<PAGE>
 
                      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, 1998; or
 
[   ]    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.)

                  1300 SUMMIT AVENUE, FORT WORTH, TEXAS 76102
                  -------------------------------------------
                    (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 required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  YES   X   NO  
                                                ---      ---   

The number of shares of common stock, $1.25 par value, outstanding at June 30,
1998 was 6,514,794 shares.
<PAGE>
 
                            SUMMIT BANCSHARES, INC.


                                     INDEX


PART I - FINANCIAL INFORMATION                                          PAGE NO.

 
Item 1.    Financial Statements                                               
 
           Consolidated Balance Sheets at June 30, 1998
           and 1997 and at December 31, 1997                             4
 
           Consolidated Statements of Income for the Three Months
           and Six Months Ended June 30, 1998 and 1997 and for   
           the Year Ended December 31, 1997                              5-6
 
           Consolidated Statements of Changes in Shareholders'
           Equity for the Six Months Ended June 30, 1998 and  
           1997 and for the Year Ended December 31, 1997                 7
 
           Consolidated Statements of Cash Flows for the Six
           Months Ended June 30, 1998 and 1997 and for the  
           Year Ended December 31, 1997                                  8-9
 
           Notes to Consolidated Financial Statements for the Six
           Months Ended June 30, 1998 and 1997 and for the        
           Year Ended December 31, 1997                                  10-21

The June 30, 1998 and 1997 and the December 31, 1997 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.

Item 2.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations for the Six Months
           Ended June 30, 1998 and 1997                                  22-29


2
<PAGE>
 
PART II - OTHER INFORMATION

Item 1.    Legal Proceedings

Item 2.    Change in Securities

Item 3.    Defaults Upon Senior Securities

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

Item 5.    Other Information

Item 6.    Exhibits and Reports on Form 8-K


                                                                               3
<PAGE>
 
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
-----------------------------
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
                                                         (Unaudited)          
                                                           June 30,              (Unaudited)
                                                  ---------------------------   December 31, 
                                                     1998           1997            1997
                                                  ----------    --------------   -----------
                          ASSETS                                (In Thousands)
<S>                                               <C>           <C>              <C>
                                                 
CASH AND DUE FROM BANKS - NOTE 1                   $ 25,602      $ 28,170        $ 30,487
FEDERAL FUNDS SOLD                                   27,675        10,900          35,760
INVESTMENT SECURITIES - NOTE 2                                                   
 Securities Available-for-Sale, at fair value        60,223        61,276          60,476
 Securities Held-to-Maturity, at cost                47,749        52,379          45,151                            
   (fair value of $48,011,000, $52,462,000,
   and $45,360,000 June 30, 1998 and 1997
   and December 31, 1997, respectively)                                                                 
LOANS - NOTE 3                                                                   
  Loans, Net of Unearned Discount                   292,846       246,816         276,069
   Allowance for Loan Losses                      (4,413)       (3,512)         (4,065)
                                                   --------      --------        --------
      LOANS, NET                                    288,433       243,304         272,004
                                                                                 
PREMISES AND EQUIPMENT - NOTE 4                       7,781         7,665           7,916
ACCRUED INCOME RECEIVABLE                             3,575         3,310           3,442
OTHER REAL ESTATE - NOTE 5                               71           151             151
OTHER ASSETS                                          4,506         2,776           4,407
                                                   --------      --------        --------
                                                                                 
      TOTAL ASSETS                                 $465,615      $409,931        $459,794
                                                   ========      ========        ========
                                                                                 
LIABILITIES AND SHAREHOLDERS' EQUITY                                             
                                                                                 
DEPOSITS - NOTE 6                                                                
  Noninterest-Bearing Demand                       $116,822      $105,226        $126,398
  Interest-Bearing                                  289,150       255,723         275,326
                                                   --------      --------        --------
                                                                                 
      TOTAL DEPOSITS                                405,972       360,949         401,724
                                                                                 
SECURITIES SOLD UNDER                                                            
 AGREEMENTS TO REPURCHASE - NOTE 7                   13,728         9,027          14,689
ACCRUED INTEREST PAYABLE                                657           616             678
OTHER LIABILITIES                                     1,911         1,466           1,591
                                                   --------      --------        --------
                                                                                 
      TOTAL LIABILITIES                             422,268       372,058         418,682
                                                   --------      --------        --------
                                                                                 
COMMITMENTS AND CONTINGENCIES - NOTE 11                                          
                                                                                 
SHAREHOLDERS' EQUITY - NOTES 12, 14 AND 18                                       
 Common Stock - $1.25 Par Value; 20,000,000                                     
   shares authorized; 6,514,794, 3,236,286                                       
   and 6,501,332 shares issued and outstanding                                   
   at June 30, 1998 and 1997 and                                                 
   at December 31, 1997, respectively                 8,143         4,045           8,127
 Capital Surplus                                      6,218         6,152           6,251
 Retained Earnings                                   29,114        27,536          26,491
 Unrealized Gain on Investment Securities                                       
    Available for Sale, Net of Tax                      286           140             243
 Treasury Stock at Cost                                                         
    (20,000 shares at June 30, 1998)                   (414)          -0-             -0-
                                                   --------     --------        --------
                                                                                 
      TOTAL SHAREHOLDERS' EQUITY                     43,347       37,873          41,112
                                                   --------     --------        --------
                                                                                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $465,615     $409,931        $459,794
                                                   ========     ========        ========
</TABLE>
The accompanying Notes should be read with these financial statements.

4
<PAGE>
 
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
 
 
                                                                   (Unaudited)           
                                                       For the Six Months Ended June 30,         (Unaudited)      
                                                      -----------------------------------  Year Ended December 31, 
                                                             1998              1997                  1997
                                                      ------------------  ---------------  ------------------------
                                                                  (In Thousands, Except Per Share Data)
<S>                                                  <C>                  <C>              <C>
 
INTEREST INCOME
  Interest and Fees on Loans                               $13,653            $11,330               $24,063
  Interest and Dividends on Investment Securities:                                          
    Taxable                                                  3,272              3,538                 6,878
    Exempt from Federal Income Taxes                            26                  9                    23
  Interest on Federal Funds Sold                               989                319                 1,008
                                                           -------            -------               -------
                                                                                            
      TOTAL INTEREST INCOME                                 17,940             15,196                31,972
                                                           -------            -------               -------
                                                                                            
INTEREST EXPENSE                                                                            
  Interest on Deposits                                       6,230              4,996                10,773
  Interest on Securities Sold Under                                                         
   Agreements to Repurchase                                    307                257                   528
                                                           -------            -------               -------
                                                                                            
      TOTAL INTEREST EXPENSE                                 6,537              5,253                11,301
                                                           -------            -------               -------
                                                                                            
      NET INTEREST INCOME                                   11,403              9,943                20,671
                                                                                            
LESS: PROVISION FOR LOAN LOSSES - NOTE 3                       408                352                   900
                                                           -------            -------               -------
                                                                                            
      NET INTEREST INCOME AFTER                                                             
       PROVISION FOR LOAN LOSSES                            10,995              9,591                19,771
                                                           -------            -------               -------
                                                                                            
NON-INTEREST INCOME                                                                         
  Service Charges and Fees on Deposits                       1,004                900                 1,890
  Loss on Sale of Investment Securities                        -0-                -0-                    (1)
  Other Income                                                 822                682                 1,376
                                                           -------            -------               -------
                                                                                            
      TOTAL NON-INTEREST INCOME                              1,826              1,582                 3,265
                                                           -------            -------               -------
                                                                                            
NON-INTEREST EXPENSE                                                                        
  Salaries and Employee Benefits                             4,102              3,575                 7,524
  Occupancy Expense - Net                                      471                387                   774
  Furniture and Equipment Expense                              584                431                   919
  Other Real Estate Owned Income - Net                         -0-                 (8)                  (63)
  Other Expense - Note 8                                     1,784              1,537                 3,164
                                                           -------            -------               -------
                                                                                            
      TOTAL NON-INTEREST EXPENSE                             6,941              5,922                12,318
                                                           -------            -------               -------
                                                                                            
      INCOME BEFORE INCOME TAXES                             5,880              5,251                10,718
                                                                                            
APPLICABLE INCOME TAXES - NOTE 9                             2,013              1,807                 3,678
                                                           -------            -------               -------
                                                                                            
      NET INCOME                                           $ 3,867            $ 3,444               $ 7,040
                                                           =======            =======               =======
                                                                                            
      NET INCOME PER SHARE - NOTE 14                                                        
          Basic                                               $.59               $.53                 $1.09
          Diluted                                              .56                .51                  1.04
 
</TABLE>

The accompanying Notes should be read with these financial statements.

                                                                               5
<PAGE>
 
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
 
                                                                   (Unaudited)
                                                           For the Three Months Ended
                                                                    June 30,
                                                     --------------------------------------
                                                           1998                1997
                                                     -----------------  -------------------
                                                     (In Thousands, Except Per Share Data)
<S>                                                 <C>                <C>
INTEREST INCOME
 Interest and Fees on Loans                               $6,975              $5,946
 Interest and Dividends on Investment Securities:        
   Taxable                                                 1,648               1,802
   Exempt from Federal Income Taxes                           13                   6
 Interest on Federal Funds Sold                              431                 116
                                                          ------              ------
                                                         
    TOTAL INTEREST INCOME                                  9,067               7,870
                                                          ------              ------
                                                         
INTEREST EXPENSE                                         
 Interest on Deposits                                      3,144               2,586
 Interest on Securities Sold Under Agreements            
  to Repurchase                                              144                 127
                                                          ------              ------
                                                         
    TOTAL INTEREST EXPENSE                                 3,288               2,713
                                                          ------              ------
                                                         
    NET INTEREST INCOME                                    5,779               5,157
                                                         
LESS: PROVISION FOR LOAN LOSSES - NOTE 3                     250                 197
                                                          ------              ------
                                                         
    NET INTEREST INCOME AFTER                            
     PROVISION FOR LOAN LOSSES                             5,529               4,960
                                                          ------              ------
                                                         
NON-INTEREST INCOME                                      
 Service Charges and Fees on Deposits                        518                 463
 Other Income                                                438                 357
                                                          ------              ------
                                                         
    TOTAL NON-INTEREST INCOME                                956                 820
                                                          ------              ------
                                                         
NON-INTEREST EXPENSE                                     
 Salaries and Employee Benefits                            2,061               1,828
 Occupancy Expense - Net                                     232                 190
 Furniture and Equipment Expense                             289                 220
 Other Real Estate Owned (Income) Expense - Net                3                  (5)
 Other Expense                                               850                 843
                                                          ------              ------
                                                         
    TOTAL NON-INTEREST EXPENSE                             3,435               3,076
                                                          ------              ------
                                                         
    INCOME BEFORE INCOME TAXES                             3,050               2,704
                                                         
APPLICABLE INCOME TAXES - NOTE 9                           1,047                 932
                                                          ------              ------
                                                         
    NET INCOME                                            $2,003              $1,772
                                                          ======              ======
                                                         
    NET INCOME PER SHARE                                 
       Basic                                                $.30                $.27
      Diluted                                                .29                 .26
 
</TABLE>


The accompanying Notes should be read with these financial statements.

6
<PAGE>
 
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                   AND FOR THE YEAR ENDED DECEMBER 31, 1997
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                                
                                                                                      Unrealized
                                    Common Stock                                      Gain (Loss)
                             -------------------------   Capital        Retained     on Investment   Treasury
                                Shares          Amount   Surplus        Earnings     Securities-Net   Stock     Total
                             ------------       ------   -------        --------     --------------  --------  -------   
                                                  (Dollars in Thousands, Except Per Share Data0
<S>                          <C>               <C>      <C>             <C>          <C>             <C>       <C>
BALANCE AT
 JANUARY 1, 1997                3,233,036       $4,041  $  6,136         $24,675            $ 228     $ -0-    $35,080
 
Net Income for the
 Six Months Ended
 June 30, 1997                                                             3,444                                 3,444
 
Stock Options Exercised             3,250            4        16                                                    20
 
Cash Dividend $.09
 Per Share                                                                  (583)                                 (583)
 
Securities Available-for-
 Sale Adjustment                                                                              (88)                 (88)

                                ---------       ------  --------         -------            -----     -----    -------   
BALANCE AT
 JUNE 30, 1997                  3,236,286        4,045     6,152          27,536              140       -0-     37,873
 
Net Income for the
 Six Months Ended
 December 31, 1997                                                         3,596                                 3,596
 
Stock Options Exercised            18,540           24        99                                                   123
 
Two-for-One Stock Split         3,246,506        4,058                    (4,058)                                  -0-
 
Cash Dividend $.09
 Per Share                                                                  (583)                                 (583)
 
Securities Available-for-
 Sale Adjustment                                                                              103                  103
                                ---------       ------  --------         -------            -----     -----    -------   
BALANCE AT
 DECEMBER 31, 1997              6,501,332        8,127     6,251          26,491              243       -0-     41,112
 
Purchase of Stock Held
 In Treasury                                                                                           (908)      (908)
 
Retirement of Stock Held                                                                                              
 In Treasury                      (25,000)         (31)                    (463)                        494        -0-
 
Net Income for the
 Six Months Ended
 June 30, 1998                                                             3,867                                 3,867
 
Stock Options Exercised            38,462           47       (33)                                                   14

Cash Dividend $.12
 Per Share                                                                  (781)                                 (781)
 
Securities Available-for-
 Sale Adjustment                                                                               43                   43
                                ---------       ------  --------         -------            -----     -----    -------   
BALANCE AT
 JUNE 30, 1998                  6,514,794       $8,143  $  6,218         $29,114            $ 286     $(414)   $43,347
                                =========       ======  ========         =======            =====     =====    =======
</TABLE>

The accompanying Notes should be read with these financial statements.

                                                                               7
<PAGE>
 
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                   AND FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
 
                                                                   (Unaudited)        
                                                                     June 30,           (Unaudited) 
                                                             -------------------------  December 31, 
                                                                1998         1997          1997
                                                             ----------  -------------  -----------
                                                                         (In Thousands)
<S>                                                          <C>        <C>            <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net Income                                                  $  3,867       $  3,444     $  7,040
                                                              --------       --------     --------
  Adjustments to Reconcile Net Income to Net
   Cash Provided by Operating Activities:
    Depreciation and Amortization                                  516            396          840
    Net Premium Amortization
      of Investment Securities                                      84             44           97
    Provision for Loan Losses                                      408            352          900
    Deferred Income Taxes                                          167             50          233
    Loss on Sale of Investment Securities                          -0-            -0-            1
    Writedown of Other Real Estate                                 -0-              4            4
    Net Gain From Sale of Other Real Estate                         (2)           (21)         (21)
    Net (Gain) Loss on Sale of Premises and Equipment                1             (1)          12
    Increase  in Accrued Income and Other Assets                  (324)          (889)      (2,796)
    Increase in Accrued Expenses and Other Liabilities             299            146          333
                                                              --------       --------     --------
 
      Total Adjustments                                          1,149             81        ( 397)
                                                              --------       --------     --------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                  5,016          3,525        6,643
                                                              --------       --------     --------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Decrease (Increase)  in Federal Funds Sold                     8,085          9,450      (15,410)
  Proceeds from Matured and Prepaid Investment Securities
    . Held-to-Maturity                                          13,457          9,494       21,486
    . Available-for-Sale                                        14,614          8,172       14,906
  Proceeds from Sales of Investment Securities                     -0-          3,505        4,506
  Purchase of Investment Securities
    . Held-to-Maturity                                         (15,118)        (7,029)     (12,884)
    . Available-for-Sale                                       (15,317)       (10,961)     (16,702)
  Loans Originated and Principal Repayments, Net               (16,990)       (26,842)     (56,363)
  Recoveries of Loans Previously Charged-Off                        55            259          439
  Proceeds from Sale of Premises and Equipment                       2             32            1
  Proceeds from Sale of Other Real Estate                           82              1           32
  Purchases of Premises and Equipment                             (383)          (956)      (1,664)
                                                              --------       --------     --------
 
      NET CASH USED BY INVESTING ACTIVITIES                    (11,513)       (14,875)     (61,653)
                                                              --------       --------     --------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Demand Deposits, Savings
   Accounts and Interest Bearing Transaction Accounts            2,778         10,341       41,081
  Net Increase  in Certificates of Deposit                       1,470          5,585       15,620
  Net Increase (Decrease) in Repurchase Agreements                (961)        (4,182)       1,480
  Payments of Cash Dividends                                      (781)          (583)      (1,166)
  Proceeds from Stock Options Exercised                             14             20          143
  Purchase of Treasury Stock                                      (908)           -0-          -0-
                                                              --------       --------     --------
 
       NET CASH PROVIDED BY FINANCING ACTIVITIES                 1,612         11,181       57,158
                                                              --------       --------     --------
 
NET INCREASE (DECREASE) IN CASH AND DUE FROM
 BANKS                                                          (4,885)          (169)       2,148
 
CASH AND DUE FROM BANKS AT BEGINNING
  OF PERIOD                                                     30,487         28,339       28,339
                                                              --------       --------     --------
 
CASH AND DUE FROM BANKS AT END OF PERIOD                      $ 25,602       $ 28,170     $ 30,487
                                                              ========       ========     ========
 
</TABLE>

8

<PAGE>
 
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
                FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                   AND FOR THE YEAR ENDED DECEMBER 31, 1997
                                  (Unaudited)



SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES:
<TABLE>
<CAPTION>
 
                                  (Unaudited)       
                                    June 30,          (Unaudited) 
                          -------------------------   December 31, 
                             1998          1997          1997
                          -----------  ------------   -----------
                                      (In Thousands)
<S>                      <C>          <C>            <C>
 
(1)  Interest Paid          $6,558        $5,275        $11,260
(2)  Income Taxes Paid       2,215         1,866          3,876
                          
</TABLE>

                                                                               9

<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
          FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
             AND FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)

NOTE 1 - Summary of Significant Accounting Policies
------                                             

       The accounting and reporting policies of Summit Bancshares, Inc. (the
       "Corporation") and Subsidiaries are in accordance with generally accepted
       accounting principles. A summary of the more significant policies
       follows:

       Basis of Presentation and Principles of Consolidation
       -----------------------------------------------------

       The consolidated financial statements of the Corporation include its
       accounts and those of its wholly-owned subsidiaries, Summit National Bank
       and Summit Community Bank, National Association (the "Subsidiary Banks")
       and Summit Bancservices, Inc., a wholly-owned operations subsidiary. All
       significant intercompany balances and transactions have been eliminated
       in consolidation.
       
       Use of Estimates
       ----------------

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

       Cash and Due From Banks
       -----------------------

       The Subsidiary Banks are required to maintain certain balances at the
       Federal Reserve Bank based on their levels of deposits. During the first
       six months of 1998 the average cash balance maintained at the Federal
       Reserve Bank was $631,000. Compensating balances held at correspondent
       banks, to minimize service charges, averaged approximately $15,269,000
       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,
       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 1998 and 1997 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.

10

<PAGE>
 
NOTE 1 - Summary of Significant Accounting Policies (cont'd.)
------                                                       

       Loans and Allowance for Loan Losses
       -----------------------------------

       Loans are stated at the principal amount outstanding less unearned
       discount and the allowance for loan losses. Unearned discount on
       installment loans is recognized as income over the terms of the loans by
       a method approximating the interest method. Interest income on all other
       loans is recognized based upon the principal amounts outstanding. The
       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. When loans are put on non-accrual all
       payments received are applied to the principal and no interest income is
       recorded until the loan is returned to accrual status or the principal
       has been reduced to zero.

       The Corporation follows 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 as determined by
       management. Management's evaluation is based on a number of factors,
       including the Subsidiary Banks' loss experience in relation to
       outstanding loans and the existing level of the allowance, prevailing and
       prospective economic conditions, and management's continuing review of
       the discounted cash flow values of impaired loans and its evaluation of
       the quality of the loan portfolio. Loans are placed on non-accrual status
       when management believes that the borrower's financial condition, after
       giving consideration to economic and business conditions and collection
       efforts, is such that collection of interest is doubtful. Loans are
       charged against the allowance for loan losses when management believes
       that the collectibility of the principal is unlikely.

       Premises and Equipment
       ----------------------

       Premises and equipment are stated at cost less accumulated depreciation.
       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 operating expenses.
       Renewals and betterments are added to the asset accounts and depreciated
       over the periods benefitted. 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 of the real estate
       acquired is less than the bank's recorded investment in the related loan,
       a writedown is recognized through a charge to the allowance for loan
       losses. Any subsequent reduction in value is recognized by a charge to
       income. Operating expenses of such properties, net of related income, and
       gains and losses on 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 are defined as those amounts included in the balance
       sheet caption "Cash and Due from Banks."

       Reclassification
       ----------------

       Certain reclassifications have been made to the 1997 financial statements
       to conform to the 1998 presentation.

                                                                              11

<PAGE>
 
NOTE 1 - Summary of Significant Accounting Policies (cont'd.)
------                                                       


       Earnings Per Common and Common Equivalent Share
       -----------------------------------------------

       Earnings per common and common equivalent share is calculated by dividing
       net income by the weighted average number of common shares and common
       share equivalents. Stock options are regarded as common share equivalents
       and are therefore considered in earnings per share calculations, if
       dilutive. The number of common share equivalents is determined using the
       treasury stock method.

       Audited Financial Statements
       ----------------------------

       The consolidated balance sheet as of December 31, 1997, and the
       consolidated statements of income, changes in shareholders' equity and
       cash flows for the year ended December 31, 1997 are headed "unaudited" in
       these financial statements. These statements were reported in the
       Securities Exchange Commission Form 10-K as of December 31, 1997 as
       "audited" but are required to be reflected in these statements as
       unaudited because of the absence of an independent auditor's report.


NOTE 2 - Investment Securities
------                        

       A summary of amortized cost and estimated fair values of investment
securities is as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                                      June 30, 1998
                                                      ---------------------------------------------
                                                                   Gross        Gross
                                                      Amortized  Unrealized  Unrealized     Fair
                                                        Cost       Gains       Losses       Value
                                                      ---------  ----------  -----------  ---------
<S>                                                   <C>        <C>         <C>          <C>
 
Investment Securities - Held-to-Maturity
  U.S. Treasury Securities                             $ 14,993        $175        $ (2)   $ 15,166
  U.S. Government Agencies
   and Corporations                                      25,405          63         (27)     25,441
  U.S. Government Agency Mortgage
   Backed Securities                                      6,216          53          (6)      6,263
  Obligations of States and
   Political Subdivisions                                 1,135           6         -0-       1,141
                                                       --------        ----        ----    --------
 
    Total Held-to-Maturity Securities                    47,749         297         (35)     48,011
                                                       --------        ----        ----    --------
 
Investment Securities - Available-for-Sale
  U.S.  Treasury Securities                              39,533         366         (20)     39,879
  U.S. Government Agencies
    and Corporations                                     11,104          49         -0-      11,153
  U.S. Government Agency Mortgage
    Backed Securities                                     8,104          39         -0-       8,143
  Federal Reserve and Federal Home Loan Bank Stock        1,048         -0-         -0-       1,048
                                                       --------        ----        ----    --------
 
     Total Available-for-Sale Securities                 59,789         454         (20)     60,223
                                                       --------        ----        ----    --------
 
        Total Investment Securities                    $107,538        $751        $(55)   $108,234
                                                       ========        ====        ====    ========
</TABLE>

       In the above schedule the amortized cost of Total Held-to-Maturity
                                 --------------
Securities of $47,749,000 and the fair value of Total Available-for-Sale
                                  ----------
Securities of $60,223,000 are reflected in Investment Securities on the
consolidated balance sheet as of June 30, 1998 for a total of $107,972,000. A
net unrealized gain of $434,000 is included in the Available-for-Sale Investment
Securities balance. The unrealized gain, net of tax, is included in
Shareholders' Equity.

12

<PAGE>
 
NOTE 2 - Investment Securities (cont'd.)
------                                  

       Investment securities with carrying value of $41,504,000 at June 30,
1998, were pledged to secure federal, state and municipal deposits and for other
purposes as required or permitted by law. The fair value of these pledged
securities totaled $41,741,000 at June 30, 1998.
<TABLE>
<CAPTION>
 
                                                              June 30, 1997
                                              ---------------------------------------------
                                                           Gross        Gross
                                              Amortized  Unrealized  Unrealized     Fair
                                                Cost       Gains       Losses       Value
                                              ---------  ----------  -----------  ---------
<S>                                           <C>        <C>         <C>          <C>
 
Investment Securities - Held-to-Maturity
  U.S. Treasury Securities                     $ 23,980        $108       $ (57)   $ 24,031
  U.S. Government Agencies
   and Corporations                              18,113          28         (40)     18,101
  U.S. Government Agency Mortgage
   Backed Securities                              9,693          59         (18)      9,734
  Obligations of States and
   Political Subdivisions                           593           3         -0-         596
                                               --------        ----       -----    --------
 
    Total Held-to-Maturity Securities            52,379         198        (115)     52,462
                                               --------        ----       -----    --------
 
Investment Securities - Available-for-Sale
  U.S.  Treasury Securities                      55,445         249        (113)     55,581
  U.S. Government Agencies
    and Corporations                              2,988          20         -0-       3,008
  U.S. Government Agency Mortgage
    Backed Securities                             2,377          56         -0-       2,433
  Federal Reserve Bank Stock                        254         -0-         -0-         254
                                               --------        ----       -----    --------
 
     Total Available-for-Sale Securities         61,064         325        (113)     61,276
                                               --------        ----       -----    --------
 
        Total Investment Securities            $113,443        $523       $(228)   $113,738
                                               ========        ====       =====    ========
</TABLE>

       In the above schedule the amortized cost of Total Held-to-Maturity
                                 -------------- 
Securities of $52,379,000 and the fair value of Total Available-for-Sale
                                  ----------
Securities of $61,276,000 are reflected in Investment Securities on the
consolidated balance sheet as of June 30, 1997 for a total of $113,655,000. A
net unrealized gain of $212,000 is included in the Available-for-Sale Investment
Securities balance. The unrealized gain, net of tax, is included in
Shareholders' Equity.

       There were no sales of investment securities during the first six months
of 1998. However, proceeds from sales were $3,505,000 during the first six
months of 1997 and $4,506,000 during the year 1997. For the year ended December
31, 1997, losses from sales of securities of $3,000 were realized, but were
partially offset by gains of $2,000.


NOTE 3 - Loans and Allowance for Loan Losses
------                                      

       The book values of loans by major type follow (in thousands):
<TABLE>
<CAPTION>
 
                                     June 30           
                             ------------------------  December 31,
                                1998         1997          1997
                             ----------  ------------   ----------
<S>                          <C>         <C>            <C>
 
Commercial                    $129,424       $118,311    $127,800
Real Estate Mortgage            96,994         78,459      90,638
Real Estate Construction        35,338         21,430      26,290
Loans to Individuals            31,654         29,370      32,003
Less:  Unearned Discount          (564)          (754)       (662)
                              --------       --------    --------
                               292,846        246,816     276,069
Allowance for Loan Losses       (4,413)        (3,512)     (4,065)
                              --------       --------    --------
 
     Loans - Net              $288,433       $243,304    $272,004
                              ========       ========    ========
 
</TABLE>

                                                                              13

<PAGE>
 
NOTE 3 - Loans and Allowance for Loan Losses (cont'd.)
------                                                

       Transactions in the allowance for loan losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
 
                                                                                        
                                                         Six Months Ended June 30,        Year Ended  
                                                      -------------------------------     December 31, 
                                                          1998               1997            1997
                                                      -----------        ------------     -----------
<S>                                                  <C>                <C>              <C>
 
Balance, Beginning of Period                            $4,065             $2,972           $2,972
Provisions, Charged to Income                              408                352              900
                                                                                      
Loans Charged-Off                                         (115)               (71)            (246)
Recoveries of Loans Previously                                                        
 Charged-Off                                                55                259              439
                                                        ------             ------           ------
                                                                                      
          Net Loans (Charged-Off) Recovered                (60)               188              193
                                                        ------             ------           ------
                                                                                      
Balance, End of Period                                  $4,413             $3,512           $4,065
                                                        ======             ======           ======
</TABLE>

       The provisions for loan losses charged to operating expenses during the
six months ended June 30, 1998 and June 30,1997 of $408,000 and $352,000,
respectively, were considered adequate to maintain the allowance in accordance
with the policy discussed in Note 1. For the year ended December 31, 1997, a
provision of $900,000 was recorded.

       At June 30, 1998, the recorded investment in loans that are considered to
be impaired under Statement of Financial Accounting Standards No. 114 was
$6,775,000 (of which $6,775,000 were on non-accrual status). The related
allowance for loan losses for these loans was $1,167,000. The average recorded
investment in impaired loans during the six months ended June 30, 1998 was
approximately $4,138,000. For this period the Corporation recognized no interest
income on these impaired loans.


NOTE 4 - Premises and Equipment
------                         

       The investment in premises and equipment stated at cost and net of
accumulated amortization and depreciation is as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                          June 30,            
                                                    ----------------------    December 31, 
                                                       1998         1997          1997
                                                    ---------    ---------    ------------
<S>                                                <C>          <C>          <C>
 
Land                                                 $ 1,446     $ 2,170        $ 1,446
Buildings and Improvements                             7,573       7,375          7,532
Furniture & Equipment                                  6,816       5,415          6,661
                                                     -------     -------        -------
                                                                           
    Total Cost                                        15,835      14,960         15,639
Less:  Accumulated Amortization and Depreciation      (8,054)     (7,295)        (7,723)
                                                     -------     -------        -------
                                                                           
    Net Book Value                                   $ 7,781     $ 7,665        $ 7,916
                                                     =======     =======        =======
 
</TABLE>
NOTE 5 - Other Real Estate
------                    

       The carrying value of other real estate is as follows (in thousands):
<TABLE>
<CAPTION>
 
 
                                    June 30,          
                             --------------------     December 31, 
                               1998        1997          1997
                             --------  ----------     ------------
<S>                         <C>       <C>            <C>
 
Other Real Estate               $  71     $ 186         $ 185
Valuation Reserve                 -0-       (35)          (34)
                                -----     -----         -----
                                                     
    Net Other Real Estate       $  71     $ 151         $ 151
                                =====     =====         =====
</TABLE>

14
<PAGE>
 
NOTE 5 - Other Real Estate (cont'd.)
------                              

       Transactions in the valuation reserve are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
 
                                                                         
                                          Six Months Ended June 30,       Year Ended
                                       -------------------------------   December 31,
                                           1998                 1997         1997
                                       ---------------     -----------    -----------
<S>                                    <C>                 <C>            <C>
 
Balance, Beginning of Period              $  34               $  35        $  35
Provisions Charged to Income                -0-                 -0-          -0-
Reductions from Sales                       (34)                -0-           (1)
                                          -----               -----        -----
                                         
Balance, End of Period                    $ -0-               $  35        $  34
                                          =====               =====        =====
 
</TABLE>

       There were no direct writedowns of other real estate charged to income
for the six months ended June 30, 1998; however there was $4,000 for the six
months ended June 30,1997 and $4,000 for the year ended December 31, 1997.


NOTE 6 - Deposits
------           

       The book values of deposits by major type follow (in thousands):
<TABLE>
<CAPTION>
 
                                                     June 30,        
                                              -----------------------  December 31, 
                                                1998         1997         1997
                                              ---------  ------------  ----------
<S>                                          <C>        <C>           <C>
 
Noninterest-Bearing Demand Deposits            $116,822    $105,226     $126,398
                                               --------    --------     --------
Interest-Bearing Deposits:                                           
 Interest-Bearing Transaction                                        
     Accounts and Money Market Funds            137,165     128,077      133,139
 Savings                                         62,435      49,600       54,107
 Savings Certificates - Time                     52,162      47,503       51,685
 Certificates of Deposits $100,000 or more       36,610      29,838       35,690
 Other                                              778         705          705
                                               --------    --------     --------
   Total                                        289,150     255,723      275,326
                                               --------    --------     --------
       Total Deposits                          $405,972    $360,949     $401,724
                                               ========    ========     ========
 
</TABLE>
NOTE 7 - Securities Sold Under Repurchase Agreements
------                                              

       Securities sold under repurchase agreements generally represent
borrowings with maturities ranging from one to thirty days. Information relating
to these borrowings is summarized as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                                                        
                                                           Six Months Ended June 30,      Year Ended 
                                                       --------------------------------  December 31,  
                                                             1998              1997          1997
                                                       ----------------   -------------  -----------
<S>                                                   <C>                <C>            <C>
 
Securities Sold Under Repurchase Agreements:
    Average                                                $13,461            $12,038       $11,668
    Period-End                                              13,728              9,027        14,689
    Maximum Month-End Balance During Period                 15,249             13,212        15,263
Interest Rate                                                                           
    Average                                                   4.60%              4.28%         4.45%
    Period-End                                                4.55               4.50          4.55
 
</TABLE>

                                                                              15

<PAGE>
 
NOTE 8 - Other Non-Interest Expense
------                             

       The significant components of other non-interest expense are as follows
(in thousands):
<TABLE>
<CAPTION>
                                                                                          
                                                           Six Months Ended June 30,       Year Ended 
                                                       ---------------------------------  December 31, 
                                                           1998                 1997          1997
                                                       ------------         ------------  ------------
<S>                                                    <C>                  <C>           <C>
 
Business Development                                      $  303               $  273        $  588
Legal and Professional Fees                                  252                  248           496
Printing and Supplies                                        202                  174           373
Regulatory Fees and Assessments                               84                   85           160
Other                                                        943                  757         1,547
                                                          ------               ------        ------
                                                                                          
  Total                                                   $1,784               $1,537        $3,164
                                                          ======               ======        ======
</TABLE>

NOTE 9 - Income Taxes
------               

       Federal income taxes included in the consolidated balance sheets were as
follows (in thousands):
<TABLE>
<CAPTION>
                                            June 30,                   
                                    --------------------  December 31, 
                                      1998        1997        1997
                                    --------    --------  ------------
<S>                                 <C>         <C>       <C>
 
Current Tax Asset (Liability)          $  28     $  37        $  (7)
Deferred Tax Asset                       816       542          672
                                       -----     -----        -----
                                                          
  Total Included in Other Assets       $ 844     $ 579        $ 665
                                       =====     =====        =====
</TABLE>

       The deferred tax asset at June 30, 1998 of $816,000 included $148,000
related to unrealized gains on Available-for-Sale Securities.

       The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                    
                                        Six Months Ended June 30,    Year Ended 
                                       ---------------------------  December 31, 
                                           1998           1997          1997
                                       -------------  ------------  -------------
<S>                                    <C>            <C>           <C>
 
Federal Income Tax Expense
 Current                                  $2,180         $1,857        $3,911
 Deferred                                   (167)           (50)         (233)
                                          ------         ------        ------
                                                                       
   Total Federal Income Tax Expense       $2,013         $1,807        $3,678
                                          ======         ======        ======
                                                                       
   Effective Tax Rates                      34.2%          34.4%         34.3%
                                          ======         ======        ======
</TABLE>

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

<TABLE>
<CAPTION>
                                         Six Months Ended June 30,    Year Ended 
                                        ---------------------------  December 31, 
                                            1998           1997          1997
                                        -------------  ------------  ------------
<S>                                     <C>            <C>           <C>
 
Federal Income Taxes at Statutory
 Rate of 34%                               $1,999         $1,785        $3,644
Effect of Tax Exempt Interest Income          (10)            (5)          (12)
Non-deductible Expenses                        25             23            47
Other                                          (1)             4            (1)
                                           ------         ------        ------
                                                                       
 Income Taxes Per Income Statement         $2,013         $1,807        $3,678
                                           ======         ======        ======
</TABLE>

16
<PAGE>
 
NOTE 10 - Related Party Transactions
-------                             

       The Subsidiary Banks have transactions made in the ordinary course of
business with certain of its 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. Total loans outstanding to such
parties amounted to approximately $3,443,000 at December 31, 1997.


NOTE 11 - 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, 1998, outstanding documentary and standby letters of credit
totaled $3,502,000 and commitments to extend credit totaled $109,019,000.


NOTE 12 - Stock Option Plans
-------                     

       The Corporation has two Incentive Stock Option Plans, the 1993 Plan and
the 1997 Plan, ("the Plans"). Each Plan has reserved 600,000 shares (adjusted
for two-for-one stock splits in 1993, 1995 and 1997) of common stock for grants
thereunder. The Plans provide for the granting to executive management and other
key employees of Summit Bancshares, Inc. and subsidiaries incentive stock
options, as defined under the current tax law. The options under the Plans will
be exercisable for ten years from the date of grant and generally vest ratably
over a five year period. Options will be and have been granted at prices which
will not be less than 100-110% of the fair market value of the underlying common
stock at the date of grant.

       The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Since the option prices are considered to approximate
fair market value at date of grant, no compensation expense has been reported.
Had compensation cost for these plans been determined consistent with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" the Corporation's net income and earnings per share would have
been reduced by insignificant amounts on a proforma basis for the year ended
December 31, 1997, and the six months ended June 30, 1998.

       The following is a summary of transactions during the periods presented:
<TABLE>
<CAPTION>

                                             Shares Under Option
                                     ----------------------------------
                                       Six Months
                                          Ended           Year Ended
                                     June  30, 1998   December 31, 1997
                                     --------------   -----------------
<S>                                  <C>              <C>
 
Outstanding, Beginning of Period            543,112             464,100
Additional Options Granted During
  the Period                                  3,000             118,752
Forfeited During the Period                    (600)             (4,480)
Exercised During the Period                 (44,762)            (35,260)
                                            -------             -------
 
  Outstanding, End of Period                500,750             543,112
                                            =======             =======
</TABLE>

       Options outstanding at June 30, 1998 ranged in price from $3.00 to $19.25
per share with a weighted average exercise price of $5.16 and 365,658 shares
exercisable. At June 30, 1998, there remained 527,900 shares reserved for future
grants of options under the 1997 Plan.


NOTE 13 - Employee Benefit Plans
-------                         

Pension Plan
------------

       The Corporation has a defined benefit pension plan covering substantially
all of its employees. The benefits are based on years of service and the
employee's compensation history. The employee's compensation used in the benefit
calculation is the highest average for any five consecutive years of employment
within the employee's last ten years of employment.

       Funding for the plan is provided by employer contributions to trust funds
in amounts determined by actuarial assumptions and valuation of the plan.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.

                                                                              17
<PAGE>
 
NOTE 13 - Employee Benefit Plans (cont'd.)
-------                                   

       The table below sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets at December 31 (in
thousands):
<TABLE>
<CAPTION>
 
                                                                            1997      1996
                                                                          --------  --------
<S>                                                                       <C>       <C>
 
Actuarial present value of benefit obligations:
 Accumulated benefit obligation, including vested
  benefits of $2,240,000 in 1997 and $1,647,000 in 1996                    $2,420    $1,762
                                                                           ======    ======
 
Projected benefit obligation for service rendered
 to date                                                                   $3,035    $1,997
Plan assets at fair value, primarily listed stocks
 and U.S. bonds                                                             2,883     2,192
                                                                           ------    ------
 
Plan assets in excess of (less than) projected benefit obligation            (152)      195
Unrecognized net loss from past experience
 different from that assumed and effect of
 changes in assumptions                                                       396        21
Prior service cost not yet recognized in net
 periodic pension cost                                                        (12)       15
                                                                           ------    ------
 
Net pension cost included in other assets                                  $  232    $  231
                                                                           ======    ======
 
Prepaid pension cost included the following components (in thousands):
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                                            1997      1996
                                                                           ------     ------
 
Service Cost - benefits earned during the period                           $  227    $  195
Interest cost on projected benefit obligation                                 157       131
Less: Actual return on plan assets                                           (196)     (153)
Net amortization and deferral                                                   5        (2)
                                                                           ------    ------
 
   Net periodic pension cost                                               $  193    $  171
                                                                           ======    ======
</TABLE>

       The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit obligation
were 7 percent and 6 percent, respectively. The expected long-term rate of
return on plan assets was 7 percent.

       The market value of plan assets at June 30, 1998 was $1,826,000. There
has not been a contribution to the plan to this date during 1998. Prepaid
pension cost at June 30, 1998 was $398,000.

401(k) Plan
-----------

       The Corporation implemented a 401(k) plan in December 1997 covering
substantially all employees. The Corporation did not match the employee's
contributions in 1997 nor to date in 1998.

Management Security Plan
------------------------

       In 1992, the Corporation established a Management Security Plan to
provide key employees with retirement, death or disability benefits in addition
to those provided by the Pension Plan. The expense charged to operations for
such future obligations was $110,000 and $168,000 during the first six months of
1998 and 1997, respectively, and $276,000 for the year 1997.

Other Post Retirement Benefits
------------------------------

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

18

<PAGE>
 
NOTE 14 - Earnings per Share
-------                     

       The following data shows the amounts used in computing earnings per share
and the weighted average number of shares of dilutive potential common stock.
The number of shares used in the calculations reflect a two-for-one stock split
in December 1997 (dollars in thousands)
<TABLE>
<CAPTION>
 
                                            June 30,          
                                     -----------------------  December 31, 
                                        1998         1997         1997
                                     ----------  -----------  ----------
<S>                                 <C>         <C>          <C>
 
Net income                           $    3,867    $    3,444  $    7,040
                                     ==========    ==========  ==========
Weighted average number of common
 shares used in Basic EPS             6,508,425     6,470,490   6,478,795
Effect of dilutive stock options        343,130       283,287     321,081
                                     ----------    ----------  ----------
Weighted number of common shares
 and dilutive potential common
 stock used in Diluted EPS            6,851,555     6,753,777   6,799,876
                                     ==========    ==========  ==========
 
</TABLE>

NOTE 15 - 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):

<TABLE>
<CAPTION>
 
                                           June 30,
                                     ------------------
                                       1998      1997
                                     --------  --------
<S>                                 <C>       <C>      
Financial Instruments Whose
  Contract Amounts Represent
     Credit Risk:
     Commitments to Extend Credit    $109,019   $82,853
     Documentary and Standby
       Letters of Credit                3,502     3,098
</TABLE>

       Since many of the loan commitments 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.

       The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.


NOTE 16 - Concentrations of Credit Risk
-------                                

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

                                                                              19

<PAGE>
 
NOTE 17 - Litigation
-------             

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


NOTE 18 - Stock Repurchase Plan
-------                        

       On April 21, 1998, the Board of Directors approved a stock repurchase
plan. The plan authorized management to purchase up to 325,654 shares of the
Corporation's common stock over the 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 first six months of 1998, 45,000 shares were purchased by the
Corporation through a similar repurchase plan through the open market and
subsequently 25,000 shares have been canceled.


NOTE 19 - Subsequent Event
-------                   

       On July 21, 1998, the Board of Directors of the Corporation approved a
quarterly dividend of $.06 per share to be paid on August 14, 1998 to
shareholders of record on July 31, 1998.


NOTE 20 - 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
<PAGE>
 
NOTE 20 - Fair Values of Financial Instruments (cont'd.)
-------                                                 

       The estimated fair values of the Corporation's financial instruments are
as follows (in thousands):
<TABLE>
<CAPTION>
 
                                                               June 30,
                                              ------------------------------------------
                                                      1998                  1997
                                              --------------------  --------------------
                                              Carrying     Fair     Carrying     Fair
                                               Amount      Value     Amount      Value
                                              ---------  ---------  ---------  ---------
<S>                                           <C>        <C>        <C>        <C>
   Financial Assets
     Cash and due from banks                  $ 25,602   $ 25,602   $ 28,170   $ 28,170
     Federal funds sold                         27,675     27,675     10,900     10,900
     Securities                                107,972    108,677    113,655    113,738
     Loans                                     292,846    292,170    246,816    245,620
     Reserve for loan losses                    (4,413)    (4,413)   ( 3,512)    (3,512)
 
   Financial Liabilities
     Deposits                                  405,972    406,241    360,949    361,026
     Securities sold under repurchase
      agreements                                13,728     13,731      9,027      9,027
 
   Off-balance Sheet Financial Instruments
     Loan commitments                                     109,019                82,853
     Letters of credit                                      3,502                 3,098
 
</TABLE>
NOTE 21 - Comprehensive Income
-------                       

       The Corporation has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income". This new standard requires an entity to report and display
comprehensive income and its components. Comprehensive income is as follows (in
thousands):
<TABLE>
<CAPTION>
 
                                                For the Six Months Ended June 30,      
                                                ----------------------------------      Year Ended 
                                                     1998              1997         December 31, 1997
                                                ---------------  -----------------  -----------------
<S>                                             <C>              <C>                <C>
 
      Net Income                                   $3,867            $3,444              $7,040
      Other Comprehensive Income:                
        Unrealized gain (loss) on securities     
        available-for-sale, net of tax                 43               (88)                 15
                                                   ------            ------              ------
                                                 
          Comprehensive Income                     $3,910            $3,356              $7,055
                                                   ======            ======              ======
</TABLE>

                                                                              21

<PAGE>
 
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
----------------

Summary
-------

       Net income for the second quarter of 1998 was $2,003,000, or $.29 diluted
earnings per share, compared with $1,772,000, or $.26 diluted earnings per
share, for the second quarter of 1997. On a per share basis, diluted net income
increased 11.5% over the second quarter of the prior year. Net income for the
first six months of 1998 was $3,867,000, or .56 per diluted earnings per share,
compared with $3,444,000, or .51 per diluted earnings per share for the first
six months of 1997. Per share amounts are based on average shares outstanding of
6,508,425 for the first six months of 1998 and 6,470,490 for the comparable
period of 1997 adjusted to 6,851,555 and 6,753,777, respectively to reflect
stock options granted. Also, shares outstanding reflect a two-for-one stock
split in December 1997.

       Outstanding loans at June 30, 1998 of $292.8 million represented an
increase of $46.0 million, or 18.6%, over June 30,1997 and an increase of $16.8
million, or 6.1%, from December 31, 1997.

       Total deposits at June 30, 1998 of $406.0 million represented an increase
of $45.0 million, or 12.5%, over June 30,1997 and an increase of $4.2 million,
or 1.1%, from December 31, 1997.

       In the second quarter, net interest income increased 12.1% over the
previous year. An increase in non-interest expense of 11.7% partially offset the
increase in net interest income.

       The following table summarizes the Corporation's performance for the
three months and six months ended June 30, 1998 and 1997 (tax equivalent basis
and dollars in thousands).

<TABLE> 
<CAPTION> 
                                       Three Months Ended       Six Months Ended
                                            June 30,                June 30,
                                   ------------------------    --------------------
                                      1998          1997        1998         1997
                                   ----------    ----------  ----------    --------
<S>                                <C>           <C>         <C>           <C>

Interest Income                       $9,075      $7,874      $17,956      $15,204
Interest Expense                       3,288       2,713        6,537        5,253
                                      ------      ------      -------      -------
 Net Interest Income                   5,787       5,161       11,419        9,951
Provision for Loan Loss                  250         197          408          352
                                      ------      ------      -------      -------
                             
 Net Interest Income After   
   Provision for Loan Loss             5,537       4,964       11,011        9,599
Non-Interest Income                      956         820        1,826        1,582
Non-Interest Expense                   3,435       3,076        6,941        5,922
                                      ------      ------      -------      -------
                             
 Income Before Income Tax              3,058       2,708        5,896        5,259
Income Tax Expense                     1,055         936        2,029        1,815
                                      ------      ------      -------      -------
                             
   Net Income                         $2,003      $1,772      $ 3,867      $ 3,444
                                      ======      ======      =======      =======
                             
Net Income per Share-        
 Basic                                $  .30      $  .27      $   .59      $   .53
 Diluted                                 .29         .26          .56          .51
                             
Return on Average Assets                1.73%       1.76%        1.69%        1.75%
 
Return on Average
 Stockholders' Equity                  18.65%      19.15%       18.42%       19.07%
 
</TABLE>

22
<PAGE>
 
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 1998 and 1997 (rates on tax equivalent
basis).
<TABLE>
<CAPTION>
 
 
                                                                  Three Months ended June 30,
                                          --------------------------------------------------------------------
                                                              1998                          1997
                                          ---------------------------------  ----------------------------------
                                           Average                Average     Average                Average
                                           Balances   Interest  Yield/Rate    Balances   Interest  Yield/Rate
                                          ----------  --------  -----------  ----------  --------  -----------
                                                                 (Dollars in Thousands)
<S>                                       <C>         <C>       <C>          <C>         <C>       <C>
Earning Assets:
  Federal Funds Sold & Due From            $ 31,338     $  431       5.53%   $  8,442     $  116       5.44%
  Investment Securities (Taxable)           107,658      1,648       6.14     115,598      1,801       6.25
  Investment Securities (Tax-exempt)          1,137         20       6.88         595         10       6.45
  Loans, Net of Unearned Discount/(1)/      290,811      6,976       9.62     245,235      5,947       9.73
                                           --------     ------               --------     ------      
    Total Earning Assets                    430,944      9,075       8.45     369,870      7,874       8.54
                                                        ------                            ------      
                                                                                                      
Non-interest Earning Assets:                                                                          
  Cash and Due From Banks                    22,130                            24,083                 
  Other Assets                               15,506                            13,056                 
  Allowance for Loan Losses                  (4,306)                           (3,413)                
                                           --------                          --------                 
    Total Assets                           $464,274                          $403,596                 
                                           ========                          ========                 
                                                                                                      
Interest-Bearing Liabilities:                                                                         
  Interest-Bearing Transaction                                                                        
    Accounts and Money Market Funds        $139,867      1,283       3.68    $128,018      1,133       3.55
  Savings & Premium                          64,202        710       4.43      49,882        516       4.15
  Savings Certificates                       51,866        660       5.10      47,008        571       4.87
  Certificates of Deposit                                                                             
    $100,000 or more                         35,931        478       5.34      28,184        358       5.09
  Other Time                                    956         13       5.56         566          8       5.43
  Other Borrowings                           12,730        144       4.53      11,248        127       4.49
                                           --------     ------               --------     ------      
    Total Interest-Bearing Liabilities      305,552      3,288       4.32     264,906      2,713       4.11
                                                        ------                            ------      
                                                                                                      
Non-interest Bearing Liabilities:                                                                     
  Demand Deposits                           113,223                            99,359                 
  Other Liabilities                           2,419                             2,210                 
  Shareholders' Equity                       43,080                            37,121                 
                                           --------                          --------                 
    Total Liabilities and                                                                             
      Shareholders' Equity                 $464,274                          $403,596                 
                                           ========                          ========                 
                                                                                                      
Net Interest Income and Margin                                                                        
 (Tax-equivalent Basis)/(2)/                            $5,787       5.39                 $5,161       5.60
                                                        ======                            ======
 
</TABLE>
(1) Loan interest income includes fees and loan volumes include loans on non-
    accrual.
(2) Presented on a tax equivalent basis ("T/E") using a federal income tax rate
    of 34% in both years.

                                                                              23

<PAGE>
 
       The following schedule presents average balance sheets that highlight
earning assets and interest-bearing liabilities and their related rates earned
and paid for the six months ended June 30, 1998 and 1997 (rates on tax
equivalent basis).
<TABLE>
<CAPTION>
 
                                                                        Six Months Ended June 30,
                                                 ---------------------------------------------------------------------
                                                                1998                               1997
                                                 ---------------------------------   ---------------------------------
                                                   Average               Average     Average                Average
                                                   Balances   Interest  Yield/Rate    Balances   Interest  Yield/Rate
                                                 -----------  --------  ----------   ----------  --------  -----------
                                                       (Dollars in Thousands)
<S>                                              <C>          <C>       <C>          <C>         <C>       <C>
Earning Assets:
  Federal Funds Sold                              $ 36,104    $   991     5.53%      $ 11,863    $   320     5.35%
  Investment Securities (Taxable)                  107,026      3,271     6.16        115,436      3,537     6.18
  Investment Securities (Tax-exempt)                 1,139         39     6.98            413         13     6.50
  Loans, Net of Unearned Discount/(1)/             283,944     13,655     9.70        236,007     11,334     9.68
                                                  --------    -------                --------    -------  
    Total Earning Assets                           428,213     17,956     8.46        363,719     15,204     8.43
                                                              -------                            -------  
                                                                                                          
Non-interest Earning Assets:                                                                              
  Cash and Due From Banks                           22,169                             23,371             
  Other Assets                                      15,490                             12,980             
  Allowance for Loan Losses                         (4,224)                            (3,273)            
                                                  --------                           --------             
    Total Assets                                  $461,648                           $396,797             
                                                  ========                           ========             
                                                                                                          
Interest-Bearing Liabilities:                                                                             
  Interest-Bearing Transaction                                                                            
    Accounts & Money Market Funds                 $138,328      2,498     3.64       $125,331      2,169     3.49
  Savings                                           65,137      1,438     4.45         50,113      1,013     4.08
  Savings Certificates                              51,767      1,308     5.09         47,059      1,127     4.83
  Certificates of Deposit                                                                                 
    $100,000 or more                                36,346        960     5.33         27,123        679     5.05
  Other Time                                           931         26     5.63            538         14     5.09
  Other Borrowings                                  13,461        307     4.60         12,038        251     4.28
                                                  --------    -------                --------    -------  
    Total Interest-Bearing Liabilities             305,970      6,537     4.31        262,202      5,253     4.04
                                                              -------                            -------  
                                                                                                          
Non-interest Bearing Liabilities:                                                                         
  Demand Deposits                                  111,004                             96,001             
  Other Liabilities                                  2,337                              2,180             
  Shareholders' Equity                              42,337                             36,414             
                                                  --------                           --------             
    Total Liabilities and                                                                                 
      Shareholders' Equity                        $461,648                           $396,797             
                                                  ========                           ========             
                                                                                                          
Net Interest Income and Margin                                                                            
 (Tax-equivalent Basis)/(2)/                                  $11,419     5.38                   $ 9,951     5.52
                                                              =======                            =======
 
</TABLE>
(1) Loan interest income includes fees and loan volumes include loans on non-
    accrual.
(2) Presented on a tax equivalent basis ("T/E") using a federal income tax rate
    of 34% in both years.

24
<PAGE>
 
Net Interest Income
-------------------

       Net interest income (tax equivalent) for the second quarter of 1998 was
$5,787,000 which represented an increase of $626,000, or 12.1%, over the second
quarter of 1997. This increase was heavily contributed to by a 18.6% increase in
average loans for the second quarter of 1998 versus the same quarter last year.

       The following table summarizes the effects of changes in interest rates,
average volumes of earning assets and interest bearing liabilities on net
interest income ( tax equivalent) for the periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
 
                                                      ANALYSIS OF CHANGES IN NET INTEREST INCOME
                                                               (Dollars in Thousands)
 
                                        2nd Qtr. 1998 vs. 2nd Qtr. 1997     Six Months 1998 vs. Six Months 1997
                                              Increase (Decrease)                   Increase (Decrease)
                                              Due to Changes in:                    Due to Changes in:
                                       ---------------------------------   -------------------------------------
                                         Volume       Rate       Total        Volume        Rate        Total
                                       ----------   --------   ---------   ------------   ---------   ----------
<S>                                    <C>          <C>        <C>         <C>            <C>         <C>
Interest Earning Assets:
 Federal Funds Sold                      $  313      $   2      $  315         $  660        $ 11       $  671
 Investment Securities (Taxable)           (122)       (31)       (153)          (255)        (11)        (266)
 Investment Securities (Tax-exempt)           9          1          10             25           1           26
 Loans, Net of Unearned Discount          1,479       (450)      1,029          2,298          23        2,321
                                         ------      -----      ------         ------        ----       ------
                                        
 Total Interest Income                    1,679       (478)      1,201          2,728          24        2,752
                                         ------      -----      ------         ------        ----       ------
                                        
Interest-Bearing Liabilities:           
 Deposits                                   414        144         558            887         341        1,228
 Other Borrowings                            16          1          17             34          22           56
                                         ------      -----      ------         ------        ----       ------

 Total Interest Expense                     430        145         575            921         363        1,284
                                         ------      -----       -----         ------         ---        -----

Net Interest Income                     $ 1,249     $ (623)   $    626        $ 1,807      $ (339)    $ 1,468
                                        =======     ======    ========        =======      ======     =======
</TABLE> 

Allowance for Loan Losses and Non-Performing Assets
---------------------------------------------------

       The Corporation's allowance for loan losses was $4,413,000, or 1.51% of
total loans, as of June 30, 1998 compared to $3,512,000, or 1.42% of total
loans, as of June 30,1997.

       Transactions in the provision for loan losses are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
 
                                        Three Months Ended    Six Months Ended
                                              June 30,             June 30,
                                       --------------------  -------------------
                                         1998       1997       1998      1997
                                       ---------  ---------  --------  ---------
<S>                                    <C>        <C>        <C>       <C>
 
Balance, Beginning of Period             $4,192     $3,327    $4,065     $2,972
Provisions, Charged to Income               250        197       408        352
 
Loans Charged-Off                           (68)       (52)     (115)       (71)
Recoveries of Loans Previously
    Charged-Off                              39         40        55        259
                                         ------     ------    ------     ------
 
            Net Loans (Charged-Off)
               Recovered                    (29)       (12)      (60)       188
                                         ------     ------    ------     ------
 
Balance, End of Period                   $4,413     $3,512    $4,413     $3,512
                                         ======     ======    ======     ======
</TABLE>

                                                                              25
<PAGE>
 
       The following table summarizes the non-performing assets as of the end of
the last five quarters (in thousands).
<TABLE>
<CAPTION>
 
                                 June 30,  March 31,  December 31,  September 30,  June 30,
                                   1998      1998         1997          1997         1997
                                 --------  ---------  ------------  -------------  --------
<S>                              <C>       <C>        <C>           <C>            <C>
 
Non-Accrual Loans                  $6,830     $2,885     $2,112        $1,245       $  901
Other Real Estate Owned                71        151        151           151          151
                                   ------     ------     ------        ------       ------
                                                                 
  Total Non-Performing Assets      $6,901     $3,036     $2,263        $1,396       $1,052
                                   ======     ======     ======        ======      ======
</TABLE>

       Non-accrual loans to total loans were 2.33% at June 30, 1998 and non-
performing assets were 2.37% of loans and other real estate owned at the same
date. As of June 30, 1998, loans to five borrowers represent approximately 89%
of the loans on non-accrual and four of five of these borrowers are current as
to payment of principal and interest on their loans. The Corporation does not
see this increase in non-accrual loans as a signal of a weakened local economy
or a change in the Corporation's lending standards, rather this is the
implementation of the Corporation's strict policy of identifying problem loans
as soon as any difficulty a borrower may be experiencing is noted.

       The following table summarizes the relationship between non-performing
loans, criticized loans and the allowance for loan losses (dollars in
thousands).
<TABLE>
<CAPTION>
 
                             June 30,   March 31,   December 31,   September 30,   June 30,
                               1998        1998         1997            1997         1997
                             ---------  ----------  -------------  --------------  ---------
<S>                          <C>        <C>         <C>            <C>             <C>
 
Non-Performing Loans          $ 6,830     $ 2,885      $2,112         $1,245        $  901
Criticized Loans               11,737      12,484       9,295          7,896         8,314
Allowance for Loan Losses       4,413       4,192       4,065          3,681         3,512
Allowance for Loan Losses                                                       
   as a Percent of:                                                             
     Non-Performing Loans          65%        145%        193%           296%          390%
     Criticized Loans              38          34          44             47            42
 
</TABLE>
Non-interest Income
-------------------

       The major component of non-interest income is service charges on
deposits. Other service fees are the majority of other non-interest income.

       The following table reflects the changes in non-interest income during
the periods presented (dollars in thousands).
<TABLE>
<CAPTION>
 
                                             Three Months Ended          Six Months Ended
                                                   June 30,                  June 30,
                                       --------------------------------  -----------------
                                       1998   1997   % Change    1998     1997    % Change
                                       -----  -----  ---------  -------  -------  --------
<S>                                    <C>    <C>    <C>        <C>      <C>      <C>
 
Service Charges on Deposit Accounts    $ 518  $ 463     11.9%   $1,004   $  900     11.6%
Non-recurring Income                      88     34       --       154       87       --
Other Non-interest Income                350    323      8.4       668      595     12.3
                                       -----  -----     ----    ------   ------ 
                                                                                
  Total Non-interest Income            $ 956  $ 820     16.6    $1,826   $1,582     15.4
                                       =====  =====              ======   ======
 
</TABLE>
       Non-recurring income is primarily interest recovered on loans charged-off
in prior years and gains on sales of assets taken in satisfaction of debt in
prior years.

26
<PAGE>
 
Non-interest Expense
--------------------

       Non-interest expenses include all expenses other than interest expense,
provision for loan losses and income tax expense.

       The following table summarizes the changes in non-interest expense during
the periods presented (dollars in thousands).
<TABLE>
<CAPTION>
 
                                    Three Months Ended June 30,    Six Months Ended June 30,
                                   -----------------------------  ---------------------------
                                     1998      1997    % Change    1998      1997    % Change
                                   --------  --------  ---------  -------  --------  --------
<S>                                <C>       <C>       <C>        <C>      <C>       <C>
 
Salaries & Employee Benefits         $2,061   $1,828      12.7%   $4,102   $3,575      14.7%
Occupancy Expense - Net                 232      190      22.1       471      387      21.7
Furniture and Equipment Expense         289      220      31.4       584      431      35.5
Other Real Estate Expense - Net           3       (5)    160.0       -0-       (8)       --
Other Expenses:                                                                     
 Business Development                   159      172      (7.6)      303      273      11.0
 Insurance - Other                       21       20       5.0        46       47      (2.1)
 Legal & Professional Fees              121      139     (12.9)      252      248       1.6
 Taxes - Other                           82       45      82.2       167       73     128.8
 Postage & Courier                       69       64       7.8       141      132       6.8
 Printing & Supplies                    107       97      10.3       202      174      16.1
 Regulatory Fees & Assessments           44       43       2.3        84       85      (1.2)
 Other Operating Expenses               247      263      (6.1)      589      505      16.6
                                     ------   ------              ------   ------   
                                                                                    
   Total Other Expenses                 850      843        .8     1,784    1,537      16.1
                                     ------   ------              ------   ------   
                                                                                    
   Total Non-interest Expense        $3,435   $3,076      11.7    $6,941   $5,922      17.2
                                     ======   ======              ======   ======
</TABLE>

       Total non-interest expense increased 11.7% in the second quarter of 1998
over 1997, reflecting increases in salaries and benefits, occupancy expense,
furniture and equipment expenses, taxes-other and printing and supplies. As a
percent of average assets, non-interest expenses were 2.97% in the second
quarter of 1998 and 3.07% in the same period of 1997. The "efficiency ratio"
(non-interest expenses divided by total non-interest income plus net interest
income) was 51.00% for the second quarter of 1998. These measures of operating
efficiency compare very favorably to other financial institutions in the
Corporation's peer group.

       The increase in salaries and employee benefits for the second quarter of
1998 is due to salary merit increases, incentive compensation accrual increases,
and an increase in pension plan expense. Also, the average number of full-time
equivalent employees increased by 26.5 to an average full-time equivalent of
167.0 from the number twelve months prior. This increase in number of employees
reflects the opening of a new banking office in 1997 in addition to the adding
of several lending officers in 1997.

       The increase in occupancy expense is primarily due to the cost of a new
branch facility that was occupied in late 1997.

       The increase in furniture and equipment expense is primarily a result of
increased depreciation for new technology related equipment acquired in the last
half of 1997.

       Taxes-other increased due to increased state franchise taxes paid on
higher levels of taxable capital and the loss of certain tax credits that were
available in prior periods.

       Printing and supplies expenses increased primarily due to expenses
related to new customer services such as debit cards and imaged customer account
statements.

 
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.

                                                                              27
<PAGE>
 
       The following table, commonly referred to as a "static gap report",
indicates the interest rate sensitivity position at June 30, 1998 and may not be
reflective of positions in subsequent periods (dollars in thousands):
<TABLE>
<CAPTION>
 
                                                                                               
                                                                           Total      Repriced 
                                      Matures or Reprices within:           Rate        After  
                                  -------------------------------        Sensitive    1 Year or
                                    30 Days     31-180       181 to       One Year   Non-interest
                                    or Less      Days       One Year      or Less     Sensitive       Total
--------------------------------  ----------   ---------   ---------    ----------   ------------    --------
<S>                               <C>          <C>         <C>          <C>          <C>             <C>
Earning Assets:
  Loans                             $156,142    $ 17,959    $ 13,721      $187,822     $105,024      $292,846
  Investment Securities                3,306      14,613      24,034        41,953       66,019       107,972
  Federal Funds Sold                  27,675         -0-         -0-        27,675          -0-        27,675
                                    --------    --------    --------      --------     --------      --------
 
   Total Earning Assets              187,123      32,572      37,755       257,450      171,043       428,493
                                    --------    --------    --------      --------     --------      --------
 
Interest Bearing Liabilities:
  Interest-Bearing Transaction
    Accounts and Savings             199,601         -0-         -0-       199,601          -0-       199,601
  Certificate of Deposits
    >$100,000                          7,923      14,947      11,203        34,073        2,537        36,610
  Other Time Deposits                  4,172      27,469      16,004        47,645        5,294        52,939
  Repurchase Agreements               13,728         -0-         -0-        13,728          -0-        13,728
                                    --------    --------    --------      --------     --------      --------
 
   Total Interest Bearing
    Liabilities                      225,424      42,416      27,207       295,047        7,831       302,878
                                    --------    --------    --------      --------     --------      --------
 
Interest Sensitivity
 Gap                                $(38,301)   $ (9,844)   $ 10,548      $(37,597)    $163,212      $125,615
                                    ========    ========    ========      ========     ========      ========
Cumulative Gap                      $(38,301)   $(48,145)   $(37,597)
                                    ========    ========    ========
 
Cumulative Gap to
 Total Earning Assets                 (8.94%)    (11.24%)     (8.77%)
 
Cumulative Gap to
 Total Assets                         (8.23%)    (10.34%)     (8.07%)
</TABLE>

       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 (8.07%) was reversed to a positive 13.78% "beta adjusted" gap position.

       Management feels that the "beta adjusted" gap risk technique more
accurately reflects the Corporation's gap position.

Capital
-------

       The Federal Reserve Board has guidelines for capital to total assets
(leverage) and capital standards for bank holding companies. The Comptroller of
the Currency also has similar guidelines for national banks. These guidelines
require a minimum level of Tier I capital to total assets of 3 percent. A
banking organization operating at or near these levels is expected to have well-
diversified risk, excellent asset quality, high liquidity, good earnings and in
general be considered a strong banking organization. Organizations not meeting
these characteristics are expected to operate well above these minimum capital
standards. Thus, for all but the most highly rated organizations, the minimum
Tier I leverage ratio is to be 3 percent plus minimum additional cushions of at
least 100 to 200 basis points. At the discretion of the regulatory authorities,
additional capital may be required.

       At June 30, 1998, total capital to total assets was 9.28%.

28
<PAGE>
 
       The Federal Reserve Board and Comptroller of the Currency also have risk-
adjusted capital adequacy guidelines. Capital under these new guidelines is
defined as Tier I and Tier II. At Summit Bancshares, Inc. the only components of
Tier I and Tier II capital are shareholders' equity and a portion of the
allowance for loan losses, respectively.

       The guidelines also stipulate that four categories of risk weights (0,
20, 50 and 100 percent), primarily based on the relative credit risk of the
counterparty, be applied to the different types of balance sheet assets. Risk
weights for all off-balance sheet exposures are determined by a two-step process
whereby the face value of the off-balance sheet item is converted to a "credit
equivalent amount" and that amount is assigned to the appropriate risk category.

       The regulatory minimum ratio for total qualifying capital is 8.00% of
which 4.00% must be Tier I capital. At June 30, 1998, the Corporation's Tier I
capital represented 14.20% of risk weighted assets and total qualifying capital
(Tier I and Tier II) represented 15.45% of risk weighted assets. Both ratios
are well above current regulatory guidelines.

                                                                              29

<PAGE>
 
                                  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: July 25, 1998                    By: /s/  Philip E. Norwood               
     ----------------------               -------------------------------------
                                          Philip E. Norwood, Chairman
                                                                                
Date: July 25, 1998                    By: /s/  Bob G. Scott                    
     ----------------------               -------------------------------------
                                          Bob G. Scott, Executive Vice President
                                              and Chief Operating Officer 
                                              (Chief Accounting Officer)


30
<PAGE>
 
                          PART II - OTHER INFORMATION

Item 1.   Legal Proceedings

          Not applicable

Item 2.   Change in Securities

          Not applicable

Item 3.   Defaults Upon Senior Securities

          Not applicable

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

          At the Corporation's annual shareholders' meeting, held on April 21,
          1998, the shareholders of the Corporation:

          .    ratified the appointment by the Board of Directors of Stovall,
               Grandey & Whatley as independent auditors of the Corporation for
               its fiscal year ending December 31, 1998. The shareholder vote in
               this matter was 5,265,865 for, 3,220 against, and none
               abstaining.
 
          .    elected the Board of Directors, consisting of thirteen (13)
               persons. The following directors, constituting the entire Board
               of Directors, were elected:
 
                                               For        Against      Abstain
                                            ---------     -------      -------
               Robert E. Bolen              5,269,949       2,000       8,540
               Elliott S. Garsek            5,258,789      13,160       8,540
               Ronald J. Goldman            5,270,749       1,200       8,540
               F.S. Gunn                    5,271,549         400       8,540
               Jeffrey M. Harp              5,271,949         -0-       8,540
               Robert L. Herchert           5,269,949       2,000       8,540
               William W. Meadows           5,263,727       8,222       8,540
               Edward P. Munson, Jr.        5,269,949       2,000       8,540
               James L. Murray              5,271,949         -0-       8,540
               Philip E. Norwood            5,271,949         -0-       8,540
               Byron B. Searcy              5,271,949         -0-       8,540
               Edgar Snelson                5,269,949       2,000       8,540
 

Item 5.   Other Information

          Not applicable

Item 6.   Exhibits and Reports on Form 8-K
<PAGE>
 
          (a)  Exhibits

          11   Computation of Earnings Per Common Share

          27   Financial Data Schedule

          (b)  No Reports on Form 8-K were filed during the period ending
               June 30, 1998
<PAGE>
 
                                 EXHIBIT INDEX

Exhibit                                                 Page No.
-------                                                 --------

11        Computation of Earnings Per Common Share

27        Financial Data Schedule