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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 000-21267
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SUMMIT BANK CORPORATION
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GEORGIA 58-1722476
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4360 CHAMBLEE-DUNWOODY ROAD, ATLANTA, GEORGIA 30341
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 454-0400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock par value $.01
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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 required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X or 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. [X]
As of March 15, 1998, the aggregate market value of the Common Stock held
by persons other than directors and executive officers of the registrant was
$26,511,533 as determined by the most recent trades of registrant's Common Stock
known to the registrant. The exclusion of all directors and executive officers
of the registrant for purposes of this calculation should not be construed as a
determination that any particular director or executive officer is an affiliate
of the registrant.
As of March 15, 1998, there were 1,815,363 shares of the Registrant's
Common Stock outstanding.
Documents Incorporated by Reference
Part III information is incorporated herein by reference, pursuant to
Instruction G to Form 10-K, from Summit's Proxy Statement for its 1998 Annual
Shareholders' Meeting. Certain Part II information required by Form 10-K is
incorporated by reference from the Summit Bank Corporation Annual Report to
Shareholders as indicated below, which is included as an exhibit hereto.
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SUMMIT BANK CORPORATION
FORM 10-K CROSS-REFERENCE INDEX
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Page
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Form Annual Proxy
10-K Report Statement
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PART 1.
<S> <C> <C> <C> <C>
ITEM 1. Business 3-12
(a) Overview 3
(b) Banking Services 3-4
(c) Location and Service Area 4-5
(d) Asian-American Market 5
(e) International Services Market 5
(f) Supervision and Regulation 5-12
(g) Competition 12
(h) Employees 12
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of
Security Holders 13
PART II.
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters 14
ITEM 6. Selected Financial Data 15
ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-22
ITEM 8. Financial Statements and Supplementary
Data 23-44
ITEM 9. Not Applicable 16
PART III.
ITEM 10. Directors and Executive Officers of the
Registrant 2-7
ITEM 11. Executive Compensation 9-13
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management 8,15-16
ITEM 13. Certain Relationships and Related
Transactions 7
PART IV.
ITEM 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 18-19
SIGNATURES 20-21
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PART 1.
ITEM 1. BUSINESS
OVERVIEW
Summit Bank Corporation ("Summit" or the "Company") was organized as a Georgia
corporation on October 15, 1986, primarily to become a bank holding company by
acquiring all the common stock of The Summit National Bank (the "Bank") upon its
formation. The Bank commenced business on March 10, 1988, and the primary
activity of the Company since then has been the ownership and operation of the
Bank.
The Bank was organized as a banking association under the laws of the United
States. The Bank is engaged in the commercial banking business from its main
office and four branch offices, which are located in its primary service area in
northern metropolitan Atlanta, Georgia. The Bank seeks to serve four principal
markets: (i) individuals, professionals, and small to medium-sized businesses in
the Bank's primary service area; (ii) ethnic communities, principally
Asian-Americans, located in the Atlanta metropolitan area, including businesses
operated by members of such communities; (iii) individuals, professionals, and
businesses in the Atlanta metropolitan area requiring the international
financial transaction services offered by the Bank; and (iv) foreign
corporations and individuals requiring specialized banking services
(international private banking) in the Atlanta metropolitan area.
Management believes the identified markets continue to provide significant
growth opportunities for the Bank to further penetrate these markets by offering
a variety of traditional and specialized banking services emphasizing personal
service, cultural sensitivity and accessibility of management.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically available at
most banks and other financial institutions, including checking accounts, NOW
accounts, savings accounts and other time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposits. The
transaction accounts and time certificates are tailored to the principal market
areas at rates competitive to those offered in the area. In addition, retirement
accounts such as Individual Retirement Accounts ("IRAs") are available. All
deposit accounts are insured by the Federal Deposit Insurance Corporation (the
"FDIC") up to the maximum amount ($100,000 per depositor). The Bank solicits
these accounts from individuals, businesses, associations, and governmental
authorities.
There are certain risks inherent in making all loans. A principal economic risk
inherent in making loans is the creditworthiness of the borrower. Other risks
inherent in making loans include risks with respect to the period of time over
which loans may be repaid, risks resulting from changes in economic and industry
conditions, risks inherent in dealing with individual borrowers and, in the case
of a collateralized loan risks resulting from uncertainties as to the future
value of the collateral. Management maintains an allowance for loan losses based
on, among other things, an evaluation of economic conditions and regular reviews
of delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for potential loan losses based upon a
percentage of the outstanding balance and for specific loans when their ultimate
collectibility is considered questionable.
The Bank offers a full range of short to medium-term commercial and personal
loans. Commercial loans include both secured and unsecured loans for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate and improvements), and purchase of equipment and
machinery. The Bank offers government guaranteed loans under the Small Business
Administration ("SBA") loan program. After origination of these loans, the Bank
usually sells the guaranteed portion of the loan (approximately 70%) resulting
in gains on the sale. In addition, the Bank retains the servicing rights to
these loans which generate servicing income on the portion sold. Personal (or
consumer) loans include
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secured and unsecured loans for financing automobiles, home improvements,
education, and personal investments. The Bank also offers, through an alliance
with Independent Mortgage Associates, Inc. ("IMA"), permanent mortgage loans.
IMA pays a referral fee to the Bank for each mortgage loan closed.
In addition to deposit and loan services, the Bank's other domestic services
include 24-hour multi-lingual telephone banking, cash management services,
investment sweep accounts, safe deposit boxes, travelers checks, direct deposit
of payroll and social security checks, as well as automatic drafts for various
accounts. The Bank is a member of the HONOR and CIRRUS networks of automated
teller machines that may be used by Bank customers in major cities throughout
Georgia, the United States, and in various cities worldwide. The automated
teller machine located at the Asian Banking Center branch location also offers
multi-lingual screens for Asian patrons. The Bank also offers both VISA and
MasterCard credit cards to its customers through a third party vendor.
The Bank's international banking services include inbound and outbound
international funds transfers, foreign collections, and import and export
letters of credit. The Bank is also actively involved in the issuance of bankers
acceptances. These drafts or bills of exchange facilitate international trade
and are available upon completion of a diligent credit review process. In
addition, the Bank offers private banking services to foreign individuals and
corporations in the establishment of business operations in Atlanta. Specialized
private banking services include bill paying, statement and mail holding,
currency exchange, international funds transfers and arranging personal lines of
credit (including credit card services) for qualified foreign nationals
conducting business in the United States.
In addition, the Bank's private banking group assists U.S. domiciled executives
with a variety of personal banking services designed to support international
business objectives. These services include introductions to correspondent
financial services as well as to general business contacts maintained by the
Company in international trade markets.
The Bank does not presently offer personal or corporate trust services (other
than retirement custodial services for IRAs and similar plans).
LOCATION AND SERVICE AREA
The Bank leases its main office at 4360 Chamblee-Dunwoody Road, Atlanta, Georgia
30341, which is in a five-story office building near the intersection of
Interstate 285 and Chamblee-Dunwoody Road, in DeKalb County. The Bank has a
6,000 square foot branch facility situated within an 18,000 square foot office
building owned by the Company which was completed in August 1994 located at 3490
Shallowford Road in Chamblee, DeKalb County, Georgia. The Bank has also leased a
branch facility at One Paces West, Suite 150, 2727 Paces Ferry Road in Vinings
which it acquired in December 1993 through the purchase of Vinings Bank and
Trust, N.A. ("Vinings".) In 1996, the Bank purchased a 4,560 square foot
building situated on approximately 1.2 acres located at 595 Franklin Road,
Marietta, Georgia to serve as its fourth office and a 7,700 square foot building
situated on approximately 1.3 acres located at 3280 Holcomb Bridge Road,
Norcross, Georgia to serve as its fifth office.
The Bank's primary service area ("PSA") is comprised of a section of North
Atlanta, Georgia located in portions of DeKalb, Fulton, Cobb, and Gwinnett
Counties. The PSA includes the city of Chamblee, portions of the cities of
Doraville and Norcross, the DeKalb-Peachtree Airport, the Northlake and
Perimeter Malls in DeKalb County, Cumberland and Town Center Malls in Cobb
County and the Perimeter Business Park and the Peachtree Corners area including
Technology Park. The PSA is traversed by major thoroughfares such as Interstate
285 to the North, Buford Highway and Peachtree Industrial Boulevard in the
South, Clairmont and Shallowford Roads in the East, and Interstate 75 in the
West.
The Bank signed a letter of intent on January 13, 1998 to acquire a California
chartered bank setting forth mutual intentions for the California institution to
be acquired by the Bank. The tentative agreement provides for the Bank to
purchase the institution for a cash price of $6.25 million. The institution had
total (unaudited) assets of $40 million and stockholders' equity of $3 million
at December 31, 1997. The merger
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is subject to execution of a definitive agreement and approval of the California
Department of Financial Institutions, the Comptroller of the Currency, the
California institution's shareholders, and any and all other necessary
regulatory authorities, together with any and all necessary contractual and
creditor consents.
ASIAN-AMERICAN MARKET
The Atlanta Asian-American population, one of the Bank's principal target
markets, consists of members of the Korean, Chinese, Japanese, Indian, and
Southeast Asian communities. The 1990 United States census indicates that the
Atlanta Asian-American population exceeds 75,000 people, with the majority of
this population located in north Atlanta including parts of DeKalb, Fulton, and
Cobb counties.
Management believes the Bank's main and branch offices are convenient to a large
number of Atlanta's Asian-Americans. At year-end 1997, approximately 50% of the
Bank's customers were Asian-American. The oldest and largest church serving the
Korean community is also located within the Bank's PSA.
Management believes the Atlanta Asian-American community can be characterized as
generally having a high savings rate, low unemployment, and a commitment to
economic advancement through education and hard work. A significant percentage
of the Atlanta Asian-American population consists of first generation U.S.
immigrants, many of whom management believes are constrained in their current
use of banking services at other institutions by language and other cultural
barriers.
The Bank has employed, and will continue to employ, personnel with Asian
language skills and first-hand knowledge of the communities to be served.
Management believes language ability and cultural sensitivity combined with
accessibility to senior management enhances the Bank's competitive position in
this market.
INTERNATIONAL SERVICES MARKET
Management believes a growing number of domestic businesses in the Atlanta
metropolitan area (and, in particular, a growing number of small to medium-sized
businesses) require the international services provided by the Bank. While a
number of financial institutions operating in the Bank's markets offer such
services, they are typically offered from international banking departments
located in downtown office facilities or an out-of-state location; personnel in
branch facilities closer to smaller businesses generally are not trained to
address these specialized needs. Management believes the Bank has penetrated,
and will be able to further penetrate, this market by providing those businesses
with convenient access to personnel specially trained to provide such services.
The Bank does not engage in off-shore buyer financing or cross border lending.
Occasionally, the Bank discounts short-term letters of credit drafts for
selected correspondent banks under approved facilities. Management is of the
opinion that the commercial and political risks are acceptable based on our
assessment of available information on the correspondent banks and the
respective countries. As of December 31, 1997, the total outstanding under such
facilities was $1,630,616.
In addition to domestic businesses requiring international banking services,
management believes a growing number of foreign businesses operating in Atlanta
along with their executives and employees, frequently require the type of
international banking services provided by the Bank. Foreign nationals
associated with such businesses are often unfamiliar with United States banking
practices. The Bank has personnel with the requisite language and cultural
skills suited to serve this clientele. Management further believes the
international banking experience of management of the Bank, along with the
contacts of the directors of the Company and the Bank in the international and
domestic business communities, enhances the Bank's ability to compete in this
target market.
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to banks and bank holding companies and provides certain
specific information related to the Company.
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GENERAL
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). As such, the Company is subject
to the supervision, examination, and reporting requirements of the BHC Act and
the regulations of the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before: (a) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
voting shares of the bank; (b) it or any of its subsidiaries, other than a bank,
may acquire all or substantially all of the assets of any bank; or (c) it may
merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that the Company, and any other bank holding company located in
Georgia may now acquire a bank located in any other state, and any bank holding
company located outside Georgia may lawfully acquire any Georgia-based bank,
regardless of state law to the contrary, in either case subject to certain
deposit-percentage, aging requirements, and other restrictions. The Interstate
Banking Act also generally provides that, as of June 1, 1997, national and
state-chartered banks may branch interstate through acquisitions of banks in
other states. By adopting legislation prior to that date, a state had the
ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether.
In response to the Interstate Banking Act, the Georgia General Assembly adopted
the Georgia Interstate Banking Act, which was effective on July 1, 1995. The
Georgia Interstate Banking Act provides that (a) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (b) interstate acquisitions of institutions
located in Georgia will be permitted by institutions in states that allow
national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted the
Georgia Interstate Branching Act which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch network.
The Georgia Interstate Branching Act also allows banks to establish de novo
branches on a limited basis as of July 1, 1996. Beginning July 1, 1998, the
number of de novo branches that may be established will no longer be limited.
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The BHC Act generally prohibits the Company from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank holding
companies. Despite prior approval, the Federal Reserve has the power to order a
holding company or its subsidiaries to terminate any activity or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit Insurance
Corporation (the "FDIC"), and as such, its deposits are insured by the FDIC to
the maximum extent provided by law. Such subsidiary is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations, and it is supervised and examined by one or more state or
federal bank regulatory agencies.
The Office of the Comptroller of the Currency (the "OCC") regularly examines the
operations of the Bank and is given authority to approve or disapprove mergers,
consolidations, the establishment of branches, and similar corporate actions.
The OCC also has the power to prevent the continuance or development of unsafe
or unsound banking practices or other violations of law.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking subsidiary.
The principal sources of cash flow of the Company, including cash flow to pay
dividends to its shareholders, are dividends by the Bank. There are statutory
and regulatory limitations on the payment of dividends by the Bank to the
Company as well as by the Company to its shareholders.
If, in the opinion of the federal banking regulator, a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "-- Prompt Corrective
Action." Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
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At December 31, 1997, under dividend restrictions imposed under federal and
state laws, the Bank, without obtaining governmental approvals, could declare
aggregate dividends to the Company of up to approximately $3.6 million plus 1998
net earnings of the Bank.
The payment of dividends by the Company and the Bank may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the appropriate federal banking
regulator in the case of Bank. There are two basic measures of capital adequacy
for bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio") of
total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least half
of Total Capital must comprise common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves ("Tier 2 Capital"). At December 31, 1997, the Company's consolidated
Total Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital Ratio (i.e.,
the ratio of Tier 1 Capital to risk-weighted assets) were 17.8% and 16.5%,
respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at December 31, 1997 was 11.2%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The Bank is subject to risk-based and leverage capital requirements adopted by
the OCC, which are substantially similar to those adopted by the Federal Reserve
for bank holding companies.
The Bank was in compliance with applicable minimum capital requirements as of
December 31, 1997. The Company has not been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it or its
subsidiary depository institution.
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Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements. See "-- Prompt
Corrective Action."
The federal bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels. In
this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA, recently
adopted final regulations, which will become mandatory on January 1, 1998,
requiring regulators to consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in the evaluation of a bank's
capital adequacy. The bank regulatory agencies' methodology for evaluating
interest rate risk requires banks with excessive interest rate risk exposure to
hold additional amounts of capital against such exposures. The market risk rules
apply to any bank or bank holding company whose trading activity equals 10% or
more of its total assets, or whose trading activity equals $1 billion or more.
SUPPORT OF SUBSIDIARY INSTITUTION
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for, and to commit resources to support its banking
subsidiary. This support may be required at times when, absent such Federal
Reserve policy, the Company may not be inclined to provide it. In addition, any
capital loans by a bank holding company to its banking subsidiary are
subordinate in right of payment to deposits and to certain other indebtedness of
the Bank. In the event of a bank holding company's bankruptcy, any commitment by
the bank holding company to a federal bank regulatory agency to maintain the
capital of a banking subsidiary will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(a) the default of a commonly controlled FDIC-insured depository institution or
(b) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The
subsidiary depository institution of the Company is subject to these
cross-guarantee provisions. As a result, any loss suffered by the FDIC in
respect of the subsidiary would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against the
depository institution's banking affiliates, and a potential loss of the
Company's investment in such other subsidiary depository institutions.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, which became effective in
December 1992, the federal banking regulators are required to establish five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and to take
certain mandatory supervisory actions, and are authorized to take other
discretionary actions, with respect to institutions in the three
undercapitalized categories, the severity of which will depend upon the capital
category in which the
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institution is placed. Generally, subject to a narrow exception, FDICIA requires
the banking regulator to appoint a receiver or conservator for an institution
that is critically undercapitalized. The federal banking agencies have specified
by regulation the relevant capital level for each category.
The capital levels established for each of the categories are as follows:
<TABLE>
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Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
====================================================================================================================
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
- -------------------------- -------------------- ------------------------- ---------------------- -------------------
Adequately Capitalized 4% or more 8% or more 4% or more --
- -------------------------- -------------------- ------------------------- ---------------------- -------------------
Undercapitalized less than 4% Less than 8% less than 4% --
- -------------------------- -------------------- ------------------------- ---------------------- -------------------
Significantly less than 3% Less than 6% less than 3% --
Undercapitalized
- -------------------------- -------------------- ------------------------- ---------------------- -------------------
Critically 2% or less -- -- --
Undercapitalized tangible equity
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</TABLE>
For purposes of the regulation, the term "tangible equity" includes core capital
elements counted as Tier 1 Capital for purposes of the risk-based capital
standards, plus the amount of outstanding cumulative perpetual preferred stock
(including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling holding company under FDICIA to fund a capital
restoration plan is limited to the lesser of 5% of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
At December 31, 1997, the Bank had the requisite capital levels to qualify as
well capitalized.
FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (a) well capitalized;
10
<PAGE> 11
(b) adequately capitalized; and (c) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates for members of both the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") for the first half of 1995 ranged
from 23 basis points (0.23% of deposits) for an institution in the highest
category (i.e., "well capitalized" and "healthy") to 31 basis points (0.31% of
deposits) for an institution in the lowest category (i.e., "undercapitalized"
and "substantial supervisory concern"). These rates were established for both
funds to achieve a designated ratio of reserves to insured deposits (i.e.,
1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC reduced
the assessment rate applicable to BIF deposits in two stages, so that, beginning
in 1996, the deposit insurance premiums for 92% of all BIF members in the
highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the existing assessment
rate range of 23 to 31 basis points for SAIF members for the foreseeable future
given the undercapitalized nature of that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates had
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits, the Deposit Insurance Funds
Act of 1996 (the "Funds Act") was enacted by Congress as part of the omnibus
budget legislation and signed into law on September 30, 1996. As directed by the
Funds Act, the FDIC implemented a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's SAIF-insured deposits
held as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions).
In addition, the FDIC has implemented a revision in the SAIF assessment rate
schedule that effected, as of October 1, 1996 (a) a widening in the assessment
rate spread among institutions in the different capital and risk assessment
categories, (b) an overall reduction of the assessment rate range assessable on
SAIF deposits of from 0 to 27 basis points, and (c) a special interim assessment
rate range for the last quarter of 1996 of from 18 to 27 basis points on
institutions subject to Financing Corporation ("FICO") assessments. Effective
January 1, 1997, assessments to help pay off the $780 million in annual interest
payments on the $8 billion FICO bonds issued in the late 1980s as part of the
government rescue of the thrift industry were imposed on both BIF- and
SAIF-insured deposits in annual amounts presently estimated at 1.29 basis points
and 6.44 basis points, respectively. Beginning in January 2000, BIF- and SAIF-
insured institutions will share the FICO interest costs at equal rates currently
estimated 2.43 basis points.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
11
<PAGE> 12
Because the Bank's risk classification was, and still is, the lowest allowable,
the Bank was not required to pay an assessment for deposit insurance in 1997,
nor will it be required to pay a deposit insurance assessment in 1998. The Bank
was required to pay the FICO assessments in 1997 and will also be required to
pay these assessments in 1998. Any increase in deposit insurance premiums for
the Bank will increase its cost of funds, and there can be no assurance that
such cost can be passed on to the Bank's customers.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation's financial institutions. It cannot be predicted whether or what
form any proposed regulation or statute will be adopted or the extent to which
the business of the Company may be affected by such regulation or statute.
COMPETITION
The banking business is highly competitive, particularly in the metropolitan
Atlanta area. In one or more aspects of their businesses, the Company and the
Bank compete with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, and brokerage and
investment banking companies operating in the metropolitan Atlanta area and
elsewhere. Many of these competitors have substantially greater resources and
lending limits than the Bank and may offer certain services, such as trust
services, the Company and the Bank do not provide. The Bank has several
employees who are fluent in foreign languages including Mandarin, Cantonese,
Korean, German, French, Spanish and others which further enhances the Bank's
ability to compete in target markets. A competing new bank was opened in August
1995 which targets the same Asian-American customer base as the Bank. The
competition from this new bank has not materially adversely impacted the Bank's
performance or profitability to date. Management believes that the Company and
the Bank will be able to continue to compete effectively with these financial
institutions, but no assurances can be given in this regard.
FISCAL AND MONETARY POLICY
Banking is a business which depends on interest rate differentials. In general,
the difference between the interest paid by a bank on its deposits and its other
borrowings, and the interest received by a bank on its loans and securities
holdings, constitutes the major portion of a bank's earnings. Thus, the earnings
and growth of the Company and the Bank are subject to the influence of economic
conditions generally, both domestic and foreign, and also to the monetary and
fiscal policies of the United States and its agencies, particularly the Federal
Reserve. The Federal Reserve regulates the supply of money through various
means, including open market dealings in United States government securities,
the discount rate at which banks may borrow from the Federal Reserve, and the
reserve requirements on deposits.
The monetary policies of the Federal Reserve historically have had a significant
effect on the operating results of commercial banks and will continue to do so
in the future. The conditions in the national and international economies and
money markets, as well as the actions and changes in policy by monetary and
fiscal authorities, and their effect on the Company and the Bank, cannot be
predicted.
EMPLOYEES
As of March 15, 1998, the Bank had 90 full-time equivalent employees. Except to
support normal growth of business, additional hiring is not anticipated in 1998.
The employees are not part of any collective bargaining agreement and employee
relations with the Company are considered good.
12
<PAGE> 13
ITEM 2. PROPERTIES
The Bank's main office is at 4360 Chamblee-Dunwoody Road, Atlanta, DeKalb
County, Georgia 30341, on the ground floor of a five-story 100,000 square foot
office building near the intersection of Interstate 285 and Chamblee-Dunwoody
Road. The Bank has signed a lease for 19,403 square feet on the main and third
floors of the building, which lease provides base rental at $14.25 per square
foot per annum during the term of the lease and rights to extend its occupancy
of the leased space twice, for one additional year each, at a base rate of
$14.50 per square foot per annum. The initial term of the lease expires in
December 1998. The main office on the first floor contains 8,897 square feet of
space which includes six teller stations, two customer services stations, the
small business lending department, the loan operations department, offices for
loan officers, and the main conference room. The Bank has an ATM attached to the
building. The third floor of the main office houses the international
department, personnel department, the operations department, and the executive
offices.
The Company owns an office building containing 16,639 square feet of leasable
space located on 2.77 acres of land in Atlanta's Asian-American business
district on Shallowford Road near Buford Highway. The Company leases 6,000
square feet of space to the Bank at a cost of $12.00 per square foot for a
branch office. The Bank also leases 760 square feet on the third floor which is
provided for Independent Mortgage Associates. The Company currently has leased
9,879 square feet to other tenants which leases provide base rental rates from
$12.53 to $14.19 per square foot per annum. The Company incurred a total cost of
$2.2 million for the land and building including improvements and tenant
finishes. In addition, the branch has approximately $200,000 in furniture,
fixtures and equipment at this site. This branch office provides six teller
stations, five customer service stations, and five offices for lending officers
and management. In addition, the Bank has installed a drive-through ATM and
drive-through teller window.
The Bank's branch office in the Vinings area of Cobb County is located at One
Paces West, Suite 150, 2727 Paces Ferry Road, N.W., Atlanta, Georgia 30339. The
office building contains 246,515 square feet of leasable space near the
intersection of Interstate 285 and Paces Ferry Road. The Vinings branch office
contains 5,266 square feet of space which the Bank has leased at a base rate of
$17.25 per square foot per annum. This space consists of four teller stations,
two drive-in windows, four customer service stations, five offices for
management and lending officers and a conference room. The Bank also has a
walk-up ATM at this location. The initial term of the lease expires June 2002.
In January 1996, the Bank acquired a 4,560 square foot building situated on 1.2
acres located at 595 Franklin Road, Marietta, Georgia. This office contains six
teller stations, one drive-up window, three drive-in lanes, three offices for
lending officers and management and also has a walk-up ATM. The branch opened in
May 1996. In August 1996, the Bank acquired a two-story 7,700 square foot
building situated on 1.3 acres located at 3280 Holcomb Bridge Road, Norcross,
Georgia. This office contains eight teller stations, one drive-up window, three
drive-in lanes, six offices for lending officers and management on the ground
floor and a drive-through ATM. The second floor contains additional office space
which will be used at a later date. The branch opened in November 1996.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings, other than ordinary routine litigation
incidental to their business, pending against or involving assets of the Company
or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security-holders, through the solicitation of proxies
or otherwise.
13
<PAGE> 14
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company currently has three market makers in the common stock of the
Company. The Company's shares are listed on the Nasdaq National Market under the
symbol "SBGA". All transactions involving the sale and purchase of shares of the
Common Stock known to the Company were facilitated through the three market
makers. As of March 15, 1998 the quoted purchase price for the Company's shares
was $22.38 per share. There were approximately 369 holders of record of the
Company's Common Stock at March 15, 1998.
The Company began paying cash dividends in 1995 for a total of $.28 per share in
that year. The Company paid a total of $.31 and $.35 per share in cash dividends
in 1996 and 1997, respectively. Although the Company currently anticipates
continuing the payment of cash dividends on a quarterly basis, there can be no
assurance that Summit's dividend policy will remain unchanged in the future. The
declaration and payment of dividends, thereafter, will depend upon business
conditions, operating results, capital and reserve requirements, and the Board
of Directors' consideration of other relevant factors. In addition, the ability
to pay dividends in the future will depend, in part, on the earnings of the Bank
and its ability to pay dividends to the Company, as to which there can be no
assurance.
For additional information concerning the Company's quarterly stock prices and
quarterly cash dividends see page 9, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1997 Annual
Report of Shareholders which is incorporated by reference herein.
The Bank may only pay dividends out of its net profits then on hand, after
deducting expenses, including losses and bad debts. In addition, the Bank is
prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of the Bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the OCC will be required if the total of all dividends declared in any
calendar year by the Bank exceeds the Bank's net profits to date, as defined,
for that year combined with its retained net profits for the preceding two years
less any required transfers to surplus. The Bank declared and paid cash
dividends of $505,000 to the Company in 1997. As of December 31, 1997, the Bank
had cumulative net retained profits for 1996 and 1997 of $3,608,000, which is
entirely available for dividends to the Company in 1998 plus 1998 net earnings,
if any, of the Bank, provided that the necessary transfers of net profits to
surplus were made. The OCC also has the authority under federal law to enjoin a
national bank from engaging in what in its opinion constitutes an unsafe or
unsound practice in conducting its business, including the payment of a dividend
under certain circumstances.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the years
ended December 31, 1997, 1996, 1995, 1994, and 1993 is unaudited and has been
derived from the Consolidated Financial Statements of the Company and its
subsidiaries, and from records of the Company. The information presented below
should be read in conjunction with the Consolidated Financial Statements, the
Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Averages are derived
from daily balances.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) As of December 31,
Balance Sheet Data 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 180,296 $ 154,248 $ 130,076 $ 108,146 $ 104,526
Investment securities 62,962 38,584 32,702 19,274 19,970
Loans 98,892 85,808 78,177 73,801 73,190
Allowance for loan losses 1,468 1,931 1,686 1,603 1,774
Deposits 144,795 132,899 109,816 90,639 88,376
Federal Home Loan Bank advance 10,000 1,000 -- -- --
Other borrowed funds 2,756 657 -- -- 750
Obligations under capital lease 81 118 152 166 --
Stockholders' equity 19,778 16,936 15,413 13,273 11,441
<CAPTION>
Year Ended December 31,
Statement of Income Data 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 13,475 $ 11,356 $ 10,101 $ 8,155 $ 6,117
Interest expense 5,470 4,520 4,070 2,800 2,354
Net interest income 8,005 6,836 6,031 5,355 3,763
Provision for loan losses 540 404 397 430 611
Net interest income after
provision for loan losses 7,465 6,432 5,634 4,925 3,152
Non-interest income 3,460 3,361 3,311 3,050 2,635
Non-interest expenses 7,156 6,411 5,802 5,209 4,211
Income tax expense (benefit) 1,319 1,174 1,042 838 (82)
Net income $ 2,450 $ 2,208 $ 2,101 $ 1,928 $ 1,658
Per Share Data
Book value per share at year end $ 13.28 $ 12.03 $ 10.95 $ 9.43 $ 8.13
Basic earnings per share 1.71 1.57 1.49 1.37 1.18
Diluted earnings per share 1.50 1.43 1.49 1.37 1.18
Weighted-average shares outstanding - basic 1,436,023 1,407,688 1,407,688 1,407,688 1,407,688
Weighted-average shares outstanding - diluted 1,632,586 1,546,332 1,414,670 1,407,688 1,407,688
Dividends declared $ .35 $ .31 $ .28 -- --
Dividend payout ratio 20.47% 19.75% 18.79% -- --
Ratios
Return on average assets 1.47% 1.59% 1.74% 1.78% 1.95%
Return on average equity 13.36% 13.80% 15.09% 15.65% 16.02%
Average equity/average assets 11.03% 11.53% 11.51% 11.37% 12.21%
Net interest margin 5.26% 5.44% 5.50% 5.39% 4.82%
Non-performing assets/total loans
and other real estate 1.80% 1.07% .14% .37% 2.67%
Allowance for loan losses/total loans 1.48% 2.25% 2.16% 2.17% 2.42%
Non-interest expense/net
interest income and non-interest income 62.42% 62.87% 62.11% 61.98% 65.82%
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference to the 1997 Annual Shareholders' Report -- See Cross
Reference Index on page 2.
The Company has not provided quantitative and qualitative disclosures of market
risk as required by Item 305 of Regulation S-K because it meets the requirements
of a small business issuer.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference to the 1997 Annual Shareholders' Report -- See Cross
Reference Index on page 2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Definitive Proxy Statement for the 1998 Annual
Shareholders' Meeting -- See Cross Reference Index on page 2.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Definitive Proxy Statement for the 1998 Annual
Shareholders' Meeting -- See Cross Reference Index on page 2.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Definitive Proxy Statement for the 1998 Annual
Shareholders' Meeting -- See Cross Reference Index on page 2.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Definitive Proxy Statement for the 1998 Annual
Shareholders' Meeting -- See Cross Reference Index on page 2.
17
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements - The consolidated financial statements, notes
to consolidated financial statements, and independent auditors'
report thereon, are incorporated by reference to the 1997 Annual
Shareholders' Report -- See Cross Reference Index on page 2.
2. Financial Statement Schedules - These are omitted as they are not
required or are not applicable.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Exhibit
Number Exhibit
3.1 Amended and Restated Articles of Incorporation of Summit Bank
Corporation (incorporated by reference to Exhibit 3.2 of Summit Bank
Corporation's Registration Statement on Form S-1, Amendment No. 3
(Registration Number 33-16366)).
3.2 Bylaws of Summit Bank Corporation, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987.)
4.1 The rights of security holders are defined in (i) Articles Five, Six,
Nine, Ten, Eleven, Thirteen, Fourteen, and Sixteen of the Amended and
Restated Articles of Incorporation of Summit Bank Corporation and (ii)
Articles Two, Three, Eight, Ten, and Eleven of the amended Bylaws of
Summit Bank Corporation, (incorporated by reference to Exhibits 3.1 and
3.2 respectively, to the Company's Annual Report on Form 10-K for the
year ended December 1994).
10.1* Summit Bank Corporation 1987 Key Employee Incentive Stock Option Plan,
as amended and restated as of February 28, 1989 (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991).
10.2 Form of Summit Bank Corporation Organizer's Warrant Agreement
(incorporated by reference to Exhibit 10.4 of Summit Bank Corporation's
Registration Statement on Form S-1 (Registration Number 33-16366)).
10.3 Lease Agreement dated December 3, 1993, between Baker Dennard Co.,
Lessor, and Summit National Bank, Lessee (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
10.4 Lease agreement dated June 16, 1995, between ZML-Paces Limited
Partnership, Lessor and Summit National Bank, Lessee (incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.)
18
<PAGE> 19
10.5* Change in Control Agreement dated August 25, 1995 by and between Pin Pin
Chau, President of the Summit National Bank, and the Summit National
Bank (incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.6* Change in Control Agreement dated August 25, 1995 by and between David
Yu, Chairman of the Summit National Bank, and the Summit National Bank
(incorporated by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.7* Change in Control Agreement dated August 25, 1995 by and between Alec
Dudley, Executive Vice President of the Summit National Bank, and the
Summit National Bank (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.8* Change in Control Agreement dated August 25, 1995 by and between Gary
McClung, Executive Vice President of the Summit National Bank, and the
Summit National Bank (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.9 Agreement to purchase real estate dated December 18, 1995 between SBC
Properties, L.L.C. (as agent for the Summit National Bank) and SunTrust
Bank, Atlanta (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.10 Agreement to purchase real estate dated June 20, 1996 between The Summit
National Bank and Nationsbank, NA. (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.)
11.1 Statement Regarding Computation of Per Share Earnings
13.1 Annual Report to Shareholders
21.1 Subsidiaries of Summit Bank Corporation (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
* Denotes a management contract compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
19
<PAGE> 20
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 BANK CORPORATION
By /s/ David Yu
---------------------------------
David Yu, President, and
Chief Executive Officer
Date March 20, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ David Yu Director, President and Chief Dated: March 20, 1998
- ---------------------------- Executive Officer
David Yu
/s/ Pin Pin Chau Director, Executive Dated: March 18, 1998
- ---------------------------- Vice President
Pin Pin Chau
/s/ Gary K. McClung Principal Financial Officer Dated: March 25, 1998
- ---------------------------- and Principal Accounting
Gary K. McClung Officer and Secretary
/s/ P. Carl Unger Director, Chairman Dated: March 21, 1998
- ---------------------------- of the Board
P. Carl Unger
/s/ Jack N. Halpern Director, Dated: March 18, 1998
- ---------------------------- Vice Chairman
Jack N. Halpern of the Board
/s/ Aaron I. Alembik Director Dated: March 19, 1998
- ----------------------------
Aaron I. Alembik
/s/ Gerald L. Allison Director Dated: March 20, 1998
- ----------------------------
Gerald L. Allison
Director
- ---------------------------- Dated:
Paul C.Y. Chu
/s/ Peter M. Cohen Director Dated: March 18, 1998
- ----------------------------
Peter M. Cohen
/s/ Donald R. Harkleroad Director Dated: March 18, 1998
- ----------------------------
Donald R. Harkleroad
/s/ Daniel T. Huang Director Dated: March 18, 1998
- ----------------------------
Daniel T. Huang
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
/s/ Shafik H. Ladha Director Dated: March 18, 1998
- ------------------------------
Shafik H. Ladha
/s/ James S. Lai Director Dated: March 18, 1998
- ------------------------------
James S. Lai
/s/ Sion Nyen Lai Director Dated: March 21, 1998
- ------------------------------
Sion Nyen (Francis) Lai
/s/ Shih Chien (Raymond) Lo Director Dated: March 26, 1998
- ------------------------------
Shih Chien (Raymond) Lo
/s/ Nack Paek Director Dated: March 18, 1998
- ------------------------------
Nack Paek
/s/ Carl L. Patrick, Jr. Director Dated: March 18, 1998
- ------------------------------
Carl L. Patrick, Jr.
/s/ Cecil M. Phillips Director Dated: March 18, 1998
- ------------------------------
Cecil M. Phillips
/s/ W. Clayton Sparrow, Jr. Director Dated: March 18, 1998
- ------------------------------
W. Clayton Sparrow, Jr.
/s/ Howard H.L. Tai Director Dated: March 19, 1998
- ------------------------------
Howard H. L. Tai
</TABLE>
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Pages
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of Summit Bank
Corporation (incorporated by reference to Exhibit 3.2 of Summit Bank
Corporation's Registration Statement on Form S-1, Amendment No.
3(Registration Number 33-16366).
3.2 Bylaws of Summit Bank Corporation, as amended (incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987.)
4.1 The rights of security holders are defined in (i) Articles Five, Six,
Nine, Ten, Eleven, Thirteen, Fourteen, and Sixteen of the Amended and
Restated Articles of Incorporation of Summit Bank Corporation and (ii)
Articles Two, Three, Eight, Ten, and Eleven of the amended Bylaws of
Summit Bank Corporation, as provided in Exhibits 3.1 and 3.2
respectively.
10.1 Summit Bank Corporation 1987 Key Employee Incentive Stock Option Plan,
as amended and restated as of February 28, 1989 (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991).
10.2 Form of Summit Bank Corporation Organizer's Warrant Agreement
(incorporated by reference to Exhibit 10.4 of Summit Bank Corporation's
Registration Statement on Form S-1 (Registration Number 33-16366).
10.3 Lease Agreement dated December 3, 1993, between Baker Dennard Co.,
Lessor, and Summit National Bank, Lessee (incorporated by reference to
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
10.4 Lease agreement dated June 16, 1995, between ZML-Paces Limited
Partnership, Lessor and Summit National Bank, Lessee (incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.)
10.5 Change in Control Agreement dated August 25, 1995 by and between Pin Pin
Chau, President of the Summit National Bank, and the Summit National
Bank (incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.6 Change in Control Agreement dated August 25, 1995 by and between David
Yu, Chairman of the Summit National Bank, and the Summit National Bank
(incorporated by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995.)
10.7 Change in Control Agreement dated August 25, 1995 by and between Alec
Dudley, Executive Vice President of the Summit National Bank, and the
Summit National Bank (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.8 Change in Control Agreement dated August 25, 1995 by and between Gary
McClung, Executive Vice President of the Summit National Bank, and the
Summit National Bank (incorporated by reference to Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.)
10.9 Agreement to purchase real estate dated December 18, 1995 between SBC
Properties, L.L.C. (as agent for the Summit National Bank) and SunTrust
Bank, Atlanta (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.)
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Pages
<S> <C> <C>
10.10 Agreement to purchase real estate dated June 20, 1996 between The Summit
National Bank and Nationsbank, NA. (incorporated by reference to Exhibit
10.11 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.)
11.1 Statement Regarding Computation of Per Share Earnings 25
13.1 Annual Report to Shareholders 26
21.1 Subsidiaries of Summit Bank Corporation (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996).
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule
</TABLE>
23
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Basic net income per share:
Weighted-average shares outstanding 1,436,023 1,407,688 1,407,688
=========== =========== ===========
Net income per share $ 1.71 $ 1.57 $ 1.49
=========== =========== ===========
Diluted earnings per share:
Weighted-average shares outstanding 1,436,023 1,407,688 1,407,688
Dilutive warrants 392,478 463,235 463,235
Dilutive stock options 52,900 41,225 42,425
repurchased under treasury stock method (248,815) (365,816) (498,678)
----------- ----------- ----------
1,632,586 1,546,332 1,414,670
=========== =========== ===========
Net income $ 2,450,000 $ 2,208,000 $ 2,101,000
Diluted net income per share $ 1.50 $ 1.43 $ 1.49
=========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
C O N T E N T S
<TABLE>
<S> <C>
Selected Financial Data IFC
To Our Shareholders 1
Corporate Overview 2
Management's Discussion & Analysis 9
Consolidated Financial Statements 23
Notes to Consolidated Financial Statements 27
Independent Auditors' Report 44
Corporate and Shareholder Information IBC
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of December 31,
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $ 180,296 $ 154,248 $ 130,076 $ 108,146 $ 104,526
Loans 98,892 85,808 78,177 73,801 73,190
Deposits 144,795 132,899 109,816 90,639 88,376
Stockholders' equity 19,778 16,936 15,413 13,273 11,441
Statement of Income Data Year ended December 31,
Net interest income 8,005 6,836 6,031 5,355 3,763
Provision for loan losses 540 404 397 430 611
Non-interest income 3,460 3,361 3,311 3,050 2,635
Non-interest expenses 7,156 6,411 5,802 5,209 4,211
Net Income $ 2,450 $ 2,208 $ 2,101 $ 1,928 $ 1,658
Per Share Data
Book value per share at year end $ 13.28 $ 12.03 $ 10.95 $ 9.43 $ 8.13
Basic earnings per share 1.71 1.57 1.49 1.37 1.18
Diluted earnings per share 1.50 1.43 1.49 1.37 1.18
Weighted-average shares outstanding 1,436,023 1,407,688 1,407,688 1,407,688 1,407,688
Weighted-average shares and
common equivalent shares outstanding 1,632,586 1,546,332 1,414,670 1,407,688 1,407,688
Dividends declared $ .35 $ .31 $.28 -- --
Ratios
Return on average assets 1.47% 1.59% 1.74% 1.78% 1.95%
Return on average equity 13.36% 13.80% 15.09% 15.65% 16.02%
</TABLE>
<PAGE> 2
TO OUR SHAREHOLDERS
Our 1997 results reaffirmed the soundness of our strategic focus: financial
services for small businesses, companies engaged in international trade, and
ethnic customers. We are pleased to report that in 1997 each of these market
segments continued to grow, and Summit strengthened our position with all three.
Achievements of the past year unfolded in an atmosphere of far-reaching change.
Consolidation continued as a dominant industry trend. Banks experienced
heightened competition from non-traditional players in the financial services
field. Many institutions pressed ahead in their efforts to restructure customer
interactions around technology rather than people.
In this environment, Summit stood out from the crowd in two key ways:
1. the relevance and quality of the financial services we provide
for our target markets; and
2. our commitment to make managing finances and creating wealth
easier, more understandable and less stressful--which requires
a highly personal approach along with customer-centered
applications of technology.
Focusing on our distinctive strengths, Summit met asset and profitability goals
for the year. We reached a new high in assets of $180 million, and, continuing a
six-year trend, we had record earnings of $2,450,000. Non-interest-bearing
demand deposit growth was 29%, following a strong 19% growth in 1996. Deposits
rose in all branches, and our two newest branches established themselves solidly
in their East Marietta and Peachtree Corners communities. We continued to grow
the non-interest portion of our income and have laid plans to increase fee
income in 1998.
Quarterly dividends were increased to nine cents per share. As of early 1998,
the stock, which is traded under the symbol "SBGA" on Nasdaq, had reached an
all-time high of $23 per share. Summit was listed in 1997 as one of Georgia's
Top 100 Public Companies by The Atlanta Journal-Constitution.
The pride and dedication of our people are the foundation of Summit's
accomplishments. Again this year, our customers expressed high satisfaction with
the quality of their interactions with Summit people. Emphasis on the personal
and professional development of employees is a pivotal factor in our success.
Going forward, Summit's strategic direction is firm and steady, yet we always
are open to new opportunities to expand our expertise. We have earned a unique
reputation within our market segments by providing a level of service they
regard as superior. Leveraging our special strengths, Summit is well positioned
to deliver growing value to shareholders and customers alike.
We thank the Summit staff for their outstanding efforts in 1997, and we greatly
appreciate the trust that you, our shareholders, have placed in us.
Sincerely,
/s/ P. Carl Unger,
- ---------------------------------
P. Carl Unger, Ph.D.
Chairman, Summit Bank Corporation
/s/ David Yu
- ---------------------------------
David Yu
Chairman, The Summit National Bank
1
<PAGE> 3
We Focus On Our Customers
It Shows In Our Actions...And Their Loyalty
Summit is a lot like our customers. We share their entrepreneurial spirit and
their determination to overcome barriers that stand in the way of creating
value. We offer the competencies they require, from small business knowledge to
international business insight to a wide range of language skills. By
understanding and meeting our customers' challenges, Summit has helped them to
grow--and is growing right along with them.
2
<PAGE> 4
Opening Doors for Small Business Customers
In the Metro Atlanta market, small business formation and growth show great
vigor. Competition for this market segment intensifies each year, both from
large banks and non-bank financial service providers. Summit's advantages stem
from our years of experience with small businesses, our knowledge of the
entrepreneur's capital and service needs, and our skill at building personal
relationships.
For six consecutive years, Summit has been among Georgia's leaders in Small
Business Administration (SBA) loan origination. While maintaining our leadership
position in 1997, we withstood competitive pressure to reduce standards and thus
protected the quality of our portfolio.
Also in 1997, we introduced new products for the small business customer,
including a Cash Management Account with overnight investment; a Simplified
Employer Pension program; and vehicles for establishing Roth and Education
Individual Retirement Accounts.
During 1998, Summit will continue developing the Cash Management Account. In
addition, studies are underway to identify new high-value services that
logically extend our ability to satisfy the needs of small business customers.
In the coming year, Summit bankers will be working to heighten customer
awareness of how Year 2000 issues could affect their business, including the
potential impact on their revenues. By sharing our knowledge with customers, we
are helping them to protect their own assets and thus to safeguard their credit
access.
3
<PAGE> 5
Enabling International Trade Customers to Seize Opportunity
As a major hub for global business, Metro Atlanta and North Georgia have
tremendous needs in the arena of financial services for international trade.
Summit's array of international services is unmatched by any community bank, and
our level of service exceeds many large banks as well.
Companies of every size rely on Summit Bank to facilitate international
transactions. With more than 100 correspondent relationships outside the United
States, Summit helps our customers fulfill business opportunities wherever they
arise.
To enhance service to the international enterprise, in 1998 we will begin
implementing an Internet-based electronic banking module to allow customers to
apply for Letters of Credit (LC) electronically from any location. Both the
speed and convenience of the LC process will be significantly improved.
4
<PAGE> 6
Meeting the Ethnic Customer's Special Needs
Summit's heritage reflects the goal of providing culturally sensitive,
high-quality financial services to ethnic customers. Many are entrepreneurs as
well. Summit has no peer in our market for helping ethnic customers acquire the
credit and financial management resources they need to establish and grow their
business ventures.
Our diverse staff can confer with customers in more than a dozen languages about
their personal and business banking needs. Summit's Asian Banking Center plays a
unique role for Atlanta's rapidly expanding Chinese, Korean, Vietnamese and
Asian Indian communities. Our private banking services are heavily utilized by
German-speaking customers, and we also have a growing presence in Atlanta's
Hispanic community.
While face-to-face banking is especially important to ethnic customers, they
also make heavy use of our multi-lingual ATM services as well as the language
capabilities we added in 1997 to our BankTouch interactive voice customer
service system. ATM and BankTouch services are now available in Chinese and
Korean as well as English.
5
<PAGE> 7
We Build Within
People Serve...Technology Supports
In a marketplace increasingly dominated by technology over personal service,
Summit's personal approach is a true point of distinction that customers
recognize and prize.
Consolidation in banking has reduced the overall service orientation of the
industry and continues to do so. Our customers constantly remind us how
different Summit is in this regard.
6
<PAGE> 8
We view our "people difference" as a vital advantage and are making investments
to further distance ourselves from competitors in quality of service.
One of our strongest convictions is that empowered people will proactively
identify and push for value-added change within the organization. During 1997
Summit undertook training initiatives to develop these capabilities. We also
upgraded policies and procedures in each branch, improving self-audit
performance. An aggressive training agenda is planned for 1998 as well, focusing
on implementing best practices, enhancing product expertise, promoting internal
teamwork and vesting our employees with ownership of customer relations.
Summit uses technology to complement, never replace, the customer service
strengths of our people. Our multi-lingual ATM and BankTouch enhancements
exemplify how this supporting role has been applied. Important
technology-based initiatives are planned for 1998, including:
* Electronic Letter of Credit system allowing remote
applications and approvals
* Internet development as a new channel for fulfilling customer
needs
* Expanded use of electronic imaging to streamline records
maintenance and access
* Completion of Year 2000 compliance within the Bank.
We never lose sight that the customer is at the center of everything Summit
does. By strengthening the customer bond, we add value for shareholders by
enlarging our future opportunities for growth and profitability.
7
<PAGE> 9
We Create Value
Shareholders...Customers...Communities
We Perform For Those Who Count On Us.
Summit's sustained financial performance has led to a broader base of ownership.
From December 1996 to January 1998, the number of Summit shareholders increased
by 50%, resulting in much improved liquidity for all of our investors. The
average number of shares traded daily grew four-fold during the same time
period.
Planning for future growth, we constantly look for opportunities to create new
shareholder value within the general framework that already has made Summit
successful. Attractive growth situations will be those that involve the market
segments we know well, allowing us to leverage the special competencies we have
developed in serving our customers.
As Summit's targeted customer groups come to represent an ever-larger portion of
total marketplace activity, their need for our knowledge, skill and commitment
will grow as well. By meeting their needs, we strengthen vital pillars of the
future: a healthy and energetic small business sector ... thriving international
trade ... and an increasingly diverse population whose members have much to
contribute to the country's economic well being.
The value that Summit Bank delivers to these customers today will continue to
pay dividends far into the 21st Century.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Performance Overview for 1997
Summit Bank Corporation (the "Company" or "Summit") reported record net income
of $2,450,000 in 1997 representing an increase of 11% over the prior year.
Management attributes the improvement to stronger net interest income resulting
from an increase in average earning assets. Contributing factors to the growth
in earning assets are the branch expansion in 1996 and use of Federal Home Loan
Bank advances. The Company's average earning assets grew 21% in 1997 and over
the last four years have grown at a compounded annual rate of more than 18%.
During 1997, Summit's average total assets increased $27 million to $166 million
compared to $139 million in 1996.
Diluted net income per share for 1997 increased to $1.50 from $1.43 in 1996, an
improvement of 4.9%. Diluted net income per share in 1995 was $1.49. Since June,
1997 the Company has been issuing new shares of stock as a result of the
exercise of warrants and options for common stock that were primarily issued to
the organizers of the Company. The Company originally had 463,235 warrants and
41,225 options outstanding prior to completion of a registration in May 1997 for
the underlying securities. As of December 31, 1997 there were 81,082 shares
issued from the exercise of warrants and options. The remaining warrants and
options expire March 10, 1998. Since 1995, the Company's common stock has traded
at a market price in excess of the $10 exercise price for these warrants and
options. The dilutive effect of these options and warrants outstanding resulted
in weighted-average shares and potential common shares outstanding of 1,632,586,
1,546,332 and 1,414,670 in 1997, 1996, and 1995, respectively.
The Company's strong profitability continues to place Summit in a group of the
nation's higher-performing community focused financial institutions. The return
on average assets was 1.5% in 1997 as compared to 1.6% in the previous year. The
small decline was attributed to the high growth rate in total assets which
outpaced the improvement in 1997 earnings. By comparison, according to the
Uniform Bank Performance Report as of September 30, 1997, the Bank's peer group
- - commercial banks with assets between $100 million and $300 million and three
or more branches in a metropolitan area, posted an average return of 1.2% of
average assets. For the past five years, the Company has posted returns on
average assets of 1.5% or better. Despite higher net earnings, Summit's return
on average equity was 13.4% in 1997 compared to 13.8% in 1996. Stockholders'
equity rose to $19.8 million at year end 1997, an increase of 17% as compared to
year end 1996 as a result of earnings and the exercise of warrants and options.
The Company became listed on the Nasdaq National Stock Market under the trading
symbol of "SBGA" on October 18, 1996. The following table sets forth: (1) the
high and low sales price for the Common Stock as reported by Nasdaq; and (2) the
amount of the quarterly dividends declared on the Common Stock during the
periods indicated.
<TABLE>
<CAPTION>
Sales Price Cash Dividend
Calendar period High Low Declared
1996
<S> <C> <C> <C>
First Quarter $ 11.00 $ 10.25 $ .07
Second Quarter 16.00 10.50 .08
Third Quarter 16.00 14.25 .08
Fourth Quarter 17.50 14.50 .08
1997
First Quarter $ 20.63 $ 16.50 $ .08
Second Quarter 20.50 16.00 .09
Third Quarter 19.38 15.75 .09
Fourth Quarter 20.00 16.00 .09
</TABLE>
9
<PAGE> 11
The Company is a legal entity separate and distinct from its Bank subsidiary,
and its revenues depend primarily on the payment of dividends from the Bank.
Banking regulations limit the amount of dividends that may be paid without prior
approval of the Bank's regulatory agencies. Further restrictions could result
from a review by regulatory authorities of the Bank's capital adequacy. The
amount of cash dividends available from the Bank for payment in 1998 is
$3,608,000 plus 1998 net earnings of the Bank. At December 31, 1997, $13,257,000
of the Parent Company's investment in the Bank is restricted as to dividend
payments from the Bank to the Parent Company. The Company increased cash
dividends in 1997 to $.35 per share, an increase of 13% over 1996 dividends of
$.31 per share.
The Company has three brokerage firms that make a primary market in its stock.
Liquidity in the Company's stock remains strong as evidenced by the trading
volume of the stock during 1997. During 1997, 854,213 shares of the Company
traded on the open market. At December 31, 1997 the most recent trade of the
Company's stock was $19.25 per share, an increase of 12% compared to $17.25 per
share at year end 1996.
Total assets reported by the Company at December 31, 1997 were $180 million
compared to $154 million at the prior year end, reflecting an increase of 17%.
Asset growth was primarily fueled by deposits which increased 9%, or $12
million, in 1997 as well as an increase in the credit advance from the Federal
Home Loan Bank of $9 million. Deposits at the two offices which opened in 1996
grew $15 million in 1997 as they focused on additional small business
relationships. Additionally, the balance in the Corporate Overnight Sweep
Accounts, a new product introduced in 1996, grew from $657,000 at December 31,
1996 to $2.8 million at December 31, 1997. Much of this new funding growth was
absorbed by expansion of the loan portfolio. Summit's net loan volume increased
16%, or $13.5 million, to $97 million at December 31, 1997 compared to $84
million at December 31, 1996. The majority of this loan growth was centered in
commercial and SBA loans. During the last four years, the Company's average
loans outstanding have grown at a rate of nearly 12% compounded annually. The
federal funds sold balance declined from $16 million at December 31, 1996 to $1
million at December 31, 1997 as funds were invested in higher yielding
investment securities. The investment security portfolio increased 62% to $63
million at December 31, 1997.
Net interest income increased $1.2 million to $8 million in 1997, a growth of
17%. The Company continues to experience a strong net interest margin. The net
interest margin for 1997 was 5.26%, which is higher than the peer group average
of 4.94%. The provision for loan losses increased to $540,000 in 1997 from
$404,000 in 1996 as a result of strong loan growth and higher charge-offs in
1997. Non-interest income improved 3% in 1997 with the largest increases being
recognized from international service fees, overdraft/NSF charges and service
charge fees. Non-interest income in 1997 was $3.5 million.
While the branch expansion in 1996 added significant deposit growth to the
balance sheet, it also caused an increase in non-interest expenses during 1997
since this was the first full year of operation for the two new offices. Most of
this increase was related to additional personnel, data/item processing and
occupancy expenses for these new offices. Total non-interest expenses were $7.2
million in 1997 and $6.4 million in 1996, an increase of $745,000. Personnel
expenses accounted for nearly half of this increase, $300,000, while equipment
costs and other general operating expenses represented another $100,000 and
$300,000 of the increase, respectively. The Company's operating efficiency ratio
(operating expenses as a percentage of net interest income and non-interest
income) has remained fairly constant despite the additional branch expansion,
reflecting good expense management. The operating efficiency ratio in 1997, 1996
and 1995 was 62.4%, 62.9%, and 62.1%, respectively.
10
<PAGE> 12
Fourth Quarter 1997 Results
Net income for the fourth quarter of 1997 was $774,000, a 19% increase over
income of $650,000 for the same period in 1996. The increase was due to higher
gains from sales of SBA loans which were $298,000 in the fourth quarter of 1997
compared to $141,000 in the same period of 1996. Fluctuations are common in
quarterly SBA loan volumes because of construction lending cycles and year-end
business sales by customers. Diluted net earnings per share for the fourth
quarter were $.46 and $.41 per share for 1997 and 1996, respectively while basic
net earnings for the same periods were $.52 and $.46 per share, respectively.
Net Interest Income
Net interest income, the primary source of revenue for the Company, is a
function of the yield earned on average interest-earning assets and the rate
paid on average interest-bearing liabilities. Changes in net interest income
from period to period reflect the increases or decreases in average
interest-earning assets, average interest-bearing liabilities and the interest
rate spread which is affected by the degree of mismatch in maturity and
repricing characteristics of the Company's interest-earning assets and
interest-bearing liabilities.
Net interest income increased $1.2 million, or 17%, to $8 million in 1997
compared to 1996. The Company's net interest margin for 1997 declined to 5.26%
as compared to 5.44% in 1996. Average interest-earning assets increased 21%, or
$26 million which helped offset the decline in the yield due to a falling rate
environment, during 1997. Average investment security volumes represented the
majority of the increase in average interest-earning assets, increasing $15
million in 1997, while average loan volumes also grew $9 million. Along with the
loan volume increase, loan fees increased $267,000 to $762,000 in 1997. Average
interest-bearing liabilities increased 21%, or $20 million, in 1997, with other
time deposits and money market accounts increasing $11 million and $2.6 million,
respectively.
Net interest income for 1996 increased $800,000, or 13% to $6.8 million compared
to 1995. The increase was also due to larger volumes of average interest-earning
assets, which grew 15%, or $16 million in 1996. The average interest-bearing
liabilities increased 16%, or $13 million in 1996. The slight decrease in the
net interest margin from 5.50% in 1995 to 5.44% in 1996 was due to a falling
rate environment.
11
<PAGE> 13
The following table sets forth information with respect to the average balances,
interest income and average yield by major categories of assets; the average
balances, interest expense and average rate by major categories of liabilities;
the average balances of non-interest-earning assets, non-interest-bearing
liabilities and stockholders' equity; and net interest income, interest rate
spread, and net interest margin for the years ended December 31, 1997 and 1996.
Average Balance Sheet Data
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates
Assets
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $ 93,015 $ 9,660 10.39% $ 84,071 $ 8,615 10.25%
Investment securities
- taxable 52,645 3,464 6.58% 37,252 2,509 6.74%
Federal funds sold 6,435 345 5.36% 4,331 228 5.26%
Interest-bearing deposits
in other banks 97 6 6.19% 67 4 5.97%
Total interest-earning assets 152,192 13,475 8.85% 125,721 11,356 9.03%
Non-interest-earning assets:
Cash and due from banks 7,378 6,374
Premises and equipment, net 4,475 3,903
Allowance for loan losses (1,815) (1,905)
Other assets 4,093 4,699
Total non-interest-earning
assets 14,131 13,071
Total assets $ 166,323 $ 138,792
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts $ 9,020 $ 180 2.00% $ 8,301 $ 169 2.04%
Money market accounts 26,090 955 3.66% 23,466 924 3.94%
Savings deposits 6,424 214 3.33% 7,673 288 3.75%
Other time deposits 65,111 3,633 5.58% 54,408 3,067 5.64%
Total interest-bearing
deposits 106,645 4,982 4.67% 93,848 4,448 4.74%
Other interest-bearing
liabilities:
Federal funds purchased 324 21 6.50% 86 5 5.81%
Federal Home Loan Bank advance 6,005 350 5.83% 896 47 5.25%
Short-term borrowings
and obligations under
capital lease 2,575 117 4.54% 293 20 6.83%
Total interest-bearing
liabilities 115,549 5,470 4.73% 95,123 4,520 4.75%
Non-interest-bearing liabilities
and stockholders' equity:
Demand deposits 29,558 23,628
Other liabilities 2,878 4,042
Stockholders' equity 18,338 15,999
Total non-interest
-bearing liabilities
and stockholders' equity 50,774 43,669
Total liabilities and
stockholders' equity $ 166,323 $ 138,792
Interest rate spread 4.12% 4.28%
Net interest income $ 8,005 $ 6,836
Net interest margin (2) 5.26% 5.44%
</TABLE>
(1) Average loans include non-performing loans. Interest on loans includes
loan fees of $762,000 in 1997 and $495,000 in 1996.
(2) Net interest margin is net interest income divided by average total
interest-earning assets.
12
<PAGE> 14
Changes in Net Interest Income
The table below details the components of the changes in net interest income for
the last two years. For each major category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
due to average volumes, changes due to rates, and the proportionate allocation
of changes in both volumes and rates to the changes due to volumes and the
changes due to rates.
<TABLE>
<CAPTION>
1997 Compared with 1996 Compared with
1996(1) 1995(1)
Due to changes in Due to changes in
(In thousands) Net Net
Average Average Increase Average Average Increase
Interest Income Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Loans $ 927 $ 118 $ 1,045 $ 1,064 $(153) $ 911
Investment securities 994 (39) 955 423 (14) 409
Federal funds sold 113 4 117 (37) (29) (66)
Interest-bearing deposits
in other banks 2 -- 2 -- 1 1
Total interest income 2,036 83 2,119 1,450 (195) 1,255
Interest expense
NOW accounts 14 (3) 11 67 (69) (2)
Money market accounts 84 (53) 31 90 (56) 34
Savings deposits (44) (30) (74) (19) 29 10
Other time deposits 597 (31) 566 514 (158) 356
Federal funds purchased 15 1 16 4 -- 4
Federal Home Loan Bank advance 297 6 303 47 -- 47
Short-term borrowings and
obligations under capital lease 101 (4) 97 5 (4) 1
Total interest expense 1,064 (114) 950 708 (258) 450
Change in net interest income $ 972 $ 197 $ 1,169 $ 742 $ 63 $ 805
</TABLE>
(1)The change in interest due to both rate and volume has been allocated to the
volume and rate components in proportion to the relationship of the dollar
amounts of the absolute change in each.
Non-interest Income
The following table presents the principal components of non-interest income for
the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Fees for international banking services $1,210 $1,057 $1,145
Gains on sales of loans 616 581 713
Overdraft and NSF charges 426 369 362
Other 396 557 439
SBA servicing fees 378 462 438
Service charge income 272 209 216
Net gains (losses) on sales
of investment securities 162 126 (2)
Total non-interest income $3,460 $3,361 $3,311
</TABLE>
13
<PAGE> 15
Non-interest income increased $100,000 in 1997 to $3.5 million compared to 1996
due primarily to increases in service charges on deposit accounts and
international fee income. Service charges on deposit accounts and overdraft/NSF
fees were up 30% and 15%, respectively, over 1996 to a combined total of
$700,000. This increase was the result of higher average demand deposit volumes,
which grew $6 million in 1997, as well as new pricing structures on various
charges including NSF and overdraft fees. International fee income also rose to
a new level of more than $1.2 million in 1997, a 14% increase. This was due to a
growth in business volumes despite a slow start to the year. These increases
were partially offset by a decline in other income of $161,000, primarily
because 1996 other non-interest income included recognition of a $100,000
non-recurring settlement of a lawsuit.
Gains on sales of SBA loans were $616,000 for 1997 compared to $581,000 in the
prior year due to a higher volume of sales. During 1997, the Company originated
$12.4 million of new SBA loans as compared to $10.4 million in 1996. Total
guaranteed amounts sold for the comparable years were $6.4 million and $5.2
million in 1997 and 1996, respectively. The Company was again recognized by SBA
as one of the most active lending institutions in the state of Georgia, a
distinction held by Summit for the last six consecutive years. The Company's
loan servicing portfolio for third parties decreased to $58 million at year end
1997 from $62 million at year end 1996.
Total non-interest income increased $50,000 to $3.4 million during 1996 as
compared to 1995 due primarily to additional other income and miscellaneous
fees. Other non-interest income increased $118,000 in 1996. This increase
consisted mainly of the non-recurring lawsuit settlement discussed above,
improvements in Automatic Teller Machine (ATM) fees, private banking fees and
other income. The Company began charging a $1.00 access fee in 1996 to all
non-Summit customers utilizing the Company's ATMs for cash withdrawals. In 1996,
this resulted in an increase in ATM fees of $30,000. Additionally, the Company
realized $126,000 of gains on sales of investment securities in 1996 compared to
a loss of $2,000 in 1995. There were no other individually significant items
affecting other income in 1996.
Non-interest Expenses
The following table presents the principal components of non-interest expenses
for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Salaries and employee benefits $3,649 $3,356 $3,046
Equipment 584 482 408
Net occupancy 516 476 452
Accounting, legal, and other professional 363 315 286
Data/item processing 323 332 218
Telephone 233 136 132
Marketing and community relations 228 271 157
Postage and courier 198 163 168
Property taxes 167 86 86
Other losses 161 167 137
Office supplies 147 157 130
Insurance 96 78 181
Directors fees 83 53 64
Dues and memberships 45 51 58
Other operating expenses 363 288 279
Total non-interest expenses $7,156 $6,411 $5,802
</TABLE>
Over the past few years the Company has continued a strong earnings growth trend
coupled with the branch expansion during 1996. Throughout this growth mode, the
non-interest expenses have increased a consistent 10% to 12% in each of the past
three years. In 1997, non-interest expenses were $7.2 million, up from $6.4
million in 1996. This increase was primarily attributed to increased staffing,
equipment, property taxes and telephone expenses. Of the
14
<PAGE> 16
$745,000 increase in non-interest expenses, nearly half was due to salary and
benefit increases. Of the $300,000 increase in salary and benefit expenses
recognized during 1997, half of this amount was due to the effect of a full
year's expense related to personnel hired in 1996 to support branch expansion.
The remaining increase in salary and benefits expenses was due to promotions and
normal performance adjustments, as well as increases in group insurance of
$27,000 and commission expense of $38,000 for the year. As of December 31, 1997,
the Bank had reduced total staff to 81.5 full-time equivalent employees compared
to 86.5 at the end of 1996. This reflects improved operating efficiencies within
the Company.
Equipment costs, which include furniture, fixtures and equipment maintenance and
depreciation, increased $102,000 in 1997 compared to 1996 due in part to
additional maintenance and service contracts relative to the branch expansion
and normal operations. Depreciation costs on equipment increased $34,000 as a
result of the branch expansion as well as the additional equipment purchased for
the implementation of new products. The Company purchased a document imaging
system in late 1997 for the computerized image storage of all loan
documentation, accounts payable and payroll records. While these costs were
capitalized, the system is designed to improve efficiencies in document
retrieval and reduce costs such as file cabinets and filing supplies which
should benefit future years.
Property taxes relative to the new branches caused an increase of $46,000 in
taxes in 1997 compared to 1996, although approximately $24,000 of these real
property taxes were paid and expensed in 1997 for the 1996 tax year due to
delays in receiving the applicable bills.
Implementation of new data processing systems in mid-year 1995 fueled higher
data processing costs in 1996 compared to 1997. In 1997, the telecommunications
expenses directly related to the delivery of the data processing system were
reclassified to telephone costs. Telephone costs increased $97,000 due to this
reclassification as well as normal growth in operations.
Non-interest expenses increased $609,000 in 1996 compared to 1995 due primarily
to increased staffing, data/ item processing expenses related to branch
expansion as well as marketing costs incurred for branch expansion and the
introduction of several new products and services. Salaries and benefits costs
were up $310,000 from 1995 while data and item processing expenses and marketing
costs were each up $114,000 from 1995. Equipment costs were also $74,000 higher
in 1996 compared to 1995 as a result of the purchase of equipment required to
offer technologically advanced products such as multi-lingual ATMs, 24-hour
telephone banking (also multi-lingual) and corporate cash management systems.
The suspension of the FDIC insurance assessment in 1995 resulted in a decrease
in insurance expense of $103,000 from 1995 to 1996.
Year 2000
The Company recognizes that there is a business risk in computerized systems as
the Year 2000 approaches and date recognition becomes a critical issue. The
Federal Financial Institutions Examination Council ("FFIEC") issued an
interagency statement on May 5, 1997, outlining five phases for institutions to
effectively manage the Year 2000 challenges. The phases were awareness,
assessment, renovation, validation and implementation. The Company has developed
an ongoing program designed to ensure that its operational and financial systems
will not be adversely affected by either software failures due to processing
errors arising from calculations using the Year 2000 date or hardware failures
arising from systems built to recognize the two-digit date field "00" as the
Year 1900. The Company has an internal task force assigned to this project, and
the Board of Directors and management of the Company have established Year 2000
compliance as a strategic initiative. The Company is well into the assessment
phase of the project in which all critical
15
<PAGE> 17
applications are identified and communication is underway with its software
vendors including the primary data processing service provider. While the
Company believes it has available dedicated resources to assure Year 2000
compliance, it is to some extent dependent on vendor cooperation.
A Year 2000 Company Action Plan was developed in 1997 and is being executed to
ensure timely assessment, validation and testing through 1998. At the present
time, the Company expects hardware testing to begin in first quarter 1998 and
continue through the year. Most of the personal computers and systems within the
Company are expected to require upgrades or replacements specifically for the
Year 2000 compliance issue. The total cost for this conversion is estimated by
management to be approximately $250,000 with a substantial portion of these
costs being recognized in 1998 as a majority of the testing and conversion will
be completed in 1998. The Company is also in the process of addressing any loan
relationships it believes could be materially affected by the Year 2000 issue.
Additionally, included in the action plan are steps to establish a task force
for the purpose of determining and ensuring customer awareness in general during
early 1998.
Loan Portfolio
Loans are expected to produce higher yields than investment securities and other
interest-earning assets (assuming that credit losses are not excessive). Thus
the absolute volume of loans and the volume as a percentage of total earning
assets are important determinants of the net interest margin. The Company
experienced a strong increase in average loan volumes in 1997 of $9 million. Net
loans outstanding increased to $97 million as compared to $84 million at year
end 1996, an increase of 15%. During 1997, the growth was evenly distributed
between regular commercial loans, with a $6.3 million increase to $29.1 million,
and commercial loans secured by real estate, with a $6.4 million increase to
$62.7 million. Consumer loans remained constant at approximately $5 million as
of December 31, 1997 compared to the prior year-end. Overall loan growth was
consistent with growth in the prior year as net loans outstanding increased 10%
from $76 million at year end 1995 to $84 million at year end 1996. Commercial
loans secured by real estate accounted for $6 million of this increase. Consumer
loans increased $309,000 to $5.1 million during 1996.
At year end 1997 and 1996, the Company had loans held for sale of $3.4 million
and $3 million, respectively. The Company makes an effort to originate loans
with rates that fluctuate with the prime lending rate. At December 31, 1997, 58%
of the total loan portfolio had floating or adjustable rates.
The following table presents the composition of the Company's loan portfolio at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
Amount % of Loans Amount % of Loans
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 29,111 30% $ 22,769 28%
Real estate - construction 1,938 2 1,704 2
Real estate mortgage-primarily commercial 60,793 64 54,538 66
Installment loans to individuals 5,024 5 5,125 6
Less: unearned income (1,393) (1) (1,358) (2)
Loans, net of unearned income 95,473 100% 82,778 100%
Loans held for sale - SBA 3,419 3,030
Less: allowance for loan losses (1,468) (1,931)
Net loans $ 97,424 $ 83,877
</TABLE>
16
<PAGE> 18
The following table presents a maturity analysis of the Company's loan portfolio
segregated between loans with predetermined interest rates and loans with
floating or adjustable rates at December 31, 1997.
<TABLE>
<CAPTION>
(In thousands) Loan Maturing
Within 1-5 After 5
1 Year Years Years Total
Loans with:
<S> <C> <C> <C> <C>
Predetermined interest rates $18,202 $21,950 $ 1,427 $41,579
Floating or adjustable rates 18,472 11,101 27,740 57,313
Total loans $36,674 $33,051 $29,167 $98,892
</TABLE>
Allowance and Provision for Loan Losses
The allowance for loan losses represents a reserve for potential losses in the
loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with particular
emphasis on impaired, non-accruing, past due, and other loans that management
believes require special attention.
For significant problem loans, management's review consists of evaluation of the
financial strengths of the borrower, the related collateral, and the effects of
economic conditions. General unallocated reserves against the remaining loan
portfolio are based on an analysis of historical loan loss ratios, loan
charge-offs, delinquency trends, and previous collection experience, along with
an assessment of the effects of external economic conditions. The Company also
utilizes an independent loan review process in assessing the overall adequacy of
the allowance for loan losses.
The provision for loan losses is a charge to income in the current period to
replenish the allowance and maintain it at a level that management has
determined to be adequate. The Company's provision for loan losses for 1997 was
$540,000 as compared to $404,000 in 1996. This increase is attributed to loan
growth and the Company's aggressive loan charge-off policy in order to maintain
strong asset quality. While non-performing assets increased from $922,000 at
year end 1996 to $1,777,000, at year end 1997, the December 31, 1997 balance
primarily reflected SBA fully guaranteed portions of credits totaling $1,018,000
and one credit for $737,000 secured by real estate. The remaining $22,000 of
1997 non-performing assets represents the unguaranteed portion of an SBA
credit(included in the $1,018,000) which has been fully reserved. The December
31, 1996 balance reflected one credit for $773,000 secured by real estate (the
same credit included in the 1997 balance) and two fully guaranteed SBA loans
totaling $149,000.
Net loan charge-offs in 1997 increased significantly to 1.08% of average net
loans outstanding from .19% in 1996. Included in gross charge-offs in 1997 were
three SBA loans of which $161,000 represents fully guaranteed amounts by the SBA
which are expected to be recovered from the SBA during the first half of 1998.
Gross charge-offs increased approximately $1 million to $1.3 million in 1997
compared to $300,000 in 1996. The charge-offs in 1997 included three large loans
totaling $642,000 which were identified as problem credits and appropriately
reserved for in 1996 based on current information known at that time. However,
the borrowers' situations continued to deteriorate in 1997 which merited in each
case larger charge-offs than was anticipated in 1996, with the additional loss
being absorbed by the Company's unallocated general reserve. In addition, a loan
charge-off in early 1997 of approximately $100,000 was fully recovered in late
1997. The remaining $400,000 of gross charge-offs represented a number of small
commercial and installment loans, none of which were individually significant
and which were absorbed by the unallocated general reserve. The Company has
historically taken aggressive charge-off measures with respect to all loans,
irrespective of SBA guarantees. Under this approach, if a workout program for a
non-performing SBA loan has failed, the Company will typically recognize the
charge-off immediately then record the repayment of the guarantee as a recovery.
Recoveries totaled
17
<PAGE> 19
$336,000 in 1997 compared to $153,000 in 1996 and recoveries in 1998 are
anticipated to be at least $161,000.
Net loan charge-offs for 1996 were extremely low at .19% of average net loans
outstanding, or $159,000, compared to .43% of average loans, or $314,000, for
1995. Gross charge-offs for 1996 declined $584,000 in 1996 although recoveries
declined at a smaller rate of $155,000.
The allowance for loan losses represented 1.48% of total loans at December 31,
1997 compared to 2.25% at December 31, 1996. The determination of the allowance
for loan losses rests upon management's judgment about factors affecting loan
quality, assumptions about the economy, and other factors. The Company felt that
the 1996 unallocated general reserve was sufficient to absorb additional losses
in 1997 which resulted in a reduction in the allowance for loan losses in 1997.
While lower than historical levels, management considers the year end allowance
adequate to cover possible losses in the loan portfolio; however, management's
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may or may not prove valid. Thus, there can
be no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the allowance for loan losses
will not be required. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to recognize additions to
the allowance based on their judgments about information available to them at
the time of their examination.
The following table represents an analysis of the Company's allowance for loan
losses including the provision for loan losses and net loan charge-offs for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands) 1997 1996
<S> <C> <C>
Allowance for loan losses at beginning of year $1,931 $1,686
Charge-offs:
Commercial, financial, and agricultural 1,147 271
Real estate 0 0
Installment loans to individuals 192 41
Total 1,339 312
Recoveries:
Commercial, financial, and agricultural 300 99
Real estate 0 16
Installment loans to individuals 36 38
Total 336 153
Net charge-offs 1,003 159
Provision for loan losses 540 404
Allowance for loan losses at end of year $1,468 $1,931
Allowance for loan losses to average
loans outstanding 1.58% 2.30%
Allowance for loan losses to net charge offs 1.5x 12.1x
</TABLE>
The amounts and percentages of such components of the allowance for loan losses
at December 31, 1997 and 1996, and the percentage of loans in each category to
total loans are presented in the table below.
<TABLE>
<CAPTION>
1997 1996
Allowance % of Allowance % of
(Dollars in thousands) $ (%) Loans $ (%) Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $1,142 78% 30% $1,382 71% 28%
Real estate 225 15% 65% 422 22% 66%
Installment loans to individuals 101 7% 5% 127 7% 6%
Total $1,468 100% 100% $1,931 100% 100%
</TABLE>
18
<PAGE> 20
Non-performing Assets
As a result of management's ongoing review of the loan portfolio, loans are
classified as non-accrual when reasonable doubt exists as to the full or timely
collection of interest or principal or when a loan becomes contractually past
due by 90 days or more with respect to interest or principal. These loans are
classified as non-accrual, even though the presence of collateral or the
borrower's financial strength may be sufficient to provide for ultimate
repayment. Where appropriate, when a loan is placed on non-accrual status, all
interest previously accrued but not collected is reversed against current period
interest income. Interest on non-accrual loans is recognized only when received.
The amount of interest that would have been recorded during 1997 and 1996, had
such loans classified as non-accrual been current in accordance with their
original terms, amounted to $167,000 and $30,000, respectively.
Non-performing assets are defined as non-accrual and renegotiated loans and
other real estate acquired by foreclosure. The Company's non-performing assets
as a percentage of total loans and other real estate was 1.80% at December 31,
1997 as compared to 1.07% in the prior year. At December 31, 1997, the Company
had non-accrual loans representing one loan secured by real estate totaling
$737,000, two fully guaranteed SBA loans totaling $894,000 and one 85%
guaranteed SBA loan totaling $146,000. The December 31, 1996 balance reflected
one loan for $773,000 secured by real estate (the same credit included in the
1997 balance) and two fully guaranteed SBA loans totaling $149,000. The
non-accrual loan secured by real estate was also the only restructured loan held
by the Company in 1997 and 1996. The Company believes that the underlying
collateral on this restructured loan will be sold in early 1998 and a minimal
loss is anticipated which has been specifically reserved. There were no loans
past due 90 days or more as to principal or interest payments at either December
31, 1997 or 1996.
The following table presents an analysis of the Company's non-performing assets
as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996
<S> <C> <C>
Loans on non-accrual $1,777 $922
Restructured loans -- --
Total non-performing assets $1,777 $922
Loans 90 days past due and still accruing interest $ -- $ --
Total non-performing assets as a percentage
of total loans and other real estate 1.80% 1.07%
Loans 90 days past due and still accruing interest
as a percentage of total loans --% --%
</TABLE>
Impaired loans are defined as those loans which management believes it is
probable that the Company will be unable to collect all principal or interest
according to the contractual terms of the note agreement. At year-end 1997 and
1996, respectively, the Company had loans totaling $1,777,000 and $1,534,000
which were considered impaired. Included in the allowance for loan losses at the
end of 1997 and 1996, respectively, the Company specifically allocated $65,000
and $398,000 for these loans. The 1997 impaired loan total includes one credit
for $737,000 which is fully secured by real estate and two fully guaranteed SBA
loans totaling $894,000.
Management is not aware of any loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention that have not been disclosed which 1)
represent or result from trends or uncertainties, which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or 2) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
19
<PAGE> 21
Liquidity and Interest Rate Sensitivity
Liquidity represents the ability to provide steady sources of funds for loan
commitments and investment activities, as well as to provide sufficient funds to
cover deposit withdrawals and payment of debt, off-balance sheet obligations and
operating obligations. These funds can be obtained by converting assets to cash
or by attracting new deposits. The Company also has lines of credit available
from other funding sources to provide additional funds as needed. These sources
include the Federal Home Loan Bank and other correspondent financial
institutions.
At December 31, 1997, the Company's net loans to deposit ratio was 67% compared
to a ratio of 63% at December 31, 1996. Management monitors and assesses the
adequacy of the Company's liquidity position on a monthly basis to ensure that
sufficient sources of liquidity are maintained and available. This increase is
primarily the result of temporary deposits made on December 31, 1996.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rates. The rate-sensitive
position, or gap, is the difference in the volume of rate-sensitive assets and
liabilities, at a given interval. The general objective of gap management is to
actively manage rate-sensitive assets and liabilities to reduce the impact of
interest rate fluctuations on the net interest margin. Management and the
Asset/Liability Committee generally attempt to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Company. The asset mix of the
balance sheet is continually evaluated in terms of several variables: yield,
credit quality, appropriate funding sources, and liquidity. Management of the
liability mix of the balance sheet focuses on expanding the various funding
sources.
The Company's interest rate sensitivity position at December 31, 1997 is
presented in the table below.
<TABLE>
<CAPTION>
Assets and liabilities repricing within
3 Months 4 to 6 7 to 12 1-5 Over 5
(Dollars in thousands) or less Months Months Years Years Total
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans $67,860 $ 2,899 $ 4,756 $21,950 $ 1,427 $ 98,892
Investment securities 8,965 8,313 12,696 20,368 11,054 61,396
Interest-bearing deposits
in other banks 69 -- -- -- -- 69
Federal funds sold 1,200 -- -- -- -- 1,200
Total interest-earning assets 78,094 11,212 17,452 42,318 12,481 161,557
Interest-bearing liabilities:
Deposits 62,995 18,560 13,476 14,527 44 109,602
Federal Home Loan Bank advance 10,000 -- -- -- -- 10,000
Other borrowed funds 2,756 -- -- -- -- 2,756
Total interest-bearing
liabilities 75,751 18,560 13,476 14,527 44 122,358
Interest sensitivity gap 2,343 (7,348) 3,976 27,791 12,437 39,199
Cumulative interest
sensitivity gap 2,343 (5,005) (1,029) 26,762 39,199 39,199
Cumulative sensitivity ratio
(Cumulative interest-earning
assets/cumulative
interest-bearing liabilities) 1.03 .95 .99 1.22 1.32 1.32
</TABLE>
20
<PAGE> 22
The Company is closely matched on its interest-earning assets and
interest-bearing liabilities through the next twelve months, insulating the
Company's net interest income from significant adverse changes in market rates.
Since all interest rates and yields do not adjust at the same velocity, the gap
is only a general indicator of rate sensitivity. For purposes of the above
repricing presentation, all demand and savings deposits are considered
repriceable within the shortest time period, 3 months or less, while time
deposits are presented based on their contractual terms. It is the Company's
policy to maintain its one year gap position in the .8 to 1.2 range. The one
year gap reflected by the interest rate sensitivity table is .99, indicating
adherence to Company policy. Management closely monitors the Company's position,
and if rates should change in either direction, will take steps to reposition
itself to minimize the impact of a gap exposure.
Investment Portfolio
The following table presents maturity distribution and yields of investment
securities available for sale.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Year-end
Amortized Fair Weighted Amortized Fair
(Dollars in thousands) Cost Value Avg. Yield Cost Value
U.S. Treasury
<S> <C> <C> <C> <C> <C>
One year or less $ 8,980 $ 8,984 5.76% $ 3,994 $ 3,998
Over one through five years -- -- -- -- --
Total U.S. Treasury 8,980 8,984 5.76% 3,994 3,998
U.S. Government Agencies
One year or less 499 503 7.42% 500 509
Over one through five years 11,375 11,415 6.59% 5,391 5,426
Over five years 3,786 3,808 6.89% 497 489
Total U.S. Government Agencies 15,660 15,726 6.69% 6,388 6,424
Mortgage-Backed Securities
One year or less 155 156 6.19% 393 393
Over one through five years 2,165 2,171 6.45% 2,506 2,516
Over five through ten years 4,057 4,102 7.01% 3,110 3,143
Over ten years 29,402 29,557 6.71% 21,367 21,426
Total mortgage-backed securities 35,779 35,986 6.72% 27,376 27,478
Other Investments
Over ten years 700 700 -- 3 3
Total other investments 700 700 -- 3 3
Total investment securities
available for sale $61,119 $61,396 6.57% $37,761 $37,903
</TABLE>
There were no investment securities classified as held to maturity at December
31, 1997 or December 31, 1996.
21
<PAGE> 23
Deposits
The following table presents the average amount outstanding and the average rate
paid on deposits by the Company for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
Average Average Average Average
(Dollars in thousands) Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Non-interest-bearing deposits $ 29,558 --% $ 23,628 --%
Interest-bearing deposits:
NOW accounts 9,020 2.00% 8,301 2.04%
Money market accounts 26,090 3.66% 23,466 3.94%
Savings deposits 6,424 3.33% 7,673 3.75%
Other time deposits 65,111 5.58% 54,408 5.64%
Total $136,203 3.66% $117,476 3.84%
</TABLE>
The following table presents the maturity of the Company's time deposits at
December 31, 1997.
<TABLE>
<CAPTION>
Other Time Other Time
Deposits Deposits
$100,000 Less Than
(Dollars In thousands) and Greater $100,000 Total
Months to Maturity:
<S> <C> <C> <C>
3 or less $10,869 $11,098 $21,967
Over 3 through 6 6,063 12,496 18,559
Over 6 through 12 4,496 8,980 13,476
Over 12 2,167 12,404 14,571
Total $23,595 $44,978 $68,573
</TABLE>
Capital Adequacy
There are various primary measures of capital adequacy for banks and bank
holding companies such as risk-based capital guidelines and the leverage capital
ratio.
As of December 31, 1997 the Bank exceeded its required levels of capital. The
Bank's risk-based capital ratio of Tier 1 capital to risk-weighted assets was
14.3%; its risk-based ratio of total capital to risk-weighted assets was 15.6%;
and its leverage ratio was 9.6%.
Inflation
Inflation has an important impact on the growth of total assets in the banking
industry and causes a need to increase equity capital at higher than normal
rates in order to maintain an appropriate equity to assets ratio. The Company
has been able to maintain an adequate level of equity, as previously mentioned,
and, though inflation has not been a material factor during the last two years,
management will address any future effects of inflation by managing its interest
rate sensitivity gap position through its asset/liability management program,
and by periodically adjusting its pricing of services and banking products to
take into consideration current costs.
Business Segment Information
During the past six years, the consolidated income of the Company and its
subsidiaries has been provided primarily through banking activities.
22
<PAGE> 24
Consolidated Balance Sheets
Summit Bank Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31,
(In thousands, except share and per share amounts) 1997 1996
<S> <C> <C>
Assets
Cash and due from banks (Note 7) $ 8,091 $ 7,443
Federal funds sold 1,200 15,900
Interest-bearing deposits in other banks 69 74
Investment securities available for sale (Note 2) 61,396 37,903
Other investments (Note 3) 1,566 681
Loans, net of unearned income of $1,393 and
$1,358 in 1997 and 1996, respectively 95,473 82,778
Loans held for sale 3,419 3,030
Less: allowance for loan losses (1,468) (1,931)
Net loans (Note 4) 97,424 83,877
Premises and equipment, net (Notes 5 and 11) 4,461 4,574
Customers' acceptance liability 1,397 1,184
Deferred income taxes (Note 12) 134 392
Other assets (Note 6) 4,558 2,220
Total assets $ 180,296 $ 154,248
Liabilities and stockholders' equity
Liabilities:
Deposits (Note 8):
Non-interest-bearing demand $ 35,193 $ 27,381
Interest-bearing:
Demand 34,348 39,487
Savings 6,681 6,288
Time, $100,000 and over 23,595 23,109
Other time 44,978 36,634
Total deposits 144,795 132,899
Acceptances outstanding 1,397 1,184
Obligation under capital lease (Note 11) 81 118
Federal Home Loan Bank advance (Note 10) 10,000 1,000
Other borrowed funds (Note 9) 2,756 657
Other liabilities 1,489 1,454
Total liabilities 160,518 137,312
Stockholders' equity (Notes 14, 15, and 16):
Common stock, $0.01 par value; 100,000,000 shares
authorized; 1,488,770 and 1,407,688 shares issued and
outstanding in 1997 and 1996, respectively 15 14
Additional paid-in capital 12,933 12,123
Net unrealized holding gains on investment securities
available for sale, net of income taxes 172 89
Retained earnings 6,658 4,710
Total stockholders' equity 19,778 16,936
Commitments and contingencies (Note 13)
Total liabilities and stockholders' equity $ 180,296 $ 154,248
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 25
Consolidated Statements of Income
Summit Bank Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In thousands, except share and per For the years ended December 31,
share amounts) 1997 1996 1995
Interest income:
<S> <C> <C> <C>
Loans, including fees $ 9,660 $ 8,615 $ 7,704
Federal funds sold 345 228 294
Interest-bearing deposits in other banks 6 4 3
Investment securities - taxable 1,243 658 946
Mortgage-backed securities 2,221 1,851 1,154
Total interest income 13,475 11,356 10,101
Interest expense:
Time deposits, $100,000 and over 1,381 1,365 1,016
Other deposits 3,601 3,083 3,034
Federal Home Loan Bank advance 350 47 --
Short-term borrowings and obligation
under capital lease 138 25 20
Total interest expense 5,470 4,520 4,070
Net interest income 8,005 6,836 6,031
Provision for loan losses (Note 4) 540 404 397
Net interest income after provision
for loan losses 7,465 6,432 5,634
Non-interest income:
Gains on sales of loans 616 581 713
Fees for international banking services 1,210 1,057 1,145
SBA servicing fees 378 462 438
Overdraft and NSF charges 426 369 362
Service charge income 272 209 216
Net gains (losses) on sales of investment
securities (Note 2) 162 126 (2)
Other 396 557 439
Total non-interest income 3,460 3,361 3,311
Non-interest expenses:
Salaries and employee benefits (Note 15) 3,649 3,356 3,046
Equipment 584 482 408
Net occupancy 516 476 452
Other (Note 19) 2,407 2,097 1,896
Total non-interest expenses 7,156 6,411 5,802
Income before income taxes 3,769 3,382 3,143
Income tax expense (Note 12) 1,319 1,174 1,042
Net income $ 2,450 $ 2,208 $ 2,101
Basic net income per share (Note 1) $ 1.71 $ 1.57 $ 1.49
Diluted net income per share and common
share equivalents (Note 1) $ 1.50 $ 1.43 $ 1.49
Weighted-average shares
outstanding-basic (Note 1) 1,436,023 1,407,688 1,407,688
Weighted-average shares
outstanding-diluted (Note 1) 1,632,586 1,546,332 1,414,670
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE> 26
Consolidated Statements of Stockholders' Equity
Summit Bank Corporation and Subsidiaries
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Net Unrealized
Holding
(In thousands, except share and per share amounts) Gains (Losses)
on Investment
Additional Securities
Common Stock Paid In Available Retained
Shares Amount Capital for Sale Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,407,688 $14 $12,123 $(96) $1,232 $13,273
Change in unrealized holding gains
(losses) on investment securities
available for sale,
net of tax effect -- -- -- 433 -- 433
Cash dividend paid, $.28 per share -- -- -- -- (394) (394)
Net income -- -- -- -- 2,101 2,101
Balance, December 31, 1995 1,407,688 14 12,123 337 2,939 15,413
Change in unrealized holding gains
(losses) on investment securities
available for sale,
net of tax effect -- -- -- (248) -- (248)
Cash dividend paid, $.31 per share -- -- -- -- (437) (437)
Net income -- -- -- -- 2,208 2,208
Balance, December 31, 1996 1,407,688 14 12,123 89 4,710 16,936
Issuance of common stock upon
exercise of options and warrants 81,082 1 810 -- -- 811
Change in unrealized holding gains
(losses) on investment securities
available for sale, net of tax effect -- -- -- 83 -- 83
Cash dividend paid, $.35 per share -- -- -- -- (502) (502)
Net income -- -- -- -- 2,450 2,450
Balance, December 31, 1997 1,488,770 $15 $12,933 $172 $6,658 $19,778
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
Consolidated Statements of Cash Flows
Summit Bank Corporation and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands)
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,450 $ 2,208 $ 2,101
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
premises and equipment 406 337 257
Deferred tax expense (benefit) 206 (37) (39)
Net amortization of premiums/discounts
on investment securities 79 54 91
Amortization of negative goodwill (110) (110) (109)
Provision for loan losses 540 404 397
Gains on sales of loans (616) (581) (713)
Proceeds from sales of loans 5,340 9,116 4,858
Net (gains) losses on sales of investment
securities (162) (126) 2
Gain on sale of premises and equipment -- -- (3)
Changes in other assets and liabilities:
(Increase) decrease in other assets (2,338) 2,814 (67)
Increase (decrease) in other liabilities 145 (1,224) 781
Net cash provided by operating activities 5,940 12,855 7,556
Cash flows from investing activities:
Proceeds from sales of investment
securities available for sale 21,949 6,745 1,991
Purchases of investment securities
available for sale and other investments (58,957) (22,950) (15,220)
Proceeds from maturities and principal collections
of investment securities available for sale 6,550 5,350 8,560
Principal collections on investment
securities available for sale 6,298 4,647 398
Purchases of investment securities held to maturity -- -- (19,401)
Proceeds from maturities of investment
securities held to maturity -- -- 8,000
Principal collections on investment
securities held to maturity -- -- 2,847
Loans made to customers, net of
principal collected on loans (18,811) (16,325) (11,881)
Purchases of premises and equipment
and leasehold improvements (293) (1,979) (689)
Proceeds from sale of premises and equipment -- -- 3
Net cash used in investing activities (43,264) (24,512) (25,392)
Cash flows from financing activities:
Net increase in demand and savings deposits 3,066 12,149 11,383
Net increase in time deposits 8,830 10,934 7,794
Principal payments for obligation
under capital lease (37) (34) (14)
Net increase in Federal Home Loan Bank advance 9,000 1,000 --
Net increase in other borrowed funds 2,099 657 --
Issuance of common stock upon exercise
of options and warrants 811 -- --
Dividends paid (502) (437) (394)
Net cash provided by financing activities 23,267 24,269 18,769
Net (decrease) increase in cash and
cash equivalents (14,057) 12,612 933
Cash and cash equivalents at beginning of year 23,417 10,805 9,872
Cash and cash equivalents at end of year $ 9,360 $ 23,417 $ 10,805
Supplemental disclosures of cash paid during the year:
Interest, net of amounts capitalized $ 5,404 $ 5,350 $ 3,979
Income taxes $ 930 $ 1,407 $ 1,376
Supplemental schedule of noncash
investing and financing activities:
Investment securities transferred from held to
maturity to available for sale $ -- $ -- $ 22,059
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 28
Summit Bank Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
1. Summary of Significant Accounting Policies
(a) General
Summit Bank Corporation (the "Company") was organized on October 15, 1986 for
the purpose of becoming a bank holding company. The Company was approved to
become a bank holding company by the Federal Reserve Bank of Atlanta on
September 11, 1987. On March 4, 1988, the Company acquired 100% of the stock of
The Summit National Bank (the "Bank"). The organizers received final approval
for the charter of the Bank from the Office of Comptroller of the Currency on
March 10, 1988, and the Bank began operations on that date.
(b) Business
The Company provides a full range of banking services to individual and
corporate customers through its subsidiary bank located in Atlanta, Georgia. The
Company is subject to competition from other financial institutions. The Company
is subject to the regulations of certain state and Federal agencies and
undergoes periodic examinations by those regulatory authorities.
(c) Basis of Presentation
The consolidated financial statements include the accounts of Summit Bank
Corporation and its subsidiaries, the Bank and the Merchant Bank, (inactive),
after elimination of all significant intercompany balances and transactions.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of other real
estate, management obtains independent appraisals for significant properties. A
substantial portion of the Company's loans are secured by real estate in the
northeast metropolitan Atlanta area. Accordingly, the ultimate collectibility of
a substantial portion of the Company's loan portfolio is susceptible to changes
in the real estate market conditions of this market area.
(d) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest-bearing deposits in other banks with maturities less
than 90 days, and federal funds sold. Federal funds are generally sold for
one-day periods.
(e) Investment Securities
Investment securities at December 31, 1997 and 1996 consist of U.S. Treasury
securities, obligations of U.S. Government agencies, mortgage-backed securities,
and equity securities. The Company's investment securities are classified as
available for sale securities and are reported at fair value.
Unrealized holding gains or losses, net of the related tax effect, on available
for sale securities are excluded from income and are reported as a separate
component of stockholders' equity until realized. The Company does not have any
financial derivative instruments other than fixed rate loan commitments.
Purchase premiums and discounts on investment securities are amortized and
accreted to interest income using the level yield method on the outstanding
principal balances. In establishing the accretion of discounts and
27
<PAGE> 29
amortization of premiums, the Company utilizes market based prepayment
assumptions. Interest and dividend income are recognized when earned. Realized
gains and losses for securities sold are included in income and are derived
using the specific identification method for determining the costs of securities
sold.
A decline in the fair value of any security below cost that is deemed other than
temporary is charged to income resulting in the establishment of a new cost
basis for the security.
(f) Loans
Loans are stated at the amount of unpaid principal, reduced by unearned income
and the allowance for loan losses. Unearned income, primarily arising from
discount basis installment loans and deferred gains on the sale of the Small
Business Administration ("SBA") guaranteed portion of loans, is recognized as
interest income over the terms of the loans by the interest method. Interest on
loans is recorded by using the simple interest method on the daily balance of
the principal amount outstanding.
Loans held for sale are stated at the lower of aggregate cost or market value
with market determined on the basis of open purchase commitments from
independent buyers. Gains or losses on disposition are recorded in non-interest
income, based on the net proceeds received and the recorded investment in the
loan sold. For sales of the SBA guaranteed portion of loans, the basis in the
portion of the loan sold is determined by allocating a portion of the loan
carrying value to the portion sold, based on its fair value relative to the fair
values of the portion of the loan retained and the related servicing asset, if
any.
Accrual of interest on loans is discontinued either when reasonable doubt exists
as to the full or timely collection of interest or principal or when a loan
becomes contractually past due by 90 days or more with respect to interest or
principal. When a loan is placed on non-accrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that cash is received
and where the future collection of principal is probable. Loans are returned to
accruing status only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
Loan fees, net of certain origination costs, are deferred and amortized over the
lives of the underlying loans using a method which approximates a level yield.
Impaired loans are measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Loans that are determined to be impaired require a
valuation allowance equivalent to the amount of the impairment. The valuation
allowance is established through the provision for loan losses.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the note agreement. Cash receipts on impaired loans
which are accruing interest are applied to principal and interest under the
contractual terms of the loan agreement. Cash receipts on impaired loans for
which the accrual of interest has been discontinued are applied to reduce the
principal amount of such loans until the principal has been recovered and are
recognized as interest income thereafter.
(g) Allowance For Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged to operations. Loans are charged against the allowance for loan losses
when management believes that the collection of the principal is
28
<PAGE> 30
not probable. Subsequent recoveries are added to the allowance. The allowance is
an amount that management believes will be adequate, determined through use of
its allowance for loan losses methodology, to absorb losses on existing loans
and commitments to extend credit. The allowance is established through
consideration of such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, the
underlying value of the collateral, and current economic conditions that may
affect the borrowers' ability to pay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, the financial condition of borrowers and other factors. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
(h) Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets, which are from three to forty years.
Leasehold improvements are amortized over the estimated useful lives of the
improvements or the term of the related lease, including expected renewal
periods for which there are renewal options, using the straight-line method.
(i) Other Real Estate
Other real estate, consisting of properties obtained through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure, is reported on an
individual asset basis at the lower of cost (carrying value at date of
foreclosure) or fair value less disposal costs. Fair value is determined on the
basis of current appraisals, comparable sales, and other estimates of value
obtained principally from independent sources. When properties are acquired
through foreclosure, any excess of the loan balance at the time of foreclosure
over the fair value of the real estate held as collateral is recognized as a
loss and charged to the allowance for loan losses. Subsequent write-downs are
charged to operations. Gains recognized on the disposition of the properties are
recorded in non-interest income.
Costs of improvements to other real estate are capitalized, while costs
associated with holding other real estate are charged to operations.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) Loan Servicing Assets
The guaranteed portion of SBA loans originated are normally sold on a servicing
retained basis. At the time of sale, a servicing asset is recorded if expected
servicing revenues exceed an amount approximating adequate servicing
compensation. The servicing asset is initially recorded based on its fair value
relative to the fair values of the portions of the loan sold and retained. The
servicing asset, included in other assets, is amortized on a method which
approximates a level yield over the estimated life of the serviced loans
considering assumed prepayment patterns.
29
<PAGE> 31
The carrying value of the servicing asset is periodically evaluated for
impairment if the Company experiences unanticipated principal prepayments which
causes the present value of future servicing fee revenue to be less than the
carrying value. If the servicing asset is determined to be impaired, a valuation
allowance is recorded equivalent to the amount of the impairment. The valuation
allowance is established through a charge to earnings.
(l) Net Income Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
Earnings Per Share, and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS). SFAS No. 128 replaces the
presentation of primary EPS and fully diluted EPS with a presentation of basic
EPS and diluted EPS, respectively. SFAS No. 128 also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures. All prior period EPS data has been restated to
conform with SFAS No. 128.
Basic EPS excludes dilution and is computed by dividing net income by
weighted-average shares outstanding. Diluted EPS is computed by dividing net
income by weighted-average shares outstanding plus potential common stock
resulting from dilutive stock options and warrants.
(m) Reclassifications
Certain 1996 and 1995 amounts have been reclassified for comparative purposes in
order to conform the prior periods to the 1997 presentation. Such
reclassifications had no impact on net income or stockholders' equity.
(n) Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. The term "comprehensive income" is used in the statement
to describe the total of all components of comprehensive income including net
income. "Other comprehensive income" refers to revenues, expenses, gains, and
losses that are included in comprehensive income but excluded from earnings
under current accounting standards. Currently, "other comprehensive income" for
the Company consists of items previously recorded directly in equity under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS
No. 130 is effective for financial statements for years beginning after December
15, 1997. The Company will adopt SFAS No. 130 effective January 1, 1998.
2. Investment Securities
Investment securities available for sale at December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
Obligations of U.S. Government
Agencies $24,640 $ 70 $-- $24,710
Mortgage-backed securities 35,779 260 53 35,986
Other investments 700 -- -- 700
Total $61,119 $330 $53 $61,396
</TABLE>
30
<PAGE> 32
Investment securities available for sale at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
Obligations of U.S. Government
Agencies $10,382 $ 52 $ 12 $10,422
Mortgage-backed securities 27,376 233 131 27,478
Other investments 3 -- -- 3
Total $37,761 $285 $143 $37,903
</TABLE>
The amortized costs and estimated fair values of investment securities at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
(In thousands) Cost Value
<S> <C> <C>
Due in one year or less $ 9,479 $ 9,487
Due after one year through five years 11,375 11,415
Due after five years through ten years 3,786 3,808
Due after ten years 700 700
Mortgage-backed securities 35,779 35,986
Total $61,119 $61,396
</TABLE>
Proceeds from the sales of investment securities available for sale during 1997,
1996, and 1995 were $21,949,000, $6,745,000, and $1,991,000, respectively. Gross
gains of $190,000, $170,000, and $24,000 and gross losses of $28,000, $44,000,
and $26,000 were realized on those sales in 1997, 1996, and 1995, respectively.
Investment securities with aggregate carrying amounts of approximately
$20,673,000 and $12,833,000 at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and for other purposes required or permitted
by law.
3. Other Investments
Other investments consist of Federal Home Loan Bank of Atlanta stock and Federal
Reserve Bank of Atlanta stock. Investment in stock of the Federal Home Loan Bank
of Atlanta is required for membership. Investment in stock of the Federal
Reserve Bank of Atlanta is required for national banks. Investment in stock of
the Federal Home Loan Bank of Atlanta and Federal Reserve Bank of Atlanta are
restricted stocks, as defined in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities; accordingly, the provisions of SFAS
No. 115 are not applicable to these stocks. Both stocks are reported in the
consolidated financial statements at cost.
4. Loans
Classifications of loans at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1995
<S> <C> <C>
Commercial, financial, and agricultural $ 29,111 $ 22,769
Real estate - construction 1,938 1,704
Real estate - mortgage 60,793 54,538
Installment loans to individuals 5,024 5,125
Less unearned income (1,393) (1,358)
Loans, net of unearned income 95,473 82,778
Loans held for sale - SBA 3,419 3,030
Less allowance for loan losses (1,468) (1,931)
Net loans $ 97,424 $ 83,877
</TABLE>
31
<PAGE> 33
In the ordinary course of business the Company extends loans to its directors,
executive officers, and principal stockholders and their affiliates at terms and
rates comparable to those prevailing at the time for comparable transactions
with other customers. In the opinion of management, these loans do not involve
more than the normal credit risk nor present other unfavorable features. The
following is a summary of activity during 1997 with respect to such aggregate
loans to these individuals and their associates:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance at December 31, 1996 $567
New loans --
Repayments (375)
Balance at December 31, 1997 $192
</TABLE>
Activity in the allowance for loan losses for the years ended December 31, 1997,
1996, and 1995 was as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $1,931 $1,686 $1,603
Provision for loan losses 540 404 397
Loans charged off (1,339) (312) (896)
Recoveries 336 153 582
Balance, end of year $1,468 $1,931 $1,686
</TABLE>
Impaired loans and related amounts included in the allowance for loan losses at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands) Balance Allowance Balance Allowance
<S> <C> <C> <C> <C>
Impaired loans, with a related
allowance $883 $65 $1,385 $398
Impaired loans, without allowance 894 -- 149 --
</TABLE>
The allowance for impaired loans was primarily determined based on the fair
value of the respective loans' collateral. Impaired loans of $894,000 and
$149,000 at December 31, 1997 and 1996, respectively, did not have a related
allowance because they were fully guaranteed by the SBA. The average recorded
investment in impaired loans for the years ended December 31, 1997, 1996, and
1995 was $1,198,000, $1,309,000, and $1,079,000, respectively. There was no
interest income recognized on impaired loans for the year ended December 31,
1997. Interest income recognized on impaired loans for the years ended December
31, 1996 and 1995, was approximately $161,000 and $93,000, respectively.
Nonaccrual loans amounted to approximately $1,777,000 and $922,000 at December
31, 1997 and 1996, respectively. Interest income on nonaccrual loans, at
December 31, 1997, 1996, and 1995, which would have been reported on an accrual
basis in 1997, 1996, and 1995, amounted to approximately $167,000, $30,000, and
$8,000, respectively.
At December 31, 1997, 1996, and 1995, the Company was servicing loans for others
with aggregate principal balances of approximately $57,534,000, $62,280,000, and
$49,190,000, respectively.
32
<PAGE> 34
5. Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
<S> <C> <C>
Land $ 985 $ 985
Building 2,742 2,720
Furniture and equipment under capital lease 183 183
Other furniture and equipment 1,692 1,458
Leasehold improvements 531 494
6,133 5,840
Less accumulated depreciation and amortization (1,672) (1,266)
Premises and equipment, net $4,461 $4,574
</TABLE>
The Company is the lessor under several noncancelable operating leases,
primarily for office space, that expire over the next five years. Future minimum
lease income under noncancelable operating leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands)
Year ending December 31,
<S> <C>
1998 $123
1999 83
2000 52
2001 2
Thereafter --
</TABLE>
6. Loan Servicing Assets
The following is a summary of activity with respect to loan servicing assets
included in other assets at December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 855,108 $ 586,576 $ 231,780
Servicing asset additions 430,235 392,733 401,908
Amortization of servicing assets (170,483) (124,201) (47,112)
Balance at end of year $ 1,114,860 $ 855,108 $ 586,576
</TABLE>
The results of the Company's impairment analysis has not identified any
significant impairment in the recorded servicing assets. Accordingly, the
Company has no valuation allowance for impairment at December 31, 1997 and 1996.
7. Reserve Requirements
At December 31, 1997 and 1996, the Federal Reserve Bank required that the Bank
maintain an average reserve balance of $1,061,000 and $789,000, respectively.
33
<PAGE> 35
8. Deposits
A summary of time deposits by maturity as of December 31, 1997 follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Time to maturity:
One year or less $54,002
Over one year through two years 12,164
Over two years through three years 1,343
Over three years through four years 841
Over four years through five years 179
Over five years 44
Total $68,573
</TABLE>
At December 31, 1997, the Company had approximately $4,100,000 in deposits from
its directors, executive officers, and principal stockholders and their
affiliates.
9. Other Borrowed Funds
The Company has available under a line of credit with SunTrust Bank
approximately $3,000,000. At December 31, 1997, the Company had no borrowings
outstanding under this credit line. The line of credit bears interest at prime,
less 1%, and will mature December 31, 1998. The Company has pledged
approximately 40%, or 4,000 shares, of the Bank's stock as collateral for this
line of credit.
Other borrowed funds at December 31, 1997 and 1996, include retail repurchase
agreements totaling $2,756,000 and $657,000, respectively. Retail repurchase
agreements principally represent overnight borrowings from commercial customers.
The weighted-average interest rate on these repurchase agreements was 4.00% at
December 31, 1997 and 1996. The repurchase agreements are collateralized by U.S.
Treasury securities with an aggregate carrying value of $2,758,000 and $685,000
at December 31, 1997 and 1996, respectively. The maximum amount of outstanding
repurchase agreements at any month-end during 1997 and 1996, respectively, was
$3,447,000 and $657,000. The average amount of outstanding repurchase agreements
for 1997 and 1996, respectively, was $2,471,000 and $154,000. All securities
underlying these repurchase agreements were under the institution's control.
There were no repurchase agreements outstanding during 1995.
10. Federal Home Loan Bank Advance
The Bank has available under a line of credit with the Federal Home Loan Bank of
Atlanta approximately $16,000,000. At December 31, 1997 and 1996, the Bank had
drawn and outstanding $10,000,000 and $1,000,000, respectively, under this
credit line. Such outstanding amounts bore interest at 5.75% and 5.18%,
respectively, and matured on January 15, 1998 and February 7, 1997,
respectively. The Bank has pledged approximately $11,000,000 in U.S. Government
securities as collateral for this line of credit.
11. Obligation Under Capital Lease
On December 30, 1994, the Company obtained approximately $166,000 of furniture
and equipment under a capital lease agreement. An additional $17,000 of
furniture and equipment were acquired under a capital lease agreement in January
1995. The obligation under the capital lease represents the present value of the
net future minimum payments. The leases expire in 2000 but provide for $6,500 in
quarterly rental payments for one additional year at the Company's option.
34
<PAGE> 36
Future minimum capital lease payments as of December 31, 1997 are:
<TABLE>
<CAPTION>
(In thousands)
Year ending December 31,
<C> <C>
1998 $49
1999 49
2000 1
Total minimum lease payments 99
Less amount representing interest at 10.5% (18)
Present value of net minimum lease payments $81
</TABLE>
12. Income Taxes
Income tax expense (benefit) attributable to income before income taxes for the
years ended December 31, 1997, 1996 and 1995 consists of:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Federal - current $1,028 $1,092 $1,032
State - current 85 119 49
Federal - deferred 176 (31) (39)
State-deferred 30 (6) --
Total $1,319 $1,174 $1,042
</TABLE>
Income tax expense (benefit) attributable to income before income taxes for the
years ended December 31, 1997, 1996, and 1995 differed from the amount computed
by applying the U.S. Federal income tax rate of 34% to income before income
taxes as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Computed "expected" income tax expense $1,281 $1,150 $1,069
Increase (decrease) resulting from:
Utilization of Federal net operating
loss carryforwards -- -- (4)
State income taxes, net of Federal
tax benefit 76 75 33
Change in the beginning-of-the-year balance
of the valuation allowance for deferred tax
assets allocated to income tax expense -- -- (104)
Amortization of negative goodwill (37) (37) (37)
Meals and entertainment expenses 11 13 3
Other (12) (27) 82
Total $1,319 $1,174 $1,042
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 1997 and 1996 are
presented below:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
Deferred tax assets (liabilities):
<S> <C> <C>
Loans, principally due to allowance for loan losses $ 183 $ 328
Merger costs amortization 12 25
Premises and equipment, principally due to
differences in depreciation (15) 35
Accrued liabilities 5 --
Net Federal and State operating loss carryforwards 2,432 2,435
Net unrealized holding gains on investment
securities available for sale (105) (53)
Total deferred tax assets 2,512 2,770
Less valuation allowance (2,378) (2,378)
Deferred tax assets, net of valuation allowance $ 134 $ 392
</TABLE>
35
<PAGE> 37
There was no change in the valuation allowance during 1997 or 1996. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projection for future taxable income over the
periods which the temporary differences resulting in the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1997.
At December 31, 1997, the Company has net operating loss carryforwards for
Federal and state income tax purposes of approximately $6,317,000 and
$7,628,000, respectively, which are available to offset future Federal and state
taxable income, subject to certain annual maximum limitations. The net operating
loss carryforwards expire at various amounts through 2008.
13. Commitments and Contingencies
In August 1995, the Company's Board of Directors entered into severance
agreements with each of the four (4) executive officers of the Bank. The
agreements basically provide that in the event of involuntary termination or a
change in the executive's position or compensation resulting from a change in
the control of the Company due to a merger, consolidation or reorganization,
each executive would be entitled to receive an amount equal to 100% of the
executive's base salary. These agreements have continuing three (3) year terms.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The Bank does not anticipate any material
losses as a result of these commitments and conditional obligations.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies, but
may include accounts receivable, inventory, property, plant, and equipment,
residential real estate, income producing properties, and cash on deposit. At
December 31, 1997, the Company had outstanding loan commitments totaling
$14,875,000 primarily at floating rates of interest with terms of less than one
year.
Standby and commercial letters of credit are conditional commitments issued by
the Company guaranteeing the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
36
<PAGE> 38
essentially the same as that involved in extending loan facilities to customers.
The Company holds collateral supporting these commitments, as deemed necessary.
At December 31, 1997, commitments under standby and commercial letters of credit
and guarantees aggregated $6,116,000.
The Company has several noncancelable operating leases, primarily for banking
offices, that expire over the next five years. One of these leases contains
rights to extend the Company's occupancy of the leased space twice, for one
additional year each. Rental expense for operating leases (except those with
lease terms of a month or less that were not renewed) during 1997, 1996, and
1995 was $404,000, $380,000, and $451,000, respectively.
Future minimum lease payments under noncancelable operating leases (with initial
or remaining lease terms in excess of one year) as of December 31, 1997 are:
<TABLE>
<CAPTION>
(In thousands)
Year ending December 31,
<C> <C>
1998 $ 419
1999 429
2000 120
2001 125
2002 67
Total minimum lease payments $1,160
</TABLE>
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
14. Stockholders' Equity
The organizers of the Company were issued warrants to purchase one share of
common stock for each share purchased by them in connection with the initial
public offering of the Company's common stock. Subject to certain limitations,
these warrants are exercisable at any time through March 10, 1998, at a per
share exercise price of $10. At December 31, 1997 warrants to purchase 392,478
shares at $10 per share were outstanding and exercisable. As of December 31,
1997, 70,757 warrants had been exercised.
The Company is authorized to issue up to 20,000,000 shares of special stock,
with no par value. Liquidation preferences and other such items are subject to
future determination by the Company's Board of Directors. At December 31, 1997,
no special stock had been issued.
15. Employee Benefit Plans
The Company had a Key Employee Incentive Stock Option Plan (the "Plan") that
expired on July 11, 1997. No additional shares have been granted under the Plan
subsequent to the expiration date. A revised plan will be submitted for approval
at the Company's 1998 Shareholder meeting. The exercise price for incentive
options is determined by the Board or Stock Option Committee as of the date the
option is granted. The period for the exercise of options shall not exceed the
earlier of ten years from the date of grant or expiration of the Plan. The
Company had reserved 150,000 shares of common stock for the Plan. As of December
31, 1997, 10,325 options have been exercised.
37
<PAGE> 39
Stock option activity during the years ended December 31, 1997, 1996, and 1995
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Options outstanding at beginning of year 41,225 41,225 42,425
Options granted 22,000 -- --
Options exercised (10,325) -- --
Options expired -- -- (1,200)
Options outstanding at end of year 52,900 41,225 41,225
Options exercisable at end of year 52,900 41,225 41,225
Option prices per share:
Options granted during the year $10.00-16.75 $ -- $ --
Options exercised during the year 10.00 -- --
Options outstanding at end of year 10.00-16.75 10.00 10.00
</TABLE>
The options outstanding at December 31, 1997 had a weighted-average exercise
price of $12.55 and a weighted-average contractual maturity of 2.9 years.
During 1997, the Company granted 2,000 options at an exercise price below
market; accordingly, $13,500 was recorded in salaries and employee benefits
expense for the year ended December 31, 1997.
The per share weighted-average fair value of stock options granted with an
exercise price equal to market and the per share weighted-average fair value of
stock options granted with an exercise price below market during 1997 was $5.05
and $8.12, respectively, using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected life of five years, expected
annual dividend rate of 2%, risk-free interest rate of 5.45%, and an expected
volatility of 31%.
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
stock options. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income for the year ended December 31, 1997 would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
<S> <C>
Net income:
As reported $2,450
Pro forma 2,446
Net income per share:
As reported:
Basic net income per share 1.71
Diluted net income per share 1.50
Pro forma:
Basic net income per share 1.70
Diluted net income per share 1.50
</TABLE>
The Company has a savings plan (the "Savings Plan") administered under the
provisions of the Internal Revenue Code Section 401(k). During 1997, 1996, and
1995, the Company and Bank made contributions totaling $37,292, $33,354, and
$33,438, respectively, to the Savings Plan. The Company computes contributions
based on matching of 50% of employee contributions up to 5%.
16. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-
38
<PAGE> 40
balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997 the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's capital category.
The actual capital amounts and ratios are also presented in the table below:
<TABLE>
<CAPTION>
Minimum to be well
Minimum capitalized under
for capital prompt corrective
(Dollars in thousands) Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital - risk-based
(to risk-weighted assets):
Bank $17,017 15.6% $8,750 - 8.0% $10,937 - 10.0%
Consolidated 19,964 17.8 8,976 - 8.0 N/A N/A
Tier 1 capital - risk-based
(to risk-weighted assets):
Bank $15,649 14.3% $4,375 - 4.0% $ 6,562 - 6.0%
Consolidated 18,561 16.5 4,488 - 4.0 N/A N/A
Tier 1 capital - leverage
(to average assets):
Bank $15,649 9.6% $6,551 - 4.0% $ 8,189 - 5.0%
Consolidated 18,561 11.2 6,653 - 4.0 N/A N/A
As of December 31, 1996:
Total capital - risk-based
(to risk-weighted assets):
Bank $15,146 15.5% $7,838 - 8.0% $ 9,798 - 10.0%
Consolidated 17,323 17.3 8,016 - 8.0 N/A N/A
Tier 1 capital - risk-based
(to risk-weighted assets):
Bank $13,913 14.2% $3,919 - 4.0% $ 5,879 - 6.0%
Consolidated 16,062 16.0 4,008 - 4.0 N/A N/A
Tier 1 capital - leverage
(to average assets):
Bank $13,913 10.2% $5,467 - 4.0% $ 6,833 - 5.0%
Consolidated 16,062 11.6 5,552 - 4.0 N/A N/A
</TABLE>
39
<PAGE> 41
17. Fair Values of Financial Instruments
SFAS No. 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 or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions would significantly affect the estimates. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements.
Fair value estimates are based on existing on-and off-balance-sheet financial
instruments and other recorded assets and liabilities without attempting to
estimate the value of anticipated future business. In addition, tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of the estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments and certain other assets and
liabilities:
Cash and Due From Banks: The carrying amounts of cash and due from banks
approximate those assets' fair values.
Federal Funds Sold: The carrying amounts of federal funds sold approximate their
fair value.
Interest-bearing deposits in other banks: The carrying amounts of
interest-bearing deposits in other banks approximate their fair value.
Investment 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.
Other investments: The carrying amounts of other investments approximate their
fair value.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for all other loans are estimated based upon a discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet
instruments are based on a comparison with terms, including interest rate and
commitment period, currently prevailing to enter into similar agreements, taking
into account credit standings. The carrying and fair values of off-balance-sheet
instruments at December 31, 1997 and 1996 were not material.
Deposits: Fair values for fixed-rate time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on deposits of similar terms of maturity. The carrying amounts of all
other deposits, due to their short-term nature, approximate their fair values.
40
<PAGE> 42
Federal Home Loan Bank advance: The carrying value of the Federal Home Loan Bank
advance, due to its short-term nature, approximates its fair value.
Other borrowed funds: The carrying amounts of other borrowed funds, due to their
short-term nature, approximate their fair values.
Obligation under capital lease: The carrying amount of the obligation under
capital lease approximates its fair value.
The estimated fair value of the Company's financial instruments as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $8,091 $8,091 $7,443 $7,443
Federal funds sold 1,200 1,200 15,900 15,900
Interest-bearing deposits
in other banks 69 69 74 74
Investment securities 61,396 61,396 37,903 37,903
Other investments 1,566 1,566 681 681
Loans, net 97,424 97,371 83,877 83,827
Liabilities:
Deposits:
Non-interest-bearing 35,193 35,193 27,381 27,381
Interest-bearing demand
and savings 41,029 41,029 45,775 45,775
Time deposits 68,573 69,418 59,743 60,028
Federal Home Loan Bank advance 10,000 10,000 1,000 1,000
Other borrowed funds 2,756 2,756 657 657
Obligation under capital lease 81 81 118 118
</TABLE>
18. Condensed Financial Information of Summit Bank Corporation (Parent
Company Only)
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In thousands except share and per share amounts) 1997 1996
<S> <C> <C>
Assets
Cash and due from Bank $ 162 $ 59
Investment in the Bank, at equity 16,865 14,787
Other investments 700 --
Premises and equipment, net 2,089 2,142
Other assets 9 --
Total assets $19,825 $16,988
Liabilities and Stockholders' Equity
Accrued liabilities $ 47 $ 52
Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 shares
authorized; 1,488,770 and 1,407,688 shares issued and
outstanding in 1997 and 1996, respectively 15 14
Additional paid-in capital 12,933 12,123
Net unrealized holding gains on investment
securities available for sale, net of income taxes 172 89
Retained earnings 6,658 4,710
Total stockholders' equity 19,778 16,936
Total liabilities and stockholders' equity $19,825 $16,988
</TABLE>
41
<PAGE> 43
Condensed Statements of Income (Parent Company Only)
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Income:
Interest on investment securities $ 3 $ -- $ --
Other income 7 -- --
Dividend income received from Bank 505 675 300
Total income 515 675 300
Operating expenses 92 122 112
Income before taxes and equity in
undistributed net income of Bank 423 553 188
Income tax benefit 32 42 --
Income before equity in undistributed
net income of Bank 455 595 188
Equity in undistributed net income of Bank 1,995 1,613 1,913
Net income $ 2,450 $ 2,208 $ 2,101
</TABLE>
Condensed Statements of Cash Flows (Parent Company Only)
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,450 $ 2,208 $ 2,101
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 70 58 37
Equity in undistributed net income of Bank (1,995) (1,613) (1,913)
(Increase) decrease in other assets (9) 10 146
(Decrease) increase in other liabilities (5) (401) 372
Net cash provided by operating activities 511 262 743
Cash flows from investing activities:
Purchases of investment securities
available for sale (700) -- --
Purchases of premises and equipment (17) (111) (198)
Net cash used in investing activities (717) (111) (198)
Cash flows from financing activities:
Dividend paid to shareholders (502) (437) (394)
Issuance of common stock upon exercise
of options and warrants 811 -- --
Net cash provided by financing activities 309 (437) (394)
Net increase (decrease) in cash and cash equivalents 103 (286) 151
Cash and cash equivalents at beginning of year 59 345 194
Cash and cash equivalents at end of year $ 162 $ 59 $ 345
Supplemental disclosures of cash paid during the year:
Income taxes $ 930 $ 1,407 $ 1,376
</TABLE>
The primary source of funds available to the Parent Company to pay shareholder
dividends and other expenses is from the Bank. Bank regulatory authorities
impose restrictions on the amounts of dividends that may be declared by the
Bank. Further restrictions could result from a review by regulatory authorities
of the Bank's capital adequacy. The amount of cash dividends available from the
Bank for payment in 1998 is $3,608,000 plus 1998 net earnings of the Bank. At
December 31, 1997, $13,257,000 of the Parent Company's investment in the Bank is
restricted as to dividend payments from the Bank to the Parent Company.
42
<PAGE> 44
19. Supplemental Financial Data
Components of other non-interest expenses in excess of 1% of total interest and
other income for any of the respective years are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Data/item processing $323 $332 $218
Telephone 233 136 132
Marketing and community relations 228 271 157
Postage and courier 198 163 168
Accounting and other professional 182 192 166
Legal fees 181 123 120
Other losses 161 167 137
Office supplies 147 157 130
Insurance 96 78 181
</TABLE>
20. Subsequent Event
On January 13, 1998, the Bank signed a letter of intent to acquire a California
chartered bank setting forth mutual intentions for the California institution to
be acquired by the Bank. The tentative agreement provides for the Bank to
purchase the institution for a cash price of $6.25 million. The institution had
total (unaudited) assets of $40 million and stockholders' equity of $3 million
at December 31, 1997. The merger is subject to execution of a definitive
agreement and approval of the California Department of Financial Institutions,
the Comptroller of the Currency, the California institution's shareholders, and
any and all other necessary regulatory authorities, together with any and all
necessary contractual and creditor consents.
43
<PAGE> 45
Independent Auditors' Report
The Board of Directors and Stockholders
Summit Bank Corporation:
We have audited the accompanying consolidated balance sheets of Summit Bank
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Summit Bank
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Atlanta, Georgia
January 23, 1998
44
<PAGE> 46
Corporate and Shareholder Information
Board of Directors P. Carl Unger, Ph.D., President, Boxtree Farm Enterprises;
Chairman, Summit Bank Corporation
Jack N. Halpern, President, Halpern Enterprises, Inc., Vice Chairman, Summit
Bank Corporation
David Yu, President and CEO, Summit Bank Corporation; Chairman, The Summit
National Bank
James S. Lai, Professor, Georgia Institute of Technology; Owner, Pavtec
Engineering Technology, Inc.,
Vice Chairman, The Summit National Bank
Pin Pin Chau, President and CEO, The Summit National Bank; Executive Vice
President, Summit Bank Corporation
Aaron I. Alembik, Partner, Alembik and Alembik
Gerald L. Allison, CEO and Chairman, AJC International, Inc.
Peter M. Cohen, President, Trident Corporate Services, Inc.
Paul C. Y. Chu, Chairman, Novax Group
Donald R. Harkleroad, Partner, Harkleroad & Hermance, P.C.
Daniel T. Huang, President, Polyarn Corporation
Shafik H. Ladha, President, Ladha International, Inc.
Sion Nyen Lai, President, Fulton Beverage Center, Inc.
Roger C. C. Lin, President, Oriental Treasure Imports, Inc.
Shih Chien Lo, President, Lo Brothers Associates
Nack Paek, President, Government Loan Service Corp.
Carl L. Patrick, Jr., Director, Carmike Cinemas, Inc.
Cecil M. Phillips, Principal, Phillips International L.P.
W. Clayton Sparrow, Jr., Partner, McCullough Sherrill, LLP
Howard H. L. Tai, Private Investor
Executive Officers
David Yu, President and CEO, Summit Bank Corporation; Chairman, The Summit
National Bank
Pin Pin Chau, Executive Vice President, Summit Bank Corporation; President and
CEO, The Summit National Bank
Gary K. McClung, Secretary, Executive Vice President and Principal Financial
Officer, Summit Bank Corporation;
Executive Vice President and Chief Financial Officer, The
Summit National Bank
H. A. Dudley, Jr., Executive Vice President, Summit Bank Corporation; Executive
Vice President, The Summit National Bank
Shareholder Information
Transfer Agent
SunTrust Bank, Corporate Trust Department, P.O. Box 4625, Atlanta, Georgia 30302
Annual Meeting
The Annual Meeting of Stockholders will be held Saturday at 10:00 a.m., April
25,1998 at the Atlanta Marriott Perimeter Center, 246 Perimeter Center Parkway,
N.E., Atlanta, Georgia 30346.
Form 10-K
The Company's Annual Report on Form 10-K for the year ended December 31, 1997,
is available without charge to stockholders upon request. Write or call Gary K.
McClung, Executive Vice President, 4360 Chamblee Dunwoody Road, Atlanta, Georgia
30341, (770) 454-0400.
45
<PAGE> 47
Corporate Headquarters / Main Office
4360 Chamblee Dunwoody Road
Atlanta, Georgia 30341
Tel: 770.454.0400
Asian Banking Center
3490 Shallowford Road
Chamblee, Georgia 30341
Tel: 770.455.1772
Vinings Office
2727 Paces Ferry Road NW
One Paces West, Suite 150
Atlanta, Georgia 30339
Tel: 770.432.1000
East Marietta Office
595 Franklin Road
Marietta, Georgia 30067
Tel: 770.421.0200
Peachtree Corners Office
3280 Holcomb Bridge Road NW
Norcross, Georgia 30092
Tel: 770.582.0705
46
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors and Stockholders
Summit Bank Corporation:
We consent to incorporation by reference in the registration statement (No.
33-29199) on Form S-8 of Summit Bank Corporation of our report dated January 23,
1998, relating to the consolidated balance sheets of Summit Bank Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1997, which report appears in the
December 31, 1997 annual report on Form 10-K of Summit Bank Corporation.
KPMG Peat Marwick LLP
Atlanta, Georgia
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 10-K FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,091
<INT-BEARING-DEPOSITS> 69
<FED-FUNDS-SOLD> 1,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,396
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 98,892
<ALLOWANCE> (1,468)
<TOTAL-ASSETS> 180,296
<DEPOSITS> 144,795
<SHORT-TERM> 12,756
<LIABILITIES-OTHER> 1,489
<LONG-TERM> 0
15
0
<COMMON> 0
<OTHER-SE> 19,763
<TOTAL-LIABILITIES-AND-EQUITY> 180,296
<INTEREST-LOAN> 9,660
<INTEREST-INVEST> 3,809
<INTEREST-OTHER> 6
<INTEREST-TOTAL> 13,475
<INTEREST-DEPOSIT> 4,982
<INTEREST-EXPENSE> 5,470
<INTEREST-INCOME-NET> 8,005
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 162
<EXPENSE-OTHER> 7,156
<INCOME-PRETAX> 3,769
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<YIELD-ACTUAL> 5.26
<LOANS-NON> 1,777
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<ALLOWANCE-CLOSE> 1,468
<ALLOWANCE-DOMESTIC> 1,468
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
