SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

Mark One

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the quarterly period ended June 30, 2005

 

 

 

or

 

 

o

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

For the transition period from                           to                          .

Commission File Number 0-11986

SUMMIT BANCSHARES, INC.


(Exact name of registrant as specified in its charter)


Texas

 

75-1694807


 


(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

3880 Hulen St., Fort Worth, Texas 76107


(Address of principal executive offices)

 

 

 

(817) 336-6817


(Registrant’s telephone number, including area code)

 

 

 

No Change


(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was authorized to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x   No  o

The number of shares of common stock, $1.25 par value, outstanding at June 30, 2005 was 12,420,616 shares.



SUMMIT BANCSHARES, INC.

INDEX

 

 

 

Page No.

 

 

 


PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2005
and 2004 and at December 31, 2004

3

 

 

 

 

 

 

Consolidated Statements of Income for the
Six Months Ended June 30, 2005 and 2004
and for the Year Ended December 31, 2004

4

 

 

 

 

 

 

Consolidated Statements of Income for the Three
Months Ended June 30, 2005 and 2004

5

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’
Equity for the Six Months Ended June 30, 2005
and 2004 and for the Year Ended December 31, 2004

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2005 and 2004 and for
the Year Ended December 31, 2004

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements for the Six
Months Ended June 30, 2005 and 2004 and for the
Year Ended December 31, 2004

8-21

 

 

 

 

 

The June 30, 2005 and 2004 financial statements included herein are unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management of the registrant, necessary to a fair statement of the results for the interim periods.  The financial statements for the year ended December 31, 2004 included herein are headed “unaudited.”  These financial statements were reported as “audited” in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission but are required to be reflected herein as unaudited because of the absence of an independent auditor’s report.

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22-34

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

 

 

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

35

 

 

 

 

 

Item 5.

Other Information

35

 

 

 

 

 

Item 6.

Exhibits

35

2


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

 

(Unaudited)
June 30,

 

(Unaudited)
December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

 

 

(In Thousands)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CASH AND DUE FROM BANKS – NOTE 1

 

$

29,205

 

$

32,899

 

$

27,219

 

FEDERAL FUNDS SOLD & DUE FROM TIME

 

 

9,750

 

 

17,551

 

 

5,020

 

INVESTMENT SECURITIES – NOTE 3

 

 

 

 

 

 

 

 

 

 

Securities Available-for-Sale, at fair value

 

 

214,750

 

 

214,991

 

 

223,351

 

LOANS – NOTES 4, 14 AND 20

 

 

 

 

 

 

 

 

 

 

Loans, Net of Unearned Discount

 

 

721,161

 

 

672,686

 

 

702,619

 

Allowance for Loan Losses

 

 

(10,798

)

 

(9,844

)

 

(10,187

)

 

 



 



 



 

LOANS, NET

 

 

710,363

 

 

662,842

 

 

692,432

 

PREMISES AND EQUIPMENT – NOTE 5

 

 

15,563

 

 

15,145

 

 

15,749

 

GOODWILL – NOTE 6

 

 

8,997

 

 

7,752

 

 

8,042

 

OTHER INTANGIBLE ASSETS, NET – NOTE 6

 

 

2,338

 

 

2,642

 

 

2,478

 

ACCRUED INCOME RECEIVABLE

 

 

5,129

 

 

4,360

 

 

4,814

 

OTHER REAL ESTATE – NOTE 7

 

 

-0-

 

 

366

 

 

-0-

 

OTHER ASSETS

 

 

12,380

 

 

11,160

 

 

10,012

 

 

 



 



 



 

TOTAL ASSETS

 

$

1,008,475

 

$

969,708

 

$

989,117

 

 

 



 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

DEPOSITS – NOTE 8

 

 

 

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

241,643

 

$

218,343

 

$

235,399

 

Interest-Bearing

 

 

562,846

 

 

557,347

 

 

556,865

 

 

 



 



 



 

TOTAL DEPOSITS

 

 

804,489

 

 

775,690

 

 

792,264

 

SHORT TERM BORROWINGS – NOTE 9

 

 

108,581

 

 

106,663

 

 

103,972

 

NOTES PAYABLE – NOTE 10

 

 

1,250

 

 

2,750

 

 

1,750

 

JUNIOR SUBORDINATED DEFERRABLE DEBENTURES – NOTE 11

 

 

12,372

 

 

12,372

 

 

12,372

 

ACCRUED INTEREST PAYABLE

 

 

800

 

 

493

 

 

601

 

OTHER LIABILITIES

 

 

3,399

 

 

3,041

 

 

3,668

 

 

 



 



 



 

TOTAL LIABILITIES

 

 

930,891

 

 

901,009

 

 

914,627

 

 

 



 



 



 

COMMITMENTS AND CONTINGENCIES – NOTES 15, 17, 19 AND 21

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY – NOTES 16, 18 AND 22

 

 

 

 

 

 

 

 

 

 

Common Stock - $1.25 Par Value; 20,000,000 shares authorized; 12,420,616, 12,372,498 and 12,359,232 shares issued and outstanding at June 30, 2005 and 2004 and at December 31, 2004, respectively

 

 

15,526

 

 

7,733

 

 

15,449

 

Capital Surplus

 

 

8,036

 

 

7,563

 

 

7,705

 

Retained Earnings

 

 

55,775

 

 

56,211

 

 

51,810

 

Accumulated Other Comprehensive Income – Unrealized Loss on Available-for-Sale Investment Securities, Net of Tax Benefit

 

 

(1,753

)

 

(2,227

)

 

(474

)

Treasury Stock at Cost (41,000 shares at June 30, 2004)

 

 

-0-

 

 

(581

)

 

-0-

 

 

 



 



 



 

TOTAL SHAREHOLDERS’ EQUITY

 

 

77,584

 

 

68,699

 

 

74,490

 

 

 



 



 



 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,008,475

 

$

969,708

 

$

989,117

 

 

 



 



 



 

The accompanying Notes should be read with these financial statements.

3


SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

 

 

(Unaudited)
For the Six Months Ended
June 30,

 

(Unaudited)
Year Ended
December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

 

 

 

(In Thousands, Except Per Share Data)

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans

 

$

23,702

 

$

17,800

 

$

39,018

 

Interest and Dividends on Investment Securities:

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

3,840

 

 

3,496

 

 

7,409

 

Exempt from Federal Income Taxes

 

 

142

 

 

117

 

 

260

 

Interest on Federal Funds Sold and Due From Time

 

 

67

 

 

88

 

 

170

 

 

 



 



 



 

TOTAL INTEREST INCOME

 

 

27,751

 

 

21,501

 

 

46,857

 

 

 



 



 



 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

Interest on Deposits

 

 

4,984

 

 

3,478

 

 

7,677

 

Interest on Short Term Borrowings

 

 

1,435

 

 

620

 

 

1,423

 

Interest on Notes Payable

 

 

43

 

 

16

 

 

62

 

Interest on Junior Subordinated Deferrable Debentures

 

 

334

 

 

76

 

 

344

 

 

 



 



 



 

TOTAL INTEREST EXPENSE

 

 

6,796

 

 

4,190

 

 

9,506

 

 

 



 



 



 

NET INTEREST INCOME

 

 

20,955

 

 

17,311

 

 

37,351

 

LESS: PROVISION FOR LOAN LOSSES – NOTE 4

 

 

450

 

 

1,005

 

 

1,790

 

 

 



 



 



 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

20,505

 

 

16,306

 

 

35,561

 

 

 



 



 



 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

Service Charges and Fees on Deposits

 

 

1,972

 

 

1,984

 

 

4,248

 

Gain on Sale of Investment Securities

 

 

-0-

 

 

-0-

 

 

32

 

Other Income

 

 

1,943

 

 

1,306

 

 

2,962

 

 

 



 



 



 

TOTAL NON-INTEREST INCOME

 

 

3,915

 

 

3,290

 

 

7,242

 

 

 



 



 



 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

Salaries and Employee Benefits - NOTE 17

 

 

8,717

 

 

7,140

 

 

15,329

 

Occupancy Expense - Net

 

 

1,264

 

 

990

 

 

2,206

 

Furniture and Equipment Expense

 

 

1,169

 

 

1,060

 

 

2,261

 

Other Real Estate Owned Expense - Net

 

 

(11

)

 

15

 

 

44

 

Core Deposit Intangible Amortization

 

 

164

 

 

55

 

 

219

 

Other Expense – NOTE 12

 

 

3,507

 

 

2,620

 

 

6,131

 

 

 



 



 



 

TOTAL NON-INTEREST EXPENSE

 

 

14,810

 

 

11,880

 

 

26,190

 

 

 



 



 



 

INCOME BEFORE INCOME TAXES

 

 

9,610

 

 

7,716

 

 

16,613

 

APPLICABLE INCOME TAXES – NOTE 13

 

 

3,406

 

 

2,669

 

 

5,851

 

 

 



 



 



 

NET INCOME

 

$

6,204

 

$

5,047

 

$

10,762

 

 

 



 



 



 

NET INCOME PER SHARE – NOTE 18

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.50

 

$

0.41

 

$

0.87

 

Diluted

 

 

0.49

 

 

0.40

 

 

0.85

 

The accompanying Notes should be read with these financial statements.

4


SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

 

 

(Unaudited)

 

 

 

For the Three Months Ended
June 30,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

 

 

(In Thousands, Except Per Share Data)

 

INTEREST INCOME

 

 

 

 

 

 

 

Interest and Fees on Loans

 

$

12,356

 

$

9,391

 

Interest and Dividends on Investment Securities:

 

 

 

 

 

 

 

Taxable

 

 

1,914

 

 

1,778

 

Exempt from Federal Income Taxes

 

 

72

 

 

58

 

Interest on Federal Funds Sold and Due From Time

 

 

36

 

 

75

 

 

 



 



 

TOTAL INTEREST INCOME

 

 

14,378

 

 

11,302

 

 

 



 



 

INTEREST EXPENSE

 

 

 

 

 

 

 

Interest on Deposits

 

 

2,652

 

 

1,837

 

Interest on Short Term Borrowings

 

 

811

 

 

345

 

Interest on Notes Payable

 

 

20

 

 

16

 

Interest on Junior Subordinated Deferrable Debentures

 

 

173

 

 

76

 

 

 



 



 

TOTAL INTEREST EXPENSE

 

 

3,656

 

 

2,274

 

 

 



 



 

NET INTEREST INCOME

 

 

10,722

 

 

9,028

 

LESS: PROVISION FOR LOAN LOSSES – NOTE 4

 

 

225

 

 

400

 

 

 



 



 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

10,497

 

 

8,628

 

 

 



 



 

NON-INTEREST INCOME

 

 

 

 

 

 

 

Service Charges and Fees on Deposits

 

 

990

 

 

1,078

 

Other Income

 

 

1,045

 

 

645

 

 

 



 



 

TOTAL NON-INTEREST INCOME

 

 

2,035

 

 

1,723

 

 

 



 



 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

Salaries and Employee Benefits - NOTE 17

 

 

4,448

 

 

3,772

 

Occupancy Expense - Net

 

 

660

 

 

552

 

Furniture and Equipment Expense

 

 

571

 

 

565

 

Other Real Estate Owned Expense - Net

 

 

(14

)

 

15

 

Core Deposit Intangible Amortization

 

 

82

 

 

55

 

Other Expense – NOTE 12

 

 

1,811

 

 

1,391

 

 

 



 



 

TOTAL NON-INTEREST EXPENSE

 

 

7,558

 

 

6,350

 

 

 



 



 

INCOME BEFORE INCOME TAXES

 

 

4,974

 

 

4,001

 

APPLICABLE INCOME TAXES – NOTE 13

 

 

1,783

 

 

1,405

 

 

 



 



 

NET INCOME

 

$

3,191

 

$

2,596

 

 

 



 



 

NET INCOME PER SHARE - NOTE 18

 

 

 

 

 

 

 

Basic

 

$

0.26

 

$

0.21

 

Diluted

 

 

0.25

 

 

0.20

 

The accompanying Notes should be read with these financial statements.

5


SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE  SIX MONTHS ENDED JUNE 30, 2005 AND 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2004
(Unaudited)

 

 

 

 

 

 

 

 

Capital
Surplus

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income - Net
Unrealized Gain
(Loss) on
Investment
Securities

 

Treasury
Stock

 

Total
Share-
Holders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 


 

Shares

 

Amount

 

 



 



 



 



 



 



 



 

 

 

(Dollars in Thousands, Except Per Share Data)

 

Balance at January 1, 2004

 

 

6,152,329

 

$

7,690

 

$

7,421

 

$

52,988

 

$

688

 

$

(103

)

$

68,684

 

Stock Options Exercised

 

 

37,620

 

 

48

 

 

142

 

 

 

 

 

 

 

 

 

 

 

190

 

Purchases of Stock Held in Treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(581

)

 

(581

)

Retirement of Stock Held in Treasury

 

 

(3,700

)

 

(5

)

 

 

 

 

(98

)

 

 

 

 

103

 

 

-0-

 

Cash Dividend - $.28 Per Share

 

 

 

 

 

 

 

 

 

 

 

(1,726

)

 

 

 

 

 

 

 

(1,726

)

Net Income for the Six Months Ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

5,047

 

 

 

 

 

 

 

 

5,047

 

Securities Available- for-Sale Adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,915

)

 

 

 

 

(2,915

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total Comprehensive Income – NOTE 25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,132

 

 

 



 



 



 



 



 



 



 

Balance at June 30, 2004

 

 

6,186,249

 

 

7,733

 

 

7,563

 

 

56,211

 

 

(2,227

)

 

(581

)

 

68,699

 

Stock Options Exercised

 

 

17,650

 

 

21

 

 

142

 

 

 

 

 

 

 

 

 

 

 

163

 

Purchases of Stock Held in Treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(113

)

 

(113

)

Retirement of Stock Held in Treasury

 

 

(23,883

)

 

(29

)

 

 

 

 

(665

)

 

 

 

 

694

 

 

-0-

 

Two-for-One Stock Split

 

 

6,179,216

 

 

7,724

 

 

 

 

 

(7,724

)

 

 

 

 

 

 

 

-0-

 

Cash Dividend - $.28 Per Share

 

 

 

 

 

 

 

 

 

 

 

(1,727

)

 

 

 

 

 

 

 

(1,727

)

Net Income for the Six Months Ended December 31, 2004

 

 

 

 

 

 

 

 

 

 

 

5,715

 

 

 

 

 

 

 

 

5,715

 

Securities Available- for-Sale Adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,753

 

 

 

 

 

1,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total Comprehensive Income – NOTE 25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,468

 

 

 



 



 



 



 



 



 



 

Balance at December 31, 2004

 

 

12,359,232

 

 

15,449

 

 

7,705

 

 

51,810

 

 

(474

)

 

-0-

 

 

74,490

 

Stock Options Exercised

 

 

90,684

 

 

114

 

 

331

 

 

 

 

 

 

 

 

 

 

 

445

 

Purchases of Stock Held in Treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(542

)

 

(542

)

Retirement of Stock Held in Treasury

 

 

(29,300

)

 

(37

)

 

 

 

 

(505

)

 

 

 

 

542

 

 

-0-

 

Cash Dividend - $.14 Per Share

 

 

 

 

 

 

 

 

 

 

 

(1,734

)

 

 

 

 

 

 

 

(1,734

)

Net Income for the Six Months Ended June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

6,204

 

 

 

 

 

 

 

 

6,204

 

Securities Available- for-Sale Adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,279

)

 

 

 

 

(1,279

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Total Comprehensive Income – NOTE 25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,925

 

 

 



 



 



 



 



 



 



 

Balance at June 30, 2005

 

 

12,420,616

 

$

15,526

 

$

8,036

 

$

55,775

 

$

(1,753

)

 

-0-

 

$

77,584

 

 

 



 



 



 



 



 



 



 

The accompanying Notes should be read with these financial statements.

6


SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2004

 

 

(Unaudited)
For the Six Months Ended
June 30,

 

(Unaudited)
Year Ended
December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

 

 

(In Thousands)

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

6,204

 

$

5,047

 

$

10,762

 

 

 



 



 



 

Adjustments to Reconcile Net Income to Net

 

 

 

 

 

 

 

 

 

 

Cash Provided by Operating Activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

958

 

 

770

 

 

1,669

 

Net Premium Amortization of Investment Securities

 

 

755

 

 

638

 

 

1,429

 

Amortization of Core Deposit Intangible

 

 

164

 

 

55

 

 

219

 

Provision for Loan Losses

 

 

450

 

 

1,005

 

 

1,790

 

Deferred Income Taxes Benefit

 

 

(173

)

 

(440

)

 

(434

)

Net Gain on Sale of Investment Securites

 

 

-0-

 

 

-0-

 

 

(32

)

Net Gain From Sale of Other Real Estate & Repossessed Assets

 

 

-0-

 

 

(69

)

 

(70

)

Net Gain From Sale of Premises and Equipment

 

 

-0-

 

 

(1

)

 

(37

)

Net Increase in Accrued Income and Other Assets

 

 

(2,007

)

 

(1,724

)

 

(809

)

Net Increase (Decrease) in Accrued Expenses and Other Liabilities

 

 

(70

)

 

(544

)

 

397

 

 

 



 



 



 

Total Adjustments

 

 

77

 

 

(310

)

 

4,122

 

 

 



 



 



 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

6,281

 

 

4,737

 

 

14,884

 

 

 



 



 



 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net (Increase) Decrease in Federal Funds Sold and Due From Time

 

 

(4,730

)

 

7,207

 

 

19,738

 

Proceeds from Matured and Prepaid Investment Securities
Available-for-Sale

 

 

92,156

 

 

27,621

 

 

120,254

 

Proceeds from Sales of Investment Securities

 

 

-0-

 

 

80,000

 

 

23,233

 

Purchase of Investment Securities
Available-for-Sale

 

 

(86,090

)

 

(131,342

)

 

(173,730

)

Premium Paid for ANB Financial Corporation
(Net of Aquired Cash of $3,871)

 

 

-0-

 

 

(10,394

)

 

(10,520

)

Net Assets Acquired in the Purchase of ANB Financial Corporation

 

 

-0-

 

 

(2,039

)

 

(2,039

)

Net Assets Acquired in the Purchase of Dignum Financial

 

 

(976

)

 

-0-

 

 

-0-

 

Loans Originated and Principal Repayments, Net

 

 

(18,773

)

 

(59,423

)

 

(89,427

)

Recoveries of Loans Previously Charged-Off

 

 

392

 

 

134

 

 

400

 

Proceeds from Sale of Premises and Equipment

 

 

-0-

 

 

12

 

 

48

 

Proceeds from Sale of Other Real Estate & Repossessed Assets

 

 

-0-

 

 

124

 

 

892

 

Purchases of Premises and Equipment

 

 

(777

)

 

(546

)

 

(4,509

)

 

 



 



 



 

NET CASH USED BY INVESTING ACTIVITIES

 

 

(18,798

)

 

(88,646

)

 

(115,660

)

 

 



 



 



 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Demand Deposits, Savings Accounts and Interest-Bearing Transaction Accounts

 

 

(11,938

)

 

41,709

 

 

52,506

 

Net Increase in Certificates of Deposit

 

 

24,163

 

 

9,045

 

 

14,803

 

Net Increase in Short Term Borrowings

 

 

4,609

 

 

24,429

 

 

21,738

 

Net Increase (Decrease) in Note Payable

 

 

(500

)

 

2,750

 

 

1,750

 

Proceeds from Issuance of Junior Subordinated Debentures

 

 

-0-

 

 

12,372

 

 

12,372

 

Payments of Cash Dividends

 

 

(1,734

)

 

(1,726

)

 

(3,453

)

Proceeds from Stock Options Exercised

 

 

445

 

 

190

 

 

353

 

Purchases of Treasury Stock

 

 

(542

)

 

(581

)

 

(694

)

 

 



 



 



 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

14,503

 

 

88,188

 

 

99,375

 

 

 



 



 



 

NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS

 

 

1,986

 

 

4,279

 

 

(1,401

)

CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD

 

 

27,219

 

 

28,620

 

 

28,620

 

 

 



 



 



 

CASH AND DUE FROM BANKS AT END OF PERIOD

 

$

29,205

 

$

32,899

 

$

27,219

 

 

 



 



 



 

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Interest Paid

 

$

6,597

 

$

4,167

 

$

9,199

 

Income Taxes Paid

 

 

3,600

 

 

3,240

 

 

6,377

 

Other Real Estate and Other Assets Acquired in Settlement of Loans

 

 

-0-

 

 

55

 

 

321

 

The accompanying Notes should be read with these financial statements.

7


SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2004 (UNAUDITED)

NOTE 1 - Summary of Significant Accounting and Reporting Policies

          The accounting and reporting policies of Summit Bancshares, Inc. are in accordance with accounting principles generally accepted in the United States of America and the prevailing practices within the banking industry.  A summary of the more significant policies follows:

Basis of Presentation and Principles of Consolidation

          The consolidated financial statements of Summit Bancshares, Inc. (hereinafter, collectively with its subsidiaries, the “Corporation”), include its accounts and its direct and indirect wholly-owned subsidiaries, Summit Delaware Financial Corporation, Summit Bank, National Association (the “Bank”) and SIA Insurance Agency, Inc. (“SIA”).  All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ materially from those estimates.

Cash and Due From Banks

          The Bank is required to maintain certain noninterest-bearing cash balances at the Federal Reserve Bank based on its level of deposits. During the first six months of 2005, the average cash balance maintained at the Federal Reserve Bank was $2,633,000. Compensating balances held at correspondent banks, to minimize service charges, averaged approximately $23,004,000 during the same period.

Investment Securities

          The Corporation has adopted Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”).  At the date of purchase, the Corporation is required to classify debt and equity securities into one of three categories: held-to-maturity, trading or available-for-sale.  At each reporting date, the appropriateness of the classification is reassessed.  Investments in debt securities are classified as held-to-maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability to hold those securities to maturity.  Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings.  Investments not classified as either held-to-maturity or trading are classified as available-for-sale and measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, in a separate component of shareholders’ equity until realized.

          The Corporation has the ability and intent to hold to maturity its investment securities classified as held-to-maturity; accordingly, no adjustment has been made for the excess, if any, of amortized cost over market.  In determining the investment category classifications at the time of purchase of securities, management considers its asset/liability strategy, changes in interest rates and prepayment risk, the need to increase capital and other factors.  Under certain circumstances (including the deterioration of the issuer’s creditworthiness, a change in tax law, or statutory or regulatory requirements), the Corporation may change the investment security classification.  In the periods reported for 2005 and 2004, the Corporation held no securities that would have been classified as trading securities.

          All investment securities are adjusted for amortization of premiums and accretion of discounts.  Amortization of premiums and accretion of discounts are recorded to income over the contractual maturity or estimated life of the individual investment on the level yield method.  Gain or loss on sale of investments is based upon the specific identification method and the gain or loss is recorded in non-interest income.  Income earned on the Corporation’s investments in state and political subdivisions is not taxable.

Loans and Allowance for Loan Losses

          Loans are stated at the principal amount outstanding less unearned discount, deferred fees and the allowance for loan losses.  Unearned discount on installment loans is recognized as income over the terms of the loans by a method approximating the interest method.  Interest income on all other loans is recognized based upon the principal amounts outstanding, the simple interest method.  Loan origination fee income, net of direct loan origination costs, is deferred and amortized over the life of the related loan.  The accrual of interest on a loan is discontinued when, in the opinion of management, there is doubt about the ability of the borrower to pay interest or principal.  Interest previously earned, but uncollected on such loans, is written off.  After loans are placed on non-accrual all payments received are applied to principal and no interest income is recorded until the loan is returned to accrual status or the principal has been reduced to zero.

8


NOTE 1 - Summary of Significant Accounting and Reporting Policies (cont’d.)

          The Corporation has adopted Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure.”  Under this standard, the allowance for loan losses related to loans that are identified for evaluation in accordance with Statement No. 114 (impaired loans) is based on discounted cash flows using the loan’s initial effective rate or the fair value of the collateral for certain collateral dependent loans.

          The allowance for loan losses is comprised of amounts charged against income in the form of a provision for loan losses for certain loans when it is probable that all amounts due pursuant to the contractual terms of the loan will not be collected.  In these situations, a reserve is recorded when the carrying amount of the loan exceeds the discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans.  Income on impaired loans is recognized based on the collectibility of the principal amount.  Adjustments to the allowance for loan losses will be reported in the period such adjustments become known or are reasonably estimable.

          The amount maintained in the allowance reflects management’s continuing assessment of the potential losses inherent in its loan portfolio based on its evaluation of a number of factors, including the Bank’s loss experience in relation to outstanding loans and the existing level of the allowance, prevailing and prospective economic conditions, and management’s continuing review of the discounted cash flow values of impaired loans and its evaluation of the quality of the loan portfolio.  Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely.

          The evaluation of the adequacy of loan collateral is often based upon estimates and appraisals.  Because of changing economic conditions, the valuations determined from such estimates and appraisals may also change.  Accordingly, the Corporation may ultimately incur losses which vary materially from management’s current estimates. 

Premises and Equipment

          Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation expense is computed on the straight-line method based upon the estimated useful lives of the assets ranging from three to forty years.  Maintenance and repairs are charged to non-interest expense.  Renewals and betterments are added to the asset accounts and depreciated over the periods benefited.  Depreciable assets sold or retired are removed from the asset and related accumulated depreciation accounts and any gain or loss is reflected in the income and expense accounts.

Other Real Estate

          Other real estate is foreclosed property held pending disposition and is valued at the lower of its fair value or the recorded investment in the related loan.  At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Corporation’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses.  Any subsequent reduction in value is recognized by a charge to income.  Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in non-interest expense.

Federal Income Taxes

          The Corporation joins with its subsidiaries in filing a consolidated federal income tax return.  The subsidiaries pay to the parent a charge equivalent to their current federal income tax based on the separate taxable income of the subsidiaries.

          The Corporation and the subsidiaries maintain their records for financial reporting and income tax reporting purposes on the accrual basis of accounting.  Deferred income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”  Deferred income taxes are provided for accumulated temporary differences due to basic differences for assets and liabilities for financial reporting and income tax purposes.

          Realization of net deferred tax assets is dependent on generating sufficient future taxable income.  Although realization is not assured, management believes it is more likely than not that all of the net deferred tax assets will be realized.  The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

Cash and Cash Equivalents

          For the purpose of presentation in the Statements of Cash Flows, cash and cash equivalents include cash on hand, clearings and exchanges, and balances due from correspondent banks. 

Reclassification

          Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.

9


NOTE 1 - Summary of Significant Accounting Policies (cont’d.)

Earnings Per Common and Common Equivalent Shares

          Statement of Financial Accounting Standards No. 128 (“SFAS 128”), “Earnings Per Share,” requires presentation of basic and diluted earnings per share.  Basic earnings per share has been computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  Net income per common share for all periods presented has been calculated in accordance with SFAS 128.  Outstanding stock options issued by the Corporation represent the only dilutive effect reflected in diluted weighted average shares.

Stock-Based Compensation

          The Corporation accounts for stock-based compensation in accordance with the intrinsic value based method recommended by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”  Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date over the amount an employee must pay to acquire the stock.  The impact on the financial statements of using this method is disclosed below.

          Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as amended by Statement of Financial Accounting Standards 148 (“SFAS  123”), requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based compensation.  The pro forma disclosures presented below use the fair value method of SFAS 123 to measure compensation expense for stock-based compensation plans.

          The Corporation accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost has been recognized for options granted.  The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation.

 

 

June 30, 2005

 

December 31, 2004

 

 

 


 


 

Net Income, as Reported

 

$

6,204

 

$

10,762

 

Deduct: Total stock-based compensation expense determined under fair value based method               for all awards, net of related tax effects

 

 

(139

)

 

(171

)

 

 



 



 

Pro Forma Net Income

 

$

6,065

 

$

10,591

 

 

 



 



 

Earnings Per Share:

 

 

 

 

 

 

 

Basic - as Reported

 

$

0.50

 

$

0.87

 

Basic - Pro Forma

 

 

0.49

 

 

0.86

 

Diluted - as Reported

 

 

0.49

 

 

0.85

 

Diluted - Pro Forma

 

 

0.48

 

 

0.84

 

           SFAS No. 123(R), “Share-Based Payment (Revised 2004),” among other things, eliminates the ability to account for stock-based compensation  using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant.  The Corporation will adopt the provisions of this statement on January 1, 2006.  The methodology has not yet been determined.

Advertising Costs

          Advertising costs are expensed as incurred.

Comprehensive Income

          Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from investments by and distributions to owners and treasury stock transactions.  Besides net income, the other component of the Corporation’s comprehensive income is the after tax effect of changes in the fair value of securities available-for-sale.  Comprehensive income for the periods ended June 30, 2005 and 2004 and for the year ended December 31, 2004 is reported in Note 25, “Comprehensive Income.”

10


Audited Financial Statements

          The consolidated balance sheet as of December 31, 2004, and the consolidated statements of income, changes in shareholders’ equity and cash flows for the year ended December 31, 2004 are headed “unaudited” in these financial statements.  These statements were reported as “audited” in our Annual Report of Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission but are required to be reflected in these statements as unaudited because of the absence of an independent auditor’s report.

NOTE 2 – Acquisitions

          On May 3, 2004, the Corporation completed its merger with ANB Financial Corporation and its wholly-owned subsidiary, Arlington National Bank of Arlington, Texas (collectively, “ANB”).  Under the terms of the merger agreement with ANB, the Corporation acquired ANB for approximately $16.0 million in cash.  ANB was privately held and operated four (4) banking offices in Arlington, Texas.  On May 1, 2004, ANB had total assets of $89.0 million, loans of $59.4 million, deposits of $83.6 million and shareholders’ equity of $3.1 million.  This acquisition was partially funded through the formation of SBI Trust and its subsequent issuance of $12.0 million of its floating rate Capital Securities and $372,000 of trust common securities.

NOTE 3 - Investment Securities

 

A summary of amortized cost and estimated fair values of investment securities as of June 30, 2005 is as follows (in thousands):


 

 

June 30, 2005

 

 

 


 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 


 


 


 


 

Investment Securities - Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies and Corporations

 

$

160,185

 

$

148

 

$

(1,904

)

$

158,429

 

U.S. Government Agency Mortgage Backed Securities

 

 

40,128

 

 

43

 

 

(947

)

 

39,224

 

Obligations of States and Political Subdivisions

 

 

8,801

 

 

69

 

 

(54

)

 

8,816

 

Community Reinvestment Act Investment Fund

 

 

3,000

 

 

-0-

 

 

(11

)

 

2,989

 

Other Securities

 

 

5,292

 

 

-0-

 

 

-0-

 

 

5,292

 

 

 



 



 



 



 

Total Available-for-Sale Securities

 

$

217,406

 

$

260

 

$

(2,916

)

$

214,750

 

 

 



 



 



 



 

          All investment securities are carried on the consolidated balance sheet as of June 30, 2005 at fair value.  The net unrealized loss of $2,656,000 is included in the Available-for-Sale Investment Securities balance.  The unrealized loss, net of tax benefit, is included in Shareholders’ Equity.

          Included in the Other Securities category at June 30, 2005 is $4,413,000 of Federal Home Loan Bank Stock and $800,000 of Federal Reserve Stock which are classified as restricted investment securities, carried at cost, and evaluated for impairment.  No impairment losses were recorded as of June 30, 2005.  The Corporation is required to have stock holdings of Federal Home Loan Bank Stock equal to .14% of the Corporation’s total assets as of the previous year end plus 4.25% of its outstanding advancements from the Federal Home Loan Bank (“FHLB”).  The Corporation is also required to have stock holdings of Federal Reserve Stock equal to 6% of its Capital Stock and Surplus.

11


NOTE 3 - Investment Securities (cont’d.)

 

A summary of amortized cost and estimated fair values of investment securities as of June 30, 2004 is as follows (in thousands):


 

 

June 30, 2004

 

 

 


 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 


 


 


 


 

Investment Securities - Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government Agencies and Corporations

 

$

146,369

 

$

585

 

$

(2,066

)

$

144,888

 

U.S. Government Agency Mortgage Backed Securities

 

 

55,558

 

 

57

 

 

(1,881

)

 

53,734

 

Obligations of States and Political Subdivisions

 

 

7,016

 

 

62

 

 

(80

)

 

6,998

 

Community Reinvestment Act Investment Fund

 

 

3,000

 

 

-0-

 

 

(51

)

 

2,949

 

Other Securities

 

 

6,422

 

 

-0-

 

 

-0-

 

 

6,422

 

 

 



 



 



 



 

Total Available-for-Sale Securities

 

$

218,365

 

$

704

 

$

(4,078

)

$

214,991

 

 

 



 



 



 



 

            All investment securities were carried on the consolidated balance sheet as of June 30, 2004 at fair value.  The net unrealized loss of $3,374,000 was included in the Available-for-Sale Investment Securities balance.  The unrealized loss, net of tax benefit, was included in Shareholders’ Equity.

          Included in the Other Securities category at June 30, 2004 was $5,444,000 of Federal Home Loan Bank Stock and $800,000 of Federal Reserve Stock which were classified as restricted investment securities, carried at cost, and evaluated for impairment.  No impairment losses were recorded as of June 30, 2004.  The Corporation was required at June 30, 2004 to have stock holdings of Federal Home Loan Bank Stock equal to .20% of the Corporation’s total assets as of the previous year end plus 4.25% of its outstanding advancements from the FHLB.  The Corporation was also required to have stock holdings of Federal Reserve Stock equal to 6% of its Capital Stock and Surplus.

NOTE 4 - Loans and Allowance for Loan Losses

          The book values of loans by major type follow (in thousands):

 

 

June 30,

 

December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

Commercial and Industrial

 

$

257,362

 

$

249,230

 

$

261,571

 

Real Estate Mortgage - Commercial

 

 

236,142

 

 

192,956

 

 

224,720

 

Real Estate Mortgage - Residential

 

 

86,558

 

 

83,398

 

 

82,839

 

Real Estate - Construction

 

 

105,256

 

 

104,237

 

 

93,558

 

Loans to Individuals

 

 

35,843

 

 

42,865

 

 

39,931

 

 

 



 



 



 

 

 

 

721,161

 

 

672,686

 

 

702,619

 

Allowance for Loan Losses

 

 

(10,798

)

 

(9,844

)

 

(10,187

)

 

 



 



 



 

Loans - Net

 

$

710,363

 

$

662,842

 

$

692,432

 

 

 



 



 



 

          Loans are net of unearned income of $922,000 and $833,000 at June 30, 2005 and 2004, respectively, and $893,000 at December 31, 2004.

12


NOTE 4 - Loans and Allowance for Loan Losses (cont’d.)

          Transactions in the allowance for loan losses are summarized as follows (in thousands):

 

 

Six Months Ended
June,

 

Year Ended
December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

Balance, Beginning of Period

 

$

10,187

 

$

7,784

 

$

7,784

 

Balance Acquired in the Arlington National Bank Acquisition

 

 

-0-

 

 

1,254

 

 

1,254

 

Provisions, Charged to Income

 

 

450

 

 

1,005

 

 

1,790

 

Loans Charged-Off

 

 

(231

)

 

(333

)

 

(1,041

)

Recoveries of Loans Previously  Charged-Off

 

 

392

 

 

134

 

 

400

 

 

 



 



 



 

Net Loans (Charged-Off) Recovered

 

 

161

 

 

(199

)

 

(641

)

 

 



 



 



 

Balance, End of Period

 

$

10,798

 

$

9,844

 

$

10,187

 

 

 



 



 



 

          The provisions for loan losses charged to operating expenses during the six months ended June 30, 2005 and June 30, 2004 of $450,000 and $1,005,000, respectively, were considered adequate to maintain the allowance in accordance with the policy discussed in Note 1.  For the year ended December 31, 2004, a provision of $1,790,000 was recorded.

          At June 30, 2005, the recorded investment in loans that are considered to be impaired under Statement of Financial Accounting Standards No. 114 was $2,623,000 (of which $2,623,000 were on non-accrual status).  The related allowance for loan losses for these loans was $186,000.  The average recorded investment in impaired loans during the six months ended June 30, 2005 was approximately $2,701,000.  For this period, the Corporation recognized no interest income on these impaired loans.

NOTE 5 - Premises and Equipment

          The investment in premises and equipment stated at cost and net of accumulated amortization and depreciation is as follows (in thousands):

 

 

June 30,

 

December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

Land

 

$

3,038

 

$

3,047

 

$

3,038

 

Buildings and Improvements

 

 

12,356

 

 

11,578

 

 

12,427

 

Furniture & Equipment

 

 

11,177

 

 

11,276

 

 

11,864

 

 

 



 



 



 

Total Cost

 

 

26,571

 

 

25,901

 

 

27,329

 

Less:  Accumulated Amortization and Depreciation

 

 

11,008

 

 

10,756

 

 

11,580

 

 

 



 



 



 

Net Book Value

 

$

15,563

 

$

15,145

 

$

15,749

 

 

 



 



 



 

NOTE 6 – Goodwill and Other Intangible Assets

          Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations under the purchase method of accounting.  The Corporation has adopted Financial Accounting Standards Board Statement No. 142 (FAS 142), “Goodwill and Other Intangible Assets.”  FAS 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001.  Goodwill is periodically assessed for impairment when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  The Corporation bases its evaluation on such impairment factors as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present.  On May 3, 2004, the Corporation completed its acquisition of ANB.  A premium of $10.7 million was paid in connection with the acquisition of ANB, $2.7 million of which was identified as core deposit intangibles.  The remaining $8.0 million has been recorded as goodwill.  In accordance with FAS 142, the goodwill will not be amortized.  The core deposit intangibles are being amortized using a straight line method over their estimated useful life of 8 years.  Amortization expense of $219,000 and $164,000 has been recorded on the core deposit intangibles for the year ended December 31, 2004 and for the six months ended June 30, 2005, respectively.

          On March 21, 2005, the Corporation completed the acquisition of Dignum Financial Services (“DFS”), a proprietorship engaged in financial planning and management services.  Goodwill of $955,000 was recorded in connection with the acquisition.

13


NOTE 7 - Other Real Estate

          The carrying value of other real estate is as follows (in thousands):

 

 

June 30,

 

December 31,
2004

 

 

 


 

 

 

 

 

2005

 

 

2004

 

 

 

 


 


 


 

Other Real Estate

 

$

-0-

 

$

366

 

$

-0-

 

 

 



 



 



 

          There was no Other Real Estate at June 30, 2005.  There were no direct write-downs of other real estate charged to income for the six months ended June 30, 2005 or June 30, 2004.  There were also no direct write-downs of other real estate charged to income for the year ended December 31, 2004. 

          Included in Other Assets at June 30, 2004 was $4,000 of Other Foreclosed Assets.  The 2004 assets were comprised of motor vehicles.  There were no direct write-downs of these assets for any period during 2004.

NOTE 8 – Deposits

          The book values of deposits by major type follow (in thousands):

 

 

June 30,

 

December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

Noninterest-Bearing Demand Deposits

 

$

241,643

 

$

218,343

 

$

235,399

 

Interest-Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Transaction Accounts and Money Market Funds

 

 

228,041

 

 

263,039

 

 

239,773

 

Savings

 

 

157,913

 

 

147,355

 

 

164,363

 

Certificates of Deposits under $100,000 and IRA’s

 

 

80,357

 

 

71,550

 

 

72,825

 

Certificates of Deposits $100,000 or more

 

 

96,385

 

 

75,087

 

 

79,754

 

Other

 

 

150

 

 

316

 

 

150

 

 

 



 



 



 

Total

 

 

562,846

 

 

557,347

 

 

556,865

 

 

 



 



 



 

Total Deposits

 

$

804,489

 

$

775,690

 

$

792,264

 

 

 



 



 



 

14


NOTE 9 - Short Term Borrowings

          Securities sold under repurchase agreements generally represent borrowings with maturities ranging from one to thirty days.  Information relating to these and other borrowings are summarized as follows (in thousands):

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 

 

 


 

 

 

 

2005

 

2004

 

 

 

 


 


 


 

Securities Sold Under Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

Average Balance

 

$

43,330

 

$

30,995

 

$

33,068

 

Period-End Balance

 

 

38,581

 

 

36,663

 

 

43,972

 

Maximum Month-End Balance During Period

 

 

49,885

 

 

36,663

 

 

43,972

 

Interest Rate:

 

 

 

 

 

 

 

 

 

 

Average

 

 

2.10

%

 

0.52

%

 

0.68

%

Period-End

 

 

2.43

 

 

0.63

 

 

1.64

 

Federal Home Loan Bank Advances:

 

 

 

 

 

 

 

 

 

 

Average Balance

 

$

64,669

 

$

72,225

 

$

67,732

 

Period-End Balance

 

 

70,000

 

 

70,000

 

 

60,000

 

Maximum Month-End Balance During Period

 

 

70,000

 

 

100,000

 

 

100,000

 

Interest Rate:

 

 

 

 

 

 

 

 

 

 

Average

 

 

2.80

%

 

1.45

%

 

1.65

%

Period-End

 

 

3.37

 

 

1.68

 

 

2.11

 

Federal Funds Purchased:

 

 

 

 

 

 

 

 

 

 

Average Balance

 

$

559

 

$

3,051

 

$

1,878

 

Period-End Balance

 

 

-0-

 

 

-0-

 

 

-0-

 

Maximum Month-End Balance During Period

 

 

-0-

 

 

21,525

 

 

21,525

 

Interest Rate:

 

 

 

 

 

 

 

 

 

 

Average

 

 

2.78

%

 

1.28

%

 

1.45

%

Period-End

 

 

-0-

 

 

-0-

 

 

-0-

 

          The Corporation has available a line of credit with the FHLB of Dallas which allows it to borrow on a collateralized basis at a fixed term.  The borrowings are collateralized by a blanket floating lien on all first mortgage loans, the FHLB capital stock owned by the Corporation and any funds on deposit with FHLB.  At June 30, 2005, the Corporation had $70.0 million of borrowings outstanding under the line of credit at a rate of 2.50%, $15.0 million of which matures in 2005, 40.0 million of which matures in 2006 and the remaining $15.0 million of which matures in 2007.  For the six months ended June 30, 2005, the Corporation had average borrowings under the line of credit of $64.7 million.  At June 30, 2004, the Corporation had $70.0 million of borrowings outstanding under the line of credit at a rate of 1.65%, $30.0 million of which matured in 2004, $30.0 million of which matures in 2005 and the remaining $10.0 million of which matures in April 2006.  At December 31, 2004, $60.0 million of borrowings were outstanding at an average rate of 2.11%, $40.0 million of which matures during 2005 and $20.0 million of which matures during 2006.  For the year ended December 31, 2004, the Corporation had average borrowings of $67.7 million. 

NOTE 10 – Notes Payable

          On September 15, 2004, the Corporation obtained a line of credit from a bank under which the Corporation may borrow $10,000,000 at a floating rate (three month LIBOR plus margin of 2.00%).  The line of credit is secured by stock of the Bank and matures on September 15, 2005, whereupon, if balances are outstanding, the line converts to a term note having a five year term.  The Corporation will not pay a fee for any unused portion of the line.  As of June 30, 2005, $1.25 million had been borrowed under this line.  The rate on this line at June 30, 2005 was 5.190%.

NOTE 11 - Junior Subordinated Deferrable Debentures

          On May 3, 2004, the Corporation formed SBI Trust and SBI Trust subsequently issued $12.0 million of floating rate (three month LIBOR plus a margin of 2.65%) Capital Securities (the “Trust Capital Securities”).  Concurrent with the issuance of the Trust Capital Securities, SBI Trust issued trust common securities to the Corporation in the aggregate liquidation value of $372,000.  The proceeds of the issuance of the Trust Capital Securities and trust common securities were invested in the Corporation’s Floating Rate Junior Subordinated Deferrable Debentures (the “Deferrable Debentures”), which mature on July 7, 2034 and have a call feature that permits the Corporation to redeem any or all of the securities after July 7, 2009.  The interest rate on the Deferrable Debentures at June 30, 2005 and December 31, 2004 was 5.79% and 4.72%, respectively.  The Deferrable Debentures, which are the only assets of SBI Trust, are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the Indenture dated May 3, 2004) of the Corporation.

15


NOTE 12 - Other Non-Interest Expense

          The significant components of other non-interest expense are as follows (in thousands):

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 


 

2005

 

2004

 

 

 


 


 


 

Business Development

 

$

559

 

$

420

 

$

810

 

Legal and Professional Fees

 

 

693

 

 

398

 

 

1,267

 

Item Processing

 

 

300

 

 

271

 

 

895

 

Printing and Supplies

 

 

218

 

 

183

 

 

440

 

Regulatory Fees and Assessments

 

 

165

 

 

143

 

 

302

 

Other

 

 

1,572

 

 

1,205

 

 

2,417

 

 

 



 



 



 

Total

 

$

3,507

 

$

2,620

 

$

6,131

 

 

 



 



 



 

NOTE 13 - Income Taxes

          Federal income taxes included in the consolidated balance sheets were as follows (in thousands):

 

 

June 30,

 

December 31,
2004

 


2005

 

2004

 

 


 


 


 

Current Tax Asset

 

$

38

 

$

727

 

$

807

 

Net Deferred Tax Asset

 

 

4,078

 

 

4,155

 

 

3,006

 

 

 



 



 



 

Total Included in Other Assets

 

$

4,116

 

$

4,882

 

$

3,813

 

 

 



 



 



 

          The net deferred tax asset at June 30, 2005 of $4,078,000 included $903,000 related to unrealized losses on Available-for-Sale Securities.

The components of income tax expense were as follows (in thousands):

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 


 

2005

 

2004

 

 

 


 


 


 

Federal Income Tax Expense:

 

 

 

 

 

 

 

 

 

 

Current

 

$

3,579

 

$

3,109

 

$

6,285

 

Deferred (Benefit)

 

 

(173

)

 

(440

)

 

(434

)

 

 



 



 



 

Total Federal Income Tax Expense

 

$

3,406

 

$

2,669

 

$

5,851

 

 

 



 



 



 

Effective Tax Rates

 

 

35.40

%

 

34.60

%

 

35.00

%

16


NOTE 13 - Income Taxes (cont’d.)

          The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rate to operating earnings are as follows (in thousands):

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 

 


 

2005

 

2004

 

 


 


 


 

Federal Income Taxes at Statutory Rate of 35.4%

 

$

3,364

 

$

2,662

 

$

5,783

 

Effect of Tax Exempt Interest Income

 

 

(49

)

 

(42

)

 

(88

)

Non-deductible Expenses

 

 

113

 

 

66

 

 

166

 

Other

 

 

(22

)

 

(17

)

 

(10

)

 

 



 



 



 

Income Taxes Per Income Statement

 

$

3,406

 

$

2,669

 

$

5,851

 

 

 



 



 



 


Deferred income tax expense (benefit) results from differences between amounts of assets and liabilities as measured for income tax return and financial reporting purposes.  The significant components of federal deferred tax assets and liabilities are in the following table (in thousands):

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 


2005

 

2004

 

 


 


 


 

Federal Deferred Tax Assets:

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

$

3,827

 

$

3,396

 

$

3,546

 

Interest on Non-accrual Loans

 

 

119

 

 

148

 

 

79

 

Valuation Reserves- Other Real Estate

 

 

-0-

 

 

15

 

 

-0-

 

Unrealized Losses on Available-for-Sale Securities

 

 

903

 

 

1,147

 

 

244

 

Deferred Compensation

 

 

717

 

 

594

 

 

596

 

Net Operating Loss Carryover

 

 

129

 

 

183

 

 

149

 

 

 



 



 



 

Gross Federal Deferred Tax Assets

 

 

5,695

 

 

5,483

 

 

4,614

 

 

 



 



 



 

Federal Deferred Tax Liabilities:

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

1,450

 

 

1,188

 

 

1,466

 

Accretion

 

 

61

 

 

29

 

 

34

 

Other

 

 

106

 

 

111

 

 

108

 

 

 



 



 



 

Gross Federal Deferred Tax Liabilities

 

 

1,617

 

 

1,328

 

 

1,608

 

 

 



 



 



 

Net Deferred Tax Asset

 

$

4,078

 

$

4,155

 

$

3,006

 

 

 



 



 



 

NOTE 14 - Related Party Transactions

          The Bank has made transactions in the ordinary course of business with certain of its and the Corporation’s officers, directors and their affiliates. All loans included in such transactions are made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and all loans are current as to principal and interest payments.  Total loans outstanding to such parties amounted to approximately $11,254,000 at June 30, 2005 and $8,537,000 at December 31, 2004.

NOTE 15 - Commitments and Contingent Liabilities

          In the normal course of business, there are various outstanding commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the financial statements.  No losses are anticipated as a result of these transactions. Commitments are most frequently extended for real estate, commercial and industrial loans.

          At June 30, 2005, outstanding documentary and standby letters of credit totaled $6,411,000 and commitments to extend credit totaled $195,308,000.

17


NOTE 15 - Commitments and Contingent Liabilities (cont’d.)

          In addition, the Corporation leases certain office facilities under operating leases.  Rent expense for all operating leases totaled $606,000 and $496,000 for the six months ended June 30, 2005 and 2004, respectively, and $1,128,000 for the year ended December 31, 2004. 

NOTE 16 - Stock Option Plans

          The Corporation has two Incentive Stock Option Plans, the 1993 Plan and the 1997 Plan, (each, a “Plan,” and, collectively, “the Plans”).  Each Plan has reserved 1,200,000 shares (adjusted for two-for-one stock splits in 1995, 1997 and 2004) of common stock for grants thereunder.  The Plans provide for the granting to executive management and other key employees of the Corporation and its subsidiaries incentive stock options, as defined under the current tax law.  The options granted under the Plans will be exercisable for ten years from the date of grant and generally vest ratably over a five year period.  Options will be and have been granted at prices which will not be less than 100-110% of the fair market value of the underlying common stock at the date of grant.

          The following is a summary of transactions during the periods presented:

 

 

Shares Under Option Plans

 

 

 


 

 

 

Six Months Ended June 30, 2005

 

Year Ended December 31, 2004

 

 

 


 


 

Outstanding, Beginning of Period

 

 

679,578

 

 

759,318

 

Additional Options Granted During the Period

 

 

10,000

 

 

68,000

 

Forfeited During the Period

 

 

(2,400

)

 

(38,000

)

Exercised During the Period

 

 

(90,684

)

 

(109,740

)

 

 



 



 

Outstanding, End of Period

 

 

596,494

 

 

679,578

 

 

 



 



 

          Options outstanding at June 30, 2005 have exercise prices between $2.78 to $18.75 per share with a weighted average exercise price of $8.63 and 493,754 shares exercisable.  At June 30, 2005, there remained 536,796 shares reserved for future grants of options under the 1997 Plan.  See Note 1 “Summary of Significant Accounting Policies – Stock Based Compensation” for information regarding the dilutive impact of these stock options.

NOTE 17 - Employee Benefit Plans

401(k) Plan

          The Corporation implemented a 401(k) plan in December 1997 covering substantially all employees.  The Corporation made no contribution to this plan in 1998 or 1999.  In 2000 through 2004, the Corporation made matching contributions, not to exceed 6% of the employee’s annual compensation, to the participant’s deferrals of compensation up to 100% of the employee contributions.  The Corporation’s Board of Directors has approved matching contributions for 2005, not to exceed 6% of the employee’s annual compensation.

          The amount expensed in support of the plan was $294,000 and $267,000 during the first six months of 2005 and 2004, respectively, and $490,000 for the year 2004.

Supplemental Executive Retirement Plan

          In 2002, the Corporation established a Supplemental Executive Retirement Plan (the “Retirement Plan”) to provide key employees with retirement, death or disability benefits.  For currently employed employees, the Retirement Plan replaces the previous Management Security Plan.  The Retirement Plan is a defined contribution plan and the expense charged to earnings relating to the Retirement Plan was $227,000 and $85,000 for the first six months of 2005 and 2004, respectively, and $175,000 for the year 2004.

Employment Contracts

          The Chief Executive Officer of the Corporation has entered into a severance agreement providing for salary and fringe benefits in the event of termination for other than cause and under certain changes in control.

Other Post Retirement Benefits

          The Corporation provides certain health care benefits for certain retired employees who bear all costs of these benefits.  These benefits are covered under the Consolidated Omnibus Budget Reconciliation Act.

18


NOTE 17 - Employee Benefit Plans (cont’d.)

Compensated Absences

           Employees of the Corporation are entitled to paid vacation, paid sick days and other personal days off, depending on job classification, length of service and other factors.  It is impracticable to estimate the amount of compensation for future absences, and accordingly, no liability has been recorded in the accompanying financial statements.  The Corporation’s policy is to recognize the costs of compensated absences when actually paid to employees.

NOTE 18 - Earnings per Share

          The following data shows the amounts used in computing earnings per share (“EPS”) and the weighted average number of shares of dilutive potential common stock (dollars in thousands), as adjusted to reflect the two-for-one stock split effected on December 31, 2004:

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 


2005

 

2004

 

 


 


 


 

Net income

 

$

6,204

 

$

5,047

 

$

10,762

 

 

 



 



 



 

Weighted average number of common shares used in Basic EPS

 

 

12,397,580

 

 

12,312,354

 

 

12,326,477

 

Effect of dilutive stock options

 

 

328,431

 

 

352,264

 

 

352,048

 

 

 



 



 



 

Weighted number of common shares and dilutive potential common stock used in Diluted EPS

 

 

12,726,011

 

 

12,664,618

 

 

12,678,525

 

 

 



 



 



 

The incremental shares for the assumed exercise of the outstanding options were determined by application of the treasury stock method.

NOTE 19 - Financial Instruments with Off-Balance Sheet Risk

          The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include loan commitments, standby letters of credit and documentary letters of credit.  The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.

          The Corporation’s exposure to credit loss in the event of non-performance by the other party of these loan commitments and standby letters of credit is represented by the contractual amount of those instruments.  The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

          The total contractual amounts of financial instruments with off-balance sheet risk are as follows (in thousands):

 

 

June 30,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Financial Instruments Whose Contract Amounts Represent Credit Risk:

 

 

 

 

 

 

 

Loan Commitments Including Unfunded Lines of Credit

 

$

195,308

 

$

170,148

 

Standby Letters of Credit

 

 

6,411

 

 

5,327

 

          Loan commitments are agreements to lend to a customer as long as there is no customer violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Standby letters of credit are conditional commitments by the Corporation to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

           Since many of the loan commitments and letters of credit may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.  The Corporation evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied real estate and income-producing commercial properties.

19


NOTE 19 - Financial Instruments with Off-Balance Sheet Risk (cont’d.)

          The Corporation originates real estate, commercial and consumer loans primarily to customers in the Tarrant County area.  Although the Corporation has a diversified loan portfolio, a substantial portion of its customers’ ability to honor their contracts is dependent upon the local economy and the real estate market.

          The Corporation maintains funds on deposit at correspondent banks which at times exceed the federally insured limits.  Management of the Corporation monitors the balance in these accounts and periodically assesses the financial condition of correspondent banks.

NOTE 20 - Concentrations of Credit Risk

          The Bank makes commercial, consumer and real estate loans in its direct market which is defined as Fort Worth and its surrounding area.  The Board of Directors of the Bank monitors concentrations of credit by purpose, collateral and industry at least quarterly.  Certain limitations for concentration are set by the Board of Directors of the Bank.  Additional loans in excess of these limits must have prior approval of the Bank’s directors’ loan committee.  Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ abilities to honor their contracts is dependent upon the strength of the local and state economy.

NOTE 21 - Litigation

          The Corporation is involved in legal actions arising in the ordinary course of business.  It is the opinion of management, after reviewing such actions with outside legal counsel, that the settlement of these matters will not materially affect the Corporation’s financial position.

NOTE 22 - Stock Repurchase Plan

          On April 19, 2005, the Board of Directors of the Corporation approved a stock repurchase plan.  The plan authorized management to purchase up to 620,467 shares of the Corporation’s common stock over the next twelve months through the open market or in privately negotiated transactions in accordance with all applicable state and federal laws and regulations.

          In the six months ended June 30, 2005, 29,300 shares were purchased and retired by the Corporation pursuant to the stock repurchase plan.

NOTE 23 - Subsequent Events

          On July 19, 2005, the Board of Directors of the Corporation approved a quarterly dividend of $.07 per share to be paid on August 15, 2005 to shareholders of record on August 1, 2005.

 NOTE 24 - Fair Values of Financial Instruments

          The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments:

 

Cash and cash equivalents:  The carrying amounts reported in the balance sheet for cash and due from banks and federal funds sold approximate those assets’ fair values.

 

 

 

Investment securities (including mortgage backed securities):  Fair values for investment securities are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

 

 

 

Loans:  For variable rate loans, fair values are based on carrying values.  The fair values for fixed rate loans such as mortgage loans (e.g., one-to-four family residential) and installment loans are estimated using discounted cash flow analysis.  The carrying amount of accrued interest receivable approximates its fair value.

 

 

 

Deposit liabilities:  The fair value disclosed for interest-bearing and noninterest-bearing demand deposits, passbook savings, and certain types of money market accounts are, by definition, equal to the amount payable on demand at the reporting date or their carrying amounts.  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

 

 

Short term borrowings:  The carrying amounts of borrowings under repurchase agreements approximate their fair values.

20


NOTE 24 - Fair Values of Financial Instruments (cont’d.)

          The estimated fair values of the Corporation’s financial instruments are as follows (in thousands):

 

 

June 30,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

 

 


 


 


 


 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

29,205

 

$

29,205

 

$

32,899

 

$

32,899

 

Federal funds sold and due from time

 

 

9,750

 

 

9,750

 

 

17,551

 

 

17,551

 

Securities

 

 

214,750

 

 

214,750

 

 

214,991

 

 

214,991

 

Loans

 

 

721,161

 

 

710,260

 

 

672,686

 

 

677,903

 

Allowance for loan losses

 

 

(10,798

)

 

(10,798

)

 

(9,844

)

 

(9,844

)

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

804,489

 

 

804,800

 

 

775,690

 

 

777,158

 

Short term borrowings

 

 

122,203

 

 

122,345

 

 

121,785

 

 

122,019

 

Off-balance Sheet Financial Instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan commitments

 

 

 

 

 

195,308

 

 

 

 

 

170,148

 

Letters of credit

 

 

 

 

 

6,411

 

 

 

 

 

5,327

 

NOTE 25 - Comprehensive Income

          The Corporation has adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income”.  This standard requires an entity to report and display comprehensive income and its components.  Comprehensive income is as follows (in thousands):

 

 

Six Months Ended
June 30,

 

Year Ended
December 31,
2004

 


2005

 

2004

 

 


 


 


 

Net Income

 

$

6,204

 

$

5,047

 

$

10,762

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain (loss) on securities available-for-sale, net of tax (benefit)

 

 

(1,279

)

 

(2,915

)

 

(1,162

)

 

 



 



 



 

Comprehensive Income

 

$

4,925

 

$

2,132

 

$

9,600

 

 

 



 



 



 

21


Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion should be read in conjunction with the consolidated financial statements, accompanying notes and selected financial data appearing elsewhere in this Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K and may contain certain forward-looking statements that are based on current management expectations.  Generally, verbs in the future tense and the words “believe,” “expect,” “anticipate,” “estimate,” “intends,” “opinion,” “potential” and similar expressions identify forward-looking statements.  Examples of this forward-looking information can be found in, but are not limited to, the expected effects of accounting pronouncements and government regulation applicable to our operations, the discussion of allowance for loan losses, and quantitative and qualitative disclosure about market risk.  Our actual results could differ materially from those management expectations.  Further information concerning our business, including additional risk factors and uncertainties that could cause actual results to differ materially from the results described in the forward-looking statements contained in this Quarterly Report on Form 10-Q, is set forth below under the heading “Factors That May Affect Future Results.”  These risk factors and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.  The forward-looking statements contained herein speak only as of the date of this Quarterly Report on Form 10-Q and, except as may be required by applicable law and regulation, we do not undertake, and specifically disclaim any obligation to, publicly update or revise such statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.  Except as the context otherwise requires, references herein to “the Corporation,” “we,” or “our” refer to the business of Summit Bancshares, Inc. and its consolidated subsidiaries.

Overview

          Our business has been conducted primarily through our wholly-owned subsidiaries, Summit Bank, National Association (the “Bank”), SBI Trust, Summit Delaware Financial Corporation and SIA Insurance Agency, Inc. (“SIA”).  The Bank currently operates its branch offices in twelve locations in Tarrant County, Texas.

          At December 31, 2003, the Bank had seven branch offices.  Five branch offices were added in 2004 with the May 2004 acquisition of the four branches of Arlington National Bank and the October 2004 opening of a branch in Euless, Texas.  In May 2004, the Corporation completed its acquisition of ANB Financial Corporation and its wholly-owned subsidiary, Arlington National Bank (collectively, “ANB”), and ANB’s results of operations have been included in the Corporation’s results of operations since the acquisition date.  On December 31, 2004, the Corporation effected a two-for-one stock split on its common stock payable in the form of a 100% stock dividend, and all share and per share data included herein has been adjusted to reflect the stock split.

          Our results of operations are primarily dependent on net interest income, which is the difference between the income earned on our loans and investment portfolios and our cost of funds, consisting of the interest paid on deposits and borrowings.  Results of operations are also affected by our allowance for loan losses, investment activities, loan servicing fees and other fees.  Our non-interest expense principally consists of salary and benefits, occupancy and equipment expense, business development costs, professional fees, data processing expense and other expenses.            

          Net income for the second quarter of 2005 was $3,191,000, an increase of $595,000, or 22.9%, compared to $2,596,000 recorded for the second quarter of 2004.  On a weighted average share basis, net income for the second quarter of 2005 was $0.25 per diluted share as compared to $0.20 per diluted share for the second quarter of 2004, an increase of 25.0%.  Net income for the first six months of 2005 was $6,204,000, an increase of $1,157,000, or 22.9%, compared to net income of $5,047,000 for the first six months of 2004.  On a weighted average share basis, net income for the first six months of 2005 was $.49 per diluted share compared to $.40 per diluted share for the first six months of 2004.  The increase in earnings during the second quarter of 2005 and for the first six months of 2005 was largely due to an increase in net interest income (tax equivalent) of $1,702,000, or 18.8%, for the second quarter of 2005 over the second quarter of 2004 and $3,652,000, or 21.0%, for the first six months of 2005 over the first six months of 2004.  The increase in net interest income was primarily due to the growth in loans and an increase in the yield on loans.

          Based on continuing economic growth in our market area, total loans at June 30, 2005 were $721.2 million, which represented an increase of $18.5 million, or 2.6%, over total loans at December 31, 2004 and an increase of $48.5 million, or 7.2%, over total loans at June 30, 2004. Average total loans for the second quarter of 2005 were 12.5% higher compared with the second quarter last year.  Excluding the impact of the ANB acquisition, average total loans for the second quarter of 2005 were 9.4% more than the second quarter of 2004.  Average total loans for the six months ended June 30, 2005 were 17.6% higher than for the six months ended June 30, 2004.  Excluding the impact of the ANB acquisition, average total loans for the six months ended June 30, 2005 were 10.6% higher than for the same period in 2004.

22


          Total deposits were $804.5 million at June 30, 2005, an increase of $12.2 million, or 1.5%, from December 31, 2004 and an increase of $28.8 million, or 3.7%, from $775.7 million at June 30, 2004.   Average total deposits for the second quarter of 2005 were 9.4% higher compared with the second quarter last year.  Excluding the impact of the ANB acquisition, average total deposits for the second quarter of 2005 were 9.4% more than the second quarter of 2004.  Average total deposits for the six months ended June 30, 2005 were 16.1% higher than for the six months ended June 30, 2004.  Excluding the impact of the ANB acquisition, average total deposits for the six months ended June 30, 2005 were 7.5% higher than for the same period in 2004.  Compared to the second quarter of 2004, we experienced growth in every category of deposits, for the second quarter of 2005, except for interest-bearing transaction accounts and money market funds.  The most significant growth was in demand deposits and certificates of deposit.

          Shareholders’ equity was $77.6 million at June 30, 2005, an increase of $3.1 million, or 4.2%, from December 31, 2004 and an increase of $8.9 million, or 12.9%, from June 30, 2004.   See the Consolidated Statements of Changes in Shareholders’ Equity on page 6 for a detail of the changes.

          The following table shows selected performance ratios for the first six months of 2005 and 2004 that management believes to be key indicators of the Corporation’s overall financial performance:

 

 

Six Months Ended

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Annualized Return on Average Assets (ROAA)

 

 

1.25

%

 

1.17

%

Annualized Return on Average Shareholders’ Equity (ROAE)

 

 

16.44

 

 

14.43

 

Shareholders’ Equity to Assets - Average

 

 

7.61

 

 

8.11

 

Dividend Payout Ratio

 

 

27.95

 

 

34.20

 

Net Interest Margin (tax equivalent)

 

 

4.52

 

 

4.27

 

Efficiency Ratio

 

 

59.37

 

 

57.48

 

          The return on average assets ratio is calculated by dividing net income by average total assets for the period.  Management believes our return on average assets ratio of 1.25% for the first six months of 2005 compares favorably to the return on average assets ratio of other financial institutions in our selected peer group, which averaged 1.34% for the first six months of 2005.  Our selected peer group is comprised of seven other publicly traded bank holding companies headquartered in Texas with assets ranging from $10 billion to $2.4 billion and was selected by our management.

          The return on average shareholders’ equity ratio is calculated by dividing net income by average shareholders’ equity for the period.  Management believes our return on average shareholders’ equity ratio of 16.44% in the first six months of 2005 compares favorably to the return on average shareholders’ equity ratio of other financial institutions in our peer group, which averaged 14.62% for the first six months of 2005.

          The shareholders’ equity to assets ratio is calculated by dividing average shareholders’ equity by average total assets for the period.  Management believes our average shareholders’ equity to average assets ratio of 7.61% for the first six months of 2005 compares favorably to the average shareholders’ equity to average asset ratio of other financial institutions in our peer group, which averaged 9.20% in the first six months of 2005. 

          The dividend payout ratio is determined by dividing the total dividends paid by net income for the period.  For the first six months of 2005, our dividend payout ratio resulted in a yield-to-market price return that compared favorably to our peer group.

          Net interest margin is calculated by dividing net interest income on a tax equivalent basis by average total earning assets.  Management believes our net interest margin of 4.52% in the first six months of 2005 compares favorably to the net interest margin ratio of other financial institutions in our peer group, which averaged 4.20% in the first six months of 2005.

          The efficiency ratio is calculated by dividing non-interest expenses by the sum of total non-interest income and net interest income on a tax equivalent basis for the period.  The efficiency ratio provides a measure of the extent to which our revenues are absorbed by our non-interest expenses.  Management believes our efficiency ratio of 59.37% in the first six months of 2005 compares favorably to the average efficiency ratio of other financial institutions in our peer group, which was 58.6% in the first six months of 2005.

23


Summary of Earning Assets and Interest-Bearing Liabilities

          The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the second quarter of 2005 and 2004 (rates on tax equivalent basis):

 

 

Three Months Ended June 30,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

 

 

Average
Balances

 

Interest

 

Average
Yield/Rate

 

Average
Balances

 

Interest

 

Average
Yield/Rate

 

 

 


 


 


 


 


 


 

 

 

 

(Dollars in Thousands)

 

Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold & Due From Time

 

$

4,891

 

$

36

 

 

2.95

%

$

31,177

 

$

75

 

 

0.96

%

Investment Securities (Taxable)

 

 

208,367

 

 

1,914

 

 

3.67

%

 

190,212

 

 

1,778

 

 

3.76

%

Investment Securities (Tax-exempt)

 

 

8,458

 

 

110

 

 

5.20

%

 

6,760

 

 

88

 

 

5.26

%

Loans, Net of Unearned Discount(1)

 

 

723,535

 

 

12,356

 

 

6.85

%

 

642,935

 

 

9,391

 

 

5.87

%

 

 



 



 



 



 



 



 

Total Earning Assets

 

 

945,251

 

 

14,416

 

 

6.12

%

 

871,084

 

 

11,332

 

 

5.23

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Non-interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due From Banks

 

 

30,139

 

 

 

 

 

 

 

 

28,813

 

 

 

 

 

 

 

Other Assets

 

 

42,973

 

 

 

 

 

 

 

 

35,256

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

(10,683

)

 

 

 

 

 

 

 

(9,323

)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total Assets

 

$

1,007,680

 

 

 

 

 

 

 

$

925,830

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts and Money Market Funds

 

$

231,313

 

 

797

 

 

1.38

%

$

238,697

 

 

637

 

 

1.07

%

Savings

 

 

162,065

 

 

704

 

 

1.74

%

 

143,322

 

 

408

 

 

1.15

%

Certificates of Deposit under $100,000 and IRA’s

 

 

78,105

 

 

522

 

 

2.68

%

 

68,459

 

 

366

 

 

2.15

%

Certificates of Deposit $100,000 or more

 

 

87,272

 

 

628

 

 

2.89

%

 

71,019

 

 

424

 

 

2.40

%

Other Time

 

 

150

 

 

1

 

 

2.67

%

 

316

 

 

2

 

 

2.87

%

Other Borrowings

 

 

128,684

 

 

1,004

 

 

3.13

%

 

121,193

 

 

437

 

 

1.45

%

 

 



 



 



 



 



 



 

Total Interest-Bearing Liabilities

 

 

687,589

 

 

3,656

 

 

2.13

%

 

643,006

 

 

2,274

 

 

1.42

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Non-interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

 

239,127

 

 

 

 

 

 

 

 

207,815

 

 

 

 

 

 

 

Other Liabilities

 

 

4,389

 

 

 

 

 

 

 

 

4,426

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

76,575

 

 

 

 

 

 

 

 

70,583

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

1,007,680

 

 

 

 

 

 

 

$

925,830

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Net Interest Income and Margin
(Tax-equivalent Basis)(2)

 

 

 

 

$

10,760

 

 

4.57

%

 

 

 

$

9,058

 

 

4.18

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 



(1)     Loan interest income includes fees and loan volumes include loans on non-accrual.  The loan fees include loan origination fees which are considered adjustments to interest income.  These fees aggregated $446,000 and $400,000 at June 30, 2005 and 2004, respectively.  Related loan origination costs are not separately allocated to loans, but are charged to non-interest expense.  For the purpose of calculating loan yields, average loan balances include non-accrual loans with no related interest income.

(2)     Presented on tax equivalent basis using a federal income tax rate of 34% both years.

24


Summary of Earning Assets and Interest-Bearing Liabilities (cont’d.)

          The net interest margin was 4.57% for the second quarter of 2005, which represented an increase of 39 basis points from the second quarter of 2004.  This increase in net interest margin reflected an 89 basis point increase in yield on earning assets from the second quarter of 2004 to the second quarter of 2005, which was partially offset by a 71 basis point increase in rates paid on interest-bearing liabilities from the second quarter of 2004 to the second quarter of 2005.  The increase in net interest margin also reflected an increase in the volume of loans, up $80.6 million, or 12.5%, over the second quarter of 2004 and increases in non-interest bearing funding sources, such as demand deposits and shareholders’ equity.   Average demand deposits were $239.1 million in the second quarter of 2005, an increase of $31.3 million, or 15.1%, over the second quarter of 2004.

          The following schedule presents average balance sheets that highlight earning assets and interest-bearing liabilities and their related rates earned and paid for the first six months of 2005 and 2004 (rates on tax equivalent basis):

 

 

Six Months Ended June 30,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

 

 

Average
Balances

 

Interest

 

Average
Yield/Rate

 

Average
Balances

 

Interest

 

Average
Yield/Rate

 

 

 


 


 


 


 


 


 

 

 

 

(Dollars in Thousands)

Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold & Due From Time

 

$

5,042

 

$

67

 

 

2.68

%

$

18,300

 

$

88

 

 

0.96

%

Investment Securities (Taxable)

 

 

210,249

 

 

3,840

 

 

3.65

%

 

185,701

 

 

3,496

 

 

3.77

%

Investment Securities (Tax-exempt)

 

 

8,235

 

 

216

 

 

5.25

%

 

6,779

 

 

178

 

 

5.27

%

Loans, Net of Unearned Discount(1)

 

 

715,265

 

 

23,702

 

 

6.68

%

 

608,398

 

 

17,805

 

 

5.89

%

 

 



 



 



 



 



 



 

Total Earning Assets

 

 

938,791

 

 

27,825

 

 

5.98

%

 

819,178

 

 

21,567

 

 

5.29

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Non-interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due From Banks

 

 

30,099

 

 

 

 

 

 

 

 

26,975

 

 

 

 

 

 

 

Other Assets

 

 

42,073

 

 

 

 

 

 

 

 

29,417

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

(10,506

)

 

 

 

 

 

 

 

(8,651

)

 

 

 

 

 

 

   

             

             

Total Assets

 

$

1,000,457

 

 

 

 

 

 

 

$

866,919

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts and Money Market Funds

 

$

233,490

 

 

1,514

 

 

1.31

%

$

217,810

 

 

1,155

 

 

1.07

%

Savings

 

 

165,188

 

 

1,340

 

 

1.64

%

 

137,301

 

 

793

 

 

1.16

%

Certificates of Deposit under $100,000 and IRA’s

 

 

76,082

 

 

971

 

 

2.57

%

 

65,254

 

 

711

 

 

2.19

%

Certificates of Deposit $100,000 or more

 

 

84,466

 

 

1,157

 

 

2.76

%

 

67,402

 

 

815

 

 

2.43

%

Other Time

 

 

150

 

 

2

 

 

2.69

%

 

316

 

 

4

 

 

2.84

%

Other Borrowings

 

 

128,430

 

 

1,812

 

 

2.85

%

 

111,271

 

 

712

 

 

1.29

%

 

 



 



 



 



 



 



 

Total Interest-Bearing Liabilities

 

 

687,806

 

 

6,796

 

 

1.99

%

 

599,354

 

 

4,190

 

 

1.41

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

Non-interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Deposits

 

 

232,361

 

 

 

 

 

 

 

 

193,605

 

 

 

 

 

 

 

Other Liabilities

 

 

4,199

 

 

 

 

 

 

 

 

3,610

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

76,091

 

 

 

 

 

 

 

 

70,350

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

1,000,457

 

 

 

 

 

 

 

$

866,919

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 

 

 

 

Net Interest Income and Margin (Tax-equivalent Basis)(2)

 

 

 

 

$

21,029

 

 

4.52

%

 

 

 

$

17,377

 

 

4.27

%

 

 

 

 

 



 

 

 

 

 

 

 



 

 

 

 



(1)     Loan interest income includes fees and loan volumes include loans on non-accrual.  The loan fees include loan origination fees which are considered adjustments to interest income.  These fees aggregated $836,000 and $734,000 at June 30, 2005 and 2004, respectively.  Related loan origination costs are not separately allocated to loans, but are charged to non-interest expense.  For the purpose of calculating loan yields, average loan balances include non-accrual loans with no related interest income.

(2)     Presented on tax equivalent basis using a federal income tax rate of 34% both years.

25


          The net interest margin was 4.52% for the six months ended June 30, 2005 which represented a 25 basis point increase over the net interest margin of 4.27% for the six months ended June 30, 2004.  The increase in net interest margin reflected a 69 basis point increase in yield on earning assets from the first six months of 2004 to the first six months of 2005, which was partially offset by a 58 basis point increase in rates paid on interest-bearing liabilities from the first six months of 2004 to the first six months of 2005.  The increase in net interest margin also reflected an increase in the volume of loans, up $106.9 million, or 17.6%, over the first six months of 2004 and increases in non-interest bearing funding sources, such as, demand deposits and shareholders’ equity.   Average demand deposits were $232.4 million in the first half of 2005, an increase of $38.8 million, or 20.0%, over the first half of 2004.

          In the event that our average loans continue to grow during the second half of 2005 and we are unable to fund such growth solely through the generation of additional deposits, we may be required to obtain funding from secondary sources, such as the Federal Home Loan Bank or brokered deposits, which could have a material negative impact on our net interest margin.  In this event, we may experience a slower growth in net interest margin during the second half of 2005 as a result of any such borrowings, but expect to benefit as our investment portfolio and maturing fixed rate loans reprice at higher rates.  Because of the composition of our balance sheet and our emphasis on commercial lending, we are market interest rate sensitive and expect to benefit from any market interest rate increases, assuming deposit interest rates do not increase significantly faster than interest rates on earning assets.

Net Interest Income

          Net interest income (tax equivalent) for the second quarter of 2005 was $10,760,000, which represented an increase of $1,702,000, or 18.8%, compared to the second quarter of 2004.  In the second quarter of 2005, tax equivalent interest income increased $3,084,000, or 27.2%, while interest expense increased $1,382,000, or 60.8%, compared to the second quarter of 2004.  The  increase in net interest income resulted from a 8.5% increase in average earning assets for the second quarter of 2005 compared to the second quarter of 2004, along with a 225 basis point increase in market interest rates (as measured by average market rates published in the Wall Street Journal) from June 2004 through June 2005.

           Net interest income (tax equivalent) for the first six months of 2005 was $21,029,000, which represented an increase of $3,652,000, or 21.0%, compared to the first six months of 2004.  In the first half of 2005, tax equivalent interest income increased $6,258,000, or 29.0%, while interest expense increased $2,606,000, or 62.2% compared to the first half of 2004.  The increase in net interest income reflected a 14.6% increase in average earning assets for the first six months of 2005 compared to the first six months of 2004.

          The table below summarizes the effects of changes in interest rates and average volumes of earning assets and interest-bearing liabilities on net interest income (tax equivalent) for the three and six month periods ended June 30, 2005 and 2004.  Non-accruing loans have been included in assets for these computations, thereby reducing yields on total loans.  For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated to rate.

ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in Thousands)

 

 

2nd Qtr. 2005 vs. 2nd Qtr. 2004
Increase (Decrease)
Due to Changes in:

 

Six Months 2005 vs. Six Months 2004
Increase (Decrease)
Due to Changes in:

 

 

 


 


 

 

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

 

 

 


 


 


 


 


 


 

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

$

(63

)

$

24

 

$

(39

)

$

(64

)

$

43

 

$

(21

)

Investment Securities (Taxable)

 

 

170

 

 

(34

)

 

136

 

 

462

 

 

(118

)

 

344

 

Investment Securities (Tax-exempt)

 

 

23

 

 

(1

)

 

22

 

 

38

 

 

-0-

 

 

38

 

Loans, Net of Unearned Discount

 

 

1,181

 

 

1,784

 

 

2,965

 

 

3,119

 

 

2,778

 

 

5,897

 

 

 



 



 



 



 



 



 

Total Interest Income

 

 

1,311

 

 

1,773

 

 

3,084

 

 

3,555

 

 

2,703

 

 

6,258

 

 

 



 



 



 



 



 



 

Interest-Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

180

 

 

635

 

 

815

 

 

562

 

 

944

 

 

1,506

 

Other Borrowings

 

 

27

 

 

540

 

 

567

 

 

109

 

 

991

 

 

1,100

 

 

 



 



 



 



 



 



 

Total Interest Expense

 

 

207

 

 

1,175

 

 

1,382

 

 

671

 

 

1,935

 

 

2,606

 

 

 



 



 



 



 



 



 

Net Interest Income

 

$

1,104

 

$

598

 

$

1,702

 

$

2,884

 

$

768

 

$

3,652

 

 

 



 



 



 



 



 



 

26


Non-Interest Income

          The following table reflects the changes in non-interest income during the periods presented (dollars in thousands):

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 


 


 

 

 

2005

 

2004

 

% Change

 

2005

 

2004

 

% Change

 

 

 


 


 


 


 


 


 

Service Charges on Deposit Accounts

 

$

990

 

$

1,078

 

 

(8.2

)%

$

1,972

 

$

1,984

 

 

(0.6

)%

Non-recurring Income

 

 

-0-

 

 

-0-

 

 

-0-

 

 

134

 

 

167

 

 

(19.8

)

Other Non-interest Income

 

 

1,045

 

 

645

 

 

62.0

 

 

1,809

 

 

1,139

 

 

58.8

 

 

 



 



 



 



 



 



 

Total Non-interest Income

 

$

2,035

 

$

1,723

 

 

18.1

%

$

3,915

 

$

3,290

 

 

19.0

%

 

 



 



 



 



 



 



 

          Non-interest income for the second quarter of 2005 was $2,035,000, which represented an increase of $312,000, or 18.1%, over the second quarter of 2004.  Non-interest income for the six months ended June 30, 2005 was $3,915,000, which represented an increase of $625,000, or 19.0%, over the six months ended June 30, 2004.  The most significant component of non-interest income is the various charges and fees that we earn on deposit accounts and related services.

          Service charges and fees on deposits were $990,000 for the second quarter of 2005, a decrease of $88,000, or 8.2%, from the second quarter of 2004.  The decrease was largely the result of a reduction in fees earned on commercial accounts that are on account analysis. Service charges and fees on deposits were $1,972,000 for the first six months of 2005, a slight decrease (0.6%) from the first six months of 2004.   For the first six months of 2005, the decrease in revenue from commercial deposit accounts that are on account analysis was largely offset by fees from “overdraft privilege” services.  The decrease in commercial deposit account analysis income for the second quarter of 2005 and the first half of 2005 was driven by the higher interest rate environment for the first half of 2005 compared to first half of 2004 which provided commercial customers higher credits for funds on deposit. 

          The non-recurring non-interest income for the first six months of 2005 resulted from an extraordinary payment from PULSE EFT as a participant in that ATM network.  The non-recurring income for the same period of the prior year resulted from the gain on the sale of assets previously carried in Other Assets.

          The increase in other non-interest income for the second quarter of 2005 and the first six months of 2005 as compared to the same periods last year is primarily due to increases in investment services fees, gains on the sale of student loans and trust income.  There were also increases for both periods in merchant card processing income and check card fees.  The increases in various components of other non-interest income were partially offset by lower levels of  ATM fees.

          Investment services fees were $225,000 for the second quarter of 2005, an increase of $144,000, or 177.8%, over the second quarter of 2004.  For the first six months of 2005, investment services fees were $332,000, an increase of $166,000, or 100.0%, over the same period in 2004.  Gains on the sale of student loans were $183,000 and $239,000 for the second quarter of 2005 and the first six months of 2005, respectively.  There were no gains on the sale of student loans recorded in the first six months of 2004.  Trust income was $85,000 and $155,000 for the second quarter of 2005 and the first six months of 2005, respectively.  Trust income was  $35,000 for the second quarter and first six months of 2004.   Trust services, a product previously offered by ANB, are now provided by the Corporation.     

27


Non-interest Expense

          The following table summarizes the changes in non-interest expense during the periods presented (dollars in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2005

 

2004

 

% Change

 

2005

 

2004

 

% Change

 

 

 


 


 


 


 


 


 

Salaries & Employee Benefits

 

$

4,448

 

$

3,772

 

 

17.9

%

$

8,717

 

$

7,140

 

 

22.1

%

Occupancy Expense - Net

 

 

660

 

 

552

 

 

19.6

 

 

1,264

 

 

990

 

 

27.7

 

Furniture and Equipment Expense

 

 

571

 

 

565

 

 

1.1

 

 

1,169

 

 

1,060

 

 

10.3

 

Other Real Estate and Foreclosed Asset Expense - Net

 

 

(14

)

 

15

 

 

(193.3

)

 

(11

)

 

15

 

 

(173.3

)

Core Deposit Intangible Amortization

 

 

82

 

 

55

 

 

49.1

 

 

164

 

 

55

 

 

198.2

 

Other Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Development

 

 

311

 

 

227

 

 

37.0

 

 

559

 

 

420

 

 

33.1

 

Insurance - Other

 

 

53

 

 

71

 

 

(25.4

)

 

95

 

 

134

 

 

(29.1

)

Legal & Professional Fees

 

 

311

 

 

219

 

 

42.0

 

 

693

 

 

398

 

 

74.1

 

Item Processing

 

 

100

 

 

124

 

 

(19.4

)

 

300

 

 

271

 

 

10.7

 

Taxes - Other

 

 

31

 

 

15

 

 

106.7

 

 

44

 

 

33

 

 

33.3

 

Postage & Courier

 

 

111

 

 

116

 

 

(4.3

)

 

234

 

 

217

 

 

7.8

 

Printing & Supplies

 

 

111

 

 

88

 

 

26.1

 

 

218

 

 

183

 

 

19.1

 

Regulatory Fees & Assessments

 

 

78

 

 

76

 

 

2.6

 

 

165

 

 

143

 

 

15.4

 

Other Operating Expenses

 

 

705

 

 

455

 

 

54.9

 

 

1,199

 

 

821

 

 

46.0

 

 

 



 



 



 



 



 



 

Total Other Expenses

 

 

1,811

 

 

1,391

 

 

30.2

 

 

3,507

 

 

2,620

 

 

33.9

 

 

 



 



 



 



 



 



 

Total Non-interest Expense

 

$

7,558

 

$

6,350

 

 

19.0

%

$

14,810

 

$

11,880

 

 

24.7

%

 

 



 



 



 



 



 



 

          Non-interest expenses include all expenses other than interest expense, the provision for loan losses and income tax expense.  Total non-interest expense increased 19.0% in the second quarter of 2005 over the second quarter of 2004.  As a percent of average assets, non-interest expenses were 3.01% in the second quarter of 2005 (annualized) and 2.76% in the same period of 2004.  Total non-interest expenses for the first six months of 2005 were 24.7% higher than the first six months of 2004.  The higher levels of non-interest expense were largely the result of increases in salaries and benefits, occupancy and equipment, business development expenses, and legal and professional fees.

          The “efficiency ratio” (non-interest expenses divided by the sum of total non-interest income plus net interest income on a tax equivalent basis) was 59.07% for the second quarter of 2005 compared to 58.90% for the second quarter of 2004. 

          The increases in salaries and benefits during the second quarter of 2005 and the first six months of 2005 compared to the same periods in the prior year were due to salary merit increases, increases in the cost of employee benefits and costs associated with the ANB personnel.   Salaries and benefits expenses attributable to the ANB personnel were $458,000 and $987,000 for the second quarter of 2005 and for the first six months of 2005, respectively.

          Net occupancy expense increased $108,000 and $274,000 for the second quarter of 2005 and the first six months of 2005, respectively, compared to the same periods in 2004.  The increase in occupancy expense was largely the result of opening new facilities (the Euless branch and the Hulen motor bank) in late 2004 and the addition of the ANB locations.  Net occupancy expense attributable to the ANB locations was $109,000 and $215,000 for the second quarter of 2005 and the first six months of 2005, respectively.  Net occupancy expense related to the ANB locations was $80,000 in both the second quarter of 2004 and the first six months of 2004.

          Business development expenses increased $84,000 and $139,000 for the second quarter of 2005 and the first six months of 2005, respectively, compared to the same periods in 2004.  The increases result from higher levels of advertising and charitable contributions.

          Legal and professional fees increased $92,000 and $295,000 for the second quarter of 2005 and the first six months of 2005, respectively, compared to the same periods in 2004.  The increases primarily reflected expenses incurred in relation to compliance with the Sarbanes-Oxley Act of 2002 and other corporate governance initiatives.

28


Allowance for Loan Losses and Non-Performing Assets

          Transactions in the provision for loan losses are summarized as follows (in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2005

 

2004

 

2005

 

2004

 

 

 


 


 


 


 

Balance, Beginning of Period

 

$

10,519

 

$

8,320

 

$

10,187

 

$

7,784

 

Balance Acquired in the Arlington National Bank Acquisition

 

 

-0-

 

 

1,254

 

 

-0-

 

 

1,254

 

Provisions, Charged to Income

 

 

225

 

 

400

 

 

450

 

 

1,005

 

Loans Charged-Off

 

 

(147

)

 

(196

)

 

(231

)

 

(333

)

Recoveries of Loans Previously Charged-Off

 

 

201

 

 

66

 

 

392

 

 

134

 

 

 



 



 



 



 

Net Loans (Charged-Off) Recovered

 

 

54

 

 

(130

)

 

161

 

 

(199

)

 

 



 



 



 



 

Balance, End of Period

 

$

10,798

 

$

9,844

 

$

10,798

 

$

9,844

 

 

 



 



 



 



 

          Our allowance for loan losses was $10,798,000, or 1.50% of total loans, as of June 30, 2005 compared to $9,844,000, or 1.46% of total loans, as of June 30, 2004.   For the six months ended June 30, 2005 and 2004, net charge-offs (recoveries) were (0.02)% and 0.03% of loans, respectively, not annualized.            

          The following table summarizes the non-performing assets as of the end of the last five quarters (in thousands):

 

 

June 30,
2005

 

March 31,
2005

 

December 31,
2004

 

September 30,
2004

 

June 30,
2004

 

 

 


 


 


 


 


 

Non-Accrual Loans

 

$

3,372

 

$

3,294

 

$

2,587

 

$

2,545

 

$

2,832

 

Renegotiated Loans

 

 

-0-

 

 

-0-

 

 

-0-

 

 

-0-

 

 

-0-

 

Other Real Estate Owned and Other Foreclosed Assets

 

 

-0-

 

 

-0-

 

 

-0-

 

 

4

 

 

369

 

 

 



 



 



 



 



 

Total Non-Performing Assets

 

$

3,372

 

$

3,294

 

$

2,587

 

$

2,549

 

$

3,201

 

 

 



 



 



 



 



 

As a Percent of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

 

0.34

%

 

0.33

%

 

0.26

%

 

0.25

%

 

0.33

%

Total Loans and Other Real Estate/ Foreclosed Assets

 

 

0.47

%

 

0.46

%

 

0.37

%

 

0.37

%

 

0.48

%

Loans Past Due 90 days or More and Still Accruing

 

$

36

 

$

-0-

 

$

18

 

$

2,300

 

$

111

 

          At June 30, 2005, the ratio of non-accrual loans to total loans was .47% and non-performing assets represented .47% of loans and other real estate owned/foreclosed assets at the same date.

          As of June 30, 2005, non-accrual loans were comprised of $1,981,000 in commercial loans, $960,000 in real estate mortgage loans, $337,000 in interim construction loans and $94,000 in consumer loans. 

          As of June 30, 2005, there was no other real estate owned or other foreclosed assets.

29


          The following table summarizes the relationship between non-performing loans, criticized loans and the allowance for loan losses (dollars in thousands):

 

 

June 30,
2005

 

March 31,
2005

 

December 31,
2004

 

September 30,
2004

 

June 30,
2004

 

 

 


 


 


 


 


 

Non-Performing Loans

 

$

3,372

 

$

3,294

 

$

2,587

 

$

2,545

 

$

2,832

 

Criticized Loans

 

 

35,580

 

 

38,110

 

 

35,375

 

 

40,289

 

 

34,218

 

Allowance for Loan Losses

 

 

10,798

 

 

10,519

 

 

10,187

 

 

10,079

 

 

9,844

 

Allowance for Loan Losses as a Percent of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Performing Loans

 

 

320

%

 

319

%

 

394

%

 

396

%

 

348

%

Criticized Loans

 

 

30

%

 

28

%

 

29

%

 

25

%

 

29

%

          Loans are graded on a system similar to that used by the banking industry regulators.  The first level of criticized loans is “Other Assets Especially Mentioned” (OAEM).  These loans are fundamentally sound but have potential weaknesses which may, if not corrected, weaken the asset or inadequately protect the bank’s credit position at some future date.  The second level is “Substandard,” which are loans inadequately protected by current sound net worth, paying capacity or pledged collateral of the borrower.  The last level of criticized loans, before they are charged-off, is “Doubtful.”  Doubtful loans are considered to have inherent weaknesses because collection or liquidation in full is highly questionable.  In addition to the above grading system, the Corporation maintains a separate “watch list” which further aids the Corporation in monitoring loan quality.  Watch list loans show warning elements where the present status portrays one or more deficiencies that require attention in the short run or where pertinent ratios of the account have weakened to a point where more frequent monitoring is warranted.

          Total criticized loans at June 30, 2005, loans classified as OAEM, Substandard or Doubtful as noted above, have increased compared to June 30, 2004.  However as a percentage of total loans, criticized loans have decreased from 5.1% as of June 30, 2004 to 4.9% as of June 30, 2005.  The allowance for possible loan losses as a percentage of criticized loans has increased from 28.8% as of June 30, 2004 to 30.3% as of June 30, 2005.  The Corporation remains diligent in its efforts to identify any loan that might reflect weakness of the borrower as soon as practicable.  Management is not aware of any potential loan problems that have not been disclosed to which serious doubt exists as to the ability of the borrower to substantially comply with the present repayment terms and the Corporation does not anticipate any significant losses from these criticized loans.

30


Interest Rate Sensitivity

          Interest rate sensitivity is the relationship between changes in market interest rates and net interest income due to the repricing characteristics of assets and liabilities.

          The following table, commonly referred to as a “static GAP report”, indicates the interest rate sensitivity position at June 30, 2005 and may not be reflective of positions in subsequent periods (dollars in thousands):

 

 

Matures or Reprices within

 

Total
Rate
Sensitive
One Year
or Less

 

Repriced
After
1 Year or
Non -interest
Sensitive

 

Total

 

 


 

30 Days
or Less 

 

31-180
Days 

 

181 to
One Year

 

 

 


 


 


 


 


 


 

Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

369,182

 

$

49,341

 

$

50,985

 

$

469,508

 

$

251,653

 

$

721,161

 

Investment Securities

 

 

11,369

 

 

9,210

 

 

18,237

 

 

38,816

 

 

175,934

 

 

214,750

 

Federal Funds Sold and Due From Time

 

 

9,750

 

 

-0-

 

 

-0-

 

 

9,750

 

 

-0-

 

 

9,750

 

 

 



 



 



 



 



 



 

Total Earning Assets

 

 

390,301

 

 

58,551

 

 

69,222

 

 

518,074

 

 

427,587

 

 

945,661

 

 

 



 



 



 



 



 



 

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Transaction Accounts and Savings

 

 

385,954

 

 

-0-

 

 

-0-

 

 

385,954

 

 

-0-

 

 

385,954

 

Certificates of Deposit under $100,000 and IRA’s

 

 

4,001

 

 

17,529

 

 

22,637

 

 

44,167

 

 

36,190

 

 

80,357

 

Certificates of Deposit $100,000 or More

 

 

3,437

 

 

17,786

 

 

29,649

 

 

50,872

 

 

45,663

 

 

96,535

 

Short Term Borrowings

 

 

48,581

 

 

5,000

 

 

30,000

 

 

83,581

 

 

25,000

 

 

108,581

 

 

 



 



 



 



 



 



 

Total Interest Bearing Liabilities

 

 

441,973

 

 

40,315

 

 

82,286

 

 

564,574

 

 

106,853

 

 

671,427

 

 

 



 



 



 



 



 



 

Interest Sensitivity  Gap

 

$

(51,672

)

$

18,236

 

$

(13,064

)

$

(46,500

)

$

320,734

 

$

274,234

 

 

 



 



 



 



 



 



 

Cumulative Gap

 

$

(51,672

)

$

(33,436

)

$

(46,500

)

 

 

 

 

 

 

 

 

 

 

 



 



 



 

 

 

 

 

 

 

 

 

 

Periodic Gap to Total Assets

 

 

(5.12

)%

 

1.81

%

 

(1.30

)%

 

 

 

 

 

 

 

 

 

Cumulative Gap to  Total Assets

 

 

(5.12

)%

 

(3.32

)%

 

(4.61

)%

 

 

 

 

 

 

 

 

 

          The preceding static GAP report reflects a cumulative liability sensitive position during the one year horizon.  An inherent weakness of this report is that it ignores the relative volatility any one category may have in relation to other categories or market rates in general.  For instance, the rate paid on NOW accounts typically moves slower than the three month T-Bill.  Management attempts to capture this relative volatility by utilizing a simulation model with a “beta factor” adjustment which estimates the volatility of rate sensitive assets and/or liabilities in relation to other market rates.

          Beta factors are an estimation of the long term, multiple interest rate environment relation between an individual account and market rates in general.  For instance, NOW, savings and money market accounts, which are repriceable within 30 days, will have considerably lower beta factors than variable rate loans and most investment categories.  Taking this into consideration, it is quite possible for a bank with a negative cumulative GAP to total asset ratio to have a positive “beta adjusted” GAP risk position.  As a result of applying the beta factors established by management to the earning assets and interest bearing liabilities in the static gap report via a simulation model, the negative cumulative GAP to total assets ratio at one year of (4.61%) was reversed to a positive 28.26% “beta adjusted” GAP position.  Management feels that the “beta adjusted” GAP risk technique more accurately reflects the Corporation’s GAP position.

31


Capital

          At June 30, 2005, shareholders’ equity totaled $77.6 million, an increase of $3.1 million, or 4.2%, compared to December 31, 2004, and an increase of $8.9 million, or 12.9%, compared to June 30, 2004.  These increases are primarily due to net income exceeding the amount of dividends paid, the change in the unrealized loss on available for sale securities and the repurchases of outstanding shares of our Common Stock.  On April 19, 2005, our Board of Directors authorized the repurchase of up to 620,467 shares of our Common Stock over the twelve-month period beginning April 19, 2005.  During the first six months of 2005, we repurchased and retired 29,300 shares of our Common Stock.  Our ability to repurchase shares of Common Stock is subject to various banking laws, regulations and policies as well as rules and regulations of the Securities and Exchange Commission.  The Corporation anticipates repurchasing additional shares of its outstanding Common Stock as conditions permit.

          The consolidated Corporation and the Bank are subject to capital adequacy guidelines established by the Federal Reserve Board and other regulatory authorities.  The table below illustrates the consolidated Corporation’s and the Bank’s compliance with the capital adequacy guidelines as of June 30, 2005 and 2004 (dollars in thousands):               

 

 

June 30, 2005

 

June 30, 2004

 

 

 


 


 

 

 

The Consolidated
Corporation

 

Summit
Bank, N.A.

 

The Consolidated
Corporation

 

Summit
Bank, N.A

 

 

 



 



 



 



 

Total Assets

 

$

1,008,475

 

$

1,008,057

 

$

969,708

 

$

969,280

 

Risk Weighted Assets

 

 

773,286

 

 

773,248

 

 

723,022

 

 

722,596

 

Equity Capital (Tier 1)

 

 

79,991

 

 

80,672

 

 

72,430

 

 

74,512

 

Qualifying Allowance for Loan Losses

 

 

9,680

 

 

9,680

 

 

9,048

 

 

9,042

 

 

 



 



 



 



 

Total Capital

 

$

89,671

 

$

90,352

 

$

81,478

 

$

89,671

 

 

 



 



 



 



 

Leverage Ratio

 

 

7.93

%

 

8.10

%

 

7.91

%

 

8.17

%

Risk Capital Ratio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier I Capital

 

 

10.34

%

 

10.43

%

 

10.02

%

 

10.31

%

Total Capital

 

 

11.60

 

 

11.68

 

 

11.27

 

 

11.56

 

          As of June 30, 2005, the consolidated Corporation and the Bank each exceeded the risk-based capital and leverage requirements set by regulatory authorities, as applicable, and satisfied the criteria for classification as a “well capitalized” institution under the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991.

Liquidity

          Our primary “internal” sources of liquidity consist of the federal funds that we sell and our portfolio of marketable investment securities, particularly those with shorter maturities.  Federal funds sold and investment securities maturing within 30 days represented $11.5 million, or 1.1%, of total assets as of June 30, 2005.  Additionally, our ability to sell loan participations, purchase federal funds and obtain advances from the Federal Home Loan Bank serve as secondary sources of liquidity.  The Bank also has funds available to the Bank under approved federal funds lines at other banks.

          Our liquidity is enhanced by the fact that 88.0% of our total deposits at June 30, 2005 were “core” deposits.  For this purpose, core deposits are defined as total deposits less public funds, certificates of deposit greater than $100,000 and brokered deposits.  As of June 30, 2005, brokered deposits were $198,000 or less than .1% of total deposits.   Our loan to deposit ratio averaged 90.3% for the six month period ended June 30, 2005.

          In the event that our average loans continue to grow during the second half of 2005 and we are unable to fund any such growth solely through the generation of additional deposits, we may be required to obtain funding from secondary sources, including purchasing federal funds, obtaining advances from the Federal Home Loan Bank or other secondary sources.  In such event, our business, results of operations and financial condition could be materially negatively impacted. 

          Our income, which provides funds for the payment of dividends to our shareholders and for other corporate purposes, is derived from our investment in the Bank.

          On May 3, 2004, the Corporation formed SBI Trust and SBI Trust subsequently issued $12.0 million of floating rate (three month LIBOR plus a margin of 2.65%) Capital Securities (the “Trust Capital Securities”).  Concurrent with the issuance of the Trust Capital Securities, SBI Trust issued trust common securities to the Corporation with an aggregate liquidation value of $372,000.  The proceeds of the issuance of the Trust Capital Securities and trust common securities were invested in the Corporation’s Floating Rate Junior Subordinated Deferrable Debentures (the “Deferrable Debentures”), which mature on July 7, 2034 and have a call feature that permits the Corporation to redeem any or all of the securities after July 7, 2009.  The interest rate on the Deferrable Debentures at June 30, 2005 was 5.79%.  The Deferrable Debentures, which are the only asset of SBI Trust, are subordinated and junior in right of payment to all present and future senior indebtedness (as defined in the Indenture dated May 3, 2004) of the Corporation.

32


          On September 15, 2004, we obtained a line of credit from a bank under which we may borrow $10,000,000 at a floating rate (three month LIBOR plus a margin of 2.00%).  The line of credit is secured by stock of the Bank owned by the Corporation and matures on September 15, 2005, whereupon, if balances are outstanding, the line converts to a term note with a five year term.  The Corporation is not required to pay a fee for any unused portion of this line.  At June 30, 2005, $1,250,000 had been borrowed under the line.  The rate on this line at June 30, 2005 was 5.19%.   The purpose of the line is to provide an additional liquidity source and the current amount outstanding was used to help fund the acquisition of ANB.

Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contractual Obligations

          Except as set forth herein, there have been no material changes outside the ordinary course of business in our contractual obligations as set forth in “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance-Sheet Arrangements, Commitments, Guarantees and Contractual Obligations in our Annual Report on Form 10-K for the year ended December 31, 2004.

          At June 30, 2005, outstanding documentary and standby letters of credit totaled $6,411,000 and commitments to extend credit totaled $195,308,000.  Documentary and standby letters of credit and commitments to extend credit totaled $6,175,000 and $175,074,000, respectively, at December 31, 2004.  The increase in commitments to extend credit reflects the continued demand for credit facilities in our market.

Related Party Transactions

          The Bank has made transactions in the ordinary course of business with certain of its and the Corporation’s officers, directors and their affiliates. All loans included in such transactions were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with unrelated parties and all loans are current as to principal and interest payments.  Total loans outstanding to such related parties amounted to approximately $11,254,000 at June 30, 2005 and $8,537,000 at December 31, 2004.

Subsequent Events

          On July 20, 2005, the Board of Directors of the Corporation approved a quarterly dividend of $.07 per share to be paid on August 15, 2005 to shareholders of record on August 1, 2005.

Critical Accounting Policies

          Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  We have identified our policy with respect to allowance for loan losses as critical because it requires management to make particularly difficult, subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.  There have been no material changes in our application of this critical accounting policy since December 31, 2004.  We, in consultation with our Audit Committee of the Board of Directors, have reviewed and approved this critical accounting policy, which is further described under the caption “Loans and Allowance for Loan Losses” in Note 1 (“Summary of Significant Accounting and Reporting Policies”) to the Financial Statements.

          Evaluations of this critical accounting policy are inherently subjective because, even though they are based on objective data, management’s interpretation of the data determines the amount of the appropriate allowance.  Therefore, from time to time (but at least quarterly), management reviews the actual performance and write-off history of the loan portfolio and compares that to previously determined allowance coverage percentages.  In this manner, management evaluates the impact the previously mentioned variables may have had on the loan portfolio to determine what changes, if any, should be made to the assumptions and analyses.  Recent analysis has indicated that projections of estimated losses inherent in the loan portfolio have approximated actual write-off experience.  

          Actual results could differ materially from estimates as a result of changes in economic or market conditions and other factors.  Changes in our evaluations and the assumptions underlying these evaluations could result in a material change in the allowance.  While we believe that the allowance for loan losses has been established and maintained at levels adequate to reflect the risks inherent in the loan portfolio, future increases may be necessary if economic or market conditions and other factors differ substantially from the conditions that existed at the time of the initial determination.

Factors That May Affect Future Results

          This Quarterly Report on Form 10-Q contains forward-looking statements concerning the business, results of operations and financial condition of the Corporation and our subsidiaries.  The forward-looking statements are based upon management’s current expectations and assumptions about future events.  Such expectations and assumptions have been expressed in good faith, and management believes that there is a reasonable basis for them. 

          A number of risks and uncertainties could cause our actual results to differ materially from the results described in the forward-looking statements contained in this Quarterly Report on Form 10-Q.  These risks and uncertainties include, without limitation:

33


Changes in, or the effects of, competition for our products and services;

 

 

Our ability to effectively manage interest rate risk and other market, credit and operation risks;

 

 

Changes in the financial condition of the Corporation’s borrowers;

 

 

Our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers and potential customers;

 

 

The costs and effects of litigation involving us and of unexpected or adverse outcomes in such litigation;

 

 

Our ability to successfully integrate, and to achieve anticipated cost savings and revenue enhancements with respect to, acquired businesses and operations;

 

 

Our ability to attract and retain key employees;

 

 

Changes in general local, regional and international economic conditions;

 

 

Changes in, or the effects of, trade, monetary and fiscal policies, laws and regulations, including interest rate policies, of the Federal Reserve Board and other regulatory authorities;

 

 

Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;

 

 

Changes in consumer and business spending, borrowing and saving habits;

 

 

Changes in laws, regulations and policies applicable to us;

 

 

Technological changes; and

 

 

Political instability and acts of war or terrorism.

Item 3 – Quantitative and Qualitative Disclosure about Market Risk

          There have been no material changes in market risks faced by the Corporation since December 31, 2004.  For more information regarding quantitative and qualitative disclosures about market risk, please refer to the Corporation’s Annual Report on Form 10-K as of and for the year ended December 31, 2004, and in particular, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity and Liquidity” of that Form 10-K.

Item 4 – Controls and Procedures

          The Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the Corporation’s fiscal quarter ended June 30, 2005.  Based on that evaluation, the Corporation’s principal executive officer and principal financial officer have concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the Corporation’s fiscal quarter ended June 30, 2005.

          There were no changes in the Corporation’s internal control over financial reporting that occurred during the Corporation’s fiscal quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

34


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

                              Not applicable

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

On April 19, 2005, the Board of Directors of the Corporation approved a stock repurchase plan (the “2005 Repurchase Plan”) authorizing the Corporation to purchase up to 620,467 shares of our Common Stock over the twelve-month period beginning April 19, 2005 through open market purchases or in privately negotiated transactions in accordance with all applicable state and federal laws and regulations.  During the first six months of 2005, we repurchased and retired 29,300 shares of our Common Stock.  The Corporation did not purchase any shares of its common stock pursuant to the 2005 Repurchase Plan during the second quarter of 2005.  Our ability to repurchase shares of Common Stock is subject to various banking laws, regulations and policies as well as rules and regulations of the Securities and Exchange Commission.  The Corporation anticipates repurchasing additional shares of its outstanding Common Stock as conditions permit.

Item 3.   Defaults Upon Senior Securities

                              Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders

At the Corporation’s 2005 Annual Meeting of Shareholders held on April 19, 2005, the shareholders of the Corporation elected the following directors, constituting the entire Board of Directors of the Corporation, to serve terms expiring at the Corporation’s 2006 Annual Meeting of Shareholders:

 

 

For

 

Withheld

 

Abstain

 

 

 


 


 


 

Robert P. Evans

 

 

9,734,338

 

 

342,611

 

 

—  

 

Elliot S. Garsek

 

 

8,313,395

 

 

1,763,554

 

 

—  

 

Ronald J. Goldman

 

 

9,732,038

 

 

344,911

 

 

—  

 

F.S. Gunn

 

 

9,571,170

 

 

505,779

 

 

—  

 

Robert L. Herchert

 

 

9,732,038

 

 

344,911

 

 

—  

 

Jay J. Lesok

 

 

9,738,738

 

 

338,211

 

 

—  

 

William W. Meadows

 

 

7,786,375

 

 

2,290,574

 

 

—  

 

James Murray

 

 

9,571,170

 

 

505,779

 

 

—  

 

Phillip E. Norwood

 

 

9,728,838

 

 

348,111

 

 

—  

 

Byron B. Searcy

 

 

9,696,612

 

 

380,337

 

 

—  

 

Roderick D. Stepp

 

 

9,738,738

 

 

338,211

 

 

—  

 

Item 5.  Other Information

                              Not applicable

Item 6.  Exhibits

 

3.1

Restated Articles of Incorporation of the Corporation (incorporated herein by Reference to Exhibit 3(a) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1998)

 

 

 

 

3.2

Amended and Restated Bylaws of the Corporation (incorporated herein by reference to Exhibit 3(b) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

 

3.3

Amendment to the Amended and Restated Bylaws of the Corporation adopted by resolution of the Board of Directors of the Corporation (incorporated herein by reference to Exhibit 99.1 to the Corporation’s Current Report on Form 8-K filed February 22, 2005)

35


 

4.1

Rights Agreement, dated April 17, 1990, by and between the Corporation and Summit Bancservices, Inc. (incorporated herein by reference to Exhibit 1 to the Corporation’s Current Report on Form 8-K dated April 18, 1990 filed on April 24, 1990)

 

 

 

 

4.2

Amendment No. 1 to Rights Agreement, effective as of April 16, 2000, by and between the Corporation and Summit Bancservices, Inc. (incorporated herein by reference to Exhibit 4(b) to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000)

 

 

 

 

4.3

Junior Subordinated Debt Securities Indenture Agreement dated May 3, 2004 (incorporated herein by reference to Exhibit 4(a) to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004)

 

 

 

 

4.4

Junior Subordinated Debt Securities Due 2034 (incorporated herein by reference to Exhibit 4(b) to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004)

 

 

 

 

11

Computation of Earnings Per Common Share

 

 

 

 

31.1

Certification of Principal Executive Officer of Summit Bancshares, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

 

31.2

Certification of Principal Financial Officer of Summit Bancshares, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

 

32.1

Certification of Principal Executive Officer of Summit Bancshares, Inc. pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.2

Certification of Principal Financial Officer of Summit Bancshares, Inc. pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

36


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SUMMIT BANCSHARES, INC.

 

                  Registrant

 

 

 

Date:     August 9, 2005

By:

/s/ PHILIP E. NORWOOD

 

 


 

Philip E. Norwood, Chairman, President
and Chief Executive Officer

 

 

Date:     August 9, 2005

By:

/s/ BOB G. SCOTT

 

 


 

Bob G. SCOTT, Executive Vice President
and Chief Operating Officer
(Principal Financial Officer)

37


EXHIBIT INDEX

Exhibit

 

Description


 


3.1

 

Restated Articles of Incorporation of the Corporation (incorporated herein by Reference to Exhibit 3(a) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1998)

 

 

 

3.2

 

Amended and Restated Bylaws of the Corporation (incorporated herein by reference to Exhibit 3(b) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002)

 

 

 

3.3

 

Amendment to the Amended and Restated Bylaws of the Corporation adopted by resolution of the Board Directors of the Corporation (incorporated herein by reference to Exhibit 99.1 to the Corporation’s Current Report on Form 8-K filed February 22, 2005)

 

 

 

4.1

 

Rights Agreement, dated April 17, 1990, by and between the Corporation and Summit Bancservices, Inc. (incorporated herein by reference to Exhibit 1 to the Corporation’s Current Report on Form 8-K dated April 18, 1990 filed on April 24, 1990)

 

 

 

4.2

 

Amendment No. 1 to Rights Agreement, effective as of April 16, 2000, by and between the Corporation and Summit Bancservices, Inc. (incorporated herein by reference to Exhibit 4(b) to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000)

 

 

 

4.3

 

Junior Subordinated Debt Securities Indenture Agreement dated May 3, 2004 (incorporated herein by reference to Exhibit 4(a) to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004)

 

 

 

4.4

 

Junior Subordinated Debt Securities Due 2034 (incorporated herein by reference to Exhibit 4(b) to the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004)

 

 

 

11

 

Computation of Earnings Per Common Share

 

 

 

31.1

 

Certification of Principal Executive Officer of Summit Bancshares, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

31.2

 

Certification of Principal Financial Officer of Summit Bancshares, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

32.1

 

Certification of Principal Executive Officer of Summit Bancshares, Inc. pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Principal Financial Officer of Summit Bancshares, Inc. pursuant to Section 1350, Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

38