved federal funds lines at other banks.
The liquidity of the Corporation is enhanced by the fact that 92% of total
deposits at December 31, 1998, were "core" deposits. Core deposits for this
purpose are defined as total deposits less public funds and certificates of
deposit greater than $100,000.
The parent Corporation's income, which provides funds for the payment of
dividends to shareholders and for other corporate purposes, is derived from the
investment in its subsidiaries and from management fees paid by the
subsidiaries. See Note 16 - Dividends from Subsidiaries for limitations on
dividends payable by subsidiaries.
-29-
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Corporation's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
Based on assessments, the Corporation determined that it would be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Corporation presently
believes that with modifications to existing software, the Year 2000 Issue can
be mitigated. However, if such modifications are not made, or are not completed
timely, the Year 2000 Issue could have material impact on the operations of the
Corporation.
The Corporation has utilized both internal and external resources to correct and
test the software for Year 2000 modifications. The Corporation has substantially
completed the Year 2000 project. The remaining work on the project includes
finalization of the Corporation's contingency plans should any area not function
as tested or any external event impact the operation of the Corporation. The
total cost of the Year 2000 project has not been material to the financial
condition of the Corporation.
FORWARD-LOOKING STATEMENTS. The Corporation may from time to time make forward-
looking statements (within the meaning of the Private Securities Litigation
Reform Act of 1995) with respect to earnings per share, credit quality, expected
Year 2000 compliance program, corporate objectives and other financial and
business matters. The Corporation cautions the reader that these forward-
looking statements are subject to numerous assumptions, risks and uncertainties,
including economic conditions; actions taken by the Federal Reserve Board;
legislative and regulatory actions and reforms; competition; as well as other
reasons, all of which change over time. Actual results may differ materially
from forward-looking statements.
ITEM 7A. QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For information regarding the market risk of the Corporation's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Interest Rate Sensitivity and Liquidity." The
Corporation's principal market risk exposure is to interest rates.
-30-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: PAGE
---------------------------------------------------- ----
<S> <C>
Independent Auditor's Report 32
Management's Responsibility for Financial Reporting 33
Consolidated Balance Sheets of Summit Bancshares, Inc. and Subsidiaries as of
December 31, 1998 and 1997 34
Consolidated Statements of Income of Summit Bancshares, Inc. and Subsidiaries
for the Years Ended December 31, 1998, 1997 and 1996 35
Statements of Changes in Shareholders' Equity of Summit Bancshares, Inc. and
Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996
(Consolidated and Parent Company Only) 36
Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and Subsidiaries
for the Years Ended December 31, 1998, 1997 and 1996 37
Notes to Consolidated Financial Statements 38-54
</TABLE>
-31-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Summit Bancshares, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Summit
Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related statements of income, changes in shareholders' equity and cash flows for
each of the three years in the period ending December 31, 1998. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Summit Bancshares, Inc. and
Subsidiaries, as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Stovall, Grandey, & Whatley
STOVALL, GRANDEY, & WHATLEY
Fort Worth, Texas
January 22, 1999
-32-
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of the Corporation is responsible for the preparation of the
financial statements, related financial data and other information in this
annual report. The consolidated financial statements have been prepared in
accordance with general accepted accounting principles and include amounts based
on management's estimates and judgment where appropriate. Financial information
appearing throughout this annual report is consistent with the financial
statements.
In meeting its responsibility both for the integrity and fairness of these
financial statements and information, management depends on the accounting
systems and related internal accounting controls that are designed to provide
reasonable assurances that transactions are authorized and recorded in
accordance with established procedures and that assets are safeguarded and that
proper and reliable records are maintained.
The concept of reasonable assurance is based on the recognition that the cost of
a system of internal controls should not exceed the related benefits. As an
integral part of the system of internal controls, the Corporation retains
auditors who monitor compliance with and evaluate the effectiveness of the
system of internal controls and coordinate audit coverage with the independent
auditors.
The Audit Committee of the Corporation and the Banking Subsidiaries' Board of
Directors, which are composed entirely of directors independent of management,
meet regularly with management, regulatory examiners, internal auditors, the
loan review consultants and independent auditors to discuss financial reporting
matters, internal controls, regulatory reports, internal auditing and the
nature, scope and results of audit efforts. Internal audit and loan review
personnel report directly to the Audit Committee. The banking regulators,
internal auditors and independent auditors have direct access to the Audit
Committee.
The consolidated financial statements have been audited by Stovall, Grandey &
Whatley, independent auditors, who render an independent opinion on management's
financial statements. Their appointment was recommended by the Audit Committee
and approved by the Board of Directors and by the shareholders. The audit by
the independent auditors provides an additional assessment of the degree to
which the Corporation's management meets its responsibility for financial
reporting. Their opinion on the financial statements is based on auditing
procedures, which include their consideration of the internal control structure
and performance of selected tests of transactions and records, as they deem
appropriate. These auditing procedures are designed to provide an additional
reasonable level of assurance that the financial statements are fairly presented
in accordance with general accepted accounting principles in all material
respects.
/s/ Philip E. Norwood /s/ Jeff Harp
PHILIP E. NORWOOD JEFFREY M. HARP
CHAIRMAN OF THE BOARD PRESIDENT
/s/ Bob G. Scott
BOB G. SCOTT
EXECUTIVE VICE PRESIDENT
AND CHIEF OPERATING OFFICER
-33-
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
-------- --------
ASSETS (In Thousands)
<S> <C> <C>
CASH AND DUE FROM BANKS - NOTE 1 $ 26,735 $ 30,487
FEDERAL FUNDS SOLD 38,706 35,760
INVESTMENT SECURITIES - NOTE 2
Securities Available-for-Sale, at fair value 121,417 60,476
Securities Held-to-Maturity, at cost (fair value
of $26,959,000 and $45,360,000 at
December 31, 1998 and 1997, respectively) 26,595 45,151
LOANS - NOTE 3
Loans, Net of Unearned Discount 305,833 276,069
Allowance for Loan Losses (4,724) (4,065)
-------- --------
LOANS, NET 301,109 272,004
PREMISES AND EQUIPMENT, NET - NOTE 4 9,082 7,916
ACCRUED INCOME RECEIVABLE 3,823 3,442
OTHER REAL ESTATE - NOTE 5 281 151
OTHER ASSETS - NOTE 10 5 ,016 4,407
-------- --------
TOTAL ASSETS $532,764 $459,794
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS - NOTE 6
Noninterest-Bearing Demand $141,170 $126,398
Interest-Bearing 324,330 275,326
-------- --------
TOTAL DEPOSITS 465,500 401,724
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - NOTE 7 17,839 14,689
ACCRUED INTEREST PAYABLE 1,037 678
OTHER LIABILITIES 2,153 1,591
-------- --------
TOTAL LIABILITIES 486,529 418,682
-------- --------
COMMITMENTS AND CONTINGENCIES - NOTES 4, 8, 13, 15 and 17
SHAREHOLDERS' EQUITY - NOTES 12, 14, 18 and 19
Common Stock - $1.25 par value; 20,000,000 shares authorized;
6,471,827 and 6,501,332 shares issued and outstanding
at December 31, 1998 and 1997, respectively 8,090 8,127
Capital Surplus 6,329 6,251
Retained Earnings 31,271 26,491
Accumulated Other Comprehensive Income-Unrealized Gain on
Available-for-Sale Investment Securities, Net of Tax 560 243
Treasury Stock at Cost (800 shares at December 31, 1998) (15) -0-
-------- --------
TOTAL SHAREHOLDERS' EQUITY 46,235 41.112
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $532,764 $459,794
======== ========
</TABLE>
The accompanying Notes should be read with these financial statements.
-34-
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $28,000 $24,063 $19,274
Interest and Dividends on Investment Securities:
Taxable 6,963 6,878 7,405
Exempt from Federal Income Taxes 50 23 1
Interest on Federal Funds Sold 2,052 1,008 897
------- ------- -------
TOTAL INTEREST INCOME 37,065 31,972 27,577
------- ------- -------
INTEREST EXPENSE
Interest on Deposits - NOTE 6 12,786 10,773 9,243
Interest on Securities Sold Under
Agreements to Repurchase 692 528 528
------- ------- -------
TOTAL INTEREST EXPENSE 13,478 11,301 9,771
------- ------- -------
NET INTEREST INCOME 23,587 20,671 17,806
LESS: PROVISION FOR LOAN LOSSES - NOTE 3 785 900 819
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 22,802 19,771 16,987
------- ------- -------
NON-INTEREST INCOME
Service Charges and Fees on Deposits 2,018 1,890 1,645
Net Gain (Loss) on Sale of Investment Securities 35 (1) (14)
Other Income 1,797 1,376 1,345
------- ------- -------
TOTAL NON-INTEREST INCOME 3,850 3,265 2,976
------- ------- -------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 8,576 7,524 6,753
Occupancy Expense - Net 928 774 772
Furniture and Equipment Expense 1,150 919 800
Other Real Estate Owned (Income) Expense - Net (1) (63) 10
Other Expense - NOTE 9 3,520 3,164 2,582
------- ------- -------
TOTAL NON-INTEREST EXPENSE 14,173 12,318 10,917
------- ------- -------
INCOME BEFORE INCOME TAXES 12,479 10,718 9,046
APPLICABLE INCOME TAXES - NOTE 10 4,333 3,678 3,103
------- ------- -------
NET INCOME $ 8,146 $ 7,040 $ 5,943
======= ======= =======
NET INCOME PER SHARE - NOTE 14
Basic $ 1.25 $ 1.09 $ .93
Diluted 1.20 1.04 .90
</TABLE>
The accompanying Notes should be read with these financial statements.
-35-
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED AND COMPANY ONLY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income -
Net Unrealized
Gain (Loss) on Total
Common Stock Capital Retained Investment Treasury Shareholders'
---------------------
Shares Amount Surplus Earnings Securities Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996 3,149,886 $ 3,937 $ 6,078 $ 19,776 $ 334 $ -0- $ 30,125
Stock Options Exercised 92,150 115 58 173
Purchases of Stock Held
in Treasury (157) (157)
Retirement of Stock
Held in Treasury (9,000) (11) (146) 157 -0-
Cash Dividend -
$.14 Per Share (898) (898)
Net Income for
Year Ended 1996 5,943 5,943
Securities Available-
for-Sale Adjustment (106) (106)
----------
Total Comprehensive
Income 5,837
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
DECEMBER 31, 1996 3,233,036 4,041 6,136 24,675 228 -0- 35,080
Stock Options Exercised 21,790 28 115 143
Two-for-One Stock Split 3,246,506 4,058 (4,058)
Cash Dividend -
$.18 Per Share (1,166) (1,166)
Net Income for
Year Ended 1997 7,040 7,040
Securities Available-
for-Sale Adjustment 15 15
----------
Total Comprehensive
Income 7,055
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
DECEMBER 31, 1997 6,501,332 8,127 6,251 26,491 243 -0- 41,112
Stock Options Exercised 72,195 90 78 168
Purchases of Stock Held
in Treasury (1,948) (1,948)
Retirement of Stock
Held in Treasury (101,700) (127) (1,806) 1,933
Cash Dividend -
$.24 Per Share (1,560) (1,560)
Net Income for
Year Ended 1998 8,146 8,146
Securities Available-
for-Sale Adjustment 317 317
----------
Total Comprehensive
Income 8,463
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
DECEMBER 31, 1998 6,471,827 $ 8,090 $ 6,329 $ 31,271 $ 560 $ (15) $ 46,235
========== ========== ========== ========== ========== =========== ==========
</TABLE>
The accompanying Notes should be read with these financial statements.
-36-
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars In Thousands) YEAR ENDED DECEMBER 31,
- ---------------------- ---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,146 $ 7,040 $ 5,943
--------- --------- ---------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 1,037 840 762
Net Premium Amortization (Accretion) of Investment Securities (31) 97 310
Provision for Loan Losses 785 900 819
Deferred Federal Income Taxes (Benefit) (465) (233) (137)
Net (Gain) Loss on Sale of Investment Securities (35) 1 14
Writedown of Other Real Estate -0- 4 12
Net Gain From Sale of Other Real Estate (2) (21) -0-
Net (Gain) Loss on Sale of Premises and Equipment (3) 12 (1)
Increase in Accrued Income and Other Assets (523) (2,330) (292)
Increase in Accrued Expenses and Other Liabilities 921 333 280
--------- --------- ---------
TOTAL ADJUSTMENTS 1,684 (397) 1,767
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,830 6,643 7,710
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (Increase) Decrease in Federal Funds Sold (2,946) (15,410) 5,330
Proceeds from Matured and Prepaid Investment Securities
. Held-to-Maturity 21,627 21,486 20,001
. Available-for-Sale 63,334 14,906 20,486
Proceeds from Sales of Investment Securities 11,992 4,506 14,527
. Held-to-Maturity
. Available-for-Sale (20,644) (12,884) (19,174)
Loans Originated and Principal Repayments, Net (118,148) (16,702) (33,969)
Recoveries of Loans Previously Charged-Off (30,482) (56,363) (42,171)
Proceeds for Sale of Premises and Equipment 217 439 115
Proceeds from Sale of Other Real Estate 6 1 1
Purchases of Premises and Equipment 82 32 -0-
(2,206) (1,664) (710)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (77,168) (61,653) (35,564)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand Deposits, Savings
Accounts and Interest Bearing Transaction Accounts 60,585 41,081 36,011
Net Increase (Decrease) in Certificates of Deposit 3,191 15,620 (1,097)
Net Increase (Decrease) in Repurchase Agreements 3,150 1,480 (319)
Payments of Cash Dividends (1,560) (1,166) (898)
Proceeds from Stock Options Exercised 168 143 173
Purchase of Treasury Stock (1,948) -0- (157)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 63,586 57,158 33,713
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (3,752) 2,148 5,859
CASH AND DUE FROM BANKS - BEGINNING OF YEAR 30,487 28,339 22,480
--------- --------- ---------
CASH AND DUE FROM BANKS - END OF YEAR $ 26,735 $ 30,487 $ 28,339
========= ========= =========
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest Paid $ 13,120 $ 11,260 $ 9,769
Income Taxes Paid 4,815 3,876 3,285
Other Real Estate Acquired in Settlement of Loans 210 -0- 65
</TABLE>
The accompanying Notes should be read with these financial statements.
-37-
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of Summit Bancshares, Inc. ("the
Corporation") and its Subsidiaries are in accordance with generally accepted
accounting principles and the prevailing practices within the banking industry.
A summary of the more significant policies follows:
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
- -----------------------------------------------------
The consolidated financial statements of the Corporation include its accounts
and those of its wholly-owned subsidiaries, Summit National Bank, Summit
Community Bank, N.A. (the "Subsidiary Banks") and Summit Bancservices, Inc.
("Bancservices"). All significant intercompany balances and transactions have
been eliminated.
USE OF ESTIMATES
- ----------------
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.
CASH AND DUE FROM BANKS
- -----------------------
The Subsidiary Banks are required to maintain certain restricted balances at the
Federal Reserve Bank based on their level of deposits. During 1998 the average
cash balance maintained at the Federal Reserve Bank was approximately $678,000.
Compensating balances held at correspondent banks to minimize service charges
averaged approximately $16,668,000 in 1998.
INVESTMENT SECURITIES
- ---------------------
The Corporation has adopted Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115").
At the date of purchase, the Corporation is required to classify debt and equity
securities into one of three categories: held-to-maturity, trading or available-
for-sale. At each reporting date, the appropriateness of the classification is
reassessed. Investments in debt securities are classified as held-to-maturity
and measured at amortized cost in the financial statements only if management
has the positive intent and ability to hold those securities to maturity.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading and measured at fair value in the
financial statements with unrealized gains and losses included in earnings.
Investments not classified as either held-to-maturity or trading are classified
as available-for-sale and measured at fair value in the financial statements
with unrealized gains and losses reported, net of tax, in a separate component
of shareholders' equity until realized.
The Corporation has the ability and intent to hold to maturity its investment
securities classified as held-to-maturity; accordingly, no adjustment has been
made for the excess, if any, of amortized cost over market. In determining the
investment category classifications at time of purchase of securities,
management considers its asset/liability strategy, changes in interest rates and
prepayment risk, the need to increase capital and other factors. Under certain
circumstances (including the deterioration of the issuer's credit worthiness, a
change in tax law, or statutory or regulatory requirements), the Corporation may
change the investment security classification. In 1998 and 1997 the Corporation
held no securities that would have been classified as trading securities.
-38-
<PAGE>
All investment securities are adjusted for amortization of premiums and
accretion of discounts. Amortization of premiums and accretion of discounts are
recorded to interest income over the contractual maturity or estimated life of
the individual investment on the level yield method. Gain or loss on sale of
investments is based upon the specific identification method and the gain or
loss is recorded in non-interest income. Income earned on the Corporation's
investments in securities of state and political subdivisions is not taxable.
LOANS AND ALLOWANCE FOR LOAN LOSSES
- -----------------------------------
Loans are stated at the principal amount outstanding less unearned discount and
the allowance for loan losses. Unearned discount on installment loans is
recognized as income over the terms of the loans by a method approximating the
interest method. Interest income on all other loans is recognized based upon
the principal amounts outstanding, the simple interest method. Generally, loan
origination and commitment fees are recognized at the time of funding and are
considered adjustments to interest income. Related direct costs are not
separately allocated to loans but are charged to non-interest expense in the
period incurred. The net effect of not recognizing such fees and related costs
over the life of the related loan is not considered to be material to the
financial statements. The accrual of interest on a loan is discontinued when,
in the opinion of management, there is doubt about the ability of the borrower
to pay interest or principal. Interest previously earned, but uncollected on
such loans, is written off. After loans are placed on non-accrual all payments
received are applied to principal and no interest income is recorded until the
loan is returned to accrual status or the principal has been reduced to zero.
The Corporation has adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure." Under SFAS 114,
the allowance for loan losses related to any loans that are identified for
evaluation in accordance with SFAS 114 (impaired loans) is based on discounted
cash flows using the loan's initial effective rate or the fair value of the
collateral for certain collateral dependent loans.
The allowance for loan losses is comprised of amounts charged against income in
the form of the provision for loan losses as determined by management.
Management's evaluation is based on a number of subjective factors, including
the Subsidiary Banks' loss experience in relation to outstanding loans and the
existing level of the allowance, prevailing and prospective economic conditions,
and management's continuing review of nonperformance loans and its evaluation of
the quality of the loan portfolio. Loan balances are charged against the
allowance for loan losses when management believes that the collectability of
the principal is unlikely.
The evaluation of the adequacy of loan collateral is often based upon estimates
and appraisals. Because of changing economic conditions, the valuations
determined from such estimates and appraisals may also change. Accordingly, the
Corporation may ultimately incur losses which vary from management's current
estimates. Adjustments to the allowance for loan losses will be reported in the
period such adjustments become known or are reasonably estimable.
PREMISES AND EQUIPMENT
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation expense is computed on the straight-line method
based upon the estimated useful lives of the assets. Maintenance and repairs
are charged to non-interest expense. Renewals and improvements are added to the
asset accounts and depreciated over the periods benefited.
OTHER REAL ESTATE
- -----------------
Other real estate is foreclosed property held pending disposition and is valued
at the lower of its fair value or the recorded investment in the related loan.
At foreclosure, if the fair value, less estimated costs to sell, of the real
estate acquired is less than the Corporation's recorded investment in the
related loan, a writedown is recognized through a charge to the allowance for
loan losses. Any subsequent reduction in value is recognized by a charge to
income. Operating expenses of such properties, net of related income, and gains
and losses on disposition are included in non-interest expense.
FEDERAL INCOME TAXES
- --------------------
The Corporation joins with its subsidiaries in filing a consolidated federal
income tax return. The subsidiaries pay the Corporation a charge equivalent to
their current federal income tax based on the separate taxable income of the
subsidiaries.
The Corporation and the subsidiaries maintain their records for financial
reporting and income tax reporting purposes on the accrual basis of accounting.
Deferred income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Deferred taxes are
provided for the accumulated temporary differences
-39-
<PAGE>
due to basic differences for assets and liabilities for financial reporting and
income tax reporting.
Realization of net deferred tax assets is dependent on generating sufficient
future taxable income. Although realization is not assured, management believes
it is more likely than not that all of the net deferred tax assets will be
realized. The amount of the net deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
are reduced.
CASH AND CASH EQUIVALENTS
- -------------------------
For the purpose of presentation in the Statements of Cash Flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"Cash and Due from Banks".
RECLASSIFICATION
- ----------------
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
- -----------------------------------------------
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
share," requires presentation of basic and diluted earnings per share. Basic
earnings per share has been computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Net income per common share for all
periods presented has been calculated in accordance with SFAS 128. Outstanding
stock options issued by the Corporation represent the only dilutive effect
reflected in diluted weighted average shares.
NOTE 2 - INVESTMENT SECURITIES
A summary of amortized cost and estimated fair values of investment securities
is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Investment Securities - Held-to-Maturity
U.S. Treasury Securities $ 11,990 $ 306 $ -0- $ 12,296
U.S. Government Agencies
and Corporations 14,031 60 (7) 14,084
Obligations of States and Political Subsidiaries 574 5 -0- 579
-------- ------ ----- --------
Total Held-to-Maturity Securities 26,595 371 (7) 26,959
-------- ------ ----- --------
Investment Securities - Available-for-Sale
U.S. Treasury Securities 29,039 643 -0- 29,682
U.S. Government Agencies
and Corporations 73,517 330 (87) 73,760
U.S. Government Agency
Mortgage Backed Securities 16,485 15 (60) 16,440
Obligations of States and Political Subsidiaries 455 8 -0- 463
Federal Reserve Bank and Federal
Home Loan Bank Stock 1,072 -0- -0- 1,072
-------- ------ ----- --------
Total Available-for-Sale Securities 120,568 996 (147) 121,417
-------- ------ ----- --------
Total Investment Securities $147,163 $1,367 $(154) $148,376
======== ====== ===== ========
</TABLE>
In the above schedule, the amortized cost of Total Held-to-Maturity Securities
of $26,595,000 and the estimated fair value of Total Available-for-Sale
Securities of $121,417,000 are reflected in Investment Securities on the
consolidated balance sheet as of December 31, 1998 for a total of $148,012,000.
A net unrealized gain of $849,000 is included in the Available-for-Sale
Investment Securities balance. The unrealized gain, net of tax, is included in
Shareholders' Equity.
-40-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Investment Securities - Held-to-Maturity
U.S. Treasury Securities $ 19,983 $178 $ (15) $ 20,146
U.S. Government Agencies
and Corporations 16,238 24 (27) 16,235
U.S. Government Agency
Mortgage Backed Securities 7,788 46 (6) 7,828
Obligations of States and Political Subsidiaries 1,142 9 -0- 1,151
-------- ---- ----- --------
Total Held-to-Maturity Securities 45,151 257 (48) 45,360
-------- ---- ----- --------
Investment Securities - Available-for-Sale
U.S. Treasury Securities 50,481 397 (67) 50,811
U.S. Government Agencies
and Corporations 4,014 3 (6) 4,011
U.S. Government Agency
Mortgage Backed Securities 4,697 42 -0- 4,739
Federal Reserve Bank and Federal
Home Loan Bank Stock 915 -0- -0- 915
-------- ---- ----- --------
Total Available-for-Sale Securities 60,107 442 (73) 60,476
-------- ---- ----- --------
Total Investment Securities $105,258 $699 $(121) $105,836
======== ==== ===== ========
</TABLE>
In the above schedule, the amortized cost of Total Held-to-Maturity Securities
of $45,151,000 and the estimated fair value of Total Available-for-Sale
Securities of $60,476,000 are reflected in Investment Securities on the
consolidated balance sheet as of December 31, 1997 for a total of $105,627,000.
A net unrealized gain of $369,000 is included in the Available-for-Sale
Investment Securities balance. The unrealized gain, net of tax, is included in
Shareholders' Equity.
A summary of the amortized cost and estimated fair value of debt securities by
contractual maturity as of December 31, 1998, is shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Held-to-Maturity Available-for-Sale
------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 3,283 $ 3,294 $ 42,671 $ 42,761
Due after One Year
through Five Years 22,301 22,651 45,775 46,540
Due after Five Years
through Ten Years 1,011 1,014 18,260 18,296
Due after Ten Years -0- -0- 13,862 13,820
------- ------- -------- --------
Total $26,595 $26,959 $120,568 $121,417
======= ======= ======== ========
</TABLE>
Included in the investment securities is $15,745,000 and $11,104,000 at December
31, 1998 and December 31, 1997, respectively, of mortgage-backed securities
having stated maturities after five years. The estimated maturities on these
securities are between two and twelve years as of December 31, 1998, based on
estimated prepayments of the underlying mortgages.
Investment securities with carrying values of $44,567,000 and $34,663,000 at
December 31, 1998 and 1997, respectively, were pledged to secure federal, state
and municipal deposits and for other purposes as required or permitted by law.
Also, the fair values of those pledged securities totaled $44,849,000 and
$34,823,000 at December 31, 1998 and 1997, respectively.
Proceeds from sales of investment securities were $11,992,000 during 1998,
$4,506,000 during 1997 and $14,527,000 during 1996. In 1998, gross gains from
sale of securities of $35,000 were realized. In 1997, gross losses from sale of
securities of
-41-
<PAGE>
$3,000 were realized, but were partially offset by gross gains of $2,000. In
1996, gross losses from sale of securities of $27,000 were realized but were
partially offset by gross gains of $13,000. The total amount of proceeds from
securities sales have been from sales of securities included in the Available-
for-Sale category.
The Corporation or subsidiaries do not own any investment securities of any one
issuer (excluding U.S. Government or U.S. Government Agency Securities) of which
aggregate adjusted cost exceeds 10% of the consolidated shareholders' equity at
December 31, 1998 and 1997, respectively.
Effective October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards Board No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133") which establishes accounting and reporting
standards for derivative instruments and requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. At the effective date, the Corporation
transferred approximately $17,448,000 of securities from Held-to-Maturity to
Available-for-Sale classification. At the time of transfer the securities had an
approximate unrealized gain of $349,000.
NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio consists of various types of loans made principally to
borrowers located in Tarrant County, Texas. The book values of loans by major
type follow (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Commercial $133,066 $127,800
Real Estate Mortgage 100,421 90,638
Real Estate Construction 40,456 26,290
Loans to Individuals 32,388 32,003
Less: Unearned Discount (498) (662)
-------- --------
305,833 276,069
Allowance for Loan Losses (4,724) (4,065)
-------- --------
Loans, Net $301,109 $272,004
======== ========
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under Statement of Financial Accounting Standards No.
114 was $4,596,000 and $1,652,000, respectively. These loans were on non-accrual
status. The related allowance for loan losses for these loans was $1,052,000 and
349,000, respectively. The average recorded investment in impaired loans during
the year ended December 31, 1998 was approximately $4,954,000.
For 1998 the Corporation recognized no interest income on any loan classified as
impaired.
Loans on which accrued interest has been discontinued or reduced amounted to
approximately $5,049,000, $2,112,000, and $1,102,000 at December 31, 1998, 1997
and 1996 respectively. If interest on these loans had been recorded in
accordance with their original terms such income would have approximated
$537,000 for 1998, $272,000 for 1997 and $111,000 for 1996. Interest income on
those loans included in net income was $312,000 for 1998, $154,000 for 1997 and
$30,000 for 1996.
Transactions in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance, Beginning of Year $4,065 $2,972 $2,500
Provision, Charged to Income 785 900 819
Loans Charged Off (343) (246) (462)
Recoveries of Loans Previously
Charged Off 217 439 115
------ ------ ------
Net Charge-Offs/(Recoveries) (126) 193 (347)
------ ------ ------
Balance, End of Year $4,724 $4,065 $2,972
====== ====== ======
</TABLE>
-42-
<PAGE>
NOTE 4 - PREMISES AND EQUIPMENT
The investment in premises and equipment stated at cost and net of accumulated
depreciation and amortization is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Land $ 2,783 $ 1,446 $ 1,446
Buildings and Improvements 7,537 7,532 7,375
Furniture and Equipment 7,234 6,661 5,182
------- ------- -------
Total Cost 17,554 15,639 14,003
Less: Accumulated Depreciation and Amortization 8,472 7,723 6,898
------- ------- -------
Net Book Value $ 9,082 $ 7,916 $ 7,105
======= ======= =======
</TABLE>
Depreciation and amortization charged to expense amounted to $1,037,000,
$840,000 and $762,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998, the Corporation and subsidiaries had certain noncancelable
operating leases which cover premises with future minimum annual rental payments
as follows (in thousands):
1999 $ 402
2000 437
2001 430
2002 430
2003 440
Thereafter 4,021
It is expected that in the normal course of business, leases that expire will be
renewed or replaced by leases on other property.
Rental income and rental expense of premises included in the consolidated
financial statements is computed as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Total Rental Income $ 359 $ 365 $ 344
Less: Rental Expense 350 272 245
----- ----- -----
Net Rental Income $ 9 $ 93 $ 99
===== ===== =====
</TABLE>
NOTE 5 - OTHER REAL ESTATE
The carrying value of other real estate was as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Other Real Estate $ 281 $ 185 $ 201
Valuation Reserve -0- (34) (35)
----- ----- -----
Net Other Real Estate $ 281 $ 151 $ 166
===== ===== =====
</TABLE>
-43-
<PAGE>
Transactions in the valuation reserve are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Balance, Beginning of Year $ 35 $ 35 $ 35
Provisions Charged to Income -0- -0- -0-
Reductions from Sales 35 1 -0-
----- ----- -----
Balance, End of Year $ -0- $ 34 $ 35
===== ===== =====
</TABLE>
Direct writedowns of other real estate charged to income were: 1998 - $-0-, 1997
- - $4,000, and 1996 - $12,000.
NOTE 6 - DEPOSITS AND RELATED EXPENSE
At December 31, 1998, 1997 and 1996, deposits and related interest expense for
the related years ended December 31, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Deposits Interest Expense
----------------------------------------- -----------------
1998 1997 1996 1998 1997 1996
--------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing
Demand Deposits $141,170 $126,398 $103,695
Interest-Bearing Deposits:
Interest-Bearing
Transaction Accounts 151,557 133,139 119,316 $ 5,186 $ 4,599 $3,853
Savings 81,503 54,107 49,048 2,972 2,135 1,871
Savings Certificates - Time 53,394 51,685 47,025 2,631 2,434 2,292
Certificates of Deposit
$100,000 or More 37,099 35,690 25,434 1,948 1,572 1,208
Other 777 705 505 49 33 19
-------- -------- -------- ------- ------- ------
Total 324,330 275,326 241,328 $12,786 $10,773 $9,243
-------- -------- -------- ======= ======= ======
Total Deposits $465,500 $401,724 $345,023
======== ======== ========
</TABLE>
The Corporation has no brokered deposits and there are no major concentrations
of deposits.
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under repurchase agreements generally represent borrowings with
maturities ranging from one to thirty days. Information relating to these
borrowings is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Securities Sold Under Repurchase Agreements:
Average $15,742 $11,668 $12,181
Year-end 17,839 14,689 13,209
Maximum Month-End Balance During Year 19,354 15,263 14,453
Interest Rate
Average 4.40% 4.45% 4.33%
Period-End 3.83 4.55 4.35
</TABLE>
-44-
<PAGE>
NOTE 8 - NOTES PAYABLE
The note payable at the Parent Company is an intercompany note and, therefore,
is reflected in the Parent Company financial statements but is eliminated in the
consolidated financial statements. The note balance at December 31, 1998 and
1997, was $762,000 and $859,000, respectively. This note matures December 15,
1999 and is secured by banking premises. The interest rate at December 31, 1998
was 7.75% and is fixed annually on the note's anniversary date.
The fair value of the note payable is it's carrying value since the note is a
variable rate loan and the note is adjusted annually in December of each year at
prime rate.
On July 15, 1998, the Corporation obtained lines of credit from a bank under
which the Corporation may borrow $9,000,000 at prime rate. The lines of credit
are secured by stock of one of the Subsidiary Banks and mature in July 1999,
whereupon, if balances are outstanding the lines convert to term notes having
five year terms. The Corporation will not pay a fee for any unused portion of
the lines. There have been no borrowings to date on these lines of credit.
NOTE 9 - OTHER NON-INTEREST EXPENSE
The significant components of other non-interest expense are presented below (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Business Development $ 611 $ 588 $ 426
Legal and Professional Fees 511 496 442
Printing and Supplies 387 373 303
Regulatory Fees and Assessments 169 160 134
Other 1,842 1,547 1,277
------ ------ ------
Total $3,520 $3,164 $2,582
====== ====== ======
</TABLE>
NOTE 10 - INCOME TAXES
The consolidated provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal Income Tax Expense
Current $4,798 $3,911 $3,240
Deferred (465) (233) (137)
------ ------ ------
Total Federal Income Tax Expense $4,333 $3,678 $3,103
====== ====== ======
Effective Tax Rates 34.7% 34.3% 34.3%
====== ====== ======
</TABLE>
The reasons for the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate to operating earnings
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal Income Taxes at Statutory Rate of 34% $4,278 $3,644 $3,076
Effect of Tax Exempt Interest Income (19) (12) (8)
Nondeductible Expenses 58 47 39
Other 16 (1) (4)
------ ------ ------
Income Taxes Per Income Statement $4,333 $3,678 $3,103
====== ====== ======
</TABLE>
-45-
<PAGE>
Federal income taxes included in the consolidated balance sheets were as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
-------- ---------
<S> <C> <C>
Current Tax Asset (Liability) $ 10 $ (7)
Deferred Tax Asset 973 672
----- -----
Total Included in Other Assets $ 983 $ 665
===== =====
</TABLE>
Deferred income tax expense (benefit) results from differences between amounts
of assets and liabilities as measured for income tax return and financial
reporting purposes. The significant components of federal deferred tax assets
and liabilities are in the following table (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Federal Deferred Tax Assets:
Allowance for Loan Losses $1,107 $ 831 $ 525
Valuation Reserves - Other Real Estate 1 36 60
Interest on Non-accrual Loans 199 66 46
Deferred Compensation 414 359 260
Other 18 43 63
------ ------ -----
Gross Federal Deferred Tax Assets 1,739 1,335 954
------ ------ -----
Federal Deferred Tax Liabilities:
Depreciation and Amortization 301 228 217
Accretion 78 165 97
Unrealized Gains on Available-for-Sale Securities 289 125 117
Other 98 145 74
------ ------ -----
Gross Federal Deferred Tax Liabilities 766 663 505
------ ------ -----
Net Deferred Tax Asset $ 973 $ 672 $ 449
====== ====== =====
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
During 1998 and 1997 the Subsidiary Banks had transactions which were made in
the ordinary course of business with certain of their and the Corporation's
officers, directors and their affiliates. All loans included in such
transactions were made on substantially the same terms, including interest rate
and collateral, as those prevailing at the time for comparable transactions with
other persons and all loans are current as to principal and interest payments.
A summary of these transactions follows (in thousands):
<TABLE>
<CAPTION>
Balance at Net
Beginning Net Amounts Balance at
of Year Additions Collected End of Year
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
For the Year ended December 31, 1998:
22 Directors and Officers $3,443 $1,494 $(2,089) $2,848
For the Year ended December 31, 1997:
22 Directors and Officers $3,819 $1,011 $(1,387) $3,443
</TABLE>
-46-
<PAGE>
NOTE 12 - STOCK OPTION PLAN
The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the 1997
Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted for two-
for-one stock splits in 1995 and 1997) of common stock for grants thereunder.
The Plans provide for the granting to executive management and other key
employees of Summit Bancshares, Inc. and subsidiaries incentive stock options,
as defined under the current tax law. The options under the Plans will be
exercisable for ten years from the date of grant and generally vest ratably over
a five year period. Options will be and have been granted at prices which will
not be less than 100-110% of the fair market value of the underlying common
stock at the date of grant.
The following is a summary of transactions (adjusted for stock splits) for the
years presented:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1998 1997 1996
------------------- -------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
-------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, Beginning of Year 543,112 $ 6.77 464,100 $ 4.57 602,800 $ 2.96
Granted 3,000 19.25 118,752 14.58 59,600 10.38
Exercised (78,995) 3.76 (35,260) 4.04 (196,300) 1.43
Canceled (5,400) 17.54 (4,480) 6.62 (2,000) 3.00
------- -------- ---------
Outstanding, End of Year 461,717 $ 7.24 543,112 $ 6.77 464,100 $ 4.57
======= ======== =========
Exercisable at End of Year 354,825 5.66 375,510 $ 4.60 323,700 $ 3.67
Weighted Average Fair Value of
Options Granted During the Year $19.25 $14.58 $10.375
</TABLE>
The options outstanding at December 31, 1998, have exercise prices between $3.00
and $19.25 with a weighted average exercise price of $ and a
weighted average remaining contractual life of years. Stock options
have been adjusted retroactively for the effects of stock dividends.
The Corporation accounts for this plan under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
cost has been recognized for options granted. Had compensation cost for the
plan been determined consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income
and earnings per share would have been reduced by insignificant amounts on a pro
forma basis for the years ended December 31, 1998 and 1997. The fair value of
the options granted in 1997 and 1998 were estimated as of the date of grant
using an accepted options pricing model with the following weighted-average
assumptions: risk-free interest rate of 5.48% and 6.10% respectively, expected
dividend yield of 2.0% and 2.4%, respectively, and expected life of 6.5 years
and expected volatility 29.7% and 29.2%, respectively.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include loan commitments and standby letters of
credit. The instruments involve, to varying degrees, elements of credit risk in
excess of the amounts recognized in the financial statements.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
-47-
<PAGE>
The amounts of financial instruments with off-balance sheet risk are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
Contract Contract
Amount Amount
------------ ------------
<S> <C> <C>
Financial Instruments Whose Contract Amounts Represent Credit Risk:
Loan commitments including unfunded lines of credit $106,806 $94,942
Standby letters of credit 2,155 4,568
</TABLE>
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee.
Since many of the loan commitments and letters of credit may expire without
being drawn upon, the total commitment amount does not necessarily represent
future cash requirements. Standby letters of credit are conditional commitments
by the Corporation to guarantee the performance of a customer to a third party.
The Corporation evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit, is based on management's credit evaluation
of the counter party. Collateral held varies but may include certificates of
deposits, accounts receivable, inventory, property, plant and equipment, and
real property.
The Corporation originates real estate, commercial and consumer loans primarily
to customers in the Tarrant County area. Although the Corporation has a
diversified loan portfolio, a substantial portion of its customers' ability to
honor their contracts is dependent upon the local economy and the real estate
market.
The Corporation maintains funds on deposit at correspondent banks which at times
exceed the federally insured limits. Management of the Corporation monitors the
balance in the account and periodically assesses the financial condition of
correspondent banks.
NOTE 14 - EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share and
the weighted average number of shares of dilutive potential common stock. The
number of shares used in the calculations reflect a two-for-one stock split in
December 1997 (dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 8,146 $ 7,040 $ 5,943
========== ========== ==========
Weighted average number of common
shares used in Basic EPS 6,496,595 6,478,795 6,398,960
Effect of dilutive stock options 316,702 321,081 314,079
---------- ---------- ----------
Weighted number of common shares
and dilutive potential common
stock used in Diluted EPS 6,813,297 6,799,876 6,713,039
========== ========== ==========
</TABLE>
NOTE 15 - EMPLOYEE BENEFIT PLANS
PENSION PLAN
- ------------
The Corporation has a defined benefit pension plan covering substantially all of
its employees. The benefits are based on years of service and the employee's
compensation history. The employee's compensation used in the benefit
calculation is the highest average for any five consecutive years of employment
within the employee's last ten years of employment.
Effective August 31, 1998, the accrual of benefits under this plan were
suspended. In February 1999, the Board of Directors chose to terminate the plan
effective April 15, 1999. The assets held in trust will be distributed to the
plan participants in 1999 under terms of the plan.
-48-
<PAGE>
Funding for the plan is provided by employer contributions to trust funds in
amounts determined by actuarial assumption and valuation of the plan.
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated balance sheets at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,719 in 1998 and $2,240 in 1997 $1,852 $2,420
====== ======
Projected benefit obligation for service rendered to date $2,958 $3,035
Plan assets at fair value, primarily listed stocks and U.S. bonds 2,176 2,883
------ ------
Plan assets in excess of projected benefit obligation 782 152
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions (930) (396)
Prior service cost not yet recognized in net periodic pension cost (10) (12)
------ ------
Prepaid pension cost included in other assets $ 158 $ 232
====== ======
</TABLE>
Net pension expense included the following components (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 355 $ 227 $ 195
Interest cost on projected benefit obligation 170 157 131
Less: Actual return on plan assets, net of expenses (126) (196) (153)
Net amortization and deferral 39 5 (2)
------ ------ ------
Net periodic pension expense $ 438 $ 193 $ 171
====== ====== ======
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation in
1998 were 7 percent and 6 percent, respectively. The expected long-term rate of
return on plan assets was 7 percent.
During 1998 and 1997 the Corporation contributed $407,000 and $370,000 to the
plan, respectively.
401(K) PLAN
- -----------
The Corporation implemented a 401(k) plan in December 1997 covering
substantially all employees. The Corporation made no contribution to this plan
in 1998 or 1997.
MANAGEMENT SECURITY PLAN
- ------------------------
In 1992, the Corporation established a Management Security Plan to provide key
employees with retirement, death or disability benefits in addition to those
provided by the Pension Plan. The expense charged to operations in 1998, 1997,
and 1996 for such future obligations was $237,000, $276,000, and $239,000,
respectively.
OTHER POST RETIREMENT BENEFITS
- ------------------------------
The Corporation provides certain health care benefits for certain retired
employees who bear all costs of these benefits. These benefits are covered
under the "Consolidated Omnibus Budget Reconciliation Act" (COBRA).
COMPENSATED ABSENCES
- --------------------
Employees of the Corporation are entitled to paid vacation, paid sick days and
other personal days off, depending on job classification, length of service, and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been recorded in the
accompanying financial statements. The Corporation's policy is to recognize the
costs of compensated absences when actually paid to employees.
-49-
<PAGE>
NOTE 16- DIVIDENDS FROM SUBSIDIARIES
The primary source of funds for the Parent Company is cash dividends received
from the Subsidiary Banks. The amount of dividends that the Subsidiary Banks
may pay in any one year, without approval of the Comptroller of the Currency, is
the sum of the retained net profits for the preceding two years plus its total
of the net profits for the current year. Under this formula, in 1999 the
Subsidiary Banks can legally initiate dividend payments of $10,081,000 plus an
additional amount equal to their net profits, as defined, for 1999 to the date
of any such dividend payment. The Subsidiary Banks are also restricted from
paying dividends that would cause the Bank to be under-capitalized.
Internal dividend policies limit dividends paid by Subsidiary Banks if their
equity capital levels fall below certain minimums determined by the respective
Boards of Directors.
NOTE 17 - LITIGATION
Certain of the Subsidiary Banks are involved in legal actions arising in the
ordinary course of business. It is the opinion of management, after reviewing
such actions with outside legal counsel, that the settlement of these matters
will not materially affect the Corporation's financial position.
NOTE 18 - STOCK SPLIT
In October 1997, the Board of Directors of the Corporation approved a two-for-
one stock split of the Corporation's common stock to be effected as a 100% stock
dividend. The split was paid in December 1997. All references in the
accompanying financial statements regarding stock options and per share data for
prior periods have been restated to reflect the stock split.
NOTE 19 - STOCK REPURCHASE PLAN
On April 21, 1998 the Board of Directors approved a stock repurchase plan. The
plan authorized management to purchase up to 325,654 shares of the Corporation's
common stock over the following twelve months through the open market or in
privately negotiated transactions in accordance with all applicable state and
federal laws and regulations. In 1998, 102,500 shares were purchased on the
open market.
Under similar programs approved by the Board in the years 1994 through 1997,
188,680 shares in the aggregate were purchased in those years, reflecting two-
for-one stock splits in years 1995 and 1997.
NOTE 20 - REGULATORY CAPITAL COMPLIANCE
The Corporation and Subsidiary Banks are subject to regulatory risk-based
capital requirements that assign risk factors to all assets, including off-
balance sheet items such as loan commitments and standby letters of credit.
Failure to meet minimum capital requirements can cause certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's consolidated financial
statement. Capital is separated into two categories, Tier 1 and Tier 2, which
combine for total capital. At December 1998 and 1997, the Corporation's and
Subsidiary Bank's Tier 1 capital consists of their respective shareholders'
equity and Tier 2 consists of the allowance for loans losses subject to certain
limitations. The guidelines require total capital of 8% of risk-weighted
assets.
In conjunction with risk-based capital guidelines, the regulators have issued
capital leverage guidelines. The leverage ratio consists of Tier 1 capital as a
percent of total assets. The minimum leverage ratio for all banks is 3%, with a
higher minimum ratio dependent upon the condition of the individual bank. The
3% minimum was established to make certain that all banks have a minimum capital
level to support their assets, regardless of risk profile.
-50-
<PAGE>
In addition to the minimum guidelines stated above, the regulatory authorities
have established minimums for an institution to be classified as "well
capitalized." A financial institution is deemed to be well capitalized if the
institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ration of 6% or greater, and a Tier 1 leverage ratio of 5% or
greater and the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure. The Corporation and Subsidiary
Banks currently exceed all minimum capital requirements and are considered to be
"well capitalized", the highest rating, by the regulatory authorities.
Management is not aware of any conditions or events that would have changed the
Corporation's capital rating since December 31, 1998.
The Corporation's regulatory capital position was as follows:
<TABLE>
<CAPTION>
Actual, Minimum Required,
December 31, December 31,
---------------------------- ------------------
1998 1997 1998
------------- ------------- ----------------
<S> <C> <C> <C>
Total Qualifying Capital to Risk-Based Assets 15.06% 15.06% 8.00%
Tier I Capital to Risk-Based Assets 13.81 13.81 4.00
Tier I Capital to Average Assets (Leverage) 8.52 8.83 3.00
</TABLE>
NOTE 21 - SUBSEQUENT EVENTS
On January 19, 1999, the Board of Directors of Summit Bancshares, Inc. approved
a quarterly dividend of $.08 per share to be paid on February 16, 1999 to
shareholders of record on February 1,1999.
NOTE 22 - RECENT ACCOUNTING PRONOUNCEMENTS
The Corporation adopted Statement of Financial Accounting Standards Board No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
("SFAS No. 131") effective January 1, 1998. This statement establishes
standards for reporting information about segments in annual and interim
financial statements. SFAS No. 131 introduces a new model for segment reporting
called "management approach". The management approach is based on the way the
chief operating decision-maker organizes segments within a company for making
operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure and any other in which management disaggregates
a company. Based on the "management approach" model, the Corporation has
determined that its business is comprised of a single operating segment and that
SFAS No. 131 therefore has no impact on its consolidated financial statements.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
about Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value tables or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. SFAS 107 excludes certain financial instruments
and all non-financial instruments from its disclosure requirements.
-51-
<PAGE>
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
--------------------------
for cash and due from banks approximate those assets' fair values.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES): Fair values for
-------------------------------------------------------------
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
LOANS: For variable-rate loans, fair values are based on carrying values. The
------
fair values for fixed rate loans such as mortgage loans (e.g., one-to-four
family residential) and installment loans are estimated using discounted cash
flow analysis. The carrying amount of accrued interest receivable approximates
its fair value.
DEPOSIT LIABILITIES: The fair value disclosed for interest bearing and non-
--------------------
interest bearing demand deposits, passbook savings, and certain types of money
market accounts are, by definition, equal to the amount payable on demand at
the reporting date or their carrying amounts. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS: The carrying value of borrowings under repurchase
----------------------
agreements approximate their fair values.
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 26,735 $ 26,735 $ 30,487 $ 30,487
Federal funds sold 38,706 38,706 35,760 35,760
Securities 148,012 148,376 105,627 105,836
Loans 305,833 306,790 276,069 276,663
Financial Liabilities
Deposits 465,500 465,858 401,724 401,957
Securities sold under repurchase
agreements 17,839 17,845 14,689 14,689
Off-balance Sheet Financial Instruments
Loan commitments 106,806 94,942
Letters of credit 2,155 4,568
</TABLE>
NOTE 24 - COMPREHENSIVE INCOME
The Corporation has adopted Statement of Financial Accounting Standards Board
No. 130, "Reporting Comprehensive Income". The statement requires an entity to
report and display comprehensive income and its components. Comprehensive
income is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Net Income $8,146 $7,040 $5,943
Other Comprehensive Income:
Unrealized Gain (Loss) on Securities
Available-for-Sale, Net of Tax 317 15 (106)
------ ------ ------
Comprehensive Income $8,463 $7,055 $5,837
====== ====== ======
</TABLE>
-52-
<PAGE>
NOTE 25- CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- -----------
ASSETS (In Thousands)
<S> <C> <C>
CASH IN SUBSIDIARY BANKS
Demand $ 100 $ 1,110
Time 833 811
INVESTMENTS IN SUBSIDIARIES
Bank Subsidiaries 42,877 36,989
Non-Bank Subsidiary 371 388
NOTE RECEIVABLE FROM SUBSIDIARY 495 500
PREMISES AND EQUIPMENT - NET 1,654 1,776
OTHER ASSETS 1,996 1,619
------- -------
TOTAL ASSETS $48,326 $43,193
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes Payable $ 762 $ 859
Other Liabilities 1,329 1,222
SHAREHOLDERS' EQUITY 46,235 41,112
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,326 $43,193
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
INCOME
Dividends from Subsidiaries $3,200 $ 3,000 $ 2,000
Interest 76 33 18
Other Income 188 322 417
------ ------- -------
TOTAL INCOME 3,464 3,355 2,435
------ ------- -------
EXPENSES
Interest 70 76 88
Salaries and Employee Benefits 752 845 795
Occupancy and Furniture-Net (6) (44) 4
Other Expense 347 262 293
------ ------- -------
TOTAL EXPENSE 1,163 1,139 1,180
------ ------- -------
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES 2,301 2,216 1,255
INCOME TAX BENEFIT 291 262 244
------ ------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 2,592 2,478 1,499
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 5,554 4,562 4,444
------ ------- -------
NET INCOME $8,146 $ 7,040 $ 5,943
====== ======= =======
</TABLE>
-53-
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 8,146 $ 7,040 $ 5,943
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 137 134 140
Deferred Federal Income Taxes 81 71 77
Undistributed Earnings of Subsidiaries (5,554) (4,562) (4,444)
Increase in Other Assets (350) (167) (403)
Increase (Decrease) in Other Liabilities 107 (150) 293
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,567 2,366 1,606
CASH FLOWS FROM INVESTING ACTIVITIES
Net Funding to Non-Bank Subsidiary (105) (440) -0-
Purchases of Premises and Equipment (13) (46) (117)
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES (118) (486) (117)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments on Notes Payable (97) (92) (80)
Payments of Cash Dividends (1,560) (1,166) (898)
Receipts from Stock Options Exercised 168 143 173
Purchase of Treasury Stock (1,948) -0- (157)
------- ------- -------
NET CASH USED BY FINANCING ACTIVITIES (3,437) (1,115) (962)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (988) 765 527
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEAR 1,921 1,156 629
------- ------- -------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 933 $ 1,921 $ 1,156
======= ======= =======
</TABLE>
-54-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in accountants and no disagreements with accountants
on any matter of accounting principles or practices or financial statement
disclosures during the twenty-four (24) month period ended December 31, 1998.
-55-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the caption "PROPOSAL NO. 1: ELECTION OF
DIRECTORS" on pages 2 through 9 of the Corporation's Proxy Statement dated March
19, 1999, relating to the 1999 Annual Meeting of Shareholders of the
Corporation, the information set forth under the caption "STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 10 through 12 of such Proxy
Statement, and the information set forth under the caption "EXECUTIVE OFFICERS
OF THE CORPORATION" on pages 11 and 12 of Part I of this report is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "EXECUTIVE COMPENSATION AND OTHER
INFORMATION" on pages 13 through 22 of the Corporation's Proxy Statement dated,
March 19, 1999 relating to the 1999 Annual Meeting of Shareholders of the
Corporation, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to shareholders of the Corporation who are known to
be beneficial owners of more than five percent (5%) of the outstanding shares of
Common Stock of the Corporation set forth under the caption "STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" on pages 10 through 12 of the
Corporation's Proxy Statement dated March 19, 1999, relating to the 1999 Annual
Meeting of Shareholders of the Corporation, is incorporated herein by reference.
The information relating to the beneficial ownership of the outstanding shares
of Common Stock of the Corporation by its directors and executive officers set
forth under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" on pages 10 through 12 of the Corporation's Proxy Statement dated
March 19, 1999, relating to the 1999 Annual Meeting of Shareholders of the
Corporation, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "CERTAIN TRANSACTIONS" on page 24 of
the Corporation's Proxy Statement dated March 19, 1999, relating to the 1999
Annual Meeting of Shareholders of the Corporation, is incorporated herein by
reference.
-56-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS. The following financial statements are included
--------------------
in Part II, Item 8:
Independent Auditor's Report
Consolidated Balance Sheets of Summit Bancshares, Inc. and
Subsidiaries as of December 31, 1998 and 1997
Consolidated Statements of Income of Summit Bancshares, Inc. and
Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996
Statements of Changes in Shareholders' Equity of Summit Bancshares,
Inc. and Subsidiaries for the Years Ended December 31, 1998, 1997 and
1996 (Consolidated and Parent Company Only)
Consolidated Statement of Cash Flows of Summit Bancshares, Inc. and
Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES. Financial statement schedules are
-----------------------------
omitted because of the absence of conditions under which they are
required or because the required information is given in the financial
statements or notes thereto.
(3) EXHIBITS. The following exhibits are filed as a part of this report:
--------
3(a) Restated Articles of Incorporation of the Corporation as of July
21, 1998.**
3(b) Amended and Restated Bylaws of the Corporation dated April 21,
1998.**
4(a) Summit Bancshares, Inc.'s Rights Agreement dated April 17, 1990
(incorporated herein by reference to Exhibit 1 to the
Corporation's Current Report on Form 8-K dated April 18, 1990
filed on April 24, 1990).*
10(a) Lease Agreement dated August 28, 1985 by and between Alta Mesa
National Bank, as lessor, and the Corporation, as lessee
(incorporated herein by reference to Exhibit 10(a) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1985).*
10(b) Lease Agreement dated October 1, 1986 by and between the
Corporation, as lessor, and Alta Mesa National Bank, as lessee
(incorporated herein by reference to Exhibit 10(f) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1986).*
10(c) Promissory Note dated December 21, 1989 in the original
principal amount of $1,400,000 executed by Summit Bancshares,
Inc. and payable to the order of Summit National Bank
(incorporated herein by reference to Exhibit 10(s) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1989).*
10(d) Lease Agreement dated February 14, 1992 by and between
Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership, as landlord, and Summit Bancshares, Inc., as tenant
(incorporated herein by reference to Exhibit 10(I) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992).*
-57-
<PAGE>
10(e) First Amendment dated May 3, 1994 to Lease Agreement dated
February 14, 1992 by and between Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership, as landlord, and
Summit Bancshares, Inc., as tenant (incorporated herein by
reference to Exhibit 10(k) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1994).*
10(f) Management Security Plan of Summit Bancshares, Inc. effective
September 1, 1992; Management Security Plan Agreement between
Summit Bancshares, Inc. and F. S. Gunn; and Management Security
Plan Agreement between Summit Bancshares, Inc. and James L.
Murray (incorporated herein by reference to Exhibit 10(k) to
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992).*
10(g) Commercial-Industrial Lease Agreement dated January 1, 1993 by
and between Summit National Bank, as landlord, and Summit
Bancservices, Inc., as tenant (incorporated herein by reference
to Exhibit 10(m) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 1992).*
10(h) 1993 Incentive Stock Option Plan of Summit Bancshares, Inc.
(incorporated herein by reference to Exhibit 10(n) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993).*
10(i) Loan Agreement dated July 12, 1995, between the Corporation and
The Frost National Bank (incorporated herein by reference to
Exhibit 10 to the Corporation's Quarterly Report on Form 10-Q
for the three months ended June 30, 1995).*
10(j) Lease Agreement dated July 6, 1989 by and between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited Partnership, as
landlord, and Summit National Bank as tenant (incorporated
herein by reference to Exhibit 10(r) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1995).*.
10(k) First Amendment dated July 15, 1996 to Loan Agreement dated
July 12, 1995, between the Corporation and The Frost National
Bank (incorporated herein by reference to Exhibit 10(s) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997).*
10(l) 1997 Incentive Stock Option Plan of Summit Bancshares, Inc.
(incorporated herein by reference to Annex I to the
Corporation's Proxy Statement for Annual Meeting of
Shareholders, dated March 17, 1997.*
10(m) Second Amendment dated July 15, 1997 to Loan Agreement dated
July 12, 1995, between the Corporation and The Frost National
Bank.*
10(n) Second Lease Amendment and Extension Agreement to the Lease
Agreement dated July 6, 1989, as amended by the Amendment of
Lease dated August 12, 1993, by and between EOP-Summit Limited
Partnership (as successor in interest to Zell/Merrill Lynch
Real Estate Opportunity Partners Limited Partnership), as
landlord, and Summit National Bank, as tenant.*
10(o) Agreement of Limited Partnership of IDI Summit, Ltd. dated
November 6, 1997, between Summit Community Bank, N.A. and
Innovative Developers, Inc.*
10(p) Lease Agreement dated November 6, 1997 between Summit Community
Bank, N.A., as tenant, and IDI - Summit, Ltd., as landlord.*
10(q) Second Amemdment dated July 8, 1998 to Lease Agreement dated
February 13, 1992 by and between Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership, as landlord, and
Summit Bancshares, Inc., as tenant.**
-58-
<PAGE>
10(r) Third Amendment dated July 15, 1998 to Loan Agreement dated
July 12, 1995, between the Corporation and the Frost National
Bank.**
21 Subsidiaries of the Corporation.
23 Consent of Stovall, Grandey & Whatley, independent certified
public accountants.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
-------------------
The Corporation did not file during the last quarter covered by this
report any reports on Form 8-K.
___________________________
* A copy of this Exhibit is available to any shareholders, at the actual cost
of reproduction upon written request to the Corporation.
** File herewith.
-59-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SUMMIT BANCSHARES, INC.
DATE: March 19, 1999 By: /s/ Philip E. Norwood
-------------------------------
Philip E. Norwood, Chairman
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on this 19th day of March, 1999.
SIGNATURE TITLE
--------- -----
/s/ Philip E. Norwood Chairman and Director
- ----------------------------------
Philip E. Norwood (Principal Executive Officer)
/s/ Bob G. Scott Chief Operating Officer, Executive
- ----------------------------------
Bob G. Scott Vice President, Secretary and Treasurer
(principal financial officer and
principal accounting officer)
/s/ Jeffrey M. Harp President and Director
- ----------------------------------
Jeffrey M. Harp
/s/ Robert E. Bolen Director
- ----------------------------------
Robert E. Bolen
/s/ Elliott S. Garsek Director
- ----------------------------------
Elliott S. Garsek
/s/ Ronald J. Goldman Director
- ----------------------------------
Ronald J. Goldman
/s/ F.S. Gunn Director
- ----------------------------------
F.S. Gunn
/s/ Robert L. Herchert Director
- ----------------------------------
Robert L. Herchert
/s/ William W. Meadows Director
- ----------------------------------
William W. Meadows
-60-
<PAGE>
/s/ Edward P. Munson Director
- ----------------------------------
Edward P. Munson
/s/ James L. Murray Director
- ----------------------------------
James L. Murray
/s/ Byron B. Searcy Director
- ----------------------------------
Byron B. Searcy
/s/ Edgar Snelson Director
- ----------------------------------
Edgar Snelson
-61-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE NO.
- ------- --------
<S> <C>
3(a) Amended and Restated Articles of Incorporation of the Corporation as
of July 21, 1998.**
3(b) Amended and Restated Bylaws of the Corporation dated April 21, 1998.**
4(a) Summit Bancshares, Inc.'s Rights Agreement dated April 17, 1990
(incorporated herein by reference to Exhibit 1 to the Corporation's
Current Report on Form 8-K dated April 18, 1990 filed on April 24,
1990).*
10(a) Lease Agreement dated August 28, 1985 by and between Alta Mesa
National Bank, as lessor, and the Corporation, as lessee (incorporated
herein by reference to Exhibit 10(a) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1985).*
10(b) Lease Agreement dated October 1, 1986 by and between the Corporation,
as lessor,and Alta Mesa National Bank, as lessee (incorporated herein
by reference to Exhibit 10(f) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1986).*
10(c) Promissory Note dated December 21, 1989 in the original principal
amount of $1,400,000 executed by Summit Bancshares, Inc. and payable
to the order of Summit National Bank (incorporated herein by reference
to Exhibit 10(s) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1989).*
10(d) Lease Agreement dated February 14, 1992 by and between Zell/Merrill
Lynch Real Estate Opportunity Partners Limited Partnership, as
landlord, and Summit Bancshares, Inc., as tenant (incorporated herein
by reference to Exhibit 10(I) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1992).*
10(e) First Amendment dated May 3, 1994 to Lease Agreement dated February
14, 1992 by and between Zell/Merrill Lynch Real Estate Opportunity
Partners Limited Partnership, as landlord, and Summit Bancshares,
Inc., as tenant (incorporated herein by reference to Exhibit 10(k) to
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994).*
10(f) Management Security Plan of Summit Bancshares, Inc. effective
September 1, 1992; Management Security Plan Agreement between Summit
Bancshares, Inc. and F. S. Gunn; and Management Security Plan
Agreement between Summit Bancshares, Inc. and James L. Murray
(incorporated herein by reference to Exhibit 10(k) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992).*
10(g) Commercial-Industrial Lease Agreement dated January 1, 1993 by and
between Summit National Bank, as landlord, and Summit Bancservices,
Inc., as tenant (incorporated herein by reference to Exhibit 10(m) to
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1992).*
10(h) 1993 Incentive Stock Option Plan of Summit Bancshares, Inc.
(incorporated herein by reference to Exhibit 10(n) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993).*
</TABLE>
<PAGE>
10(i) Loan Agreement dated July 12, 1995, between the
Corporation and The Frost National Bank (incorporated
herein by reference to Exhibit 10 to the Corporation's
Quarterly Report on Form 10-Q for the three months ended
June 30, 1995).*
10(j) Lease Agreement dated July 6, 1989 by and between
Zell/Merrill Lynch Real Estate Opportunity Partners
Limited Partnership, as landlord, and Summit National Bank
as tenant (incorporated herein by reference to Exhibit
10(r) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995).*.
10(k) First Amendment dated July 15, 1996 to Loan Agreement
dated July 12, 1995, between the Corporation and The Frost
National Bank (incorporated herein by reference to Exhibit
10(s) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1997).*
10(l) 1997 Incentive Stock Option Plan of Summit Bancshares,
Inc. (incorporated herein by reference to Annex I to the
Corporation's Proxy Statement for Annual Meeting of
Shareholders, dated March 17, 1997.*
10(m) Second Amendment dated July 15, 1997 to Loan Agreement
dated July 12, 1995, between the Corporation and The Frost
National Bank.*
10(n) Second Lease Amendment and Extension Agreement to the
Lease Agreement dated July 6, 1989, as amended by the
Amendment of Lease dated August 12, 1993, by and between
EOP-Summit Limited Partnership (as successor in interest
to Zell/Merrill Lynch Real Estate Opportunity Partners
Limited Partnership), as landlord, and Summit National
Bank, as tenant.*
10(o) Agreement of Limited Partnership of IDI Summit, Ltd. dated
November 6, 1997, between Summit Community Bank, N.A. and
Innovative Developers, Inc.*
10(p) Lease Agreement dated November 6, 1997 between Summit
Community Bank, N.A., as tenant, and IDI - Summit, Ltd.,
as landlord.*
10(q) Second Amemdment dated July 8, 1998 to Lease Agreeement
dated February 13, 1992 by and between Zell/Merrill Lynch
Real Estate Opportunity Partners Limited Partnership, as
landlord, and Summit Bancshares, Inc., as tenant.**
10(r) Third Amendment dated July 15, 1998 to Loan Agreement
dated July 12, 1995, between the Corporation and the Frost
National Bank.**
21 Subsidiaries of the Corporation.
23 Consent of Stovall, Grandey & Whatley, independent
certified public accountants.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 3 (A)
RESTATED ARTICLES OF INCORPORATION
ARTICLE ONE
Summit Bancshares, Inc., pursuant to the provisions of Article 4.07 of the
Texas Business Corporation Act, hereby adopts Restated Articles of Incorporation
which accurately copy the Articles of Incorporation and all amendments thereto
that are in effect to date and such Restated Articles of Incorporation contain
no change in any provision thereof.
ARTICLE TWO
The Restated Articles of Incorporation were adopted by resolution of the
Board of Directors of the corporation on the 21st day of July, 1998.
ARTICLE THREE
The Articles of Incorporation and all amendments and supplements thereto
are hereby superseded in the following Restated Articles of Incorporation which
accurately copy the entire text thereof.
RESTATED ARTICLES OF INCORPORATION
OF
SUMMIT BANCSHARES. INC.
-----------------------
The undersigned natural person, of the age of eighteen years or more,
acting as incorporator of a corporation under the Texas Business Corporation
Act, hereby adopts the following Articles of Incorporation for the corporation.
ARTICLE 1.
The name of the corporation is SUMMIT BANCSHARES, INC.
<PAGE>
ARTICLE 2.
The period of its duration is perpetual.
ARTICLE 3.
The corporation is organized to buy, sell, lease and deal in services,
personal property and real property, subject to Part Four of the Texas
Miscellaneous Corporation Laws Act, and to transact any and all other lawful
business for which a corporation may be incorporated under the Texas Business
Corporation Act.
ARTICLE 4.
The aggregate number of shares which the corporation shall have authority
to issue is 20,000,000 shares of the par value of One Dollar and 25/100 Dollars
($1.25) per share. The shares are designated as Common Stock and have identical
rights and privileges in every respect.
ARTICLE 5.
The corporation will not commence business until it has received for the
issuance of its shares consideration of the value of One Thousand Dollars
($1,000.00) consisting of money paid, labor done or property actually received.
ARTICLE 6.
No shareholder or other person shall have any preemptive rights whatsoever.
ARTICLE 7.
Directors shall be elected by plurality vote. Cumulative voting shall not
be permitted.
ARTICLE 8.
The initial bylaws shall be adopted by the Board of Directors. The power to
alter, amend or repeal the bylaws or adopt new bylaws is vested in the Board of
Directors, subject to repeal or change by action of the shareholders.
2
<PAGE>
ARTICLE 9. INDEMNIFICATION: INSURANCE.
--------------------------
The corporation shall indemnify to the fullest extent permitted by law any
person who is made a named defendant or respondent in any action, suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, or in any appeal in such an action, suit or proceeding, by reason
of the fact that he or she is or was a director, advisory director or officer of
the corporation, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
director, advisory director or officer in connection with any such action, suit
or proceeding. The corporation may indemnify other persons, as permitted by law.
The corporation shall pay or reimburse expenses to directors, advisory directors
and officers and may pay or reimburse expenses to other persons, as permitted by
law. The corporation may purchase and maintain insurance, create a trust fund,
establish any form of self-insurance, secure its indemnity obligation by grant
of a security interest or other lien on the assets of the corporation, establish
a letter of credit, guaranty or surety arrangement, or other arrangement on
behalf of directors, advisory directors, officers or other persons, against any
liability asserted against such persons in their capacities as directors,
advisory directors, officers or otherwise, of the corporation, whether or not
the corporation would have the power to indemnify such directors, advisory
directors, officers or other persons against such liability, as permitted by
law.
ARTICLE 10.
The street address of its initial registered office is 1300 Summit Avenue,
Fort Worth, Texas, and the name of its current registered agent at such address
is Bobby G. Scott.
ARTICLE 11.
The number of directors constituting the initial Board of Directors is
three (3) and the names and addresses of the persons who are to serve as
directors until the first annual meeting of
3
<PAGE>
the shareholders or until their successors are elected and qualified are:
NAME ADDRESS
---- -------
James L. Murray 1300 Summit Ave.
Fort Worth, Texas 76102
F. S. Gunn 1300 Summit Ave.
Fort Worth, Texas 76102
Henry A. Meadows 444 West 7th Street
Fort Worth, Texas 76102
ARTICLE 12.
The name and address of the incorporator is Loren Q. Hanson, 2700
Continental National Bank Building, Fort Worth, Texas 76102.
ARTICLE 13.
No director of the corporation shall be liable to the corporation or its
shareholders for monetary damages for an act or omission in such director's
capacity as a director of the corporation, except that this Article 13 shall not
eliminate or limit the liability of a director of the corporation for:
(i) a breach of such director's duty of loyalty to the
corporation or its shareholders;
(ii) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law;
(iii) a transaction from which a director received an improper
benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office;
(iv) an act or omission for which the liability of a director
4
<PAGE>
is expressly provided by statute; or
(v) an act related to an unlawful stock repurchase or payment of
a dividend.
Any repeal or amendment of this Article 13 by the shareholders of the
corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the corporation existing
at the time of such repeal or amendment. Anything herein to the contrary
notwithstanding, if the Texas Miscellaneous Corporation Laws Act is amended
after approval by the shareholders of this Article 13 to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Texas Miscellaneous Corporation Laws Act, as
so amended from time to time.
ARTICLE 14. SPECIAL MEETINGS OF SHAREHOLDERS
--------------------------------
Special meetings of the shareholders, for any purpose or purposes, unless
otherwise prescribed by statute or by the Articles of Incorporation, may be
called by the President, the Board of Directors or the holders of not less than
three-tenths (3/10) of all shares entitled to vote at the meetings. Business
transacted at a special meeting shall be confined to the purpose or purposes
stated in the notice of the meeting.
DATED the 21st day of July, 1998.
SUMMIT BANCSHARES, INC.
By: /s/ Bob G. Scott
---------------------------------
Its Authorized Officer
<PAGE>
EXHIBIT 3 (B)
BYLAWS OF SUMMIT BANCSHARES, INC.
CONTENTS
ARTICLE 1: Offices
-------
1.01 Registered Office and Agent
1.02 Other Offices
ARTICLE 2: Shareholders
------------
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Voting List
2.04 Special Meetings
2.05 Notice
2.06 Quorum
2.07 Majority Vote; Withdrawal of Quorum
2.08 Method of Voting
2.09 Record Date; Closing Transfer Books
2.10 Order of Business at Meetings
ARTICLE 3: Directors
---------
3.01 Management
3.02 Number; Qualification; Election; Term
3.03 Election of Directors
3.04 Removal
3.05 Vacancies
3.06 Place of Meetings
3.07 First Meeting
3.08 Regular Meetings
3.09 Special Meetings
3.10 Quorum; Majority Vote
3.11 Compensation
3.12 Procedure
3.13 Interested Directors and Officer
3.14 Action Without Meeting
3.15 Committees of Directors
ARTICLE 4: Notice and Attendance Through Use of Electronic Equipment
---------------------------------------------------------
4.01 Method
4.02 Waiver
4.03 Telephone and Similar Meetings
i
<PAGE>
ARTICLE 5: Officers and Agents
-------------------
5.01 Number; Qualification; Election; Term
5.02 Removal
5.03 Vacancies
5.04 Authority
5.05 Compensation
5.06 Chairman of the Board
5.07 President
5.08 Vice President
5.09 Secretary
5.10 Assistant Secretary
5.11 Treasurer
5.12 Assistant Treasurer
ARTICLE 6: Certificates and Shareholders
-----------------------------
6.01 Certificates
6.02 Issuance
6.03 Payment for Shares
6.04 Subscriptions
6.05 Lien
6.06 Lost, Stolen or Destroyed Certificates
6.07 Registration of Transfer
6.08 Registered Shareholders
6.09 Preemptive Rights
ARTICLE 7: General Provisions
------------------
7.01 Dividends and Reserves
7.02 Books and Records
7.03 Report to Shareholders
7.04 Checks and Notes
7.05 Fiscal Year
7.06 Seal
7.07 Indemnification; Insurance
7.08 Resignation
7.09 Amendment to Bylaws
7.10 Construction
7.11 Relation to Articles of Incorporation
ii
<PAGE>
ARTICLE 1: Offices
-------
1.01 Registered Office and Agent. The registered office of the
---------------------------
corporation shall be at 1300 Summit Avenue, Fort Worth, Texas 76102. The name of
the registered agent at such address is Bob G. Scott. Anything in these Bylaws
to the contrary notwithstanding, revision of the registered office or the
registered agent of the corporation in accordance with the provisions of the
Texas Business Corporation Act shall automatically and without further action
amend this section to name such newly adopted registered office or registered
agent.
1.02 Other Offices. The corporation may have offices at other places
-------------
both within and without the state of Texas as the Board of Directors may
determine or as the business of the corporation may require.
ARTICLE 2: Shareholders
------------
2.01 Place of Meetings. All meetings of the shareholders shall be held
-----------------
at such time and place, in or out of the state of Texas, as shall be stated in
the notice of the meeting or in a waiver of notice.
2.02 Annual Meeting. An annual meeting of the shareholders shall be
--------------
held each year at 4:00 o'clock p.m. on the third Tuesday of April of each year.
If such a day is a legal holiday, then the meeting shall be on the next business
day following. At the meeting, the shareholders shall elect directors and
transact such other business as may properly be brought before the meeting. In
the event the annual meetings is omitted by oversight or otherwise and not held
as provided herein, an annual meeting may be called in the manner provided for
special meetings herein at a subsequent date, and the business transacted at
such meeting shall be valid as if transacted at the annual meeting held during
the month of April.
2.03 Voting List. At least ten days before each meeting of shareholders,
-----------
a complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, with the address of each and the number of voting shares
held by each, shall be prepared by the officer or agent having charge of the
stock transfer books. The list, for a period of ten days prior to the meeting,
shall be kept on file at the registered office of the corporation and shall be
subject to inspection by any shareholder at any time during usual business
hours. The list shall also be produced and kept open at the time and place of
the meeting during the whole time thereof, and shall be subject to the
inspection of any shareholder during the whole time of the meeting.
2.04 Special Meetings. Special meetings of the shareholders, for any
----------------
purpose or purposes, unless otherwise prescribed by statue, the Articles of
Incorporation or these Bylaws, may be called by the President, the Board of
Directors or the holders of not less than one-tenth of all the shares entitled
to vote at the meetings. Business transacted at a special meeting shall be
confined to the purpose or purposes stated in the notice of the meeting.
1
<PAGE>
2.05 Notice. Written or printed notice stating the place, day and hour
------
of the meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten nor more
than sixty days before the date of the meeting, either personally or by mail, by
or at the direction of the Chairman of the Board, the Secretary or the officer
or person calling the meeting, to each shareholder of record entitled to vote at
the meeting, except to the extent that notice is not required to be given to any
shareholder by law. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to the shareholder at his address
as it appears on the stock transfer books of the corporation, with postage
thereon prepaid.
2.06 Quorum. The holders of a majority of the shares issued and
------
outstanding and entitled to vote, present in person or represented by proxy,
shall be required and shall constitute a quorum at meetings of the shareholders
for the transaction of business, except as otherwise provided by statue, the
Articles of Incorporation or these Bylaws. If a quorum is not present or
represented at a meeting of the shareholders, the shareholders entitled to vote,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice (other than announcement at the
meeting of the time and place at which the meeting is to be reconvened) until a
quorum is present and represented. At such adjourned meeting at which a quorum
is present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed.
2.07 Majority Vote; Withdrawal of Quorum. When a quorum is present at
-----------------------------------
any meeting of the shareholders and unless otherwise required by statute, the
Articles of Incorporation or these Bylaws, the vote of the holders of a majority
of the shares entitled to vote, present in person or represented by proxy and
voting "for" or "against" any matter brought before the meeting shall decide
such matter. In the determination of such majority, abstentions and broker non-
votes shall not be counted (even though such shares are considered present and
entitled to vote for purposes of determining a quorum pursuant to Bylaw 2.06 of
these Bylaws). The term "abstentions" means shares which are not voted "for" or
"against" a particular matter by a holder or holders present in person or by
proxy at a meeting and entitled to vote such shares on such matter. The term
"broker non-votes" means shares held by brokers or nominees as to which
instructions have not been received from the beneficial owners or persons
entitled to vote and that the broker or nominee does not have discretionary
power to vote on the particular matter on which the vote is being counted. The
shareholders present at a duly constituted meeting may continue to transact
business until adjournment, and the subsequent withdrawal from the meeting of
any shareholder shall not affect the presence of a quorum at the meeting.
2.08 Method of Voting. Each outstanding share shall be entitled to one
----------------
vote on each matter submitted to a vote at a meetings shareholders. At any
meeting of the shareholders, every shareholder having the right to vote may vote
either in person or by proxy executed in writing by the shareholder or by his
duly authorized attorney-in-fact. No proxy shall be valid after eleven months
from the date of its execution, unless otherwise provided in the proxy. Each
proxy shall be revocable unless expressly provided therein to be irrevocable and
unless otherwise made irrevocable by law. Each proxy shall be filed with the
Secretary of the corporation prior to or at the time of the meeting.
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Voting for directors shall be in accordance with Bylaw 3.03 of these Bylaws. Any
vote may be taken by voice or by show of hands unless someone entitled to vote
objects, in which case written ballots shall be used.
2.09 Record Date; Closing Transfer Books. The Board of Directors may fix
-----------------------------------
in advance a record date for the purpose of determining shareholders entitled to
notice of or to vote at a meeting of shareholders, the record date to be not
less than ten nor more than sixty days prior to the meeting, or the Board of
Directors may close the stock transfer books for such purpose for a period of
not less than ten nor more than sixty days prior to such meeting. In the absence
of any action by the Board of Directors, the date upon which the notice of the
meeting is mailed shall be the record date. Whenever action by shareholders is
proposed to be taken by consent in writing without a meeting of shareholders,
the Board of Directors may fix a record date for the purpose of determining
shareholders entitled to consent to that action, which record date shall not
precede, and shall not be more than ten days after, the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors and prior action of the
Board of Directors is not required by law, the record date for determining
shareholders entitled to consent to action in writing without a meeting shall be
the first date on which a signed written consent setting forth the action taken
or proposed to be taken is delivered to the corporation by delivery to its
registered office, its principal place of business, or an officer or agent of
the corporation having custody of the books in which proceedings of meetings of
shareholders are recorded. If no record date shall have been fixed by the Board
of Directors and prior action of the Board of Directors is required by law, the
record date for determining shareholders entitled to consent to action in
writing without a meeting shall be at the close of business on the date on which
the Board of Directors adopts a resolution taking such prior action.
2.10 Order of Business at Meetings. The order of business insofar as
-----------------------------
practicable or applicable at annual and other meetings of shareholders shall be
as follows:
(a) call to order;
(b) proof of due notice of meeting or waiver;
(c) determination of quorum and examination of proxies;
(d) announcement of availability of voting list (see Bylaw 2.03);
(e) reading and disposing of minutes of last meeting of
shareholders;
(f) reports of officers and committees;
(g) appointment of voting inspectors;
(h) unfinished business;
(i) new business;
(j) nomination of directors;
(k) opening of polls for voting;
(l) recess;
(m) reconvening; closing of polls;
(n) report of voting inspectors;
(o) other business;
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(p) adjournment.
The failure to follow this order of business at any meeting of shareholders
shall have no effect on the validity of such meeting.
ARTICLE 3: Directors
---------
3.01 Management. The business and affairs of the corporation shall be
----------
managed by the Board of Directors who may exercise all such powers of the
corporation and do all such lawful acts and things as are not (by statue or the
Articles of Incorporation or these Bylaws) directed or required to be exercised
or done by shareholders.
3.02 Number; Qualification; Election; Term. The Board of Directors shall
-------------------------------------
consist of not more than twenty five (25) directors, the exact number of which
shall be determined from time to time as specified by resolution of the Board of
Directors; provided, that no director's term shall be shortened by reason of a
resolution reducing the number of directors; and further provided, that the
number of directors constituting the Board of Directors at the time of the
adoption of these Bylaws shall be thirteen (13) and shall remain at such number
unless and until changed by resolution of the Board of Directors. The directors
shall be elected at the annual meeting of shareholders, except as provided in
Bylaw 3.05. Directors need not be shareholders or residents of the state of
Texas.
3.03 Election of Directors. Directors shall be elected by plurality
---------------------
vote. Cumulative voting shall not be permitted.
3.04 Removal. Any director may be removed either with or without cause
-------
at any special or annual meeting of shareholders by the affirmative vote of a
majority in number of shares of the shareholders present in person or by proxy
at such meeting and entitled to vote for the election of such director if notice
of intention to act upon such matter shall have been given in the notice calling
such meeting.
3.05 Vacancies. Except as provided below, any vacancy occurring in the
---------
Board of Directors (by death, resignation, removal, increase in number of
directors or otherwise) may be filled by an affirmative vote of a majority of
the remaining directors though less than a quorum of the Board of Directors, or
may be filled (at the election of the Board of Directors) by an election at an
annual or special meeting of shareholders called for that purpose. If the
vacancy is caused by reason of an increase in the number of directors, the Board
of Directors may vote to fill not more than two such directorships during the
period between any two successive annual meetings of shareholders. A director
elected to fill a vacancy shall be elected for the unexpired term of his
predecessor in office, or until the next election of directors by shareholders
if the vacancy is caused by an increase in the number of directors.
4
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3.06 Place of Meetings. Meetings of the Board of Directors, regular or
-----------------
special, may be held either within or without the state of Texas.
3.07 First Meeting. The first meeting of each newly elected Board of
-------------
Directors shall be held without further notice immediately following the annual
meeting of shareholders and at the same place, unless (by unanimous consent of
the directors then elected and serving) such time or place shall be changed.
3.08 Regular Meetings. Regular meetings of the Board of Directors shall
----------------
be held quarterly without notice on the third Tuesday of each January, April,
July and October at 1300 Summit Avenue, Fort Worth, Texas 76113 or at such other
address as the Board of Directors may determine.
3.09 Special Meetings. Special meetings of the Board of Directors may
----------------
be called by the Chairman of the Board on one days' notice to each director,
either personally or by mail or by telegram. Special meetings shall be called by
the Chairman of the Board or Secretary in like manner and on like notice on the
written request of the President or on the written request of a majority of the
directors. Except as otherwise expressly provided by statue or the Articles of
Incorporation or these Bylaws, neither the business to be transacted at nor the
purpose of any special meeting need be specified in a notice or waiver of
notice.
3.10 Quorum; Majority Vote. At all meetings of the Board of Directors, a
---------------------
majority of the directors fixed in the manner provided in these Bylaws shall
constitute a quorum for the transaction of business. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors. If a quorum is not present at a meeting, a majority of
the directors present may adjourn the meeting from time to time, without notice
other than an announcement at the meeting, until a quorum is present. The vote
of a majority of the directors present at a meeting at which a quorum is in
attendance shall be the act of the Board of Directors, unless the vote of a
different number is required or permitted by the Articles of Incorporation or
these Bylaws. If a quorum is not present at any meeting of the Board of
Directors, the directors present may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.11 Compensation. By resolution of the Board of Directors, the
------------
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of any committee of the
Board of Directors may, by resolution of the Board of Directors, be allowed like
compensation for attending committee meetings.
3.12 Procedure. The Board of Directors shall keep regular minutes of its
---------
proceedings. The minutes shall be placed in the minute book of the corporation.
5
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3.13 Interested Directors and Officers.
---------------------------------
(a) No contract or transaction between the corporation and one or more
of its directors or officers, or between the corporation and any other
corporation, partnership, association or other organization in which one or more
of the directors or officers are directors or officers or have a financial
interest, shall be voidable solely for this reason, solely because the director
or officer is present at or participates in the meeting of the Board of
Directors or a committee thereof which authorizes the contract or transaction,
or solely because his or their votes are counted for such purposes, if:
(1) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors are less than a quorum;
(2) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or
(3) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified by the Board of
Directors, a committee thereof or the shareholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof.
3.14 Action Without Meeting. Any action required or permitted to be
----------------------
taken at a meeting of the Board of Directors or any committee may be taken
without a meeting if a consent in writing, setting forth the action so taken, is
signed by all members of the Board of Directors or the committee, as the case
may be. Such consent shall have the same force and effect as a unanimous vote at
a meeting and may be stated as such in any document or instrument filed with the
Secretary of State.
3.15 Committees of Directors.
-----------------------
(a) The Board of Directors, by resolution adopted by a majority of the
full Board, may designate from among its members an executive committee and one
or more other committees, each of which, to the extent provided in such
resolution, shall have and may exercise all of the authority of the Board of
Directors in the business and affairs of the corporation, except where the
action of the Board of Directors is required by statute. Vacancies in the
membership of a committee shall be filled by the Board of Directors at a regular
or special meeting of the Board of Directors. The executive committee shall keep
regular minutes of its proceedings and report the same to the Board when
required. The designation of any such committee and the delegation thereto of
authority shall
6
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not operate to relieve the Board of Directors, or any member thereof, of any
responsibility imposed upon it or him by law.
(b) The Board of Directors may designate a chairman and vice chairman
for each committee. Unless otherwise provided by the Board of Directors, a
majority of the full committee shall constitute a quorum for each committee, and
the act of a majority of the committee members present at any meeting at which a
quorum is present shall be the act of the committee. The Board of Directors may
at any time add or remove committee members, change the authority or
responsibility of any committee or abolish a committee.
ARTICLE 4: Notice and Attendance Through Use of Electronic Equipment
---------------------------------------------------------
4.01 Method. Whenever by statue or the Articles of Incorporation or
------
these Bylaws notice is required to be given to any director, committee member or
shareholder, and no provision is made as to how the notice shall be given, it
shall not be construed to mean personal notice, but any such notice may be given
(i) in writing, by mail, postage prepaid, addressed to the director, committee
member or shareholder at the address appearing on the books of the corporation,
or (ii) in any other method permitted by law. Any notice required or permitted
to be given by mail shall be deemed given at the time when the same is thus
deposited in the United States mail.
4.02 Waiver. Whenever by statute or the Articles of Incorporation or
------
these Bylaws notice is required to be given to any director, committee member or
shareholder, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated in such notice,
shall be equivalent to the giving of such notice. Attendance of a director,
committee member or shareholder at a meeting shall constitute a waiver of notice
of such meeting, except where a director, committee member or shareholder
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
4.03 Telephone and Similar Meetings. Directors, committee members and
------------------------------
shareholders may participate in and hold a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in such a
meeting shall constitute presence in person at the meeting, except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
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ARTICLE 5: Officers and Agents
-------------------
5.01 Number; Qualification; Election; Term.
-------------------------------------
(a) The corporation shall have:
(1) a President and a Secretary and
(2) such other officers (including a Chairman of the Board, Vice
Presidents and a Treasurer) and assistant officers and agents as the Board
of Directors may deem necessary.
(b) No officer or agent need to be a shareholder, director or resident
of the state of Texas.
(c) Officers named in Bylaw 5.01(a)(1) shall be elected by the Board of
Directors on the expiration of an officer's term or whenever a vacancy exists.
Officers and agents named in Bylaw 5.01(a)(2) may be elected by the Board at any
meeting.
(d) Unless otherwise specified by the Board at the time of election or
appointment, or in any employment contract approved by the Board, each officer's
and agent's term shall end at the first meeting of directors after the next
annual meeting of shareholders. He shall serve until the end of his term or, if
earlier, his death, resignation or removal.
(e) Any two or more offices may be held by the same person.
5.02 Removal. Any officer or agent elected or appointed by the Board of
-------
Directors may be removed by the Board of Directors whenever, in its judgment,
the best interests of the corporation will be served thereby. Such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
5.03 Vacancies. Any vacancy occurring in any office of the corporation
---------
(by death, resignation, removal or otherwise) may be filled by the Board of
Directors.
5.04 Authority. Officers and agents shall have such authority and
---------
perform such duties in the management of the corporation as are provided in
these Bylaws or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws.
5.05 Compensation. The compensation of officers and agents shall be
------------
fixed from time to time by the Board of Directors.
5.06 Chairman of the Board. The Chairman of the Board, if any, shall
---------------------
preside over all Board of Directors' and shareholders' meetings. The Chairman
shall also perform such other authority and powers as the Board of Directors may
from time to time prescribe.
8
<PAGE>
5.07 President. The President shall assist the Chairman of the Board in
---------
presiding over all Board of Directors' and shareholders' meetings. In the
absence of a Chairman of the Board, the President shall preside over all such
meetings. The President shall also perform such other duties and have such other
authority and powers as the Board of Directors may from time to time prescribe.
5.08 Vice President. The Executive Vice President, if any, shall be the
--------------
chief operating officer of the Corporation and shall be treated as the Vice
President with most seniority. The Vice Presidents, if any, inclusive of the
Executive Vice President, in the order of their seniority unless otherwise
determined by the Board of Directors, shall, in the absence or disability of the
Chairman of the Board and President, preside over all Board of Directors' and
shareholders' meetings. The Vice President, inclusive of the Executive Vice
President, shall also perform all duties and have such other authority and
powers as the Board of Directors may from time to time prescribe.
5.09 Secretary.
---------
(a) The Secretary shall attend all meetings of the Board of Directors
and all meetings of the shareholders and record the minutes of all proceedings
in a book to be kept for that purpose.
(b) The Secretary shall give, or cause to be given, notice of all
meetings of the shareholders and special meetings of the Board of Directors.
(c) The Secretary shall keep in safe custody the seal of the
corporation and, when authorized by the Board of Directors or the executive
committee, affix the same to any instrument requiring it.
(d) If no Treasurer or Assistant Treasurer is appointed, or in the
event of the absence or disability of the Treasurer and Assistant Treasurer, the
Secretary shall perform the duties, have the authority and exercise the powers
of the Treasurer.
(e) The Secretary shall be under the supervision of the Chairman of the
Board and shall also perform such other duties and have such other authority and
powers as the Board of Directors may from time to time prescribe.
5.10 Assistant Secretary. The Assistant Secretary, if any, shall, in
-------------------
the absence or the disability of the Secretary, perform the duties and have the
authority and exercise the powers of the Secretary. He shall also perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
5.11 Treasurer.
---------
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements of the corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the corporation in such
9
<PAGE>
depositories as may be designated by the Board of Directors.
(b) He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Chairman of the Board, President and directors, at the regular
meetings of the Board of Directors or whenever any of them may require it, an
account of all transactions as Treasurer and of the financial condition of the
corporation.
(c) If required by the Board of Directors, he shall give the
corporation a bond in such form, in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation.
(d) He shall perform such other duties and have such other authority
and powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.
5.12 Assistant Treasurer. The Assistant Treasurer, if any, shall, in
-------------------
the absence or disability of the Treasurer, perform the duties and have the
authority and exercise the powers of the Treasurer. He shall also perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.
ARTICLE 6: Certificates and Shareholders
-----------------------------
6.01 Certificates. Certificates in the form determined by the Board of
------------
Directors shall be delivered representing all shares to which shareholders are
entitled. Certificates shall be consecutively numbered and shall be entered in
the books of the corporation or its agents as they are issued. Each certificate
shall state on its face the holder's name, the number and class of shares, the
par value of shares or a statement that such shares are without par value, and
such other matters as may be required by law. They shall be signed by the
Chairman of the Board, President, a Vice President, the Secretary, the Assistant
Secretary, or such other officer or officers as the Board of Directors shall
designate and may be sealed with the seal of the corporation or a facsimile
thereof. The signature of any such officer may be a facsimile. In case any
officer who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer at the date of its issuance.
6.02 Issuance. Shares (both treasury and authorized but unissued) may be
--------
issued for such consideration (not less than par value) and to such persons as
the Board of Directors may determine from time to time. Shares may not be issued
until the full amount of the consideration, fixed as
10
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provided by law, has been paid.
6.03 Payment for Shares.
------------------
(a) Kind. The consideration for the issuance of shares shall consist of
----
money paid, labor done (including services actually performed for the
corporation) or property (tangible or intangible) actually received. Neither
promissory notes nor the promise of future services shall constitute payment for
shares.
(b) Valuation. In the absence of fraud in the transaction, the judgment
---------
of the Board of Directors as to the value of consideration received shall be
conclusive.
(c) Effect. When consideration, fixed as provided by law, has been
------
paid, the shares shall be deemed to have been issued and shall be considered
fully paid and nonassessable.
(d) Allocation of Consideration. The consideration received for shares
---------------------------
shall be allocated by the Board of Directors in accordance with law, between
stated capital and capital surplus accounts.
6.04 Subscriptions. Unless otherwise provided in the subscription
-------------
agreement, subscriptions for shares, whether made before or after organization
of the corporation, shall be paid in full at such time or in such installments
and at such times as shall be determined by the Board of Directors. Any call
made by the Board of Directors for payment on subscriptions shall be uniform as
to all shares of the same series. In case of default in the payment on any
installment or call when payment is due, the corporation may proceed to collect
the amount due in the same manner as any debt due to the corporation.
6.05 Lien. For any indebtedness of a shareholder to the corporation, the
----
corporation shall have a first and prior lien on all shares of its stock owned
by him and on all dividends or other distributions declared thereon.
6.06 Lost, Stolen or Destroyed Certificates.
--------------------------------------
(a) Issuance of New Certificates. The corporation shall issue a new
----------------------------
certificate in place of any certificate for shares previously issued if the
registered owner of the certificate:
(1) Claim. Makes proof in affidavit form that it has been lost,
-----
destroyed or wrongfully taken;
(2) Timely Request. Requests the issuance of a new certificate
--------------
before the corporation has notice that the certificate has been acquired
by a purchaser for value in good faith and without notice of an adverse
claim;
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(3) Bond. Gives a bond in such form, and with such surety or
----
sureties, with fixed or open penalty, as the corporation may direct, to
indemnify the corporation (and its transfer agent and registrar, if any)
against any claim that may be made on account of the alleged loss,
destruction or theft of the certificate; and
(4) Other Requirements. Satisfies any other reasonable
------------------
requirements imposed by the corporation.
(b) Effect of Failure to Notify Corporation. When a certificate has
---------------------------------------
been lost, apparently destroyed or wrongfully taken, and the holder of record
fails to notify the corporation within a reasonable time after he has notice of
it, and the corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the corporation for the transfer or for
a new certificate.
6.07 Registration of Transfer. The corporation shall register the
------------------------
transfer of a certificate for shares presented to it for transfer if:
(a) Endorsement. The certificate is properly endorsed by the
-----------
registered owner or by his duly authorized attorney;
(b) Guarantee and Effectiveness of Signature. The signature of
----------------------------------------
such person has been guaranteed by a national banking association or
member of the New York Stock Exchange or Midwest Stock Exchange, and
reasonable assurance is given that such endorsements are effective;
(c) Adverse Claims. The corporation has no notice of an adverse
--------------
claim or has discharged any duty to inquire into such a claim; and
(d) Collection of Taxes. Any applicable law relating to the
-------------------
collection of taxes has been complied with.
6.08 Registered Shareholders. The corporation shall be entitled to treat
-----------------------
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it has express or other notice thereof, except as otherwise
provided by law.
6.09 Preemptive Rights. No shareholder or other person shall have any
-----------------
preemptive rights whatsoever.
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ARTICLE 7: General Provisions
------------------
7.01 Dividends and Reserves.
----------------------
(a) Declaration and Payment. Subject to statute and the Articles of
-----------------------
Incorporation, dividends may be declared by the Board of Directors at any
regular or special meeting and may be paid in cash, in property or in shares of
the corporation. The declaration and payment shall be at the discretion of the
Board of Directors.
(b) Record Date. The Board of Directors may fix in advance a record
-----------
date for the purpose of determining shareholders entitled to receive payment of
any dividend, the record date to be not more than sixty days prior to the
payment date of such dividend, or the Board of Directors may close the stock
transfer books for such purpose for a period of not more than sixty days prior
to the payment date of such dividend. In the absence of any action of the Board
of Directors, the date upon which the Board of Directors adopts the resolution
declaring the dividend shall be the record date.
(c) Reserves. By resolution the Board of Directors may create such
--------
reserve or reserves out of the earned surplus of the corporation as the
directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the corporation, or for any other purpose they think beneficial to the
corporation. The directors may modify or abolish any such reserve in the manner
in which it was created.
7.02 Books and Records. The corporation shall keep correct and complete
-----------------
books and records of account and shall keep minutes of the proceedings of its
shareholders and Board of Directors, and shall keep at its registered office or
principal place of business or at the office of its transfer agent or registrar,
a record of its shareholders, giving the names and addresses of all shareholders
and the number and class of the shares held by each.
7.03 Report to Shareholders. Upon the written request of any
----------------------
shareholder, the corporation shall mail within ninety days of such request to
such shareholder its annual statements for its last fiscal year showing in
reasonable detail its assets and liabilities and results of its operations and
the most recent interim statements, if any, which have been filed in a public
record or otherwise published.
7.04 Checks and Notes. All checks or demands for money and notes of the
----------------
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
7.05 Fiscal Year. The fiscal year of the corporation shall be fixed by
-----------
resolution of the Board of Directors.
7.06 Seal. The Board of Directors may provide a suitable corporate seal
----
(of which there
13
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may be one or more) which shall contain the name of the corporation and the name
of the state of Texas. The seal may be used by impressing it or reproducing a
facsimile of it or otherwise.
7.07 Indemnification; Insurance. The corporation shall indemnify to the
--------------------------
full extent permitted by law any person who is made a named defendant or
respondent in any action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, or in any appeal in such an
action, suit or proceeding, by reason of the fact that he or she is or was a
director, advisory director or officer of the corporation, against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such director, advisory director or officer
in connection with any such action, suit or proceeding. The corporation shall
pay or reimburse expenses to directors, advisory directors and officers, and may
pay or reimburse expenses to other persons, as permitted by law. The corporation
may purchase and maintain insurance, create a trust fund, establish any form of
self-insurance, secure its indemnity obligation by grant of a security interest
or other lien on the assets of the corporation, establish a letter of credit,
guaranty or surety arrangement, or other arrangement on behalf of directors,
advisory directors, officers or other persons, against any lability asserted
against such persons in their capacities as directors, advisory directors,
officers or otherwise, of the corporation, whether or not the corporation would
have the power to indemnify such directors, advisory directors, officers or
other persons against such liability, as permitted by law.
7.08 Resignation. Any director, officer or agent may resign by giving
-----------
written notice to the President or the Secretary. The resignation shall take
effect at the time specified therein or immediately if no time is specified
therein. Unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
7.09 Amendment of Bylaws. These Bylaws may be altered, amended or
-------------------
repealed, or new bylaws may be adopted (subject to the shareholders repealing or
changing the action of the Board of Directors, or making new bylaws, at an
annual or special meeting called and held as provided in these Bylaws) at any
meeting of the Board of Directors at which a quorum is present, by the
affirmative vote of a majority of the directors present at such meeting,
provided notice of the proposed alteration, amendment or repeal is contained in
the notice of such meeting.
7.10 Construction. Whenever the context so requires, the masculine shall
------------
include the feminine and neuter, and the similar shall include the plural, and
conversely. If any portion of these Bylaws shall be invalid or inoperative,
then, so far as it is reasonable and possible, the remainder of these Bylaws
shall be considered valid and operative, and effect shall be given to the intent
manifested by the portion held invalid or inoperative. The table of contents and
headings used in these Bylaws have been inserted for convenience only and do not
constitute matter to be construed in interpretation.
7.11 Relation to Articles of Incorporation. These Bylaws are subject to,
-------------------------------------
and governed by, the Articles of Incorporation.
14
<PAGE>
* * * * * * * * * * * * * * * * * * * * *
Subject to the amendments to the Bylaws of the Corporation as set forth
above, the Bylaws of the Corporation, as now amended, shall be and remain in
full force and effect.
I hereby certify that the foregoing Bylaws are the true and correct Bylaws
of the corporation as amended and restated the 21st day of April, 1998.
/s/ Bob G. Scott
----------------------------------
_______________________, Secretary
15
<PAGE>
EXHIBIT 10 (Q)
SECOND AMENDMENT
This Second Amendment (the "Second Amendment") is made and entered into as of
the 8th day of July, 1998 (the "Effective Date"), by and between EOP-SUMMIT
LIMITED PARTNERSHIP, a Delaware limited partnership ("Lessor"), and SUMMIT
BANCSHARES, INC. ("Lessee").
WITNESSETH
A. WHEREAS, Lessor (as successor in interest to Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership) and Lessee are parties to that
certain lease dated February 1992, for space currently containing
approximately 4,978 rentable square feet (the "Premises") described as
Suite No 604 on the 6th floor of the building commonly known as Summit
Office Park and the address of which is 1200-1300 Summit Avenue, Ft. Worth,
Texas (the "Building"), which lease has been previously amended by First
Amendment dated May 3, 1994 (the "First Amendment") which, among other
things, extended the lease for an additional three-year period (the First
Amendment and the lease are collectively referred to herein as the
"Lease"); and
B. WHEREAS, the Lease Term shall expire on February 15, 2000 and Lessee has
requested an option to extend the Lease Term and Lessor has agreed to grant
Lessee such option; and
C. WHEREAS, Lessee and Lessor mutually desire that the Lease be amended on and
subject to the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Lessor and Lessee agree as follows:
I. Renewal Option. Lessor and Lessee agree that the Lease shall be
--------------
amended in accordance with the following terms and conditions:
A. Lessee, provided it is not in default and has not sublet the
Premises or assigned the Lease, shall have two options to extend
the Lease Term (the "Second Renewal Option" and the "Third
Renewal Option"), each for an additional period of five years
(the "Second Renewal Term" and the "Third Renewal Term"). If
properly exercised in accordance with this Second Amendment, the
Second Renewal Term shall commence on the day following the
Extended Termination Date (as defined in the First Amendment) and
the Third Renewal Term shall commence on the day following the
last day of the Second Renewal Term. If Lessee elects to exercise
the Second Renewal Option, Lessee shall provide Lessor with
written notice of such election at least six months prior to the
Extended Termination Date and if Lessee elects to exercise the
Third Renewal Option, Lessee shall provide Lessor with written
notice of such election at least six months prior to the
expiration of the Second Renewal Term.
<PAGE>
B. The Base Monthly Rent rate during the Second Renewal Term shall
be $13.50 per rentable square foot of the Premises. The Base
Monthly Rental rate per rentable square foot of the Premises
during the Third Renewal Term shall equal the prevailing market
rate for such space as determined in Lessor's reasonable
judgment.
C. During the Second Renewal Term and the Third Renewal Term Lessee
shall pay to Lessor as additional rental the amount (the
"Excess") by which the sum of Lessee's Proportionate Share of
Real Estate Taxes for the applicable calendar year and Operating
Expenses for the applicable calendar year exceeds $6.50 per
rentable square foot (the "Expense Stop"); provided Lessee shall
not be entitled to a credit if Lessee's Proportionate Share is
less than $ 6.50 per rentable square foot. As soon as is
practical following the end of each calendar year during the
Second Renewal Term and Third Renewal Term, Lessor shall furnish
to Lessee a statement (the "Annual Statement") of Lessor's actual
Operating Expenses and the actual Excess for the previous
calendar year. Not later than thirty (30) days after Lessee's
receipt of the Annual Statement, Lessee will pay to Lessor, as
Additional Rent, the Excess stated in the Annual Statement.
D. If the Building is not at least ninety-five percent (95%)
occupied during any calendar year of the Lease Term or if Lessor
is not supplying services to at least ninety-five (95%) of the
total Rentable Area of the Building at any time during any
calendar year of the Lease Term, actual Operating Expenses for
purposes hereof shall be determined as if the Building had been
ninety-five percent (95%) occupied and Lessor had been supplying
services to ninety-five percent (95%) of the Rentable Area of the
Building during such year.
E. During the Second Renewal Term and the Third Renewal Term, Lessor
agrees to provide six (6) covered, reserved parking spaces in the
on-site garage. Lessee will pay Lessor rent on each of the
reserved spaces which, on the date of this Amendment is $25.00
per space per month. The rent for the parking spaces may be
increased by Lessor annually by the same amount the rent charged
to other tenants in the Building is increased. Lessor will make
these parking spaces available to Lessee prior to the Second
Renewal Term at the referenced monthly rate upon Lessee's written
request.
F. If Lessee is entitled to and properly exercises the Second
Renewal Option and/or the Third Renewal Option, Lessor shall
prepare appropriate instruments (each a "Renewal Amendment") to
reflect changes in the Base Monthly Rental, Lease Term, Extended
Termination Date and other appropriate terms. Lessee shall
execute and return such Renewal Amendment(s) within fifteen days
after Lessee's receipt thereof from Lessor.
<PAGE>
II. Suite 634 Rights.
----------------
A. Lessee shall have the following rights (the "Suite 634
Rights") with respect to Suite 634 in the Building (the
"Option Space"), consisting of approximately 1,829 rentable
square feet as shown on Exhibit "A" attached hereto:
(i) A one-time expansion right to take the Option Space
(the "Expansion Right") beginning September 1, 1999 by
giving Lessor the Notice of Exercise (defined below) by
March 1, 1999. The Base Monthly Rent applicable to the
Option Space shall be the then current market rate for
the Building as determined is Lessor's reasonable
discretion.
(ii) If Lessee does not exercise the Expansion Right, then
Lessee shall have a one time right of first refusal to
lease the Option Space ("Right of First Refusal"). The
Right of First Refusal shall be exercised as follows:
when Lessor has a prospective tenant ("Prospect")
interested in leasing all or any part the Option Space,
Lessor shall advise Lessee (the "Advice") of the terms
under which Lessor is prepared to lease the Option
Space (or portion thereof if the Prospect is interested
in leasing less than all of the Option Space) to such
Prospect. Lessee shall have five (5) days after the
date of the Advice to give Lessor the Notice of
Exercise. If Lessee exercises its Right of First
Refusal, it shall lease the Option Space under the
terms and conditions contained in the Advice. The term
for the Option Space under the Right of First Refusal
shall commence upon the commencement date stated in the
Advice.
B. To exercise either of the Suite 634 Rights, Lessee shall
provide Lessor with written notice of exercise ("Notice of
Exercise") to Lessor's notice address as provided in the
Lease. Lessee has no Suite 634 Rights if:
a. Lessee is in default under the Lease at the time
of the Notice of Exercise or the Advice (if
applicable); or
b. The Premises, or any portion thereof, is sublet at
the time of the Notice of Exercise or the Advice
(if applicable); or
c. The Lease has been assigned; or
d. The Lease is not occupying the Premises on the
date of the Notice of Exercise ("Notice of
Exercise") or the Advice if applicable.
C. The Option Space shall be considered a part of the Premises,
provided that all of the terms herein and in the Lease (and
in the Advice, if applicable) shall govern Lessee's leasing
of the Option Space. The Option Space (including
improvements and personalty, if any) shall be accepted by
Lessee in its condition and as-built configuration existing
on the earlier of the date Lessee takes possession of the
Option Space or the date the term for such Option Space
commences.
<PAGE>
D. The Right of First Refusal with respect to the Option Space shall
terminate on the earlier to occur of (i) Lessee's failure to
exercise its Right of First Refusal within the five (5) day
period provided in paragraph A above, and (ii) the date Lessor
would have provided Lessee an Advice if Lessee had not been in
violation of one or more of the conditions as set forth in
Paragraph A above.
E. If Lessee exercises either of its Suite 634 Rights, Lessor shall
prepare an amendment (the "Expansion Amendment") adding the
Option Space to the Premises and reflecting the changes in the
Base Monthly Rent, Rentable Area of the Premises, Lessee's
Proportionate Share and other appropriate terms. A copy of the
Expansion Amendment shall be (i) sent to Lessee within a
reasonable time after Lessor's receipt of the Notice of Exercise,
and (ii) executed by Lessee and returned to Lessor within ten
(10) days thereafter.
Ill. Effective Date. This Second Amendment shall become effective as
--------------
of the Effective Date and shall continue in effect until otherwise
amended by the parties in writing or until expiration or sooner
termination of the Lease.
IV. Miscellaneous.
-------------
A. This Second Amendment sets forth the entire agreement between the
parties with respect to the matters set forth herein. There have
been no additional oral or written representations or agreements.
Under no circumstances shall Lessee be entitled to any Rent
abatement, improvement allowance, leasehold improvements, or
other work to the Premises, or any similar economic incentives
that may have been provided Lessee in connection with entering
into the Lease.
B. Except as herein modified or amended, the provisions, conditions
and terms of the Lease shall remain unchanged and in full force
and effect.
C. In the case of any inconsistency between the provisions of the
Lease and this Second Amendment, the provisions of this Second
Amendment shall govern and control.
D. Submission of this Second Amendment by Lessor is not an offer to
enter into this Second Amendment but rather is a solicitation for
such an offer by Lessee. Lessor shall not be bound by this Second
Amendment until Lessor has executed and delivered the same to
Lessee.
E. The capitalized terms used in this Second Amendment shall have
the same definitions as set forth in the Lease to the extent that
such capitalized terms are defined therein and not redefined in
this Second Amendment.
F. Lessee hereby represents to Lessor that Lessee has dealt with no
broker in connection with this Second Amendment other than Kelly,
Geren & Searcy, Inc., on Lessee's behalf and the Richard D.
Minker Co., on Lessor's behalf ("Brokers"). Lessee agrees to
indemnify and hold Lessor, its members, principals,
beneficiaries, partners, officers, directors, employees,
mortgagee(s) and agents, and the respective
<PAGE>
principals and members of any such agents (collectively, the
"Lessor Related Parties") harmless from all claims of any brokers
claiming to have represented Lessee in connection with this
Second Amendment other than Brokers. Lessor hereby represents to
Lessee that Lessor has dealt with no broker in connection with
this Second Amendment. Lessor agrees to indemnify and hold
Lessee, its members, principals, beneficiaries, partners,
officers, directors, employees, and agents, and the respective
principals and members of any such agents (collectively, the
"Lessee Related Parties") harmless from all claims of any brokers
claiming to have represented Lessor in connection with this
Second Amendment.
IN WITNESS WHEREOF, Lessor and Lessee have duly executed this Second
Amendment as of the Effective Date.
LESSOR:
EOP-SUMMIT LIMITED PARTNERSHIP, a Delaware
limited partnership
By: EOP-SUMMIT, L.L.C., a Delaware limited
liability company, its general partner
By: EOP Operating Limited Partnership,
a Delaware limited partnership, its
sole member
By: Equity Office Properties
Trust, a Maryland real estate
investment trust, its managing
partner
By: /s/ John Gallander
--------------------------
Name: John Gallender
------------------------
Title: VP, Leasing
-----------------------
LESSEE:
SUMMIT BANCSHARES, INC.
By: /s/ Bob G. Scott
----------------------------------
Name: Bob G. Scott
--------------------------------
Title: Executive Vice President
-------------------------------
<PAGE>
EXHIBIT 10 (R)
THIRD AMENDMENT TO LOAN AGREEMENT
---------------------------------
THIS THIRD AMENDMENT ("Third Amendment") dated as of the 15th day of July,
1998, to the Loan Agreement (the "Loan Agreement"), made and entered into as of
July 12, 1995, by and among SUMMIT BANCSHARES, INC., a Texas corporation,
(hereinafter called "Borrower") and THE FROST NATIONAL BANK, a national banking
association (hereinafter called "Lender"). All capitalized terms not otherwise
defined herein shall have the meaning ascribed to each of them in the Loan
Agreement.
WITNESSETH:
WHEREAS, Borrower executed the Loan Agreement to govern those two certain
promissory notes from Lender, specifically a $8,000,000.00 Acquisition Note and
a $1,000,000.00 Liquidity Note (collectively, the "Notes").
WHEREAS, Borrower executed the First Amendment to Loan Agreement on July
15, 1996 ("First Amendment") which renewed and extended the maturity date of the
Notes: and
WHEREAS, Borrower executed the Second Amendment to Loan Agreement on July
15, 1997 ("Second Amendment") which renewed and extended the maturity date of
the Notes; and
WHEREAS, the Borrower desires to again renew and extend the unpaid
principal balance of the Notes: and
WHEREAS, the Lender agrees to renew and extend the Notes all as hereinafter
provided.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower and Lender do hereby agree as follows:
ARTICLE I
---------
AMENDMENT TO LOAN AGREEMENT
---------------------------
1.1 Amendment to Notes. As of the effective date hereof, the Borrower has
-------------------
zero outstanding under the Acquisition Note and the Liquidity Note. The Borrower
desires to renew these credit facilities by the execution of another Acquisition
Note and Liquidity Note extending the original payment terms and the maturity
date by one year. Accordingly, Sections 2.02 (s) and (b) of the Loan Agreement
shall be, and are hereby, amended to read in their entirety as follows:
(a) Acquisition Note. From Closing Date and continuing at all times
-----------------
through July 15, 1999 ( the "Revolving Credit Period") the Loan evidenced
by the Acquisition Note shall be a revolving credit facility which will
allow the Borrower to request such amounts as Borrower may elect from time
to time (each such amount being herein called an "Advance") so long as the
aggregate amount of Advances outstanding at any time under the Acquisition
Note does not exceed Eight Million and No/100 Dollars ($8,000,000.00)
provided however, the minimum Advance must be at least $500,000.00. The
Borrower shall have the right to borrow, repay, and
<PAGE>
borrow again under the credit facility. The outstanding principal balance
of the Acquisition Note on July 15, 1999 shall convert to a term facility
(the "Term Period") and shall be payable in 20 equal quarterly installments
of principal plus all accrued and unpaid interest, with all unpaid
principal plus all accrued and unpaid interest being due and payable on
July 15, 2004. Principal and interest of the Acquisition Note shall be due
and payable as provided in the Acquisition Note.
(b) Liquidity Note. The Liquidity Note shall be due and payable as
---------------
follows: during the Revolving Credit Period the Loan evidenced by the
Liquidity Note shall be a revolving credit facility which will allow the
Borrower to request such amounts as Borrower may elect from time to time
(each such amount being herein call an "Advance") so long as the aggregate
amount of Advances outstanding at any time under the Liquidity Note does
not exceed One Million and No/100 Dollars ($1,000,000.00) provided however,
the minimum Advance must be at least $50,000.00. The Borrower shall have
the right to borrow, repay and borrow again under the credit facility. The
outstanding principal balance of the Liquidity Note on July 15, 1999 shall
convert to a term facility (the "Term Period") and shall be payable in 20
equal quarterly installments of principal plus all accrued and unpaid
interest, with all unpaid principal plus all accrued and unpaid interest
being due and payable on July 15, 2004. Principal and interest of the
Liquidity Note shall be due and payable as provided in the Liquidity Note.
ARTICLE II
----------
CONDITIONS OF EFFECTIVENESS
---------------------------
2.1 Effective Date. This Third Amendment shall become effective as of
---------------
July 15, 1998, when, and only when, Lender shall have received counterparts of
this Third Amendment executed and delivered by Borrower and when each of the
following conditions shall have been met, all in form, substance, and date
satisfactory to Lender.
(a) Renewal Notes. Borrower shall have executed and delivered to
--------------
Lender a new Acquisition Note and Liquidity Note, payable to the order of
Lender as set forth therein, duly executed on behalf of the Borrower, dated
effective July 15, 1997 in the principal amounts of $8,000,000.00 and
$1,000,000.00, respectively.
(b) Additional Loan Documents. Borrower shall have executed and
--------------------------
delivered to Lender such other documents as shall have been requested by
Lender to renew, and extend, the Loan Documents to secure payment of the
Obligations of Borrower, all in form satisfactory to Lender and its
counsel.
<PAGE>
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 Representations and Warranties. In order to induce Lender to enter
-------------------------------
into this Third Amendment, Borrower represents and warrants the following:
(a) Borrower has the corporate power to execute and deliver this Third
Amendment, the Notes, and other Loan Documents and to perform all of its
obligations in connection herewith and therewith.
(b) The execution and delivery by Borrower of this Third Amendment,
the Notes, and other Loan Documents and the performance of its obligations
in connection herewith and therewith: (I) have been duly authorized or will
be duly ratified and affirmed by all requisite corporate action; (ii) will
not violate any provision of law, any order of any court or agency of
government of the Articles of Incorporation or Bylaws of such entity; (iii)
will not be in conflict with, result in a breach of or constitute (alone or
with due notice or lapse of time or both) a default under any indenture,
agreement or other instrument; and (iv) will not require any registration
with, consent or approval of or other action by any federal, state
provincia l or other governmental authority or regulatory body.
(c) There is no action, suit or proceeding at law or in equity or by
or before any governmental instrumentality or other agency or regulatory
authority now pending or, to the knowledge of Borrower, threatened against
or affecting Borrower or any properties or rights of Borrower or involving
this Third Amendment or the transactions contemplated hereby which, if
adversely determined, would materially impair the right of Borrower, to
carry business substantially as now conducted or materially and adversely
affect the financial condition of Borrower or materially and adversely
affect the ability of Borrower to consummate the transactions contemplated
by this Third Amendment.
(d) The representations and warranties of Borrower this Third
Amendment, the Notes, and any other contained in the Loan Agreement, Loan
Document securing Borrower's Obligations and indebtedness to Lender are
correct and accurate on and as of the date hereof as though made on and as
of the date hereof , except to the extent that the facts upon which such
representations are based have been changed by the transactions herein
contemplated.
ARTICLE IV
----------
RATIFICATION OF OBLIGATIONS AND LIENS
-------------------------------------
4.1 Ratification of Obligation. The Borrower does here acknowledge,
---------------------------
ratify and confirm that it is obligated and indebted to Lender as evidenced by
the Loan Agreement (as amended by the First Amendment, the Second Amendment and
this Third Amendment), the Notes and all other Loan Documents.
4.2 Valid Liens. Borrower hereby acknowledges and agrees that the liens
------------
and security interests and are superior to all liens and security interests
other than those exceptions approved by Lender in writing. Nothing herein
contained shall affect or impair the validity or priority of the liens and
security interests and are superior to all liens and security interests other
than those exceptions approved by Lender in writing.
<PAGE>
Nothing herein contained shall affect or impair the validity or priority of the
liens and security interests under the Loan Documents.
4.3 Ratification of Agreements. The Loan Agreement (as previously amended
---------------------------
by the First Amendment and the Second Amendment), this Third Amendment, the
Notes, and each other Loan Document, as hereby amended, is acknowledged,
ratified and confirmed in all respects as being valid, existing, and of full
force and effect. Any reference to the Loan Agreement in any Loan Document shall
be deemed to be a reference to the Loan Agreement (as previously amended) and as
amended by this Third Amendment. The execution, delivery and effectiveness of
this Third Amendment shall not, except as expressly provided herein, operate as
a waiver of any right, power or remedy of Lender under the Loan Agreement, nor
constitute a waiver of any provision of the Loan Agreement. The Borrower
acknowledges, ratifies and confirms that the collateral securing the Loan
secures all of the indebtedness of the Borrower, including without limitation,
the Notes.
ARTICLE V
---------
MISCELLANEOUS
-------------
5.1 Survival of Agreements. All representations, warranties, covenants
-----------------------
and agreements of Borrower, herein or in any other Loan Document shall survive
the execution and delivery of this Third Amendment, and the other Loan Documents
and the performance hereof and thereof, including without limitation the making
or granting of the Loan and the delivery of the Notes and all other Loan
Documents, and shall further survive until all of Borrower's Obligations to
Lender are paid in full. All statements and agreements contained in any
certificate or instrument delivered by Borrower hereunder or under the Loan
Documents to Lender shall be deemed to constitute the respective representations
and warranties by Borrower and/or respective agreements and covenants of
Borrower under this Third Amendment and under the Loan Agreement.
5.2 Loan Document. This Third Amendment, the Notes, and each other Loan
--------------
Documents executed in connections herewith are each a Loan Document and all
provisions in the Loan Agreement, as amended, pertaining to Loan Documents apply
hereto and thereto.
5.3 Governing Law. This Third Amendment shall be governed by and construed
--------------
in all respects in accordance with the laws of the State of Texas and any
applicable laws of the United States of America, including construction,
validity and performance.
5.4 Counterparts. This Third Amendment may be separately executed in any
-------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to constitute one and the same
Third Amendment.
5.5 Release of Claims. Borrower by its execution of this Third Amendment,
------------------
hereby declares that it has no set-offs, counterclaims, defenses or other causes
of action against Lender arising out of the Loan, the renewal, modification and
extension of the Loan, any documents mentioned herein or otherwise; and, to the
extent any such setoffs, counterclaims, defenses or other causes of action which
may exist, whether known or unknown, such items are hereby expressly waived and
released by Borrower.
<PAGE>
5.6 Attorneys' Fees. Borrower hereby agrees to pay Lender, upon demand,
----------------
the reasonable attorneys' fees and expenses of Lender's counsel, filing and
recording fees and other reasonable expenses incurred by Lender in connection
with this Third Amendment. Borrower also agrees to provide to Lender such other
documents and instruments as Lender may reasonably request in connection with
the renewal, extension and modification of the Loans mentioned herein.
5.7 ENTIRE AGREEMENT. THIS THIRD AMENDMENT, TOGETHER WITH ANY LOAN
-----------------
DOCUMENTS EXECUTED IN CONNECTION HEREWITH , CONTAINS THE ENTIRE AGREEMENT
BETWEEN THE PARTIES HERETO RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND
ALL PRIOR AGREEMENTS RELATIVE THERETO WHICH ARE NOT CONTAINED HEREIN OR THEREIN
ARE TERMINATED. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS
THIRD AMENDMENT, AND THE LOAN DOCUMENTS MAY BE AMENDED, REVISED, WAIVED,
DISCHARGED, RELEASED OR TERMINATED ONLY BY A WRITTEN INSTRUMENT OR INSTRUCTIONS,
EXECUTED BY THE PARTY AGAINST WHICH ENFORCEMENT OF THE AMENDMENT, REVISION,
WAIVER, DISCHARGE, RELEASE OR TERMINATION IS ASSERTED. ANY ALLEGED AMENDMENT,
REVISION, WAIVER, DISCHARGE, RELEASE OR TERMINATION WHICH IS NOT SO DOCUMENTED
SHALL NOT BE EFFECTIVE AS TO ANY PARTY.
IN WITNESS WHEREOF, this Third Amendment is executed effective as of the
date first written above.
BORROWER: SUMMIT BANCSHARES, INC.
By: /s/ Philip E. Norwood
----------------------------------
Its: Chairman
--------------------------------
By: /s/ Bob G. Scott
---------------------------------
Its: Executive Vice President
---------------------------------
LENDER: THE FROST NATIONAL BANK
By: /s/ Jerry L. Crutsinger
--------------------------------
Its: Vice President
--------------------------------
<PAGE>
SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES OF THE CORPORATION
Subsidiaries State of Incorporation
- ------------ ----------------------
Summit National Bank, Fort Worth, Texas National Association
Summit Community Bank, N.A., Fort Worth, Texas National Association
Summit Bancservices, Inc., Fort Worth, Texas Texas
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
TO INCORPORATION BY REFERENCE
The Board of Directors
SUMMIT BANCSHARES, INC.
We consent to incorporation by reference in the registration statement on Form
S-8 of SUMMIT BANCSHARES, INC. (File #33-68974) of our report dated January 22,
1999, relating to the consolidated balance sheets of SUMMIT BANCSHARES, INC. and
subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity, and cash flows and related
schedules for each of the years in the three-year period ended December 31,
1998, which report appears in the December 31, 1998 annual report on Form 10-K
of SUMMIT BANCSHARES, INC.
/s/ Stovall, Grandey & Whatley
STOVALL, GRANDEY & WHATLEY
Fort Worth, Texas
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF SUMMIT BANCSHARES, INC., AS OF DECEMBER 31, 1998,
AND THE RELATED STATEMENTS OF INCOME, CHANGES IN SHAREHOLDERS' EQUITY AND CASH
FLOWS FOR THE PERIOD ENDING DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 26,735
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 38,706
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 121,417
<INVESTMENTS-CARRYING> 26,595
<INVESTMENTS-MARKET> 26,959
<LOANS> 305,833
<ALLOWANCE> 4,724
<TOTAL-ASSETS> 532,764
<DEPOSITS> 465,500
<SHORT-TERM> 17,839
<LIABILITIES-OTHER> 3,190
<LONG-TERM> 0
8,090
0
<COMMON> 0
<OTHER-SE> 38,145
<TOTAL-LIABILITIES-AND-EQUITY> 532,764
<INTEREST-LOAN> 28,000
<INTEREST-INVEST> 7,013
<INTEREST-OTHER> 2,052
<INTEREST-TOTAL> 37,065
<INTEREST-DEPOSIT> 12,786
<INTEREST-EXPENSE> 13,478
<INTEREST-INCOME-NET> 23,587
<LOAN-LOSSES> 785
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 14,173
<INCOME-PRETAX> 12,479
<INCOME-PRE-EXTRAORDINARY> 8,146
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,146
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 5.28
<LOANS-NON> 5,049
<LOANS-PAST> 3
<LOANS-TROUBLED> 6
<LOANS-PROBLEM> 10,468
<ALLOWANCE-OPEN> 4,065
<CHARGE-OFFS> 343
<RECOVERIES> 217
<ALLOWANCE-CLOSE> 4,724
<ALLOWANCE-DOMESTIC> 4,355
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 369
</TABLE>
