<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): March 7, 1997
----------------
Summit Bancorp.
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(Exact Name of Registrant as Specified in its Charter)
New Jersey 1-6451 22-1903313
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File number) Identification No.)
301 Carnegie Center, P.O. Box 2066
Princeton, New Jersey 08543-2066
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(Address of Principal Executive Offices)
(Zip Code)
(609) 987-3200
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(Registrant's Telephone Number, including Area Code)
<PAGE> 2
Item 5 Other Events
The Registrant hereby files certain financial statements and
other materials from Registrant's 1996 Annual Report to
Shareholders.
Item 7 Financial Statements and Exhibits
(c) Exhibits:
(99) Selected portions of the Summit Bancorp 1996
Annual Report to Shareholders, namely:
Financial Review; Consolidated Comparative
Average Balance Sheets with Resultant Interest
and Rates for the years ended December 31, 1996,
December 31, 1995, December 31, 1994, December
31, 1993, December 31, 1992 and December 31,
1991; Consolidated Balance Sheets at December
31, 1996 and December 31, 1995, Consolidated
Statements of Income for the years ended
December 31, 1996, December 31, 1995 and
December 31, 1994; Consolidated Statements of
Cash Flows for the years ended December 31,
1996, December 31, 1995 and December 31, 1994,
Consolidated Statements of Shareholders'
Equity at December 31, 1996, December 31, 1995
and December 31, 1994, and Notes to the
Consolidated Financial Statements.
1
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 13, 1997 SUMMIT BANCORP.
By: /s/ William J. Healy
----------------------------
William J. Healy
Executive Vice President
and Comptroller
2
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
(99) Selected portions of the Summit Bancorp 1996 Annual Report
to Shareholders, namely:
Financial Review; Consolidated Comparative Average Balance
Sheets with Resultant Interest and Rates for the years ended
December 31, 1996, December 31, 1995, December 31, 1994,
December 31, 1993, December 31, 1992 and December 31, 1991;
Consolidated Balance Sheets at December 31, 1996 and
December 31, 1995, Consolidated Statements of Income for the
years ended December 31, 1996, December 31, 1995 and
December 31, 1994; Consolidated Statements of Cash Flows for
the years ended December 31, 1996, December 31, 1995 and
December 31, 1994, Consolidated Statements of Shareholders'
Equity at December 31, 1996, December 31, 1995 and December
31, 1994, and Notes to the Consolidated Financial Statements.
</TABLE>
3
<PAGE> 1
Summit Bancorp and Subsidiaries
FINANCIAL REVIEW
BASIS OF PRESENTATION
================================================================================
On March 1, 1996, Summit Bancorp emerged from UJB Financial's acquisition of The
Summit Bancorporation. The acquisition was accounted for as a pooling of
interests and, therefore, all financial information includes the combined
balances and results of operations for both entities.
The Financial Review should be read in conjunction with the Consolidated
Comparative Average Balance Sheets on pages 30 and 31, the Consolidated
Financial Statements and Notes beginning on page 32, and the Consolidated
Summary of Selected Financial Data on pages 52 and 53.
Several acquisitions were completed by Summit Bancorp during 1996, which
increased its presence in the markets it serves and supported balance sheet
growth strategies. Since July 1995, the company completed four acquisitions that
affect comparisons to prior year financial information. The purchase acquisition
of Bancorp New Jersey, Inc. (Bancorp) was completed on July 11, 1995. The first
quarter acquisitions of Garden State Bancshares, Inc. (Garden State) and The
Flemington National Bank and Trust Company (Flemington) have been reflected in
the financial statements from January 1, 1996. The purchase acquisition of
Central Jersey Financial Corporation (Central Jersey) was completed on December
7, 1996.
SUMMARY OF PERFORMANCE
================================================================================
For the year ended December 31, 1996, Summit Bancorp's net income was $229.2
million compared to $242.9 million earned in 1995, a decrease of 5.6%. On a per
common share basis, net income decreased 11.9% to $2.44, compared to $2.77 the
prior year.
Net income for 1996 included non-recurring items of $110.7 million of
restructuring charges and a one-time special assessment of $11.1 million.
Restructuring charges were recorded for the acquisitions of The Summit
Bancorporation, Flemington and Garden State and a supermarket branch initiative.
The one-time special assessment was recorded in conjunction with legislation
passed to recapitalize the Savings Association Insurance Fund (SAIF).
For the year ended December 31, 1996, Summit Bancorp's operating earnings,
before the non-recurring items, were $305.9 million compared to $242.9 million
earned in 1995, an increase of 26.0%. On a per common share basis, operating
earnings increased 17.7% to $3.26 compared to $2.77 the prior year.
Summit Bancorp's performance for 1996 was highlighted by the successful
integration of the acquisitions, realization of merger cost savings, and an
improvement in asset quality ratios. These factors contributed to increases in
key profitability measures. Before non-recurring items, return on average assets
improved to 1.38% compared to 1.16% the previous year, and return on common
equity rose to 16.61% versus 14.82% for 1995. Based on net income as reported,
return on average assets and return on common equity for 1996 were 1.03% and
12.41%, respectively. In addition, the efficiency ratio improved to 53.39% for
1996 from 57.55% in 1995.
The following chart illustrates the growth in net income before non-recurring
items for the past five years.
Net Income, Before and After Non-recurring Items (in millions)
YEAR BEFORE AFTER
---- ------ -----
1992 $90.28 $90.28
1993 136.72 133.14
1994 190.18 154.55
1995 242.87 242.87
1996 305.92 229.18
As a result of the company's internal and external growth strategies, earnings
were enhanced with acquired and core loan growth. Average total loans increased
$1.2 billion or 9.0% during 1996, with the residential mortgage and consumer
loan portfolios contributing $999.1 million of this increase. Net interest
income rose $42.3 million, or 4.9%, benefiting from loan growth, as well as an
increased level of non-interest bearing deposits.
In addition to the rise in net interest income, operating earnings benefited
from higher non-interest income and lower non-interest expenses compared to the
prior year. Non-interest income, including securities gains, rose $23.3 million
or 10.4% to $247.5 million as a result of increased fee-based income on loans
and deposits. Non-interest expenses, before non-recurring items, declined $16.2
million to $626.2 million as a result of merger savings and lower deposit
insurance premiums.
Continued improvement in asset quality ratios was evidenced by declines in
non-performing loans and other real estate owned (OREO). During 1996,
non-performing loans were reduced by $56.4 million, or 29.9%, to $132.1 million.
Non-performing loans as a percentage of total loans declined to .89% at year-end
1996 from 1.34% at the prior year end. As a result of this improvement, the
provision for loan losses was reduced to $62.0 million, a decline of $9.9
million, or 13.7%.
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<PAGE> 2
FINANCIAL CONDITION
================================================================================
INTEREST-EARNING ASSETS AND INTEREST-BEARING
LIABILITIES:
Average interest-earning assets totaled $20.5 billion in 1996, an increase of
$1.2 billion, or 6.2%, compared to 1995, reflecting an increase in loans due to
strategic acquisitions and modest growth in securities. Average total loans
increased $1.2 billion, or 9.0%, to average $14.6 billion.
Average interest-bearing liabilities totaled $16.2 billion in 1996, an increase
of $729.8 million, or 4.7%, compared to 1995. This increase was primarily
attributable to growth in interest-bearing deposits of $617.0 million, due
primarily to acquisitions, and a $191.7 million increase in other borrowed
funds.
The average tax-equivalent yield on total interest-earning assets amounted to
7.64%, a decrease of 21 basis points from 7.85% earned in 1995. This decline can
be attributed to declining interest rates during the year and the competitive
loan pricing environment. The average prime rate declined approximately 56 basis
points to 8.27% in 1996 compared to 8.83% in 1995.
The average cost of interest-bearing liabilities was 3.94% for 1996, an 11 basis
point decrease from the 4.05% paid in 1995. Net interest spread was 3.70% for
1996 compared to 3.80% in 1995, a decline of 10 basis points. This decrease
resulted as yields earned on interest-earning assets declined faster than the
rates paid on interest-bearing liabilities, reflecting an increasingly
competitive market for deposits.
SECURITIES:
Securities available for sale may be sold in response to changing market and
interest rate conditions. These securities are reported at fair value with
unrealized gains and losses, net of tax, included as a separate component of
shareholders' equity. Securities available for sale averaged $2.5 billion during
1996 compared to $1.0 billion in 1995, an increase of $1.5 billion.
The average balance for 1996 increased significantly from 1995 as a result of
the one-time reclassification of $1.7 billion of securities held to maturity to
securities available for sale at December 31, 1995. In November 1995, the
Financial Accounting Standards Board (FASB) issued a special report on the
implementation of Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
permitted a one-time reclassification of securities as of a single measurement
date between November 15, 1995, and December 31, 1995. This transfer was made
based upon Summit Bancorp's reevaluation of its securities portfolios as a
result of the special report.
The available-for-sale portfolio consists primarily of U.S. Government and
Federal agency securities and other securities, primarily corporate
collateralized mortgage obligations (CMOs). During 1996, U.S. Government and
Federal agency securities averaged $2.0 billion compared with $738.0 million in
1995. Other securities averaged $487.4 million during 1996 compared with $247.0
million in the prior year.
In 1996, $135.6 million of securities available for sale were sold for a net
gain of $4.2 million and maturities for the period amounted to $486.0 million.
At December 31, 1996, there were net unrealized gains of $10.2 million on
securities available for sale compared to $11.3 million at December 31, 1995.
At December 31, 1996, the average estimated life of securities available for
sale, adjusted for historical prepayment patterns on mortgage-backed securities,
was 3 years. The average yield on this portfolio decreased 37 basis points to
6.22% in 1996 compared to 6.59% in 1995.
Securities held to maturity are carried at amortized historical cost and consist
of those securities for which there is a positive intent and ability to hold to
maturity. Securities held to maturity averaged $3.3 billion during 1996, a
decline of $1.4 billion, or 29.6%, from the 1995 average of $4.7 billion. This
decline was primarily due to the one-time reclassification of $1.7 billion of
securities to securities available for sale. At December 31, 1996, securities
held to maturity totaled $3.2 billion, an increase of $170.3 million, or 5.6%,
from the $3.0 billion at year-end 1995.
The portfolio consists primarily of U.S. Government and Federal agency
securities, which averaged $1.6 billion, and other securities, principally
corporate CMOs, which averaged $1.4 billion. The average estimated life of
securities held to maturity, adjusted for historical prepayment patterns on
mortgage-backed securities, was 3 years and 3 months at December 31, 1996. The
average yield on this portfolio declined 4 basis points during 1996 to 6.34%
compared to 6.38% in 1995.
20
<PAGE> 3
LOANS:
================================================================================
The following chart illustrates the growth in average total loans for the past
five years.
Total Average Loans (in billions)
YEAR
----
1992 $12.0439
1993 11.8895
1994 12.3876
1995 13.4165
1996 14.6213
Total loans averaged $14.6 billion during 1996, an increase of $1.2 billion, or
9.0%, compared to an average of $13.4 billion in 1995. This increase is
primarily due to residential mortgage loans which grew $586.7 million and
consumer loans which rose $412.4 million. The average yield on the total loan
portfolio was 8.19% in 1996 compared to 8.48% in 1995, a decline of 29 basis
points, reflecting the lower interest rate and competitive loan pricing
environment.
The commercial loan portfolio, which consists primarily of commercial and
industrial (C & I) loans and construction and development loans, grew $45.4
million, or 0.9%, to average $5.3 billion for 1996. However, at December 31,
1996, commercial loans declined $54.4 million, or 1.0%, from the prior year end,
resulting from several paydowns on large corporate credits during the fourth
quarter. The average yield on the portfolio declined 42 basis points to 8.33% in
1996 from 8.75% the prior year.
C & I loans totaled $4.8 billion at December 31, 1996, an increase of $44.0
million, or 0.9%, over 1995. This portfolio continued to mirror the business
diversification of the region, with no industry concentrations greater than 10%
of total C & I loans. Construction and development loans amounted to $471.4
million at December 31, 1996, a decline of $98.4 million, or 17.3%, compared to
1995. As the table below reports, construction and development loans have
declined 57.6% over the last four years, resulting from managed reductions in
the portfolio and transfers to permanent financing.
Commercial mortgage loans averaged $2.4 billion for 1996, an increase of $160.3
million, or 7.2%, from 1995. At December 31, 1996, commercial mortgage loans
totaled $2.3 billion. The average yield on commercial mortgage loans was 8.71%
for 1996 compared to 8.97% for 1995, a decrease of 26 basis points.
Residential mortgage loans averaged $3.6 billion, up $586.7 million, or 19.4%,
from 1995. Most of the growth occurred in adjustable-rate loans, which are
generally originated and retained in the portfolio. In addition, approximately
$223.9 million of the increase in residential mortgage loans were from the
acquisitions of Garden State, Flemington and Central Jersey.
Mortgage loan originations totaled $911.9 million in 1996, compared to $912.7
million in 1995. Sales of loans in the secondary market, generally fixed-rate
loans, were $373.9 million in 1996 compared to $124.8 million in 1995.
Residential mortgage loans held for sale totaled $49.4 million at December 31,
1996, versus $68.8 million at year-end 1995. The average yield on residential
mortgage loans was 7.41% for 1996 compared to 7.40% for 1995.
Consumer loans averaged $3.3 billion for the year, an increase of $412.4
million, or 14.3%, from 1995. The growth in this portfolio occurred primarily in
home equity loans. Home equity loans grew $257.7 million, or 13.5%, to total
$2.2 billion at year-end 1996. These loans increased primarily as a result of
successful promotions to attract retail customers at competitive rates.
Automobile loans totaled $893.7 million as of December 31, 1996, an increase of
$67.4 million, or 8.2%, over year-end 1995 and represented growth in both direct
lending and leasing activity. The credit card portfolio, initiated in late 1995,
grew $15.4 million during 1996, totaling $18.7 million at year end. The average
yield on the consumer loan portfolio was 8.43%, a decrease of 30 basis points
from the 8.73% earned in 1995.
The following table presents the classification of the loan portfolio by major
category at December 31 for each of the past five years. Total loans have grown
$2.8 billion or 23.8% since December 31, 1992, primarily in residential mortgage
and consumer loans.
<TABLE>
<CAPTION>
LOANS
(In thousands) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Commercial and industrial ........... $ 4,795,252 $ 4,751,227 $ 4,568,763 $ 3,971,082 $ 3,957,929
Construction and development ........ 471,413 569,820 785,595 973,279 1,112,655
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial ........................ 5,266,665 5,321,047 5,354,358 4,944,361 5,070,584
Commercial mortgage ................. 2,313,610 2,315,384 2,201,698 2,381,630 2,312,332
Residential mortgage ................ 3,795,752 3,296,818 2,803,286 2,148,004 2,097,504
Consumer ............................ 3,443,568 3,086,325 2,745,837 2,407,431 2,491,633
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans ....................... $14,819,595 $14,019,574 $13,105,179 $11,881,426 $11,972,053
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</TABLE>
21
<PAGE> 4
DEPOSITS:
During 1996, deposits continued to be impacted by investors' desire for
higher-yielding investment alternatives such as mutual funds, annuities, and the
stock market. Average total deposits were $18.1 billion for 1996 compared to
$17.1 billion for 1995, an increase of $975.1 million, or 5.7%. The most
significant growth occurred in demand deposits and time deposits. At December
31, 1996, total deposits were $18.4 billion, an increase of $419.9 million or
2.3% from year-end 1995. This increase in deposits was primarily due to
acquisitions.
The following chart illustrates the growth in average demand deposits for the
past five years.
Average Demand Deposits (in billions)
YEAR
----
1992 $2.6801
1993 3.0253
1994 3.3140
1995 3.3939
1996 3.7520
Average demand deposits were $3.8 billion for 1996, an increase of $358.1
million, or 10.6%, from the prior year. Demand deposit growth occurred primarily
in business accounts. The increase in this interest-free source of funds was a
contributing factor to the growth of net interest income.
Savings deposits, which include interest bearing checking, money market and
savings accounts, increased on average $181.1 million, or 2.3%, to average $8.0
billion during 1996. Money market accounts increased $183.8 million and interest
bearing checking accounts increased $90.1 million, offset by a decline of $92.8
million in savings accounts. The average cost of these deposit products
decreased 12 basis points to 2.52% in 1996 compared to 2.64% in 1995.
Time deposits, which consist primarily of retail certificates of deposit,
increased $263.6 million, or 5.0%, during 1996 to average $5.6 billion. The
majority of the increase was in certificates of deposit with a term of one to
two and one-half years. The average cost of time deposits decreased six basis
points to 5.10% in 1996 from 5.16% in 1995.
Commercial certificates of deposit $100,000 and over are a funding source to
support growth in the loan portfolio and as an alternative to other sources of
borrowed funds. These deposits averaged $803.9 million during 1996, an increase
of $172.3 million, or 27.3%, compared to 1995. The cost of these deposits
decreased by 36 basis points during the year to 5.35% compared with 5.71% in
1995, reflecting the lower interest rate environment.
OTHER BORROWED FUNDS:
Other borrowed funds include Federal funds purchased, repurchase agreements,
short-term Federal Home Loan Bank borrowings, treasury tax and loan deposits,
and other short-term borrowings. These borrowings provide an additional source
of funds to support loan or investment securities growth. During 1996, other
borrowed funds increased $191.7 million, or 15.6%, to average $1.4 billion. The
average cost of other borrowed funds decreased 34 basis points during the year
to 5.45% compared with 5.79% in 1995 due to the lower interest rate environment
in 1996.
Commercial paper, a funding source for certain non-bank subsidiaries, averaged
$44.5 million during 1996, a decrease of $3.2 million, or 6.7%, from 1995. The
average cost of commercial paper decreased 45 basis points to 5.25% in 1996 from
5.70% in 1995.
LONG-TERM DEBT:
Long-term debt averaged $423.9 million for 1996, a decrease of $75.7 million, or
15.2%, compared to 1995. This decline is due to maturities during the year. At
year-end 1996, long-term debt totaled $690.0 million, an increase of $265.1
million, or 62.4%, compared to December 31, 1995. This increase was due to
$300.2 million of long-term advances from the Federal Home Loan Bank in the
fourth quarter of 1996.
Certain long-term debt agreements contain limitations on the amount of
additional funded debt that can be assumed. At December 31, 1996, under the most
restrictive covenants, the amount of additional funded debt that could have been
created was $553.4 million. Long-term debt totaling $224.5 million qualified as
risk-based Tier II capital at December 31, 1996. For additional information on
long-term debt, see Note 12 of the Notes to Consolidated Financial Statements.
SHAREHOLDERS' EQUITY AND DIVIDENDS:
Summit Bancorp has long had a policy of maintaining a strong capital position.
The maintenance of a strong capital base promotes investor confidence and
enhances the flexibility to capitalize on business growth and acquisition
opportunities and to serve the needs of depositors and creditors. Shareholders'
equity averaged $1.9 billion during 1996, an increase of $202.4 million, or
12.2%, compared to 1995. The ratio of average total equity to average total
assets increased to 8.42% for 1996 compared to 7.97% for 1995. At December 31,
1996, book value per common share rose to $20.51, compared to $19.89 at the
prior year end due primarily to retained net income offset by issuance of
additional common shares in connection with certain acquisitions.
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<PAGE> 5
As a result of sustained earnings growth, the quarterly dividend paid on common
stock was increased from $.32 per share to $.36 per share during the third
quarter of 1996. Common stock dividends declared totaled $1.36 per share for
1996 compared to $1.19 for 1995, an increase of 14.3%.
The market price of the common stock was $43.75 at December 31, 1996, compared
to $35.63 the prior year end. The common stock of Summit Bancorp is traded on
the New York Stock Exchange under the symbol SUB. The quarterly market price
ranges and dividends declared per common share for the last two years are shown
on page 57.
On December 15, 1996, all outstanding shares of the Series B and Series C
preferred stock were redeemed at $50.00 and $25.00, respectively. Both Series
were retired upon redemption.
In 1996 Summit Bancorp issued 6.7 million shares of common stock for the
acquisitions of Garden State, Flemington and Central Jersey. Of the common
shares issued for these acquisitions, 2.3 million shares were reissued treasury
shares, which were specifically purchased in the open market during the third
and fourth quarters for the Central Jersey acquisition. During 1995, Summit
Bancorp issued 1.9 million shares of common stock for the purchase acquisition
of Bancorp.
Summit Bancorp and its bank subsidiaries are subject to various regulatory
capital requirements administered by the Federal Reserve Board and Federal
Deposit Insurance Corporation. For information on regulatory capital, see Note
20 of the Notes to Consolidated Financial Statements.
Results of Operations
================================================================================
NET INTEREST INCOME:
The accompanying Rate/Volume Table presents an analysis of
the impact on interest income and interest expense resulting from changes in
average volumes and rates over the past two years. Changes that are not due to
volume or rate have been allocated proportionally to both, based on their
relative absolute values.
Interest income on a tax-equivalent basis was $1.6 billion, an increase of $51.5
million, or 3.4%, compared to 1995. This increase was primarily due to growth in
interest-earning assets. On average, interest-earning assets increased $1.2
billion, principally in loans due to the strategic acquisitions. This growth
contributed $94.9 million to interest income. Partially offsetting this was a
$43.4 million decrease due to the decline in interest rates during 1996. The
average yield on interest-earning assets was 7.64% for 1996 compared to 7.85%
for 1995, a decrease of 21 basis points.
Interest expense was $639.3 million for 1996, an increase of $12.9 million, or
2.1%, from a year ago. On average, interest-bearing liabilities increased
$729.8 million, primarily due to interest bearing deposits from the
acquisitions. Interest expense rose $34.6 million from the increase in
interest-bearing liabilities. Partially offsetting this increase, interest
expense declined $21.7 million as a result of the lower interest rate
environment. The average cost of total interest-bearing liabilities was 3.94% in
1996, a decrease of 11 basis points from 4.05% in 1995.
Net interest income on a tax-equivalent basis amounted to $925.1 million, an
increase of $38.6 million, or 4.4%, from $886.5 million earned in 1995. Net
interest spread declined 10
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Rate/Volume Table
Amount of Increase (Decrease)
----------------------------------------------------------------------------
1996 versus 1995 1995 versus 1994
----------------------------------- ----------------------------------
Due to Change in: Due to Change in:
--------------------- ---------------------
(Tax-equivalent basis, in millions) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans
Commercial ................................ $ 4.0 $ (22.4) $ (18.4) $ 10.7 $ 59.5 $ 70.2
Commercial mortgage ....................... 14.1 (5.9) 8.2 (5.6) 16.1 10.5
Residential mortgage ...................... 43.4 .3 43.7 47.4 11.2 58.6
Consumer .................................. 34.9 (8.9) 26.0 26.4 15.8 42.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans ............................. 96.4 (36.9) 59.5 78.9 102.6 181.5
Securities held to maturity ................. (88.5) (1.9) (90.4) 4.1 17.3 21.4
Securities available for sale ............... 90.9 (3.9) 87.0 (31.0) 14.3 (16.7)
Other interest-earning assets ............... (3.9) (.7) (4.6) .3 4.2 4.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income ................. 94.9 (43.4) 51.5 52.3 138.4 190.7
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Deposits
Savings deposits .......................... 4.8 (9.2) (4.4) (12.8) 35.5 22.7
Time deposits ............................. 13.5 (3.2) 10.3 49.5 56.4 105.9
Commercial certificates of deposit
$100,000 and over ....................... 9.5 (2.6) 6.9 8.2 9.0 17.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits .......................... 27.8 (15.0) 12.8 44.9 100.9 145.8
Other interest-bearing liabilities .......... 6.8 (6.7) .1 (20.3) 24.9 4.6
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense ................ 34.6 (21.7) 12.9 24.6 125.8 150.4
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ........................... $ 60.3 $ (21.7) $ 38.6 $ 27.7 $ 12.6 $ 40.3
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 6
basis points to 3.70% for the year compared to 3.80% earned in 1995. Net
interest margin declined to 4.52% for 1996 compared to 4.60% in 1995. Both
declines resulted as yields earned on interest-earning assets declined faster
than the costs paid on interest-bearing liabilities, reflecting an increasingly
competitive market for customer loans and deposits.
The following chart illustrates the growth in tax-equivalent net interest income
for the past five years.
Net Interest Income (tax-equivalent basis, in millions)
YEAR
----
1992 $769.9
1993 801.1
1994 846.2
1995 886.5
1996 925.1
NON-INTEREST INCOME:
Non-interest income, including securities gains, amounted to $247.5 million in
1996 compared to $224.2 million in the prior year, an increase of $23.3 million,
or 10.4%. Excluding securities gains, non-interest income rose $26.7 million, or
12.4%.
Non-interest income categories compared to the prior year are shown in the
following table.
<TABLE>
<CAPTION>
(Dollars in thousands) Increase (Decrease)
- --------------------------------------------------------------------------------
1996 1995 Amount Percent
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges on deposit
accounts ................ $ 98,949 $ 88,083 $ 10,866 12.3
Service and loan fee income 40,414 35,562 4,852 13.6
Trust income .............. 39,540 35,418 4,122 11.6
Trading account gains ..... 477 1,295 (818) (63.2)
Other ..................... 62,866 55,225 7,641 13.8
- --------------------------------------------------------------------------------
242,246 215,583 26,663 12.4
Securities gains .......... 5,217 8,606 (3,389) (39.4)
- --------------------------------------------------------------------------------
$247,463 $224,189 $ 23,274 10.4
- --------------------------------------------------------------------------------
</TABLE>
Service charges on deposit accounts amounted to $98.9 million in 1996, an
increase of $10.9 million, or 12.3%. This increase resulted from the impact of
Summit Bancorp's fee structure on acquired deposits and higher insufficient
funds income from demand deposit accounts.
Service and loan fee income increased $4.9 million, or 13.6%, to $40.4 million
in 1996 primarily due to increases in fee income on merchant card processing and
consumer debit cards. The increase in merchant processing fees was a result of a
successful sales effort which led to an increase in processing volume. Also
contributing was an increase in consumer debit card fees resulting from higher
point-of-sale customer usage.
Trust income of $39.5 million increased $4.1 million, or 11.6%, over the prior
year. This increase is primarily due to an increase in fee income on proprietary
mutual funds, third-party mutual fund commissions and investment advisory
accounts. Assets under trust administration, including corporate debt issue
trusteeships, totaled $23.2 billion at December 31, 1996. Assets under
discretionary management were $6.9 billion at year-end 1996. These assets
include the Pillar Funds(R), a family of bank sponsored mutual funds established
in 1992, which totaled $1.6 billion at December 31, 1996. These funds increased
$203.6 million, or 14.9%, from the prior year end.
Other income amounted to $62.9 million, an increase of $7.6 million, or 13.8%,
compared to the prior year. The increase was primarily due to new ATM access
fees, effective in May 1996. For the year ended December 31, 1996, securities
gains were $5.2 million, a decrease of $3.4 million, or 39.4%, below 1995. These
gains were principally due to sales of equity securities.
NON-INTEREST EXPENSES:
Non-interest expenses totaled $747.9 million in 1996, an increase of $105.6
million, or 16.4%, compared to 1995. Impacting the comparison of 1996
non-interest expenses to the prior year are the Bancorp, Garden State,
Flemington and Central Jersey acquisitions. Non-interest expenses for 1996
included restructuring charges totaling $110.7 million and a special one-time
assessment for SAIF deposits of $11.1 million. Before these non-recurring items,
non-interest expenses decreased $16.2 million, or 2.5%, compared to 1995 as a
result of merger savings and a reduction in deposit insurance premiums.
Non-interest expense categories compared to the prior year are shown in the
following table.
<TABLE>
<CAPTION>
(Dollars in thousands) Increase (Decrease)
- ----------------------------------------------------------------------------------------
1996 1995 Amount Percent
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries .................... $245,507 $251,253 $(5,746) (2.3)
Pension and other employee
benefits .................. 80,873 85,297 (4,424) (5.2)
Occupancy, net .............. 71,368 70,297 1,071 1.5
Furniture and equipment ..... 64,841 61,104 3,737 6.1
Communications .............. 30,029 26,155 3,874 14.8
Deposit insurance premiums .. 3,780 21,600 (17,820) (82.5)
Other ....................... 129,778 126,655 3,123 2.5
- ----------------------------------------------------------------------------------------
626,176 642,361 (16,185) (2.5)
Savings Association Insurance
Fund assessment ........... 11,059 -- 11,059 NM
Restructuring charges ....... 110,700 -- 110,700 NM
- ----------------------------------------------------------------------------------------
$747,935 $ 642,361 $ 105,574 16.4
- ----------------------------------------------------------------------------------------
</TABLE>
NM-Not meaningful
Salaries totaled $245.5 million in 1996, a decrease of $5.7 million, or 2.3%,
compared to 1995. Total full-time equivalent employees at December 31, 1996 were
7,333 compared to 7,547 at December 31, 1995, a decrease of 2.8%. Pension and
other
24
<PAGE> 7
employee benefits expense totaled $80.9 million for the year ended
December 31, 1996, and was $4.4 million, or 5.2%, lower than 1995. These
expenses declined throughout 1996 as duplicate positions of the acquired
entities were eliminated.
During 1996, net occupancy expenses increased $1.1 million, or 1.5%, from the
prior year. This increase was primarily due to the impact of the 1996
acquisitions offset by cost savings from branch closings and consolidations.
Furniture and equipment expenses totaled $64.8 million, an increase of $3.7
million or 6.1% from 1995. This increase can also be attributed to the 1996
acquisitions and higher expenses associated with the automation of acquired
banks and enhanced uses of technology.
Communications expense totaled $30.0 million in 1996, an increase of $3.9
million, or 14.8%, compared to 1995. This increase was due in part to additional
expenses associated with the upgrading of communication equipment and lines that
support the branch automation network, other system improvements and an ATM
network purchased in late 1995.
As a result of rate changes in Bank Insurance Fund (BIF) and SAIF premiums,
deposit insurance premiums declined $17.8 million, or 82.5%. BIF deposits, which
make up approximately 88% of the insurable deposit base, were exempt from
premiums in 1996. In addition, as a result of the one-time $11.1 million special
assessment to recapitalize the SAIF on September 30, 1996, there were no SAIF
premiums for the fourth quarter of 1996.
Other expenses were $129.8 million in 1996, an increase of $3.1 million, or
2.5%, from 1995. This increase was due in part to an increase in miscellaneous
operating expenses offset by a reduction in OREO expenses, reflecting a
continued decline in OREO properties. For additional information, please see
Note 16 to the Notes to Consolidated Financial Statements.
INCOME TAXES:
Federal and state income tax expenses for 1996 were $119.9 million compared to
$136.3 million in 1995. The decrease was primarily due to lower pre-tax income,
the reduction in valuation reserves and tax planning. The combined Federal and
state effective income tax rate, which is income tax expense as a percentage of
pre-tax income, was 34.3% for 1996 compared to 36.0% for 1995.
ASSET QUALITY
NON-PERFORMING LOANS:
At December 31, 1996, non-performing loans totaled $132.1 million and
represented .89% of total loans, compared to $188.5 million, or 1.34% of total
loans, the prior year. Non-performing loans declined $56.4 million, or 29.9%,
in 1996. The significant reduction in non-performing loans can be attributed to
a stabilized real estate market and aggressive loan workout strategies. During
1996, there was a decline in the amount of loans transferred into
non-performing, while payments received increased. In addition, there were
several sales totaling $38.5 million of small-balance non-performing loans and
resolutions of several large non-performing loans.
The following chart illustrates the trend in non-performing loans for the past
five years.
Non-Performing Loans (in millions)
YEAR
----
1992 $458.5
1993 319.4
1994 200.2
1995 188.5
1996 132.1
At December 31, 1995, there were 16 non-performing loans greater than $2 million
totaling $78.0 million, or approximately 41.5% of the non-performing loan
portfolio. This compares with four loans greater than $2 million, totaling $31.0
million or approximately 23.5% of the portfolio at year-end 1996.
The following table represents the composition of non-performing loans by type.
<TABLE>
<CAPTION>
(Dollars in thousands) Increase (Decrease)
- --------------------------------------------------------------------------------------
1996 1995 Amount Percent
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial .. $ 54,308 $ 52,086 $ 2,222 4.3
Construction and development 31,901 52,975 (21,074) (39.8)
Commercial mortgage ........ 45,877 83,427 (37,550) (45.0)
- --------------------------------------------------------------------------------------
$132,086 $ 188,488 $(56,402) (29.9)
- --------------------------------------------------------------------------------------
</TABLE>
The following table illustrates the activity in non-performing loans over the
past two years.
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year ................. $188,488 $200,205
Additions:
From loan portfolio ...................... 172,765 223,502
Adjustment for acquisitions .............. 10,980 4,126
Transfer from OREO and assets held
for accelerated disposition ............ 950 7,211
- --------------------------------------------------------------------------------
Total additions ........................ 184,695 234,839
- --------------------------------------------------------------------------------
Deductions:
Payments received ........................ 133,017 102,253
Loan charge offs ......................... 69,097 75,736
Transfer to performing loans ............. 26,492 36,606
Transfer to other real estate owned ...... 12,491 29,496
Other .................................... -- 2,465
- --------------------------------------------------------------------------------
Total deductions ....................... 241,097 246,556
- --------------------------------------------------------------------------------
Balance, end of year ....................... $132,086 $188,488
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 8
Loans 90 days or more past due and not included in the non-performing loan
category totaled $60.6 million at year-end 1996, compared to $47.8 million at
the prior year end. These loans consist of residential mortgage and consumer
loans which are generally well-secured and in the process of collection.
Unsecured consumer loans included in this category are typically charged off
after 120 days of delinquency.
OTHER REAL ESTATE OWNED:
OREO, net of a valuation allowance, amounted to $21.0 million at year end
compared to $24.3 million the prior year, a decline of $3.3 million, or 13.6%.
The following table illustrates the activity in OREO for the past two years.
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year ................... $ 37,539 $ 62,256
Additions:
From non-performing loans .................. 12,491 29,496
From loan portfolio ........................ 8,910 6,965
Transfer from assets held for accelerated
disposition .............................. 3,300 1,000
Adjustment from acquisitions ............... 3,534 1,064
- --------------------------------------------------------------------------------
Total additions .......................... 28,235 38,525
- --------------------------------------------------------------------------------
Deductions:
Sales and other reductions ................. 36,267 53,007
Transfer to non-performing loans, gross .... -- 10,235
- --------------------------------------------------------------------------------
Total deductions ......................... 36,267 63,242
- --------------------------------------------------------------------------------
Balance, end of year ......................... 29,507 37,539
Less allowance for OREO .................... (8,528) (13,244)
- --------------------------------------------------------------------------------
Balance, end of year, net .................... $ 20,979 $ 24,295
- --------------------------------------------------------------------------------
</TABLE>
OREO is carried at the lower of cost or fair value less estimated costs to sell
with any deficiency charged against the valuation allowance. At year-end 1996,
the allowance totaled $8.5 million, compared to $13.2 million the prior year
end.
ALLOWANCE FOR LOAN LOSSES AND RELATED PROVISION:
The allowance for loan losses at December 31, 1996 was $267.7 million compared
to $279.0 million the prior year end, a decrease of $11.3 million, or 4.1%. The
ratio of the allowance for loan losses to total loans was 1.81% at December 31,
1996 and 1.99% at year-end 1995. The allowance for loan losses as a percentage
of non-performing loans was 202.7% at December 31, 1996 compared to 148.0% at
the end of 1995.
A standardized process has been established to assess the adequacy of the
allowance for loan losses and to identify the risks inherent in the loan
portfolio. This process incorporates credit reviews and gives consideration to
areas of exposure such as concentrations of credit, economic and industry
conditions, trends in delinquencies and collections, collateral coverage, and
the composition of the performing and non-performing loan portfolios.
When it is probable that, based on current information, the company will not
collect all amounts due under contractual terms, the loan is considered
impaired. A loan is also considered impaired if it is more than 90 days
contractually past due. Under Summit Bancorp's credit and accounting policies,
all impaired loans are defined as non-performing loans.
Specific allocations, when required under SFAS No. 114, are identified by
individual loan while general reserve percentages are identified by loan
category or grade and allocated accordingly. All other loans not considered
impaired, as defined, are graded and incorporated in the process of assessing
the adequacy of the allowance for loan losses. The allowance is maintained at a
level considered sufficient to absorb estimated losses in the loan portfolio.
At year-end 1996, of the total $267.7 million loan loss allowance, approximately
$19.5 million was identified for impaired loans, $115.0 million was allocated to
specific categories or grades of loans not considered impaired as deemed
necessary under the assessment process, and $133.2 million was considered a
general unallocated reserve for the remaining inherent risk in the portfolio.
The provision for loan losses was $62.0 million for the year, down $9.9 million,
or 13.7%, from $71.9 million recorded in 1995. This decrease resulted from the
improvement in asset quality ratios and the reduction in non-performing loans
during 1996. Net charge offs of $81.8 million were recorded in 1996, a decrease
of $22.5 million, or 21.5%, compared to $104.3 million recorded in 1995. These
net charge offs represented .56% of average loans in 1996 compared to .78% of
average loans in 1995.
ASSET/LIABILITY MANAGEMENT
================================================================================
INTEREST SENSITIVITY:
Interest rate sensitivity and the repricing characteristics of assets and
liabilities are managed by the Asset/Liability Management Committee (ALCO). The
principal objective of ALCO is to maximize net interest income within acceptable
levels of risk established by policy. Interest rate risk is measured using
financial modeling techniques, including stress tests, to measure the impact of
changes in interest rates on future earnings. Net interest income, the primary
source of earnings, is affected by interest rate movements. To mitigate the
impact of changes in interest rates, a balance sheet must be structured so that
repricing opportunities exist for both assets and liabilities in approximately
equivalent amounts at basically the same time intervals. Imbalances in these
repricing opportunities at any point in time constitute an interest-sensitivity
gap, which is the difference between interest-sensitive assets and interest-
sensitive liabilities. These static measurements do not reflect the results of
any projected activity and are best used as early indicators of potential
interest rate exposures.
26
<PAGE> 9
As illustrated by the interest rate sensitivity analysis in the accompanying
table, sensitivity to interest rate fluctuations is measured in a number of time
frames. The gap position is presented on an adjusted basis allowing for the
impact of off-balance-sheet transactions.
An asset-sensitive gap means an excess of interest-sensitive assets over
interest-sensitive liabilities, whereas a liability-sensitive gap means an
excess of interest-sensitive liabilities over interest-sensitive assets. At
December 31, 1996, there was a thirty-day liability-sensitive gap of $3.5
billion and a one-year cumulative liability-sensitive gap of $2.7 billion. In a
rising rate environment, a liability-sensitive gap position generally indicates
that increases in the cost of interest-bearing liabilities will outpace
increases in income from interest-earning assets. This risk can be reduced by
various strategies, including the administration of liability costs, asset
maturities and use of off-balance-sheet financial instruments to insulate net
interest income from the effects of changes in interest rates.
These gap positions are also monitored through the use of simulation modeling
techniques which apply alternative interest rate scenarios to periodic forecasts
of future business activity and estimate the related impact on net interest
income. The use of simulation modeling assists management in its continuing
efforts to achieve earnings growth in varying interest rate environments.
Asset and liability management efforts also involved the use of hedges,
primarily interest rate swaps and interest rate floors, to modify the interest
rate characteristics of designated assets and liabilities. These interest rate
swaps and floors were accounted for as hedges and were not recorded on the
balance sheet. Income or expense related to these instruments was accrued
monthly and recognized as an adjustment to interest income or interest expense
for those balance sheet instruments being hedged. Hedged transactions resulted
in a reduction in net interest income of $2.0 million in 1996 compared to a $9.8
million reduction in 1995.
The following table illustrates the aggregate notional amounts and expected
maturities of interest rate swaps and interest rate floors at December 31, 1996.
<TABLE>
<CAPTION>
Weighted
Notional Avg. Est.
(In millions) Amount Maturity
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest rate swaps:
Receive fixed/pay floating .............. $ 161.3 8/98
Receive floating/pay fixed .............. 225.0 10/97
Interest rate floors ...................... 430.0 12/98
- --------------------------------------------------------------------------------
$ 816.3 7/98
- --------------------------------------------------------------------------------
</TABLE>
The notional values of these instruments represent the contractual balances on
which calculations of the amount of interest exchanged were based. A portion of
the swaps were indexed amortizing swaps that were structured to contain an
initial principal lockout period followed by a scheduled principal amortization
period. The amortization speed was determined by a sliding percentage scale
which used different amortization percentages for varying levels of London
Interbank Offer Rate (LIBOR). The scheduled principal amortization speed is
designed to increase or decrease in a manner similar to that of the hedged asset
or liability. The actual lives of these agreements will move with the level of
rates, but cannot exceed the maximum life contained in each agreement. At
year-end 1996, the swap agreements had an average maximum remaining maturity of
17 months. The interest rate floors were purchased primarily to hedge LIBOR
based assets.
INTEREST RATE SENSITIVITY TABLE AS OF DECEMBER 31, 1996
(In thousands)
<TABLE>
<CAPTION>
INTEREST SENSITIVITY PERIOD
------------------------------------------------------
30 DAY 90 DAY 180 DAY 365 DAY
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earning Assets:
Total securities ................ $ 778,233 $ 422,695 $ 690,038 $ 1,037,404
Loans, net .................... 4,734,603 949,008 833,681 1,406,742
Other interest-earning assets . 135,968 -- -- --
- -----------------------------------------------------------------------------------------
5,648,804 1,371,703 1,523,719 2,444,146
- -----------------------------------------------------------------------------------------
Sources of Funds:
Savings and time deposits ..... 7,899,228 900,851 856,960 1,364,292
Commercial CDs ................ 423,507 131,120 30,876 25,314
Other interest-bearing
liabilities ................. 813,726 212,305 92,393 341,406
Non-interest-bearing sources .. -- -- -- --
- -----------------------------------------------------------------------------------------
9,136,461 1,244,276 980,229 1,731,012
- -----------------------------------------------------------------------------------------
Asset (Liability) Interval Gap .. (3,487,657) 127,427 543,490 713,134
Net effect of off-balance sheet
instruments ................... 25,000 (391,313) -- (225,000)
- -----------------------------------------------------------------------------------------
Asset (Liability) Sensitivity Gap
Period gap .................... (3,462,657) (263,886) 543,490 488,134
Cumulative gap ................ $(3,462,657) $(3,726,543) $(3,183,053) $ (2,694,919)
- -----------------------------------------------------------------------------------------
<CAPTION>
TOTAL ONE YEAR NON-INTEREST
WITHIN TO SENSITIVE AND
ONE YEAR TWO YEARS OVER TWO YEARS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earning Assets:
Total securities ................ $ 2,928,370 $ 798,610 $2,187,194 $ 5,914,174
Loans, net .................... 7,924,034 1,244,966 5,382,876 14,551,876
Other interest-earning assets . 135,968 -- -- 135,968
- -----------------------------------------------------------------------------------------
10,988,372 2,043,576 7,570,070 20,602,018
- -----------------------------------------------------------------------------------------
Sources of Funds:
Savings and time deposits ..... 11,021,331 951,560 1,806,912 13,779,803
Commercial CDs ................ 610,817 -- -- 610,817
Other interest-bearing
liabilities ................. 1,459,830 45,959 522,922 2,028,711
Non-interest-bearing sources .. -- -- 4,182,687 4,182,687
- -----------------------------------------------------------------------------------------
13,091,978 997,519 6,512,521 20,602,018
- -----------------------------------------------------------------------------------------
Asset (Liability) Interval Gap .. (2,103,606) 1,046,057 1,057,549
Net effect of off-balance sheet
instruments ................... (591,313) -- 591,313
- -----------------------------------------------------------------------------------------
Asset (Liability) Sensitivity Gap
Period gap .................... (2,694,919) 1,046,057 1,648,862
Cumulative gap ................ $ (2,694,919) (1,648,862) $ --
- -----------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 10
The following table illustrates the interest rate swap activity for the past two
years.
<TABLE>
<CAPTION>
(In millions) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year ............ $ 967.5 $1,063.5
Additions ........................... 225.0 40.0
Maturities/amortizations ............ (673.6) (136.0)
Terminations ........................ (132.6) --
- --------------------------------------------------------------------------------
Balance, end of year .................. $ 386.3 $ 967.5
- --------------------------------------------------------------------------------
</TABLE>
During 1996, interest rate swaps with a remaining notional value of $132.6
million were terminated for $.6 million. These termination costs are being
amortized over the remaining lives of the related hedged assets or liabilities.
At December 31, 1996, the remaining unamortized termination costs were $1.6
million with amortization periods ranging from 5 to 31 months. For additional
information on the use of derivative financial instruments, see Notes 18 and 19
of the Notes to Consolidated Financial Statements.
LIQUIDITY:
Bank liquidity is the ability to support asset growth while satisfying the
borrowing needs and deposit withdrawal requirements of customers. Traditional
sources of liquidity include asset maturities, asset repayments, and deposit
growth. Purchased liabilities such as commercial certificates of deposit,
Federal funds purchased and securities sold under agreements to repurchase
represent other major sources of funding. In addition, the bank subsidiaries
have established borrowing relationships with the Federal Home Loan Bank and
other correspondent banks which further support and enhance liquidity.
A base of low-cost demand and retail deposits, which is the cornerstone of
liquidity, is managed through an extensive branch network. Total demand and
retail deposits amounted to $17.8 billion at December 31, 1996, compared to
$17.2 billion at year-end 1995.
Liquidity is also important at the Parent Corporation in order to provide funds
for operations and to pay dividends to shareholders. Parent Corporation cash
requirements are met primarily through management fees and dividends from its
subsidiaries and the issuance of short- and long-term debt. The amount of
dividends from bank subsidiaries is subject to certain regulatory restrictions
as detailed in Note 20 of the Notes to Consolidated Financial Statements.
Commercial paper issued by the Parent Corporation is primarily a funding source
for certain non-bank subsidiaries. These funds averaged $44.5 million during the
year, compared to the 1995 average of $47.7 million. At December 31, 1996,
commercial paper totaled $40.5 million. At year-end 1996, there were $38.0
million of short-term lines of credit available to support commercial paper
borrowings and for general corporate purposes.
Liquidity management is a function of ALCO and includes monitoring current and
projected cash flows, as well as economic forecasts for the industry. A
liquidity contingency plan, which is designed to manage potential liquidity
concerns due to changes in interest rates, credit markets, and other external
risks, is also in place.
The Consolidated Statements of Cash Flows present the change in cash from
operating, investing, and financing activities. Cash decreased by $110.8 million
during 1996. Net cash provided by operating activities totaled $324.0 million.
This amount was primarily due to results of operations adjusted for: provisions
for loan losses and OREO, depreciation, amortization and accretion, originations
of mortgages held for sale, and proceeds from the sales of mortgages held for
sale. Net cash used in investing activities totaled $237.6 million and was
primarily the result of loan and securities activity. Net cash used in financing
activities totaled $197.2 million, reflecting dividends paid, the redemption of
preferred stock and the purchase of common stock specifically for the Central
Jersey acquisition, in addition to decreases in deposits partially offset by
increases in short-term borrowings and long-term debt.
The combined securities portfolio is also a source of liquidity, as portfolio
assets provide cash flows through maturities and periodic repayments of
principal. During 1996, proceeds from maturities and other cash flows in the
combined securities portfolios were $1.2 billion, while proceeds from the sales
of securities available for sale were $139.8 million. Cash flows from the
securities portfolios were primarily used to fund loan growth. Total scheduled
maturities of interest bearing deposits with banks plus maturities and
anticipated principal repayments of the combined securities portfolios are
expected to approximate $1.1 billion during 1997. In addition, all or part of
the $2.7 billion of securities available for sale could be sold to provide
additional liquidity. At December 31, 1996, the average duration of securities
held to maturity and securities available for sale, adjusted for historical
prepayment patterns on mortgage-backed securities, was estimated to be
approximately 2.2 years and 1.4 years, respectively.
RESULTS OF OPERATIONS - 1995 COMPARED TO 1994
================================================================================
Total earnings in 1995 amounted to $242.9 million or $2.77 per share compared to
$154.6 million or $1.80 per share for 1994. Improved earnings were primarily the
result of growth in net interest income, a lower provision for loan losses, and
a reduction in non-interest expenses. As a result of sustained earnings and
capital growth, the quarterly dividend paid on common stock was increased twice
during 1995 to an annualized dividend rate of $1.28 per share compared to a
$1.04 dividend rate at year-end 1994. Also, during 1995 key performance ratios
showed significant improvement. Return on average assets increased 40 basis
points from 1994 to 1.16%, while return on common equity rose to 14.82% versus
10.37% for 1994. In addition, the efficiency ratio improved to 57.55% for 1995
from 59.71% in 1994.
Interest income on a tax-equivalent basis was $1.5 billion, an increase of
$190.7 million, or 14.4%, compared to 1994. This increase was primarily due to
the impact of higher interest rates in early 1995 on the loan and securities
portfolios. The average yield on interest earning assets was 7.85% for 1995
compared to 7.09% for 1994, an increase of 76 basis points.
28
<PAGE> 11
Interest expense was $626.4 million for 1995, an increase of $150.4 million, or
31.6%, from a year ago. The increase is primarily the result of the higher rates
paid for deposits and other borrowed funds. The average cost of total
interest-bearing liabilities was 4.05% in 1995, an increase of 91 basis points
from 3.14% in 1994.
Net interest income on a tax-equivalent basis amounted to $886.5 million, an
increase of $40.3 million, or 4.8%, from $846.2 million earned in 1994. This
increase was primarily from higher levels of net interest-earning assets over
the prior year. Net interest spread on a tax-equivalent basis declined 15 basis
points to 3.80% for the year compared to 3.95% earned in 1994. Net interest
margin rose slightly to 4.60% for 1995 compared to 4.53% in 1994, as the growth
in net interest income outpaced the growth in average interest-earning assets.
Excluding securities gains, non-interest income rose $7.7 million, or 3.7%, from
1994. Service charges on deposit accounts amounted to $88.1 million in 1995, an
increase of $5.1 million, or 6.1%. Service and loan fee income decreased $1.5
million, or 3.9%, to $35.6 million in 1995. Trust income of $35.4 million
increased $1.8 million, or 5.2%, over the prior year. Other income amounted to
$55.2 million, an increase of $1.9 million, or 3.6%, compared to the prior year.
For the year ended December 31, 1995, securities gains were $8.6 million, an
increase of $6.4 million over 1994.
Non-interest expenses totaled $642.4 million in 1995, a decrease of $57.3
million, or 8.2%, compared to 1994. Excluding the restructuring charge and the
loss on sale of assets taken in 1994, non-interest expenses decreased $8.3
million, or 1.3%, in 1995. Salaries expense totaled $251.3 million in 1995, an
increase of $6.3 million, or 2.6%, compared to 1994. Pension and other employee
benefits expense totaled $85.3 million for the year ended December 31, 1995, and
was $7.4 million, or 9.5%, greater than 1994.
Furniture and equipment expenses amounted to $61.1 million, an increase of $2.5
million, or 4.3%, from $58.6 million in 1994. Communications expense was $26.2
million for 1995, an increase of $1.3 million, or 5.1%, from 1994. Deposit
insurance premiums of $21.6 million represented a decline of $16.4 million, or
43.1%, from 1994, which reflected the reduction in premium rates on BIF deposits
effective June 1995.
During 1994, a restructuring charge of $13.6 million was recorded in conjunction
with the Crestmont Financial Corp. (Crestmont) acquisition. In addition, other
expenses for 1995 were $126.7 million, a decrease of $45.6 million, or 26.5%,
from 1994. Included were declines of $13.2 million in OREO expenses and $35.4
million due to the loss on the sale of certain non-performing loans and OREO
acquired from Crestmont.
Federal and state income tax expenses for 1995 were $136.3 million compared to
$89.0 million in 1994. The increase was primarily the result of higher pre-tax
income.
RECENT ACCOUNTING PRONOUNCEMENTS
================================================================================
IN June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transactions that are secured borrowings. SFAS No. 125 is effective
for transfers occurring after December 31, 1996. In December 1996 the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, an Amendment of FASB Statement No. 125." The adoption of
SFAS Nos. 125 and 127 is not expected to have a material effect on Summit
Bancorp's future financial condition or results of operations.
REACHING HIGHER - LOOKING AHEAD
================================================================================
One of Summit Bancorp's primary objectives is to achieve balanced asset and
revenue growth, and at the same time expand market presence and diversify the
line of financial products. However, it is recognized that objectives, no matter
how focused, are subject to factors beyond the control of Summit Bancorp which
can impede the ability to achieve these goals.
The following are some factors that should be considered when evaluating Summit
Bancorp's ability to achieve its objectives:
The financial market place is rapidly changing. Over the last several decades,
the banking industry has lost market share to other financial service providers.
Banks are no longer the only place to obtain loans, nor the only place to keep
financial assets. The future is predicated on Summit Bancorp's ability to adapt
product lines, provide superior customer service and compete in an ever-changing
marketplace.
Net interest income, the primary source of earnings, is impacted favorably or
unfavorably by changes in interest rates. Although the impact of interest rate
fluctuations is mitigated by ALCO strategies, significant changes in interest
rates can have an adverse impact on profitability.
The ability of customers to repay their obligations is often impacted by changes
in the regional and national economy. Although Summit Bancorp regularly sets
aside loan loss provisions toward the allowance for loan losses in amounts
intended to be sufficient to absorb foreseeable credit losses, significant
unfavorable changes in the economy could severely impact the assumptions used in
the determination of the adequacy of the allowance.
Technological changes will have a material impact on how financial service
companies compete for and deliver services. It is recognized that these changes
will have a direct impact on how the marketplace is approached and ultimately on
profitability. Summit Bancorp has already taken steps to reduce reliance on
traditional delivery channels. However, continued success will be measured by
the ability to react immediately to future technological changes.
<PAGE> 12
Summit Bancorp and Subsidiaries
CONSOLIDATED COMPARATIVE AVERAGE BALANCE SHEETS WITH RESULTANT
INTEREST AND RATES
<TABLE>
<CAPTION>
(Tax-equivalent basis, dollars in millions, not covered by independent auditors' report) 1996
Average Average
Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and securities purchased under
agreements to resell ....................................................... $ 49.1 $ 2.9 5.90%
Interest-bearing deposits with banks ......................................... 14.3 .8 5.74
Trading account securities ................................................... 27.5 1.5 5.44
Securities available for sale:
U.S. Government and Federal agencies ....................................... 1,956.7 122.6 6.27
States and political subdivisions .......................................... 6.4 .4 6.66
Other securities ........................................................... 487.4 29.5 6.04
- --------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ...................................... 2,450.5 152.5 6.22
- --------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government and Federal agencies ....................................... 1,607.2 99.6 6.20
States and political subdivisions .......................................... 255.8 23.3 9.11
Other securities ........................................................... 1,443.7 86.6 6.00
- --------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity ........................................ 3,306.7 209.5 6.34
- --------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial ................................................................. 5,331.4 444.3 8.33
Commercial mortgage ........................................................ 2,392.6 208.4 8.71
Residential mortgage ....................................................... 3,608.2 267.3 7.41
Consumer ................................................................... 3,289.1 277.2 8.43
- --------------------------------------------------------------------------------------------------------------------------
Total loans .............................................................. 14,621.3 1,197.2 8.19
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ............................................ 20,469.4 1,564.4 7.64
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ........................................................ 1,198.5
Allowance for loan losses ...................................................... (284.9)
Other assets ................................................................... 796.9
- --------------------------------------------------------------------------------------------------------------------------
Total Assets ................................................................... $22,179.9
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ............................................................. $ 7,954.8 200.8 2.52
Time deposits ................................................................ 5,561.8 283.7 5.10
Commercial certificates of deposit $100,000 and over ......................... 803.9 43.0 5.35
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits .......................................... 14,320.5 527.5 3.68
- --------------------------------------------------------------------------------------------------------------------------
Commercial paper ............................................................. 44.5 2.3 5.25
Other borrowed funds ......................................................... 1,423.7 77.7 5.45
Long-term debt ............................................................... 423.9 31.8 7.50
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ....................................... 16,212.6 639.3 3.94
- --------------------------------------------------------------------------------------------------------------------------
Demand deposits ................................................................ 3,752.0
Other liabilities .............................................................. 348.6
Shareholders' equity ........................................................... 1,866.7
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ..................................... $22,179.9
==========================================================================================================================
Net interest income (tax-equivalent basis) 925.1 3.70%
Tax-equivalent basis adjustment (13.6)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 911.5
==========================================================================================================================
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.52%
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
Average Average
Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and securities purchased under
agreements to resell .......................................... $ 112.9 $ 7.1 6.31%
Interest-bearing deposits with banks ............................ 11.1 .6 5.81
Trading account securities ...................................... 34.8 2.1 5.89
Securities available for sale:
U.S. Government and Federal agencies .......................... 738.0 48.7 6.60
States and political subdivisions ............................. 9.3 .6 6.89
Other securities .............................................. 247.0 16.2 6.56
- ----------------------------------------------------------------------------------------------------------------
Total securities available for sale ......................... 994.3 65.5 6.59
- ----------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government and Federal agencies .......................... 2,445.5 151.4 6.19
States and political subdivisions ............................. 323.5 31.4 9.69
Other securities .............................................. 1,929.4 117.1 6.07
- ----------------------------------------------------------------------------------------------------------------
Total securities held to maturity ........................... 4,698.4 299.9 6.38
- ----------------------------------------------------------------------------------------------------------------
Loans:
Commercial .................................................... 5,286.0 462.7 8.75
Commercial mortgage ........................................... 2,232.3 200.2 8.97
Residential mortgage .......................................... 3,021.5 223.6 7.40
Consumer ...................................................... 2,876.7 251.2 8.73
- ----------------------------------------------------------------------------------------------------------------
Total loans ................................................. 13,416.5 1,137.7 8.48
- ----------------------------------------------------------------------------------------------------------------
Total interest-earning assets ............................... 19,268.0 1,512.9 7.85
- ----------------------------------------------------------------------------------------------------------------
Cash and due from banks ........................................... 1,079.2
Allowance for loan losses ......................................... (299.9)
Other assets ...................................................... 822.8
- ----------------------------------------------------------------------------------------------------------------
Total Assets ...................................................... $20,870.1
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ................................................ $ 7,773.7 205.2 2.64
Time deposits ................................................... 5,298.2 273.4 5.16
Commercial certificates of deposit $100,000 and over ............ 631.6 36.1 5.71
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ............................. 13,703.5 514.7 3.76
- ----------------------------------------------------------------------------------------------------------------
Commercial paper ................................................ 47.7 2.7 5.70
Other borrowed funds ............................................ 1,232.0 71.4 5.79
Long-term debt .................................................. 499.6 37.6 7.52
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities .......................... 15,482.8 626.4 4.05
- ----------------------------------------------------------------------------------------------------------------
Demand deposits ................................................... 3,393.9
Other liabilities ................................................. 329.1
Shareholders' equity .............................................. 1,664.3
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ........................ $20,870.1
================================================================================================================
Net interest income (tax-equivalent basis) 886.5 3.80%
Tax-equivalent basis adjustment (17.3)
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 869.2
================================================================================================================
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.60%
================================================================================================================
</TABLE>
Notes: Average loan balances and rates include non-accruing loans.
The tax-equivalent basis adjustment was computed based on a Federal
income tax rate of 35% for 1996 through 1993 and 34% for 1992 and 1991.
30
<PAGE> 13
<TABLE>
<CAPTION>
1994 1993
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and securities purchased under
agreements to resell ................................. $ 103.2 $ 3.8 3.73% $ 231.9 $ 7.1 3.08%
Interest-bearing deposits with banks ................... 16.9 .6 3.72 21.9 .7 2.98
Trading account securities ............................. 28.9 .9 2.94 32.7 1.5 4.44
Securities available for sale:
U.S. Government and Federal agencies ................. 442.3 25.2 5.71 410.2 17.1 4.16
States and political subdivisions .................... 536.2 30.6 5.70 272.0 14.7 5.39
Other securities ..................................... 514.9 26.4 5.13 464.1 21.4 4.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ................ 1,493.4 82.2 5.50 1,146.3 53.2 4.64
- ------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government and Federal agencies ................. 2,378.4 136.2 5.72 2,898.5 189.8 6.55
States and political subdivisions .................... 381.5 38.1 9.99 403.1 42.8 10.62
Other securities ..................................... 1,869.5 104.2 5.57 947.6 53.9 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity .................. 4,629.4 278.5 6.01 4,249.2 286.5 6.74
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial .............................................. 5,148.0 392.5 7.62 5,008.1 352.8 7.04
Commercial mortgage ..................................... 2,299.3 189.7 8.25 2,338.4 189.7 8.11
Residential mortgage .................................... 2,372.6 165.0 6.95 2,083.5 162.9 7.82
Consumer ................................................ 2,567.7 209.0 8.14 2,459.5 203.5 8.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans ........................................... 12,387.6 956.2 7.72 11,889.5 908.9 7.64
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ......................... 18,659.4 1,322.2 7.09 17,571.5 1,257.9 7.16
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ................................... 1,130.2 1,073.4
Allowance for loan losses ................................. (342.0) (359.5)
Other assets .............................................. 810.6 830.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets .............................................. $20,258.2 $19,115.6
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ....................................... $ 8,327.5 182.5 2.19 $ 7,997.5 184.4 2.31
Time deposits .......................................... 4,205.2 167.5 3.98 4,758.3 200.0 4.20
Commercial certificates of deposit $100,000 and over ... 460.1 18.9 4.10 324.5 9.4 2.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits .................... 12,992.8 368.9 2.84 13,080.3 393.8 3.01
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial paper ....................................... 46.5 1.9 4.06 58.9 1.7 2.95
Other borrowed funds ................................... 1,624.6 70.3 4.33 922.7 32.7 3.55
Long-term debt ......................................... 479.5 34.9 7.28 370.6 28.6 7.71
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ................. 15,143.4 476.0 3.14 14,432.5 456.8 3.17
- ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits .......................................... 3,314.0 3.025.3
Other liabilities ........................................ 289.3 244.3
Shareholders' equity ..................................... 1,511.5 1,413.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ............... $20,258.2 $19,115.6
====================================================================================================================================
Net interest income (tax-equivalent basis) ................ 846.2 3.95% 801.1 3.99%
Tax-equivalent basis adjustment .......................... (19.4) (21.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income ...................................... $ 826.8 $ 779.9
====================================================================================================================================
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.53% 4.56%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1992 1991
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and securities purchased under
agreements to resell ................................. $ 287.0 $ 11.1 3.86% $ 526.9 $ 31.5 5.98%
Interest-bearing deposits with banks ................... 18.7 .7 3.70 34.7 2.3 6.58
Trading account securities ............................. 23.9 1.5 6.26 14.5 1.3 9.16
Securities available for sale:
U.S. Government and Federal agencies ................. 120.5 10.3 8.54 22.4 2.1 9.32
States and political subdivisions .................... -- -- -- 5.0 .8 15.43
Other securities ..................................... 6.3 .5 7.75 7.8 .6 8.29
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale ................ 126.8 10.8 8.50 35.2 3.5 9.97
- ---------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government and Federal agencies ................. 3,781.9 276.5 7.31 3,067.7 268.5 8.75
States and political subdivisions .................... 498.2 51.5 10.34 581.6 61.5 10.58
Other securities ..................................... 486.1 31.9 6.57 701.1 60.1 8.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity .................. 4,766.2 359.9 7.55 4,350.4 390.1 8.97
- ---------------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial .............................................. 5,249.9 381.1 7.26 5,542.7 494.9 8.93
Commercial mortgage ..................................... 2,265.7 199.3 8.80 2,055.1 203.7 9.91
Residential mortgage .................................... 2,025.9 178.4 8.81 2,098.9 204.0 9.72
Consumer ................................................ 2,502.4 221.9 8.87 2,477.5 259.0 10.45
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans ............................................ 12,043.9 980.7 8.14 12,174.2 1,161.6 9.54
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets .......................... 17,266.5 1,364.7 7.90 17,135.9 1,590.3 9.28
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks ................................... 974.6 865.7
Allowance for loan losses ................................. (401.6) (397.2)
Other assets .............................................. 858.2 840.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets .............................................. $18,697.7 $18,444.4
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ...................................... $ 7,246.3 226.7 3.13 $ 6,034.0 300.0 4.97
Time deposits ......................................... 5,417.6 282.1 5.21 5,785.1 399.4 6.90
Commercial certificates of deposit $100,000 and over .. 517.0 20.2 3.91 1,000.0 61.4 6.14
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ................... 13,180.9 529.0 4.01 12,819.1 760.8 5.94
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial paper ...................................... 94.3 3.4 3.61 167.4 10.2 6.10
Other borrowed funds .................................. 1,027.0 38.3 3.73 1,417.1 82.3 5.80
Long-term debt ........................................ 248.7 24.1 9.68 303.6 29.3 9.66
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ................ 14,550.9 594.8 4.09 14,707.2 882.6 6.00
- ---------------------------------------------------------------------------------------------------------------------------------
Demand deposits ......................................... 2,680.1 2,347.7
Other liabilities ....................................... 209.1 227.7
Shareholders' equity .................................... 1,257.6 1,161.8
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity .............. $18,697.7 $18,444.4
=================================================================================================================================
Net interest income (tax-equivalent basis) .............. 769.9 3.81% 707.7 3.28%
Tax-equivalent basis adjustment ......................... (23.2) (27.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income ..................................... $ 746.7 $ 679.8
=================================================================================================================================
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.46% 4.13%
=================================================================================================================================
</TABLE>
31
<PAGE> 14
Summit Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................ $ 1,256,684 $ 1,337,718
Federal funds sold and securities purchased under agreements to resell ................. 111,143 161,650
Interest bearing deposits with banks ................................................... 24,825 18,329
Securities:
Trading account securities ........................................................... 26,376 28,637
Securities available for sale ........................................................ 2,670,414 2,408,065
Securities held to maturity (fair value of $3,198,347 in 1996
and $3,040,826 in 1995) ............................................................ 3,217,384 3,047,080
- ------------------------------------------------------------------------------------------------------------------------------
Total securities ................................................................. 5,914,174 5,483,782
- ------------------------------------------------------------------------------------------------------------------------------
Loans .................................................................................. 14,819,595 14,019,574
Less: Allowance for loan losses ...................................................... 267,719 279,034
- ------------------------------------------------------------------------------------------------------------------------------
Net loans ........................................................................ 14,551,876 13,740,540
- ------------------------------------------------------------------------------------------------------------------------------
Premises and equipment ................................................................. 204,953 206,691
Accrued interest receivable ............................................................ 140,368 132,441
Due from customers on acceptances ...................................................... 15,671 26,740
Other assets ........................................................................... 448,318 429,044
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets ........................................................................... $22,668,012 $21,536,935
==============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing demand deposits ................................................. $ 3,984,366 $ 3,873,801
Interest bearing deposits:
Savings and time deposits .......................................................... 13,779,803 13,373,864
Commercial certificates of deposit $100,000 and over ............................... 610,817 707,438
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits ................................................................... 18,374,986 17,955,103
- ------------------------------------------------------------------------------------------------------------------------------
Other borrowed funds ................................................................... 1,338,734 1,042,556
Accrued expenses and other liabilities ................................................. 271,510 239,791
Accrued interest payable ............................................................... 50,261 45,567
Bank acceptances outstanding ........................................................... 15,671 26,740
Long-term debt ......................................................................... 689,977 424,862
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................................ 20,741,139 19,734,619
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock:
Series B: Authorized 1,200,000 shares, issued and outstanding 600,166 shares in 1995 -- 30,008
Series C: Authorized, issued and outstanding 504,481 shares in 1995 -- 12,612
Common stock par value $1.20:
Authorized 130,000,000 shares; issued and outstanding 93,962,565 in 1996 and
88,471,028 in 1995 ............................................................... 112,755 106,165
Surplus .............................................................................. 881,483 826,788
Retained earnings .................................................................... 927,672 821,579
Net unrealized gain on securities, net of tax ........................................ 4,963 5,164
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity ....................................................... 1,926,873 1,802,316
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ............................................. $22,668,012 $21,536,935
==============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE> 15
SUMMIT BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans ................................................................... $1,191,805 $1,132,584 $ 951,029
Securities:
Trading account securities ............................................ 1,481 1,981 747
Securities available for sale ......................................... 152,326 63,973 81,187
Securities held to maturity ........................................... 201,481 289,310 265,365
- ------------------------------------------------------------------------------------------------------------------------------
Total securities .................................................... 355,288 355,264 347,299
Federal funds sold and securities purchased under agreements to resell .. 2,894 7,122 3,843
Deposits with banks ..................................................... 820 647 629
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income ............................................... 1,550,807 1,495,617 1,302,800
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings and time deposits ............................................... 484,524 478,643 349,989
Commercial certificates of deposit $100,000 and over .................... 43,011 36,090 18,858
Borrowed funds and long-term debt ....................................... 111,761 111,643 107,126
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense .............................................. 639,296 626,376 475,973
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income ................................................. 911,511 869,241 826,827
Provision for loan losses ............................................... 62,000 71,850 91,995
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ................. 849,511 797,391 734,832
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts ..................................... 98,949 88,083 82,997
Service and loan fee income ............................................. 40,414 35,562 37,013
Trust income ............................................................ 39,540 35,418 33,667
Securities gains ........................................................ 5,217 8,606 2,232
Trading account gains ................................................... 477 1,295 847
Other ................................................................... 62,866 55,225 53,310
- ------------------------------------------------------------------------------------------------------------------------------
Total non-interest income ........................................... 247,463 224,189 210,066
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Salaries ................................................................ 245,507 251,253 244,906
Pension and other employee benefits ..................................... 80,873 85,297 77,906
Occupancy, net .......................................................... 71,368 70,297 69,617
Furniture and equipment ................................................. 64,841 61,104 58,561
Communications .......................................................... 30,029 26,155 24,885
Savings Association Insurance Fund assessment ........................... 11,059 -- --
Deposit insurance premium ............................................... 3,780 21,600 37,983
Restructuring charges ................................................... 110,700 -- 13,565
Other ................................................................... 129,778 126,655 172,242
- ------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses ......................................... 747,935 642,361 699,665
- ------------------------------------------------------------------------------------------------------------------------------
Income before taxes ................................................. 349,039 379,219 245,233
Federal and state income taxes .......................................... 119,864 136,349 88,952
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle . 229,175 242,870 156,281
Cumulative effect of a change in accounting principle ................... -- -- (1,731)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income .......................................................... $ 229,175 $ 242,870 $ 154,550
==============================================================================================================================
Net Income Per Common Share:
Income before cumulative effect of a change in accounting principle . $ 2.44 $ 2.77 $ 1.82
Cumulative effect of a change in accounting principle ................... -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share ......................................... $ 2.44 $ 2.77 $ 1.80
==============================================================================================================================
Average Common Shares Outstanding (in thousands) ........................ 93,061 86,674 84,381
==============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE> 16
Summit Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .......................................................................... $ 229,175 $ 242,870 $ 154,550
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for loan losses and other real estate owned ............................ 64,204 77,736 102,568
Depreciation, amortization, and accretion, net .................................... 24,644 44,075 44,168
Restructuring charges ............................................................. 110,700 -- 13,565
Deferred income tax ............................................................... 10,916 22,486 23,244
Gains on sales of trading account securities and securities available for sale .... (5,694) (9,901) (3,079)
Gains on sales of mortgages held for sale ......................................... (1,935) (4,806) (2,759)
Gains on sales of other real estate owned ......................................... (3,596) (3,528) (1,457)
Proceeds from sales of other real estate owned .................................... 27,165 24,534 44,927
Proceeds from sales of mortgages held for sale .................................... 375,824 129,650 450,554
Originations of mortgages held for sale ........................................... (372,389) (160,290) (373,552)
Net decrease (increase) in trading account securities ............................. 2,738 7,528 (2,536)
Net (increase) decrease in accrued interest receivable and other assets ........... (40,986) 44,626 (320,559)
Net (decrease) increase in accrued interest payable, accrued expenses,
and other liabilities ........................................................... (96,779) 13,775 23,095
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ....................................... 323,987 428,755 152,729
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of securities held to maturity ............................................ (504,879) (562,943) (2,134,258)
Purchases of securities available for sale .......................................... (884,304) (276,199) (557,253)
Proceeds from maturities of securities held to maturity ............................. 697,822 924,202 1,375,252
Proceeds from maturities of securities available for sale ........................... 486,028 203,609 800,271
Proceeds from sales of securities available for sale ................................ 139,796 401,104 111,023
Net decrease (increase) in Federal funds sold and securities purchased under
agreements to resell .............................................................. 63,832 (84,481) 303,425
Net (increase) decrease in interest bearing deposits with banks ..................... (6,496) 493 12,958
Purchase acquisitions ............................................................... -- (36,273) (42,156)
Net increase in loans ............................................................... (221,625) (654,001) (1,071,204)
Purchases of premises and equipment, net ............................................ (7,791) (18,515) (24,044)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ........................................... (237,617) (103,004) (1,225,986)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits ................................................. (496,212) 528,488 546,205
Net increase (decrease) in short-term borrowings .................................... 274,541 (520,483) 758,412
Principal payments on long-term debt, net ........................................... (35,085) (196,499) (398,004)
Proceeds from issuance of debt, net of related expenses ............................. 300,200 76,425 475,439
Dividends paid ...................................................................... (133,185) (94,784) (74,042)
Proceeds from issuance of common stock under dividend reinvestment
and other stock plans ............................................................. 30,301 32,631 24,962
Purchase of common stock ............................................................ (91,175) -- --
Redemptions of preferred stock ...................................................... (42,620) (5,984) --
Other, net .......................................................................... (3,966) (4,186) (714)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities ............................. (197,201) (184,392) 1,332,258
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and due from banks ...................................... (110,831) 141,359 259,001
Beginning cash balance of acquired entities ......................................... 29,797 9,273 4,432
Cash and due from banks, beginning of year .......................................... 1,337,718 1,187,086 923,653
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year ................................................ $ 1,256,684 $ 1,337,718 $ 1,187,086
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid:
Interest payments ................................................................. $ 636,913 $ 615,750 $ 469,079
Income tax payments ............................................................... 123,408 100,386 73,191
Noncash investing activities:
Net transfer of securities held to maturity to (from) securities available for sale -- 1,397,526 (573,715)
Net transfer of loans to other real estate owned .................................. 21,401 30,050 47,628
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE> 17
Summit Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in thousands)
Preferred Common Retained
Stock Stock Surplus Earnings
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 ............................ $ 50,008 $ 99,901 $ 706,530 $ 596,348
Beginning balance of immaterial pooled
acquisition (450,000 shares) ...................... -- 540 (140) 2,395
Net unrealized gain on securities upon
adoption of a change in accounting principle,
net of tax ........................................ -- -- -- --
Adjustment for the pooling of companies with
different fiscal year ends ........................ -- -- 343 474
Net income .......................................... -- -- -- 154,550
Cash dividend declared:
Preferred stock ................................... -- -- -- (3,035)
Common stock ...................................... -- -- -- (74,451)
Common stock issued:
Dividend reinvestment and other stock plans
(647,661 shares) ................................ -- 777 14,690 --
Exercise of stock options, net (655,374 shares) ... -- 787 8,708 --
Change in unrealized gain (loss) on securities,
net of tax ........................................ -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ............................ 50,008 102,005 730,131 676,281
- -------------------------------------------------------------------------------------------------------------------------------
Net income .......................................... -- -- -- 242,870
Cash dividend declared:
Preferred stock ................................... -- -- -- (2,700)
Common stock ...................................... -- -- -- (96,276)
Common stock issued:
In connection with purchase acquisition of
Bancorp New Jersey, Inc. (1,948,153 shares) ..... -- 2,338 65,848 --
Dividend reinvestment and other stock plans
(894,061 shares) ................................ -- 1,073 24,684 --
Exercise of stock options, net (624,862 shares) ... -- 749 6,125 --
Redemption of Series C preferred stock
(295,519 shares) .................................. (7,388) -- -- 1,404
Change in unrealized gain (loss) on securities,
net of tax ........................................ -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ............................ 42,620 106,165 826,788 821,579
- -------------------------------------------------------------------------------------------------------------------------------
Beginning balance of immaterial pooled
acquisitions (4,353,085 shares) ................... -- 5,224 29,612 14,054
Net income .......................................... -- -- -- 229,175
Cash dividend declared:
Preferred stock ................................... -- -- -- (2,544)
Common stock ...................................... -- -- -- (134,592)
Common stock issued:
Dividend reinvestment and other stock plans
(282,390 shares) ................................ -- 339 10,083 --
Exercise of stock options, net (856,062 shares) ... -- 1,027 18,852 --
Purchase of common stock at cost
(2,329,880 shares) ................................ -- (2,796) (88,379) --
Reissuance of treasury stock in conjunction with
acquisition (2,329,880 shares) .................... -- 2,796 84,527 --
Redemption of Series B preferred stock
(600,166 shares) and Series C preferred stock
(504,481 shares) .................................. (42,620) -- -- --
Change in unrealized gain (loss) on securities,
net of tax ........................................ -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ............................ $ -- $ 112,755 $ 881,483 $ 927,672
===============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) Net Total
Unrealized Shareholders'
Gain (Loss) Equity
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1993 ............................ $ 3,740 $ 1,456,527
Beginning balance of immaterial pooled
acquisition (450,000 shares) ...................... -- 2,795
Net unrealized gain on securities upon
adoption of a change in accounting principle,
net of tax ........................................ 9,355 9,355
Adjustment for the pooling of companies with
different fiscal year ends ........................ -- 817
Net income .......................................... -- 154,550
Cash dividend declared:
Preferred stock ................................... -- (3,035)
Common stock ...................................... -- (74,451)
Common stock issued:
Dividend reinvestment and other stock plans
(647,661 shares) ................................ -- 15,467
Exercise of stock options, net (655,374 shares) ... -- 9,495
Change in unrealized gain (loss) on securities,
net of tax ........................................ (37,803) (37,803)
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ............................ (24,708) 1,533,717
- -------------------------------------------------------------------------------------------------
Net income .......................................... -- 242,870
Cash dividend declared:
Preferred stock ................................... -- (2,700)
Common stock ...................................... -- (96,276)
Common stock issued:
In connection with purchase acquisition of
Bancorp New Jersey, Inc. (1,948,153 shares) ..... -- 68,186
Dividend reinvestment and other stock plans
(894,061 shares) ................................ -- 25,757
Exercise of stock options, net (624,862 shares) ... -- 6,874
Redemption of Series C preferred stock
(295,519 shares) .................................. -- (5,984)
Change in unrealized gain (loss) on securities,
net of tax ........................................ 29,872 29,872
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ............................ 5,164 1,802,316
- -------------------------------------------------------------------------------------------------
Beginning balance of immaterial pooled
acquisitions (4,353,085 shares) ................... (567) 48,323
Net income .......................................... -- 229,175
Cash dividend declared:
Preferred stock ................................... -- (2,544)
Common stock ...................................... -- (134,592)
Common stock issued:
Dividend reinvestment and other stock plans
(282,390 shares) ................................ -- 10,422
Exercise of stock options, net (856,062 shares) ... -- 19,879
Purchase of common stock at cost
(2,329,880 shares) ................................ -- (91,175)
Reissuance of treasury stock in conjunction with
acquisition (2,329,880 shares) .................... -- 87,323
Redemption of Series B preferred stock
(600,166 shares) and Series C preferred stock
(504,481 shares) .................................. -- (42,620)
Change in unrealized gain (loss) on securities,
net of tax ........................................ 366 366
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ............................ $ 4,963 $ 1,926,873
=================================================================================================
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
- --------------------------------------------------------------------------------
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles and prevailing industry standards. The
following is a description of the significant accounting policies used in the
preparation of the Consolidated Financial Statements.
BUSINESS
On March 1, 1996, UJB Financial Corp. completed its acquisition of The Summit
Bancorporation, and the company changed its name to Summit Bancorp. Summit
Bancorp is a bank holding company registered under the Bank Holding Company Act
of 1956. Through its bank and active non-bank subsidiaries, a full range of
banking services and certain non-banking services are provided to its customers
in a competitive environment. Summit Bancorp is regulated by various Federal and
state agencies and is subject to periodic examinations by those regulatory
authorities.
PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include the accounts of
Summit Bancorp after elimination of all significant intercompany accounts and
transactions. Certain prior period amounts have been reclassified to conform to
the financial statement presentation of 1996. The reclassifications have no
effect on shareholders' equity or net income as previously reported.
Prior period financial statements have been restated to include the accounts and
results of operations for all material acquisitions accounted for as
pooling-of-interests combinations. For acquisitions using the purchase method of
accounting, results of operations are included from the dates of acquisition.
The assets and liabilities of companies acquired under the purchase method of
accounting have been adjusted to estimated fair values at the date of
acquisition; the resulting net discount or premium is being accreted or
amortized into income over the estimated remaining lives of the related assets
and liabilities.
In preparation of financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from these
estimates.
SECURITIES
Securities are classified into one of three categories: trading account, held to
maturity, and available for sale.
Securities that are purchased specifically for short-term appreciation with the
intent of selling in the near future are classified as trading account
securities. Trading account securities are carried at fair value with realized
and unrealized gains and losses reported in non-interest income.
Debt securities purchased with the intent and ability to hold until maturity are
classified as securities held to maturity and are carried at cost, adjusted for
amortization of premiums and accretion of discounts.
All other securities, including equity securities, are classified as securities
available for sale. Securities available for sale may be sold prior to maturity
in response to changes in interest rates, changes in prepayment risk, for
asset/liability management purposes, or other factors. These securities are
carried at fair value with unrealized gains and losses, including the effect of
hedges, reported on a net-of-tax basis, as a separate component of shareholders'
equity. Realized gains and losses, which are generally computed using the
specific identification method, are reported in non-interest income.
LOANS
Loans are generally carried at the principal amount outstanding, net of unearned
discounts and deferred loan origination fees and costs. Interest on loans is
accrued and credited to interest income as earned. Loan origination fees and
certain direct loan origination costs are deferred and amortized over the life
of the loan in interest income as an adjustment to the yield. Other loan fees
are recognized as earned and are included in non-interest income.
Residential mortgage loans that are serviced for others are not included in the
Consolidated Financial Statements. Fees earned for servicing loans are reported
as non-interest income primarily when the related loan payments are collected.
Loan servicing costs are charged to non-interest expense as incurred.
Loans held for sale primarily consist of residential mortgages and are carried
at the lower of cost or market using the aggregate method. Gains and losses on
loans sold are included in non-interest income.
NON-PERFORMING LOANS
Non-performing loans consist of commercial and industrial, construction and
development, and commercial mortgage loans for which the accrual of interest has
been discontinued. These loans are classified as non-performing when they are 90
days or more past due as to principal or interest or where reasonable doubt
exists as to timely collectibility.
36
<PAGE> 19
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," were adopted
prospectively on January 1, 1995. Under SFAS Nos. 114 and 118, when it is
probable that, based on current information, the lender will not collect all
amounts due under the contractual terms of the loan, the loan is to be reported
as impaired. Summit Bancorp considers all of its non-performing loans to be
impaired.
At the time a loan is placed on non-accrual status, previously accrued and
uncollected interest is reversed against interest income. Interest income on
non-accrual loans is generally credited to income on a cash basis; however, if
ultimate collectibility of principal is in doubt, interest collections are
applied as principal reductions. A loan is transferred to accrual status when it
is brought current and its future collectibility is assured.
Smaller balance loans such as consumer loans and residential mortgages, which
are collectively evaluated, are specifically excluded from the population of
impaired loans. Interest accruals on all consumer and residential mortgage loans
cease at 90 days, at which time all previously accrued interest is reversed.
Generally, all non-real-estate consumer loans are charged off at 120 days. All
impaired loans, residential mortgage loans and consumer real estate secured
loans, or a portion thereof, are charged off when deemed uncollectible.
Loan impairment is measured based on the present value of the expected future
cash flows discounted at the loan's effective interest rate or the underlying
value of collateral for collateral dependent loans. The impaired loan's carrying
value in excess of the expected cash flows or collateral value is specifically
reserved for or is charged to the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve available for losses
incurred or expected on extensions of credit. Credit losses primarily arise from
the loan portfolio, but may also be derived from other credit-related sources
including commitments to extend credit, guarantees and standby letters of
credit. Additions are made to the allowance through periodic provisions which
are charged to expense. All losses of principal are charged to the allowance
when incurred or when a determination is made that a loss is expected.
Subsequent recoveries, if any, are credited to the allowance.
The adequacy of the allowance for loan losses is determined through a quarterly
review of outstanding loans and commitments to extend credit. The impact of
economic conditions on the creditworthiness of the borrowers is considered, as
well as loan loss experience, changes in the composition and volume of the loan
portfolio, and management's assessment of the risks inherent in the loan
portfolio. These and other factors are used in assessing the overall adequacy of
the allowance for loan losses and the resulting provision for loan losses.
PREMISES AND EQUIPMENT
Premises, furniture, and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method. Premises, furniture, and equipment are depreciated
over the estimated useful lives of the assets or terms of the leases, as
applicable. Estimated useful lives are ten to forty years for premises, and
three to ten years for furniture and equipment. Maintenance and repairs are
charged to non-interest expenses as incurred, while renewals and major
improvements are capitalized. Upon disposition, premises, furniture and
equipment are removed from the property accounts at their net carrying amount
with the resulting gain or loss credited or charged to non-interest income or
expenses.
OTHER REAL ESTATE OWNED (OREO)
OREO is carried at the lower of cost or fair value less estimated cost to sell.
When a property is acquired, the excess of the carrying amount over fair value,
if any, is charged to the allowance for loan losses. An allowance for OREO has
been established, through charges to OREO expense, to maintain properties at the
lower of cost or fair value less estimated cost to sell. Operating results of
OREO, including rental income, operating expenses, and gains and losses realized
from the sale of properties owned, are included in non-interest expenses.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired through purchase acquisitions. The
amortization of goodwill is on a straight-line basis over the estimated periods
to be benefited, ranging from ten to twenty-five years, and is included in
non-interest expenses.
Other intangibles primarily consist of core deposit intangibles which represent
the intangible value of depositor relationships assumed in acquisitions. The
amortization of these intangibles is on an accelerated basis over their
estimated periods of benefit, ranging from five to ten years, and is included in
non-interest expenses.
MORTGAGE SERVICING RIGHTS
Effective January 1, 1996, SFAS No. 122, "Accounting for Mortgage Servicing
Rights," was adopted on a prospective basis. SFAS No. 122 requires the
recognition of separate assets for the rights to service mortgage loans for
others, however those servicing rights are acquired, through purchase
transactions or loan originations. Mortgage servicing rights are amortized over
the estimated net servicing life and are evaluated for impairment based on their
fair value on a quarterly basis. The fair value is estimated using the present
value of future cash flows along with numerous assumptions including servicing
income, cost of servicing, discount rates, prepayment anticipations and default
rates. Impairment adjustments are recognized through the use of a valuation
allowance.
37
<PAGE> 20
DERIVATIVE FINANCIAL INSTRUMENTS
Off-balance-sheet financial derivatives are used as part of the overall
asset/liability management process. These instruments are used to manage risk
related to changes in interest rates. At December 31, 1996, interest rate swaps,
caps and floors were used primarily to manage interest rate risk.
Interest rate swaps are agreements with counterparties to exchange periodic
interest payments calculated on a notional principal amount and are accounted
for under the accrual method. To qualify for accounting under the accrual
method, the swaps must be designated to interest-bearing assets or liabilities
and must modify their interest rate characteristics over the term of the
agreement or the designated instrument, whichever is shorter. The net periodic
interest payments or receipts arising from these instruments are recognized in
interest income or interest expense as yield adjustments to the designated asset
or liability.
Interest rate caps and floors are agreements in which, for an upfront premium
and on predetermined future dates, the counterparty agrees to pay an interest
amount based on the movement of specified market interest rates either above or
below a predetermined level. The payments, if applicable, are derived from the
measured rate variance multiplied by the contractual notional volume. To qualify
for accrual accounting, interest rate caps and floors must be designated to
interest-bearing assets or liabilities and must modify their interest rate
characteristics over the term of the agreement or the designated instrument,
whichever is shorter. Costs of interest rate caps and floors are deferred and
amortized in interest income or interest expense as adjustments to the yield of
the designated instrument. Unamortized costs are included in other assets.
Payments received on these caps and floors are recognized under the accrual
method as adjustments to interest income or interest expense of the designated
instruments.
Changes in the fair value of derivatives are only reported in financial
statements if they are hedging financial instruments accounted for at fair value
on the balance sheet. If terminated, realized gains and losses on these
instruments are deferred and amortized in interest income and interest expense
as yield adjustments to the designated asset or liability over the shorter of
the remaining life of the agreement or the designated asset or liability.
Summit Bancorp does not hold or issue any derivative financial instruments for
trading purposes where changes in their values are reported in earnings.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for under the intrinsic value based method
as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Included in these Notes to the Consolidated
Financial Statements are the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation," which assumes the fair value based
method of accounting had been adopted.
RETIREMENT PLANS
Several formal non-contributory retirement plans exist which cover substantially
all full-time employees. Annual contributions are made to the plans in amounts
at least equal to the minimum regulatory requirements and no greater than the
maximum amount that can be deducted for Federal income tax purposes. The costs
associated with these benefits are accrued based on actuarial assumptions and
included in non-interest expenses.
INCOME TAXES
The amount provided for Federal income taxes is based on income reported for
consolidated financial statement purposes, after elimination of Federal
tax-exempt income which is derived primarily from securities of state and
political subdivisions and certain commercial and mortgage loans. The amount
provided for state income taxes is based on income reported by each subsidiary
on a stand alone basis.
Deferred Federal and state tax assets and liabilities are recognized for the
expected future tax consequences of existing differences between financial
statement and tax bases of existing assets and liabilities, as well as for
operating losses. The effect of a change in the tax rate on deferred taxes is
recognized in the period of the enactment date.
A consolidated Federal income tax return is filed with the amount of income tax
expense or benefit computed and allocated to each subsidiary on a separate
return basis.
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income, less the
dividends on preferred stocks, by the average daily number of common shares
outstanding during the period. Common stock equivalents are not included in the
calculation as they have no material dilutive effect.
38
<PAGE> 21
NOTE 2 ACQUISITIONS AND RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
ACQUISITIONS
On March 1, 1996, UJB Financial Corp. completed its acquisition of The Summit
Bancorporation, and the company changed its name to Summit Bancorp. This
transaction was accounted for as a pooling of interests, and all financial
information has been restated for 1995 and prior periods. Of the acquisitions
accounted for as poolings of interest, The Flemington National Bank and Trust
Company (Flemington), Garden State Bancshares, Inc. (Garden State) and Lancaster
Financial Ltd., Inc. acquisitions were not material to Summit Bancorp's
Consolidated Financial Statements and were recorded as adjustments to beginning
shareholders' equity in the year of acquisition. Entities acquired under the
purchase method of accounting are reflected in Summit Bancorp's financial
statements from the date of acquisition.
On August 28, 1996, Summit Bancorp announced a definitive merger agreement to
acquire B.M.J. Financial Corp. (B.M.J.). At December 31, 1996, B.M.J. had total
assets of $676 million, loans of $449 million and deposits of $552 million. The
transaction is expected to be consummated in March 1997 in an exchange of .56
shares of Summit Bancorp common stock for each share of B.M.J. common stock.
This transaction will be accounted for as a pooling of interests.
On February 28, 1997, Summit Bancorp announced a definitive merger agreement to
acquire Collective Bancorp, Inc.(Collective). At December 31, 1996, Collective
had total assets of $5,544 million, loans of $2,874 million and deposits of
$3,553 million. The transaction is intended to be accounted for as a pooling of
interests in an exchange of .895 shares of Summit Bancorp common stock for each
share of Collective common stock. At December 31, 1996, there were approximately
20.4 million of Collective shares issued and outstanding. This transaction is
subject to regulatory and Collective shareholder approval, and is anticipated to
be consummated in the third quarter of 1997.
RESTRUCTURING CHARGES
Summit Bancorp recorded restructuring charges of $110.7 million, or $.75 per
common share, for merger-related expenses associated with The Summit
Bancorporation, Flemington and Garden State acquisitions. Also included in the
restructuring charge was $9.5 million for costs relating to the closing of
select full-service branches in conjunction with the supermarket branch
initiative.
The Summit Bancorporation acquisition accounts for $89 million of the
restructuring charge of which $35 million is for personnel expenses. Personnel
expenses include severance pay and benefits for terminated employees including
external placement costs. Charges for real estate were approximately $26
million. Real estate expenses resulted from the costs incurred when branches and
other operation facilities were consolidated, including lease-termination costs,
write-downs of owned properties and leasehold improvements and other
facility-related costs. Charges for professional fees amounted to $12 million
and included costs for investment banking, accounting and legal fees. Charges
for data processing were $8 million, which primarily included costs associated
with the disposal or write-offs of duplicate or non-usable software or hardware
systems. The remaining $8 million was for account conversions, communications
and other merger costs. Merger-related restructuring charges also included $4.3
million for the Flemington acquisition and $7.9 million for the Garden State
acquisition. The types of costs incurred for these acquisitions are similar to
that of The Summit Bancorporation.
These charges included only identified direct and incremental costs associated
with the mergers and the restructuring.
Funding for cash expenditures related to the charges have, and will be paid for
out of operations of Summit Bancorp. Liquidity was not significantly impacted by
these cash outlays. Approximately $71 million of restructuring charge payments
and $12 million of write-offs had been realized through December 31, 1996. It is
anticipated that the remaining restructuring charges will be used in 1997.
<TABLE>
<CAPTION>
SUMMARY OF COMPLETED ACQUISITIONS
Cash
(In millions, except common shares issued) Date Assets Loans Deposits Paid
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Central Jersey Financial Corporation ............... Dec. 7 $ 446.6 $ 200.5 $ 376.8 $ --
The Summit Bancorporation .......................... March 1 5,654.1 3,562.2 4,693.7 --
The Flemington National Bank and Trust Company ..... Feb. 23 285.9 190.6 257.5 --
Garden State Bancshares, Inc.* ..................... Jan. 16 311.8 208.8 281.8 --
1995
Bancorp New Jersey, Inc. ........................... July 11 504.5 290.4 450.0 36.3
1994
Palisade Savings Bank, FSB ......................... Sept. 16 324.2 164.8 266.7 42.2
Crestmont Financial Corp.* ......................... Sept. 13 859.4 422.7 726.2 --
Lancaster Financial Ltd., Inc.* .................... Sept. 1 16.1 12.9 -- --
VSB Bancorp, Inc. .................................. July 1 381.1 133.0 294.0 --
</TABLE>
<TABLE>
<CAPTION>
Common
Shares Method of
(In millions, except common shares issued) Issued Accounting
- ----------------------------------------------------------------------------------------
<S> <C> <C>
1996
Central Jersey Financial Corporation ............. 2,329,880 Stock purchase
The Summit Bancorporation ........................ 34,078,905 Pooling of interests
The Flemington National Bank and Trust Company ... 1,324,000 Pooling of interests
Garden State Bancshares, Inc.* ................... 3,029,085 Pooling of interests
1995
Bancorp New Jersey, Inc. ......................... 1,948,153 Stock/cash purchase
1994
Palisade Savings Bank, FSB ....................... -- Cash purchase
Crestmont Financial Corp.* ....................... 3,829,588 Pooling of interests
Lancaster Financial Ltd., Inc.* .................. 450,000 Pooling of interests
VSB Bancorp, Inc. ................................ 2,628,912 Pooling of interests
</TABLE>
* Amounts included in the March 1, 1996, The Summit Bancorporation acquisition.
39
<PAGE> 22
NOTE 3 SECURITIES
- --------------------------------------------------------------------------------
The following table represents the major components of investment securities.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- ----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal agencies . $2,188,919 $ 8,755 $ 15,291 $2,182,383 $1,904,017 $14,238 $ 15,996 $1,902,259
States and political subdivisions .... 12,908 1 3 12,906 -- -- -- --
Other securities:
Mortgage-backed .................... 317,434 1,232 997 317,669 348,939 2,079 2,285 348,733
Other debt ......................... 30,197 923 4 31,116 41,497 2,042 87 43,452
Equities, net ...................... 110,771 15,708 139 126,340 102,269 11,531 179 113,621
- ------------------------------------------------------------------------------------------------------------------------------------
Total other ...................... 458,402 17,863 1,140 475,125 492,705 15,652 2,551 505,806
- ------------------------------------------------------------------------------------------------------------------------------------
$2,660,229 $26,619 $ 16,434 $2,670,414 $2,396,722 $29,890 $ 18,547 $2,408,065
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government and Federal agencies . $1,698,032 $ 6,959 $ 18,561 $1,686,430 $1,261,172 $ 8,180 $ 11,747 $1,257,605
States and political subdivisions .... 217,547 9,575 119 227,003 271,621 14,815 186 286,250
Other securities:
Mortgage-backed .................... 1,170,547 894 18,518 1,152,923 1,404,834 1,138 20,453 1,385,519
Other debt ......................... 131,258 1,133 400 131,991 109,453 2,326 327 111,452
- ------------------------------------------------------------------------------------------------------------------------------------
Total other ...................... 1,301,805 2,027 18,918 1,284,914 1,514,287 3,464 20,780 1,496,971
- ------------------------------------------------------------------------------------------------------------------------------------
$3,217,384 $18,561 $ 37,598 $3,198,347 $3,047,080 $26,459 $ 32,713 $3,040,826
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in interest on securities held to maturity and securities available
for sale is tax-exempt income on certain state and municipal securities which
amounted to $16,563,000, $21,127,000 and $25,328,000 for 1996, 1995 and 1994,
respectively.
Gross realized gains on securities available for sale amounted to $7,823,000,
$23,892,000 and $2,693,000, while gross realized losses amounted to
$3,580,000, $15,994,000 and $834,000 for the years 1996, 1995 and 1994,
respectively. These amounts are included in non-interest income as securities
gains in the Consolidated Statements of Income. Also included in securities
gains are gains and losses realized from the early redemption of securities
held to maturity.
The carrying value of investment securities pledged to secure public funds
and securities sold under agreements to repurchase, as well as for other
purposes required by law, was $1,853,832,000 at December 31, 1996.
The table below provides the remaining contractual yields of debt securities
within the investment portfolios. The carrying value of securities at
December 31, 1996, are distributed by contractual maturity. However,
mortgage-backed securities and other securities which may have principal
prepayment provisions are distributed based on contractual maturity adjusted
for historical prepayments. These prepayments are not scheduled over the life
of the investment, but are reflected as adjustments to the final maturity
distribution. Equity securities, which have no contractual maturity, are
shown without the anticipated dividend yield in the due "within one year"
column.
<TABLE>
<CAPTION>
Within After one year After five years After
one year through five years through ten years ten years Total
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Government and Federal agencies ....... $207,262 6.58% $1,173,061 6.07% $193,735 6.60% $608,325 6.71% $2,182,383
States and political subdivisions .......... 12,906 4.19 -- -- -- -- -- -- 12,906
Other securities:
Mortgage backed .......................... 7,503 7.19 101,272 6.79 79,470 6.43 129,424 6.15 317,669
Other debt ............................... -- -- 31,089 6.43 -- -- 27 6.46 31,116
Equities, net ............................ 126,340 -- -- -- -- -- -- -- 126,340
- ------------------------------------------------------------------------------------------------------------------------------------
Total other ............................ 133,843 7.19* 132,361 6.71 79,470 6.43 129,451 6.15 475,125
- ------------------------------------------------------------------------------------------------------------------------------------
$354,011 6.46%* $1,305,422 6.13% $273,205 6.55% $737,776 6.61% $2,670,414
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
U.S. Government and Federal agencies ....... $ 62,846 6.14% $ 866,378 5.99% $396,886 6.72% $371,922 7.03% $1,698,032
States and political subdivisions .......... 45,833 6.17 103,559 6.26 45,931 6.06 22,224 6.40 217,547
Other securities:
Mortgage backed .......................... 102,163 5.95 948,823 6.19 67,963 6.36 51,598 6.96 1,170,547
Other debt ............................... 1,055 5.95 77,621 6.23 12,793 6.42 39,789 7.00 131,258
- ------------------------------------------------------------------------------------------------------------------------------------
Total other ............................ 103,218 5.95 1,026,444 6.19 80,756 6.37 91,387 6.98 1,301,805
- ------------------------------------------------------------------------------------------------------------------------------------
$211,897 6.05% $1,996,381 6.11% $523,573 6.61% $485,533 6.99% $3,217,384
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Yields exclude equity securities.
40
<PAGE> 23
NOTE 4 LOANS
- --------------------------------------------------------------------------------
The composition of the loan portfolio, net of unearned discount and deferred
loan origination fees and costs, at December 31 was as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Commercial and industrial ........... $ 4,795,252 $ 4,751,227
Construction and development ........ 471,413 569,820
- ----------------------------------------------------------------------
Total commercial loans ............ 5,266,665 5,321,047
Commercial mortgage ................. 2,313,610 2,315,384
Residential mortgage ................ 3,795,752 3,296,818
- ----------------------------------------------------------------------
Total mortgage loans .............. 6,109,362 5,612,202
Home equity ......................... 2,165,550 1,907,883
Automobile .......................... 893,703 826,263
Other consumer ...................... 384,315 352,179
- ----------------------------------------------------------------------
Total consumer loans .............. 3,443,568 $ 3,086,325
- ----------------------------------------------------------------------
$14,819,595 $14,019,574
- ----------------------------------------------------------------------
</TABLE>
Summit Bancorp's credit policy emphasizes diversification of risk among
industries and borrowers. Concentrations of credit risk, whether on or off the
balance sheet, exist in relation to certain groups of customers or
counterparties. A group concentration arises when a number of customers or
counterparties have similar economic characteristics that would cause their
ability to meet contractual obligations or be similarly affected by changes in
economic or other conditions. Summit Bancorp does not have a significant
exposure to any individual customer, counterparty, or group concentration.
Summit Bancorp's business is concentrated in New Jersey and eastern
Pennsylvania. A significant portion of the total loan portfolio is secured by
real estate or other collateral located in these states. This concentration is
mitigated by the diversification of the loan portfolio among commercial,
construction, commercial mortgage, residential mortgage, and consumer loans. The
commercial and industrial loan portfolio represents approximately 32% of the
entire loan portfolio and has no concentration greater than 10% to any specific
industry.
At December 31, 1996, the ten largest commercial and commercial mortgage loans
have outstanding balances of $460,754,000 and unexercised commitments of
$61,874,000.
Included in the commercial and commercial mortgage loan portfolios are loans
where the accrual of interest has been discontinued. These non-performing loans
were $132,086,000 and $188,488,000 at December 31, 1996 and 1995, respectively.
These loans return to accrual status when the loan becomes contractually current
and future collectibility of amounts due is reasonably assured.
The table below shows the lost interest on non-performing loans at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income that would have been recorded
under original contract terms ........ $13,497 $19,724 $19,702
Less interest income received .......... 1,817 2,833 2,642
- --------------------------------------------------------------------------------
Lost income on non-performing
loans at year end $11,680 $16,891 $17,060
- --------------------------------------------------------------------------------
</TABLE>
The average balance of non-performing loans for 1996 and 1995 was $174,933,000
and $209,674,000, respectively. The amount of cash basis interest income that
was received on these loans was $3,312,000 in 1996 and $3,254,000 in 1995.
Included in residential mortgage loans are mortgage loans held for sale, which
approximated $49,400,000 at December 31, 1996, and $68,800,000 at December 31,
1995. These loans are accounted for at the lower of aggregate cost or market
value.
NOTE 5 ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $279,034 $305,330 $339,028
Acquisition adjustments, net 8,492 6,131 1,910
Add provision charged to expense 62,000 71,850 91,995
- --------------------------------------------------------------------------------
349,526 383,311 432,933
- --------------------------------------------------------------------------------
Less charge offs:
Commercial and industrial 36,524 45,293 37,229
Construction and development 16,862 35,451 39,209
Commercial mortgage 25,695 25,741 21,731
Residential mortgage 5,043 6,016 4,440
Consumer 20,913 13,871 10,300
- --------------------------------------------------------------------------------
Total charge offs 105,037 126,372 112,909
- --------------------------------------------------------------------------------
Add recoveries:
Commercial and industrial 12,602 14,684 13,921
Construction and development 2,427 2,072 1,320
Commercial mortgage 2,466 1,920 2,838
Residential mortgage 838 667 594
Consumer 4,897 2,752 3,585
- --------------------------------------------------------------------------------
Total recoveries 23,230 22,095 22,258
- --------------------------------------------------------------------------------
Net charge offs 81,807 104,277 90,651
- --------------------------------------------------------------------------------
Less write downs on transfer to assets
held for accelerated disposition -- -- 36,952
- --------------------------------------------------------------------------------
Balance, December 31 $267,719 $279,034 $305,330
- --------------------------------------------------------------------------------
</TABLE>
The allocation of the allowance for loan losses at December 31 was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance allocated to non-performing
loans $ 19,520 $ 29,473
Allowance allocated to performing loans 114,975 163,703
Unallocated allowance 133,224 85,858
- --------------------------------------------------------------------------------
$267,719 $279,034
- --------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 24
NOTE 6 PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The major components of premises and equipment at December 31 were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Land .................................. $ 26,451 $ 21,046
Premises and leasehold improvements ... 260,342 251,875
Furniture and equipment ............... 205,284 210,832
- --------------------------------------------------------------------
492,077 483,753
Less accumulated depreciation and
amortization ........................ 287,124 277,062
- --------------------------------------------------------------------
$204,953 $206,691
- --------------------------------------------------------------------
</TABLE>
Amounts charged to non-interest expenses for depreciation and amortization
amounted to $28,576,000 in 1996, $29,191,000 in 1995, and $28,558,000 in 1994.
NOTE 7 OTHER ASSETS
- --------------------------------------------------------------------------------
The major components of other assets at December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets $156,346 $149,237
Goodwill and other intangibles 148,144 119,676
Other real estate owned 20,979 24,295
Assets held for accelerated disposition -- 16,650
Other 122,849 119,186
- --------------------------------------------------------------------------------
$448,318 $429,044
- --------------------------------------------------------------------------------
</TABLE>
See Note 16 for additional information on other real estate owned, goodwill and
other intangibles and see Note 17 for detail on the deferred tax assets.
Included in "Other" is the carrying value of the capitalized mortgage servicing
rights which was $1,646,000 and $1,828,000 at December 31, 1996 and 1995,
respectively. The carrying value of these servicing rights approximates market
value.
NOTE 8 DEPOSITS
- --------------------------------------------------------------------------------
The following is an expected maturity distribution of savings and time
deposits at December 31, 1996:
<TABLE>
<CAPTION>
(In thousands) Amount
- --------------------------------------------------------------------
<S> <C>
Due in one year or less ........................ $12,368,126
Due between one and two years .................. 886,727
Due between two and three years ................ 422,116
Due between three and four years ............... 62,616
Due between four and five years ................ 28,135
Due over five years ............................ 12,083
- --------------------------------------------------------------------
$13,779,803
- --------------------------------------------------------------------
</TABLE>
As of December 31, 1996, there were $990,681,000 of time deposits greater than
$100,000, of which $610,817,000 are classified as commercial certificates of
deposit. At year-end 1996 and 1995, there were $36,302,000 and $36,971,000,
respectively, of overdraft deposit relationships classified as loans.
The total amount of public funds held on deposit as of December 31, 1996 was
$867,015,000, for which $191,147,000 of securities were pledged as collateral.
NOTE 9 OTHER BORROWED FUNDS
- --------------------------------------------------------------------------------
Other borrowed funds at December 31 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to
repurchase ........................ $ 796,815 $ 649,650
Federal funds purchased ............. 199,950 200,700
Treasury tax and loan ............... 128,695 90,689
Federal Home Loan Bank advances ..... 90,000 --
Commercial paper* ................... 40,476 38,503
Other ............................... 82,798 63,014
- --------------------------------------------------------------------------------
$1,338,734 $1,042,556
- --------------------------------------------------------------------------------
</TABLE>
* Indicates Parent Corporation obligation.
Lines of credit at the Parent Corporation are available to support commercial
paper borrowings and for general corporate purposes. Interest on these lines of
credit approximates the prime lending rate at the time of borrowing. Unused
lines amounted to $38,000,000 at December 31, 1996.
NOTE 10 LEASE COMMITMENTS
- -------------------------------------------------------------------------------
Non-interest expenses include rentals for premises and equipment of $54,441,000
in 1996, $51,629,000 in 1995, and $46,881,000 in 1994, after reduction for
sublease rentals of $3,026,000, $3,683,000 and $2,986,000 in each of the
respective years. At December 31, 1996, Summit Bancorp was obligated under a
number of non-cancelable leases for premises and equipment, many of which
provide for increased rentals based upon increases in real estate taxes and the
cost of living index. These leases, most of which have renewal provisions, are
principally non-financing leases. Minimum rentals under the terms of these
leases for the years 1997 through 2001 are $29,647,000, $28,066,000,
$23,507,000, $20,634,000 and $18,929,000, respectively. Minimum rentals due
after 2002 are $151,409,000.
NOTE 11 CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
Summit Bancorp and its subsidiaries are, from time to time, defendants in legal
proceedings relating to the conduct of their businesses. In the best judgment of
management, the consolidated financial position of Summit Bancorp and its
subsidiaries will not be affected materially by the final outcome of any pending
legal proceedings or other contingent liabilities and commitments.
42
<PAGE> 25
NOTE 12 LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt at December 31 consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
FHLB Notes and advances, 4.00% to 8.05%,
due 1997 through 2010 .................... $426,442 $157,460
8.625% Subordinated notes due
December 10, 2002* ....................... 175,000 175,000
6.75% Subordinated notes due June 15, 2003.. 49,485 49,405
7.95% Senior notes due August 25, 2003* .... 20,000 20,000
Collateralized mortgage obligations ........ 10,391 13,148
7.75% Sinking fund debentures due
November 1, 1997* ........................ 8,659 9,349
Other ...................................... -- 500
- -----------------------------------------------------------------------
$689,977 $424,862
- -----------------------------------------------------------------------
</TABLE>
* Indicates Parent Corporation obligation.
The major banking subsidiaries of Summit Bancorp are members of the Federal Home
Loan Bank (FHLB) and have access to term financing from the FHLB having a
maturity of up to 15 years. The FHLB borrowings, reported as long-term debt, had
original maturities greater than one year and are secured by securities and
residential mortgages under a blanket collateral agreement.
The 8.625% subordinated notes were issued in 1992 and are unsecured. Interest is
payable semi-annually on June 10 and December 10 of each year. The subordinated
notes are not subject to redemption prior to maturity. This debt qualifies as
Tier II capital.
Summit Bank issued $50 million in 6.75% subordinated notes in 1993. Unamortized
discount on the subordinated notes was $515,000 and $595,000 at December 31,
1996 and 1995, respectively, resulting in an effective interest rate of 7.00%.
Interest is payable semiannually on June 15 and December 15 of each year. The
6.75% subordinated notes are not subject to redemption prior to maturity. This
debt qualifies as Tier II capital.
The 7.95% ten-year maturity private placement senior notes were issued in 1993
with interest payable quarterly. Summit Bancorp has the option to prepay the
notes, subject to certain prepayment provisions.
The collateralized mortgage obligations are secured by investments in
mortgage-backed securities having carrying values of $11,588,000 and $14,859,000
at December 31, 1996 and 1995. These mortgage-backed securities have interest
rates ranging from 7.25% to 9.50%. A trustee holds the collateral certificates,
collects all principal and interest payments thereon, and disburses all funds to
the noteholders.
Principal amounts due on long-term debt for the years 1997 through 2001 are
$93,024,000, $45,260,000, $141,495,000, $69,005,000 and $61,194,000,
respectively.
NOTE 13 PREFERRED AND COMMON STOCK
- --------------------------------------------------------------------------------
PREFERRED STOCK
There were 4,000,000 shares of preferred stock authorized as of December 31,
1996 and 1995, with no shares issued at year-end 1996 and 1,104,647 shares
issued and outstanding at year-end 1995.
The Series B Preferred Stock was redeemed and retired, in whole, at its stated
value of $50 per share on December 15, 1996, plus an accrued dividend of $.375
per share. Dividends in the amounts of $2.625, $3.04 and $3.07 per share were
declared for 1996, 1995 and 1994, respectively.
The Series C Preferred Stock was redeemed and retired, in whole, at its stated
value of $25 per share on December 15, 1996, plus a dividend of $.375 per share.
Dividends of $1.50 per share were declared for 1996, 1995 and 1994.
COMMON STOCK
The following table summarizes common stock reserved, issued, outstanding and
authorized as of December 31, 1996:
<TABLE>
<CAPTION>
Number
(In thousands) of Shares
- --------------------------------------------------------------------------------
<S> <C>
Dividend Reinvestment Plan .......................... 686
Savings Incentive Plan .............................. 471
Incentive Stock Option Plans ........................ 2,589
Other stock option plans ............................ 5,685
- --------------------------------------------------------------------------------
Unissued and reserved ............................. 9,431
Unissued ............................................ 26,606
Issued and outstanding .............................. 93,963
- --------------------------------------------------------------------------------
Total shares authorized ........................... 130,000
- --------------------------------------------------------------------------------
</TABLE>
The total shares reserved represent the amount of shares registered with the
Securities and Exchange Commission under current registration statements. Other
stock option plans consist primarily of plans acquired through acquisitions,
under which no new options can be granted.
During 1996 and 1995, Summit Bancorp issued 1,138,452 and 1,518,923 shares of
common stock, respectively, for the Dividend Reinvestment, Savings Incentive and
other stock option plans.
A Shareholder Rights Plan exists which is designed to ensure fair and equal
treatment for all shareholders in the event of any proposal to acquire Summit
Bancorp. The terms of the Plan provide that effective August 28, 1989, each
share of common stock also represents one "right." Each right will entitle the
holder to buy one one-hundredth of a share of a new series of preferred stock,
Series R, upon the occurrence of certain events. In addition, upon the
occurrence of certain other events, holders of the rights will be entitled to
purchase either shares of this new preferred stock or shares in an "acquiring
person" at half their fair market value as determined under the Plan.
43
<PAGE> 26
NOTE 14 BENEFIT PLANS
- --------------------------------------------------------------------------------
Summit Bancorp has several trusteed non-contributory defined benefit retirement
plans covering substantially all of its employees. The benefits are based on the
employees' years of service and final average compensation. The funding policy
is to contribute annually an amount that can be deducted for Federal income tax
purposes. Contributions are intended to provide not only for benefits attributed
for service to date, but also for those expected to be earned in the future.
The following table sets forth the qualified retirement plans' funding status
and amounts recognized in non-interest expenses at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation,
including vested benefits of
$176,388 in 1996, $172,135 in 1995,
and $145,420 in 1994 ..................... $(188,580) $(184,262) $(155,855)
- -------------------------------------------------------------------------------------
Projected benefit obligation for services
rendered to date ......................... $(239,892) $(230,626) $(195,003)
Plan assets at fair value .................. 250,289 219,119 173,225
- -------------------------------------------------------------------------------------
Plan assets over (under) projected
benefit obligation ....................... 10,397 (11,507) (21,778)
Unrecognized transition asset .............. (5,293) (7,758) (10,319)
Unrecognized prior service cost ............ 327 354 667
Unrecognized net loss from past
experience, which is different from
that assumed, and effect of change
in assumptions ........................... 5,097 14,650 20,726
- -------------------------------------------------------------------------------------
Prepaid (accrued) pension cost ............. $ 10,528 $ (4,261) $ (10,704)
- -------------------------------------------------------------------------------------
Net pension expense components:
Service cost ............................. $ 11,226 $ 9,482 $ 9,063
Interest cost ............................ 17,862 16,315 14,309
Accrued return on plan assets ............ (27,203) (41,635) 7,890
Net deferral and amortization ............ 6,129 22,337 (25,726)
- -------------------------------------------------------------------------------------
Net pension expense ........................ $ 8,014 $ 6,499 $ 5,536
- -------------------------------------------------------------------------------------
</TABLE>
The plans' assets were principally invested in equities and fixed income
securities. The weighted average discount rates for the plans were 7.5% in 1996
and 1995 and 8.0% in 1994. The rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation was 5.0% in 1996 and 1995 and 5.5% in 1994. The weighted-average
expected long-term rate of return on plan assets was 9.0% in 1996, 1995 and
1994.
Summit Bancorp also maintains non-qualified supplemental retirement plans for
certain officers of the company. The plans, which are unfunded, provide benefits
in excess of that permitted to be paid by the pension plan under provisions of
the tax law. The plans' cost was $2,760,000 for 1996, $3,170,000 for 1995, and
$887,000 for 1994. At December 31, 1996, the projected benefit obligation
amounted to $13,351,000 and the accrued liability amounted to $9,049,000.
In addition to pension benefits, certain health care and life insurance benefits
are made available to retired employees. The cost of such benefits is accrued
based on actuarial assumptions from the date of hire to the date the employee is
fully eligible to receive benefits.
The following table sets forth the accumulated postretirement benefit obligation
and the net periodic postretirement benefit cost at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit
obligation (APBO)...................... $(29,921) $(36,160) $(38,062)
Fair value of assets................... -- -- --
---------------------------------------------------------------------------------
Projected benefit obligation funded
status ................................ (29,921) (36,160) (38,062)
Unrecognized transition obligation..... 16,087 20,983 24,514
Unrecognized prior service cost........ (619) 634 141
Unrecognized loss...................... (3,347) (2,695) (1,122)
---------------------------------------------------------------------------------
Accrued APBO............................. $(17,800) $(17,238) $(14,529)
---------------------------------------------------------------------------------
Net postretirement benefit cost
components:
Service cost........................... $ 422 $ 482 $ 574
Interest cost.......................... 2,191 2,670 2,696
Amortization of transition obligation.. 829 1,161 1,190
---------------------------------------------------------------------------------
Net postretirement benefit cost.......... $ 3,442 $ 4,313 $ 4,460
---------------------------------------------------------------------------------
</TABLE>
For measurement purposes, the cost of medical benefits was projected to increase
at a rate of 12.0% in 1996, 13.0% in 1995, and 14.0% in 1994 and thereafter
decreasing linearly to 6.0% after six years. Increasing the assumed health care
cost trend by one percent in each year would increase the accumulated
postretirement benefit obligation as of January 1, 1996, by $1,710,000 and the
aggregate of the service and interest components of net periodic postretirement
benefit cost for the year ended December 31, 1996, by $130,000. The present
value of the accumulated benefit obligation assumed a discount rate of 7.5% in
1996 and 1995 and 8.0% in 1994. The rate of increase used in future compensation
levels was 5.0% in 1996 and 1995 and 5.5% in 1994.
Various incentive plans have been established with the intention of providing
added incentive to middle and senior management to increase the profits of the
company. The amount of the awards are subject to limits as set forth in the
plans. Accruals for these plans amounted to $9,525,000, $9,649,000 and
$7,633,000 in 1996, 1995 and 1994, respectively.
There is a Savings Incentive Plan which covers employees with one or more years
of service. The plan permits eligible employees to make basic contributions to
the plan up to 5% of their base compensation with additional contributions up to
10% of their base compensation. Under the current plan, the employer matches
100% of the first 3% of the employee contribution and 50% of the next 2% of the
employee contribution. Matching contributions to the plan amounted to
$4,633,000, $3,270,000 and $2,446,000 in 1996, 1995 and 1994, respectively.
44
<PAGE> 27
NOTE 15 STOCK-BASED COMPENSATION
- --------------------------------------------------------------------------------
At December 31, 1996, Summit Bancorp had two types of stock award programs
referred to as Long-Term Performance Stock Programs and Incentive Stock Option
Programs which are described below. Summit Bancorp applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its stock-based compensation.
Incentive stock awards (i.e., nonvested stock awards) are issued under The
Long-Term Performance Stock Program to reward executives and to retain them by
distributing stock over a period of time. The nonvested stock awards granted
were 121,225 shares in 1996, 101,117 shares in 1995 and 130,306 shares in 1994.
The fair market value per share on these grants was $36.23 in 1996, $23.82 in
1995 and $21.10 in 1994. These shares vest over several years and are recognized
as compensation income to the employee. The compensation cost that has been
charged to non-interest expense for the nonvested stock awards was $4,145,000,
$3,264,000 and $3,168,000 for 1996, 1995 and 1994, respectively. In 1996,
$2,012,000 of compensation cost was recognized in the restructuring charge due
to accelerated vesting.
The Incentive Stock Option Programs are designed with a broad scope to align the
interests of a large number of employees with shareholder interests. These
options are intended to be either incentive stock options or non-qualified
options. Options have been granted to purchase common stock principally at the
fair market value of the stock at the date of grant. Options are exercisable
starting one year after the date of grant and generally expire ten years from
the date of grant. Upon the exercise of these options, proceeds received in
excess of par value of the shares are credited to surplus.
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
3.60% and 4.30%; expected volatility of 25% and 28%; risk-free interest rates of
5.40% and 7.80%; and expected lives of 5 years.
The weighted-average fair value at grant-date for the incentive options awarded
during 1996 and 1995 were $7.64 and $5.94, respectively.
Under APB Opinion No. 25, compensation cost for the stock options is not
recognized because the exercise price of the stock options equals the market
price of the underlying stock on the date of grant. Had compensation expense
been recorded for stock options granted as determined under SFAS No. 123, net
income would have been reduced by $3,523,000 in 1996 and $2,771,000 in 1995,
impacting per share net income by $.04 and $.03, for each respective year.
The following is a summary of the status of the Incentive Stock Option Programs
and changes during the past three years:
<TABLE>
<CAPTION>
Weighted-Avg.
Shares Exercise Price
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding, December 31, 1993............. 4,546,520 $15.77
Granted and acquired .................... 554,935 23.79
Exercised ............................... 750,754 10.17
Forfeited and expired ................... 98,845 23.52
- ------------------------------------------------------------------------
Outstanding, December 31, 1994
(3,513,475 exercisable shares at a
weighted-avg. exercise price of $16.71) 4,251,856 17.63
- ------------------------------------------------------------------------
Granted and acquired .................... 1,193,987 18.08
Exercised ............................... 1,142,601 11.75
Forfeited ............................... 29,115 23.97
Expired ................................. 1,010 17.56
- ------------------------------------------------------------------------
Outstanding, December 31, 1995
(3,402,035 exercisable shares at a
weighted-avg. exercise price of $18.28) 4,273,117 19.28
- ------------------------------------------------------------------------
Granted and acquired .................... 796,810 35.61
Exercised ............................... 969,504 18.07
Forfeited ............................... 15,660 35.49
Expired ................................. 5,625 28.33
- ------------------------------------------------------------------------
Outstanding, December 31, 1996
(3,313,338 exercisable shares at a
weighted-avg. exercise price of $19.62) 4,079,138 $22.68
- ------------------------------------------------------------------------
</TABLE>
The following table summarizes information about the Incentive Stock Option
Programs at December 31, 1996:
OUTSTANDING INCENTIVE STOCK OPTIONS
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Weighted-Avg.
Range of Options Remaining Weighted-Avg. Options Weighted-Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 6.80 to $15.16 895,224 3.5 years $11.46 895,224 $11.46
16.40 to 20.83 645,005 3.8 18.28 645,005 18.28
21.32 to 23.88 567,833 4.9 22.48 567,833 22.48
24.00 to 24.75 864,020 7.4 24.66 864,020 24.66
25.06 to 29.44 341,256 3.6 26.06 341,256 26.06
35.00 to 39.03 765,800 9.2 35.91 -- --
- -----------------------------------------------------------------------------------------------------------
4,079,138 4.6 years $22.68 3,313,338 $19.62
===========================================================================================================
</TABLE>
45
<PAGE> 28
NOTE 16 OTHER INCOME AND OTHER EXPENSES
- --------------------------------------------------------------------------------
Other income consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
International fees ............... $10,912 $10,288 $10,090
Automated teller fees ............ 11,531 5,039 4,801
Brokerage fees ................... 9,099 8,631 7,631
Insurance and annuity income ..... 7,770 5,359 5,986
Gain on sale of assets ........... 2,825 2,457 4,034
Other ............................ 20,729 23,451 20,768
- ----------------------------------------------------------------------
$62,866 $55,225 $53,310
======================================================================
</TABLE>
Other expenses consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Legal and professional fees ........ $ 28,575 $ 28,113 $ 26,268
Advertising and public relations ... 14,708 16,135 15,604
Amotization of goodwill and other
intangibles ...................... 10,823 8,932 5,934
Other real estate owned ............ 2,936 8,093 21,340
Loss on sale of assets (Crestmont).. -- -- 35,390
Other .............................. 72,736 65,382 67,706
- --------------------------------------------------------------------------
$129,778 $126,655 $172,242
==========================================================================
</TABLE>
NOTE 17 INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal ....................... $ 92,753 $ 89,760 $55,219
State ......................... 16,195 22,801 10,489
- ----------------------------------------------------------------------
108,948 112,561 65,708
Deferred provision:
Federal ....................... 9,662 19,684 17,636
State ......................... 1,254 4,104 5,608
- ----------------------------------------------------------------------
10,916 23,788 23,244
- ----------------------------------------------------------------------
Provision for income taxes .... $119,864 $136,349 $88,952
======================================================================
</TABLE>
A summary of the differences between the actual income tax provision and the
amounts computed by applying the statutory Federal income tax rate to income is
as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax at statutory rate ............. $ 122,164 $ 132,727 $ 85,832
Increase (decrease) in taxes resulting from:
Tax-exempt interest income .............. (8,407) (13,970) (10,886)
State taxes, net of Federal tax effect .. 11,342 17,488 10,452
Other, net .............................. (5,235) 104 3,554
- ----------------------------------------------------------------------------------------
$ 119,864 $ 136,349 $ 88,952
========================================================================================
</TABLE>
The significant Federal and state temporary differences which comprise the
deferred tax assets and liabilities presented at December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Provision for loan losses ............. $105,252 $105,622
Provision for other real estate owned.. 4,625 8,704
Restructuring charges ................. 10,325 --
Other ................................. 36,144 34,911
- --------------------------------------------------------------------------------
156,346 149,237
Deferred tax liabilities:
Leasing operations .................... (30,420) (21,829)
Net unrealized gain on securities ..... (2,253) (3,524)
Other ................................. (9,973) (539)
- --------------------------------------------------------------------------------
(42,646) (25,892)
- --------------------------------------------------------------------------------
Net deferred tax assets $113,700 $123,345
================================================================================
</TABLE>
Included in deferred tax assets "Other" is a valuation allowance which has been
established against certain Federal and state temporary differences. The
valuation allowance was $8,501,000 at December 31, 1996, and $12,416,000 at
December 31, 1995. The net change in the total valuation allowance for the years
ended December 31, 1996 and 1995, was a decrease of $3,915,000 and an increase
of $510,000, respectively. At December 31, 1996, there was a deferred state tax
asset of $5,930,000 resulting from operating loss carryforwards. This asset was
reserved by the valuation allowance.
Management is not aware of any factors which would generate significant
differences between taxable income and pre-tax book income in future years
except for the effects of the reversal of current or future net deductible
temporary differences. However, there can be no assurances that there will not
be any significant differences in the future, if circumstances change.
Management believes, based upon current facts, that more likely than not there
will be sufficient taxable income in future years to realize the deferred tax
assets. However, there can be no assurance about the level of future earnings.
Included in shareholders' equity are income tax benefits attributable to
nonvested stock awards and the exercise of non-qualified incentive stock options
of $4,620,000, $1,359,000 and $1,957,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
46
<PAGE> 29
NOTE 18 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
In the ordinary course of business, Summit Bancorp and its subsidiaries enter
into a variety of financial instruments that are recorded off the balance sheet.
This reporting is considered appropriate where either the exchange of the
underlying asset or liability has not yet occurred or the notional amounts are
used solely as a means to determine the cash flows to be exchanged. These
off-balance-sheet financial instruments are primarily divided into two
categories: credit-related financial instruments and derivative financial
instruments.
Credit-related financial instruments are principally customer related, while
derivative financial instruments are acquired primarily for asset/liability
management purposes.
The following table summarizes the notional amount of off-balance-sheet
financial instruments at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Credit-related instruments:
Commitments to extend credit ....... $5,053,963 $4,578,939
Standby letters of credit .......... 302,825 298,327
Commercial letters of credit ....... 94,961 104,845
Derivative instruments
Interest rate swaps ................ 386,314 967,537
Interest rate floors ............... 430,000 --
Interest rate caps ................. 73,326 63,892
Foreign exchange contracts ......... 33,259 24,382
==============================================================
</TABLE>
CREDIT-RELATED FINANCIAL INSTRUMENTS
Commitments to extend credit are legally binding agreements to lend to a
customer provided all established contractual conditions are met. These
commitments generally have fixed expiration dates and usually require the
payment of a fee. Summit Bancorp does not issue long-term fixed-rate loan
commitments that can be locked in during the commitment period.
Standby letters of credit are conditional guarantees issued to ensure the
performance of a customer to a third party and are generally terminated through
the fulfillment of a specific condition or through the lapse of time.
Commercial letters of credit are conditional commitments, generally less than
180 days, issued to guarantee payment by a customer to a third party upon proof
of an international trade shipment. The short-term nature of these instruments
limit their credit risk.
Fees received from credit-related financial instruments are recognized over the
terms of the contracts and are generally included in other non-interest income.
The credit risk associated with these financial instruments is essentially the
same as that involved in extending loans to customers and is incorporated in the
assessment of the adequacy of the allowance for loan losses. Credit risk is
managed by limiting the total amount of arrangements outstanding and by applying
normal credit policies. Many of the commitments to extend credit are expected to
expire without being drawn upon and, therefore, the amounts do not necessarily
represent future cash flow requirements.
DERIVATIVE FINANCIAL INSTRUMENTS
Activities involving interest rate swaps are primarily attributed to
asset/liability risk management efforts aimed at stabilizing net interest income
through periods of changing interest rates. The interest rate swaps were
acquired to hedge interest rate risk on certain interest-earning assets and
interest-bearing liabilities.
Interest rate swaps are contractual agreements between two parties to exchange
interest payments at particular intervals, computed on different terms, on a
specified notional amount. The notional amounts represent the base on which
interest due each counterparty is calculated and do not represent the potential
for gains or losses associated with the market risk or credit risk of such
transactions.
Under the terms of the interest rate swaps at December 31, 1996, there were
$161,314,000 of contracts to receive fixed payments of 5.65% with an expected
maturity of August 1998, and an average payout based on three-month LIBOR.
Additionally, there were $225,000,000 of interest rate swaps to receive payments
at the effective Federal funds rate and make fixed payments of 5.64% with an
expected maturity of October 1997. These swaps have resulted in a decrease of
$1,952,000 and $9,846,000 in net interest income during 1996 and 1995,
respectively, and an increase of $530,000 in 1994.
Interest rate caps and floors are agreements in which, for an upfront premium
and on predetermined future dates, the counterparty agrees to pay an interest
amount based on the movement of specified market interest rates either above or
below a strike rate. The payments, if applicable, are derived from the measured
rate differential multiplied by the contractual notional volume. The interest
rate floors were purchased primarily to hedge adjustable rate LIBOR based
assets. Interest rate caps were purchased to accommodate customers who desire
interest rate protection on variable rate loans.
Credit-related losses can occur in the event of non-performance by the
counterparties to the derivative financial instruments. The credit risk that
results from interest rate swaps and interest rate floors is represented by the
fair value of contracts that have a positive value at the reporting date. At
December 31, 1996, the total amount of credit risk was $1,362,000; however, this
amount can increase or decrease if interest rates change. To minimize the risk
of credit losses, Summit Bancorp monitors the credit standing of the
counterparties and only transacts with those that have credit ratings of AA or
better.
Summit Bancorp enters into contracts to purchase or sell foreign currency to be
delivered at a future date to facilitate customer transactions. The notional
amount represents the outstanding contracts at year end.
47
<PAGE> 30
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of these
financial instruments, the fair values of such financial instruments are derived
based on the amount and timing of future cash flows, estimated discount rates,
as well as management's best judgment with respect to current economic
conditions. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the value of Summit Bancorp taken as a whole. The disclosures do not address the
value of recognized and unrecognized non-financial assets and liabilities or the
value of future anticipated business. The following methods and assumptions were
used to estimate the fair values of significant financial instruments at
December 31, 1996 and 1995.
FINANCIAL ASSETS
Cash, short-term investments and customer acceptances have relatively short
maturities or no defined maturities, but are payable on demand, with little or
no credit risk. The carrying amounts reported in the Consolidated Balance Sheets
approximate fair value.
Trading account securities and securities available for sale are reported at
their respective fair values in the Consolidated Balance Sheets. These values
were based on quoted market prices. The fair values of securities held to
maturity were also based upon quoted market prices.
The fair value of loans is estimated using a combination of techniques including
discounted estimated future cash flows and, where available, quoted market
prices of similar instruments. The loan portfolios are segmented based upon loan
type, credit quality and repricing characteristics. The fair values of most
fixed-rate loans are estimated using discounted cash flow models taking into
consideration current rates that would be offered to borrowers with similar
credit risk for loans with similar remaining terms. The fair values of variable
rate loans are estimated by reducing their carrying values by their
corresponding general and specific credit reserves. Non-performing loans are
primarily valued based upon the net realizable value of the loan's underlying
collateral.
FINANCIAL LIABILITIES
The estimated fair values of demand and savings deposits are equal to the
amounts recognized in the Consolidated Balance Sheets. These amounts do not
recognize the fair value of core deposit intangibles, which represent the value
of a core deposit base with an expected duration. The fair values for medium- to
long-term deposit liabilities are calculated by discounting estimated future
cash flows using current rates offered for deposits of similar remaining
maturities.
The fair values for borrowed funds are calculated by discounting estimated
future cash flows using current rates offered for borrowings of similar
remaining maturities. Due to the short maturities of bank acceptances, their
carrying value approximates fair value.
The fair value of long-term debt is based upon quoted market prices. For
long-term debt issuances where quoted market prices are not available, the fair
values are determined using discounted cash flow analyses.
The estimated fair values of accrued interest receivable and accrued interest
payable are considered to be equal to the amounts recognized in the Consolidated
Balance Sheets.
OFF-BALANCE-SHEET INSTRUMENTS
The estimated fair values of derivative financial instruments are based upon
quoted market prices, without consideration of the market values related to the
hedged on-balance-sheet financial instruments. For commitments to extend credit
and letters of credit, the fair values would approximate fees currently charged
to enter into similar agreements. The following table presents the carrying
amounts and fair values of financial instruments at December 31:
<TABLE>
<CAPTION>
(In millions) 1996 1995
- ---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term
investments .................. $ 1,392.7 $ 1,392.7 $ 1,517.7 $ 1,517.7
Trading account securities ..... 26.4 26.4 28.6 28.6
Securities available for
sale ......................... 2,670.4 2,670.4 2,408.1 2,408.1
Securities held to
maturity ..................... 3,217.4 3,198.3 3,047.1 3,040.8
Loans, net ..................... 14,551.9 14,859.8 13,740.5 14,080.0
Accrued interest
receivable ................... 140.4 140.4 132.4 132.4
Due from customers on
acceptance ................... 15.7 15.7 26.7 26.7
FINANCIAL LIABILITIES:
Deposits ....................... $18,375.0 $18,417.0 $17,955.1 $18,002.0
Other borrowed funds ........... 1,338.7 1,343.0 1,042.6 1,042.6
Long-term debt ................. 690.0 704.3 424.9 449.2
Accrued interest payable ....... 50.3 50.3 45.6 45.6
Bank acceptances
outstanding .................. 15.7 15.7 26.7 26.7
OFF-BALANCE-SHEET
INSTRUMENTS:
Interest rate swaps ............ NA $ (1.3) NA $ (1.1)
Interest rate floors
and caps ..................... NA 1.4 NA --
Loan commitments ............... NA (26.9) NA (25.6)
Standby letters of credit ...... NA (2.0) NA (1.9)
Commercial letters of
credit ....................... NA (.1) NA (.1)
=============================================================================================
</TABLE>
NA - Not applicable.
48
<PAGE> 31
NOTE 20 REGULATORY MATTERS
- --------------------------------------------------------------------------------
CASH AND DUE FROM BANKS
Certain subsidiary banks are required to maintain reserve balances with a
Federal Reserve Bank based principally upon deposits. These non-interest-earning
reserve balances averaged $492,027,000 in 1996 and $486,373,000 in 1995.
LOANS TO AFFILIATES
Summit Bancorp's subsidiary banks are restricted, with certain limited
exceptions, by the Federal Reserve Act, from extending credit to affiliated
companies, including the Parent Corporation. Each subsidiary bank is also
subject to collateral security requirements for any loans or extensions of
credit permitted by exception. Further, a subsidiary bank may only engage in
most transactions with other subsidiaries if terms and conditions are at least
as favorable to the bank as those prevailing for transactions with unaffiliated
companies. Such secured loans and other regulated transactions are limited in
amount to each of its affiliates, including the Parent Corporation. The
limitation is 10% of the bank's capital stock and defined surplus per affiliate,
and 20% in aggregate to all of its affiliates. At December 31, 1996, the Parent
Corporation had available credit from its subsidiary banks of approximately
$200,000,000.
SUBSIDIARY DIVIDENDS
Certain bank regulatory limitations exist on the availability of subsidiary bank
undistributed net assets for the payment of dividends to the Parent Corporation
without prior approval of bank regulatory authorities.
The Federal Reserve Act, which affects the New Jersey state-member bank,
restricts the payment of dividends in any calendar year to the net profit of the
current year combined with retained net profits of the preceding two years. The
Pennsylvania state-chartered bank may declare a dividend up to the amount of
accumulated net profit. In addition to these statutory restrictions, the
subsidiary banks are required to maintain adequate levels of capital. At
December 31, 1996, the total undistributed net assets of the subsidiary banks
were $1,774,383,000, of which $238,634,000 was available, under the most
restrictive limitations, for the payment of dividends to the Parent Corporation.
CAPITAL REQUIREMENTS
Summit Bancorp is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have an adverse
material impact on Summit Bancorp. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Summit Bancorp must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. Summit Bancorp's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Summit Bancorp and its subsidiary banks to maintain amounts and ratios
(set forth in the table below) of Total and Tier I risk-based capital (as
defined in the regulations) to risk-weighted assets, and of Tier I leverage to
average assets.
At December 31, 1996, Summit Bancorp and its banking subsidiaries were well
capitalized under the regulatory framework for prompt and corrective action. To
be well capitalized, Tier I leverage, Tier I risk-based capital and Total
risk-based capital must equal or exceed the ratios set forth in the table below.
There are no conditions or events that management believes have changed Summit
Bancorp's or its subsidiary banks' well capitalized rating.
CAPITAL RATIOS FOR SUMMIT BANCORP AND SIGNIFICANT SUBSIDIARY BANKS
(Dollars in thousands)
<TABLE>
<CAPTION>
As of December 31, Minimum Statutory
------------------ Required Well As of Minimum
1996 1995 Capital Capitalized December 31, 1996 Capital
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I Leverage
Summit Bancorp ................ 8.06% 7.97% ) $1,779,517 $ 883,682
Summit Bank NJ ................ 7.22 7.24 ) 4.00% 5.00% 1,387,275 769,037
Summit Bank PA ................ 7.97 7.79 ) 215,997 108,381
Tier I Risk-Based Capital
Summit Bancorp ................ 11.09% 10.75% ) $1,779,517 $ 641,793
Summit Bank NJ ................ 10.05 9.87 ) 4.00% 6.00% 1,387,275 552,403
Summit Bank PA ................ 10.65 10.12 ) 215,997 81,089
Total Risk-Based Capital
Summit Bancorp ................ 13.75% 13.46% ) $2,205,390 $1,283,586
Summit Bank NJ ................ 12.32 12.16 ) 8.00% 10.00% 1,701,163 1,104,805
Summit Bank PA ................ 12.60 12.05 ) 255,478 162,178
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 32
NOTE 21 PARENT CORPORATION INFORMATION
- --------------------------------------------------------------------------------
Condensed financial information of Summit Bancorp Parent Corporation is
presented below. For information on long-term debt, see Note 12.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) December 31,
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks .................. $ 11,180 $ 3,570
Securities purchased under agreements
to resell .............................. 136,585 191,250
Interest-bearing deposits with banks ..... 5,000 5,000
Securities available for sale ............ 40,611 34,276
Investment in subsidiaries ............... 1,800,714 1,673,115
Due from subsidiaries .................... 237,250 181,142
Premises and equipment, net .............. 1,094 500
Other assets ............................. 24,588 20,481
- ----------------------------------------------------------------------------
TOTAL ASSETS ............................. $2,257,022 $2,109,334
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities ... $ 86,014 $ 64,166
Commercial paper ......................... 40,476 38,503
Long-term debt ........................... 203,659 204,349
- ----------------------------------------------------------------------------
Total liabilities ...................... 330,149 307,018
Total shareholders' equity ............... 1,926,873 1,802,316
- ----------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,257,022 $2,109,334
============================================================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
- ------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiaries ............. $ 225,003 $ 121,010 $ 80,640
Management fees from subsidiaries ....... 34,090 32,761 29,322
Interest from subsidiaries .............. 22,063 22,925 17,026
Securities gains ........................ 5,831 18,829 123
Other interest .......................... 1,119 102 3,719
Other ................................... 616 2,564 684
- ------------------------------------------------------------------------------------------
Total operating income ................ 288,722 198,191 131,514
- ------------------------------------------------------------------------------------------
OPERATING EXPENSES
Services charges to subsidiaries ........ 37,055 33,144 --
Interest ................................ 19,726 20,412 19,586
Salaries and employee benefits .......... 5,183 4,193 26,491
Occupancy and equipment ................. 68 70 4,340
Other ................................... 1,355 522 11,314
- ------------------------------------------------------------------------------------------
Total operating expenses .............. 63,387 58,341 61,731
- ------------------------------------------------------------------------------------------
Income before taxes and equity in
undistributed net income of
subsidiaries ........................ 225,335 139,850 69,783
Federal and state income taxes (benefits) (7,196) 4,891 (3,758)
- ------------------------------------------------------------------------------------------
232,531 134,959 73,541
Equity in undistributed net income
of subsidiaries ....................... (3,356) 107,911 81,009
- ------------------------------------------------------------------------------------------
Net income ............................ $ 229,175 $ 242,870 $ 154,550
==========================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
- -------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .............................. $ 229,175 $ 242,870 $ 154,550
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ....... 150 3 1,794
(Increase) decrease in other assets . (3,924) (50) 18,421
Increase (decrease) in accrued
expenses and other liabilities .... 23,280 15,830 (30,531)
Equity in undistributed net income
of subsidiaries ................... 3,356 (107,911) (81,009)
Securities gains .................... (5,831) (18,829) (123)
- -------------------------------------------------------------------------------------------
Net cash provided by operating
activities ...................... 246,206 131,913 63,102
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale .................... 27,434 28,332 16,819
Net decrease in securities purchased
under agreements to resell ............ 54,665 3,376 9,213
Purchase of securities available for sale (23,054) -- --
Payments received on advances to
subsidiaries .......................... 451,776 180,278 205,611
Purchase acquisitions ................... -- (36,273) (42,156)
Advances to subsidiaries ................ (507,884) (204,588) (198,189)
Purchases of premises and equipment,
net ................................... (744) -- (2,069)
Capital contributions to subsidiaries ... (1,500) (10,310) (11,525)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities ............ 693 (39,185) (22,296)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in commercial
paper ................................. 1,973 (3,708) 8,852
Principal payments on long-term debt .... (690) (15,689) (3,134)
Dividends paid .......................... (133,185) (94,784) (74,042)
Repurchase of common stock .............. (91,175) -- --
Proceeds from issuance of common
stock, net ............................ 30,301 32,631 24,962
Redemption of preferred stock ........... (42,620) (5,984) --
Other, net .............................. (3,966) (4,186) (714)
- -------------------------------------------------------------------------------------------
Net cash used in financing
activities ...................... (239,362) (91,720) (44,076)
- -------------------------------------------------------------------------------------------
Increase (decrease) in cash and due
from banks ............................ 7,537 1,008 (3,270)
Cash and due from banks at
beginning of year ..................... 3,570 2,562 5,832
Beginning cash balance of acquired
entities .............................. 73 -- --
- -------------------------------------------------------------------------------------------
Cash and due from banks at end of year .. $ 11,180 $ 3,570 $ 2,562
===========================================================================================
</TABLE>
50
<PAGE> 33
Summit Bancorp and Subsidiaries
MANAGEMENT'S REPORT
Summit Bancorp and its subsidiaries are responsible for the preparation,
integrity, and fair presentation of the audited consolidated financial
statements and notes contained on pages 32 through 50 in this report. The
statements were prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts that are
based on management's estimates and judgments. Other financial information
presented throughout the annual report is prepared on a basis consistent with
these financial statements.
The consolidated financial statements of Summit Bancorp have been audited by
KPMG Peat Marwick LLP, independent auditors, whose selection has been
ratified by the shareholders. Their audit was made in accordance with
generally accepted auditing standards and considered the internal control
structure to the extent deemed necessary to support their independent
auditors' report appearing herein.
Summit Bancorp is responsible for establishing and maintaining an internal
control structure to provide reasonable assurance that the financial
statements are presented in conformity with generally accepted accounting
principles. There are inherent limitations in the effectiveness of any
internal control structure, no matter how well designed, including the
possibility of human error, the circumvention or overriding of controls, and
the consideration of cost in relation to the benefit of the control.
Accordingly, even an effective internal control structure can provide only
reasonable assurance with respect to financial statement preparation.
Furthermore, because of changes in conditions, the effectiveness of an
internal control structure may vary over time. To monitor compliance, Summit
Bancorp maintains an internal auditing program. This program includes a
review for compliance with written policies and procedures and a review of
the adequacy and effectiveness of internal controls.
The Audit Committee of the Board of Directors of Summit Bancorp, composed
entirely of outside directors, meets periodically with the independent
auditors, management and internal auditors to review the work of each and
ensure that each is properly discharging its responsibilities. The
independent auditors and internal auditors have full and free access to the
Committee to discuss the results of their audit work, their evaluation of
internal controls, and the quality of financial reporting.
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Summit Bancorp:
We have audited the accompanying consolidated balance sheets of Summit
Bancorp and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Bancorp and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------
Short Hills, New Jersey
January 20, 1997, except as to the third paragraph of note 2, which is as of
February 28, 1997.
51
