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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, 1998
Commission File Number 000-21267
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. [ ]
As of March 15, 1999, the aggregate market value of the Common Stock
held by persons other than directors and executive officers of the registrant
was $17,198,875 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, 1999, there were 1,739,718 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 1999 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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FORM ANNUAL PROXY
10-K REPORT STATEMENT
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PART I
<S> <C> <C> <C> <C>
ITEM 1. Business 3-12
(a) Overview 3
(b) Banking Services 3-4
(c) Locations and Service Areas 4
(d) Asian-American Market 4-5
(e) International Services Market 5
(f) Supervision and Regulation 5-12
(g) Competition 12
(h) Fiscal and Monetary Policy 12
(i) Employees 12
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of
Security Holders 14
PART II
ITEM 5. Market for Registrant's Common Equity
and Related Stockholder Matters 15
ITEM 6. Selected Financial Data 16
ITEM 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-25
ITEM 8. Financial Statements and Supplementary
Data 26-47
ITEM 9. Not Applicable 17
PART III
ITEM 10. Directors and Executive Officers of the
Registrant 2-7
ITEM 11. Executive Compensation 9-12
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management 7,14-15
ITEM 13. Certain Relationships and Related
Transactions 7
PART IV
ITEM 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 19-20
SIGNATURES 21-22
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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 Company's
primary activity since then has been the ownership and operation of the Bank.
The Bank is a banking association organized under the laws of the United States.
The Bank engages in commercial banking from its main office and five branch
offices, four of which are located in its primary service area of northern
metropolitan Atlanta, Georgia. The fifth branch office was added on June 30,
1998 with the Bank's acquisition of California Security Bank ("CSB") in San
Jose, California. The Bank's fifth office is in an ethnic community of San Jose
that is very similar to part of the Bank's Atlanta primary service area. The
Bank seeks to serve four principal markets: (1) individuals, professionals, and
small to medium-sized businesses in the Bank's primary service areas; (2) ethnic
communities, principally Asian-Americans and Latin Americans, located in the
primary service areas, including businesses operated by members of such
communities; (3) individuals, professionals, and businesses in the primary
service areas requiring the international financial transaction services offered
by the Bank; and (4) foreign corporations and individuals requiring specialized
banking services (international private banking) in the Atlanta and San Jose
metropolitan areas.
Management believes the identified markets continue to provide significant
growth opportunities for the Bank. The Bank offers these markets a variety of
traditional and specialized banking services, and emphasizes personal service,
cultural sensitivity and accessibility of management.
BANKING SERVICES
The Bank offers the full range of deposit services typically offered by 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.
However, the Bank tailors its transaction accounts and time certificates 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. The Bank solicits these accounts from individuals, businesses,
associations, and government entities. All deposit accounts are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount
($100,000 per depositor).
There are certain risks in making all loans. A principal economic risk in making
loans is the creditworthiness of the borrower. Other risks in making loans
include the period of time over which loans may be repaid, changes in economic
and industry conditions, in dealing with individual borrowers, and uncertainties
about the future value of any collateral. The Bank's management maintains an
allowance for loan losses based on, among other things, an evaluation of
economic conditions and other lending risks, and its regular reviews of
delinquencies and loan portfolio quality. The Bank's allowance for potential
loan losses is based upon a percentage of the total outstanding loan portfolio
and upon a percentage of the balance of 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 originating a guaranteed loan, the
Bank may sell the guaranteed portion (approximately 75%) resulting in a gain on
the sale of the portion of the loan sold. In addition, the Bank retains the
servicing rights to these loans which generate servicing income on the portion
sold. Personal (or consumer) loans include secured and unsecured loans for
financing automobiles, home improvements,
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education, and personal investments. The Bank also offers residential mortgages,
through a brokering arrangement with Century Mortgage Corporation.
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, INSTA TELLER and CIRRUS networks of
automated teller machines that may be used by Bank customers in major cities
throughout Georgia and California, and in various other cities in the United
States and 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 also issues bankers acceptances. These drafts or
bills of exchange facilitate international trade and are available only after
the Bank completes a diligent credit review process. In addition, the Bank
offers private banking services to qualified foreign individuals and
corporations establishing business operations in Atlanta. These specialized
private banking services include bill paying, statement and mail holding,
currency exchange, international funds transfers and personal lines of credit
(including credit card services).
In addition, the Bank's private banking group assists executives living in the
United States with personal banking services that support international business
objectives. These services include introductions to correspondent financial
services as well as to the Company's general business contacts in international
trade markets.
The Bank does not offer personal or corporate trust services (other than
retirement custodial services for IRAs and similar plans).
LOCATIONS AND SERVICE AREAS
The Bank leases its main office at 4360 Chamblee-Dunwoody Road, Atlanta, Georgia
30341. The main office 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 in the Company's 18,000 square foot office
building at 3490 Shallowford Road, Chamblee, DeKalb County, Georgia. The Bank
also leases a branch facility at One Paces West, Suite 150, 2727 Paces Ferry
Road in Vinings. In 1996, the Bank purchased a 4,560 square foot building on
approximately 1.2 acres located at 595 Franklin Road, Marietta, Georgia to serve
as its third branch office. A 7,700 square foot building on approximately 1.3
acres at 3280 Holcomb Bridge Road, Norcross, Georgia serves as its fourth branch
office. In 1998, the Bank assumed a lease for the office acquired through the
purchase of CSB. This facility has 8,142 square feet at 1694 Tully Road, San
Jose, California and is the Bank's fifth branch location.
One of the Bank's two primary service areas covers a section of North Atlanta,
Georgia including portions of DeKalb, Fulton, Cobb, and Gwinnett Counties. This
area 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. This
area is crossed 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. A second primary
service area covers the city of San Jose, California. San Jose is located in the
south San Francisco bay area and is crossed by the major thoroughfares of
Highway 101 and Interstates 880, 680, and 280.
ASIAN-AMERICAN MARKETS
One of the Bank's principal target markets is the Atlanta Asian-American
population, including 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
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population located in north Atlanta, including parts of DeKalb, Fulton, and Cobb
counties. The San Jose market consists largely of Vietnamese-American and
Latin-American individuals and businesses.
Management believes the locations of Bank's main office and Atlanta branch
offices are convenient to a large number of both Asian- and Latin-Americans. At
year-end 1998, approximately 50% of the Bank's Atlanta customers were
Asian-American. Vietnamese and Latin-American individuals comprise the majority
of the Bank's San Jose branch customer base.
Management believes that the Asian-American community has a high savings rate,
low unemployment, and a commitment to economic advancement through education and
hard work. In addition, a significant percentage of Asian-Americans in the
Bank's market are first generation U.S. immigrants who may be constrained in
their current use of banking services at other financial institutions by
language and other cultural barriers.
The Bank has employed, and will continue to employ, personnel with Asian and
Spanish language skills and first-hand knowledge of the communities to be
served. Management believes that language ability and cultural sensitivity,
combined with accessibility to senior management, enhances the Bank's
competitive position in its market.
INTERNATIONAL SERVICES MARKET
Management believes that a growing number of domestic businesses in the
metropolitan areas served by the Bank (and, in particular, a growing number of
small- to medium-sized businesses) require its international banking services.
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 from an out-of-state location;
personnel in branch facilities closer to smaller businesses generally are not
trained to address these specialized needs. Management believes that the Bank
has penetrated, and will be able to further penetrate, this market by providing
businesses with convenient access to personnel specially trained to provide
international 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 believes that
the commercial and political risks of these activities are acceptable based on
our assessment of available information on the correspondent banks and the
respective countries. As of December 31, 1998, the total amount outstanding
under such facilities was $1,035,017.
In addition to domestic businesses requiring international banking services,
management believes that a growing number of foreign businesses in Atlanta and
San Jose, along with their executives and employees, frequently require the
international banking services provided by the Bank. Foreign nationals doing
business in the United States are often unfamiliar with our banking practices.
The Bank has personnel with the 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 about the Company.
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.
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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 was effective on September 29, 1995, repealed prior statutory
restrictions on interstate acquisitions of banks by bank holding companies.
Therefore, the Company may now acquire a bank in another state, and any bank
holding company located outside Georgia may acquire a Georgia-based bank,
regardless of state law to the contrary, but subject to certain
deposit-percentage, aging, and other restrictions. The Interstate Banking Act
also generally provided that, as of June 1, 1997, national and state-chartered
banks could 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. Subsequent to July 1, 1998, the
number of de novo branches that may be established was no longer limited.
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
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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 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. The Bank 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
Bank's operations and has authority to approve or disapprove any bank mergers,
consolidations, establishment of branches, and similar corporate actions. The
OCC also may prohibit 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 Company's principal sources of cash flow, 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 the payment of dividends 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 is
an unsafe and unsound banking practice. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), a depository institution may not
pay dividends if payment would cause it to become undercapitalized or if it
already is undercapitalized. See "-- Prompt Corrective Action." Moreover, the
federal agencies have policies that provide that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
At December 31, 1998, under federal and state dividend rules, the Bank, without
obtaining regulatory approvals, could declare aggregate dividends to the Company
of up to approximately $4 million, plus 1999 net earnings of the Bank.
Dividend payments by the Company and the Bank may also be affected or limited by
other factors, such as the regulatory requirements to maintain adequate capital.
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and by the appropriate federal
banking regulator in the case of the Bank. The Federal Reserve has two basic
measures of capital adequacy for bank holding companies: a risk-based measure
and a leverage measure.
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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, 1998, 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 14.8% and 13.6%,
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, 1998 was 9.8%. 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 the risk-based and leverage capital requirements of the
OCC, which are substantially similar to those of the Federal Reserve for bank
holding companies.
The Bank exceeded applicable minimum capital requirements as of December 31,
1998. No federal banking agency has imposed any additional capital requirements
on the Company or the Bank. Failure to meet regulatory 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 became 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.
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SUPPORT OF THE BANK
Under Federal Reserve policy, the Company is expected to be a source of
financial strength for, and to commit resources to support the Bank. The Bank
may need this support 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 may be 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. The Act, which was effective in December 1992,
requires the federal banking regulators to establish five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized) and to take certain mandatory
supervisory actions, and to consider other discretionary actions, with respect
to institutions in the three undercapitalized categories. The severity of the
regulatory actions depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, FDICIA requires a 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.
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The capital levels established for each of the categories are as follows:
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Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
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Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
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Adequately Capitalized 4% or more 8% or more 4% or more --
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Undercapitalized less than 4% Less than 8% less than 4% --
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Significantly less than 3% Less than 6% less than 3% --
Undercapitalized
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Critically 2% or less -- -- --
Undercapitalized tangible equity
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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, 1998, the Bank met each of the capital levels to qualify as a
well capitalized financial institution.
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;
(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
10
<PAGE> 11
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 October, 1996, the FDIC revised the SAIF assessment rate schedule to (a)
widen the assessment rate spread among institutions in the different capital and
risk assessment categories, (b) reduce the assessment rate range assessable on
SAIF deposits to 0 to 27 basis points, and (c) set 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 1.22 basis points
and 6.10 basis points, respectively. Beginning in January 2000, BIF- and SAIF-
insured institutions will share the FICO interest costs at equal rates currently
estimated to be 2.43 basis points.
Under the FDIA, the FDIC may terminate insurance of deposits 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.
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 1998,
nor will it be required to pay a deposit insurance assessment in 1999. The Bank
was required to pay the FICO assessments in 1998 and will also be required to
pay these assessments in 1999. 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.
11
<PAGE> 12
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
areas served by the Bank. In one or more aspects of their businesses, the
Company and the Bank compete with 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, the San Jose area and elsewhere. Many of these
competitors have substantially greater resources and lending limits than the
Bank and may offer services, such as trust services, that the Company and the
Bank do not provide. The Bank has employees fluent in foreign languages
including Mandarin, Cantonese, Korean, Vietnamese, German, French, Spanish and
others which enhances the Bank's ability to compete in target markets.
FISCAL AND MONETARY POLICY
The business of banking 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, accounts for the major portion of a bank's earnings. Thus, the
earnings and growth of the Company and the Bank are subject to 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 Federal Reserve's monetary policies historically have had a significant
effect on the operating results of commercial banks and will continue to do so
in the future. Management cannot predict the national and international economic
conditions and money markets, changes in policy by monetary and fiscal
authorities, and the effect of such factors on the Company and the Bank.
EMPLOYEES
As of March 15, 1999, the Company and the Bank had 104 full-time equivalent
employees. Management does not anticipate additional hiring in 1999, except to
support normal growth of business. 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 a lease for 19,403 square feet on the main and third floors
of the building. The 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 expired in December 1998,
and the lease was extended to December 2000. The main office on the first floor
contains 8,897 square feet of space which includes six teller stations, two
customer service 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 Company currently has leased 10,639 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 has 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 has 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 has 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 on 1.3
acres at 3280 Holcomb Bridge Road, Norcross, Georgia. This office has 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 has additional office space which will be used at a later date. The
branch opened in November 1996.
The Bank's San Jose branch office is in leased office space at 1694 Tully Road.
The branch, as anchor tenant in the building, occupies 8,142 square feet. This
branch has five teller stations, in addition to a merchant booth for large
commercial transactions, and two walk-up ATM machines.
13
<PAGE> 14
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.
14
<PAGE> 15
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company currently has three market makers for shares of its common stock.
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, 1999, the quoted purchase price for the Company's shares was $15.63
per share. There were approximately 324 holders of record of the Company's
Common Stock at March 15, 1999.
The Company began paying cash dividends in 1995 and paid $.28 per share in that
year. The Company paid $.35 and $.39 per share in cash dividends in 1997 and
1998, respectively. Although the Company currently plans to pay 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
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 10, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1998 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 is 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
$690,000 to the Company in 1998. As of December 31, 1998, the Bank had
cumulative net retained profits for 1997 and 1998 of $3,989,000, which is
entirely available for dividends to the Company in 1999, plus the Bank's 1999
net earnings, if any, provided that the necessary transfers of net profits to
surplus were made. The OCC also may to enjoin a national bank from engaging in
an unsafe or unsound practice, which may include the payment of a dividend under
certain circumstances.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the years
ended December 31, 1998, 1997, 1996, 1995, and 1994 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 1998 1997 1996 1995 1994
- ------------------ --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $263,161 $180,296 154,248 $130,076 $108,146
Investment securities 96,101 62,962 38,584 32,702 19,274
Loans 133,496 98,892 85,808 78,177 73,801
Allowance for loan losses 2,336 1,468 1,931 1,686 1,603
Deposits 218,647 144,795 132,899 109,816 90,639
Federal Home Loan Bank advances 10,000 10,000 1,000 -- --
Other borrowed funds 5,987 2,756 657 -- --
Obligations under capital lease 39 81 118 152 166
Stockholders' equity 24,505 19,778 16,936 15,413 13,273
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
Statement of Income Data 1998 1997 1996 1995 1994
- ------------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 17,253 $ 13,475 $ 11,356 $ 10,101 $ 8,155
Interest expense 7,309 5,470 4,520 4,070 2,800
Net interest income 9,944 8,005 6,836 6,031 5,355
Provision for loan losses 455 540 404 397 430
Net interest income after
provision for loan losses 9,489 7,465 6,432 5,634 4,925
Non-interest income 3,575 3,460 3,361 3,311 3,050
Non-interest expenses 8,792 7,156 6,411 5,802 5,209
Income tax expense 1,503 1,319 1,174 1,042 838
Net income $2,769 $2,450 $2,208 $ 2,101 $ 1,928
Per Share Data
Book value per share at year end $13.68 $13.28 $12.03 $ 10.95 $ 9.43
Basic earnings per share 1.56 1.71 1.57 1.49 1.37
Diluted earnings per share 1.53 1.50 1.43 1.49 1.37
Weighted-average shares outstanding - basic 1,773,010 1,436,023 1,407,688 1,407,688 1,407,688
Weighted-average shares outstanding - diluted 1,804,828 1,632,586 1,546,332 1,414,670 1,407,688
Dividends declared $ .39 $ .35 $ .31 $ .28 --
Dividend payout ratio 25.00% 20.47% 19.75% 18.79% --
Ratios
Return on average assets 1.24% 1.47% 1.59% 1.74% 1.78%
Return on average equity 11.89% 13.36% 13.80% 15.09% 15.65%
Average equity/average assets 10.47% 11.03% 11.53% 11.51% 11.37%
Net interest margin 4.90% 5.26% 5.44% 5.50% 5.39%
Non-performing assets/total loans
and other real estate 2.70% 1.80% 1.07% .14% .37%
Allowance for loan losses/total loans 1.75% 1.48% 2.25% 2.16% 2.17%
Non-interest expense/net
interest income and non-interest income 65.03% 62.42% 62.87% 62.11% 61.98%
</TABLE>
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference to the 1998 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 1998 Annual Shareholders' Report -- See Cross
Reference Index on page 2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the Definitive Proxy Statement for the 1999 Annual
Shareholders' Meeting -- See Cross Reference Index on page 2.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Definitive Proxy Statement for the 1999 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 1999 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 1999 Annual
Shareholders' Meeting -- See Cross Reference Index on page 2.
18
<PAGE> 19
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
1999 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).
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
2.1 Agreement and Plan of Merger by and between The Summit National Bank
and California Security Bank dated as of March 27, 1998 (incorporated
by reference to Exhibit 2.1 of Summit Bank Corporation's Current Report
on Form 8-K dated March 27, 1998.)
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 1998 Stock Incentive Plan, as of February 23,
1998 (incorporated by reference to Appendix A to the Company's Proxy
Statement filed on March 18, 1998).
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.)
</TABLE>
19
<PAGE> 20
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 (for SEC use only)
* 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 1998.
20
<PAGE> 21
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 24, 1999
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>
<CAPTION>
<S> <C> <C>
/s/ David Yu Director, President and Chief Dated: March 24, 1999
- ------------------------------------- Executive Officer
David Yu
/s/ Pin Pin Chau Director, Executive Dated: March 24, 1999
- ------------------------------------- Vice President
Pin Pin Chau
/s/ Gary K. McClung Principal Financial Officer Dated: March 24, 1999
- ------------------------------------- and Principal Accounting
Gary K. McClung Officer and Secretary
/s/ Jack N. Halpern Director, Chairman Dated: March 24, 1999
- ------------------------------------- of the Board
Jack N. Halpern
/s/ Gerald L. Allison Director, Dated: March 24, 1999
- ------------------------------------- Vice Chairman
Gerald L. Allison of the Board
/s/ Aaron I. Alembik Director Dated: March 25, 1999
- -------------------------------------
Aaron I. Alembik
Director Dated:
- -------------------------------------
Paul C.Y. Chu
/s/ Peter M. Cohen Director Dated: March 25, 1999
- -------------------------------------
Peter M. Cohen
/s/ Jose I. Gonzalez Director Dated: March 24, 1999
- -------------------------------------
Jose I. Gonzalez
/s/ Donald R. Harkleroad Director Dated: March 25, 1999
- -------------------------------------
Donald R. Harkleroad
/s/ Daniel T. Huang Director Dated: March 24, 1999
- -------------------------------------
Daniel T. Huang
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
/s/ Shafik H. Ladha Director Dated: March 25, 1999
- -------------------------------------
Shafik H. Ladha
/s/ James S. Lai Director Dated: March 24, 1999
- -------------------------------------
James S. Lai
/s/ Sion Nyen Lai Director Dated: March 25, 1999
- -------------------------------------
Sion Nyen (Francis) Lai
/s/ Shih Chien Lo Director Dated: March 25, 1999
- -------------------------------------
Shih Chien (Raymond) Lo
/s/ Nack Paek Director Dated: March 24, 1999
- -------------------------------------
Nack Paek
/s/ Carl L. Patrick, Jr. Director Dated: March 24, 1999
- -------------------------------------
Carl L. Patrick, Jr.
- ------------------------------------- Director Dated:
Cecil M. Phillips
/s/ W. Clayton Sparrow, Jr. Director Dated: March 24, 1999
- -------------------------------------
W. Clayton Sparrow, Jr.
- ------------------------------------- Director Dated:
Howard H. L. Tai
/s/ P. Carl Unger Director Dated: March 24, 1999
- -------------------------------------
P. Carl Unger
</TABLE>
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Pages
<S> <C> <C>
2.1 Agreement and Plan of Merger by and between The Summit National
Bank and California Security Bank dated as of March 27, 1998
(incorporated by reference to Exhibit 2.1 of Summit Bank
Corporation's Current Report on Form 8-K dated March 27, 1998.)
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 1998 Stock Incentive Plan, as of February
23, 1998 (incorporated by reference to Appendix A to the
Company's Proxy Statement filed on March 18, 1998).
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>
23
<PAGE> 24
<TABLE>
<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 70
27.1 Financial Data Schedule (for SEC use only) 71
</TABLE>
24
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION
OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic net income per share:
Weighted-average shares outstanding 1,773,010 1,436,023 1,407,688
=========== =========== ===========
Net income per share $ 1.56 $ 1.71 $ 1.57
=========== =========== ===========
Diluted earnings per share:
Weighted-average shares outstanding 1,773,010 1,436,023 1,407,688
Dilutive warrants 51,505 392,478 463,235
Dilutive stock options 23,162 52,900 41,225
repurchased under treasury stock method (42,849) (248,815) (365,816)
----------- ----------- -----------
1,804,828 1,632,586 1,546,332
=========== =========== ===========
Net income $ 2,769,000 $ 2,450,000 $ 2,208,000
Diluted net income per share $ 1.53 $ 1.50 $ 1.43
=========== =========== ===========
</TABLE>
25
<PAGE> 1
EXHIBIT 13.1
CONTENTS
<TABLE>
<S> <C>
To Our Shareholders 2
Selected Financial Data 3
Corporate Overview 4
Management's Discussion & Analysis 9
Consolidated Financial Statements 26
Notes to Consolidated Financial Statements 30
Independent Auditors' Report 47
Corporate and Shareholder Information 48
</TABLE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of December 31,
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $ 263,161 $ 180,296 $ 154,248 $ 130,076 $ 108,146
Loans 133,496 98,892 85,808 78,177 73,801
Deposits 218,647 144,795 132,899 109,816 90,639
Stockholders' equity 24,505 19,778 16,936 15,413 13,273
Statement of Income Data Year ended December 31,
Net interest income 9,944 8,005 6,836 6,031 5,355
Provision for loan losses 455 540 404 397 430
Non-interest income 3,575 3,460 3,361 3,311 3,050
Non-interest expenses 8,792 7,156 6,411 5,802 5,209
Net Income $ 2,769 $ 2,450 $ 2,208 $ 2,101 $ 1,928
Per Share Data
Book value per share at year end $ 13.68 $ 13.28 $ 12.03 $ 10.95 $ 9.43
Basic earnings per share 1.56 1.71 1.57 1.49 1.37
Diluted earnings per share 1.53 1.50 1.43 1.49 1.37
Weighted-average shares outstanding 1,773,010 1,436,023 1,407,688 1,407,688 1,407,688
Weighted-average shares and
common equivalent shares outstanding 1,804,828 1,632,586 1,546,332 1,414,670 1,407,688
Dividends declared $ .39 $ .35 $ .31 $ .28 -
Ratios
Return on average assets 1.24% 1.47% 1.59% 1.74% 1.78%
Return on average equity 11.89% 13.36% 13.80% 15.09% 15.65%
</TABLE>
26
<PAGE> 2
TO OUR SHAREHOLDERS
In 1998 Summit Bank Corporation increased assets to $263 million, up a robust
46% from the previous year. In June 1998, we completed the acquisition of
California Security Bank ("CSB") located in San Jose, California. Much like
Atlanta, San Jose is characterized by a vigorous small business climate, lively
international trade and dynamic ethnic communities - the pillars of Summit's
strategy. During the second half of the year, we re-branded and integrated CSB
as a branch of the Summit system. Coupled with the asset growth, we achieved
record corporate earnings of $2.8 million, an increase of 13% over last year.
Our deposit base grew a strong 51%, or $74 million in 1998. More importantly,
non-interest bearing deposits rose 37%, confirming our stature as a bank for
business. We also achieved solid loan growth of 35% which was driven by business
lending. Summit regained the top spot among Georgia originators of SBA loans
which is especially noteworthy given a rapid increase in the small business
competition we are seeing from regional banks and non-bank financial service
providers.
Net interest income rose 24% to $10 million, while non-interest income rose 3%.
Much of our non-interest income is derived from international fee-based
documentary transactions, which we were able to maintain at last year's level
despite adverse overseas economic conditions. Our international trade business
was buttressed by development of customer relationships with several of
Georgia's most internationally active companies. Other than a small amount of
short term self-liquidating trade transactions with credit-worthy correspondent
banks, we have no exposure to overseas loans.
Our Year 2000 compliance program spurred a general upgrading of technology with
important operational benefits. Improving our technology has made possible our
transition to Imaging Statements in place of returning canceled checks, a
development that was positively received by our customers.
Although this pace of change in 1998 produced formidable challenges for Summit
employees, our staff consistently rose to the occasion.
Looking ahead, we will maintain the focus that has led to Summit's growth and
profitability in both Atlanta and San Jose. We look forward to achieving even
greater results in the year to come and very much appreciate the continued
confidence our shareholders have placed in us.
Sincerely,
Jack N. Halpern David Yu
Chairman, Chairman,
Summit Bank Corporation The Summit National Bank
27
<PAGE> 3
The Summit mission is to make creating wealth easy, understandable and
enjoyable. Our most effective wealth-creating tools include the market knowledge
and competencies we have developed around small business, international trade
and ethnic customers. In 1998, we leveraged these strengths to grow aggressively
in our home market and extend Summit's geographic reach.
Serving Customers, The Summit Way
In each of our market niches, Summit provides a level of personal attention and
service that sets us apart from other financial institutions. Small companies
value the lengths to which Summit bankers go to understand their business.
Companies engaged in international trade recognize how our knowledge helps make
the most of global opportunities. Ethnic customers quickly learn that Summit
speaks their language, literally and in culturally sensitive service. Expanding
our ethnic emphasis in 1998, the bank undertook an advertising/community
relations initiative aimed at Latin American business owners.
Expanding The Foundation
The full Summit staff was enlisted in an asset growth campaign that generated
$74 million in new deposits overall, half of which was raised in the Atlanta
market. This maintains an impressive trend of deposit growth in recent years.
Strong asset growth in 1998 paved the way for greater emphasis on yield in the
future. A key goal for 1999 is to enlarge the loan portfolio while maintaining
Summit's high quality standards.
Extending The Strategy
Our entry into Northern California was bold yet very logical, given the
parallels of this market with Atlanta. Santa Clara County is among the leading
U.S. markets in all three of Summit's strategic focal areas. In recent years the
county has ranked at or near the top of the nation in export sales. Small
business activity is intense. The rich mix of ethnic communities includes
several that we judge to be under-served for progressive, culturally targeted
financial services. The acquisition and brand conversion of a strong, locally
respected institution opens up vast potential.
Summit is building capacity today for the opportunities of tomorrow. In 1998 we
offered customers a larger portfolio of products and more efficient operations
through advanced technology. Significant in their own right, these
accomplishments fit a longer-term strategic pattern aimed at enhancing
profitability and value for Summit shareholders. Moving forward, we will
continue to add depth in our product lines and infrastructure.
Broadening Customer Relationships
Summit's goal is to develop a total customer relationship, capturing all or most
of the customer's personal and business banking. Intensified competition from
many sources makes portfolio expansion imperative. During 1998, we enlarged our
offerings with a new Cash Management program and mortgage initiative. Summit's
hard-earned reputation for personal service complements our portfolio and
provides a crucial advantage in winning customer loyalty.
Developing Technology-Based Advantages
Summit dedicated considerable resources in 1998 to achieving Year 2000
compliance. We are turning this effort into a positive step with lasting
benefits beyond compliance alone. Our staff has gained invaluable experience in
effective team action. Systems are being introduced to streamline operations and
improve the quality and timeliness of response to customers. This new technology
already has made possible our enhanced Cash Management product as well as our
transition to imaging for customer statements. We will continue to exploit the
potential of new systems to reduce operating costs and meet a wider range of
customer needs.
Deploying Assets For Heightened Value
The asset growth generated by acquisition and energetic marketing in 1998
positions Summit for greater lending activity and profitability. This will be
much of our focus in the foreseeable future, both in Atlanta and San Jose.
Continued economic momentum and new business formation in these markets should
maintain a steady pace of loan demand. With increased commercial lending, we can
look for a corresponding rise in low-cost commercial deposits and a resulting
positive influence on margins.
28
<PAGE> 4
Summit's strategic success is confirmed by accelerating competition for our
traditional base. Our singular blend of small business emphasis, international
trade expertise and ethnic community focus has fostered growth and prosperity
for our customers ... and helped to make them attractive to other financial
service providers.
While recognizing the challenges inherent in intensified competition, we face
the future with pride and great confidence. Simply stated -- Summit works. Our
strategy works for shareholders. Our ideas and personal attention work for
customers. Our knowledge, imagination and energy work for communities that count
on Summit for financial services of the highest quality.
Maintaining focus on what has made us a vital force for our customers, Summit
will continue striving to provide shareholders with superior value grounded in
outstanding execution of a solid, proven strategy.
29
<PAGE> 5
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Performance Overview for 1998
Summit Bank Corporation (the "Company" or "Summit") reported record net income
of $2,769,000 in 1998 representing an increase of 13% 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 was expansion due to the acquisition of California Security
Bank ("CSB") in San Jose, California on June 30, 1998, as well as strong deposit
growth in the Atlanta market. The Company's average earning assets grew 33% in
1998 and, since year-end 1994, have grown at a compounded annual rate of 20%.
During 1998, Summit's average total assets increased $56 million to $222 million
compared to $166 million in 1997.
Diluted net income per share for 1998 increased to $1.53 from $1.50 in 1997, an
improvement of 2%. Diluted net income per share in 1996 was $1.43. In the first
quarter of 1998, Summit issued 326,593 new shares of stock as a result of the
exercise of warrants and options for common stock that were primarily issued to
Summit's organizers. As of December 31, 1998 there were no unexpired,
unexercised warrants outstanding for Summit stock. In July 1997, the Company
issued 20,000 stock options to members of executive management. These options
have a seven-year life and remain outstanding to date. On November 4, 1998, the
Company announced a stock repurchase plan to acquire up to 90,000 shares of its
common shares outstanding, or approximately 5%. Through December 31, 1998, the
Company had purchased 24,375 shares under this plan. Due to the exercise of the
warrants and options, which is partially offset by the repurchased shares under
the Company's stock repurchase plan, the weighted-average shares and potential
common shares outstanding were 1,804,828, 1,632,586, and 1,546,332 in 1998,
1997, and 1996, respectively.
The Company has reported strong profitability for the past five years, placing
Summit in a group of the nation's higher-performing community focused financial
institutions. The return on average assets was 1.24% in 1998 as compared to
1.47% in the previous year. The decline was attributed to the high growth rate
in total assets which outpaced the growth in 1998 earnings. By comparison,
according to the Uniform Bank Performance Report as of September 30, 1998, 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 1.20% of average assets. For the past six years, the Company has
posted returns on average assets of 1.24% or better. Despite higher net
earnings, Summit's return on average equity was 11.89% in 1998 compared to
13.36% in 1997. The decrease was attributed to the new capital funds from the
issuance of additional stock for warrants and options. With the infusion of $3.2
million of capital as a result of the exercise of warrants and options for
common stock, stockholders' equity rose to $24.5 million at year end 1998, an
increase of 24% compared to year end 1997.
30
<PAGE> 6
The Company listed its common stock 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
<S> <C> <C> <C>
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
1998
First Quarter $25.50 $18.75 $.09
Second Quarter 25.88 19.75 .10
Third Quarter 21.75 16.75 .10
Fourth Quarter 20.00 16.00 .10
</TABLE>
The Company is a legal entity separate and distinct from The Summit National
Bank (the "Bank"), its 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 1999 is $3,989,000 plus 1999 net earnings
of the Bank. At December 31, 1998, $14,721,000 of the Company's investment in
the Bank is restricted as to dividend payments from the Bank to the Company. In
1998, the Company's cash dividend to shareholders was $.39 per share, an
increase of 11% over 1997 dividends of $.35 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 1998. During 1998, 938,590 shares of the Company
traded on the open market. At December 31, 1998 the most recent trade of the
Company's stock was $16.50 per share, compared to $19.25 per share at year end
1997.
Total assets reported by the Company at December 31, 1998 were $263 million
compared to $180 million at the prior year end, reflecting an increase of 46%.
Asset growth is primarily attributable to the acquisition of CSB, and to funds
provided by deposits which increased 51%, or $74 million, in 1998. The purchase
of CSB resulted in the addition to net loans and investment securities of $19
million and $14 million, respectively. The Company's net loan volume increased
35%, or $34 million, to $131 million at December 31, 1998 compared to $97
million at December 31, 1997. The majority of the loan growth was centered in
commercial and SBA loans. Excluding the acquisition of CSB, net loans grew 15%,
or $15 million, compared to 16%, or $13.5 million, growth during the prior year.
The investment security portfolio increased 53% to $96 million at December 31,
1998. Funds from strong deposit growth in excess of loan funding needs were
placed temporarily in investment securities. The federal funds sold balance
increased from $1 million at December 31, 1997 to $11 million at December 31,
1998, due in part to $6 million of temporary deposits held by the Bank at
year-end. Deposit growth as a result of the CSB acquisition totaled $36 million,
while the remaining growth in deposits was the result of targeted marketing
efforts in the Atlanta area. While certificates of deposits increased $27
million, or 40%, non-interest bearing demand deposits increased $8 million, or
21%, excluding the deposits acquired from CSB.
31
<PAGE> 7
Net interest income increased $1.9 million to $10 million in 1998, a growth of
24%. The net interest margin for 1998 was 4.90%, which is comparable to the peer
group average of 4.97%. The net interest margin did experience pressure from the
falling rate environment coupled with the significant growth in certificates of
deposits which typically carry a high cost of funds. The provision for loan
losses decreased to $455,000 in 1998 from $540,000 in 1997 as a result of lower
charge-offs in 1998. Non-interest income increased 3% in 1998 with the largest
increases being recognized from overdraft/NSF charges, service charge fees, and
other non-interest income which included recoveries on loans charged-off in
previous years by CSB. Non-interest income in 1998 was $3.6 million.
Non-interest expenses increased primarily due to the acquisition of CSB on June
30, 1998, which also added $37 million of earning assets to the balance sheet.
For the year ended December 31, 1998, non-interest expenses totaled $8.8
million, an increase of 23% over 1997, which totaled $7.2 million. Most of this
increase was related to additional personnel expenses, data/item processing and
occupancy expenses for the San Jose office. Personnel expenses accounted for
$660,000 of the increase, while equipment costs and other general operating
expenses represented another $200,000 and $600,000 of the increase,
respectively. In addition to increases due to the CSB acquisition, the Company
incurred $144,000 for expenses related to the Year 2000 readiness project. The
Company's operating efficiency ratio (operating expenses as a percentage of net
interest income and non-interest income) moved up unfavorably in 1998 compared
to past years as a result of the CSB acquisition as well as Year 2000 expenses.
The San Jose data processing function was consolidated into the Bank's system in
late September, 1998. During the first three months of operation after the
acquisition, the Bank incurred higher than normal data processing costs as a
result of operating duplicate data processing systems. The operating efficiency
ratio in 1998, 1997 and 1996 was 65%, 62.4%, and 62.9%, respectively.
Fourth Quarter 1998 Results
Net income for the fourth quarter of 1998 was $795,000, a 3% increase over
income of $774,000 for the same period in 1997. The increase was due in part to
higher net interest income which was $2.8 million in the fourth quarter of 1998
compared to $2.1 million in the same period of 1997. Comparing fourth quarters
1997 and 1998, the increased net interest income was due to the higher average
earning assets resulting both from the CSB acquisition and the expansion in the
Atlanta loan base in 1998. In addition, the loan loss provision declined in
fourth quarter 1998 compared to the same period last year by $135,000 due to
higher recoveries in 1998. The increase in net interest income was largely
offset by higher non-interest expenses which were $2.5 million and $1.8 million
for the quarters ended December 31, 1998 and 1997, respectively, due mainly to
the CSB acquisition. Diluted net earnings per share for the fourth quarter were
$.44 and $.47 per share for 1998 and 1997, respectively, while basic net
earnings for the same periods were $.44 and $.52 per share, respectively. The
decline in both basic and diluted earnings per share was due to the dilutive
effect of unexercised options and warrants that were outstanding in fourth
quarter 1997, that were exercised in first quarter 1998.
Bank Acquisition
On June 30, 1998, Summit completed the acquisition of CSB located in San Jose,
Santa Clara County, California. Management believes this acquisition provides
Summit an entrance into a vibrant market sharing demographics very similar to
the Atlanta market which the Company has served for ten years. The similarities
include: 1)strong Small Business Administration loan opportunities (Summit has
been the most active SBA lender in Georgia for six of the last seven years;
Santa Clara County, California is the leading county in the Northern California
SBA region), 2)opportunities to provide banking services to various ethnic
groups (Summit has long-served Atlanta's Chinese-, Korean-, and German-American
population and began a Latin-American banking unit in 1998; the San Jose branch
is located in a market highly populated with
32
<PAGE> 8
Vietnamese and Latin American individuals), and 3)strong international trade
finance activities (another stronghold Summit has established in Atlanta during
the last ten years; San Jose has been recognized as the leading export city in
the United States fueled largely by the Silicon Valley business activities.)
At the closing of the acquisition on June 30, 1998, CSB had total assets of
approximately $39 million, net loans of $20 million, cash and investment
securities of approximately $19 million, and total deposits of $36 million.
Summit purchased all outstanding shares of CSB stock for $6 million in cash. The
transaction was accounted for using the purchase method of accounting.
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 $1.9 million, or 24%, to $10 million in 1998
compared to 1997. The Company's net interest margin for 1998 declined to 4.90%
compared to 5.26% in 1997. Average interest-earning assets increased 33%, or $51
million which helped offset the decline in the yield due to a falling interest
rate environment during 1998. Average investment security volumes represented a
large portion of the increase in average interest-earning assets, increasing $25
million in 1998, while average loan volumes grew $22 million. Along with the
loan volume increase, loan fees increased $110,000 to $872,000 in 1998. Average
interest-bearing liabilities increased 35%, or $41 million, in 1998, with other
time deposits and Federal Home Loan Bank advances increasing $31 million and $4
million, respectively.
Net interest income for 1997 increased $1.2 million, or 17% to $8 million
compared to 1996. The increase was due to larger volumes of average
interest-earning assets, which grew 21%, or $26 million in 1997. The average
interest-bearing liabilities increased 21%, or $20 million in 1997. The decrease
in the net interest margin from 5.44% in 1996 to 5.26% in 1997 was due to a
falling interest rate environment.
33
<PAGE> 9
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, 1998 and 1997.
Average Balance Sheet Data
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates Balances Expense Rates
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans (1) $114,986 $11,932 10.38% $ 93,015 $ 9,660 10.39%
Investment securities 77,540 4,758 6.14% 52,645 3,464 6.58%
Federal funds sold 10,340 550 5.32% 6,435 345 5.36%
Interest-bearing deposits
in other banks 214 13 6.07% 97 6 6.19%
Total interest-earning assets 203,080 17,253 8.50% 152,192 13,475 8.85%
Non-interest-earning assets:
Cash and due from banks 9,436 7,378
Premises and equipment, net 4,520 4,475
Allowance for loan losses (2,264) (1,815)
Other assets 7,700 4,093
Total non-interest-earning assets 19,392 14,131
Total assets $222,472 $166,323
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts $ 11,463 $ 198 1.73% $ 9,020 $ 180 2.00%
Money market accounts 27,326 950 3.48% 26,090 955 3.66%
Savings deposits 7,542 238 3.16% 6,424 214 3.33%
Other time deposits 95,615 5,229 5.47% 65,111 3,633 5.58%
Total interest-bearing deposits 141,946 6,615 4.66% 106,645 4,982 4.67%
Other interest-bearing liabilities:
Federal funds purchased 42 3 7.14% 324 21 6.50%
Federal Home Loan Bank advances 10,000 501 5.01% 6,005 350 5.83%
Short-term borrowings and obligations
under capital lease 4,271 190 4.45% 2,575 117 4.54%
Total interest-bearing liabilities 156,259 7,309 4.68% 115,549 5,470 4.73%
Non-interest-bearing liabilities
and stockholders' equity:
Demand deposits 39,297 29,558
Other liabilities 3,618 2,878
Stockholders' equity 23,298 18,338
Total non-interest-bearing liabilities
and stockholders' equity 66,213 50,774
Total liabilities and
stockholders' equity $222,472 $166,323
Interest rate spread 3.82% 4.12%
Net interest income $ 9,944 $ 8,005
Net interest margin (2) 4.90% 5.26%
</TABLE>
(1) Average loans include non-performing loans. Interest on loans includes loan
fees of $872,000 in 1998 and $762,000 in 1997.
(2) Net interest margin is net interest income divided by average total
interest-earning assets.
34
<PAGE> 10
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>
1998 Compared with 1997(1) 1997 Compared with 1996(1)
(In thousands) Due to changes in Due to changes in
Net Net
Average Average Average Increase Average Average Increase
Interest Income Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Loans $2,280 $ (8) $2,272 $ 927 $ 118 $1,045
Investment securities 1,509 (215) 1,294 994 (39) 955
Federal funds sold 208 (3) 205 113 4 117
Interest-bearing deposits
in other banks 7 - 7 2 - 2
Total interest income 4,004 (226) 3,778 2,036 83 2,119
Interest expense
NOW accounts 36 (18) 18 14 (3) 11
Money market accounts 83 (88) (5) 84 (53) 31
Savings deposits 34 (10) 24 (44) (30) (74)
Other time deposits 1,667 (71) 1,596 597 (31) 566
Federal funds purchased (20) 2 (18) 15 1 16
Federal Home Loan Bank advances 191 (40) 151 297 6 303
Short-term borrowings and
obligations under capital lease 75 (2) 73 101 (4) 97
Total interest expense 2,066 (227) 1,839 1,064 (114) 950
Change in net interest
income $1,938 $ (1) $1,939 $ 972 $ 197 $1,169
</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, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Fees for international
banking services $1,172 $1,210 $1,057
Overdraft and NSF charges 571 426 369
Other 531 396 557
Gains on sales of loans 463 616 581
Service charge income 352 272 209
SBA servicing fees 275 378 462
Net gains on sales of investment
securities 211 162 126
Total non-interest income $3,575 $3,460 $3,361
</TABLE>
Non-interest income increased $115,000 in 1998 to $3.6 million compared to 1997,
due primarily to increases in service charges on deposit accounts, including
overdraft and insufficient funds ("NSF") charges, and other non-interest income.
Service charges on deposit accounts and overdraft/NSF fees were up 29% and 34%,
respectively, over 1997 for a combined total of $923,000. This increase was the
result of higher average demand deposit volumes, which grew $10 million in 1998.
The increase in demand deposit growth was due in part to the acquisition as well
as a bankwide marketing campaign aimed at increasing deposits in 1998. Other
non-interest income was $135,000 higher in 1998 than the prior year for a total
of $531,000. Half of this increase was
35
<PAGE> 11
due to recoveries of pre-acquisition losses recognized by CSB , while
approximately $30,000 was the increase in private banking fees compared to fees
for the prior year. International fee income was relatively stable at $1.2
million for 1998 and 1997. The growth in the international department from
business development during 1998 was overshadowed by the decline in foreign
export volume due to the weakened Asian economy. The decline was offset somewhat
by increased import volume, resulting in fee income being relatively unchanged
1997. Summit's fees from international operations are generated from import and
export transactions because the Company does not provide lending products to any
non-US resident companies.
Gains on sales of SBA loans were $463,000 for 1998 compared to $616,000 in the
prior year due to lower premiums on sales. During 1998, the Company originated
$15.2 million of new SBA loans compared to $12.4 million in 1997. Total
guaranteed amounts sold for the comparable years were $6.3 million and $6.4
million in 1998 and 1997, respectively. The Company was again recognized by SBA
as the most active lending institution in the state of Georgia, a distinction
held by Summit for six of the last seven years. The Company's loan servicing
portfolio for third parties remained consistent at $59 million at year end 1998
compared to $58 million at year end 1997.
Total non-interest income increased $100,000 to $3.5 million during 1997 as
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 for 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 1998, a 14% increase. 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.
Non-interest Expenses
The following table presents the principal components of non-interest expenses
for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Salaries and employee benefits $4,309 $3,649 $3,356
Equipment 791 584 482
Net occupancy 668 516 476
Accounting, legal, and
other professional 519 363 315
Data/item processing 486 323 332
Marketing and community relations 290 228 271
Telephone 268 233 136
Postage and courier 268 198 163
Office supplies 183 147 157
Travel 115 73 67
Insurance 96 96 78
Directors fees 96 83 53
Property taxes 91 167 86
Other losses 80 161 167
Dues and memberships 66 45 51
Other operating expenses 466 290 221
Total non-interest expenses $8,792 $7,156 $6,411
</TABLE>
Non-interest expenses grew 23% in 1998 fueling the Bank's continued strategy of
expanding in both existing and new profitable markets - this year through
acquisition, adding the San Jose office on June 30. In 1998, non-interest
expenses were $8.8 million, up from $7.2 million in 1997. This increase is
primarily attributed to increased staffing costs, data processing expenses, Year
2000 expenses, legal fees, as well as occupancy expenses related to the San Jose
office. The largest portion of the $1.6 million increase in non-interest
expenses, $660,000, was due to additional salary and benefit costs.
36
<PAGE> 12
Nearly half of this increase is related to operating costs of the San Jose
branch during the last two quarters of 1998. As of December 31, 1998, there were
sixteen employees located in the San Jose office. The Bank's Atlanta operation
has also grown this year, with 91 full-time equivalent staff positions at
year-end compared to 81.5 at December 31, 1997. Two of the positions added in
1998 were for the purpose of establishing a Latin-American Banking department to
target this rapidly growing sector of the Atlanta market. This expansion,
coupled with general salary increases and promotions, resulted in the remaining
increase in salaries and benefits.
Data processing expenses increased $163,000 over 1997 expenses, also largely due
to the addition of the San Jose office. During third quarter, this branch
continued to operate on its previous data and item processing systems. In late
September, the San Jose branch was converted to the Bank's primary system,
eliminating the higher cost of duplicate processing systems.
During 1998, the Company made significant progress on its Year 2000 project to
ensure that the Bank is ready for the roll-over of the date to January 1, 2000.
There are several major phases to this project, and the Bank has been on
schedule for all of these phases to date. In early 1998, the Bank committed to
replace every personal computer at all work stations and purchased replacements
for all of the file servers necessary for daily operations. A review of major
credit and deposit customers was performed and will continue into 1999. Software
testing began in 1998, including testing on the third party data processing
system. This testing will also continue into 1999. The cost incurred to date for
the Year 2000 compliance project was $144,000, which is included in equipment
costs. It is expected that an additional $65,000 will be required in 1999.
Primarily as a result of the new computer equipment and software purchased in
1998, depreciation increased $50,000. Legal fees were $300,000 in 1998 compared
to $180,000 in 1997. Most of this expense was loan-related such as charged-off
loan collection fees and workout plans for delinquent loans. Approximately
$35,000 of the legal fees were due to collection and work-out efforts in San
Jose. Total occupancy expense increased $152,000 in 1998 compared to last year.
The San Jose office was responsible for $120,000 of that increase for six months
of operation after the purchase of CSB.
The operating efficiency ratio of the Bank moved up unfavorably to 65.5% for the
current year compared to 62.4% for 1997, primarily due to pressure on interest
rates causing a lower interest margin, in addition to the increase in overhead.
The bank's peer group showed an operating efficiency ratio for the year to date
through September of 62.8%.
Non-interest expenses increased $745,000 in 1997 compared to 1996, due primarily
to increased staffing, equipment, property taxes and telephone expenses. Nearly
half of the increase was due to salaries and benefits costs, which were up
$300,000 from 1996 mainly due to a full year's effect of the personnel hired in
1996 to support branch expansion. 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. Telephone expenses
increased in 1997 as telecommunications costs associated with the delivery of
the data processing system were reclassified from data processing expenses.
Year 2000
The Company considers the Year 2000 computer processing risk to be a serious
risk for all businesses that depend on computer hardware and software to perform
the critical functions of their businesses. Year 2000 computer processing risk
is defined as the risk associated with computer hardware or software that fails
to process data or operate in the manner for which it was designed as a result
of century date changes.
37
<PAGE> 13
The Company's State of Readiness
The Company has established a Year 2000 Committee which is headed by senior
management, meets at least monthly, and reports monthly to the Bank's Board of
Directors and quarterly to the Company's Board of Directors. The Committee's
goal is to address Year 2000 technology issues so that they will not materially
adversely affect the Company's operations or customer service. The Company
engaged a third party to assist in the testing of any computer hardware which
was not Year 2000 compliant. A major milestone was reached on June 30, 1998 with
the completion of hardware testing and necessary hardware replacement.
The available hardware solutions were either to repair and upgrade existing
equipment or to replace the equipment. Due to the recent advancements in
hardware technology at affordable costs, the Company chose to replace all
personal computers throughout the organization. This decision has resulted in
better productivity at the workstations through the use of efficient technology,
and has allowed the Company to offer more advanced products to its customers.
The Company has not delayed any other projects related to information technology
as a result of Year 2000 actions. On the contrary, the Company has completed the
acquisition of another bank and converted that bank's entire data processing,
financial reporting and other computer systems to its own. In the third quarter
of 1998, the Bank implemented new, more efficient technology which provides
deposit customers with account statements containing check images. The Bank is
also in the process of adding a fourth language, Spanish, to its voice response
system and ATM's, as well as merchant verification functionality to its voice
response system. This process will be completed in 1999. The Company has also
completed an analysis of non-information technology related systems to determine
the impact that the century date change may have on them. These include all HVAC
systems, telecommunications systems (both wired and wireless), controlled-access
systems and elevators. The Company expects that all necessary upgrades to these
systems will be completed by June 30, 1999.
The Company outsources its data processing and item processing services to third
party vendors. The completion of the Company's Year 2000 project and its ability
to adequately service its customers in 2000 largely depend on the compliance of
these third party vendors. The Company has monitored the progress of these
vendors in their efforts to become Year 2000 compliant over the past year, and
established contingency plans for these systems, if testing and validation
proves the systems unsatisfactory. The Office of the Comptroller of the Currency
("OCC"), the regulatory authority for the Bank, has also reviewed the Company's
primary data processing service provider to ensure that Year 2000 issues are
being addressed timely and effectively. Another critical system is utilized in
the Bank's international department to process customer letters of credit and
other trade finance products. This system has been certified as Year 2000
compliant by the third party vendor and is currently being tested and validated
by the Bank.
The Company also recognizes the importance of ensuring that significant
borrowers are addressing the problem in a timely manner to avoid deterioration
of the Company's loan portfolio solely due to Year 2000 problems. The Company
has identified all material relationships, mailed relevant questionnaires to
assess the risk, and is working with these customers on a one-to-one basis, as
appropriate, to stay informed of their compliance efforts. Identification of
borrower risks associated with the failure to adequately prepare for Year 2000
issues is considered in the lending function. Commercial and retail deposit
customer awareness is being addressed through mailings, statement stuffers, and
pamphlets placed in the branches.
The Company also performed a review of significant customer deposit
relationships with the Bank to determine those customers' efforts to address the
Year 2000 issue. The purpose of this analysis was to determine any special
funding needs that the Bank may incur as a result of a significant depositor
needing to draw against reserve cash to meet Year 2000 critical operations.
Management of the Bank believes, based on that analysis,
38
<PAGE> 14
that it has sufficient funding sources available, to meet any extra currency
needs customers may have as December 31, 1999 approaches and, also, into early
year 2000. Funding sources include available credit lines with the Federal Home
Loan Bank and correspondent banks, as well as unpledged investment securities.
Ongoing reviews of both loan and deposit customers will continue during 1999 to
ensure the Bank makes every effort to provide services to its customers through
the century change.
The Costs to Address the Company's Year 2000 Issues
Actual costs accrued or incurred in 1998 for the Year 2000 project were
$144,000, not including indirect salary expenses directed toward the project. A
testing plan for mission critical systems - systems which are necessary to the
ongoing operation of the Bank - has been developed, and testing of these systems
is underway. This portion of the project will continue through second quarter
1999. Non-mission critical systems are in the remediation phase and are expected
to be completed by June 30, 1999. Costs to be incurred in 1999 for the project
are estimated to be approximately $65,000, bringing the total estimated Year
2000 project costs to just over $200,000. The Company does not expect the
amounts required to be expensed to resolve Year 2000 issues to have a material
adverse effect on its financial position or results of operations.
The Risks of the Company's Year 2000 Issues
The Year 2000 issue presents a number of risks to the business and financial
condition of the Company and the Bank. External factors, which include but are
not limited to electric, telephone, and water service, are beyond the control of
the Company and the failure of such systems could have a material negative
impact on the Company, its customers and third parties on whom the Company
relies for its day-to-day operations.
The Company believes that its internal systems and the software and the network
connections it maintains will be adequately programmed to address the Year 2000
issue. Based on information currently available, management does not believe
that the Company will incur significant additional costs in connection with the
Year 2000 issue. Nevertheless, there can be no assurance that all hardware and
software that the Company uses will be Year 2000 compliant, and the Company
cannot predict with any certainty the costs the Company will incur to respond to
any Year 2000 issues. Further, since the business of the Company's customers and
vendors may be negatively affected by the Year 2000 issue, any financial
difficulties incurred by the Company's customers and vendors in solving Year
2000 issues could negatively affect their ability to perform their agreements
with the Company. Therefore, even if the Company does not expect to incur
significant direct costs in connection with responding to the Year 2000 issue,
there can be no assurance that the failure or delay of the Company's customers,
vendors or other third parties in addressing the Year 2000 issue or the costs
involved in such process will not have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's Contingency Plans
As part of the Company's normal business practice, it maintains contingency
plans to follow in the event of emergency situations, some of which could arise
from Year 2000-related problems. The Company has formulated a detailed Year 2000
contingency plan, which assesses several possible scenarios to which the Company
may be required to react. These scenarios include identification of alternative
vendors in the event a critical software program fails the testing process,
alternative written procedures in the event of both short- and long-term power,
data and telephone disruptions and contingent liquidity plans. The Company's
contingency plan has addressed these issues in both the Atlanta and San Jose
markets.
The foregoing are forward-looking statements reflecting management's current
assessment and estimates with respect to the Company's Year 2000 compliance
efforts and the impact of Year 2000 issues on the Company's business and
operations. Various factors could cause actual plans and results to differ
materially from those contemplated by such assessments, estimates and
forward-
39
<PAGE> 15
looking statements, many of which are beyond the control of the Company. Some of
these factors include, but are not limited to, representations by the Company's
vendors and counterparties, technological advances, economic considerations, and
consumer perceptions. The Company's Year 2000 compliance program is an ongoing
process involving continual evaluation and may be subject to change in response
to new developments.
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 net loan volumes in 1998 of $22
million. Net loans outstanding increased to $131 million as compared to $97
million at year end 1997, an increase of 35% due in large part to the CSB
acquisition. During 1998, the growth was primarily realized in regular
commercial loans, with a $6.1 million increase to $37.7 million, and commercial
loans secured by real estate, with a $25.5 million increase to $83.8 million.
Consumer loans remained constant at approximately $5 million as of December 31,
1998 compared to the prior year-end. Overall loan growth was strong in 1997
compared to 1996. Net loans outstanding increased 15% from $84 million at year
end 1996 to $97 million at year end 1997. Commercial loans secured by real
estate accounted for $6.4 million of this increase. Consumer loans remained
constant at approximately $5 million during 1997.
At year end 1998 and 1997, the Company had loans held for sale of $5.7 million
and $3.4 million, respectively. The Company makes an effort to originate loans
with rates that fluctuate with the prime lending rate. At December 31, 1998, 63%
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, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
Amount % of Loans Amount % of Loans
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $ 37,724 29% $ 31,614 33%
Real estate - construction 2,722 2 1,938 2
Real estate mortgage - primarily commercial 83,808 66 58,290 61
Installment loans to individuals 5,084 4 5,024 5
Less: unearned income (1,514) (1) (1,393) (1)
Loans, net of unearned income 127,824 100% 95,473 100%
Loans held for sale - SBA 5,672 3,419
Less: allowance for loan losses (2,336) (1,468)
Net loans $131,160 $97,424
</TABLE>
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, 1998.
<TABLE>
<CAPTION>
(In thousands) Loan Maturing
Within 1-5 After 5
1 Year Years Years Total
<S> <C> <C> <C> <C>
Loans with:
Predetermined interest rates $23,981 $25,302 $ 704 $ 49,987
Floating or adjustable rates 27,783 19,312 36,414 83,509
Total loans $51,764 $44,614 $37,118 $133,496
</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.
40
<PAGE> 16
For purposes of determining the required allowance for loan losses and resulting
periodic provisions, the Company segregates the loan portfolio into broad
segments, such as: consumer, commercial and SBA loans. The Company provides for
a general allowance for losses inherent in the portfolio by the above
categories. The general allowance for losses on problem loans in these
categories is based on a review and evaluation of these loans, taking into
consideration financial condition and strengths of the borrower, related
collateral, cash flows available for debt repayment, and known and expected
economic trends and conditions. General loss percentages for the problem loans
are determined based upon historical loss experience and regulatory
requirements. Specific allowances are provided in the event that the specific
collateral analysis on each problem loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. For the remainder of the portfolio, general allowances for losses
are calculated based on estimates of inherent losses which probably exist as of
the evaluation date even though they might not have been identified by the more
objective processes used for the portion of the allowance described above. Loss
percentages used for this portion of the portfolio are generally based on
historical loss factors adjusted where necessary for qualitative factors. This
portion of the allowance is particularly subjective and requires judgments based
on qualitative factors which do not lend themselves to exact mathematical
calculations, such as: trends in delinquencies and non-accruals, migration
trends in the portfolio, trends in volume, the risk identification process,
changes in the outlook for local and regional economic conditions,
concentrations of credit, and peer group comparisons. In addition to the
Company's internal loan review process, 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 1998 was
$455,000 as compared to $540,000 in 1997. The decrease is attributed to lower
charge-offs in 1998 coupled with strong recoveries. While non-performing assets
increased from $1.8 million at year end 1997 to $3.2 million at year end 1998,
the December 31, 1998 balance largely reflected SBA fully guaranteed portions of
credits totaling $1.5 million and three credits totaling $1.7 million secured by
real estate. One of the credits for $462,000 secured by real estate was acquired
in the CSB merger, and subsequently paid off in February 1999. The December 31,
1997 balance included one credit for $737,000 secured by real estate and fully
guaranteed SBA loans totaling $1,018,000.
Net loan charge-offs in 1998 decreased significantly to .35% of average net
loans outstanding from 1.08% in 1997. Gross charge-offs declined from $1.3
million in 1997 to $951,000 in 1998. The charge-offs in 1998 included a total of
approximately $200,000 for the unguaranteed portion of five SBA loans. The
remaining charge-offs consisted largely of commercial loans ranging in size from
$10,000 to $200,000. Installment loan charge-offs represented $63,000 of the
total gross amount, none of which were individually significant. Recoveries
totaled $551,000 in 1998 compared to $336,000 in 1997, which included $161,000
of recoveries on three fully guaranteed SBA loans that were charged-off in late
1997.
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 represented fully guaranteed amounts by the
SBA which were subsequently recovered from the SBA during early 1998. Gross
charge-offs increased approximately $1 million to $1.3 million in 1997 compared
to $300,000 in 1996.
The allowance for loan losses represented 1.75% of total loans at December 31,
1998 compared to 1.48% at December 31, 1997. 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; 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
41
<PAGE> 17
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, 1998 and 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands) 1998 1997
<S> <C> <C>
Allowance for loan losses at beginning of year $1,468 $1,931
Charge-offs:
Commercial, financial, and agricultural 174 1,071
Real estate 714 76
Installment loans to individuals 63 192
Total 951 1,339
Recoveries:
Commercial, financial, and agricultural 419 290
Real estate 105 10
Installment loans to individuals 27 36
Total 551 336
Net charge-offs 400 1,003
Provision for loan losses 455 540
Loan loss allowance of acquired bank 813 -
Allowance for loan losses at end of year $2,336 $1,468
Allowance for loan losses to average loans outstanding 2.03% 1.58%
Allowance for loan losses to net charge offs 5.8x 1.5x
</TABLE>
The amounts and percentages of such components of the allowance for loan losses
at December 31, 1998 and 1997, and the percentage of loans in each category to
total loans are presented in the table below.
<TABLE>
<CAPTION> 1998 1997
Allowance Allowance
% of % of
(Dollars in thousands) $ (%) Loans $ (%) Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $1,310 56% 27% $1,142 78% 30%
Real estate 922 40% 69% 225 15% 65%
Installment loans to
individuals 104 4% 4% 101 7% 5%
Total $2,336 100% 100% $1,468 100% 100%
</TABLE>
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 1998 and 1997, had
such loans classified as non-accrual been current in accordance with their
original terms, amounted to $246,000 and $167,000, respectively.
42
<PAGE> 18
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 were 2.41% at December 31,
1998 as compared to 1.80% in the prior year. At December 31, 1998, the Company
had non-accrual loans representing three loans secured by real estate totaling
$1.7 million, five fully guaranteed SBA loans totaling $1.3 million and three
SBA loans totaling $230,000, of which $166,000 is guaranteed by the SBA. The
December 31, 1997 balance reflected one loan for $737,000 secured by real estate
(also included in the 1998 balance), two fully guaranteed SBA loans totaling
$894,000, and one 85% guaranteed SBA loan totaling $146,000. The underlying
collateral of the loan secured by real estate was not sold as anticipated in
1998, however, at the time of this writing, a contract is pending that will
allow the Bank to recover all principal on this loan. There were no loans past
due 90 days or more as to principal or interest payments and still accruing at
either December 31, 1998 or 1997.
The following table presents an analysis of the Company's non-performing assets
as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997
<S> <C> <C>
Loans on non-accrual $3,219 $1,777
Restructured loans 391 -
Total non-performing assets $3,610 $1,777
Loans 90 days past due and still accruing interest $ - $ -
Total non-performing assets as a percentage of total
loans and other real estate 2.70% 1.80%
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 1998 and
1997, respectively, the Company had loans totaling $3,610,000 and $1,777,000
which were considered impaired. Impaired loans at year-end 1998 included all
non-accrual loans as well as one restructured credit for $391,000 secured by
real estate. Included in the allowance for loan losses at the end of 1998 and
1997, respectively, the Company specifically allocated $104,000 and $65,000 for
these loans.
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.
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, 1998, the Company's net loan to deposit ratio was 59% compared
to a ratio of 67% at December 31, 1997, as a result of aggressive marketing
efforts in 1998 to produce strong deposit growth which thus outpaced loan
growth. Management monitors and assesses the adequacy of the Company's liquidity
position on a monthly basis to ensure that sufficient sources of
43
<PAGE> 19
liquidity are maintained and available. A portion of the decrease in the loans
to deposit ratio at December 31, 1998 was due to the influx of approximately $6
million of temporary deposits during the final week of 1998.
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, 1998 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
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $91,733 $ 6,151 $ 9,606 $25,302 $ 704 $133,496
Investment securities 32,142 5,944 14,427 28,094 14,180 94,787
Interest-bearing deposits
in other banks 156 - - - - 156
Federal funds sold 10,725 - - - - 10,725
Total interest-earning assets 134,756 12,095 24,033 53,396 14,884 239,164
Interest-bearing liabilities:
Deposits 106,104 19,811 26,449 17,976 61 170,401
Federal Home Loan Bank advances 10,000 - - - - 10,000
Other borrowed funds 5,987 - - - - 5,987
Total interest-bearing
liabilities 122,091 19,811 26,449 17,976 61 186,388
Interest sensitivity gap 12,665 (7,716) (2,416) 35,420 14,823 52,776
Cumulative interest
sensitivity gap 12,665 4,949 2,533 37,953 52,776 52,776
Cumulative sensitivity ratio
(Cumulative interest-earning assets/cumulative
interest-bearing liabilities) 1.10 1.03 1.02 1.20 1.28 1.28
</TABLE>
The Company is closely matched in 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 1.02, indicating
adherence to Company policy. Management closely monitors the Company's position,
and, if rates should change in either direction, Management will take steps to
reposition its interest-earning assets and interest-bearing liabilities to
minimize the impact of a gap exposure.
44
<PAGE> 20
Investment Portfolio
The following table presents maturity distribution and yields of investment
securities available for sale.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Year-end
Amortized Fair Weighted Amortized Fair
(Dollars in thousands) Cost Value Avg. Yield Cost Value
<S> <C> <C> <C> <C> <C>
U.S. Treasury
One year or less $ 2,499 $ 2,504 5.47% $ 8,980 $ 8,984
Total U.S. Treasury 2,499 2,504 5.47% 8,980 8,984
U.S. Government Agencies
One year or less 17,207 17,160 5.08% 499 503
Over one through five years 15,519 15,571 4.84% 11,375 11,415
Over five years 4,500 4,530 6.72% 3,786 3,808
Total U.S. Government Agencies 37,226 37,261 5.47% 15,660 15,726
Mortgage-Backed Securities
One year or less - - - 155 156
Over one through five years 3,842 3,873 6.01% 2,165 2,171
Over five through ten years 5,100 5,116 6.74% 4,057 4,102
Over ten years 44,182 44,133 6.26% 29,402 29,557
Total mortgage-backed securities 53,124 53,122 6.29% 35,779 35,986
Tax-exempt municipal securities
Over five through ten years 250 250 4.05% - -
Over ten years 750 750 4.25% - -
Total tax-exempt municipal securities 1,000 1,000 4.20% - -
Other Investments
Over ten years 900 900 - 700 700
Total other investments 900 900 - 700 700
Total investment securities
available for sale $94,749 $94,787 5.82% $61,119 $61,396
</TABLE>
There were no investment securities classified as held to maturity at December
31, 1998 or December 31, 1997.
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, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
Average Average Average Average
(Dollars in thousands) Amount Rate Amount Rate
<S> <C> <C>
Non-interest-bearing deposits $ 39,297 -% $ 29,558 -%
Interest-bearing deposits:
NOW accounts 11,463 1.73% 9,020 2.00%
Money market accounts 27,326 3.48% 26,090 3.66%
Savings deposits 7,542 3.16% 6,424 3.33%
Other time deposits 95,615 5.47% 65,111 5.58%
Total $181,243 3.65% $136,203 3.66%
</TABLE>
45
<PAGE> 21
The following table presents the maturity of the Company's time deposits at
December 31, 1998.
<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 $19,053 $36,263 $ 55,316
Over 3 through 6 5,775 14,036 19,811
Over 6 through 12 11,645 14,804 26,449
Over 12 4,767 13,270 18,037
Total $41,240 $78,373 $119,613
</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, 1998, the Bank exceeded its required levels of capital. The
Bank's risk-based capital ratio of Tier 1 capital to risk-weighted assets was
10.2%; its risk-based ratio of total capital to risk-weighted assets was 11.4%;
and its leverage ratio was 7.3%.
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 three
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 seven years, the consolidated income of the Company and its
subsidiaries has been provided primarily through banking activities.
Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company has not
made an assessment of the expected impact that SFAS 133 will have on its
financial statements.
46
<PAGE> 22
Consolidated Balance Sheets
Summit Bank Corporation and Subsidiaries
<TABLE>
<CAPTION>
December 31,
(In thousands, except share and per share amounts) 1998 1997
Assets
<S> <C> <C>
Cash and due from banks (Note 7) $ 10,559 $ 8,091
Federal funds sold 10,725 1,200
Interest-bearing deposits in other banks 156 69
Investment securities available for sale (Note 2) 94,787 61,396
Other investments (Note 3) 1,314 1,566
Loans, net of unearned income of $1,514 and $1,393
in 1998 and 1997, respectively 127,824 95,473
Loans held for sale 5,672 3,419
Less allowance for loan losses (2,336) (1,468)
Net loans (Note 4) 131,160 97,424
Premises and equipment, net (Notes 5 and 11) 4,633 4,461
Customers' acceptance liability 2,319 1,397
Deferred income taxes (Note 12) 1,981 134
Goodwill, net (Note 20) 1,651 --
Other assets (Note 6) 3,876 4,558
Total assets $ 263,161 $ 180,296
Liabilities and stockholders' equity
Liabilities:
Deposits (Note 8):
Non-interest-bearing demand $ 48,246 $ 35,193
Interest-bearing:
Demand 42,350 34,348
Savings 8,438 6,681
Time, $100,000 and over 41,240 23,595
Other time 78,373 44,978
Total deposits 218,647 144,795
Acceptances outstanding 2,319 1,397
Obligation under capital lease (Note 11) 39 81
Federal Home Loan Bank advances (Note 10) 10,000 10,000
Other borrowed funds (Note 9) 5,987 2,756
Other liabilities 1,664 1,489
Total liabilities 238,656 160,518
Stockholders' equity (Notes 14, 15, and 16):
Common stock, $0.01 par value; 100,000,000 shares authorized;
1,815,363 shares issued and 1,790,988 shares outstanding
in 1998; 1,488,770 shares issued and outstanding in 1997 18 15
Additional paid-in capital 16,178 12,933
Treasury stock, at cost; 24,375 shares (Note 14) (447) --
Accumulated other comprehensive income 25 172
Retained earnings 8,731 6,658
Total stockholders' equity 24,505 19,778
Commitments and contingencies (Note 13)
Total liabilities and stockholders' equity $ 263,161 $ 180,296
</TABLE>
See accompanying notes to consolidated financial statements
47
<PAGE> 23
Consolidated Statements of Income
Summit Bank Corporation and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands, except share and per share amounts) 1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 11,932 $ 9,660 $ 8,615
Federal funds sold 550 345 228
Interest-bearing deposits in other banks 13 6 4
Investment securities - taxable 1,821 1,243 658
Mortgage-backed securities 2,937 2,221 1,851
Total interest income 17,253 13,475 11,356
Interest expense:
Time deposits, $100,000 and over 1,826 1,381 1,365
Other deposits 4,789 3,601 3,083
Federal Home Loan Bank advances 501 350 47
Short-term borrowings and obligation
under capital lease 193 138 25
Total interest expense 7,309 5,470 4,520
Net interest income 9,944 8,005 6,836
Provision for loan losses (Note 4) 455 540 404
Net interest income after provision
for loan losses 9,489 7,465 6,432
Non-interest income:
Gains on sales of loans 463 616 581
Fees for international banking services 1,172 1,210 1,057
SBA servicing fees 275 378 462
Overdraft and NSF charges 571 426 369
Service charge income 352 272 209
Net gains on sales of investment
securities (Note 2) 211 162 126
Other 531 396 557
Total non-interest income 3,575 3,460 3,361
Non-interest expenses:
Salaries and employee benefits (Note 15) 4,309 3,649 3,356
Equipment 791 584 482
Net occupancy 668 516 476
Other (Note 19) 3,024 2,407 2,097
Total non-interest expenses 8,792 7,156 6,411
Income before income taxes 4,272 3,769 3,382
Income tax expense (Note 12) 1,503 1,319 1,174
Net income $ 2,769 $ 2,450 $ 2,208
Basic net income per share (Note 1) $ 1.56 $ 1.71 $ 1.57
Diluted net income per share and common
share equivalents (Note 1) $ 1.53 $ 1.50 $ 1.43
Weighted-average shares
outstanding-basic (Note 1) 1,773,010 1,436,023 1,407,688
Weighted-average shares
outstanding-diluted (Note 1) 1,804,828 1,632,586 1,546,332
</TABLE>
See accompanying notes to consolidated financial statements
48
<PAGE> 24
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Summit Bank Corporation and Subsidiaries
For the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Additional
Comprehensive Common Stock Paid In Treasury
Income Shares Amount Capital Stock
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,407,688 $ 14 $12,123 $ --
Comprehensive income:
Net income $ 2,208 -- -- -- --
Net unrealized gains
(losses) on investment
securities available for
sale, net of tax effect
and reclassification
adjustment (Note 21) (248) -- -- -- --
Total comprehensive
income $ 1,960
Cash dividends
declared, $.31 per share -- -- -- -- (437)
Balance, Dec. 31, 1996 1,407,688 14 12,123 --
Comprehensive income:
Net income $ 2,450 -- -- -- --
Net unrealized gains
(losses) on
investment securities
available for sale, net
of tax effect and
reclassification
adjustment (Note 21) 83 -- -- -- --
Total comprehensive
income $ 2,533
Issuance of common stock upon
exercise of options and
warrants (Note 14) 81,082 1 810 --
Cash dividends
declared, $.35 per share -- -- -- --
Balance, Dec. 31, 1997 1,488,770 15 12,933 --
Comprehensive income:
Net income $ 2,769 -- -- -- --
Net unrealized gains
(losses) on investment
securities available for
sale, net of tax effect
and reclassification
adjustment (Note 21) (147) -- -- -- --
Total comprehensive
income $ 2,622
Issuance of common stock
upon exercise of options
and warrants (Note 14) 326,593 3 3,245 --
Purchase of treasury stock (24,375) -- -- (447)
Cash dividends declared,
$.39 per share -- -- -- -- --
Balance, Dec. 31, 1998 1,790,988 $ 18 $16,178 (447)
<CAPTION>
Accumulated
Other Total
Comprehensive Retained Stockholders'
Income Earnings Equity
<C> <C> <C> <C>
Balance, December 31, 1995 $ 337 $ 2,939 $ 15,413
Comprehensive income:
Net income -- 2,208 2,208
Net unrealized gains
(losses) on investment
securities available for
sale, net of tax effect
and reclassification
adjustment (Note 21) (248) -- (248)
Total comprehensive
income
Cash dividends
declared, $.31 per share (437) (437)
Balance, Dec. 31, 1996 89 4,710 16,936
Comprehensive income:
Net income -- 2,450 2,450
Net unrealized gains
(losses) on
investment securities
available for sale, net
of tax effect and
reclassification
adjustment (Note 21) 83 -- 83
Total comprehensive
income
Issuance of common stock upon
exercise of options and
warrants (Note 14) -- -- 811
Cash dividends
declared, $.35 per share -- (502) (502)
Balance, Dec. 31, 1997 172 6,658 19,778
Comprehensive income:
Net income -- 2,769 2,769
Net unrealized gains
(losses) on investment
securities available for
sale, net of tax effect
and reclassification
adjustment (Note 21) (147) -- (147)
Total comprehensive
income
Issuance of common stock
upon exercise of options
and warrants (Note 14) -- -- 3,248
Purchase of treasury stock -- -- (447)
Cash dividends declared,
$.39 per share -- (696) (696)
Balance, Dec. 31, 1998 $ 25 $ 8,731 $ 24,505
</TABLE>
See accompanying notes to consolidated financial statements
49
<PAGE> 25
Consolidated Statements of Cash Flows
Summit Bank Corporation and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31,
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,769 $ 2,450 $ 2,208
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
premises and equipment 463 406 337
Deferred tax expense (benefit) 262 206 (37)
Net amortization of premiums/discounts on
investment securities 294 79 54
Amortization of servicing assets 237 170 124
Amortization of goodwill 46 -- --
Amortization of negative goodwill (110) (110) (110)
Provision for loan losses 455 540 404
Gains on sales of loans (463) (616) (581)
Proceeds from sales of loans 6,251 5,340 9,116
Net gains on sales of investment securities (211) (162) (126)
Loss on disposal of premises and equipment 68 -- --
Changes in other assets and liabilities:
Net increase in loans held for sale (8,041) (5,113) (10,083)
Decrease (increase) in other assets 1,192 (2,508) 2,690
(Decrease) increase in other liabilities (48) 145 (1,224)
Net cash provided by operating activities 3,164 827 2,772
Cash flows from investing activities:
Proceeds from sales of investment
securities available for sale 27,916 21,949 6,745
Purchases of investment securities
available for sale and other investments (89,190) (58,957) (22,950)
Proceeds from maturities of investment
securities available for sale 28,100 6,550 5,350
Principal collections on investment
securities available for sale 13,662 6,298 4,647
Loans made to customers, net of principal
collected on loans (13,196) (13,698) (6,242)
Purchases of premises, equipment and
leasehold improvements (629) (293) (1,979)
Purchase of California Security Bank, net of
cash and cash equivalents acquired (note 20) (537) -- --
Net cash used in investing activities (33,874) (38,151) (14,429)
Cash flows from financing activities:
Net increase in demand and savings deposits 10,322 3,066 12,149
Net increase in time deposits 27,174 8,830 10,934
Principal payments for obligation
under capital lease (42) (37) (34)
Net increase in Federal Home Loan Bank advances -- 9,000 1,000
Net increase in other borrowed funds 3,231 2,099 657
Issuance of common stock upon exercise of
options and warrants 3,248 811 --
Purchase of treasury stock (447) -- --
Dividends paid (696) (502) (437)
Net cash provided by financing activities 42,790 23,267 24,269
Net increase (decrease) in cash and
cash equivalents 12,080 (14,057) 12,612
Cash and cash equivalents at beginning of year 9,360 23,417 10,805
Cash and cash equivalents at end of year $ 21,440 $ 9,360 $ 23,417
Supplemental disclosures of cash paid during the year:
Interest, net of amounts capitalized $ 6,733 $ 5,404 $ 5,350
Income taxes $ 1,329 $ 930 $ 1,407
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 26
Summit Bank Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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 the Comptroller of the Currency
on March 10, 1988, and the Bank began operations on that date.
(b) Business
The Company operates through one segment, providing a full range of banking
services to individual and corporate customers through its subsidiary bank. 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 and in San Jose, California as a result of
the 1998 acquisition of California Security Bank. 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 these market
areas.
(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, 1998 and 1997 consist of U.S. Treasury
securities, obligations of U.S. Government agencies, tax-exempt municipal
securities, 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
51
<PAGE> 27
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 using 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 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
52
<PAGE> 28
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 shorter of 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.
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 net 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.
53
<PAGE> 29
(l) Goodwill
Goodwill represents the excess of the purchase price and related costs over the
fair value of the net assets acquired. Goodwill is being amortized over 20 years
using the straight-line method. The Company re-evaluates goodwill based on
undiscounted operating cash flows whenever significant events or changes occur
which might impair recovery of the recorded costs.
(m) Net Income Per Share
Basic earnings per share (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.
(n) Reclassifications
Certain 1997 and 1996 amounts have been reclassified for comparative purposes in
order to conform the prior periods to the 1998 presentation. Such
reclassifications had no impact on net income or stockholders' equity.
(o) Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company has not
made an assessment of the expected impact that SFAS 133 will have on its
financial statements.
2. Investment Securities
Investment securities available for sale at December 31, 1998 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 $39,725 $ 89 $ 49 $39,765
Tax-exempt municipal securities 1,000 - - 1,000
Mortgage-backed securities 53,124 233 235 53,122
Other investments 900 - - 900
Total $94,749 $322 $284 $94,787
</TABLE>
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>
The amortized costs and estimated fair values of investment securities at
December 31, 1998, 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 $19,706 $19,661
Due after one year through five years 15,519 15,574
Due after five years through ten years 4,750 4,780
Due after ten years 1,650 1,650
Mortgage-backed securities 53,124 53,122
Total $94,749 $94,787
</TABLE>
54
<PAGE> 30
Proceeds from the sales of investment securities available for sale during 1998,
1997, and 1996 were $27,916,000, $21,949,000, and $6,745,000, respectively.
Gross gains of $212,000, $190,000, and $170,000 and gross losses of $1,000,
$28,000, and $44,000 were realized on those sales in 1998, 1997, and 1996,
respectively.
Investment securities with aggregate carrying amounts of approximately
$20,758,000 and $20,673,000 at December 31, 1998 and 1997, 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
<S> <C> <C>
Commercial, financial, and agricultural $ 37,724 $ 31,614
Real estate - construction 2,722 1,938
Real estate - mortgage 83,808 58,290
Installment loans to individuals 5,084 5,024
Less unearned income (1,514) (1,393)
Loans, net of unearned income 127,824 95,473
Loans held for sale - SBA 5,672 3,419
Less allowance for loan losses (2,336) (1,468)
Net loans $ 131,160 $ 97,424
</TABLE>
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 1998 with respect to such aggregate
loans to these individuals and their associates:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Balance at December 31, 1997 $ 192
New loans --
Repayments (157)
Balance at December 31, 1998 $ 35
</TABLE>
Activity in the allowance for loan losses for the years ended December 31, 1998,
1997, and 1996 was as follows::
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 1,468 $ 1,931 $ 1,686
Loan loss allowance of acquired bank 813 -- --
Provision for loan losses 455 540 404
Loans charged off (951) (1,339) (312)
Recoveries 551 336 153
Balance, end of year $ 2,336 $ 1,468 $ 1,931
</TABLE>
55
<PAGE> 31
Impaired loans and related amounts included in the allowance for loan losses at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands) Balance Allowance Balance Allowance
<S> <C> <C> <C> <C>
Impaired loans, with a related allowance $2,086 $104 $883 $65
Impaired loans, without allowance 1,524 - 894 -
</TABLE>
The allowance for impaired loans was primarily determined based on the fair
value of the respective loans' collateral. Impaired loans of $1,524,000 and
$894,000 at December 31, 1998 and 1997, respectively, did not have a related
allowance because the majority of these loans were fully guaranteed by the SBA.
The average recorded investment in impaired loans for the years ended December
31, 1998, 1997, and 1996 was $2,068,000, $1,198,000, and $1,309,000,
respectively. Interest income recognized on impaired loans for the years ended
December 31, 1998 and 1996 was approximately $41,000 and $161,000, respectively.
There was no interest income recognized on impaired loans for the year ended
December 31, 1997.
Nonaccrual loans amounted to approximately $3,219,000 and $1,777,000 at December
31, 1998 and 1997, respectively. Interest income on nonaccrual loans at December
31, 1998, 1997, and 1996, which would have been reported on an accrual basis in
1998, 1997, and 1996, amounted to approximately $246,000, $167,000, and $30,000,
respectively.
At December 31, 1998, 1997, and 1996, the Company was servicing loans for others
with aggregate principal balances of approximately $59,418,000, $57,534,000, and
$62,280,000, respectively.
5. Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
<S> <C> <C>
Land $ 985 $ 985
Building 2,784 2,742
Furniture and equipment under capital lease 183 183
Other furniture and equipment 1,744 1,692
Leasehold improvements 573 531
6,269 6,133
Less accumulated depreciation and amortization (1,636) (1,672)
Premises and equipment, net $ 4,633 $ 4,461
</TABLE>
The Company is the lessor under several noncancelable operating leases,
primarily for office space, that expire over the next three years. Future
minimum lease income under noncancelable operating leases (with initial or
remaining lease terms in excess of one year) as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
(In thousands)
Year ending December 31,
<C> <C>
1999 $118
2000 72
2001 2
Thereafter --
</TABLE>
56
<PAGE> 32
6. Loan Servicing Assets
The following is a summary of activity with respect to loan servicing assets
included in other assets at December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $1,114,860 $ 855,108 $ 586,576
Servicing asset additions 299,536 430,235 392,733
Amortization of servicing assets (237,346) (170,483) (124,201)
Balance at end of year $1,177,050 $1,114,860 $ 855,108
</TABLE>
The results of the Company's impairment analysis have not identified any
significant impairment in the recorded servicing assets. Accordingly, the
Company has no valuation allowance for impairment at December 31, 1998 and 1997.
7. Reserve Requirements
At December 31, 1998 and 1997, the Federal Reserve Bank required that the Bank
maintain an average reserve balance of $1,901,000 and $1,061,000, respectively.
8. Deposits
A summary of time deposits by maturity as of December 31, 1998 follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Time to maturity:
One year or less $101,576
Over one year through two years 15,912
Over two years through three years 1,213
Over three years through four years 311
Over four years through five years 540
Over five years 61
Total $119,613
</TABLE>
At December 31, 1998, the Company had approximately $2,700,000 in deposits from
its directors, executive officers, and principal stockholders and their
affiliates.
9. Other Borrowed Funds
During 1998 and 1997, the Company had available under a line of credit with
SunTrust Bank approximately $3,000,000. At December 31, 1998 and 1997, the
Company had no borrowings outstanding under this credit line. The line of credit
bore interest at prime, less 1%, and matured December 31, 1998. The Company had
pledged approximately 40% or 4,000 shares of the Bank's stock as collateral for
this line of credit. Upon expiration, the Company chose not to renew the line of
credit.
Other borrowed funds at December 31, 1998 and 1997, include retail repurchase
agreements totaling $5,987,000 and $2,756,000, respectively. Retail repurchase
agreements principally represent overnight borrowings from commercial customers.
The weighted-average interest rate on these repurchase agreements was 4.37% and
4.00% at December 31, 1998 and 1997, respectively. The repurchase agreements are
collateralized by U.S. Treasury securities with an aggregate carrying value of
$5,008,000 and $2,758,000 at December 31, 1998 and 1997, respectively. The
maximum amount of outstanding repurchase agreements at any month-end during 1998
and 1997, respectively, was $6,518,000 and $3,447,000. The average amount of
outstanding repurchase agreements for 1998 and 1997, respectively, was
$4,207,000 and $2,471,000. All securities underlying these repurchase agreements
were under the Bank's control.
57
<PAGE> 33
10. Federal Home Loan Bank Advances
The Bank has available under a line of credit with the Federal Home Loan Bank of
Atlanta approximately $16,000,000. At December 31, 1998 and 1997, the Bank had
drawn and outstanding $10,000,000, under this credit line. Such outstanding
amounts bore interest at 4.91% and 5.75%, respectively. The Bank has pledged
approximately $12,400,000 in U.S. Government securities as collateral for this
line of credit. The line of credit is callable on a quarterly basis and matures
on January 15, 2003.
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.
Future minimum capital lease payments as of December 31, 1998 total
approximately $39,000 of which $38,400 is due in 1999 and the remaining balance
is due in 2000.
12. Income Taxes
Income tax expense (benefit) attributable to income before income taxes for the
years ended December 31, 1998, 1997 and 1996 consists of:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Federal - current $1,153 $1,028 $1,092
State - current 88 85 119
Federal - deferred 231 176 (31)
State-deferred 31 30 (6)
Total $1,503 $1,319 $1,174
</TABLE>
Income tax expense (benefit) attributable to income before income taxes for the
years ended December 31, 1998, 1997, and 1996 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) 1998 1997 1996
<S> <C> <C> <C>
Computed "expected" income tax expense $ 1,452 $ 1,281 $ 1,150
Increase (decrease) resulting from:
State income taxes, net of Federal tax benefit 77 76 75
Amortization of negative goodwill (37) (37) (37)
Amortization of goodwill 15 -- --
Meals and entertainment expenses 14 11 13
Other (18) (12) (27)
Total $ 1,503 $ 1,319 $ 1,174
</TABLE>
58
<PAGE> 34
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 1998 and 1997 are
presented below::
<TABLE>
<CAPTION>
(In thousands) 1998 1997
<S> <C> <C>
Deferred tax assets (liabilities):
Loans, principally due to allowance for loan losses $ 278 $ 183
Merger costs amortization -- 12
Premises and equipment, principally due to
differences in depreciation 26 (15)
Accrued liabilities -- 5
Nonaccrual interest 102 --
Other 7 --
Net Federal and State operating loss carryforwards 4,322 2,432
Net unrealized holding gains on investment
securities available for sale (13) (105)
Total deferred tax assets 4,722 2,512
Less valuation allowance (2,741) (2,378)
Deferred tax assets, net of valuation allowance $ 1,981 $ 134
</TABLE>
As a result of the CSB acquisition, the valuation allowance increased $363,000
in 1998. 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, 1998.
At December 31, 1998, the Company has net operating loss carryforwards for
Federal and state income tax purposes of approximately $11,349,000 and
$10,149,000, 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 agreements with
each of the four 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-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 Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. The Company 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
59
<PAGE> 35
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, 1998, the Company had outstanding loan commitments totaling
$24,885,000 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 Bank 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
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, 1998, commitments under standby and commercial letters of credit
and guarantees aggregated $4,494,000.
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 1998, 1997, and
1996 was $547,000, $404,000, and $380,000, respectively. Future minimum lease
payments under noncancelable operating leases (with initial or remaining lease
terms in excess of one year) as of December 31, 1998 are:
<TABLE>
<CAPTION>
(In thousands)
<C> <C>
Year ending December 31,
1999 $ 638
2000 499
2001 127
2002 69
Thereafter 2
Total minimum lease payments $1,335
</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 were exercisable at any time through March 10, 1998, at a per
share exercise price of $10. In 1998 and 1997, 293,693 and 70,757 warrants,
respectively, were exercised. All unexercised warrants have expired.
On November 4, 1998, the Company announced a stock repurchase plan. Under the
plan, the Company announced its intention to repurchase up to 90,000 shares of
its outstanding common stock. At December 31, 1998, the Company had repurchased
24,375 shares under the plan. These shares cost a total of $447,000 and are
recorded as treasury stock.
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, 1998,
no special stock had been issued.
60
<PAGE> 36
15. Employee Benefit Plans
The Company has a Employee Incentive Stock Option Plan (the "Plan"). The
exercise price for incentive options issued under the Plan 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 200,000 shares
of common stock for the Plan. As of December 31, 1998, 43,225 options under the
Plan have been exercised.
Stock option activity during the years ended December 31, 1998, 1997, and 1996
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Options outstanding at beginning of year 52,900 41,225 41,225
Options granted - 22,000 -
Options exercised (32,900) (10,325) -
Options expired - - -
Options outstanding at end of year 20,000 52,900 41,225
Options exercisable at end of year 20,000 52,900 41,225
Option prices per share:
Options granted during the year $ - $10.00-16.75 $ -
Options exercised during the year 10.00 10.00 -
Options outstanding at end of year 16.75 10.00-16.75 10.00
</TABLE>
The options outstanding at December 31, 1998 had a weighted-average exercise
price of $16.75 and a weighted-average contractual maturity of 5.5 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%. There were no stock options granted during 1998.
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 years ended December 31, 1998 and 1997 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1998 1997
<S> <C> <C>
Net income:
As reported $ 2,769 $ 2,450
Pro forma 2,769 2,371
Net income per share:
As reported:
Basic net income per share $ 1.56 $ 1.71
Diluted net income per share 1.53 1.50
Pro forma:
Basic net income per share 1.56 1.65
Diluted net income per share 1.53 1.45
</TABLE>
The Company has a savings plan (the "Savings Plan") administered under the
provisions of the Internal Revenue Code Section 401(k). During 1998, 1997, and
1996, the Company and Bank made contributions totaling $49,561, $37,292, and
$33,354, respectively, to the Savings Plan. The Company computes contributions
based on matching of 50% of employee contributions up to 5%.
61
<PAGE> 37
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-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,
1998, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998 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 prompt
for capital 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, 1998:
Total capital - risk-based
(to risk-weighted assets):
Bank $17,809 11.4% $12,455 8.0% $15,568 10.0%
Consolidated 23,602 14.8 12,722 8.0 N/A N/A
Tier 1 capital - risk-based
(to risk-weighted assets):
Bank 15,858 10.2 6,227 4.0 9,341 6.0
Consolidated 21,651 13.6 6,361 4.0 N/A N/A
Tier 1 capital - leverage
(to average assets):
Bank 15,858 7.3 8,643 4.0 10,804 5.0
Consolidated 21,651 9.8 8,858 4.0 N/A N/A
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
</TABLE>
62
<PAGE> 38
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, 1998 and 1997 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.
Federal Home Loan Bank advances: The carrying value of the Federal Home Loan
Bank advances, due to their short-term nature, approximates fair value.
63
<PAGE> 39
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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 10,559 $ 10,559 $ 8,091 $ 8,091
Federal funds sold 10,725 10,725 1,200 1,200
Interest-bearing deposits in other banks 156 156 69 69
Investment securities 94,787 94,787 61,396 61,396
Other investments 1,314 1,314 1,566 1,566
Loans, net 131,160 131,923 97,424 97,371
Liabilities:
Deposits:
Non-interest-bearing $ 48,246 $ 48,246 $35,193 $35,193
Interest-bearing demand and savings 50,788 50,788 41,029 41,029
Time deposits 119,613 119,516 68,573 69,418
Federal Home Loan Bank advances 10,000 10,000 10,000 10,000
Other borrowed funds 5,987 5,987 2,756 2,756
Obligation under capital lease 39 39 81 81
</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) 1998 1997
<S> <C> <C>
Assets
Cash and due from Bank $ 947 $ 162
Investment in the Bank, at equity 18,710 16,865
Investment securities available for sale 2,903 700
Premises and equipment, net 2,034 2,089
Other assets 16 9
Total assets $ 24,610 $19,825
Liabilities and Stockholders' Equity
Accrued liabilities $ 105 $ 47
Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 shares
authorized; 1,815,363 shares issued
and 1,790,988 shares outstanding in
1998; 1,488,770 shares issued and outstanding in 1997 18 15
Additional paid-in capital 16,178 12,933
Treasury stock, at cost, 24,375 shares (447) --
Accumulated other comprehensive income 25 172
Retained earnings 8,731 6,658
Total stockholders' equity 24,505 19,778
Total liabilities and stockholders' equity $ 24,610 $19,825
</TABLE>
64
<PAGE> 40
Condensed Statements of Income (Parent Company Only)
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Income:
Interest on investment securities $ 211 $ 3 $ --
Other income 10 7 --
Dividend income received from Bank 690 505 675
Total income 911 515 675
Operating expenses 90 92 122
Income before taxes and equity in
undistributed net income of Bank 821 423 553
Income tax (expense) benefit (46) 32 42
Income before equity in undistributed net
income of Bank 775 455 595
Equity in undistributed net income of Bank 1,994 1,995 1,613
Net income $ 2,769 $2,450 $2,208
</TABLE>
Condensed Statements of Cash Flows (Parent Company Only)
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,769 $ 2,450 $ 2,208
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 72 70 58
Net gains on sales of investment
securities available for sale (10) -- --
Equity in undistributed net income of Bank (1,994) (1,995) (1,613)
(Increase) decrease in other assets (7) (9) 10
Increase (decrease) in other liabilities 58 (5) (401)
Net cash provided by operating activities 888 511 262
Cash flows from investing activities:
Purchases of investment securities
available for sale (3,699) (700) --
Proceeds from sales of investment
securities available for sale 1,508 -- --
Purchases of premises and equipment (17) (17) (111)
Net cash used in investing activities (2,208) (717) (111)
Cash flows from financing activities:
Dividends paid to shareholders (696) (502) (437)
Issuance of common stock upon exercise
of options and warrants 3,248 811 --
Purchase of treasury stock (447) -- --
Net cash provided by (used in) financing
activities 2,105 309 (437)
Net increase (decrease) in cash and
cash equivalents 785 103 (286)
Cash and cash equivalents at beginning of year 162 59 345
Cash and cash equivalents at end of year $ 947 $ 162 $ 59
Supplemental disclosures of cash paid during the year:
Income taxes $ 1,329 $ 930 $ 1,407
</TABLE>
65
<PAGE> 41
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 1999 is $3,989,000 plus 1999 net earnings of the Bank. At
December 31, 1998, $14,721,000 of the Parent Company's investment in the Bank is
restricted as to dividend payments from the Bank to the Parent Company.
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) 1998 1997 1996
<S> <C> <C> <C>
Data/item processing $486 $323 $332
Legal fees 301 181 123
Marketing and community relations 290 228 271
Telephone 268 233 136
Postage and courier 268 198 163
Accounting and other professional 218 182 192
Office supplies 183 147 157
Other losses 80 161 167
</TABLE>
20. Acquisition
On June 30, 1998, the Company acquired all of the issued and outstanding common
stock of California Security Bank ("CSB"), a single-office California state
chartered bank located in San Jose, California, for a cash price of $6,217,000,
including acquisition costs. The acquisition was recorded by the Company under
the purchase method of accounting. Goodwill of approximately $1,697,000 was
recorded in connection with the purchase and is being amortized over 20 years on
a straight-line basis. Amortization expense of approximately $46,000 was
recorded during the year ended December 31, 1998.
The fair values of assets acquired and liabilities assumed were as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash and due from banks $ 1,845
Federal funds sold 3,835
Investment securities available for sale 13,948
Loans, net 18,742
Premises and equipment 74
Deferred tax assets 2,017
Other assets 747
Deposits (36,356)
Other liabilities (332)
Fair value of net assets acquired 4,520
Cash paid to shareholders 6,000
Acquisition costs 217
Total purchase price 6,217
Cost over fair value of net assets acquired $ 1,697
</TABLE>
The net cash paid was $537,000.
66
<PAGE> 42
The following is pro forma information for the years ended December 31, 1998 and
1997 as if the acquisition had been consummated on January 1, 1998 and 1997,
respectively. The pro forma information is not necessarily indicative of the
combined financial position or results of operations which would have been
realized had the acquisition been consummated as of the dates assumed in the pro
forma presentation:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
(In thousands, except per-share amounts) Historic Pro forma Historic Pro forma
<S> <C> <C> <C> <C>
Net interest income $9,944 $10,738 $8,005 $9,511
Net income 2,769 2,255 2,450 2,442
Basic net income per share 1.56 1.27 1.71 1.70
Diluted net income per share 1.53 1.25 1.50 1.50
</TABLE>
21. Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, was adopted by the Company on
January 1, 1998. SFAS No. 130 establishes standards for reporting comprehensive
income. Comprehensive income includes net income and other comprehensive income
which is defined as non-owner related transactions in stockholders' equity.
Prior period amounts have been reclassified to reflect the application of the
provisions of SFAS No. 130. The following table sets forth the amounts of other
comprehensive income included in stockholders' equity along with the related tax
effect for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Pretax Tax (Expense) Net of Tax
(In thousands) Amount Benefit Amount
<S> <C> <C> <C>
December 31, 1998:
Net unrealized holding losses on investment
securities available for sale $ (25) $ 9 $ (16)
Less reclassification adjustment for net
gains realized in net income 211 (80) 131
Other comprehensive income (loss) $(236) $ 89 $(147)
December 31, 1997:
Net unrealized holding gains on investment
securities available for sale $ 295 $(111) $ 184
Less reclassification adjustment for net
gains realized in net income 162 (61) 101
Other comprehensive income $ 133 $ (50) $ 83
December 31, 1996:
Net unrealized holding losses on investment
securities available for sale $(272) $ 102 $(170)
Less reclassification adjustment for net
gains realized in net income 126 (48) 78
Other comprehensive income (loss) $(398) $ 150 $(248)
</TABLE>
67
<PAGE> 43
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- ------------------------
Atlanta, Georgia
January 22, 1999
68
<PAGE> 44
Corporate and Shareholder Information
Board of Directors
Jack N. Halpern, President, Halpern Enterprises, Inc., Chairman, Summit Bank
Corporation
Gerald L. Allison, CEO and Chairman, AJC International, 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, Retired, Alembik and Alembik
Peter M. Cohen, President, Trident Corporate Services, Inc.
Paul C. Y. Chu, Chairman, Novax Group
Jose I. Gonzalez, President, PanAmerican Logistics, LLC
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.
Shih Chien Lo, President, Lo Brothers Associates
Nack Paek, President, Government Loan Service Corp., Inc.
Carl L. Patrick, Jr., Director, Carmike Cinemas, Inc.
Cecil M. Phillips, Managing Partner, Place Collegiate Properties, L.P.
W. Clayton Sparrow, Jr., Partner, McCullough Sherrill, LLP
Howard H. L. Tai, Private Investor
P. Carl Unger, Ph.D., President, Boxtree Farm Enterprises
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, 58 Edgewood Avenue, Room 225, Annex
Building, Atlanta, Georgia 30303
Annual Meeting
The Annual Meeting of Stockholders will be held Saturday at 10:00 a.m., May 1,
1999 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, 1998,
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.
69
<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 22,
1999, relating to the consolidated balance sheets of Summit Bank Corporation and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 1998,
which report appears in the December 31, 1998 annual report on Form 10-K of
Summit Bank Corporation.
/s/ KPMG LLP
----------------------------------------
Atlanta, Georgia
March 29, 1999
70
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,559
<INT-BEARING-DEPOSITS> 156
<FED-FUNDS-SOLD> 10,725
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94,787
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 133,496
<ALLOWANCE> (2,336)
<TOTAL-ASSETS> 263,161
<DEPOSITS> 218,647
<SHORT-TERM> 15,987
<LIABILITIES-OTHER> 1,664
<LONG-TERM> 0
0
0
<COMMON> 18
<OTHER-SE> 24,487
<TOTAL-LIABILITIES-AND-EQUITY> 263,161
<INTEREST-LOAN> 11,932
<INTEREST-INVEST> 5,308
<INTEREST-OTHER> 13
<INTEREST-TOTAL> 17,253
<INTEREST-DEPOSIT> 6,615
<INTEREST-EXPENSE> 7,309
<INTEREST-INCOME-NET> 9,944
<LOAN-LOSSES> 455
<SECURITIES-GAINS> 211
<EXPENSE-OTHER> 8,792
<INCOME-PRETAX> 4,272
<INCOME-PRE-EXTRAORDINARY> 4,272
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,769
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.53
<YIELD-ACTUAL> 4.90
<LOANS-NON> 3,219
<LOANS-PAST> 0
<LOANS-TROUBLED> 391
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,468
<CHARGE-OFFS> 951
<RECOVERIES> 551
<ALLOWANCE-CLOSE> 2,336
<ALLOWANCE-DOMESTIC> 2,336
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
