==============================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from-------------------- to-----------------------
Commission File Number: 1-6451
----------------------------------------------------
SUMMIT BANCORP.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1903313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 987-3200
- ----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
As of July 31, 1998 there were 173,805,211 shares of common stock,
$.80 par value, outstanding.
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<PAGE>
SUMMIT BANCORP
FORM 10-Q
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998, December 31, 1997 and
June 30, 1997....................................... 2
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1998 and 1997....3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997............. 4
Consolidated Statements of Shareholders' Equity -
Six Months Ended June 30, 1998 and 1997..............5
Notes to Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........... 8
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.................19
Part II. Other Information.
Item 1. Legal Proceedings................................20
Item 2. Changes in Securities and Use of Proceeds........20
Item 3. Defaults Upon Senior Securities..................20
Item 4. Submission of Matters to a Vote of
Security Holders............................. 21
Item 5. Other Information................................21
Item 6. Exhibits and Reports on Form 8-K.................21
Signature.............................................. 22
Exhibit Index.......................................... 23
1
<PAGE>
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Balance Sheets
Unaudited
(In thousands)
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
------------ ------------ -----------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 1,153,023 $ 1,173,118 $ 1,153,517
Federal funds sold and securities purchased
under agreements to resell 176,000 4,460 143,497
Interest-bearing deposits with banks 34,476 14,072 6,879
Securities:
Trading account securities 23,797 35,216 43,407
Securities available for sale 4,295,945 5,074,896 3,513,390
Securities held to maturity 5,070,615 4,157,543 5,138,227
------------ ------------ -----------
Total securities 9,390,357 9,267,655 8,695,024
------------ ------------ -----------
Loans (net of unearned discount):
Commercial 6,682,510 6,253,740 5,708,203
Commercial mortgage 2,863,378 2,703,793 2,800,499
Residential mortgage 5,635,144 5,671,200 6,011,423
Consumer 4,523,071 4,259,633 4,077,538
------------ ------------ -----------
Total loans 19,704,103 18,888,366 18,597,663
Less: Allowance for loan losses 308,753 296,494 294,066
------------ ------------ -----------
Net loans 19,395,350 18,591,872 18,303,597
Premises and equipment 249,156 244,913 239,734
Goodwill and other intangibles 179,206 188,620 179,159
Accrued interest receivable 188,559 175,170 155,228
Due from customers on acceptances 16,608 15,814 13,852
Other assets 359,308 288,478 334,200
------------ ------------ -----------
Total Assets $31,142,043 $29,964,172 $29,224,687
============ ============ ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits $ 4,785,430 $ 4,530,690 $ 4,327,962
Interest-bearing deposits:
Savings and time deposits 16,409,298 16,914,485 17,014,270
Commercial certificates of deposit
$100,000 and over 911,722 884,261 824,908
------------ ------------ -----------
Total deposits 22,106,450 22,329,436 22,167,140
Other borrowed funds 4,152,961 3,397,953 3,332,234
Accrued expenses and other liabilities 317,030 290,197 262,734
Accrued interest payable 85,123 71,602 53,899
Bank acceptances outstanding 16,608 15,814 13,852
Long-term debt 1,881,289 1,246,750 910,766
------------ ------------ -----------
Total liabilities 28,559,461 27,351,752 26,740,625
------------ ------------ -----------
Shareholders' equity:
Common stock par value $ .80: Authorized 390,000
shares; issued 177,654, outstanding 173,934
at June 30, 1998; issued and outstanding 176,590
at December 31, 1997 and 175,364
at June 30, 1997 142,123 141,272 140,291
Surplus 1,006,812 987,281 965,194
Retained earnings 1,596,600 1,467,193 1,378,999
Employee stock ownership plan obligation (3,663) (4,201) (4,739)
Accumulated other comprehensive income, net 22,669 20,875 4,317
Treasury stock; 3,720 shares at June 30, 1998 (181,959) - -
------------ ------------ -----------
Total shareholders' equity 2,582,582 2,612,420 2,484,062
------------ ------------ -----------
Total Liabilities and Shareholders' Equity $31,142,043 $29,964,172 $29,224,687
============ ============ ===========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Income
Unaudited
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest Income
Loans $ 392,005 $ 376,091 $ 772,314 $ 741,321
Securities:
Trading account securities 331 731 885 1,104
Securities available for sale 76,324 55,031 161,346 104,281
Securities held to maturity 69,117 83,416 131,723 168,451
----------- ----------- ----------- ----------
Total securities 145,772 139,178 293,954 273,836
----------- ----------- ----------- ----------
Federal funds sold and securities purchased
under agreements to resell 236 1,344 643 2,597
Deposits with banks 375 218 806 391
----------- ----------- ----------- ----------
Total interest income 538,388 516,831 1,067,717 1,018,145
----------- ----------- ----------- ----------
Interest Expense
Savings and time deposits 153,706 157,787 310,574 315,047
Commercial certificates of deposit
$100,000 and over 12,302 12,120 24,559 23,174
Borrowed funds, including long-term debt 77,487 60,109 148,533 113,094
----------- ----------- ----------- ----------
Total interest expense 243,495 230,016 483,666 451,315
----------- ----------- ----------- ----------
Net interest income 294,893 286,815 584,051 566,830
Provision for loan losses 18,000 15,090 33,000 30,600
----------- ----------- ----------- ----------
Net interest income after
provision for loan losses 276,893 271,725 551,051 536,230
----------- ----------- ----------- ----------
Non-Interest Income
Service charges on deposit accounts 31,653 28,347 61,937 56,580
Service and loan fee income 15,199 12,928 28,113 24,263
Trust and investment services income 14,986 11,370 28,430 22,698
Securities gains 3,072 775 4,498 2,206
Other 25,233 18,108 46,685 35,181
----------- ----------- ----------- ----------
Total non-interest income 90,143 71,528 169,663 140,928
----------- ----------- ----------- ----------
Non-Interest Expenses
Salaries 74,422 72,296 150,915 142,855
Pension and other employee benefits 27,202 22,534 53,820 47,654
Furniture and equipment 20,816 19,895 41,183 38,154
Occupancy, net 17,605 17,855 36,105 36,286
Communications 9,044 8,566 18,576 17,331
Merger-related charges - - - 26,500
Other 42,830 40,187 82,973 79,495
----------- ----------- ----------- ----------
Total non-interest expenses 191,919 181,333 383,572 388,275
----------- ----------- ----------- ----------
Income before income taxes 175,117 161,920 337,142 288,883
Federal and state income taxes 56,640 56,862 106,248 101,343
----------- ----------- ----------- ----------
Net Income $ 118,477 $ 105,058 $ 230,894 $ 187,540
=========== =========== =========== ==========
Net Income per Common Share:
Basic $ 0.67 $ 0.60 $ 1.31 $ 1.07
=========== =========== =========== ==========
Diluted 0.66 0.59 1.29 1.06
=========== =========== =========== ==========
Average Common Shares Outstanding:
Basic 176,127 174,905 176,528 174,642
=========== =========== =========== ==========
Diluted 178,232 177,123 178,739 176,916
=========== =========== =========== ==========
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<CAPTION>
Six Months Ended
June 30,
------------------------
Operating activities 1998 1997
----------- -----------
<S> <C> <C>
Net income $ 230,894 $ 187,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses and other real estate owned 33,120 31,356
Depreciation, amortization and accretion, net 48,258 38,689
Merger-related charges - 26,500
Gains on sales of securities (4,498) (2,206)
Gains on sales of mortgages held for sale (7,273) (3,289)
Gains on sales of other real estate owned (2,314) (1,757)
Proceeds from sales of other real estate owned 9,784 14,779
Proceeds from sales of mortgages held for sale 395,987 198,740
Originations of mortgages held for sale (474,198) (195,465)
Net decrease (increase) in trading account securities 11,370 (18,005)
Net increase in accrued interest receivable and other assets (90,251) (16,554)
Net increase (decrease) in accrued interest payable, accrued
expenses and other liabilities 35,328 (52,579)
----------- -----------
Net cash provided by operating activities 186,207 207,749
Investing activities ----------- -----------
Purchases of securities held to maturity (2,031,896) (234,158)
Purchases of securities available for sale (1,294,197) (1,224,192)
Proceeds from maturities of securities held to maturity 1,104,088 397,046
Proceeds from maturities of securities available for sale 1,363,435 353,778
Proceeds from sales of securities available for sale 732,133 497,103
Net (increase) decrease in Federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits with banks (191,944) 37,786
Net increase in loans (753,147) (487,120)
Purchases of premises and equipment, net (44,506) (7,082)
----------- -----------
Net cash used in investing activities (1,116,034) (666,839)
----------- -----------
Financing activities
Net decrease in deposits (222,986) (314,623)
Net increase in short-term borrowings 755,008 400,867
Principal payments on long-term debt (170,941) (27,266)
Proceeds from issuance of long-term debt 805,895 231,500
Dividends paid (95,667) (79,498)
Purchase of Common Stock (192,289) -
Proceeds from issuance of common stock under dividend
reinvestment and other stock plans 30,712 17,824
----------- -----------
Net cash provided by financing activities 909,732 228,804
----------- -----------
Decrease in cash and due from banks (20,095) (230,286)
Beginning cash balance of acquired entities - 56,296
Cash and due from banks at beginning of period 1,173,118 1,327,507
----------- -----------
Cash and due from banks at end of period $ 1,153,023 $ 1,153,517
=========== ===========
Supplemental disclosure of cash flow information
Cash paid:
Interest payments $ 470,145 $ 445,190
Income tax payments 45,358 115,848
Noncash investing activities:
Net transfer of securities from held to maturity to
available for sale resulting from acquisitions - 96,000
Net transfer of loans to other real estate owned 3,831 12,781
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unaudited
(In thousands)
<CAPTION>
Accum. Other Total
Common Retained ESOP Treasury Comprehensive Shareholders'
Stock Surplus Earnings Obligation Stock Income Equity
------- ---------- --------- ----------- --------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $134,637 $ 918,411 $1,237,892 $ (5,816)$ -$ 5,714 $ 2,290,838
Adjustment for the pooling of a company with
a different fiscal year end (158) (4,771) 9,288 539 - 1,832 6,730
------- ---------- --------- ----------- --------- -------------- --------------
Adjusted beginning balance 134,479 913,640 1,247,180 (5,277) - 7,546 2,297,568
Balances at beginning of period of immaterial
pooled acquisition (6,047 shares) 4,837 34,705 25,562 - - (278) 64,826
Comprehensive income:
Net income - - 187,540 - - - 187,540
Unrealized holding losses on
securities arising during the period - - - - - (2,951) (2,951)
--------------
Total comprehensive income 184,589
Cash dividend declared on common stock - - (81,283) - - - (81,283)
Common stock issued:
Dividend reinvestment and other stock plans
(181 shares) 145 5,394 - - - - 5,539
Exercise of stock options, net (1,037 shares) 830 11,455 - - - - 12,285
ESOP debt repayment - - - 538 - - 538
------- ---------- --------- ----------- --------- -------------- --------------
Balance, June 30, 1997 $140,291 $ 965,194 $1,378,999 $ (4,739)$ -$ 4,317 $ 2,484,062
======== ========== ========== =========== ========== ============== ==============
Balance, December 31, 1997 $141,272 $ 987,281 $1,467,193 $ (4,201)$ -$ 20,875 $ 2,612,420
Comprehensive income:
Net income - - 230,894 - - - 230,894
Unrealized holding gains on
securities arising during the period - - - - - 1,794 1,794
--------------
Total comprehensive income 232,688
Cash dividends declared on common stock - - (101,487) - - - (101,487)
Common stock issued:
Dividend reinvestment and other stock plans
(345 shares) 276 17,799 - - - - 18,075
Exercise of stock options, net (917 shares) 575 1,732 - - 10,330 - 12,637
Purchase of treasury stock (3,926 shares) (192,289) (192,289)
ESOP debt repayment - - - 538 - - 538
------- ---------- --------- ----------- --------- -------------- --------------
Balance, June 30, 1998 $142,123 $1,006,812 $1,596,600 $ (3,663)$ (181,959)$ 22,669 $ 2,582,582
======== ========== ========== =========== ========== ============== ==============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
Summit Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.) Basis of Presentation
The accompanying financial statements reflect, in the opinion of
management, all normal recurring adjustments necessary to present
fairly the consolidated financial position of Summit Bancorp and
subsidiaries (the "Company"), the consolidated results of operations,
changes in cash flows and changes in shareholders' equity. All
significant intercompany accounts and transactions have been
eliminated in consolidation. In all material respects, the financial
statements presented comply with the current reporting requirements of
supervisory authorities. Certain prior period amounts have been
reclassified to conform to the financial statement presentation of
1998. For additional information and disclosures required under
generally accepted accounting principles, reference is made to the
Company's 1997 Annual Report on Form 10-K.
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". The Statement defines total comprehensive income as all
changes in equity during a period from transactions and other events
and circumstances from nonowner sources. The Company's other
comprehensive income is generally comprised of unrealized holding
gains and losses on securities available for sale. Disclosure of
comprehensive income for the 1998 and 1997 periods is presented in the
accompanying Consolidated Statements of Shareholders' Equity.
Effective January 1, 1998, the Company adopted Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" issued by the American Institute of
Certified Public Accountants. This statement establishes standards for
the capitalization of computer software developed or obtained for
internal use. The impact of adopting this statement was not material
to the financial condition or results of operations of the Company.
2.) Acquisitions and Restructuring Charges
On March 1, 1997, the Company completed the acquisition of B.M.J.
Financial Corp. ("BMJ"). This acquisition was accounted for as a
pooling of interests, and was recorded as an adjustment to
shareholders' equity as of January 1, 1997, without restating the
consolidated financial statements for 1996 and prior years.
Merger-related charges of $26.5 million ($16.7 million, after tax)
were recorded at the time of the acquisition.
On August 1, 1997, the Company completed the acquisition of Collective
Bancorp, Inc. ("Collective"). This acquisition was accounted for as a
pooling of interests and all financial information, prior to the
acquisition date, has been restated to reflect the combined financial
information. Merger-related charges of $56.5 million ($37.1 million,
after tax) were recorded at the time of the acquisition.
On December 12, 1997, the Company acquired Corporate Dynamics, an
employee benefits consulting firm, and Philadelphia Benefits Corp., a
group health insurance agency, with the issuance of 495,000 shares of
common stock. These acquisitions were accounted for as purchases.
On June 18, 1998, the Company announced that it had entered into a
definitive agreement to acquire NSS Bancorp. Inc., a bank holding
company headquartered in Norwalk, Connecticut. Under the terms of the
agreement, each share of NSS Bancorp, Inc. common stock will be
exchanged for 1.232 shares of the Company's common stock. The
transaction, which will be accounted for as a purchase, is expected
to be completed in the fourth quarter of 1998,
subject to NSS Bancorp, Inc. shareholder and regulatory approval. In
connection with this acquisition, the Company has purchased its common
stock of which approximately 2.8 million shares will be reissued to
effect the acquisition.
6
<PAGE>
3.) Net Income per Common Share
The Company calculates net income per common share in accordance with
SFAS No. 128, "Earnings per Share." Basic net income per common share
is calculated by dividing net income by the weighted average common
shares outstanding during the period. Diluted net income per common
share is computed similar to that of basic net income per common
share, except that the denominator is increased to include the number
of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options, were
issued during the reporting period.
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
--------------------------- ------------------------
<S> <C> <C> <C> <C>
Net Income $118,477 $105,058 $230,894 $187,540
===============================================================================
Basic weighted-average
common shares outstanding 176,127 174,905 176,528 174,642
Plus: Common stock
equivalents 2,105 2,218 2,211 2,274
- ---------------------------------------------------------------------------------
Diluted weighted-average
common shares outstanding 178,232 177,123 178,739 176,916
================================================================================
Net income per common share:
Basic $0.67 $0.60 $1.31 $1.07
Diluted 0.66 0.59 1.29 1.06
================================================================================
</TABLE>
4.) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
information." SFAS No. 131 establishes standards and disclosure
requirements for the way companies report information about operating
segments, including related product information. Operating segments
are defined based upon the way management organizes segments for
making operations decisions and evaluating performance. Information
such as segment net earnings, revenues, expense items and certain
balance sheet amounts are required to be presented. These amounts are
to be reconciled to the Company's combined financial information. SFAS
No. 131 is effective for financial statements issued for annual
periods ending after December 15, 1998, and interim periods beginning
in 1999.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits." This Statement
standardizes the disclosure requirements for pension and other
postretirement benefits by requiring additional information that will
facilitate financial analysis, and eliminating certain disclosures
that are considered no longer useful. SFAS No. 132 supersedes the
disclosure requirements in SFAS Nos. 87, 88 and 106. This Statement is
effective for fiscal years beginning after December 15, 1997, and will
be adopted December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, and for
hedging activities. SFAS No. 133 supersedes the disclosure
requirements in SFAS No. 80, 105 and 119. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material impact
on the financial position or results of operations of the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
---------------------------------------------
Summit Bancorp is a bank holding company located in Princeton, New
Jersey. The Company owns two bank subsidiaries and several active
non-bank subsidiaries. The Company's bank subsidiaries provide a broad
range of retail, commercial and private banking services as well as
trust and investment services to individuals, businesses, not-for-
profit organizations, government entities and other financial institutions.
These services are provided through an extensive branch
network, including supermarket branches and private banking
facilities, as well as through automated teller machines and personal
computers.
FINANCIAL CONDITION
Total assets at June 30, 1998, were $31.1 billion, an increase of $1.2
billion or 3.9 percent from year-end 1997, which can generally be
attributed to an increase in the loan portfolios.
Securities held to maturity at June 30, 1998, were $5.1 billion and
were mainly comprised of $3.5 billion of U.S. Government and Federal
agency securities, $1.4 billion of other securities, predominately
corporate collateralized mortgage obligations ("CMOs"), and $165.0
million of state and political subdivision securities. These
securities increased $913.1 million or 22.0 percent from year-end
1997, primarily as cash flows from securities available for sale were
reinvested in securities held to maturity. For the six months of 1998,
$2.0 billion of held to maturity securities were purchased, partially
offset by principal repayments and maturities of $1.1 billion. At June
30, 1998, and December 31, 1997, net unrealized gains(losses) on
securities held to maturity amounted to $ 9.5 million and $(6.0)
million, respectively.
At June 30, 1998, securities available for sale amounted to $4.3
billion and were predominately comprised of U.S. Government and
Federal agency securities. These securities decreased $779.0 million
or 15.3 percent from year-end 1997, primarily as cash flows from
securities available for sale were reinvested in securities held to
maturity. The decrease resulted from $1.4 billion in maturities and
principal repayments and $732.1 million in sales, partially offset by
$1.3 billion in purchases.
At June 30, 1998, total loans amounted to $19.7 billion and increased
$815.7 million or 4.3 percent from year-end 1997. Commercial loans
increased $428.8 million or 6.9 percent as compared to December 31,
1997. The increase in commercial loans was primarily related to growth
in large corporate (larger middle market credit users with revenues in
excess of $125 million), real estate and asset-based lending.
Commercial mortgage loans increased $159.6 million or 5.9 percent.
Residential mortgage loans decreased $36.1 million or .6 percent from
December 31, 1997. Consumer loans increased $263.4 million or 6.2%
from year end December 1997.
Total deposits were $22.1 billion at June 30, 1998, a decrease of
$223.0 million or 1.0 percent from December 31, 1997. Savings and time
deposits continued to be impacted by the investors desire for
investment alternatives such as mutual funds, annuities and the stock
market. Savings and time deposits at $16.4 billion decreased $505.2
million or 3.0 percent from December 31, 1997. Partially offsetting
these decreases, was an increase in demand deposits of $254.7 million
or 5.6 percent from year-end 1997 to $4.8 billion. The increase in
demand deposits was generated in both business and personal accounts.
Also increasing were commercial certificates of deposit $100,000 and
over which were up $27.5 million, or 3.1 percent compared to December
31, 1997.
Other borrowed funds at June 30, 1998, increased $755.0 million or 22.2
percent from December 31, 1997, to $4.2 billion. The increase in
borrowed funds can be attributed to increases in short-term Federal
Home Loan Bank advances and Federal funds purchased, partially offset
by a decrease in short-term repurchase agreements. Long-term debt at
June 30, 1998, increased $634.5 million, or 50.9 percent from December
31, 1997 to $1.9 billion. The increase in long-term debt was
principally the result of the increase in long-term repurchase
agreements of $725.0 million. Included in long-term debt at each of
the periods
8
<PAGE>
presented, is $150.0 million of capital qualifying
securities. The increases in other borrowed funds and long-term debt
were generally used to fund the growth in the loan and investment
portfolios and to replace the reduction in deposits.
Approximately 3.9 million shares of Company common stock was
repurchased during the second quarter, at a cost of $192.3 million.
The treasury stock will be used for employee benefit plans, the
acquisition of NSS Bancorp Inc., and for general corporate purposes.
Partially offsetting the decrease in shareholders' equity resulting
from the buyback, was net income for the period less dividends paid on
common stock. Total shareholders' equity at June 30, 1998, decreased
$29.8 million from the December 31, 1997, balance of $2.612 billion.
Included in shareholders' equity at June 30, 1998, was accumulated
other comprehensive income, net of tax, amounting to $22.7 million,
compared to $20.9 million at year-end 1997. Accumulated other
comprehensive income is comprised principally of unrealized holding
gains/losses on the securities available for sale portfolio.
The Company's capital ratios for June 30, 1998, as compared to select
prior periods and regulatory requirements, are shown in the following
table. The Company's bank subsidiaries meet the well-capitalized
requirements for each of the periods presented. The decreases in the
June 30, 1998, ratios are principally attributable to the treasury
stock repurchase previously referenced.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Minimum
June 30, Dec. 31, June 30, Required Well
Selected Capital Ratios: 1998 1997 1997 Capital Capitalized
<S> <C> <C> <C> <C> <C>
Equity to assets 8.29% 8.72% 8.50 % - -
Leverage ratio 8.39 8.76 8.54 3.00% 5.00%
Tier I capital 11.68 12.64 12.63 4.00 6.00
Total risk-based capital 13.76 14.83 15.04 8.00 10.00
- ----------------------------------------------------------------------------------
</TABLE>
Non-Performing Assets
Non-performing assets include non-performing loans and other real
estate owned ("OREO") and are shown in the following table as of the
dates indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Performing Assets
(In thousands) June 30, 1998 Dec. 31, 1997 June 30, 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-performing loans (1):
Commercial and industrial $46,405 $42,644 $46,675
Commercial mortgage 22,484 37,993 47,931
Construction and development 2,566 4,453 15,571
- ------------------------------------------------------------------------------
Non-performing loans 71,455 85,090 110,177
OREO, net 8,913 14,249 21,807
- -----------------------------------------------------------------------------
Non-performing assets $80,368 $99,339 $131,984
- -----------------------------------------------------------------------------
Non-performing loans
to total loans .36% .45% .59%
Non-performing assets to
total loans and OREO .41 .53 .71
- ----------------------------------------------------------------------------
</TABLE>
(1) Loans, not included above, past due 90 days or more amounted to $57.0
million, $48.6 million and $71.5 million at June 30, 1998, December
31, 1997, and June 30, 1997, respectively. These loans are primarily
residential mortgage and consumer loans which are well
secured and in the process of collection.
The average balance of non-performing loans for the six months ended
June 30, 1998, was $75.5 million. Interest income received on
non-performing loans amounted to $1.0 million for the six months ended
June 30, 1998, compared to $1.3 million in the same period a year ago.
9
<PAGE>
Allowance for Loan Losses
A standardized process has been established to assess the adequacy of
the allowance for loan losses and to identify the risks inherent in
the loan portfolio. This process incorporates credit reviews and gives
consideration to areas of exposure such as concentrations of credit,
economic and industry conditions, trends in delinquencies and
collections, collateral coverage, and the composition of the
performing and non-performing loan portfolios. The allowance for loan
losses is maintained at a level that management believes to be
adequate to absorb anticipated loan losses. The unallocated portion of
the allowance for loan losses, in excess of specific and general
reserves, was $182.8 million at June 30, 1998, compared to $166.8
million at December 31, 1997.
Transactions in the allowance for loan losses, by loan category, for
the three and six month periods ended June 30, 1998, and 1997 and
selected loan quality ratios for the dates indicated are shown in the
following tables:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Allowance for Loan Losses Three months Six months
ended June 30, ended June 30,
(In thousands) 1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $301,264 $290,471 $296,494 $280,611
Acquisition adjustments, net - - - 9,994
Provision for loan losses 18,000 15,090 33,000 30,600
- ------------------------------------------------------------------------------
319,264 305,561 329,494 321,205
- -----------------------------------------------------------------------------
Loans charged off:
Commercial and industrial 2,824 6,295 11,490 14,429
Construction and development 939 2,148 1,295 2,872
Commercial mortgage 1,847 1,652 2,107 5,928
Residential mortgage 3,330 4,534 3,649 5,568
Consumer 8,524 6,495 17,856 13,985
- -------------------------------------------------------------------------------
Total loans charged off 17,464 21,124 36,397 42,782
- --------------------------------------------------------------------------------
Recoveries:
Commercial and industrial 1,755 4,907 6,404 7,533
Construction and development 1,019 3,042 2,817 3,225
Commercial mortgage 1,431 79 1,718 832
Residential mortgage 555 101 829 593
Consumer 2,193 1,500 3,888 3,460
- -------------------------------------------------------------------------------
Total recoveries 6,953 9,629 15,656 15,643
- -------------------------------------------------------------------------------
Net charge offs 10,511 11,495 20,741 27,139
- --------------------------------------------------------------------------------
Balance, end of period $308,753 $294,066 $308,753 $294,066
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
June 30, Dec. 31, June 30,
1998 1997 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net charge offs to
average loans:
Quarter-to-date .22% .25% .25%
Year-to-date .22 .29 .30
Allowance for loan losses to:
Total loans 1.57 1.57 1.58
Non-performing loans 432.09 348.45 266.90
Non-performing assets 384.17 298.47 222.80
- ----------------------------------------------------------------------------
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1998, was $118.5 million, or
$.67 per basic share compared to $105.1 million or $.60 per basic
share for the second quarter of 1997. On a diluted per share basis,
net income for the three months ended, was $.66 per diluted share
compared to $.59 for the same period in 1997.
For the six months ended June 30, 1998, net income was $230.9 million
or $1.31 per basic share compared to $187.5 million or $1.07 per basic
share, after merger-related charges. On a diluted basis, net income
for the six months ended, was $1.29 per diluted share, compared to
$1.06 for the six months ended June 30, 1997. The results for the six
months ended June 30, 1997, included merger-related restructuring
charges of $26.5 million ($16.7 million, after tax) recorded in the
first quarter of 1997, associated with the acquisition of BMJ.
The following are key performance indicators for the three and six
month periods ended June 30, 1998, and 1997.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(In thousands, except per share)
- --------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
Before merger-related charges 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $118,477 $105,058 $230,894 $204,220
Net income per share:
Basic $0.67 $0.60 $1.31 $1.17
Diluted 0.66 0.59 1.29 1.15
Dividends per share 0.30 0.24 0.57 0.48
Return on:
Average assets 1.56% 1.46% 1.54% 1.43%
Average common equity 17.86 17.16 17.46 16.97
Efficiency ratio 49.81 50.03 50.83 50.36
- -------------------------------------------------------------------------------------
After merger-related charges
- -------------------------------------------------------------------------------------
Net income $118,477 $105,058 $230,894 $187,540
Net income per share: :
Basic $0.67 $0.60 $1.31 $1.07
Diluted 0.66 0.59 1.29 1.06
Return on:
Average assets 1.56% 1.46% 1.54% 1.32%
Average common equity 17.86 17.16 17.46 15.59
- -------------------------------------------------------------------------------------
</TABLE>
Net Interest Income
Interest income on a tax-equivalent basis was $1.1 billion for the six
months ended June 30, 1998, an increase of $48.6 million, or 4.7
percent, compared to a year ago. Interest-earning assets averaged
$28.6 billion, an increase of $1.5 billion, or 5.7 percent compared to
the prior year period. The increase in interest-earning assets
contributed $65.0 million to the increase in tax-equivalent interest
income, partially offset by a decline of $16.4 million due to the
reduction in the yield on interest-earning assets. While the average
balance of interest-earning assets increased over the period, the rate
earned on the overall balance decreased 6 basis points from 7.65
percent in 1997 to 7.59 percent in 1998. The decrease was generally
the result of maturing assets being reinvested in a lower interest
rate environment.
11
<PAGE>
Interest expense increased $32.3 million, or 7.2 percent, for the six
months ended June 30, 1998, compared to the same period in 1997. The
increase in the rate paid for interest-bearing liabilities contributed
$7.9 million to the increase in interest expense. The increase in the
rate paid on interest-bearing liabilities was largely attributable to
the increase in the average rate paid on time deposits, from 5.15
percent in the 1997 period to 5.31 percent in 1998 as a result of a
shift from lower rate savings and money market accounts to higher cost
tiered and retail CDs. The remaining $24.4 million in interest expense
was attributable to an increase in interest-bearing liabilities used
to fund the growth in the loan and investment portfolios.
Interest-bearing liabilities averaged $22.8 billion, an increase of
$875.7 million, or 4.0 percent, from the prior year period.
The rate/volume table below presents an analysis of the impact on
interest income and expense resulting from changes in average volumes
and rates over the periods. Changes that are not due to volume or rate
variances have been allocated proportionally to both, based on their
relative absolute values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Rate/Volume Table
Amount of Increase(Decrease)
- --------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
1998 versus 1997 1998 versus 1997
- --------------------------------------------------------------------------------------
Due to change in: Due to change in:
- ---------------------------------------------------------------------------------------
(Tax-equivalent basis, in millions)
Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans:
Commercial $30.4 $(13.6) $16.8 $40.7 $(8.7) $32.0
Commercial mortgage 4.3 (5.6) (1.3) 0.5 (3.1) (2.6)
Residential mortgage (5.4) (1.7) (7.1) (11.6) (3.0) (14.6)
Consumer 8.0 (0.7) 7.3 16.5 (0.6) 15.9
- ---------------------------------------------------------------------------------------
Total loans 37.3 (21.6) 15.7 46.1 (15.4) 30.7
Securities held to maturity (13.4) (1.2) (14.6) (35.1) (2.4) (37.5)
Securities available for sale 27.6 (6.4) 21.2 57.0 0.1 57.1
Other interest-earning asset (1.3) 0.0 (1.3) (3.0) 1.3 (1.7)
- ----------------------------------------------------------------------------------------
Total interest income $50.2 $(29.2) $21.0 $65.0 $(16.4) $48.6
- ----------------------------------------------------------------------------------------
Interest Expense
Deposits:
Savings deposits $(1.8) $(1.0) $(2.8) $(2.3) $(1.0) $(3.3)
Time deposits (12.3) 11.0 (1.3) (13.3) 12.1 (1.2)
Commercial CD's > $100 M 0.2 0.0 0.2 1.1 0.3 1.4
- --------------------------------------------------------------------------------------
Total deposits (13.9) 10.0 (3.9) (14.5) 11.4 (3.1)
Other interest-bearing
liabilities 28.1 (10.7) 17.4 38.9 (3.5) 35.4
- --------------------------------------------------------------------------------------
Total interest expense 14.2 (0.7) 13.5 24.4 7.9 32.3
- --------------------------------------------------------------------------------------
Net interest income $36.0 $(28.5) $7.5 $40.6 $(24.3) $16.3
======================================================================================
</TABLE>
Net interest income on a tax-equivalent basis was $590.4 million for
the six months ended June 30, 1998, an increase of $16.3 million, or
2.8 percent, compared to the same period in 1997.
The net interest spread percentage on a tax-equivalent basis (the
difference between the rate earned on average interest-earning assets
and the rate paid on average interest bearing liabilities) was 3.31
percent for the six months ended June 30, 1998, compared to 3.49
percent for the prior year period. Net interest margin (net interest
income on a tax-equivalent basis as a percentage of average
interest-earning assets) was 4.17 percent for the six months ended
June 1998, compared to 4.28 percent during the same period in 1997.
The decline in net interest spread and net interest margin can
primarily be attributed to maturing assets being invested in a lower
interest rate environment, and a change in the mix of funding, from
deposits to borrowings.
12
<PAGE>
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Average Balance Sheets with Resultant Interest and Rates
Unaudited
(Tax-equivalent basis, dollars in thousands)
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------
1998 1997
--------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ --------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning-assets:
Federal funds sold and securities purchased
under agreements to resell $ 15,035 $ 236 6.30 % $ 91,877 $ 1,344 5.87 %
Interest-bearing deposits with banks 24,770 375 6.07 15,822 218 5.53
Securities:
Trading account securities 22,661 360 6.37 37,073 764 8.27
Securities available for sale 4,816,731 76,938 6.39 3,427,850 55,692 6.50
Securities held to maturity 4,402,545 70,391 6.40 5,236,067 85,033 6.50
------------ --------- -------- ------------ --------- --------
Total securities 9,241,937 147,689 6.39 8,700,990 141,489 6.50
------------ --------- -------- ------------ --------- --------
Loans:
Commercial 6,528,314 137,113 8.42 5,628,057 120,320 8.57
Commercial mortgage 2,833,291 59,696 8.43 2,795,811 61,002 8.73
Residential mortgage 5,721,791 104,842 7.33 6,015,922 111,924 7.44
Consumer 4,359,659 91,587 8.43 4,004,200 84,250 8.44
------------ --------- -------- ------------ --------- --------
Total loans 19,443,055 393,238 8.11 18,443,990 377,496 8.21
------------ --------- -------- ------------ --------- --------
Total interest-earning assets 28,724,797 541,538 7.56 27,252,679 520,547 7.66
------------ --------- -------- ------------ --------- --------
Non-interest earning assets:
Cash and due from banks 1,005,805 987,413
Allowance for loan losses (305,566) (299,375)
Other assets 965,884 936,257
------------ ------------
Total non-interest earning assets 1,666,123 1,624,295
------------ ------------
Total Assets $30,390,920 $28,876,974
============ ============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 9,419,197 60,329 2.57 $ 9,686,602 63,083 2.61
Time deposits 7,071,065 93,377 5.30 7,347,987 94,704 5.17
Commercial certificates of deposit
$100,000 and over 906,884 12,302 5.44 893,680 12,120 5.44
------------ --------- -------- ------------ --------- --------
Total interest-bearing deposits 17,397,146 166,008 3.83 17,928,269 169,907 3.80
------------ --------- -------- ------------ --------- --------
Other borrowed funds 3,690,155 50,105 5.45 3,219,353 44,064 5.49
Long-term debt 1,742,456 27,382 6.29 880,643 16,045 7.29
------------ --------- -------- ------------ --------- --------
Total interest-bearing liabilities 22,829,757 243,495 4.28 22,028,265 230,016 4.19
------------ --------- -------- ------------ --------- --------
Non-interest bearing liabilities:
Demand deposits 4,510,854 4,060,779
Other liabilities 389,433 332,565
------------ ------------
Total non-interest bearing liabilities 4,900,287 4,393,344
Shareholders' Equity 2,660,876 2,455,365
------------ ------------
Total Liabilities and Shareholders' Equity $30,390,920 $28,876,974
============ --------- ============ ---------
Net interest income (tax-equivalent basis) 298,043 3.28 % 290,531 3.47 %
--------- ======== --------- ========
Tax-equivalent basis adjustment (based on a
Federal income tax rate of 35%) (3,150) (3,716)
--------- ---------
Net interest income $294,893 $286,815
========= =========
Net interest income as a percent of interest
earning assets (tax-equivalent basis) 4.16 % 4.28 %
======== ========
</TABLE>
13
<PAGE>
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Average Balance Sheets with Resultant Interest and Rates
Unaudited
(Tax-equivalent basis, dollars in thousands)
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Assets ------------ ----------- ---------- ------------ ----------- ----------
Interest-earning-assets:
Federal funds sold and securities purchased
under agreements to resell $ 22,072 $ 643 5.87 % $ 98,452 $ 2,597 5.32 %
Interest-bearing deposits with banks 25,911 806 6.27 14,163 391 5.57
Securities:
Trading account securities 27,863 942 6.82 34,623 1,138 6.63
Securities available for sale 5,089,824 162,581 6.39 3,303,193 105,431 6.38
Securities held to maturity 4,187,363 134,302 6.41 5,288,703 171,786 6.50
------------ ----------- ---------- ------------ ----------- ----------
Total securities 9,305,050 297,825 6.40 8,626,519 278,355 6.45
------------ ----------- ---------- ------------ ----------- ----------
Loans:
Commercial 6,363,227 265,659 8.42 5,523,801 233,659 8.53
Commercial mortgage 2,801,791 118,832 8.48 2,798,087 121,448 8.68
Residential mortgage 5,722,116 209,628 7.33 6,032,323 224,231 7.43
Consumer 4,314,428 180,654 8.44 3,933,338 164,749 8.45
------------ ----------- ---------- ------------ ----------- ----------
Total loans 19,201,562 774,773 8.14 18,287,549 744,087 8.21
------------ ----------- ---------- ------------ ----------- ----------
Total interest-earning assets 28,554,595 1,074,047 7.59 27,026,683 1,025,430 7.65
------------ ----------- ---------- ------------ ----------- ----------
Non-interest earning assets:
Cash and due from banks 1,017,587 1,058,270
Allowance for loan losses (303,828) (297,594)
Other assets 956,368 920,682
------------ ------------
Total non-interest earning assets 1,670,127 1,681,358
------------ ------------
Total Assets $30,224,722 $28,708,041
============ ============
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 9,478,456 121,881 2.59 $ 9,662,614 125,173 2.61
Time deposits 7,163,649 188,693 5.31 7,428,550 189,874 5.15
Commercial certificates of deposit
$100,000 and over 912,386 24,559 5.43 872,346 23,174 5.36
------------ ----------- ---------- ------------------------ ----------
Total interest-bearing deposits 17,554,491 335,133 3.85 17,963,510 338,221 3.80
------------ ----------- ---------- ------------------------ ----------
Other borrowed funds 3,588,557 96,893 5.44 3,135,772 85,150 5.48
Long-term debt 1,630,478 51,640 6.33 798,497 27,944 7.00
------------ ----------- ---------- ------------------------ ----------
Total interest-bearing liabilities 22,773,526 483,666 4.28 21,897,779 451,315 4.16
------------ ----------- ---------- ------------------------ ----------
Non-interest bearing liabilities:
Demand deposits 4,402,440 4,050,466
Other liabilities 381,470 333,241
------------ ------------
Total non-interest bearing liabilities4,783,910 4,383,707
Shareholders' Equity 2,667,286 2,426,555
------------ ------------
Total Liabilities and Shareholders' Equity$30,224,722 $28,708,041
============ ----------- ============ -----------
Net interest income (tax-equivalent basis) 590,381 3.31 % 574,115 3.49 %
----------- ========== ----------- ==========
Tax-equivalent basis adjustment (based on a
Federal income tax rate of 35%) (6,330) (7,285)
----------- -----------
Net interest income $ 584,051 $ 566,830
=========== ===========
Net interest income as a percent of interest
earning assets (tax-equivalent basis) 4.17 % 4.28 %
========== ==========
</TABLE>
14
<PAGE>
Non-Interest Income
Non-interest income categories for the three and six month periods
ended June 30, 1998, and 1997, are shown in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(In millions) Three months ended June 30, Six months ended June 30,
- -------------------------------------------------------------------------------------------
Percent Percent
1998 1997 Change 1998 1997 Change
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on
deposit accounts $31.7 $28.3 11.7% $61.9 $56.6 9.5%
Service and loan fee income 15.2 12.9 17.6 28.1 24.2 15.9
Trust and investment
services income 15.0 11.4 31.8 28.4 22.7 25.3
Other 25.2 18.1 39.3 46.8 35.2 32.7
- --------------------------------------------------------------------------------------------
Total non-interest
operating income 87.1 70.7 23.1 165.2 138.7 19.1
Securities gains 3.0 0.8 296.4 4.5 2.2 103.9
- --------------------------------------------------------------------------------------------
Total non-interest
income $90.1 $71.5 26.0% $169.7 $140.9 20.4%
============================================================================================
</TABLE>
The increase in income from service charges on deposits for the three and
six month periods ended June 30, 1998, was primarily the result of the
increase in rates and a change in the method used to assess charges
for nonsufficient funds.
The increase in service and loan fee income for the three and six
months ended June 30, 1998, was primarily due to increased
originations and gains on sales of mortgage loans.
The increase in trust and investment services fees for the three and
six month periods ended June 30, 1998, was generally due to increases
in asset management advisory fees and fees from sales of proprietary
and third party mutual funds.
The increase in other non-interest income for the 1998
periods was largely attributable to increased insurance fees generated
by Corporate Dynamics and Philadelphia Benefits Corp., the recently
acquired subsidiaries. Also contributing to the increase were gains on
the sale of branches and deposits and ATM access fees.
Non-Interest Expenses
Non-interest expense categories for the three and six month periods
ended June 30, 1998, and 1997, are shown in the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(In millions) Three months ended June 30, Six months ended June 30,
- ---------------------------------------------------------------------------------------------
Percent Percent
1998 1997 Change 1998 1997 Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $74.4 $72.3 2.9% $150.9 $142.9 5.6%
Pension and other
employee benefits 27.2 22.5 20.7 53.8 47.7 12.9
Furniture and
equipment 20.8 19.9 4.6 41.2 38.2 7.9
Occupancy, net 17.6 17.8 (1.4) 36.1 36.3 (0.5)
Communications 9.1 8.6 5.6 18.6 17.3 7.2
Other 42.8 40.2 6.6 83.0 79.4 4.4
- ----------------------------------------------------------------------------------------------
Total non-interest
operating
expenses 191.9 181.3 5.8 383.6 361.8 6.0
- ----------------------------------------------------------------------------------------------
Merger-related charges - - - - 26.5 (100.0)
- ----------------------------------------------------------------------------------------------
Total non-interest
expenses $191.9 $181.3 5.8% $383.6 $388.3 (1.2)%
- ----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Salaries and employee benefits increased $2.1 million or 2.9 percent
and $4.7 million or 20.7 percent, respectively, for the quarter ended
June 30, 1998, compared to 1997. For the six months ended June 30,
1998, compared to 1997, these costs increased $8.0 million or 5.6
percent and $6.1 million or 12.9 percent, respectively. Salaries and
employee benefits reflect merit increases and increased incentive
compensation linked to sales efforts. Partially offsetting the
increases in salaries and benefits expense was the impact of adopting
Statement of Position No. 98-1 providing for the capitalization of
certain salary and benefit costs associated with internally developed
software, which for the six months ended June 30, 1998, amounted to
$1.4 million and $0.3 million, respectively.
Furniture and equipment expenses increased $0.9 million or 4.6 percent
for the quarter ended June 30, 1998, compared with 1997, and increased
$3.0 million or 7.9 percent for the six months ended June 30, 1998,
compared with the same period a year ago. This increase was primarily
due to increases in leasing expenses associated with computer
equipment.
Communications expense increased $0.5 million or 5.6 percent for the
three months ended June 30, 1998, compared with 1997, and increased
$1.3 million or 7.2 percent for the six months ended 1998 when
compared with the six months ended 1997. The increase was primarily
due to expanded on line telephone system usage and equipment costs.
Other expenses, which did not vary significantly from period to period,
were largely comprised of legal and professional fees of $15.5
million, advertising and public relations expenses of $12.3 million
and amortization of goodwill and intangibles of $9.4 million for the
six months ended June 30, 1998.
The effective income tax rate was 32.3 percent for the three months
ended June 30, 1998, and 31.5 percent for the six months then ended,
compared with 35.1 percent for each of the comparable 1997 periods.
The decrease in the effective income tax rate was the result of the
implementation of business strategies, including the realignment of
corporate entities. The lower effective income tax rate is expected to
continue throughout the remainder of 1998.
YEAR 2000
The Company began taking a proactive stance regarding this issue in
1995 and has been working to prepare its computer systems and
applications for the Year 2000. This process involves reviewing,
modifying and replacing existing hardware and software as necessary
and communicating with external providers and customers to determine
whether they are addressing their Year 2000 issues appropriately.
The Company remains on schedule with its initial plans to have all of
its software tested and Year 2000 ready by first quarter, 1999. At
June 30, 1998, approximately 85 percent of all software code has been
remediated and is in testing. Testing has been completed on 43 percent
of this software. Of the mission critical systems 65 percent are in
testing and 20 percent have been completed. The cost for the
millennium conversion, which is being expensed as incurred, is
estimated to be $23 million and will be funded through operating cash
flows.
The Company has also initiated discussions with third parties, such as
vendors, customers, governmental entities and others, to attempt to
obtain assurance that they have appropriate plans to be Year 2000
compliant. At June 30, 1998, the Company has started to evaluate third
party compliance with Year 2000 issues. Failure of the Company or
third parties to correct Year 2000 issues could cause disruption of
operations resulting in increased operating costs. In addition, to the
extent customers' financial positions are weakened as a result of Year
2000 issues, credit quality could be adversely affected. The Company
believes at this time that its efforts are adequate to address its
Year 2000 concerns. However, since it cannot predict whether its
vendors and customers will be successful in becoming Year 2000
compliant it is formulating detailed contingency plans to address the
potential of a disruption of operations.
16
<PAGE>
In addition, the Company receives guidance from the Federal Financial
Institutions Examination Council (FFIEC), the formal interagency body
empowered to prescribe uniform principles, standards, and examination
procedures for the examination of financial institutions by the
federal regulatory agencies, and participates in scheduled federal
Year 2000 examinations. These examinations are being conducted to
assess each financial institution's Year 2000 efforts.
The cost of the project and the expected completion dates are based on
management's best estimates. However, there can be no guarantee that
these estimates will be achieved and actual results could differ
materially.
LIQUIDITY
Liquidity is the ability to meet the borrowing needs and deposit
withdrawal requirements of customers and support asset growth.
Principal sources of liquidity are deposit generation, access to
purchased funds, maturities and repayments of loans and investment
securities and interest and fee income.
The consolidated statements of cash flows present the change in cash
and due from banks from operating, investing and financing activities.
During the first six months of 1998, net cash provided by operating
activities totaled $186.2 million. Contributing to net cash provided
by operating activities were the results of operations, plus noncash
expenses, and proceeds from the sales of mortgages held for sale.
Partially offsetting the contributions to operating cash were funds
used to originate mortgage loans held for sale and noncash revenues.
Net cash used in investing activities totaled $1.1 billion. For the six
months ended June 30, 1998, net cash used in transactions involving
the investment portfolios totaled $126.4 million, while the growth in
the loan portfolio used $753.1 million.
Scheduled maturities and anticipated principal repayments of the held
to maturity portfolio will approximate $0.8 billion throughout the
balance of 1998. In addition, the securities available for sale
portfolio is another source of liquidity. These sources can also be
used to meet the funding needs during periods of loan growth.
Net cash provided by financing activities totaled $.9 billion. During
the first six months of 1998, other borrowed funds and long-term debt
increased $1.4 billion. This increase was partially offset by the
decrease in total deposits of $223.0 million, the purchase of the
Company's common stock of $192.3 million, and the payment of common
stock dividends.
Liquidity is also available through additional lines of credit and the
ability to incur additional debt. The banking subsidiaries have
established lines of credit with the Federal Reserve Bank and the
Federal Home Loan Bank of New York and other correspondent banks which
further support and enhance liquidity.
Liquidity is also important at the Parent Company in order to provide
funds for operations and to pay dividends to shareholders. Parent
Company cash requirements are met primarily through management fees
and dividends from its subsidiaries, the issuance of short and
long-term debt and the exercise of stock options. The amount of
dividends that can be assessed to the bank subsidiaries is subject to
certain regulatory restrictions.
17
<PAGE>
LOOKING AHEAD
This report contains certain forward-looking statements, either
expressed or implied, which are provided to assist the reader to
understand anticipated future financial performance. These
forward-looking statements involve certain risks, uncertainties,
estimates and assumptions made by management.
Factors that may cause actual results to differ from those results
expressed or implied include, but are not limited to, the interest
rate environment and the overall economy, the ability of customers to
repay their obligations, the adequacy of the allowance for loan
losses, the progress of integrating acquired financial institutions,
competition and technological changes, including the Year 2000 issue.
Although management has taken certain steps to mitigate the negative
effect of the above mentioned items, significant unfavorable changes
could severely impact the assumptions used and have an adverse affect
on profitability.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------------------------------------------------------
Due to the nature of the Company's business, the Company's market risk
is primarily its exposure to interest rate risk. Interest rate risk is
the impact that changes in interest rates have on future earnings. The
principal objective in managing interest rate risk is to maximize net
interest income within the acceptable levels of risk that have been
previously established by policy. This risk can be reduced by various
strategies, including the administration of liability costs, the
reinvestment of asset maturities and the use of off-balance sheet
financial instruments. The Company has limited risks
associated with foreign currencies and commodities.
Interest rate risk is monitored through the use of simulation modeling
techniques which apply alternative interest rate scenarios to periodic
forecasts of future business activity and estimate the related impact
on net interest income. The use of simulation modeling assists
management in its continuing efforts to achieve earnings growth in
varying interest rate environments.
Key assumptions in the model include anticipated prepayments on
mortgage-related instruments, contractual cash flow and maturities of
all financial instruments including derivatives, anticipated future
business activity, deposit sensitivity and changes in market
conditions. Selected core deposit rates are held constant based on the
results of analysis of historical rate movements.
These assumptions are inherently uncertain, and as a result, these
models cannot precisely estimate the impact that higher or lower rate
environments will have on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency
of interest rate changes, changes in market conditions as well as
changes in management's strategies.
Based on the results of the interest simulation model as of June 30,
1998, if interest rates increase or decrease 100 basis points from
current rates in an immediate and parallel shock over a twelve month
period, the Company would expect a decrease of $10.0 million in net
interest income and an increase of $4.0 million in net interest
income, respectively. The results of the interest simulation model as
of June 30, 1998, do not represent a material change from the amounts
previously reported as of December 31, 1997.
Interest rate risk management efforts also involve the use of certain
derivative financial instruments for the purpose of stabilizing net
interest income in a changing interest rate environment. The
derivative financial instruments portfolio consists of interest rate
swaps and floors. At June 30, 1998, the notional values of the swaps
and floors were $424.0 million and $430.0 million, respectively. These
derivatives resulted in a net interest income reduction of $1.0
million for the first six months of 1998. The cost to terminate these
contracts at June 30, 1998, would have been $.3 million.
19
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
Management does not believe that the ultimate disposition of the
litigation discussed below will have a material adverse effect on the
financial position and results of operation of the Company and its
subsidiaries, taken as a whole.
1. Annette Loatman on behalf of herself and all others similarly
-------------------------------------------------------------
situated v. United Jersey Bank, U.S. District Court for the District
------------------------------
of New Jersey, Civil Action No. 95-5258 (JBS), filed on October 4,
1995. Robert M. Gundle, III, on behalf of himself and all others
----------------------------------------------------------
similarly situated v. Summit Bank, successor in interest to United
- -------------------------------------------------------------------
Jersey Bank, U.S. District Court for the District of New Jersey, Civil
- -----------
Action No. 96-4477 (JBS), filed on October 14, 1996, and Annette
--------
Loatman, on behalf of herself and all others similarly situated v.
- -------------------------------------------------------------------
United Jersey Bank, Superior Court of New Jersey, Camden County,
- -------------------
Docket No. L-3527-96 ("the State Action"), filed April 24, 1996,
dismissed without prejudice pending the outcome of the federal actions
on December 9, 1996, and reinstated October 15, 1997 with Robert M.
Gundle, III as an additional named plaintiff. Reported on Form 10-K
for the period ended December 31, 1997, and on Form 10-Q for the
period ended March 31, 1998.
In the State Action, on April 27, 1998, the Appellate Division denied
the Bank's motion for leave to appeal from the trial court's
certification of the class. The trial court has approved the form of
notice to the class but has ruled that it need only be sent, at this
time, to putative members of the class who were customers of United
Jersey Bank/South, N.A.
2. Daniel Iverson, Lawrence Cohen and Terri Cohen, on behalf of
------------------------------------------------------------
themselves and all others similarly situated v. Collective Bank, a
-----------------------------------------------------------------
federally chartered savings bank organized under the laws of the
-----------------------------------------------------------------
United States of America (improperly named as Collective Bancorp,
----------------------------------------------------------------
Inc., a Delaware corporation), on behalf of itself and all others
-----------------------------------------------------------------
similarly situated. Superior Court of New Jersey, Atlantic County,
------------------
Docket No. ATL-L-2578-95, filed on July 26, 1995, New Jersey Superior
Court, Appellate Division, Docket No. A-2251-97T5F. Reported on Form
10-K for the period ended December 31, 1997, and on the Form 10-Q for
the period ended March 31, 1998.
On July 9, 1998, the New Jersey Appellate Division reversed the
decision of the trial court and held that a bank may charge an
attorney review fee in connection with a residential mortgage loan.
3. McAdoo CERCLA Matters. United States of America v. Alcan Aluminum,
-----------------------------------------------------------------
Inc., et al United States of America v. Alcan Aluminum et al, United
------------------------------------------------------------
States District Court, Eastern District of Pennsylvania, Civil Action
No.88-4970; United States of America and the Commonwealth of
--------------------------------------------------
Pennsylvania v. Air Products and Chemicals, Inc. et al, United States
------------------------------------------------------
District Court for the Eastern District of Pennsylvania, Civil Action
No. 97-7140; United States of America and the Commonwealth of
--------------------------------------------------
Pennsylvania v. Air Products and Chemicals, Inc. et al, United States
------------------------------------------------------
District Court for the Eastern District of Pennsylvania, Civil Action
No. 97-7144. Reported on Form 10-K for the period ended December 31,
1997.
On May 6, 1998, the court approved the consent decrees in each of the
actions. The cases are now closed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- -------------------------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
Not applicable.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION.
- ---------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
(a) Exhibits
- ------------
(10) FF (ii) Summit Bancorp. Executive Severance Plan Participation Letter.
(27) Summit Bancorp. financial data schedule-June 30, 1998
(b) Reports on Form 8-K
- -----------------------
None.
21
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SUMMIT BANCORP.
-----------------
Registrant
DATE: August 13, 1998 BY: /s/ WILLIAM J. HEALY
---------------------
William J. Healy
Executive Vice President, Comptroller
and Chief Accounting Officer
(Duly Authorized Officer)
22
<PAGE>
EXHIBIT INDEX
----------------
Exhibit No. Description
- -------------- ------------------------------------------------------------
*(10) FF (ii) Summit Bancorp. Executive Severance Plan Participation Letter.
(27) Summit Bancorp. financial data schedule-June 30, 1998
* Management contract or compensatory plan or arrangement.
23
<PAGE>
Exhibit (10) FF (ii)
Date
Participant
Home Street Address
City, State ZIP
Re: Executive Severance Plan
------------------------
Dear Salutation:
On October 15, 1997, the Board of Directors of Summit Bancorp. (the
"Company") amended and restated the Summit Bancorp. Executive Severance Plan
(as amended, the "Plan"). A copy of the Plan, reflecting all amendments, is
attached hereto and made a part hereof as if fully set forth in this letter.
Unless the context otherwise requires or unless otherwise defined in this
letter, capitalized terms used in this letter have the meanings assigned to
them in the Plan.
The Committee, as a matter of separate inducement and not in lieu of any
salary or other compensation for services, has selected you to participate
in the Plan, subject to the terms and conditions of the Plan and this
letter. This letter constitutes your Participation Letter under the Plan.
Your participation in the Plan commences as of October 15, 1997. You cease
to be a Participant in the Plan upon the earliest to occur of (i)
October 15, 2002 (the "Expiration Date"), (ii) the Date of Termination, and
(iii) your Retirement. The Expiration Date will be automatically extended
for an additional year (each such anniversary being the new Expiration Date)
unless at least 90 calendar days prior to the then Expiration Date, the
Company notifies you that the then Expiration Date will not be extended
(it being understood that the automatic extension operates in successive
years so long as no notice is given).
The payments and benefits to which you as a Participant in the Plan may
become entitled will be determined under the Plan. It is an express
condition to your entitlement to the payments of amounts and the provision
of benefits provided for by paragraph 5(a) of the Plan that the Company
receive on the Date of Termination a Release, Covenant Not to Sue,
Non-Disclosure and Non-Solicitation Agreement executed by you, or your
legal representative (in the event of your death or Disability) in the
form set forth in Exhibit A to the Plan, and that such Agreement be
effective.
For purposes of this letter and the Plan, notices and all communications
provided for in this letter or the Plan shall be in writing and shall be
treated as having been duly given when delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as
follows: (i) if to you, your address indicated on the first page of this
letter; (ii) if to the Company or the Subsidiary, Summit Bancorp., 301
Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066, Attention:
Corporate Secretary; or (iii) to such other address as either party may
have furnished to the other in writing in accordance with this paragraph,
except that notices of change of address shall be effective only upon
receipt.
All questions pertaining to the construction, regulation, validity and
effect of the provisions hereof will be determined in accordance with the
law of the State of New Jersey.
Your participation in the Plan is conditioned on your acknowledgment of the
terms of this letter. You also agree that this letter and your
participation in the Plan supersedes all prior participation letters and
understandings relating to severance benefits payable by the Company or the
Subsidiary under severance plans of the Company and its Subsidiaries, and
all such prior letters and understandings shall be null and void except for
your Termination Agreement, dated as of October 15, 1997. Please sign the
enclosed copy of this letter and deliver it to the Company in order to
evidence such acknowledgment and agreement.
Sincerely,
SUMMIT BANCORP.
By: _______________________________________
Richard F. Ober, Jr., Secretary
Acknowledged and Agreed:
_____________________________________
Participant
Dated:_______________________________
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE JUNE 30, 1998 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,153,023
<INT-BEARING-DEPOSITS> 34,476
<FED-FUNDS-SOLD> 176,000
<TRADING-ASSETS> 23,797
<INVESTMENTS-HELD-FOR-SALE> 4,295,945
<INVESTMENTS-CARRYING> 5,070,615
<INVESTMENTS-MARKET> 5,080,125
<LOANS> 19,704,103
<ALLOWANCE> 308,753
<TOTAL-ASSETS> 31,142,043
<DEPOSITS> 22,106,450
<SHORT-TERM> 4,152,961
<LIABILITIES-OTHER> 418,761
<LONG-TERM> 1,881,289
0
0
<COMMON> 142,123
<OTHER-SE> 2,440,459
<TOTAL-LIABILITIES-AND-EQUITY> 31,142,043
<INTEREST-LOAN> 772,314
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<INTEREST-INCOME-NET> 584,051
<LOAN-LOSSES> 33,000
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<EXPENSE-OTHER> 383,572
<INCOME-PRETAX> 337,142
<INCOME-PRE-EXTRAORDINARY> 337,142
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,894
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.29
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<LOANS-NON> 71,455
<LOANS-PAST> 56,960
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 33,033
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