<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 September 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 September
30, 1998 was 6,514,694 shares.
<PAGE>
 
                            SUMMIT BANCSHARES, INC.



                                     INDEX


PART I - FINANCIAL INFORMATION                                      PAGE NO.

 
Item 1.   Financial Statements

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

The September 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 Nine Months
          Ended September 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)          
                                                                       September 30,         (Unaudited) 
                                                                  -----------------------    December 31, 
                                                                    1998            1997         1997
                                                                  --------        --------     --------
ASSETS                                                                       (In Thousands)
<S>                                                               <C>             <C>          <C>
 
CASH AND DUE FROM BANKS - NOTE 1                                  $ 20,127        $ 33,060     $ 30,487
FEDERAL FUNDS SOLD & DUE FROM TIME                                  37,135          23,485       35,760
INVESTMENT SECURITIES - NOTE 2
 Securities Available-for-Sale, at fair value                       74,787          58,595       60,476
 Securities Held-to-Maturity, at cost (fair value of                46,036          47,712       45,151
   $46,803,000, $47,908,000, and $45,360,000
   September 30, 1998 and 1997 and December 31, 1997,
   respectively)
LOANS - NOTE 3
 Loans, Net of Unearned Discount                                   301,972         262,784      276,069
   Allowance for Loan Losses                                        (4,663)         (3,682)      (4,065)
                                                                  --------        --------     --------
      LOANS, NET                                                   297,309         259,102      272,004
 
PREMISES AND EQUIPMENT - NOTE 4                                      7,960           7,797        7,916
ACCRUED INCOME RECEIVABLE                                            3,835           3,368        3,442
OTHER REAL ESTATE - NOTE 5                                              71             151          151
OTHER ASSETS                                                         4,969           2,928        4,407
                                                                  --------        --------     --------
 
      TOTAL ASSETS                                                $492,229        $436,198     $459,794
                                                                  ========        ========     ========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
DEPOSITS - NOTE 6
 Noninterest-Bearing Demand                                       $117,982        $114,198     $126,398
 Interest-Bearing                                                  306,452         270,025      275,326
                                                                  --------        --------     --------
 
      TOTAL DEPOSITS                                               424,434         384,223      401,724
 
SECURITIES SOLD UNDER
 AGREEMENTS TO REPURCHASE - NOTE 7                                  18,838          10,284       14,689
ACCRUED INTEREST PAYABLE                                               676             653          678
OTHER LIABILITIES                                                    3,276           1,511        1,591
                                                                  --------        --------     --------
 
      TOTAL LIABILITIES                                            447,224         396,671      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; 6,514,694, 3,243,846, and 6,501,332 shares
   issued and outstanding at September 30, 1998 and 1997
   and at December 31, 1997, respectively                            8,144           4,055        8,127
 Capital Surplus                                                     6,285           6,191        6,251
 Retained Earnings                                                  30,429          29,027       26,491
 Unrealized Gain on Investment Securities
    Available for Sale, Net of Tax                                     661             254          243
 Treasury Stock at Cost (28,200 shares at                             (514)            -0-          -0-
                                                                  --------        --------     --------
    September 30, 1998)
      TOTAL SHAREHOLDERS' EQUITY                                    45,005          39,527       41,112
                                                                  --------        --------     --------
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $492,229        $436,198     $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)                                 (Unaudited)
                                                             For the Nine Months Ended September 30,   Year Ended December 31,
                                                             ---------------------------------------
                                                                    1998                1997                      1997
                                                                   -------             -------                   -------
                                                              (In Thousands, Except Per Share Data)
<S>                                                          <C>                       <C>             <C>
INTEREST INCOME
  Interest and Fees on Loans                                       $20,789             $17,594                   $24,063
  Interest and Dividends on Investment Securities:
    Taxable                                                          5,026               5,243                     6,878
    Exempt from Federal Income Taxes                                    38                  15                        23
  Interest on Due From Time                                             30                 -0-                       -0-
  Interest on Federal Funds Sold                                     1,505                 593                     1,008
                                                                   -------             -------                   -------
 
      TOTAL INTEREST INCOME                                         27,388              23,445                    31,972
                                                                   -------             -------                   -------
 
INTEREST EXPENSE
  Interest on Deposits                                               9,500               7,836                    10,773
  Interest on Securities Sold Under
   Agreements to Repurchase                                            496                 369                       528
                                                                   -------             -------                   -------
 
      TOTAL INTEREST EXPENSE                                         9,996               8,205                    11,301
                                                                   -------             -------                   -------
 
      NET INTEREST INCOME                                           17,392              15,240                    20,671
 
LESS: PROVISION FOR LOAN LOSSES - NOTE 3                               539                 633                       900
                                                                   -------             -------                   -------
 
      NET INTEREST INCOME AFTER
       PROVISION FOR LOAN LOSSES                                    16,853              14,607                    19,771
                                                                   -------             -------                   -------
 
NON-INTEREST INCOME
  Service Charges and Fees on Deposits                               1,504               1,389                     1,890
  Loss on Sale of Investment Securities                                -0-                  (1)                       (1)
  Other Income                                                       1,235               1,019                     1,376
                                                                   -------             -------                   -------
 
      TOTAL NON-INTEREST INCOME                                      2,739               2,407                     3,265
                                                                   -------             -------                   -------
 
NON-INTEREST EXPENSE
  Salaries and Employee Benefits                                     6,302               5,470                     7,524
  Occupancy Expense - Net                                              692                 573                       774
  Furniture and Equipment Expense                                      882                 668                       919
  Other Real Estate Owned Expense - Net                                 11                 (29)                      (63)
  Other Expense - Note 8                                             2,594               2,368                     3,164
                                                                   -------             -------                   -------
 
      TOTAL NON-INTEREST EXPENSE                                    10,481               9,050                    12,318
                                                                   -------             -------                   -------
 
      INCOME BEFORE INCOME TAXES                                     9,111               7,964                    10,718
 
APPLICABLE INCOME TAXES - NOTE 9                                     3,149               2,738                     3,678
                                                                   -------             -------                   -------
 
      NET INCOME                                                   $ 5,962             $ 5,226                   $ 7,040
                                                                   =======             =======                   =======
 
      NET INCOME PER SHARE - NOTE 14
          Basic                                                    $   .92             $   .81                   $  1.09
          Diluted                                                      .87                 .77                      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
                                                                 September 30,
                                                      -----------------------------------
                                                          1998                  1997
                                                         ------                ------
                                                     (In Thousands, Except Per Share Data)
<S>                                                  <C>                <C>
INTEREST INCOME
 Interest and Fees on Loans                              $7,136                $6,264
 Interest and Dividends on Investment Securities:                    
   Taxable                                                1,754                 1,705
   Exempt from Federal Income Taxes                          12                     6
 Interest on Due From Time                                   30                   -0-
 Interest on Federal Funds Sold                             516                   274
                                                         ------                ------
                                                                     
    TOTAL INTEREST INCOME                                 9,448                 8,249
                                                         ------                ------
                                                                     
INTEREST EXPENSE                                                     
 Interest on Deposits                                     3,270                 2,840
 Interest on Securities Sold Under Agreements                        
  to Repurchase                                             189                   112
                                                         ------                ------
                                                                     
    TOTAL INTEREST EXPENSE                                3,459                 2,952
                                                         ------                ------
                                                                     
    NET INTEREST INCOME                                   5,989                 5,297
                                                                     
LESS: PROVISION FOR LOAN LOSSES - NOTE 3                    131                   281
                                                         ------                ------
                                                                     
    NET INTEREST INCOME AFTER                                        
     PROVISION FOR LOAN LOSSES                            5,858                 5,016
                                                         ------                ------
                                                                     
NON-INTEREST INCOME                                                  
 Service Charges and Fees on Deposits                       500                   489
 Other Income                                               413                   336
                                                         ------                ------
                                                                     
    TOTAL NON-INTEREST INCOME                               913                   825
                                                         ------                ------
                                                                     
NON-INTEREST EXPENSE                                                 
 Salaries and Employee Benefits                           2,200                 1,895
 Occupancy Expense - Net                                    221                   186
 Furniture and Equipment Expense                            298                   237
 Other Real Estate Owned (Income) Expense - Net              11                   (21)
 Other Expense                                              810                   831
                                                         ------                ------
                                                                     
    TOTAL NON-INTEREST EXPENSE                            3,540                 3,128
                                                         ------                ------
                                                                     
    INCOME BEFORE INCOME TAXES                            3,231                 2,713
                                                                     
APPLICABLE INCOME TAXES - NOTE 9                          1,136                   931
                                                         ------                ------
                                                                     
    NET INCOME                                           $2,095                $1,782
                                                         ======                ======
                                                                     
    NET INCOME PER SHARE                                             
      Basic                                              $  .33                $  .28
      Diluted                                               .31                   .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 NINE MONTHS ENDED SEPTEMBER 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 Data)
<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
 Nine Months Ended
 September 30, 1997                                                     5,226                                    5,226
 
Stock Options Exercised            10,810          14          55                                                   69
 
Cash Dividend $.135
 Per Share                                                               (874)                                    (874)
 
Securities Available-for-
 Sale Adjustment                                                                         26                         26
                                ---------   ---------   ---------   ---------     ---------      ---------   --------- 
BALANCE AT
 SEPTEMBER 30, 1997             3,243,846       4,055       6,191      29,027           254            -0-      39,527
 
Net Income for the
 Three Months Ended
 December 31, 1997                                                      1,814                                    1,814
 
Stock Options Exercised            10,980          14          60                                                   74
 
Two-for-One Stock Split         3,246,506       4,058                  (4,058)                                     -0-
 
Cash Dividend $.045
 Per Share                                                               (292)                                    (292)
 
Securities Available-for-
 Sale Adjustment                                                                        (11)                       (11)
                                ---------   ---------   ---------   ---------     ---------      ---------   --------- 
BALANCE AT
 DECEMBER 31, 1997              6,501,332       8,127       6,251      26,491           243            -0-      41,112
 
Purchase of Stock Held
 In Treasury                                                                                        (1,422)     (1,422)
 
Retirement of Stock Held
 In Treasury                      (45,000)        (56)                   (852)                         908         -0-
 
Net Income for the
 Nine Months Ended
 September 30, 1998                                                     5,962                                    5,962
 
Stock Options Exercised            58,362          73          34                                                  107

Cash Dividend $.18
 Per Share                                                             (1,172)                                  (1,172)
 
Securities Available-for-
 Sale Adjustment                                                                        418                        418
                                ---------   ---------   ---------   ---------     ---------      ---------   --------- 
BALANCE AT
 SEPTEMBER 30, 1998             6,514,694   $   8,144   $   6,285   $  30,429     $     661      $    (514)  $  45,005
                                =========   =========   =========   =========     =========      =========   ========= 
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                    AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
                                                                        (Unaudited)        
                                                                       September 30,        (Unaudited) 
                                                                  ----------------------    December 31, 
                                                                    1998           1997         1997
                                                                  --------       --------     --------
                                                                              (In Thousands)
<S>                                                               <C>            <C>          <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net Income                                                      $  5,962       $  5,226     $  7,040
                                                                  --------       --------     --------
  Adjustments to Reconcile Net Income to Net
    Cash Provided by Operating Activities:
    Depreciation and Amortization                                      775            604          840
    Net Premium Amortization
      of Investment Securities                                          85             76           97
    Provision for Loan Losses                                          539            633          900
    Deferred Income Taxes                                              364            114          233
    Loss on Sale of Investment Securities                              -0-              1            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                   (3)            12           12
    Increase  in Accrued Income and Other Assets                    (1,411)        (1,230)      (2,796)
    Increase in Accrued Expenses and Other Liabilities               1,683            228          333
                                                                  --------       --------     --------
 
      Total Adjustments                                              2,030            421        ( 397)
                                                                  --------       --------     --------
      NET CASH PROVIDED BY OPERATING ACTIVITIES                      7,992          5,647        6,643
                                                                  --------       --------     --------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Increase in Federal Funds Sold                                    (1,375)        (3,135)     (15,410)
  Proceeds from Matured and Prepaid Investment Securities
    . Held-to-Maturity                                              17,627         14,362       21,486
    . Available-for-Sale                                            33,727         11,709       14,906
  Proceeds from Sales of Investment Securities                         -0-          4,506        4,506
  Purchase of Investment Securities
    . Held-to-Maturity                                             (17,617)        (8,285)     (12,884)
    . Available-for-Sale                                           (48,385)       (11,622)     (16,702)
  Loans Originated and Principal Repayments, Net                   (26,165)       (42,932)     (56,363)
  Recoveries of Loans Previously Charged-Off                           198            277          439
  Proceeds from Sale of Premises and Equipment                           3             32            1
  Proceeds from Sale of Other Real Estate                               82              1           32
  Purchases of Premises and Equipment                                 (819)        (1,309)      (1,664)
                                                                  --------       --------     --------
 
      NET CASH USED BY INVESTING ACTIVITIES                        (42,724)       (36,396)     (61,653)
                                                                  --------       --------     --------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net Increase in Demand Deposits, Savings
   Accounts and Interest Bearing Transaction Accounts               21,095         25,734       41,081
  Net Increase  in Certificates of Deposit                           1,615         13,466       15,620
  Net Increase (Decrease) in Repurchase Agreements                   4,149         (2,925)       1,480
  Payments of Cash Dividends                                       ( 1,172)          (874)      (1,166)
  Proceeds from Stock Options Exercised                                107             69          143
  Purchase of Treasury Stock                                       ( 1,422)           -0-          -0-
                                                                  --------       --------     --------
 
       NET CASH PROVIDED BY FINANCING ACTIVITIES                    24,372         35,470       57,158
                                                                  --------       --------     --------
 
NET INCREASE (DECREASE) IN CASH AND DUE FROM
  BANKS                                                            (10,360)         4,721        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                          $ 20,127       $ 33,060     $ 30,487
                                                                  ========       ========     ========
</TABLE>


8
<PAGE>
 
                    SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONT'D
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                    AND FOR THE YEAR ENDED DECEMBER 31, 1997
                                  (Unaudited)



SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES:
 
                                   (Unaudited)          
                                  September 30,         (Unaudited) 
                          ----------------------------  December 31, 
                               1998           1997         1997
                          --------------  ------------  -----------
                                  (In Thousands)
 
(1)  Interest Paid               $9,998         $8,190     $11,260
(2)  Income Taxes Paid            3,649          2,885       3,876
 
                                                                               9
<PAGE>
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    SUMMIT BANCSHARES, INC. AND SUBSIDIARIES
       FOR THE NINE MONTHS ENDED SEPTEMBER 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
     nine months of 1998 the average cash balance maintained at the Federal
     Reserve Bank was $644,000. Compensating balances held at correspondent
     banks, to minimize service charges, averaged approximately $16,461,000
     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>
                                                                  September 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                             $ 13,991    $  319      $  -0-    $ 14,310
  U.S. Government Agencies                                         
   and Corporations                                      25,377       401          (2)     25,776
  U.S. Government Agency Mortgage                                  
   Backed Securities                                      5,636        40          (3)      5,673
  Obligations of States and                                        
   Political Subdivisions                                 1,032        12         -0-       1,044
                                                       --------    ------        ----    --------
                                                                   
    Total Held-to-Maturity Securities                    46,036       772          (5)     46,803
                                                       --------    ------        ----    --------
                                                                   
Investment Securities - Available-for-Sale                         
  U.S.  Treasury Securities                              38,045       701         -0-      38,746
  U.S. Government Agencies                                         
   and Corporations                                      25,149       278          (6)     25,421
  U.S. Government Agency Mortgage                                  
   Backed Securities                                      9,531        31          (2)      9,560
  Federal Reserve and Federal Home Loan Bank Stock        1,060       -0-         -0-       1,060
                                                       --------    ------        ----    --------
                                                                   
     Total Available-for-Sale Securities                 73,785     1,010          (8)     74,787
                                                       --------    ------        ----    --------
                                                                   
        Total Investment Securities                    $119,821    $1,782        $(13)   $121,590
                                                       ========    ======        ====    ========
</TABLE>

     In the above schedule the amortized cost of Total Held-to-Maturity
Securities of $46,036,000 and the fair value  of Total Available-for-Sale
Securities of $74,787,000 are reflected in Investment Securities on the
consolidated balance sheet as of September 30, 1998 for a total of $120,823,000.
A net unrealized gain of $1,002,000 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 $42,081,000 at September
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 $43,659,000 at September 30, 1998.
<TABLE>
<CAPTION>
                                                                   September 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                            $  22,980  $      160  $       (23) $  23,117
  U.S. Government Agencies
   and Corporations                                      15,217          31          (16)    15,232
  U.S. Government Agency Mortgage
   Backed Securities                                      8,925          48           (8)     8,965
  Obligations of States and
   Political Subdivisions                                   590           4          -0-        594
                                                      ---------  ----------  -----------  ---------
 
 
    Total Held-to-Maturity Securities                    47,712         243          (47)    47,908
                                                      ---------  ----------  -----------  ---------
 
Investment Securities - Available-for-Sale
  U.S.  Treasury Securities                              52,466         377          (53)    52,790
  U.S. Government Agencies
    and Corporations                                      2,991          12          -0-      3,003
  U.S. Government Agency Mortgage
    Backed Securities                                     1,838          49          -0-      1,887
  Federal Reserve and Federal Home Loan Bank Stock          915         -0-          -0-        915
                                                      ---------  ----------  -----------  ---------
 
    Total Available-for-Sale Securities                  58,210         438          (53)    58,595
                                                      ---------  ----------  -----------  ---------
 
        Total Investment Securities                   $ 105,922  $      681  $      (100) $ 106,503
                                                      =========  ==========  ===========  =========
</TABLE>

     In the above schedule the amortized cost of Total Held-to-Maturity
Securities of $47,712,000 and the fair value  of Total Available-for-Sale
Securities of $58,595,000 are reflected in Investment Securities on the
consolidated balance sheet as of September 30, 1997 for a total of $106,307,000.
A net unrealized gain of $385,000 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 nine months
of 1998.  Proceeds from sales of securities were $4,506,000 during the first
nine months of 1997 with gains of $2,000 and losses of $3,000 were realized. 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):
 
                                       September  30,       December 31,
                                   -----------------------
                                     1998           1997        1997
                                   --------       --------    --------

Commercial                         $130,780       $122,643    $127,800
Real Estate Mortgage                 99,191         85,084      90,638
Real Estate Construction             40,067         24,725      26,290
Loans to Individuals                 32,473         31,094      32,003
Less:  Unearned Discount               (539)          (762)       (662)
                                   --------       --------    --------
                                    301,972        262,784     276,069
Allowance for Loan Losses            (4,663)        (3,682)     (4,065)
                                   --------       --------    --------
 
     Loans - Net                   $297,309       $259,102    $272,004
                                   ========       ========    ========

                                                                              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>
                                                Nine Months Ended September 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                         539               633            900
                                                               
Loans Charged-Off                                    (139)             (200)          (246)
Recoveries of Loans Previously                                 
 Charged-Off                                          198               277            439
                                                   ------            ------         ------
                                                               
          Net Loans (Charged-Off) Recovered            59                77            193
                                                   ------            ------         ------
                                                               
Balance, End of Period                             $4,663            $3,682         $4,065
                                                   ======            ======         ======
</TABLE>

    The provisions for loan losses charged to operating expenses during the nine
months ended September 30, 1998 and September 30,1997 of $539,000 and $633,000,
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 September 30, 1998, the recorded investment in loans that are considered
to be impaired under Statement of Financial Accounting Standards No. 114 was
$6,159,000 (of which $6,159,000 were on non-accrual status).  The related
allowance for loan losses for these loans was $1,137,000.  The average recorded
investment in impaired loans during the nine months ended September 30, 1998 was
approximately $4,812,000.  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>
                                                              September 30,         
                                                          ----------------------      December 31, 
                                                           1998           1997           1997
                                                          -------        -------        -------
<S>                                                       <C>            <C>            <C>
                                                                                    
Land                                                      $ 1,446        $ 2,170        $ 1,446
Buildings and Improvements                                  7,811          7,448          7,532
Furniture & Equipment                                       7,000          5,664          6,661
                                                          -------        -------        -------
                                                                                    
    Total Cost                                             16,257         15,282         15,639
Less:  Accumulated Amortization and Depreciation           (8,297)        (7,485)        (7,723)
                                                          -------        -------        -------
                                                                                    
    Net Book Value                                        $ 7,960        $ 7,797        $ 7,916
                                                          =======        =======        =======
</TABLE>
NOTE 5 - Other Real Estate

    The carrying value of other real estate is as follows (in thousands):
<TABLE>
<CAPTION>
                                                              September 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):
 
                                                                  
                                Nine Months Ended September 30,    Year Ended 
                                --------------------------------  December 31, 
                                      1998             1997           1997
                                ----------------  --------------  -------------
 
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
                                     =====            =====           =====
 

    There were no direct writedowns of other real estate charged to income for
the nine months ended September 30, 1998; however there was $4,000 for the nine
months ended September 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>
                                                        September 30,     
                                                   ---------------------- December 31, 
                                                     1998          1997       1997
                                                   --------      --------   --------
<S>                                                <C>           <C>        <C>
 
Noninterest-Bearing Demand Deposits                $117,982      $114,198   $126,398
                                                   --------      --------   --------
Interest-Bearing Deposits:
 Interest-Bearing Transaction
     Accounts and Money Market Funds                148,277       132,619    133,139
 Savings                                             68,480        51,480     54,107
 Savings Certificates - Time                         52,489        51,926     51,685
 Certificates of Deposits $100,000 or more           36,328        33,295     35,690
 Other                                                  878           705        705
                                                   --------      --------   --------
   Total                                            306,452       270,025    275,326
                                                   --------      --------   --------
       Total Deposits                              $424,434      $384,223   $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>
                                                                                           
                                                     Nine Months Ended September 30,       Year Ended  
                                                     --------------------------------      December 31, 
                                                          1998              1997              1997
                                                         -------           -------           -------
<S>                                                      <C>               <C>               <C>
Securities Sold Under Repurchase Agreements:                                         
    Average                                              $14,450           $11,050           $11,668
    Period-End                                            18,838            10,284            14,689
    Maximum Month-End Balance During Period               18,838            13,212            15,263
Interest Rate                                                                        
    Average                                                 4.59%             4.35%             4.45%
    Period-End                                              4.59              4.51              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>
                                                                     
                                   Nine Months Ended September 30,    Year Ended 
                                   -------------------------------   December 31, 
                                        1998            1997             1997
                                       ------          ------           ------
<S>                                    <C>             <C>              <C>
Business Development                   $  459          $  459           $  588
Legal and Professional Fees               362             400              496
Printing and Supplies                     305             267              373
Regulatory Fees and Assessments           123             123              160
Other                                   1,345           1,119            1,547
                                       ------          ------           ------
                                                                 
  Total                                $2,594          $2,368           $3,164
                                       ======          ======           ======
</TABLE>

NOTE 9 - Income Taxes

  Federal income taxes included in the consolidated balance sheets were as
follows (in thousands):
<TABLE>
<CAPTION>
                                               September 30,             
                                            -------------------          December 31, 
                                            1998           1997              1997
                                            -----         -----              -----
<S>                                         <C>           <C>                <C>
Current Tax Asset (Liability)               $ 129         $  61              $  (7)
Deferred Tax Asset                            820           547                672
                                            -----         -----              -----
                                                               
  Total Included in Other Assets            $ 949         $ 608              $ 665
                                            =====         =====              =====
</TABLE>
  The deferred tax asset at September 30, 1998 of $820,000 included $341,000
related to unrealized gains on Available-for-Sale Securities.

  The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
                                                                             
                                        Nine Months Ended September 30,      Year Ended  
                                       ---------------------------------     December 31, 
                                            1998             1997                1997
                                           ------           ------              ------
<S>                                    <C>                  <C>              <C>
Federal Income Tax Expense
 Current                                   $3,513           $2,852              $3,911
 Deferred                                    (364)            (114)               (233)
                                           ------           ------              ------
                                                                         
   Total Federal Income Tax Expense        $3,149           $2,738              $3,678
                                           ======           ======              ======
                                                                         
   Effective Tax Rates                       34.6%            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>
                                                                                
                                              Nine Months Ended September 30,   Year Ended  
                                              -------------------------------   December 31, 
                                                  1998             1997             1997
                                                 ------           ------           ------
<S>                                           <C>                 <C>           <C>
Federal Income Taxes at Statutory
 Rate of 34%                                     $3,114           $2,708           $3,644
Effect of Tax Exempt Interest Income                (15)              (9)             (12)
Non-deductible Expenses                              39               36               47
Other                                                11                3               (1)
                                                 ------           ------           ------
                                                                          
 Income Taxes Per Income Statement               $3,149           $2,738           $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 September 30, 1998, outstanding documentary and standby letters of credit
totaled $2,868,000 and commitments to extend credit totaled $105,247,000.


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 nine months ended September 30, 1998.

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

                                               Shares Under Option
                                     ----------------------------------------
                                         Nine Months
                                            Ended              Year Ended
                                     September  30, 1998   December 31, 1997
                                     --------------------  ------------------
 
Outstanding, Beginning of Period            543,112             464,100
Additional Options Granted During       
  the Period                                  3,000             118,752
Forfeited During the Period                  (5,400)             (4,480)
Exercised During the Period                 (64,662)            (35,260)
                                            -------             -------
                                        
  Outstanding, End of Period                476,050             543,112
                                            =======             =======

     Options outstanding at September 30, 1998 ranged in price from $3.00 to
$19.25 per share with a weighted average exercise price of $5.26 and 351,758
shares exercisable.  At September 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
                                                                           ======    ======
</TABLE> 
 
Prepaid pension cost included the following components (in thousands):
<TABLE> 
<CAPTION> 
                                                                         Year Ended December 31,
                                                                         -----------------------
                                                                            1997         1996
                                                                           ------       ------
<S>                                                                      <C>            <C> 
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 September 30, 1998 was $2,074,000. A
contribution to the plan of $407,000 has been made in 1998.  Prepaid pension
cost at September 30, 1998 was $529,000.

     The accrual of benefits for participants was curtailed effective August 31,
1998.  This curtailment of benefits is in preparation of terminating the plan in
1999.

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 $183,000 and $243,000 during the first nine 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)
 
                                              September 30,      
                                        ------------------------ December 31, 
                                           1998          1997        1997
                                        ----------    ----------  ----------
 
Net income                              $    5,962    $    5,226  $    7,040
                                        ==========    ==========  ==========
Weighted average number of common
 shares used in Basic EPS                6,503,876     6,474,342   6,478,795
Effect of dilutive stock options           329,947       304,973     321,081
                                        ----------    ----------  ----------
Weighted number of common shares
 and dilutive potential common
 stock used in Diluted EPS               6,833,823     6,779,315   6,799,876
                                        ==========    ==========  ==========
 

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):
 
                                       September 30,
                                     ------------------
                                       1998      1997
                                     --------  --------
 
Financial Instruments Whose
  Contract Amounts Represent
     Credit Risk:

     Commitments to Extend Credit    $105,247   $90,164  

     Documentary and Standby
       Letters of Credit                2,868     3,970

    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 nine months of 1998, 73,200 shares were purchased by the
Corporation through a similar repurchase plan in the open market and
subsequently 45,000 shares have been canceled.


NOTE 19 - Subsequent Event

    On October 20, 1998, the Board of Directors of the Corporation approved a
quarterly dividend of $.06 per share to be paid on November 16, 1998 to
shareholders of record on November 2, 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>
                                                            September 30,
                                              ------------------------------------------
                                                      1998                  1997
                                              --------------------  --------------------
                                              Carrying     Fair     Carrying     Fair
                                               Amount      Value     Amount      Value
                                              ---------  ---------  ---------  ---------
<S>                                           <C>        <C>        <C>        <C>
   Financial Assets
     Cash and due from banks                  $ 20,127   $ 20,127   $ 33,060   $ 33,060
     Federal funds sold & due from time         37,135     37,135     23,485     23,485
     Securities                                120,560    121,590    106,307    106,503
     Loans                                     301,972    301,548    262,784    261,734
     Reserve for loan losses                    (4,663)    (4,663)    (3,682)    (3,682)
 
   Financial Liabilities
     Deposits                                  424,434    424,776    384,223    384,451
     Securities sold under repurchase
      agreements                                18,838     18,838     10,284     10,284
 
   Off-balance Sheet Financial Instruments
     Loan commitments                                     105,247                90,164
     Letters of credit                                      2,868                 3,970
</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 Nine Months Ended September 30,     
                                                ---------------------------------------     Year Ended 
                                                       1998                1997          December 31, 1997
                                                ------------------  -------------------  -----------------
<S>                                             <C>                 <C>                  <C>
      Net Income                                       $5,962             $5,226              $7,040
      Other Comprehensive Income:                                                         
        Unrealized gain (loss) on securities                                              
        available-for-sale, net of tax                    418                 26                  15
                                                       ------             ------              ------
                                                                                          
          Comprehensive Income                         $6,380             $5,252              $7,055
                                                       ======             ======              ======
</TABLE>

                                                                              21
<PAGE>
 
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Summary

     Net income for the third quarter of 1998 was $2,095,000, or $.31 diluted
earnings per share, compared with $1,782,000, or $.26 diluted earnings per
share, for the third quarter of 1997.  On a per share basis, diluted net income
increased 19.2% over the third quarter of the prior year.  Net income for the
first nine months of 1998 was $5,962,000, or .87 per diluted earnings per share,
compared with $5,226,000, or .77 per diluted earnings per share for the first
nine months of 1997.  Per share amounts are based on average shares outstanding
of 6,503,876 for the first nine months of 1998 and 6,474,342 for the comparable
period of 1997 adjusted to 6,833,823 and 6,779,315, respectively to reflect
stock options granted.  Also, shares outstanding reflect a two-for-one stock
split in December 1997.

     Outstanding loans at September 30, 1998 of $302.0 million represented an
increase of $39.2 million, or 14.9%, over September 30,1997 and an increase of
$25.9 million, or 9.4%, from December 31, 1997.

     Total deposits at September 30, 1998 of $424.4 million represented an
increase of $40.2 million, or 10.5%, over September 30,1997 and an increase of
$22.7million, or 5.7%, from December 31, 1997.
 
     In the third quarter, net interest income increased 13.1% over the previous
year.  An increase in non-interest expense of 13.2% partially offset the
increase in net interest income.

     The following table summarizes the Corporation's performance for the three
months and nine months ended September 30, 1998 and 1997 (tax equivalent basis
and dollars in thousands).
<TABLE> 
<CAPTION> 
                                           Three Months Ended       Nine Months Ended
                                             September 30,             September 30, 
                                           -----------------        -------------------
                                            1998       1997           1998       1997
                                           ------     ------        -------     -------
<S>                                        <C>        <C>           <C>         <C>
Interest Income                            $9,454     $8,254        $27,410     $23,458
Interest Expense                            3,459      2,952          9,996       8,205
                                           ------     ------        -------     -------
 Net Interest Income                        5,995      5,302         17,414      15,253
Provision for Loan Loss                       131        281            539         633
                                           ------     ------        -------     -------
                                                                        
 Net Interest Income After                                              
   Provision for Loan Loss                  5,864      5,021         16,875      14,620
Non-Interest Income                           913        825          2,739       2,407
Non-Interest Expense                        3,540      3,128         10,481       9,050
                                           ------     ------        -------     -------
                                                                        
 Income Before Income Tax                   3,237      2,718          9,133       7,977
Income Tax Expense                          1,142        936          3,171       2,751
                                           ------     ------        -------     -------
                                                                        
   Net Income                              $2,095     $1,782        $ 5,962     $ 5,226
                                           ======     ======        =======     =======
                                                                        
Net Income per Share-                                                   
 Basic                                     $  .33     $  .28        $   .92     $   .81
 Diluted                                      .31        .26            .87         .77
                                                                        
Return on Average Assets                     1.71%      1.68%          1.70%       1.73%
                                                                        
Return on Average Stockholders' Equity      18.75%     18.17%         18.54%      18.74%
</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 third quarter of 1998 and 1997 (rates on tax equivalent basis).
<TABLE>
<CAPTION>
                                                            Three Months ended September 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 Fr Time         $ 38,743     $  546        5.57%   $ 19,432     $  273        5.58%
  Investment Securities (Taxable)           115,539      1,754        6.03     110,201      1,705        6.14
  Investment Securities (Tax-exempt)          1,101         18        6.81         592         10        6.55
  Loans, Net of Unearned Discount/(1)/      296,573      7,136        9.55     254,428      6,266        9.77
                                           --------     ------                --------     ------
    Total Earning Assets                    451,956      9,454        8.30     384,653      8,254        8.51
                                                        ------                             ------
 
Non-interest Earning Assets:
  Cash and Due From Banks                    21,926                             26,317
  Other Assets                               15,651                             13,656
  Allowance for Loan Losses                  (4,547)                            (3,545)
                                           --------                           --------
    Total Assets                           $484,986                           $421,081
                                           ========                           ========
 
Interest-Bearing Liabilities:
  Interest-Bearing Transaction
    Accounts and Money Market Funds        $146,627      1,369        3.70    $131,601      1,211        3.65
  Savings & Premium Savings                  65,542        731        4.43      50,514        548        4.30
  Savings Certificates                       52,098        664        5.06      51,080        646        5.02
  Certificates of Deposit
    $100,000 or more                         36,645        494        5.35      31,719        424        5.30
  Other Time                                    868         12        5.59         705         10        5.54
  Other Borrowings                           16,395        189        4.57       9,890        113        4.52
                                           --------     ------                --------     ------
    Total Interest-Bearing Liabilities      318,175      3,459        4.31     275,509      2,952        4.25
                                                        ------                             ------
 
Non-interest Bearing Liabilities:
  Demand Deposits                           119,965                            104,482
  Other Liabilities                           2,542                              2,171
  Shareholders' Equity                       44,304                             38,919
                                           --------                           --------
    Total Liabilities and
      Shareholders' Equity                 $484,986                           $421,081
                                           ========                           ========
 
Net Interest Income and Margin
 (Tax-equivalent Basis)/(2)/                            $5,995        5.26                 $5,302        5.47
                                                        ======                             ======
</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 nine months ended September 30, 1998 and 1997 (rates on tax
equivalent basis).
<TABLE>
<CAPTION>
                                                                      Nine Months Ended September 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 Fr Time                $ 36,993    $ 1,535       5.55%        $ 14,239    $   589      5.53%
  Investment Securities (Taxable)                  109,895      5,026       6.12          113,676      5,243      6.17
  Investment Securities (Tax-exempt)                 1,126         60       6.93              473         23      6.51
  Loans, Net of Unearned Discount/(1)/             288,200     20,789       9.65          242,215     17,599      9.71
                                                  --------    -------                    --------    -------  
    Total Earning Assets                           436,214     27,410       8.40          370,603     23,454      8.46
                                                              -------                                -------  
                                                                                                              
Non-interest Earning Assets:                                                                                  
  Cash and Due From Banks                           22,087                                 24,283             
  Other Assets                                      15,546                                 13,144             
  Allowance for Loan Losses                         (4,333)                                (3,365)            
                                                  --------                               --------             
    Total Assets                                  $469,514                               $404,665             
                                                  ========                               ========             
                                                                                                              
Interest-Bearing Liabilities:                                                                                 
  Interest-Bearing Transaction                                                                                
    Accounts & Money Market Funds                 $141,124      3,867       3.66         $127,444      3,380      3.55
  Savings & Premium Savings                         65,273      2,169       4.44           50,248      1,562      4.16
  Savings Certificates                              51,878      1,972       5.08           48,414      1,773      4.90
  Certificates of Deposit                                                                                     
    $100,000 or more                                36,447      1,454       5.33           28,672      1,103      5.14
  Other Time                                           909         38       5.63              594         23      5.27
  Other Borrowings                                  14,450        496       4.59           11,107        360      4.33
                                                  --------    -------                    --------    -------  
    Total Interest-Bearing Liabilities             310,081      9,996       4.31          266,479      8,201      4.11
                                                              -------                                -------  
                                                                                                              
Non-interest Bearing Liabilities:                                                                             
  Demand Deposits                                  114,024                                 98,766             
  Other Liabilities                                  2,409                                  2,147             
  Shareholders' Equity                              43,000                                 37,273             
                                                  --------                               --------             
    Total Liabilities and                                                                                     
      Shareholders' Equity                        $469,514                               $404.665             
                                                  ========                               ========             
                                                                                                              
Net Interest Income and Margin                                                                                
 (Tax-equivalent Basis)/(2)/                                  $17,414       5.34                     $15,253      5.50
                                                              =======                                =======
</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 third quarter of 1998 was
$5,995,000 which represented an increase of $693,000, or 13.1%, over the third
quarter of 1997.  This increase was heavily contributed to by a 16.6% increase
in average loans for the third 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 September 30, 1998 and
1997.
<TABLE>
<CAPTION>
                                                       ANALYSIS OF CHANGES IN NET INTEREST INCOME
                                                                  (Dollars in Thousands)
 
                                          3rd Qtr. 1998 vs. 3rd Qtr. 1997      Nine Months 1998 vs. Nine 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 & Due From Time       $  268     $     0     $  268            $  944      $   2      $  946
 Investment Securities (Taxable)             219        (167)        52              (174)       (43)       (217)
 Investment Securities (Tax-exempt)            9           0          9                35          2          37
 Loans, Net of Unearned Discount           1,766        (895)       871             3,371       (181)      3,190
                                          ------     -------     ------            ------      -----      ------
                                                                                                       
 Total Interest Income                     2,262      (1,062)     1,200             4,176       (220)      3.956
                                          ------     -------     ------            ------      -----      ------
                                                                                                       
Interest-Bearing Liabilities:                                                                          
 Deposits                                    392          39        431             1,281        378       1,659
 Other Borrowings                             75           1         76               113         23         136
                                          ------     -------     ------            ------      -----      ------

 Total Interest Expense                      467          40        507             1,394        401       1,795
                                          ------     -------     ------            ------      -----      ------

Net Interest Income                      $ 1,795     $(1,102)  $    693           $ 2,782     $ (621)    $ 2,161
                                          ======     =======     ======            ======      =====      ======
</TABLE> 

Allowance for Loan Losses and Non-Performing Assets

  The Corporation's allowance for loan losses was $4,663,000, or 1.54% of total
loans, as of September 30, 1998 compared to $3,682,000, or 1.40% of total loans,
as of September 30,1997.

 Transactions in the provision for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
                                          Three Months Ended                Nine Months Ended
                                             September 30,                    September 30,
                                         --------------------            ----------------------
                                          1998          1997              1998            1997
                                         ------        ------            ------          ------
<S>                                      <C>           <C>               <C>             <C>
                                                                  
Balance, Beginning of Period             $4,413        $3,512            $4,065          $2,972
Provisions, Charged to Income               131           281               539             633
                                                                  
Loans Charged-Off                           (24)         (129)             (139)           (200)
Recoveries of Loans Previously                                    
    Charged-Off                             143            18               198             277
                                         ------        ------            ------          ------
                                                                  
            Net Loans (Charged-Off)                               
               Recovered                    119          (111)               59              77
                                         ------        ------            ------          ------
                                                                  
Balance, End of Period                   $4,663        $3,682            $4,663          $3,682
                                         ======        ======            ======          ======
</TABLE>

                                                                              25
<PAGE>
 
   The following table summarizes the non-performing assets as of the end of the
last five quarters (in thousands).
<TABLE>
<CAPTION>
                                September 30,   June 30,    March 31,   December 31,  September 30,   
                                    1998          1998        1998         1997          1997
                                   ------        ------      ------       ------        ------
<S>                             <C>             <C>         <C>         <C>            <C>
Non-Accrual Loans                  $6,213        $6,830      $2,885       $2,112        $1,245
Other Real Estate Owned                71            71         151          151           151
                                   ------        ------      ------       ------        ------
                                                                                     
  Total Non-Performing Assets      $6,284        $6,901      $3,036       $2,263        $1,396
                                   ======        ======      ======       ======        ======
</TABLE>

     Non-accrual loans to total loans were 2.06% at September 30, 1998 and non-
performing assets were 2.17% of loans and other real estate owned at the same
date.  As of September 30, 1998, loans to four borrowers represent approximately
88% of the loans on non-accrual and three of four 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>
                                 September 30,  June 30,   March 31,   December 31,  September 30,
                                    1998         1998        1998         1997           1997
                                   -------      -------     -------      ------         ------
<S>                              <C>            <C>        <C>         <C>           <C>
Non-Performing Loans               $ 6,482      $ 6,830     $ 2,885      $2,112         $1,245
Criticized Loans                    11,524       11,737      12,484       9,295          7,896
Allowance for Loan Losses            4,663        4,413       4,192       4,065          3,681
Allowance for Loan Losses                                                           
   as a Percent of:                                                                 
     Non-Performing Loans               72%          65%        145%        193%           296%
     Criticized Loans                   40           38          34          44             47
</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                 Nine Months Ended
                                               September 30,                       September 30,
                                      -----------------------------       -----------------------------
                                       1998       1997     % Change         1998       1997    % Change
                                      -------    -------   --------       --------   --------  --------
<S>                                   <C>        <C>       <C>            <C>        <C>       <C>
Service Charges on Deposit Accounts    $ 500      $ 489        2.3%        $1,504     $1,389       8.3%
Non-recurring Income                      32         33         --            186        120        --
Other Non-interest Income                381        303       25.3          1,049        898      16.7
                                       -----      -----       ----         ------     ------
                                                                                    
  Total Non-interest Income            $ 913      $ 825       10.5         $2,739     $2,407      13.7
                                       =====      =====                    ======     ======
</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 September 30,           Nine Months Ended September 30,    
                                         1998        1997      % Change             1998       1997      % Change
                                        ------      ------      ------            -------     ------      ------ 
<S>                                     <C>         <C>         <C>                <C>        <C>         <C>
Salaries & Employee Benefits            $2,200      $1,895        16.1%           $ 6,302     $5,470        15.2%
Occupancy Expense - Net                    221         186        18.8                692        573        20.8
Furniture and Equipment Expense            298         237        25.7                882        668        32.0
Other Real Estate Expense - Net             11         (21)         --                 11        (29)         --
Other Expenses:                                                                                         
 Business Development                      156         186       (16.1)               459        459          --
 Insurance - Other                          27          25         8.0                 73         72         1.4
 Legal & Professional Fees                 110         152       (27.6)               362        400        (9.5)
 Taxes - Other                              70          54        29.6                237        127        86.6
 Postage & Courier                          73          77        (5.2)               214        209         2.4
 Printing & Supplies                       103          93        10.8                305        267        14.2
 Regulatory Fees & Assessments              39          38         2.6                123        123          --
 Other Operating Expenses                  232         206        12.6                821        711        15.5
                                        ------      ------                        -------     ------             
   Total Other Expenses                    810         831        (2.5)             2,594      2,368         9.5
                                        ------      ------                        -------     ------      
   Total Non-interest Expense           $3,540      $3,128        13.2            $10,481     $9,050        15.8
                                        ======      ======                        =======     ======
</TABLE>

  Total non-interest expense increased 13.2% in the third 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 2.90% in the third quarter
of 1998 and 2.95% in the same period of 1997.  The "efficiency ratio" (non-
interest expenses divided by total non-interest income plus net interest income)
was 51.2% for the third 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 third 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 29 to an average full-time equivalent of 171
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 staff members in 1997.

  The increase in occupancy expense is also due to the cost of the new branch
banking office noted above.

  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 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.

  The increase in Other Operating Expenses includes an increase in
communications expense related to implementation of improved telephone lines to
support new PC network services in the last half of 1997.

 
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 September 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                             $159,668     $20,794    $ 15,202      $195,664     $106,308      $301,972
  Investment Securities               11,122      10,931      31,820        53,873       66,950       120,823
  Federal Funds Sold &
     Due From Time                    37,135         -0-         -0-        37,135          -0-        37,135
                                    --------     -------    --------      --------     --------      --------
 
 
   Total Earning Assets              207,925      31,725      47,022       286,672      173,258       459,930
                                    --------     -------    --------      --------     --------      --------
 
Interest Bearing Liabilities:
  Interest-Bearing Transaction
    Accounts and Savings             216,756         -0-         -0-       216,756          -0-       216,757
  Certificate of Deposits
    >$100,000                          9,560      14,788       9,341        33,689        2,639        36,328
  Other Time Deposits                  8,699      24,717      13,315        46,731        6,636        53,367
  Repurchase Agreements               18,837         -0-         -0-        18,837          -0-        18,838
                                    --------     -------    --------      --------     --------      --------
 
   Total Interest Bearing
    Liabilities                      253,852      39,505      22,656       316,013        9,277       325,290
                                    --------     -------    --------      --------     --------      --------
 
Interest Sensitivity
 Gap                                $(45,927)    $(7,780)   $ 24,366      $(29,341)    $163,981      $134,640
                                    ========     =======    ========      ========     ========      ========
Cumulative Gap                      $(45,927)   $(53,707)   $(29,341)
                                    ========    ========    ========
 
Cumulative Gap to
 Total Earning Assets                 (9.99%)    (11.68%)     (6.38%)
 
Cumulative Gap to
 Total Assets                         (9.33%)    (10.91%)     (5.96%)
</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 (5.96%) was reversed to a positive 15.22% "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 September 30, 1998, the Corporation had a leverage ratio of 9.1%.

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 September 30, 1998,  the Corporation's Tier I
capital represented 14.1% of risk weighted assets and total qualifying capital
(Tier I and Tier II) represented 15.3% of risk weighted assets.  Both ratios are
well above current regulatory guidelines.

Impact of the Year 2000 Issue

      The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year.  Any of the
Corporation's computer programs that have date-sensitive software may recognize
a date as "00" as the year 1900 rather than the year 2000.  This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business activities.

    Based on a recent assessment, the Corporation determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999.  The Corporation
presently believes that with modifications to existing software, the Year 2000
Issue could have material impact on the operations of the Corporation.

    The Corporation will utilize both internal and external resources to correct
and test the software for the Year 2000 modifications.  The Corporation plans to
substantially complete the Year 2000 project not later than December 31, 1998.
The projected total remaining cost of the Year 2000 project is not material to
the financial condition of the Corporation.

    The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors.  However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.  Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.

                                                                              29
<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

          Not applicable

Item 5.   Other Information

          Not applicable

Item 6.   Exhibits and Reports on Form 8-K

          (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
               September 30, 1998

30
<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: November 10,1998           By: /s/  Philip E. Norwood
      ------------------            ------------------------------------------
                                    Philip E. Norwood, Chairman

Date: November 10,1998           By: /s/  Bob G. Scott
      ------------------            ------------------------------------------
                                    Bob G. Scott, Executive Vice President
                                          and Chief Operating Officer
                                           (Chief Accounting Officer)


                                                                              31
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                                 EXHIBIT INDEX

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

11             Computation of Earnings Per Common Share

27             Financial Data Schedule