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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
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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): July 28, 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)
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
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On February 27, 1997 The Registrant entered into an Agreement and Plan of Merger
with Collective Bancorp, Inc. ("Collective") which provides for the merger of
Collective with and into The Registrant (the "Merger")
(a) Financial Statements of Business to be Acquired.
(i) The following financial information for Collective Bancorp, Inc.
("Collective") was filed as part of the Annual Report on Form
10-K of Collective for the fiscal year ended June 30, 1996 and
is filed herewith:
<TABLE>
<S> <C>
Statements of Consolidated Financial Condition at June 30, 1996
and 1995 4
Statements of Consolidated Operations for the years ended June
30, 1996, 1995 and 1994 5
Statements of Consolidated Stockholders' Equity for the years ended June
30, 1996, 1995 and 1994 6
Statements of Consolidated Cash Flows for the years ended June 30,
1996, 1995, and 1994 7
Notes to Consolidated Financial Statements 8
Independent Auditors' Reports 29
</TABLE>
(ii) Interim Financial Information - The following financial
information for Collective was filed on Form 10-Q of Collective
for the quarter ended March 31, 1997 and is filed herein:
<TABLE>
<S> <C>
Statements of Consolidated Financial Condition at March 31, 1997
and June 30, 1996 31
Statements of Consolidated Operations for three months and nine months
ended March 31, 1997 and 1996 32
Statements of Consolidated Stockholders' Equity for the nine months ended
March 31, 1997 33
Statements of Consolidated Cash Flows for the nine months ended March 31, 1997
and 1996 34
Notes to Consolidated Financial Statements 35
</TABLE>
<TABLE>
<S> <C>
(b) Pro Forma Financial Information. 37
(i) Pro Forma Condensed Combined Balance Sheet dated March 31, 1997. 38
(ii) Pro Forma Condensed Combined Income Statements for the three
months ended March 31, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994. 39
(iii) Notes to Pro Forma Financial Information 44
</TABLE>
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(c) Exhibits
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
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Collective Bancorp, Inc. and Subsidiary
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30
(Dollar amounts in thousands except per share data) 1996 1995
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<S> <C> <C>
ASSETS
Cash $ 65,084 $ 66,256
Federal funds sold 3,646 3,717
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Total cash and cash equivalents 68,730 69,973
Trading securities, at market value (note 7) -- 13,328
Loans held for sale, at amortized cost, market value
of $5,231 in 1996 and $5,836 in 1995 (note 6) 5,186 5,815
Securities available for sale, at market value (notes 5 and 7) 162,284 113,635
Investment securities, at amortized cost, market value
of $271,650 in 1996 and $317,221 in 1995 (note 5) 276,171 315,879
Loans receivable, net (notes 6, 12, and 15) 2,548,150 2,373,706
Mortgage-backed securities, market value of $1,896,831
in 1996 and $2,027,783 in 1995 (notes 7 and 12) 1,973,642 2,100,344
Real estate acquired in settlement of loans, net (note 8) 5,427 6,476
Land, office buildings, and equipment, net (note 9) 39,239 39,313
Other assets (notes 7, 10, and 13) 42,335 43,072
Core deposit premium (note 2) 8,191 10,873
Goodwill (note 2) 16,116 18,103
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Total assets $5,145,471 $5,110,517
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LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note 11)
Demand deposits, non-interest bearing $ 95,792 $ 76,705
Demand deposits, interest bearing 508,295 451,350
Savings and investment accounts 845,199 833,041
Savings certificates 1,805,101 1,916,727
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Total deposits 3,254,387 3,277,823
Federal Home Loan Bank advances (note 12) -- 395,000
Other borrowed funds (notes 7 and 12) 1,473,448 1,052,920
Payable to brokers for securities purchased (note 12) -- 7,600
Advance payments by borrowers for taxes and insurance 26,852 29,462
Other liabilities (note 13) 26,480 19,920
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Total liabilities 4,781,167 4,782,725
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Commitments (notes 9 and 15)
Stockholders' equity (notes 5, 7, 12, 16 and 17)
Common stock, par value $.01 per share; authorized -
37,000,000 shares; issued - 20,418,641 shares in
1996 and 20,356,768 shares in 1995;
outstanding - 20,374,141 shares in 1996 and
20,356,768 shares in 1995 204 204
Preferred stock, par value $.01 per share; authorized
2,500,000 shares; none outstanding -- --
Additional paid-in capital 59,699 59,299
Treasury stock, at cost; 44,500 shares (1,093) --
ESOP debt (notes 12 and 14) (5,816) (6,892)
Unrealized appreciation on available for sale securities,
net of tax (note 13) 1,090 2,136
Retained earnings, substantially restricted 310,220 273,045
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Total stockholders' equity 364,304 327,792
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Total liabilities and stockholders' equity $5,145,471 $5,110,517
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See accompanying notes to the consolidated financial statements.
</TABLE>
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Collective Bancorp, Inc. and Subsidiary
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30
(Dollar amounts in thousands except per share data) 1996 1995 1994
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<S> <C> <C> <C>
INTEREST INCOME
Interest on mortgage loans $175,448 $150,044 $117,246
Interest on other loans 15,893 14,540 11,771
Interest on mortgage-backed securities 140,783 147,280 129,993
Interest and dividends on investments 23,561 24,453 10,560
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Total interest and dividend income 355,685 336,317 269,570
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INTEREST EXPENSE
Interest on deposits (note 11) 131,500 115,570 95,186
Interest on Federal Home Loan Bank
advances and other borrowed funds 82,413 80,286 28,573
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Total interest expense 213,913 195,856 123,759
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Net interest income before provision for loan losses 141,772 140,461 145,811
Provision for loan losses (note 6) 2,035 240 2,352
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Net interest income after provision for loan losses 139,737 140,221 143,459
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OTHER INCOME
Loan servicing 4,143 3,891 4,279
Gain (Loss) on sale of loans and securities 1,060 (11) 2,722
Unrealized appreciation on trading securities -- 201 --
Unrealized depreciation on available for sale securities -- -- (5,648)
Financial service fees and other income 10,394 9,362 6,307
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Total other income 15,597 13,443 7,660
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Total income before other expense 155,334 153,664 151,119
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OTHER EXPENSE
Compensation and employee benefits (note 14) 28,602 27,490 23,832
Occupancy expense 10,746 9,986 8,703
Advertising 1,298 1,165 812
Deposit insurance 6,085 6,796 6,093
Computer services 4,782 4,556 4,178
Loan expense 2,905 2,350 3,760
Real estate operations 687 (1,137) 444
Amortization of intangibles 4,669 4,202 1,573
Other expenses 10,757 10,070 9,295
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Total other expense 70,531 65,478 58,690
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Income before income taxes 84,803 88,186 92,429
Income taxes (note 13) 30,303 30,644 33,062
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Net income $ 54,500 $ 57,542 $ 59,367
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PER SHARE DATA
Primary net income per share $2.67 $2.80 $2.89
Fully diluted net income per share $2.67 $2.80 $2.89
Dividends per common share $0.85 $0.65 $0.57
Average primary shares outstanding 20,445,766 20,569,140 20,562,753
Average fully diluted shares outstanding 20,445,766 20,579,904 20,572,028
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See accompanying notes to the consolidated financial statements.
</TABLE>
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Collective Bancorp, Inc. and Subsidiary
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Appreciation
Additional on Available
(Dollar amounts in thousands Common Paid-In Treasury ESOP for Sale Retained
except per share data) Stock Capital Stock Debt Securities Earnings Total
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<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1993 $202 $58,055 -- $(4,551) -- $180,875 $234,581
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Net income for year ended
June 30, 1994 -- -- -- -- -- 59,367 59,367
Stock options exercised 1 563 -- -- -- -- 564
Dividends on common stock -
$.57 per share -- -- -- -- -- (11,535) (11,535)
Additional ESOP debt -- -- -- (4,060) -- -- (4,060)
ESOP debt repayment -- -- -- 811 -- -- 811
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Balance June 30, 1994 203 58,618 -- (7,800) -- 228,707 279,728
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Net income for year ended
June 30, 1995 -- -- -- -- -- 57,542 57,542
Stock options exercised 1 681 -- -- -- -- 682
Dividends on common stock -
$.65 per share -- -- -- -- -- (13,204) (13,204)
ESOP debt repayment -- -- -- 908 -- -- 908
Securities valuation -- -- -- -- $2,136 -- 2,136
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Balance June 30, 1995 204 59,299 -- (6,892) 2,136 273,045 327,792
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Net income for year ended
June 30, 1996 -- -- -- -- -- 54,500 54,500
Stock options exercised -- 279 -- -- -- -- 279
Dividends on common stock -
$.85 per share -- -- -- -- -- (17,325) (17,325)
Purchase of treasury stock -- -- $(1,093) -- -- -- (1,093)
ESOP debt repayment -- -- -- 1,076 -- -- 1,076
ESOP shares released -- 121 -- -- -- -- 121
Securities valuation -- -- -- -- (1,046) -- (1,046)
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Balance June 30, 1996 $204 $59,699 $(1,093) $(5,816) $1,090 $310,220 $364,304
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See accompanying notes to the consolidated financial statements.
</TABLE>
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Collective Bancorp, Inc. and Subsidiary
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30
(Dollar amounts in thousands) 1996 1995 1994
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<S> <C> <C> <C>
Operating Activities
Interest received $ 351,477 $ 324,519 $ 255,888
Interest paid (213,400) (195,206) (121,475)
Operating expenses (67,255) (64,940) (60,146)
Sales of trading securities 13,328 -- --
Loan fees 5,070 8,272 7,316
Other income received 15,797 13,242 7,660
Income taxes paid (23,249) (30,704) (27,260)
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Net cash provided by operating activities 81,768 55,183 61,983
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Investing Activities
Loan originations (634,001) (690,833) (895,420)
Purchases of loans (23,990) (95,583) (407)
Purchases of mortgage-backed securities (14,023) (128,306) (1,578,796)
Repayment of loan principal 381,217 286,594 416,294
Repayment of mortgage-backed security principal 145,074 150,433 749,117
Sales of loans held for sale 107,707 43,199 11,075
Reduction of payable to brokers -- -- (79,600)
Purchases of investment securities (330,971) (196,846) (152,734)
Sales of securities available for sale -- 18,961 26
Purchases of mortgage-backed securities available for sale (98,937) (36,407) (99,875)
Sales of mortgage-backed securities available for sale 60,204 110,342 269,869
Repayment of principal on mortgage-backed securities available for sale 19,084 19,901 63,204
Maturities of investment securities 331,549 21,571 11,528
Net decrease in real estate owned 1,048 2,045 5,673
Net change in loans maturing in 3 months or less (5,000) -- --
Cash obtained from acquisitions -- 90,929 264,938
Other investing, net (533) (5,636) (13,958)
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Net cash used for investing activities (61,572) (409,636) (1,029,066)
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Financing Activities
Net change in deposits (23,436) 174,043 (74,114)
Net change in Federal Home Loan Bank advances (395,000) 30,000 230,000
Net change in other borrowed funds 420,528 157,005 718,742
Net (decrease) increase in advance payments by borrowers for
taxes and insurance (2,610) 3,543 (1,179)
Dividends paid (16,304) (12,172) (10,913)
Other financing, net (4,617) 1,057 (15,083)
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Net cash (used for) provided by financing activities (21,439) 353,476 847,453
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Net decrease in cash and cash equivalents (1,243) (977) (119,630)
Cash and cash equivalents, beginning of period 69,973 70,950 190,580
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Cash and cash equivalents, end of period $ 68,730 $ 69,973 $ 70,950
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Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net income $ 54,500 $ 57,542 $ 59,367
Net change in trading securities 13,328 -- --
Amortization and accretion of deferred charges and credits, net (2,462) (5,985) (4,484)
Amortization of intangibles 4,669 4,202 1,573
Accrued income and expense 16,784 6,447 13,763
Deferred income and expense (13,131) (12,618) (15,817)
Provision for loan and real estate owned losses 2,312 470 3,478
Depreciation and amortization 4,692 4,217 3,292
ESOP debt repayment 1,076 908 811
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Net cash provided by operations $ 81,768 $ 55,183 $ 61,983
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</TABLE>
Supplemental Schedule of 1996 Noncash Investing Activities
During the year ended June 30, 1995, Collective assumed deposit liabilities and
purchased real property from Sovereign Bank partially offset by the sale of
certain Collective deposit liabilities. The fair values of net liabilities
assumed and noncash assets acquired were $100,035,000 and $1,531,000,
respectively. During fiscal 1994, mortgage-backed securities in the amount of
$203,519,000 were reclassified from held to maturity to available for sale.
During the year ended June 30, 1994, Collective acquired Hansen Federal Savings
Bank and White Horse Federal Savings and Loan. The fair values of the noncash
assets acquired were $21,208,000 and $3,050,000, respectively, and the fair
values of the liabilities assumed were $248,605,000 and $37,494,000,
respectively. During fiscal 1996, 1995, and 1994, the balance of loans
receivable transferred to real estate acquired in settlement of loans was
$9,436,000, $12,448,000, and $15,671,000,respectively.
See accompanying notes to the consolidated financial statements.
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Collective Bancorp, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Collective Bancorp, Inc. and subsidiary ("Collective") follow accounting
principles and reporting practices normally followed by thrift institutions,
which are in conformity with generally accepted accounting principles. The more
significant accounting policies are summarized below.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Collective and its wholly-owned subsidiary, Collective Bank. Collective's
business is conducted primarily through Collective Bank and subsidiaries
("Collective Bank"). All significant intercompany transactions and balances have
been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, federal funds
sold and interest-bearing deposits and securities purchased under agreements to
resell with original maturities of three months or less.
Investment Policy
Collective classifies all mortgage-backed and investment securities as either
held to maturity, available for sale, or trading in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115").
Mortgage-backed and investment securities held to maturity are carried at
cost adjusted for amortization of premiums and accretion of discounts over the
term of the related securities using the interest method. Collective has the
ability and positive intent to hold these securities to maturity, and,
accordingly, adjustments are not made for temporary declines in fair value below
amortized cost. A decline in the fair value of any held to maturity security
that is deemed other than temporary is charged to earnings. The investment in
Federal Home Loan Bank stock is carried at cost.
Mortgage-backed and investment securities classified as available for sale
are carried at fair (market) value with unrealized gains and losses excluded
from earnings and reported in a separate component of stockholders' equity.
Realized gains and losses are reported in earnings.
Trading securities are stated at fair value. Unrealized gains and losses are
included in earnings.
Loans Receivable
Loans receivable, other than loans held for sale, are stated at unpaid
principal balance less unearned discounts, unamortized premiums, net deferred
loan origination and commitment fees, and the allowance for loan losses.
Discounts and premiums are recognized in income using the level-yield method
over the estimated lives of the loans.
Loans held for sale are carried at the lower of cost or market with any
unrealized losses charged to earnings.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net fee or cost is recognized in interest income
using the level-yield method over the contractual life of the specifically
identified loans or recognized as the loans are sold or prepaid.
At the discretion of management, Collective provides an allowance for accrued
interest on loans which are more than 90 days past due. This allowance is netted
against accrued interest receivable, which is included in other assets for
financial statement purposes. Income is subsequently recognized only to the
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extent that cash payments are received and, in management's judgment, the
borrower's ability to make periodic interest and principal payments is probable,
in which case the loan is returned to accrual status.
Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans is carried at the lower of fair
value, less estimated costs to sell, or cost (carrying value or fair value at
the date of acquisition). Specific valuation allowances on real estate owned are
recorded through a charge to earnings if there is a further deterioration in
fair value. Subsequent costs directly related to the completion of construction
or improvement of the real estate are capitalized to the extent realizable.
Gains and losses on sale of real estate are recognized upon disposition of the
property to the extent allowable based on accounting requirements. Carrying
costs, such as maintenance, interest, and taxes, are charged to operations as
incurred.
Land, Office Buildings, and Equipment
Land, office buildings, and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method based on the estimated useful life of the related asset. The cost of
leasehold improvements is amortized over the estimated life of the improvement
or the term of the lease, whichever is shorter. The asset cost and accumulated
depreciation or amortization for property retirements and disposals are
eliminated from the respective accounts, and any resulting gain or loss is
included in income. The costs of maintenance and repairs are charged to
operating expense as incurred. The cost of major additions and improvements is
capitalized.
Income Taxes
Collective files a consolidated federal income tax return and separate state
tax returns. In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), deferred income tax expense or
benefit is determined by recognizing deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
realization of deferred tax assets is assessed and a valuation allowance
provided, when necessary, for that portion of the asset which is not likely to
be realized. Management believes, based upon current facts, that more likely
than not there will be sufficient taxable income in future years to realize any
deferred tax assets. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.
Core Deposit Premium
The premium resulting from the valuation of core deposits acquired in
business combinations or in the purchase of branch offices is amortized using
the interest method over a period not exceeding the estimated average remaining
life of the existing customer deposit base acquired. Amortization periods are
monitored to determine if events and circumstances require such periods to be
reduced.
Goodwill
The cost in excess of the fair value of the net tangible and identified
intangible assets acquired in the purchase of a banking or thrift institution
("goodwill") is amortized to expense over the estimated remaining life of the
long-term interest-earning assets acquired. Goodwill recorded in the purchase of
branch offices is amortized to expense using the straight line method over the
estimated life of the deposits acquired, generally ten years.
Sale of Loans and Mortgage-Backed Securities
Gains and losses on the sale of loans and MBS's consist of both a cash and a
present value gain or loss. A cash gain or loss is recognized to the extent that
the sale proceeds exceed or are less than the carrying value of the loans and
MBS's at the time of sale. The carrying value is determined by adjusting the
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unpaid principal balance by net deferred loan fees, premiums, discounts, and the
portion of the basis allocated to capitalized (originated) mortgage servicing
rights ("OMSR") in accordance with Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights". A present value gain or
loss (excess servicing) relating to sales of MBS's and loans sold with servicing
retained is calculated based on the difference between the MBS or loan interest
rate and the net yield to the investor excluding a normal servicing fee and
considering estimated prepayments on such loans. The resulting servicing rights,
both OMSR and excess, are amortized in proportion to and over the estimated
period servicing income is earned using the level yield method. Amortization or
accretion of these amounts is monitored and adjusted, if necessary, on a
periodic basis to reflect prepayments if higher than originally anticipated.
Provisions for Losses
Provisions for losses include charges to reduce the carrying value of loans
receivable and real estate acquired in settlement of loans to their fair value.
Such provisions are based on management's estimates using past experience, known
and inherent risks in the loan and real estate owned portfolios, adverse
situations that may affect borrowers' ability to repay, estimated value of any
underlying loan collateral or real estate owned, and current economic
conditions. Provisions for losses on real estate acquired in settlement of loans
are included in real estate operations expense in the Statements of Consolidated
Operations. Recovery of the carrying value of such loans and real estate is
dependent to a great extent on conditions that may be beyond management's
control. In the opinion of management, Collective has made adequate loss
provisions based on all available and relevant information affecting the loan
and real estate portfolios. It must be understood, however, that there are
inherent risks and uncertainties related to the operation of a financial
institution. By necessity, Collective's consolidated financial statements are
dependent upon estimates, appraisals, and evaluations of loans. Therefore, the
possibility exists that abrupt changes in such estimates, appraisals, and
evaluations might be required because of changing economic conditions and the
economic prospects of borrowers.
Recently Issued Accounting Standards
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114
addresses the criteria for accounting for loans that have been impaired. It
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective rate or, as a practical
expedient, the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. Although SFAS 114 is effective
for fiscal years beginning after December 15, 1994, Collective elected to adopt
the Statement for its fiscal year ended June 30, 1995. Upon adoption on July 1,
1994, Collective reclassified $17,307,000 of loans foreclosed in-substance and
$6,312,000 in related reserves from real estate acquired in settlement of loans
to loans receivable in the Statements of Consolidated Financial Condition.
In November 1993, the Accounting Standards Division of the American Institute
of Certified Public Accountants issued Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). This SOP provides
guidance on employers' accounting for employee stock ownership plans ("ESOP").
The SOP addresses measurement of compensation cost, the treatment of dividends
on shares held by an ESOP, and the financial reporting of leveraged and
nonleveraged ESOP transactions. Collective adopted SOP 93-6 effective July 1,
1994. The adoption did not have a material effect on Collective's financial
condition or results of operations.
In October 1994, the FASB issued Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan" ("SFAS 118"). SFAS
118 amends SFAS 114 to eliminate the provisions that described how a creditor
should report income on an impaired loan. It also amends certain disclosure
requirements of SFAS 114. The Statement is effective for fiscal years beginning
after December 31, 1994, although earlier application is encouraged.
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Collective adopted the provisions of SFAS 118 during its fiscal year ended June
30, 1995. It did not have a material effect on Collective's financial condition
or results of operations.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is less
than the carrying amount of the asset, an impairment loss is recognized. The
Statement also requires that long-lived assets and certain identifiable
intangibles be reported at the lower of carrying amount or fair value less cost
to sell. The Statement is effective for Collective's fiscal year beginning July
1, 1996. The adoption of SFAS 121 is not expected to have a material effect on
Collective's financial condition or results of operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities" ("SFAS 65"), to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, however those servicing rights are acquired. The Statement applies
prospectively in fiscal years beginning after December 15, 1995 although earlier
application is encouraged. Collective adopted the provisions of SFAS 122 in its
fiscal year ended June 30, 1995. The adoption did not have a material effect on
Collective's financial condition or results of operations (see note 7).
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. SFAS 123 also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from nonemployees.
The Statement provides a fair value based method for measuring compensation cost
associated with stock-based compensation and also allows, as an alternative, the
intrinsic value based method which is prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Since
most stock compensation plans have no intrinsic value at grant date, the latter
method often results in no recognition of compensation cost. Under SFAS 123
entities that elect to remain with the intrinsic value based method must also
make pro forma disclosures of net income and, if presented, earnings per share,
as if the fair value based method of accounting had been applied. The Statement
applies to transactions entered into in fiscal years that begin after December
15, 1995, though they may be adopted on issuance. Pro forma disclosures required
for entities that elect to measure compensation cost using the intrinsic value
based method must include the effects of all awards granted in fiscal years that
begin after December 15, 1994. Collective intends to continue accounting for
stock-based compensation under APB 25 and will include the pro forma disclosures
required by SFAS 123 in financial statements issued for fiscal years beginning
July 1, 1996.
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS125 amends portions of SFAS
115, amends and extends to all servicing assets and liabilities the accounting
standards for mortgage servicing rights now in SFAS 65, and supersedes SFAS 122.
The Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Those standards are based upon consistent application of a financial components
approach that focuses on control. The Statement also defines accounting
treatment for servicing assets and other retained interests in the assets that
are transferred. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. The adoption of the Statement is not expected to
have a material effect on Collective's financial condition or results of
operations.
-11-
<PAGE>
Reclassifications
Certain amounts in the consolidated financial statements of prior years have
been reclassified to conform with the presentation used in the current year.
2. Business Combinations
On May 21, 1996, Collective entered into an agreement to acquire Continental
Bancorporation, a state chartered commercial bank with assets of approximately
$187,000,000 (unaudited) at June 30, 1996. The acquisition is subject to
regulatory approval, is anticipated to be completed by December 1996, and will
be accounted for under the purchase method of accounting.
On April 21, 1995, Collective purchased certain assets and assumed the
deposit account liabilities of seven offices of Sovereign Bancorp, Inc.
("Sovereign") pursuant to an agreement entered into on January 17, 1995. As part
of this same agreement, Sovereign purchased certain assets and assumed the
deposit account liabilities of Collective's Wilmington, Delaware office. The net
deposit liabilities assumed by Collective amounted to $99,818,000 and the net
assets received, consisting primarily of cash, amounted to $92,210,000. The fair
value of liabilities assumed exceeded the fair value of tangible assets acquired
by $8,334,000. This was allocated to core deposit premium and goodwill of
$2,819,000 and $5,515,000, respectively. The acquisition was accounted for by
the purchase method.
On May 6, 1994, Collective purchased certain assets and assumed the deposit
account liabilities of White Horse Federal Savings and Loan Association from the
Resolution Trust Corporation. The deposit liabilities assumed amounted to
$37,494,000, and the assets received consisted primarily of cash amounting to
$35,322,000. The fair value of liabilities assumed exceeded the fair value of
tangible assets acquired by $2,315,000. This was allocated to core deposit
premium and goodwill of $1,359,000 and $956,000, respectively. The acquisition
was accounted for by the purchase method.
On April 15, 1994, Collective purchased certain assets and assumed the
deposit account liabilities of Hansen Federal Savings Bank from the Resolution
Trust Corporation. The deposit liabilities assumed amounted to $248,605,000, and
the assets received consisted primarily of cash amounting to $231,073,000. The
fair value of liabilities assumed exceeded the fair value of tangible assets
acquired by $19,811,000. This was allocated to core deposit premium and goodwill
of $6,220,000 and $13,591,000, respectively. The acquisition was accounted for
by the purchase method.
The following summarizes the business combinations of Collective during the
three years in the period ended June 30, 1996, all of which were accounted for
by the purchase method of accounting:
<TABLE>
<CAPTION>
Cash
Name of Institution/Branches Acquired Deposits Premiums Intangibles
(Dollar amounts in thousands) Date Acquired Paid Recorded
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hansen Federal Savings (9 offices) 04/15/94 $248,605 $18,145 $19,811
White Horse Federal Savings (2 offices) 05/06/94 37,494 2,301 2,315
Sovereign Bank (7 offices) 04/21/95 99,818 7,481 8,334
- -------------------------------------------------------------------------------------------------
Total $385,917 $27,927 $30,460
- -------------------------------------------------------------------------------------------------
</TABLE>
The results of the acquired entities have been included in the Statements of
Consolidated Operations from the dates of acquisition.
The acquisitions did not have a material effect on the results of operations
for the year of acquisition. If all the acquisitions had occurred at the
beginning of the year of acquisition or the preceding year, the effect on such
years also would have not been material.
-12-
<PAGE>
The balances of purchase accounting adjustments at June 30, 1996, resulting
from prior year acquisitions, and the accretion and amortization of such
adjustments (net increase or decrease in income) are summarized as follows:
<TABLE>
<CAPTION>
Balance as of June 30 Year ended June 30
--------------------- --------------------------------
(Dollar amounts in thousands) 1996 1995 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums and discounts on
loans receivable $ 800 $ 575 $ 225 $ (19) $ 966
Premiums and discounts on
other assets and liabilities (542) 99 (641) 1,311 2,621
Core deposit premium 8,191 10,873 (2,682) (2,672) (1,330)
Goodwill 16,116 18,103 (1,987) (1,530) (243)
- ----------------------------------------------------------------------------------------------
Total $24,565 $29,650 $(5,085) $(2,910) $ 2,014
- ----------------------------------------------------------------------------------------------
</TABLE>
3.Fair Values of Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. 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
Collective's 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 Collective, 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.
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
----------------------- -------------------------
Carrying Estimated Carrying Estimated
(Dollar amounts in thousands) Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 68,730 $ 68,730 $ 69,973 $ 69,973
Trading securities -- -- 13,328 13,328
Loans held for sale 5,186 5,231 5,815 5,836
Securities available for sale 162,284 162,284 113,635 113,635
Investment securities 276,171 271,650 315,879 317,221
Loans receivable 2,548,150 2,505,002 2,373,706 2,362,223
Mortgage-backed securities 1,973,642 1,896,831 2,100,344 2,027,783
Capitalized loan servicing rights 4,232 5,795 3,638 3,638
Liabilities:
Deposits 3,254,387 3,249,977 3,277,823 3,286,262
Federal Home Loan Bank advances -- -- 395,000 395,000
Other borrowed funds 1,473,448 1,473,448 1,052,920 1,052,920
Off Balance Sheet Instruments:
Loan servicing rights -- 8,642 -- 7,329
Nonfinancial Instruments:
Core deposit intangible 8,191 93,880 10,873 65,178
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents - The carrying amount of these items is a reasonable
estimate of their fair value.
Trading securities, loans held for sale, and securities available for sale - The
fair value of these items is calculated by using the quoted market price of
securitized loans and securities.
Investment securities - The fair values are based on quoted market prices or
dealer quotes. The fair values of restricted equity securities are estimated
to approximate their carrying values.
Loans receivable - For certain homogeneous categories of loans, such as fixed
and variable residential mortgages, fair value is estimated using quoted
market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other loan types is
estimated by discounting the future cash flows and prepayments using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining term. Some loan types were fair
valued at carrying value because of their floating rate or expected maturity
characteristics.
Mortgage-backed securities - Estimated fair value for mortgage-backed securities
issued by quasi-governmental agencies is based on quoted market prices where
available or discounted cash flows. The fair value of mortgage-backed
securities issued by non-quasi-governmental agencies is estimated based on
similar securities with quoted market prices and adjusted for any differences
in credit ratings or maturities.
Capitalized loan servicing rights - Capitalized loan servicing rights are
comprised of excess servicing and originated mortgage servicing rights
("OMSR") in accordance with SFAS 122. The fair value of excess servicing on
loans serviced for others was determined based on the estimated discounted
net cash flows to be received less the normal costs of servicing. The
estimated fair value of OMSR approximates the amount for which the servicing
currently could be sold.
Deposits - The fair value of demand deposits, savings accounts, and money market
accounts is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
FHLB advances and other borrowed funds - Estimated fair value is based on rates
currently available to Collective Bank for debt with similar remaining
maturities.
Loan servicing rights - The fair value of off balance sheet loan servicing
rights approximates the amount for which the servicing currently could be
sold.
Core deposit valuation - The estimated fair value ascribed to core deposits is
calculated based on an estimate of cost savings from the low cost of such
deposits over their estimated life, discounted using an incremental cost of
funds rate.
4. Securities Purchased Under Agreements to Resell
Collective enters into purchases of securities under agreements to resell.
There were no agreements outstanding at June 30, 1996 and 1995, but during the
year securities purchased under agreements to resell were delivered by entry
into accounts maintained by Collective Bank at the Federal Reserve Bank of
Philadelphia. These securities averaged $17,461,000 and $57,714,000 for 1996 and
1995, respectively, with maximum amounts outstanding at any month-end of
$102,969,000 and $86,390,000, respectively.
-14-
<PAGE>
5. Investment Securities
Investment securities consisted of the following:
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
FNMA Preferred Stock $ 31,600 -- $ (236) $ 31,364
FHLMC Preferred Stock 35,875 -- -- 35,875
- -----------------------------------------------------------------------------------------------
Total $ 67,475 -- $ (236) $ 67,239
- -----------------------------------------------------------------------------------------------
Held to maturity
U.S. government and agency obligations $220,460 $ 64 $(4,723) $215,801
State and municipals 9,979 138 -- 10,117
Federal Home Loan Bank stock (note 12) 45,103 -- -- 45,103
Other investments 629 -- -- 629
- -----------------------------------------------------------------------------------------------
Total $276,171 $202 $(4,723) $271,650
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
FHLMC Preferred Stock $ 35,875 $ 187 -- $ 36,062
- -----------------------------------------------------------------------------------------------
Held to maturity
U.S. government and agency obligations $279,585 $1,206 $(18) $280,773
State and municipals 12,227 155 (1) 12,381
Federal Home Loan Bank stock (note 12) 23,389 -- -- 23,389
Other investments 678 -- -- 678
- -----------------------------------------------------------------------------------------------
Total $315,879 $1,361 $(19) $317,221
- -----------------------------------------------------------------------------------------------
</TABLE>
Investment securities at June 30, 1996:
<TABLE>
<CAPTION>
Estimated
Amortized Market
(Dollar amounts in thousands) Cost Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Available for sale
No maturity $ 67,475 $ 67,239
- -----------------------------------------------------------------------------------------------
Held to maturity
No maturity $ 45,103 $ 45,103
Due in one year or less 7,545 7,545
Due after one year through five years 106,952 105,191
Due after five years through ten years 63,296 62,396
Due after ten years 53,275 51,415
- -----------------------------------------------------------------------------------------------
Total $276,171 $271,650
- -----------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
6. Loans Receivable
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
June 30
1996 1995
------------------------------------------------------
Estimated Estimated
(Dollar amounts in thousands) Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First mortgage loans -
Conventional $2,026,125 $1,979,102 $1,944,946 $1,928,508
FHA 37,580 37,772 41,257 42,746
VA 43,495 43,733 47,407 49,058
Construction and
development loans 39,805 39,604 26,290 26,159
- ----------------------------------------------------------------------------------------------
2,147,005 2,100,211 2,059,900 2,046,471
- ----------------------------------------------------------------------------------------------
FHA Title I improvement loans 291 324 410 453
Loans to depositors, secured by
savings accounts 3,137 3,192 4,170 4,204
Second mortgage loans 102,610 106,693 57,383 60,250
Education loans 9,463 9,520 9,992 9,923
Home equity credit lines 70,299 69,717 77,217 76,530
Commercial loans 238,706 238,759 189,816 189,662
Other loans 6,060 6,007 4,231 4,143
- ----------------------------------------------------------------------------------------------
2,577,571 2,534,423 2,403,119 2,391,636
- ----------------------------------------------------------------------------------------------
Less - Deferred loan fees 4,976 4,976 6,511 6,511
Deferred discounts (800) (800) (575) (575)
Loans in process 12,354 12,354 9,351 9,351
Allowance for loan losses 12,891 12,891 14,126 14,126
- ----------------------------------------------------------------------------------------------
Total $2,548,150 $2,505,002 $2,373,706 $2,362,223
- ----------------------------------------------------------------------------------------------
</TABLE>
Activity in the allowance for loan losses, established primarily for mortgage
loans, was as follows:
<TABLE>
<CAPTION>
Year Ended June 30
- ----------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $14,126 $18,006 $22,291
Provision for losses 2,035 240 2,352
Charge-offs and adjustments, net (3,270) (4,120) (6,637)
- ----------------------------------------------------------------------------------------------
Ending balance $12,891 $14,126 $18,006
- ----------------------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE>
Nonperforming (impaired) loans at June 30, 1996 and 1995 were $23,166,000 and
$21,876,000, respectively before specific allowances of $6,055,000 at June 30,
1996 and $5,753,000 at June 30, 1995. The allowance for delinquent interest on
loans (included in other assets) totalled $674,000 at June 30, 1996 and $655,000
at June 30, 1995. (See note 1, "Loans Receivable", for a discussion of
Collective's policy for recognizing interest income on impaired loans, including
the treatment of payments received.) Nonperforming loans averaged $24,650,000,
$26,077,000, and $38,768,000 for the years ended June 30, 1996, 1995, and 1994,
respectively. No interest income was recognized on those loans during the period
of impairment.
At June 30, 1996, 1995, and 1994 the balance of loans serviced for others was
$707,793,000, $695,069,000, and $725,440,000, respectively. Servicing loans
generally consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors, and foreclosure processing. Loan servicing
income includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. In connection with loans serviced for
others, Collective held borrowers' escrow balances of $7,566,000 and $8,086,000
at June 30, 1996 and 1995, respectively.
At June 30, 1996 and 1995, Collective maintained an inventory of first
mortgage loans held for sale of $5,186,000 and $5,815,000, respectively. No
valuation allowance was established at June 30, 1996 and 1995 as the market
value of those loans exceeded their carrying value.
Collective originates and purchases adjustable and fixed interest rate loans.
At June 30, 1996, the composition of these loans was as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
Fixed Rate Adjustable Rate
- -----------------------------------------------------------------------------------------------
Term to maturity Book Value Term to rate adjustment Book Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1mo. - 1yr. $ 3,220 1mo. - 1yr. $ 923,950
1yr. - 3yr. 9,899 1yr. - 2yr. 49,580
3yr. - 5yr. 25,023 2yr. - 3yr. 134,494
5yr. - 10yr. 107,954 3yr. - 5yr. 394,427
10yr. - 20yr. 349,973 5yr. - 10yr. 214,279
Over 20 yr. 364,772
- -----------------------------------------------------------------------------------------------
Total $860,841 Total $1,716,730
- -----------------------------------------------------------------------------------------------
</TABLE>
The adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the 1-year and 3-year U.S. Treasury Note rates and the
Federal Home Loan Bank Eleventh District cost of funds. Future market factors
may affect the correlation of the interest rate adjustment with the rates paid
on the short-term deposits and borrowings that have been primarily utilized to
fund these loans.
At June 30, 1996, 71% of loans receivable were collateralized by property
located in New Jersey while other major concentrations included the states of
Pennsylvania, Delaware, and New York with 9%, 5%, and 3%, respectively.
-17-
<PAGE>
7. Mortgage-Backed Securities
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
GNMA pass-through certificates $ 6,461 $ 467 -- $ 6,928
FHLMC and FNMA pass-
through certificates 86,645 2,569 $ (1,097) 88,117
- -----------------------------------------------------------------------------------------------
Total $ 93,106 $3,036 $ (1,097) $95,045
- -----------------------------------------------------------------------------------------------
Held to maturity
GNMA pass-through certificates $ 3,485 $ 35 $ (12) $ 3,508
FHLMC and FNMA pass-
through certificates 423,467 1,129 (18,793) 405,803
Collateralized mortgage
obligations 1,546,690 872 (60,042) 1,487,520
- -----------------------------------------------------------------------------------------------
Total $1,973,642 $2,036 $(78,847) $1,896,831
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(Dollar amounts in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Trading securities
FHLMC pass-through certificates $ 13,127 $ 201 -- $ 13,328
- -----------------------------------------------------------------------------------------------
Available for sale
GNMA pass-through certificates $ 8,236 $ 573 -- $ 8,809
FHLMC and FNMA pass-
through certificates 66,186 2,578 -- 68,764
- -----------------------------------------------------------------------------------------------
Total $ 74,422 $3,151 -- $ 77,573
- -----------------------------------------------------------------------------------------------
Held to maturity
GNMA pass-through certificates $ 3,990 $ 104 $ (9) $ 4,085
FHLMC and FNMA pass-
through certificates 435,334 2,100 (10,350) 427,084
Collateralized mortgage
obligations 1,661,020 4,120 (68,526) 1,596,614
- -----------------------------------------------------------------------------------------------
Total $2,100,344 $6,324 $(78,885) $2,027,783
- -----------------------------------------------------------------------------------------------
</TABLE>
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. At June 30, 1996 and
1995, mortgage-backed securities in the amount of $1,564,083,000 and
$1,118,679,000, respectively, including accrued interest, with respective market
values of $1,492,668,000 and $1,072,516,000, collateralized certain securities
sold under agreements to repurchase (see note 12). At June 30, 1996 and 1995,
the balance of unencumbered mortgage-backed securities was $512,365,000 and
$1,080,082,000, respectively.
Capitalized servicing rights recorded on the sale of loans and MBS amounted
to approximately $1,713,000, $531,000, and $2,134,000, respectively for the
years ended June 30, 1996, 1995, and 1994. The unamortized balance of
capitalized servicing rights was $4,232,000 and $3,832,000 at June 30, 1996 and
1995, respectively, and is included in other assets. During fiscal 1996, 1995,
and 1994, amortization of capitalized servicing rights amounted to $1,313,000,
$1,089,000, and $1,338,000, respectively. Net realized gains on the sale of
mortgage-backed securities were $1,202,000, $206,000, and $1,800,000 for the
years ended June 30, 1996, 1995, and 1994, respectively.
-18-
<PAGE>
8. Real Estate Acquired in Settlement of Loans
Real estate acquired in settlement of loans consisted of the following:
<TABLE>
<CAPTION>
June 30
------------------------
(Dollar amounts in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired in settlement of loans $6,119 $7,170
Allowance for losses (692) (694)
- ----------------------------------------------------------------------------------------------------
Total $5,427 $6,476
- ----------------------------------------------------------------------------------------------------
</TABLE>
Activity in the allowance for real estate losses was as follows:
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $694 $1,164 $3,344
Provision for losses 278 230 1,127
Charge-offs and adjustments, net (280) (700) (3,307)
- ----------------------------------------------------------------------------------------------------
Ending balance $692 $ 694 $1,164
- ----------------------------------------------------------------------------------------------------
</TABLE>
9. Land, Office Buildings, and Equipment
Land, office buildings, and equipment are summarized by major
classification as follows:
<TABLE>
<CAPTION>
June 30
-------------------------
(Dollar amounts in thousands) Estimated Useful Life 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land -- $ 7,484 $ 7,355
Buildings and leasehold improvements 10-30 yrs. 30,274 27,834
Office equipment 5-10 yrs. 10,859 10,260
Computer equipment 3-5 yrs. 15,593 14,178
- ----------------------------------------------------------------------------------------------------
64,210 59,627
Accumulated depreciation and amortization (24,971) (20,314)
- ----------------------------------------------------------------------------------------------------
Total $39,239 $39,313
- ----------------------------------------------------------------------------------------------------
</TABLE>
Total depreciation and amortization expense for the years ended June 30,
1996, 1995, and 1994 was $4,692,000, $4,217,000, and $3,292,000, respectively.
Collective leases certain of its branch offices under operating leases. Total
rental expense was $1,230,000 in 1996, $1,103,000 in 1995, and $1,226,000 in
1994. Minimum lease commitments for each of the next five fiscal years and
thereafter are as follows:
<TABLE>
-----------------------------------------------------------
<S> <C>
1997........................................... $ 853,596
1998........................................... 611,850
1999........................................... 444,548
2000........................................... 329,529
2001........................................... 263,379
2002 and beyond................................ 899,317
-----------------------------------------------------------
</TABLE>
10. Accrued Interest Receivable
Accrued interest receivable, included in other assets, consisted of the
following:
<TABLE>
<CAPTION>
June 30
-------------------------
(Dollar amounts in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments $ 3,999 $ 4,350
Loans 15,181 13,655
Mortgage-backed securities 9,699 11,347
- -----------------------------------------------------------------------------------------------------
Total $28,879 $29,352
- -----------------------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE>
11 Deposits
Demand, savings and investment, and certificate accounts were as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
(Dollar amounts --------------------------------- ------------------------------------
in thousands) Estimated Estimated
By type Amount Percent Fair Value Amount Percent Fair Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits
Non-interest
bearing $ 95,792 2.94% $ 95,792 $ 76,705 2.34% $ 76,705
NOW 405,889 12.47% 463,792 371,186 11.32% 371,186
Super NOW 102,406 3.15% 44,503 80,164 2.45% 80,164
- -----------------------------------------------------------------------------------------------
Total 604,087 604,087 528,055 528,055
- -----------------------------------------------------------------------------------------------
Savings and investment
accounts
Regular savings 549,055 16.87% 549,055 556,559 16.98% 556,559
Money market 115,469 3.55% 115,469 110,426 3.37% 110,426
Clubs 8,039 0.25% 8,039 7,957 0.24% 7,957
Super money
market 172,636 5.30% 172,636 158,099 4.82% 158,099
- -----------------------------------------------------------------------------------------------
Total 845,199 845,199 833,041 833,041
- -----------------------------------------------------------------------------------------------
Certificates
7-31 Day 22,361 0.69% 22,361 24,823 0.76% 24,823
91 Day 15,570 0.48% 15,577 11,104 0.34% 11,104
6 Month 188,999 5.81% 189,447 133,621 4.08% 133,603
8 Month 201,149 6.18% 201,364 5,095 0.15% 5,116
9 Month 46,450 1.43% 46,500 300,501 9.17% 301,762
12 Month 230,760 7.09% 231,357 127,432 3.89% 127,021
15 Month 77,915 2.39% 77,853 302,819 9.24% 303,950
18-24 Month 369,970 11.37% 371,702 272,793 8.32% 272,988
30 Month 19,587 0.60% 19,568 30,151 0.92% 29,707
36 Month 27,219 0.84% 27,163 57,962 1.77% 57,357
4-6 Year 84,827 2.61% 84,656 88,436 2.70% 86,679
7-10 Year 8,837 0.27% 8,999 11,468 0.35% 11,473
Regulated fixed
rate 2,056 0.06% 2,047 3,431 0.10% 3,435
IRA/Keogh 380,194 11.68% 372,874 394,034 12.02% 403,084
Certificates in
excess of
$100,000 129,207 3.97% 129,223 153,057 4.67% 153,064
- -----------------------------------------------------------------------------------------------
Total 1,805,101 1,800,691 1,916,727 1,925,166
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Total $3,254,387 100.00% $3,249,977 $3,277,823 100.00% $3,286,262
- -----------------------------------------------------------------------------------------------
</TABLE>
Total certificates at year end June 30, 1996 by maturity:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) Amount Avg. Rate
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Within 1 Year $1,271,108 5.10%
1998 371,328 5.37%
1999 50,558 5.79%
2000 79,562 5.95%
2001 14,371 5.96%
After 2001 18,174 5.24%
- -----------------------------------------------------------------------------------------------
Total $1,805,101
- -----------------------------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
At June 30, 1996 and 1995, Collective Bank did not have any brokered
deposits.
The weighted average interest rate payable on deposits at June 30, 1996 and
1995 was 4.05% and 4.13%, respectively. Interest expense on deposits was as
follows:
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificates $ 95,450 $ 79,854 $63,759
Demand deposits 12,128 9,644 7,899
Saving and investment accounts 23,922 26,072 23,528
- -----------------------------------------------------------------------------------------------
Total $131,500 $115,570 $95,186
- -----------------------------------------------------------------------------------------------
</TABLE>
12. Federal Home Loan Bank Advances and Other Borrowed Funds
Federal Home Loan Bank advances:
<TABLE>
<CAPTION>
June 30
--------------------------------------------
Estimated Estimated
(Dollar amounts in thousands) 1996 Fair Value 1995 Fair Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturing during fiscal 1996 -- -- $395,000 $395,000
- -----------------------------------------------------------------------------------------------
Total -- -- $395,000 $395,000
- -----------------------------------------------------------------------------------------------
</TABLE>
Advances are collateralized by stock in the Federal Home Loan Bank of New
York and certain mortgage loans under a blanket pledge agreement. At June 30,
1995, the balance of loans collateralizing Federal Home Loan Bank advances under
the blanket pledge agreement was $411,110,000. The weighted average interest
rate on these advances was 6.00%.
Other borrowed funds:
<TABLE>
<CAPTION>
June 30
------------------------------------------------
Weighted Average
Interest Rate At Estimated Estimated
(Dollar amounts in thousands) June 30, 1996 1996 Fair Value 1995 Fair Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities sold under
agreements to repurchase
(see note 7) 5.27% $1,465,980 $1,465,980 $1,044,596 $1,044,596
Other short-term borrowings Variable 1,652 1,652 1,432 1,432
ESOP debt 7.99% 5,816 5,816 6,892 6,892
- -----------------------------------------------------------------------------------------------
Total $1,473,448 $1,473,448 $1,052,920 $1,052,920
- -----------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995, the weighted average interest rates on securities sold
under agreements to repurchase, other short-term borrowings, and ESOP debt were
5.94%, variable, and 8.77%, respectively.
Collective enters into sales of securities under fixed-coupon reverse
repurchase agreements and fixed-coupon dollar reverse repurchase agreements.
Such agreements are treated as financings, and the obligations to repurchase
securities sold are reflected as a liability in the Statements of Consolidated
Financial Condition. The dollar amount of securities underlying the agreements
are book entry securities. During the period of such agreements, the securities
were delivered by entry into the counterparty's account at the Federal Reserve
Bank of Philadelphia (or in the case of GNMA mortgage-backed securities, to MBS
Clearing Corporation or in the case of other mortgage-backed securities, to a
third-party custodian's account that explicitly recognizes Collective's interest
in the securities).
At June 30, 1996 and 1995, agreements outstanding to repurchase the same
securities were $1,179,526,000 and $826,651,000, respectively. At June 30, 1996
and 1995, agreements to repurchase substantially identical securities were
$286,454,000 and $217,945,000, respectively.
Agreements to repurchase the same securities and agreements to repurchase
substantially identical securities averaged $1,437,905,000 and $1,114,789,000
during the years ended June 30, 1996 and 1995, respectively. The maximum amounts
outstanding at any month-end under such agreements during fiscal 1996 and 1995
were $1,595,501,000 and $1,375,212,000, respectively. Accrued interest payable
-21-
<PAGE>
on these agreements at June 30, 1996 and 1995 was $3,691,000 and $2,370,000,
respectively. The June 30, 1996 agreements will mature through July 29, 1996.
The June 1995 payable to brokers for securities purchased represents the
purchase of U.S. agency securities. The purchase closed in July 1995 and was
funded by the liquidation of short-term investments (cash equivalents) and
short-term borrowings.
13. Income Taxes
The income tax provision is comprised of the following components:
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision $26,836 $26,571 $31,267
Deferred provision 3,467 4,073 1,795
- -----------------------------------------------------------------------------------------------
Total income tax provision $30,303 $30,644 $33,062
- -----------------------------------------------------------------------------------------------
</TABLE>
The liability for income taxes at June 30, 1996 and 1995 in the Statements
of Consolidated Financial Condition (included in other liabilities) includes a
net deferred tax liability of $3,222,000 and $2,060,000, respectively that have
been provided for the temporary differences between the tax bases and financial
statement carrying amounts of assets and liabilities. The liability at June
30,1996 and 1995 includes $613,000 and $1,202,000, respectively, recorded as a
result of the adoption of SFAS 115 which is netted against the unrealized
appreciation adjustment recorded in stockholders' equity.
The major sources of temporary differences and their deferred tax effects
are as follows:
<TABLE>
<CAPTION>
June 30
---------------------
(Dollar amounts in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Loan loss reserve - book $ 2,782 $ 3,350
Deferred loan fees (net of expenses) 253 868
Unamortized discount on held to
maturity securities 1,875 1,866
Amortizable intangibles 259 288
Directors fees 522 448
- ---------------------------------------------------------------------------------------------
Total deferred tax assets 5,691 6,820
- ---------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Loan loss reserve - tax 5,483 4,832
Unrealized appreciation on trading and
available for sale securities 613 1,234
Depreciation 1,312 1,051
Excess servicing 81 131
Purchase accounting 1,258 1,397
Other, net 166 235
- ---------------------------------------------------------------------------------------------
Total deferred tax liabilities 8,913 8,880
- ---------------------------------------------------------------------------------------------
Net deferred tax (liability) asset $(3,222) $(2,060)
- ---------------------------------------------------------------------------------------------
</TABLE>
-22-
<PAGE>
A reconciliation of the statutory income tax provision to the effective
income tax provision is as follows:
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at federal statutory rate (35%) $29,681 $30,865 $32,429
Tax-exempt interest (164) (129) (164)
ESOP dividends (157) (274) (208)
Dividends received deduction (662) (544) (497)
State income tax provision (net of federal benefit) 1,692 1,684 1,777
Benefit due to federal income tax rate change -- -- (136)
Other, net (87) (958) (139)
- ----------------------------------------------------------------------------------------------
Total income tax provision $30,303 $30,644 $33,062
- ----------------------------------------------------------------------------------------------
</TABLE>
Savings banks that meet certain definitions, tests, and other conditions
prescribed by the Internal Revenue Code ("IRC") are allowed to deduct, with
limitations, a bad debt deduction. This deduction can be computed as a
percentage of taxable income before such deduction or based upon actual loss
experience. During fiscal years 1996, 1995, and 1994, Collective employed the
percentage of taxable income method.
Pursuant to SFAS 109, Collective is not required to provide deferred taxes on
its tax loan loss reserve as of December 31, 1987. The amount of this reserve on
which no deferred taxes have been provided is approximately $27,900,000. This
reserve could be recognized as taxable income and create a current and/or
deferred tax liability using the income tax rates then in effect if one of the
following occur: (1) Collective's retained earnings represented by this reserve
is used for purposes other than to absorb losses from bad debts, including
dividends or distributions in liquidation, (2) Collective fails to meet the
definitions, tests, or other conditions provided by the IRC for a qualified
Savings and Loan Association, or (3) there is a change in the federal tax law.
See note 16 for proposed changes to the IRC or federal tax law affecting the bad
debt deduction and tax loan loss reserve.
Collective recently completed an examination by the Internal Revenue Service
for the year ended December 31, 1991. There were no changes made to Collective's
taxable income as originally reported to the Internal Revenue Service
14. Benefit Plans
Collective maintains an Employee Stock Ownership Plan ("ESOP"), a defined
contribution plan covering all eligible employees. Prior to July 1, 1994,
Collective accounted for ESOP transactions in accordance with AICPA Statement of
Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans"
("SOP 76-3"). Effective July 1, 1994, Collective adopted the provisions of SOP
93-6 which supersedes SOP 76-3. These accounting rules address the method of
measuring compensation, the classification of dividends on ESOP shares, and the
treatment of ESOP shares for the computation of earnings per share. Upon
adoption, SOP 93-6 applied to unallocated shares purchased by the ESOP after
December 31, 1992 while unallocated shares purchased prior to December 31, 1992
continued to be accounted for under SOP 76-3. At June 30, 1996, there were
407,679 unallocated shares in the ESOP. Of this total, 196,200 shares were
subject to SOP 76-3 while 211,479, comprised of 15,486 shares committed to be
released and 195,994 suspense shares (market value of $4,630,000 at June 30,
1996), were subject to SOP 93-6. Dividends received on allocated shares in the
ESOP are added directly to the participant accounts while dividends received on
unallocated shares are used toward repayment of principal on the ESOP debt.
Amounts committed to be released and, in turn, provided for repayment of loan
principal are recognized as compensation expense at fair value. Unallocated
shares falling under SOP 76-3 are considered to be outstanding in calculating
earnings per share. Unallocated shares subject to SOP 93-6 that have not been
committed to be released are not treated as outstanding in calculating earnings
per share. The ESOP allocated 118,985 and 134,723 shares of Collective's stock
to employees during the plan years ended November 30, 1995 and 1994,
respectively.
-23-
<PAGE>
Contributions to the ESOP are allocated among the participants based on
compensation. During 1988, the ESOP trustee entered into a loan agreement with a
commercial bank to borrow $1,900,000, which was used to finance the purchase of
480,280 shares of common stock of Collective. The loan had a term of seven years
with a rate equal to 90.1% of the prime rate of the commercial bank. This loan
was refinanced on December 30, 1991. The new note which had a term of thirty
nine months with a rate equal to 90.1% of the prime rate of the lender was paid
off on March 31, 1995. In November 1991, the ESOP trustee entered into another
loan agreement with a commercial bank to borrow $4,050,000, which was used to
finance the purchase of 492,593 shares of common stock of Collective. This loan
had a term of seven years with a floating rate tied to 265 basis points over the
Federal Funds effective rate established by the lender or 25 basis points over
the bank's prime rate, whichever method Collective elects to apply to future
periods on the annual anniversary date. To date, the Federal Funds effective
rate has been utilized and has proven to be lower than the prime rate
alternative. In June 1993, the ESOP trustee modified the agreement with the
commercial bank to provide an additional $5,000,000 line of credit. As of June
30, 1994, the entire line of credit had been drawn for the purchase of 242,836
shares. The additional $5,000,000 was an interest only loan for a period of two
years with interest calculated in the same manner as the original $4,050,000
loan discussed above. In June 1995 the loan began a ten year principal
repayment. At June 30, 1996, the total ESOP debt outstanding was $5,816,000.
Collective also has a voluntary thrift plan (a qualifying plan under 401K of the
Internal Revenue Code) in which substantially all of the employees are eligible
to participate. Annual contributions to the plan are made at the discretion of
the Board of Directors based upon the income of Collective as defined and funded
annually. Benefits under the plan are deferred until retirement, termination, or
withdrawal upon request. Contributions made for plan years ended November 30,
1995, 1994, and 1993 were $902,835, $782,063, and $766,359, respectively.
15. Commitments and Contingencies
At June 30, 1996 and 1995 Collective had outstanding mortgage loan
origination commitments of approximately $73,445,000 and $47,682,000,
respectively, with interest rates ranging from 4.25% to 11.88% and 3.00% to
9.50%, respectively. Of the total at June 30, 1996, variable rate commitments
totalled $57,779,000 at interest rates of 4.25% to 11.88% with the balance of
$15,666,000 representing fixed rate commitments at 6.00% to 11.88%. At June 30,
1995, variable rate commitments totalled $17,718,000 at interest rates of 3.00%
to 8.50% with the balance of $29,964,000 representing fixed rate commitments at
6.75% to 9.50%. At June 30, 1996 and 1995 Collective had outstanding non-
mortgage loan origination commitments of approximately $52,989,000 and
$53,974,000, respectively. Collective evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if it is
deemed necessary upon extension of credit, is based on management's credit
evaluation of the counterparty. Management expects that these loans will be
disbursed within the next twelve months. At June 30, 1996 and 1995, Collective
had outstanding commitments on unused lines of credit of $123,822,000 and
$92,991,000, respectively. These commitments may not represent future cash
requirements since many commitments may not be drawn upon.
Collective and its subsidiary may, from time to time, be defendants in legal
proceedings relating to the conduct of their businesses. In the best judgement
of management, the consolidated financial position, results of operations, and
cash flows of Collective or its subsidiary will not be affected materially by
the final outcome of any pending legal proceedings or other contingent
liabilities and commitments.
Legislation pending in Congress would impose a one-time assessment, currently
estimated at between 75 and 85 basis points, on the amount of deposits held as
of March 31, 1995 by Savings Association Insurance Fund ("SAIF")-member
institutions, including Collective Bank, a wholly-owned subsidiary of
Collective, to recapitalize the SAIF to the required level of 1.25% of insured
deposits. If the assessment is made at the 85 basis point proposed rate, the
effect on Collective Bank would be a pre-tax charge of approximately $22
million, or $14 million after tax (36% assumed tax rate).
-24-
<PAGE>
Certain proposed legislation also would require the recapitalized SAIF to be
merged with the Bank Insurance Fund into a new Deposit Insurance Fund no later
than January 1, 1998, provided the thrift charter has been eliminated by that
date. The elimination of the thrift charter, by requiring thrifts, including
Collective Bank, to convert to state or national commercial bank charters, would
be effected via separate legislation enacted by the end of calendar 1997.
Additional proposed legislation would repeal Section 593 of the IRC for
taxable years beginning after December 31, 1995. Section 593 allows certain
thrift institutions, including Collective Bank, to use a percentage-of-taxable
income bad debt accounting method, if more favorable than the specific charge-
off method, for federal income tax purposes. Since 1993, Collective has used the
percentage-of-taxable income method in its income tax returns.
The enactment of the proposed legislation could cause Collective's effective
income tax rate to increase, thereby negatively impacting net income.
Management cannot predict whether such proposals, or similar legislation,
will be enacted, or if enacted, the ultimate effect on Collective's financial
condition or results of operations, except as indicated above.
16. Stockholders' Equity
The OTS sets forth capital standards applicable to all thrifts. These
standards include a core capital requirement, a tangible capital requirement,
and a risk-based capital requirement. The following table presents Collective
Bank's position relative to the three capital requirements. Collective Bank
exceeds all of the requirements at June 30, 1996.
At June 30, 1996 Collective Bank exceeded the minimum capital requirements as
follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) Amount Percent
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Tangible Capital:
Actual $337,759 6.60%
Required 76,821 1.50%
- -----------------------------------------------------------------------------------------------
Excess $260,938 5.10%
- -----------------------------------------------------------------------------------------------
Core (Tier 1) Capital:
Actual $337,759 6.60%
Required 153,642 3.00%
- -----------------------------------------------------------------------------------------------
Excess $184,117 3.60%
- -----------------------------------------------------------------------------------------------
Risk-based Capital:
Actual $344,595 17.30%
Required 159,316 8.00%
- -----------------------------------------------------------------------------------------------
Excess $185,279 9.30%
- -----------------------------------------------------------------------------------------------
</TABLE>
Prompt Corrective Action ("PCA") regulations that are required by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") require
specific supervisory actions as capital levels decrease. The specifications of
the capital categories are shown below:
<TABLE>
<CAPTION>
Tier 1
Tangible Total Risk- Tier 1 Risk- Leverage
Capital Ratio Capital Ratio based Ratio based Ratio(1) Ratio
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Well-capitalized N/A Greater than or Greater than or Greater than or
equal to 10% equal to 6% equal to 5%
Adequately capitalized N/A Greater than or Greater than or Greater than or
equal to 8% equal to 4% equal to 4%
Under Capitalized N/A Less than 8% Less than 4% Less than 4%
Significantly undercapitalized N/A Less than 6% Less than 3% Less than 3%
Critically undercapitalized Less than or N/A N/A N/A
equal to 2%
- --------------------------------------------------------------------------------------------------------------
<FN>
(1) Total Core (Tier 1) Capital divided by risk-adjusted assets.
</FN>
</TABLE>
Because of Collective Bank's regulatory capital requirements, $65,844,000 of
its retained earnings is unavailable for distribution to Collective.
-25-
<PAGE>
17. Stock Options
Collective has two stock option plans which call for a total of 1,696,000
shares of common stock to be reserved for issuance for the benefit of directors,
officers, and other key employees. Under the terms of the plans, options are
granted at not less than the fair market value of the shares at the date of
grant, require a two to five-year holding period before they may be exercised,
and may not have a maximum term of more than ten years. Activity in the stock
option plans for each of the three years ended June 30, 1994, 1995, and 1996 was
as follows:
<TABLE>
<CAPTION>
Option Price At time of Grant
--------------------------------------
Number of Shares Per Share Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1993 512,438 $ 1.313 - $13.250 $2,604,609
Granted 82,370 4.313 - 21.000 1,509,909
Expired (4,975) 1.313 - 21.000 (67,644)
Exercised (103,189) 1.313 - 13.250 (381,185)
- --------------------------------------------------------------------------------------------------
Balance, June 30, 1994 486,644 2.844 - 21.000 3,665,689
Granted 79,850 15.625 - 21.500 1,395,162
Expired (5,560) 2.8375 - 21.000 (91,051)
Exercised (89,242) 2.8375 - 18.250 (640,712)
- --------------------------------------------------------------------------------------------------
Balance, June 30, 1995 471,692 3.1875 - 21.000 4,329,088
Granted 9,200 20.000 - 24.875 219,100
Expired (6,200) 3.1875 - 21.000 (104,556)
Exercised (61,885) 3.1875 - 18.250 (280,513)
- --------------------------------------------------------------------------------------------------
Balance, June 30, 1996 412,807 $3.1875 - $24.875 $4,163,119
- --------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996 and 1995, exercisable options were 112,140 and 130,274,
respectively.
The balance of shares reserved for issuance under the stock option plans
was 33,790 at June 30, 1996.
Collective has a restricted stock award plan which calls for a total of
75,000 shares of common stock to be reserved for issuance for the benefit of
officers and other employees. Under the terms of the plan, stock granted is
subject to certain transfer restrictions. These restrictions lapse over a two-
year period. At June 30, 1996, 72,012 shares remained unissued under this plan.
Collective also has a restricted stock award program which calls for a
total of 10,000 shares of common stock to be reserved for issuance for the
benefit of non-employee directors and qualified consultants. Restrictions on
shares awarded under this plan lapse over a three-year period. At June 30, 1996,
2,000 shares remained unissued under this plan.
-26-
<PAGE>
18. Parent Company Financial Information
The following information on Collective Bancorp, Inc. (parent company only)
should be read in conjunction with the other Notes to Consolidated Financial
Statements.
Statements of Financial Condition
<TABLE>
<CAPTION>
June 30
-----------------------
(Dollar amounts in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 3,204 $ 8,732
Investment in subsidiary 371,910 329,824
Other assets 117 211
- ----------------------------------------------------------------------------------------------
Total $375,231 $338,767
- ----------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
ESOP debt $ 5,816 $ 6,892
Other liabilities 5,111 4,083
- ----------------------------------------------------------------------------------------------
Total liabilities 10,927 10,975
- ----------------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock 204 204
Additional paid-in capital 59,699 59,299
Treasury stock (1,093) --
ESOP debt (5,816) (6,892)
Unrealized appreciation on
available for sale securities 1,090 2,136
Retained earnings 310,220 273,045
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 364,304 327,792
- ----------------------------------------------------------------------------------------------
Total $375,231 $338,767
- ----------------------------------------------------------------------------------------------
</TABLE>
Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income and expenses:
Equity in earnings of subsidiary $55,012 $58,011 $59,747
Expenses (377) (348) (298)
- ----------------------------------------------------------------------------------------------
Income before taxes 54,635 57,663 59,449
Income taxes (135) (121) (82)
- ----------------------------------------------------------------------------------------------
Net income $54,500 $57,542 $59,367
- ----------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30
- ----------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Dividend income $12,000 $19,000 $ 8,000
Operating expenses (271) (171) (437)
Income taxes paid (140) (131) (66)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,589 18,698 7,497
- ----------------------------------------------------------------------------------------------
Financing activities:
Dividends on common stock (16,304) (12,172) (10,913)
ESOP debt incurred -- -- (4,060)
Net increase in other liabilities -- -- 4,060
Other financing, net (813) 682 564
- ----------------------------------------------------------------------------------------------
Net cash used for financing activities (17,117) (11,490) (10,349)
- ----------------------------------------------------------------------------------------------
Net (decrease) increase in cash (5,528) 7,208 (2,852)
Cash at beginning of period 8,732 1,524 4,376
- ----------------------------------------------------------------------------------------------
Cash at end of period $ 3,204 $ 8,732 $ 1,524
- ----------------------------------------------------------------------------------------------
Reconciliation of net income to net cash
provided by operating activities:
Net income $54,500 $57,542 $59,367
Increase (decrease) in deferred expense 105 177 (139)
(Decrease) increase in accrued expense (4) (10) 16
Equity in earnings of subsidiary (55,012) (58,011) (59,747)
Dividends received from subsidiary 12,000 19,000 8,000
- ----------------------------------------------------------------------------------------------
Net cash provided by operations $11,589 $18,698 $ 7,497
- ----------------------------------------------------------------------------------------------
</TABLE>
-28-
<PAGE>
Collective Bancorp, Inc. and subsidiary
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
The Board of Directors of Collective Bancorp, Inc.:
We have audited the accompanying statement of consolidated financial
condition of Collective Bancorp, Inc. and subsidiary as of June 30, 1996 and the
related statements of consolidated operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
accompanying financial statements of Collective Bancorp, Inc. and subsidiary as
of June 30, 1995 were audited by other auditors, whose report thereon dated
August 25, 1995 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides 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 Collective
Bancorp, Inc. and subsidiary at June 30, 1996 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Short Hills, New Jersey
July 31, 1996
-29-
<PAGE>
Collective Bancorp, Inc. and Subsidiary
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of Collective Bancorp, Inc.:
We have audited the statement of consolidated financial condition of Collective
Bancorp, Inc. and subsidiary as of June 30, 1995 and the related statements of
consolidated operations, stockholders' equity and cash flows for each of the two
years in the period ended June 30, 1995 as contained in the 1996 annual report
to stockholders before the restatement of the statements of consolidated cash
flows to reflect the retroactive reclassification of various amounts as
investing activities which were previously classified as operating activities
for the year ended June 30, 1995 and 1994 (not included herein). Our audits also
included the financial statement schedules listed in the Index at Item 14(a)2
for each of the two years in the period ended June 30, 1995. These financial
statements and the financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Collective Bancorp, Inc. and
subsidiary at June 30, 1995, and the results of their operations and their cash
flows before the restatement as described in the first paragraph for each of
the two years in the period ended June 30, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Effective July 1, 1994, Collective Bancorp, Inc. changed its method of
accounting for impairment of loans and for investments in certain debt and
equity securities, to conform with Statements of Financial Accounting Standards
No. 114, 115, and 118.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
August 25, 1995
-30-
<PAGE>
Part 1
Item 1
<TABLE>
<CAPTION>
COLLECTIVE BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
March 31 June 30
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS (Dollar amounts in thousands except per share data)
Cash $ 65,936 $ 65,084
Federal funds sold 19,595 3,646
Securities purchased under agreement to resell 35,000 -
--------------- ---------------
Total cash and cash equivalents 120,531 68,730
Loans held for sale, at amortized cost, market
value of $3,774 and $5,231 3,600 5,186
Securities available for sale, at market value 235,951 162,284
Investment securities, at amortized cost, market
value of $302,573 and $271,650 307,534 276,171
Loans receivable 2,876,031 2,561,041
Less allowance for loan losses (13,461) (12,891)
--------------- ---------------
Loans receivable, net 2,862,570 2,548,150
Mortgage-backed securities, at amortized cost,
market value of $1,727,576 and $1,896,831 1,860,461 1,973,642
Real estate acquired in settlement of loans, net 4,165 5,427
Land, office buildings and equipment, net 41,096 39,239
Other assets 44,810 42,335
Core deposit premium 9,980 8,191
Goodwill 26,890 16,116
--------------- ---------------
Total assets $5,517,588 $5,145,471
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits, non-interest bearing $ 140,083 $ 95,792
Demand deposits, interest bearing 602,199 508,295
Savings and investment accounts 863,144 845,199
Savings certificates 1,893,233 1,805,101
--------------- ---------------
Total deposits 3,498,659 3,254,387
Short-term borrowings 1,573,385 1,467,633
Long-term borrowings 5,486 5,815
Advance payments by borrowers for taxes and insurance 25,536 26,852
Other liabilities 28,367 26,480
--------------- ---------------
Total liabilities 5,131,433 4,781,167
--------------- ---------------
Stockholders' Equity:
Common stock, par value $.01 per share;
authorized - 37,000,000 shares;
issued - 20,496,019 shares in March 1997 and 20,418,641
shares in June 1996; outstanding - 20,446,519
shares in March 1997
and 20,374,141 shares in June 1996 205 204
Preferred stock, par value $.01 per share;
authorized - 2,500,000 shares; none outstanding - -
Additional paid-in capital 60,490 59,699
Treasury stock, at cost; 49,500 shares in March 1997
and 44,500 shares in June 1996 (1,230) (1,093)
ESOP debt (5,008) (5,816)
Unrealized appreciation on available for sale securities,
net of tax 1,311 1,090
Retained earnings, substantially restricted 330,387 310,220
--------------- ---------------
Total stockholders' equity 386,155 364,304
--------------- ---------------
Total liabilities and stockholders' equity $5,517,588 $5,145,471
=============== ===============
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
COLLECTIVE BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED OPERATIONS
Three Months Ended Nine Months Ended
March 31 March 31
1997 1996 1997 1996
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
(Dollar amounts in thousands except per share data)
INTEREST INCOME:
Interest on mortgage loans $51,736 $43,738 $150,078 $130,404
Interest on other loans 4,154 3,812 11,870 12,140
Interest on mortgage-backed securities 32,754 34,841 99,439 106,171
Interest and dividends on investments 7,110 6,056 20,711 17,558
--------------- ---------------- --------------- ----------------
Total interest and dividend income 95,754 88,447 282,098 266,273
--------------- ---------------- --------------- ----------------
INTEREST EXPENSE:
Interest on deposits 35,521 32,103 105,614 99,131
Interest on borrowed funds 20,275 20,127 60,672 62,699
--------------- ---------------- --------------- ----------------
Total interest expense 55,796 52,230 166,286 161,830
--------------- ---------------- --------------- ----------------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 39,958 36,217 115,812 104,443
PROVISION FOR LOAN LOSSES 1,010 410 2,554 1,099
--------------- ---------------- --------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 38,948 35,807 113,258 103,344
--------------- ---------------- --------------- ----------------
OTHER INCOME:
Loan servicing 1,063 1,239 3,021 3,167
Gain (Loss) on sale of loans and securities 266 (162) 375 1,032
Financial service fees and other income 3,328 2,453 9,492 7,390
--------------- ---------------- --------------- ----------------
Total other income 4,657 3,530 12,888 11,589
--------------- ---------------- --------------- ----------------
Total income before other expense 43,605 39,337 126,146 114,933
--------------- ---------------- --------------- ----------------
OTHER EXPENSE:
Compensation and employee benefits 7,900 7,463 22,592 21,377
Occupancy expense 2,966 2,806 8,444 8,036
Advertising 345 380 1,012 915
Deposit insurance 491 1,521 3,269 4,572
SAIF recapitalization assessment - - 16,653 -
Computer services 1,119 1,113 3,242 3,667
Loan expense 735 732 2,240 2,347
Real estate operations (33) 326 82 495
Amortization of intangibles 1,627 1,178 4,302 3,578
Other expenses 3,194 2,787 8,977 7,890
--------------- ---------------- --------------- ----------------
Total other expense 18,344 18,306 70,813 52,877
--------------- ---------------- --------------- ----------------
INCOME BEFORE INCOME TAXES 25,261 21,031 55,333 62,056
INCOME TAXES 9,264 7,508 19,857 22,215
--------------- ---------------- --------------- ----------------
NET INCOME $15,997 $13,523 $35,476 $39,841
=============== ================ =============== ================
PER SHARE DATA:
Primary and fully diluted net income per share $0.78 $0.66 $1.73 $1.95
Dividends per common share $0.25 $0.20 $0.75 $0.60
Average primary shares outstanding 20,510,349 20,457,753 20,473,728 20,446,517
Average fully diluted shares outstanding 20,514,570 20,457,780 20,500,714 20,448,803
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
COLLECTIVE BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Unrealized
Appreciation
Additonal on Available
Common Paid-In Treasury ESOP for Sale Retained
Stock Capital Stock Debt Securities Earnings Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollar amounts in thousands except per share data)
BALANCE JUNE 30, 1995 $204 $59,299 - $(6,892) $2,136 $273,045 $327,792
Net income for the year - - - - - 54,500 54,500
Stock options exercised - 279 - - - - 279
Dividends on common
stock - $.85 per share - - - - - (17,325) (17,325)
Purchase of treasury stock - - $(1,093) - - - (1,093)
ESOP debt repayment - - - 1,076 - - 1,076
ESOP shares released - 121 - - - - 121
Securities valuation - - - - (1,046) - (1,046)
-------------------------------------------------------------------------------------------
BALANCE JUNE 30, 1996 204 59,699 (1,093) (5,816) 1,090 310,220 364,304
Net income fiscal year to date - - - - - 35,476 35,476
Stock options exercised 1 548 - - - - 549
Dividends on common
stock - $.75 per share - - - - - (15,309) (15,309)
Purchase of treasury stock - - (137) - - - (137)
ESOP debt repayment - - - 808 - - 808
ESOP shares released - 243 - - - - 243
Securities valuation - - - - 221 - 221
-------------------------------------------------------------------------------------------
BALANCE MARCH 31, 1997 $205 $60,490 $(1,230) $(5,008) $1,311 $330,387 $386,155
===========================================================================================
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
COLLECTIVE BANCORP, INC. AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
Nine Months Ended
March 31
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
(Dollar amounts in thousands)
OPERATING ACTIVITIES:
Interest received $ $
284,073 262,163
Interest paid (165,042) (159,794)
Operating expenses (71,072) (52,273)
Sales of trading securities - 13,328
Loan fees 3,299 3,721
Other income received 12,888 11,791
Income taxes paid (21,024) (16,075)
------------- -------------
Net cash provided by operating activities 43,122 62,861
------------- -------------
INVESTING ACTIVITIES:
Loan originations (633,880) (412,467)
Purchases of loans (659) (17,224)
Purchases of mortgage-backed securities (64) (14,042)
Repayment of loan principal 339,465 269,403
Repayment of mortgage-backed security principal 120,327 99,181
Sales of loans held for sale 41,520 98,367
Purchases of investment securities (109,253) (294,630)
Sales of investment securities available for sale 48,060 -
Purchases of mortgage-backed securities available for sale (36,177) (90,854)
Sales of mortgage-backed securities available for sale 7,018 55,157
Repayment of principal on mortgage-backed securities available for sale 14,860 13,020
Maturities of investment securities 41,211 318,960
Net decrease in real estate owned 1,893 1,844
Net change in loans maturing in 3 months or less 5,000 (6,500)
Purchase of Continental Bancorporation (25,703) -
Cash obtained from Continental Bancorporation acquisition 11,264 -
Other investing, net 2,265 1,846
------------- -------------
Net cash (used for) provided by investing activities (172,853) 22,061
------------- -------------
FINANCING ACTIVITIES:
Net change in deposits 114,452 (134,467)
Net change in short-term borrowings 87,126 61,938
Net change in long-term borrowings (1,421) (807)
Net decrease in advance payments by borrowers
for taxes and insurance (1,408) (5,769)
Dividends paid (15,326) (12,222)
Other financing, net (1,891) (2,606)
------------- -------------
Net cash provided by (used for) financing activities 181,532 (93,933)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51,801 (9,011)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 68,730 69,973
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $120,531 $ 60,962
============= =============
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net income $ 35,476 $ 39,841
Net change in trading securities - 13,328
Amortization and accretion of deferred charges and credits, net (92) (2,166)
Amortization of intangibles 4,302 3,578
Accrued income and expense 6,924 14,067
Deferred income and expense (10,713) (11,347)
Provision for loan and real estate owned losses 2,761 1,239
Depreciation and amortization 3,656 3,514
ESOP debt repayment 808 807
------------- -------------
Net cash provided by operations $ 43,122 $ 62,861
============= =============
</TABLE>
-34-
<PAGE>
COLLECTIVE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited interim consolidated financial statements of Collective
Bancorp, Inc. and subsidiary ("Collective") included herein should be read
in conjunction with the audited financial statements for the year ended
June 30, 1996 included in Collective's 1996 Annual Report and incorporated
by reference in the Form 10-K for that year. The unaudited interim
financial statements reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the
periods presented. Such adjustments consist only of normal recurring
accruals. The results of operations for the three and nine-month periods
ended March 31, 1997 are not necessarily indicative of the results to be
expected for the fiscal year ending June 30, 1997.
2. On February 27, 1997, Collective entered into an Agreement and Plan of
Merger with Summit Bancorp. ("Summit") pursuant to which Collective will be
merged with and into Summit and shares of Collective's common stock will be
converted into whole shares of Summit's common stock and cash in lieu of
fractional shares based on an exchange ratio of Summit common to Collective
common of .895. The merger is subject to approval by Collective's
stockholders and certain regulatory agencies. The merger is expected to be
consummated during the third calendar quarter of 1997.
3. In connection with the enactment of the Deposit Insurance Funds Act of 1996
("DIFA") on September 30, 1996, Collective Bank, a wholly-owned subsidiary
of Collective Bancorp, Inc., was required to pay a one-time special
assessment of $16.653 million to the Federal Deposit Insurance Corporation
("FDIC") to capitalize the Savings Association Insurance Fund ("SAIF") to
its required reserve ratio. The special assessment rate of 65.7 cents per
$100 of SAIF-assessable deposits was applied as of March 31, 1995. The
assessment was paid in November 1996.
DIFA also requires the Financing Corporation ("FICO") bond obligation to be
shared by insured depository institutions pro rata beginning in the year
2000. For the transition period from January 1, 1997 to December 31, 1999,
banks will pay one-fifth of the assessment rate imposed upon thrifts.
During this period, the FICO assessment rates are estimated to be 1.3 basis
points for banks calculated on their Bank Insurance Fund ("BIF") deposit
base and 6.4 basis points for thrifts, such as Collective Bank calculated
on their SAIF deposit base.
DIFA directs the Treasury Department to present a report to Congress by
March 31, 1997 regarding the development of a common charter for all
depository institutions. The report is to include a recommendation for
legislative and administrative action. DIFA requires that the BIF and the
SAIF be merged into a single new fund (the Deposit Insurance Fund) on
January 1, 1999, provided "no insured depository institution is a savings
association on that date".
4. On August 20, 1996, the Small Business Job Protection Act of 1996 ("SBJPA")
was enacted, which included a repeal of the thrift bad debt reserve method
(percentage-of-taxable income method) under section 593 of the Internal
Revenue Code. The repeal is effective for Collective's 1997 fiscal year.
Since 1993, Collective has used the percentage-of-taxable income method in
its income tax returns. Effective July 1, 1996, Collective was required to
change from the reserve method to the specific charge-off method to
calculate its bad debt deduction. The change in bad debt tax accounting
methods has not had, nor is it expected to have, a material impact on
Collective's results of operations.
-35-
<PAGE>
The SBJPA also provided for the recapture of a thrift's post-1987 excess
bad debt reserve resulting from the use of the reserve method for
calculating the bad debt deduction. Pre-1988 excess bad debt reserves are
not subject to recapture. The recaptured amount must be taken into taxable
income ratably over a six-year period commencing with the thrift's tax year
beginning in 1996. The timing of the recapture may be delayed for a one-or
two-year period provided the residential loan requirement is met.
Collective expects to meet the residential loan requirement for its 1996
and 1997 tax years. Therefore, its estimated tax liability of approximately
$5.5 million, resulting from the recapture, will be payable over a six-year
period commencing with Collective's 1999 fiscal year. The excess bad debt
reserve recapture is not expected to have a material impact on Collective's
results of operations or financial position because Collective has recorded
deferred income tax provisions on its excess bad reserves since 1987.
5. On October 1, 1996, Collective acquired the outstanding capital stock of
Continental Bancorporation for $25.7 million in cash pursuant to an
agreement entered into on May 21, 1996. Simultaneously with the
acquisition, Continental Bancorporation was liquidated and its subsidiary,
Continental Bank of New Jersey ("Continental"), became a subsidiary of
Collective. Continental's name was changed subsequently to Collective Bank
of New Jersey. Collective Bank of New Jersey was a state-chartered, BIF-
insured commercial bank with total assets of $161.3 million and deposits of
$129.5 million on the date of acquisition. The acquisition was accounted
for by the purchase method. It has not had, nor is it expected to have, a
material effect on Collective's results of operations or financial
position. Collective Bank of New Jersey was merged into Collective Bank in
February 1997.
-36-
<PAGE>
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma condensed combined financial statements
reflect the Merger under the application of the pooling-of-interests method of
accounting. This pro forma financial information is based on the estimates and
assumptions set forth in the notes to such statements. The pro forma adjustments
made in connection with the development of the pro forma information are
preliminary and have been made solely for purposes of developing such pro forma
information as necessary to comply with the disclosure requirements of the
Commission. The pro forma financial information has been prepared using the
historical consolidated financial statements and notes thereto appearing in
Summit's Form 10-K for the year ended December 31, 1996 and Summit's Form 10-Q
for the quarterly periods ended March 31, 1996 and 1997 and Collective's Form
10-K for the fiscal year ended June 30, 1996 and Collective's Form 10-Q's for
the quarterly periods ended September 30, 1995 and March 31, 1997. The unaudited
pro forma condensed combined financial statements do not purport to be
indicative of the combined financial position or results of operations of future
periods or indicative of the results that actually would have been realized had
the entities been a single entity during these periods.
The Pro Forma Condensed Combined Statements of Income give effect to the
proposed Merger by combining the historical statements of income of Summit for
the three years ended December 31, 1996, as filed on Form 10-K for the year
ended December 31, 1996, and the historical statements of income of Collective
for the three fiscal years ended June 30, 1996, as filed on Form 10-K for the
year ended June 30, 1996 and included hereon. The Pro Forma Condensed Combined
Statement of Income for the three months ended March 31, 1997 combines the
unaudited statement of income of Summit for the three months ended March 31,
1997 and the unaudited statement of income of Collective for the three months
ended March 31, 1997 as filed on Form 10-Q and included hereon. The Pro Forma
Condensed Combined Statement of Income for the three months ended March 31, 1996
combines the unaudited statement of income of Summit for the three months ended
March 31, 1996 and the unaudited statement of income of Collective for the three
months ended September 30, 1995, to reflect the restatement of the historical
statements of income of Summit that will be recorded on the consummation of the
Merger.
The Pro Forma Condensed Combined Income Statements do not give effect to
anticipated expenses and nonrecurring charges related to the Merger and the
estimated effect of revenue enhancements and expense savings associated with
the consolidation of the operations of Summit and Collective. Had these
expenses and nonrecurring charges, net of tax effect, been reflected in the
Pro Forma Condensed Combined Income Statements for the three months ended
March 31, 1997, Summit and Collective Pro Forma net income would decrease by
approximately $33.2 million or $.28 per share. The estimated restructuring
charge constitutes forward-looking information and is based on currently
available information as well as numerous factors and assumptions which are
subject to change and could result in a restructuring charge differing from
the estimate.
The pro forma financial information uses the Exchange Ratio of .895 shares
of Summit Common for each share of Collective Common.
-37-
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS SUMMIT AND
INCREASE COLLECTIVE
SUMMIT COLLECTIVE (DECREASE) PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks. $ 968,930 $ 65,936 $ 1,034,866
Interest bearing
deposits with banks.... 13,457 -- 13,457
Short-term securities... 188,800 54,595 243,395
Securities.............. 6,199,177 2,403,946 $ (6,323)(1) 8,596,800
Loans................... 15,495,945 2,879,631 18,375,576
Less: Allowance for 277,011 13,461 290,472
loan losses.......... ----------- ---------- --------- -----------
Net Loans........... 15,218,934 2,866,170 18,085,104
Premises and equipment.. 201,363 41,096 242,459
Other assets............ 648,684 85,845 734,529
----------- ---------- --------- -----------
Total Assets............ $23,439,345 $5,517,588 $ (6,323) $28,950,610
=========== ========== ========= ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $18,831,534 $3,498,659 $22,330,193
Other borrowed funds.... 1,374,190 1,573,385 2,947,575
Other liabilities....... 385,564 53,903 $ 32,817 (1)(3) 472,284
Long-term debt.......... 830,257 5,486 835,743
----------- ---------- --------- -----------
Total Liabilities..... 21,421,545 5,131,433 32,817 26,585,795
Shareholders' equity
Common Stock.......... 118,141 205 21,579 (1)(2) 139,925
Surplus............... 926,802 60,490 (28,037)(1)(2) 959,255
Retained earnings..... 984,161 330,387 (33,200)(3) 1,281,348
Net unrealized (loss)
gain on securities,
net of tax........... (11,304) 1,311 (712)(1) (10,705)
Employee Stock
Ownership Plan debt.. -- (5,008) (5,008)
Treasury Stock........ -- (1,230) 1,230 (2) --
----------- ---------- --------- -----------
Total Shareholders' 2,017,800 386,155 (39,140) 2,364,815
equity............... ----------- ---------- --------- -----------
Total Liabilities and $23,439,345 $5,517,588 $ (6,323) $28,950,610
Shareholders' Equity... =========== ========== ========= ===========
</TABLE>
See Notes to Pro Forma Financial Information.
-38-
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUMMIT AND
COLLECTIVE
SUMMIT COLLECTIVE PRO FORMA
-------- ---------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans.................... $309,338 $55,890 $365,228
Interest on securities........................ 95,173 39,487 134,660
Other......................................... 1,051 377 1,428
-------- ------- --------
Total interest income....................... 405,562 95,754 501,316
Interest Expense
Interest on deposits.......................... 132,795 35,521 168,316
Interest on borrowed funds.................... 32,710 20,275 52,985
-------- ------- --------
Total interest expense...................... 165,505 55,796 221,301
-------- ------- --------
Net interest income......................... 240,057 39,958 280,015
Provision for loan losses..................... 14,500 1,010 15,510
-------- ------- --------
Net interest income after provision for loan
losses..................................... 225,557 38,948 264,505
Non-Interest Income
Service charges on deposit accounts........... 26,271 2,890 29,161
Securities gains.............................. 1,140 266 1,406
Other......................................... 38,025 1,501 39,526
-------- ------- --------
Total non-interest income................... 65,436 4,657 70,093
Non-Interest Expense
Salaries and employee benefits................ 87,659 7,900 95,559
Occupancy, furniture and equipment, net....... 33,691 2,966 36,657
Restructuring charges......................... 26,500 -- 26,500
Other......................................... 41,402 7,478 48,880
-------- ------- --------
Total non-interest expenses................. 189,252 18,344 207,596
-------- ------- --------
Income before income taxes...................... 101,741 25,261 127,002
Federal and state income taxes................ 35,256 9,264 44,520
-------- ------- --------
Net income...................................... 66,485 15,997 82,482
======== ======= ========
Net Income Per Common Share(4).................. $ 0.68 $ 0.78 $ 0.71
======== ======= ========
Average Common Shares Outstanding(1)(4)......... 98,271 20,515 116,251
======== ======= ========
</TABLE>
See Notes to Pro Forma Financial Information.
-39-
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUMMIT AND
COLLECTIVE
SUMMIT COLLECTIVE(5) PRO FORMA
-------- ------------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans................ $295,129 $47,016 $342,145
Interest on securities.................... 91,318 41,852 133,170
Other..................................... 1,306 -- 1,306
-------- ------- --------
Total interest income................... 387,753 88,868 476,621
Interest Expense
Interest on deposits...................... 134,142 33,279 167,421
Interest on borrowed funds................ 27,620 21,884 49,504
-------- ------- --------
Total interest expense.................. 161,762 55,163 216,925
-------- ------- --------
Net interest income..................... 225,991 33,705 259,696
Provision for loan losses................. 15,500 286 15,786
-------- ------- --------
Net interest income after provision for
loan losses............................ 210,491 33,419 243,910
Non-Interest Income
Service charges on deposit accounts....... 23,456 2,269 25,725
Securities gains.......................... 757 634 1,391
Other..................................... 34,050 1,146 35,196
-------- ------- --------
Total non-interest income............... 58,263 4,049 62,312
Non-Interest Expense
Salaries and employee benefits............ 86,919 6,979 93,898
Occupancy, furniture and equipment, net... 35,874 2,679 38,553
Restructuring charges..................... 110,700 -- 110,700
Other..................................... 39,242 7,294 46,536
-------- ------- --------
Total non-interest expenses............. 272,735 16,952 289,687
-------- ------- --------
Income before income taxes.................. (3,981) 20,516 16,535
Federal and state income taxes............ (1,742) 7,319 5,577
-------- ------- --------
Net income................................ (2,239) 13,197 10,958
======== ======= ========
Net Income Per Common Share(4)............ $ (0.03) $ 0.65 $ 0.09
======== ======= ========
Average Common Shares Outstanding(1)(4)... 93,134 20,444 111,162
======== ======= ========
</TABLE>
See Notes to Pro Forma Financial Information.
-40-
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUMMIT AND
COLLECTIVE
SUMMIT COLLECTIVE(6) PRO FORMA
---------- ------------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans............... $1,191,805 $191,341 $1,383,146
Interest on securities .................. 355,288 162,296 517,584
Other.................................... 3,714 2,048 5,762
---------- -------- ----------
Total interest income.................. 1,550,807 355,685 1,906,492
Interest Expense
Interest on deposits..................... 527,535 131,500 659,035
Interest on borrowed funds............... 111,761 82,413 194,174
---------- -------- ----------
Total interest expense................. 639,296 213,913 853,209
---------- -------- ----------
Net interest income.................... 911,511 141,772 1,053,283
Provision for loan losses................ 62,000 2,035 64,035
---------- -------- ----------
Net interest income after provision for
loan losses........................... 849,511 139,737 989,248
Non-Interest Income
Service charges on deposit accounts...... 98,949 9,373 108,322
Securities gains......................... 5,217 1,060 6,277
Other.................................... 143,297 5,164 148,461
---------- -------- ----------
Total non-interest income.............. 247,463 15,597 263,060
Non-Interest Expense
Salaries and employee benefits........... 326,380 28,602 354,982
Occupancy, furniture and equipment, net.. 136,209 10,746 146,955
Restructuring charges.................... 110,700 -- 110,700
Other.................................... 174,646 31,183 205,829
---------- -------- ----------
Total non-interest expenses............ 747,935 70,531 818,466
---------- -------- ----------
Income before income taxes................. 349,039 84,803 433,842
Federal and state income taxes........... 119,864 30,303 150,167
---------- -------- ----------
Net income................................. $ 229,175 $ 54,500 $ 283,675
========== ======== ==========
Net Income Per Common Share(4)............. $ 2.44 $ 2.67 $ 2.53
========== ======== ==========
Average Common Shares Outstanding(1)(4).... 93,061 20,446 111,283
========== ======== ==========
</TABLE>
See Notes to Pro Forma Financial Information.
-41-
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUMMIT AND
COLLECTIVE
SUMMIT COLLECTIVE(6) PRO FORMA
---------- ------------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans............... $1,132,584 $164,584 $1,297,168
Interest on securities................... 355,264 167,396 522,660
Other.................................... 7,769 4,337 12,106
---------- -------- ----------
Total interest income.................. 1,495,617 336,317 1,831,934
Interest Expense
Interest on deposits..................... 514,733 115,570 630,303
Interest on borrowed funds............... 111,643 80,286 191,929
---------- -------- ----------
Total interest expense................. 626,376 195,856 822,232
---------- -------- ----------
Net interest income.................... 869,241 140,461 1,009,702
Provision for loan losses................ 71,850 240 72,090
---------- -------- ----------
Net interest income after provision for
loan losses........................... 797,391 140,221 937,612
Non-Interest Income
Service charges on deposit accounts...... 88,083 7,815 95,898
Securities gains (losses)................ 8,606 (11) 8,595
Other.................................... 127,500 5,639 133,139
---------- -------- ----------
Total non-interest income.............. 224,189 13,443 237,632
Non-Interest Expense
Salaries and employee benefits........... 336,550 27,490 364,040
Occupancy, furniture and equipment, net.. 131,401 9,986 141,387
Other.................................... 174,410 28,002 202,412
---------- -------- ----------
Total non-interest expenses............ 642,361 65,478 707,839
---------- -------- ----------
Income before income taxes................. 379,219 88,186 467,405
Federal and state income taxes........... 136,349 30,644 166,993
---------- -------- ----------
Net income................................. $ 242,870 $ 57,542 $ 300,412
========== ======== ==========
Net Income Per Common Share(4)............. $ 2.77 $ 2.80 $ 2.84
========== ======== ==========
Average Common Shares Outstanding(1)(4).... 86,674 20,580 104,829
========== ======== ==========
</TABLE>
See Notes to Pro Forma Financial Information.
-42-
<PAGE>
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUMMIT AND
COLLECTIVE
SUMMIT COLLECTIVE(6) PRO FORMA
--------- ------------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans.............. $ 951,029 $129,017 $1,080,046
Interest on securities.................. 347,299 136,368 483,667
Other................................... 4,472 4,185 8,657
--------- -------- ----------
Total interest income................. 1,302,800 269,570 1,572,370
Interest Expense
Interest on deposits.................... 368,847 95,186 464,033
Interest on borrowed funds.............. 107,126 28,573 135,699
--------- -------- ----------
Total interest expense................ 475,973 123,759 599,732
--------- -------- ----------
Net interest income................... 826,827 145,811 972,638
Provision for loan losses............... 91,995 2,352 94,347
--------- -------- ----------
Net interest income after provision
for loan losses...................... 734,832 143,459 878,291
Non-Interest Income
Service charges on deposit accounts..... 82,997 5,997 88,994
Securities gains........................ 2,232 2,722 4,954
Other................................... 124,837 (1,059) 123,778
--------- -------- ----------
Total non-interest income............. 210,066 7,660 217,726
Non-Interest Expense
Salaries and employee benefits.......... 322,812 23,832 346,644
Occupancy, furniture and equipment, net. 128,178 8,703 136,881
Restructuring charges................... 13,565 -- 13,565
Other................................... 235,110 26,155 261,265
--------- -------- ----------
Total non-interest expenses........... 699,665 58,690 758,355
--------- -------- ----------
Income before income taxes................ 245,233 92,429 337,662
Federal and state income taxes.......... 88,952 33,062 122,014
--------- -------- ----------
Income before cumulative effect of a
change in accounting principle........... 156,281 59,367 215,648
Cumulative effect of a change in
accounting principle................... (1,731) -- (1,731)
--------- -------- ----------
Net income................................ $154,550 $ 59,367 $ 213,917
========= ======== ==========
Net Income Per Common Share:
Income before cumulative effect of a
change in accounting principle......... $ 1.82 $ 2.89 $ 2.08
Cumulative effect of a change in
accounting principle................... (0.02) -- (0.02)
--------- -------- ----------
Net Income(4)............................. $ 1.80 $ 2.89 $ 2.06
========= ======== ==========
Average Common Shares Outstanding(1)(4)... 84,381 20,572 102,465
========= ======== ==========
</TABLE>
See Notes to Pro Forma Financial Information.
-43-
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
- --------
(1) Reflects the elimination of 163,700 shares of Collective Common owned by
Summit at March 31, 1997.
(2) The Pro Forma Condensed Combined Balance Sheet gives effect to the Merger
by combining the respective balance sheets of Summit and Collective at
March 31, 1997 on a pooling-of-interests basis. The capital accounts have
been adjusted to reflect the issuance of 18.2 million shares of Summit
Common in exchange for all the outstanding shares of Collective Common and
the retirement of Collective Common held in the treasury of Collective.
(3) Reflects charges of approximately $49.3 million, $33.2 million after the
related tax effects, which includes estimated severance and outplacement
costs, expenses related to facilities closures and consolidation costs
directly attributable to the Merger.
(4) Average common shares outstanding and net income per common share for
Collective assume full dilution. Pro forma combined net income per common
share was computed based on pro forma combined net income less preferred
dividends divided by the combined weighted average number of shares
outstanding during the period. Pro forma combined weighted average shares
includes Collective's weighted average shares outstanding, adjusted for
the exchange ratio. Common stock equivalents are not included in the pro
forma calculation as they are not material.
(5) Represents the results of operations of Collective for the three months
ended September 30, 1995 to be consistent with the restatement of the
historical financial statements of Summit that will be recorded on
consummation of the Merger.
(6) Represents the results of operations of Collective for the fiscal year
ended June 30 that falls within Summit's year ended December 31 to be
consistent with the restatement of the historical financial statements of
Summit that will be recorded on consummation of the Merger.
-44-
<PAGE>
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: July 28, 1997 SUMMIT BANCORP.
(Registrant)
By: /s/ WILLIAM J. HEALY
--------------------
WILLIAM J. HEALY
Executive Vice President and Comptroller
(Chief Accounting Officer)
-45-
<PAGE>
EXHIBIT 23.1
AUDITORS' CONSENT
The Board of Directors
Collective Bancorp:
We consent to the incorporation by reference in Registration Statement No. 2-
78500 on Form S-8, Registration Statement No. 33-13930 on Form S-8, Registration
Statement No. 33-36209 on Form S-8, Registration Statement No. 33-38172 on Form
S-8, Registration Statement No. 33-53870 on Form S-3, Registration Statement No.
33-58152 on Form S-3, Registration Statement No. 33-62972 on Form S-8,
Registration Statement No. 33-54667 on Form S-8, Registration Statement
Registration No. 33-61353 on Form S-8, Registration Statement No. 333-02625,
Registration Statement No. 333-24159 on Form S-8, and Registration Statement No.
333-29019 and 333-29019-01 on Form S-4 of Summit Bancorp, Inc. of our report
dated July 31, 1996 with respect to the consolidated financial statements of
Collective Bancorp, Inc. and subsidiary as of June 30, 1996 and for the year
then ended, which report appears in the Current Report on Form 8-K of Summit
Bancorp dated July 28, 1997.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
July 28, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
2-78500, 33-13930, 33-36209, 33-38172, 33-53870, 33-58152, 33-62972, 33-54667,
33-61353, 333-02625, 333-24159, 333-29019, 333-29019-01 of Summit Bancorp of our
report dated August 25, 1995, appearing in this Report on Form 8-K of Summit
Bancorp and to the reference to Deloitte & Touche LLP under the heading
"Experts" in Registration Statements No. 333-29019 and 333-29019-01.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
July 25, 1997
