FORM 10-Q/A
Amendment No. 1
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 March 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_________________
Comission File Number: 1-6451
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SUMMIT BANCORP.
(Exact name of registrant as specified in its charter)
New Jersey 22-1903313
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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
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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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(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 April 30, 1999 there were 171,254,033 shares of common stock,
$.80 par value, outstanding.
The Registrant is filing this Form 10-Q/A (Amendment No. 1) for the
purpose of expanding its discussion of Year 2000 Readiness Disclosure,
and the Allowance for Loan Losses methodology during the periods reported
upon in its Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1999. These additions amend Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Allowance for Loan Losses (page 10) and Year 2000 Readiness Disclosure
(page 18).
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.
Registrant SUMMIT BANCORP.
DATE:June 18, 1999 BY:/s/Paul V. Stahlin
---------------
Paul V. Stahlin
Senior Vice President, Comptroller
and Principal Accounting Officer
(Duly Authorized Officer)
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Summit Bancorp is a bank holding company headquartered in Princeton,
New Jersey. Summit Bancorp owns three bank subsidiaries and several
active non-bank subsidiaries. Summit Bancorp's bank subsidiaries provide
a broad range of retail, insurance, 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, personal
computers and the internet.
FINANCIAL CONDITION
Total assets at March 31, 1999, were $33.5 billion, an increase of
$376.1 million, or 1.1 percent, from year-end 1998. The growth came
most notably from the held to maturity securities portfolio and was
generally funded with savings and time deposits. The purchase of New
Canaan Bank and Trust Company added $208.5 million to total assets.
Securities held to maturity at March 31, 1999, were $6.6 billion and
were mainly comprised of $4.4 billion of U.S. Government and Federal
agency securities, $2.1 billion of other securities, predominately
corporate collateralized mortgage obligations ("CMOs"), and $138.6
million of state and political subdivision securities. These
securities increased $567.4 million or 9.4 percent from year-end 1998,
primarily as cash flows were invested
in securities held to maturity. For the three months of 1999, $1.3
billion of held to maturity securities were purchased, partially
offset by principal repayments and maturities of $686.5 million.
At March 31, 1999, and December 31, 1998, net unrealized gains
(losses) on securities held to maturity amounted to $(5.1) million
and $15.0 million, respectively.
At March 31, 1999, securities available for sale amounted to $3.9 billion
and were predominately comprised of U.S. Government and Federal
agency securities. These securities decreased $110.8 million, or
2.8 percent, from year-end 1998. The decrease resulted from $639.3
million in maturities and principal repayments and $231.9 million
in sales, partially offset by $717.9 million in purchases.
At March 31, 1999, total loans amounted to $21.2 billion, comparable to
the balance sheet at year-end 1998. Increases in commercial loans of
$71.2 million, commercial mortgages of $33.8 million and consumer loans
of $29.2 million were significantly offset by the $107.1 million decrease
in residential mortgages, as a result of sales and prepayments. The
increase in the consumer loan portfolio can generally be attributed to
purchases of home equity loans offset by a sale of the $33.0 million
credit card portfolio. The increase in commercial loans was primarily
related to growth in asset-based lending and commercial media. Mortgage loans
held for sale amounted to $145.4 million, $183.3 million and $112.7 million
for the periods ended March 31, 1999, December 31, 1998, and March 31, 1998,
respectively.
Total deposits were $23.2 billion at March 31, 1999, an increase of
$75.0 million, or 0.3 percent, from December 31, 1998. Savings and time
deposits at $17.6 billion, increased $394.3 million, or 2.3 percent,
from December 31, 1998. Partially offsetting this increase was a decrease
in commercial certificates of deposit $100,000 and over, which were down
$139.9 million, or 14.6 percent, compared to December 31, 1998. Also
decreasing were demand deposits, which decreased $179.4 million, or 3.6
percent, from year-end 1998 to $4.8 billion. The decrease in demand
deposits came mainly from business and personal accounts.
Other borrowed funds at March 31, 1999, increased $ 91.0 million, or
2.9 percent, from December 31, 1998, to $3.3 billion. The increase in
other 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
March 31, 1999, increased $161.7 million, or 4.5 percent, from
December 31, 1998, to $3.7 billion. The increase in long-term debt
was principally the result of the increase in repurchase agreements
of $100.0 million and an increase of $62.8 million in long term
Federal Home Loan Bank Notes. Included in long-term debt at each of
the periods presented are $150.0 million of 8.40 percent pass-through
securities qualifying as Tier I Capital. The increases in other borrowed
funds and long-term debt were generally used to fund the growth in
the investment and loan portfolios.
Total shareholders' equity at March 31, 1999, was $2.7 billion,
generally unchanged from December 31, 1998. Net income for the period
was offset by the purchase of treasury stock and common stock dividends.
Treasury stock at March 31, 1999, amounted to $203.6 million and was
comprised of 4.9 million shares. These shares will be used in conjunction
with the announced acquisition of Prime Bancorp, employee benefit plans,
and general corporate purposes. Included in shareholders' equity at
March 31, 1999, was accumulated other comprehensive income, net of
tax, amounting to $9.5 million, compared to $12.1 million at year-end
1998. Accumulated other comprehensive income is comprised principally
of unrealized gains on securities available for sale.
The Company's capital ratios for March 31, 1999, compared to select
prior periods and regulatory requirements, are shown in the following
table. The Company's bank subsidiaries met the well-capitalized requirements
for each of the periods presented. The decreases in the ratios at
March 31, 1999, were principally attributable to treasury stock purchases
and asset growth.
Minimum
Mar. 31, Dec. 31, Mar. 31, Require Well
Selected Capital Ratios: 1999 1998 1998 Capital Capitalized
Equity to assets 8.10 8.22 8.84 - -
Leverage ratio 7.67 8.00 8.88 3.00 5.00
Tier I Capital 10.48 10.86 12.63 4.00 6.00
Total risk-based capital 12.33 12.72 14.78 8.00 10.00
Non-Performing Assets
Non-performing assets include non-performing loans and other real estate
owned (OREO) and is shown in the following table as of the dates indicated.
Non-performing assets Mar 31 Dec 31 Mar 31
(in thousands) 1999 1998 1998
Non-performing loans(1)
Commercial and industrial 51,731 55,245 39,934
Commercial mortgage 36,435 26,446 32,552
Construction and development 1,899 5,046 3,397
----------------------------
Non-performing loans 90,065 86,737 75,883
OREO,net 7,137 2,829 11,329
----------------------------
Non-performing assets 97,202 89,566 87,212
----------------------------
Non-performing loans to total loans .43% .41% .39%
Non-performing assets to
total loans and OREO .46% .42% .45%
(1) Loans, not included above, past due 90 days or more amounted to
$39.0 million, $45.3 million and $58.5 million at March 31, 1999,
December 31, 1998, and March 31, 1998, respectively. These loans
are primarily residential mortgage and consumer loans which are
well secured and in the process of collection.
The average balances of non-performing loans amounted to $83.8 million,
$81.9 million and $81.4 million, for the three months ended March 31,
1999, December 31, 1998, and March 31, 1998, respectively. Interest
income received on non-performing loans amounted to $1.0 million for
the three months ended March 31, 1999, compared to $2.0 million for the
three months ended December 31, 1998 and $0.6 million for the three
months ended March 31, 1998.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level to absorb
estimated credit losses in the loan portfolio as of the date of the
financial statements. A standardized process has been established to
assess the appropriateness of the allowance for loan losses and to
identify the risks inherent in the loan portfolio. This process consists
of (1) the identification of specific reserves for identified problem
loans, (2) the calculation of general reserves, which includes a
combination of formula-driven allocations and minimum reserve levels by
loan type and grade, and (3) the determination of the unallocated reserves.
Specific reserves, if any, are determined through a loan-by-loan analysis
of non-performing loans, with assessments made on the borrower's ability
to repay and the fair value of the underlying collateral for collateral-
dependent loans. If a loan's carrying value is in excess of the discounted
expected cash flows or the value of the underlying collateral, the excess
is specifically reserved or charged off. The level of specific reserves
are generally the smallest component of the allowance for loan losses.
There are three steps in the calculation of the general reserves.
Reserves are first determined by applying historical loss factors to
each loan and unused commitment by business segment and loan grade. The
historical loss factors are calculated using a trailing six quarter
loss migration analysis. Adjustments are then made to the historical
loss factor based on six qualitative objective elements ("Delinquency",
"Non-performing Assets", "Watch Lists", "Charge-offs", "Concentrations
of Credit", and "Recoveries"), and three subjective elements ("Economic
Conditions", Credit Audit's Rating", and "Other Factors"), which have
been developed to provide greater accuracy to the process. This
methodology is applied to both the commercial and retail portfolios.
The reserves calculated for the retail portfolios (residential
mortgages and consumer loans) are generally sufficient to absorb one
year of expected losses. For the commercial portfolios, the historical
loss factor, inclusive of the adjustment, is then compared to minimum
reserve levels for each loan grade. The larger of the two factors are
used in the determination of the reserves. The minimum level of reserves
by loan classification is .25% for pass loans, .75% for close follow
loans, 1% for special mention loans, 10% for substandard loans, 50% for
doubtful loans, and 100% for loss loans. These minimum reserve levels
have been consistently applied for all reported periods.
The last component of the loan loss reserve is the unallocated reserve.
The unallocated reserve is based upon management's evaluation of the
underlying inherent risk in the loan portfolio. The appropriate level
of reserves in the aggregate is based on several factors; the level of
unallocated reserves to the total loan portfolio, the level of
substandard assets and allocated reserves, industry concentrations,
delinquency trends, economic trends, and loan growth relative to the
overall allowance. The unallocated portion of the allowance for loan
losses, in excess of specific and general reserves, was $163.3 million
at March 31,1999, compared to $164.5 million at December 31, 1998.
The 1999 provision for loan losses for the first quarter was $16.5
million, a $1.5 million increase over the prior year primarily as a
result of increased loan volume and the increase in non-performing
loans. Provision for loan losses are charged to expense to bring the
allowance for loan losses at a level deemed appropriate by management
to cover the credit risk inherent in the loan portfolio.
Transactions in the allowance for loan losses, by loan category,
for the three month periods ended March 31, 1999, and 1998 and
selected loan quality ratios for the dates indicated are shown
in the following tables:
Allowance for Loan Losses Three months ended
(in thousands) March 31,
1999 1998
Balance, Beginning of period 322,814 296,494
Acquisition adjustments 2,140 -
Provision for loan losses 16,500 15,000
---------------------------
341,454 311,494
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Loans charged off
Commercial and industrial 8,131 8,666
Construction and development 13 356
Commercial mortgage 1,202 260
Residential mortgage 2,626 319
Consumer 7,987 9,332
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Total loans charged off 19,959 18,933
---------------------------
Recoveries
Commercial and industrial 3,517 4,649
Construction and development 395 1,798
Commercial mortgage 548 287
Residential mortgage 319 274
Consumer 2,028 1,695
--------------------------
Total recoveries 6,807 8,703
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Net charge offs 13,152 10,230
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Balance, end of period 328,302 301,264
===========================
Mar. 31, Dec. 31, Mar. 31,
1999 1998 1998
Net charge offs to average loans:
Quarter to date 0.25% 0.23% 0.22%
Allowance to loan losses to:
Total loans 1.55 1.53 1.56
Non-performing loans 364.52 372.18 397.01
Non-performing assets 337.75 360.42 345.44
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Average Balance Sheets with Resultant Interest and Rates
Unaudited
(Tax-equivalent basis, dollars in thousands)
Three Months Ended
March 31, 1999 March 31, 1998
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<S> <C> <C> <C> <C> <C> <C>
Balance Interest Rate Balance Interest Rate
ASSETS ----------- -------- ----- ----------- -------- -----
Interest-earning assets:
Federal funds sold and securities
purchased under agreements to resell $10,648 $145 5.52 %$ 29,187 $ 407 5.66 %
Interest-bearing deposits with banks 33,737 450 5.41 27,065 431 6.46
Securities:
Trading account securities 9,969 103 4.19 33,123 582 7.13
Securities available for sale 3,956,908 59,951 6.06 5,365,951 85,643 6.38
Securities held to maturity 6,226,526 97,587 6.27 3,969,789 63,911 6.44
----------- -------- ----- ----------- -------- -----
Total securities 10,193,403 157,641 6.19 9,368,863 150,136 6.41
----------- -------- ----- ----------- -------- -----
Loans, net of unearned discount:
Commercial 7,157,347 137,063 7.77 6,196,306 128,546 8.41
Commercial mortgage 2,874,357 57,513 8.00 2,769,941 59,136 8.54
Residential mortgage 5,717,998 101,847 7.12 5,722,445 104,786 7.32
Consumer 5,417,311 108,672 8.14 4,268,694 89,067 8.46
----------- -------- ----- ----------- -------- -----
Total loans 21,167,013 405,095 7.76 18,957,386 381,535 8.16
----------- -------- ----- ----------- -------- -----
Total interest-earning assets 31,404,801 563,331 7.27 28,382,501 532,509 7.61
----------- -------- ----- ----------- -------- -----
Non-interest earning assets:
Cash and due from banks 955,002 1,029,500
Allowance for loan losses (325,323) (302,071)
Other assets 1,123,019 946,746
----------- -----------
Total non-interest earning assets 1,752,698 1,674,175
----------- -----------
Total Assets $ 33,157,499 $ 30,056,676
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 10,067,539 61,889 2.49 %$ 9,538,374 61,552 2.62 %
Time deposits 7,123,211 89,513 5.10 7,257,262 95,316 5.33
Commercial certificates of
deposit $100,000 and over 975,331 11,575 4.81 917,949 12,257 5.42
----------- -------- ----- ----------- -------- -----
Total interest-bearing deposits 18,166,081 162,977 3.64 17,713,585 169,125 3.87
----------- -------- ----- ----------- -------- -----
Other borrowed funds 3,411,876 41,487 4.93 3,485,830 46,788 5.44
Long-term debt 3,684,708 50,637 5.50 1,517,256 24,258 6.40
----------- -------- ----- ----------- -------- -----
Total interest-bearing liabilities 25,262,665 255,101 4.10 22,716,671 240,171 4.29
----------- -------- ----- ----------- -------- -----
Non-interest bearing liabilities:
Demand deposits 4,685,198 4,292,821
Other liabilities 478,000 373,417
----------- -----------
Total non-interest bearing liabilities 5,163,198 4,666,238
Shareholders' equity 2,731,636 2,673,767
----------- -----------
Total Liabilities and Shareholders' Equity $ 33,157,499 $ 30,056,676
=========== ===========
Net interest spread 308,230 3.17 % 292,338 3.32 %
Tax-equivalent basis adjustment (2,886) ====== (3,180) ======
-------- --------
Net interest income $ 305,344 $ 289,158
======== ========
Net interest margin 3.98 % 4.18 %
====== ======
</TABLE>
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1999, was $118.7 million, or
$.68 per basic share, compared to $112.4 million, or $.64 per basic share,
for the first quarter of 1998. On a diluted per share basis, net income
for the three months ended March 31, 1999, was $.68 per diluted share
compared to $.63 for the same period in 1998.
The following are key performance indicators for the three month periods
ended March 31, 1999 and 1998.
(in thousands) Three months ended
March 31,
1999 1998
Net income $ 118,741 $ 112,417
Net income per share
Basic $0.68 $0.64
Diluted 0.68 0.63
Return on:
Average assets 1.45% 1.52%
Average equity 17.63 17.05
Efficiency ratio 50.55 51.90
Net Interest Income
Interest income on a tax-equivalent basis was $563.3 million for the
three months ended March 31, 1999, an increase of $30.8 million, or
5.8 percent, compared to a year ago. Interest-earning assets averaged
$31.4 billion, an increase of $3.0 billion, or 10.7 percent, compared
to the prior year period. The increase in interest-earning assets
contributed $57.3 million to the increase in tax-equivalent interest
income, partially offset by a decline of $26.5 million due to the
reduction in the yield. The rate earned on interest-earning assets
decreased 34 basis points to 7.27 percent in the 1999 period. The
decrease was generally the result of a lower interest rate environment
as compared to last year.
Interest expense increased $14.9 million, or 6.2 percent, for the three
months ended March 31, 1999, compared to the same period in 1998. The
$2.5 billion growth in the average balance of interest-bearing liabilities
to $25.3 billion in the 1999 period contributed $31.7 million to the increase
in interest expense. This increase was partially offset by a decrease of
$16.8 million in interest expense resulting from a decline in rates paid
on interest-bearing liabilities.
Net interest income on a tax-equivalent basis was $308.2 million for the
three months ended March 31, 1999, an increase of $15.9 million, or 5.4
percent, compared to the same period in 1998. 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 3.17 percent for the three months
ended March 31, 1999, compared to 3.32 percent for the prior year period.
Net interest income on a tax-equivalent basis as a percentage of
average interest-earning assets was 3.98 percent for the three months
ended March 1999, compared to 4.18 percent during the same period in 1998.
The decline in net interest spread and net interest margin can be
attributed primarily to a lower interest rate environment, the purchase of
treasury stock, and the change in the mix of funding as long-term debt
and other borrowed funds were used to fund asset growth.
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.
Rate/Volume Table
March 1999 vs. March 1998
Due to Change in:
(Tax-equivalent basis, in millions) Volume Rate Total
Interest Income
Loans
Commercial $18.8 $(10.3) $8.5
Commercial mortgage 2.2 (3.8) (1.6)
Residential mortgage (0.1) (2.9) (3.0)
Consumer 23.1 (3.5) 19.6
----------------------------
Total Loans 44.0 (20.5) 23.5
Securities HTM 35.4 (1.7) 33.7
Securities AFS (21.6) (4.1) (25.7)
Other interest-earning assets (0.5) (0.2) (0.7)
----------------------------
Total Interest Earning Assets 57.3 (26.5) 30.8
----------------------------
Interest Expense
Deposits
Savings Deposits 3.4 (3.1) 0.3
Time Deposits (1.7) (4.1) (5.8)
Commercial CD's > $100M 0.7 (1.4) (0.7)
-----------------------------
Total Time Deposits 2.4 (8.6) (6.2)
Other interest-bearing liabilities (1.0) (4.3) (5.3)
Long-term debt 30.3 (3.9) 26.4
-----------------------------
Total interest expense 31.7 (16.8) 14.9
----------------------------
Net interest income-fully taxable equivalent $25.6 $(9.7) $15.9
----------------------------
Non-Interest Income
Non-interest income categories for the three month periods ended
March 31, 1999 and 1998 are shown in the following table:
(in millions) Three months ended March 31
Percent
1999 1998 Change
Service charges on deposit accounts $ 30.1 $ 30.3 (0.7)%
Service and loan fee income 15.6 12.9 21.0
Trust income 11.9 10.2 16.6
Retail investment and insurance fees 18.0 11.7 54.6
Other 22.4 13.0 71.4
---------------------------
Total non-interest operating income 98.0 78.1 25.4
---------------------------
Securities gains 0.2 1.4 (84.8)
---------------------------
Total non-interest income $ 98.2 $ 79.5 23.4%
---------------------------
Service and loan fee income increased $2.7 million, or 21.0 percent, for
the quarter ended March 31, 1999, compared with 1998. The increase in
service and loan fee income for the three months ended March 31, 1999,
was primarily due to increased residential mortgage originations and gains
on sales of those loans into the secondary market.
Trust income increased $1.7 million, or 16.6 percent, for the quarter
ended March 31, 1999, compared with 1998. The increase in trust income for
the three months ended March 31, 1999 was generally due to increases in
asset management advisory fees, personal trust fees, and fees from sales
of proprietary and third party mutual funds.
Retail investment and insurance fees increased $6.4 million, or 54.6
percent, for the quarter ended March 31, 1999, compared with 1998. The
increase in retail investment and insurance fees for the three months
ended March 31, 1999, was primarily due to increased annuity fee and
insurance service fees, resulting from the acquired insurance companies.
Other income increased $9.4 million, or 71.4 percent, for the quarter
ended March 31, 1999, compared with 1998. The increase in other
non-interest income for the three months ended March 31, 1999, was
generally attributable to a net gain of $5.9 million on the sale of
the $33.0 million credit card portfolio.
Non-Interest Expense
Non-interest expense categories for the three month periods ended
March 31, 1999, and 1998, are shown in the following table:
(In millions) Three months ended March 31
Percent
1999 1998 Change
Salaries $80.3 $76.5 5.0%
Pension and other employee benefits 30.0 26.6 12.8
Furniture and equipment 22.5 20.4 10.2
Occupancy, net 19.8 18.5 7.2
Communications 9.6 9.5 0.9
Advertising and public relations 5.5 5.9 (6.7)
Amortization of goodwill
and other intangibles 5.9 4.7 24.3
Other 31.8 29.6 7.4
----------------------------
Total non-interest expense $205.4 $191.7 7.2%
----------------------------
Salaries increased $3.8 million, or 5.0 percent, for the quarter ended
March 31, 1999, compared to the same quarter in 1998. In addition to
annual merit increases, salaries rose approximately $2.4 million
from acquisitions. There were 8,670 full-time equivalent employees at
March 31, 1999, compared to 8,456 the same period a year ago.
Pension and employee benefits increased $3.4 million, or 12.8 percent,
for the three months ended March 31, 1999 compared with the same quarter
in 1998. The increases were generally related to higher levels of core
salaries, increased taxes, pension and incentive compensation expense.
Furniture and equipment expenses increased $2.1 million, or 10.2 percent,
for the quarter ended March 31, 1999, compared with the same quarter in
1998. This increase was primarily due to equipment maintenance, bank card
service fees and increases in leasing expenses associated with computer
equipment installed at branches to support teller and on-line operations.
Amortization of goodwill and other intangibles increased $1.1 million or
24.3 percent, for the three months ended March 31, 1999. The increase
was primarily due to the purchase acquisitions of Norwalk Savings Society
and New Canaan Bank and Trust Company.
Included in other expenses, which did not vary significantly from period to
period, were legal and professional fees of $7.9 million for the three
months ended March 31, 1999.
The effective income tax rate was 34.6 percent for the three months ended
March 31, 1999, compared with 30.6 percent for the comparable 1998 period.
The lower effective income tax rate for 1998 was the result of
the implementation of business strategies in the 1998 period that
will not benefit 1999.
LINES OF BUSINESS
For management purposes, Summit Bancorp is segmented into the following lines
of business: Retail Banking, Commercial Banking, and Investment Services
and Private Banking. The investment portfolio and activities not included
in these lines are reflected in Corporate and Other. The Company's
profitability measurement system
uses internal management accounting policies that ensure business line
results reflect the underlying economics of each business unit, and the
results are not necessarily comparable with similar information for any
other financial institution.
Net income includes revenues and expenses directly associated with each
line in addition to allocations of revenue earned and expenses incurred
by support units such as operations and technology. Centrally
provided corporate services and general overhead are allocated on a
per-unit cost basis or in proportion to the balances of assets, liabilities
and operating expenses associated with the particular business line.
A matched maturity funds transfer pricing methodology is employed to assign
a cost of funds to the assets of each business line, as well as to assign
a value of funds to the liabilities and equity of each business line.
The provision for loan losses is based on the historical credit losses
for each line of business. The anticipated consolidated effective income
tax rate is applied to each line of business, after consideration of earnings
of tax-advantaged assets within the lines of business.
In 1999, the Company implemented a new business unit profitability system,
which prospectively provides enhanced management reporting, including an
enhanced methodology with respect to the allocation of the provisions
for loan losses. Certain prior period information has been restated to
conform to the 1999 presentation with respect to the allocation of funds
transfer charges or credits for assigned assets, liabilities and equity.
<TABLE>
Investment
Results of Operations Services/
Quarters Ended March 31, Retail Commercial Private Corporate
(in millions) Banking Banking Banking and Other Consolidated
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $199.1 $188.3 $67.0 $63.0 $13.7 $12.8 $25.5 $25.1 $305.3 $289.2
Provision for loan losses 9.8 7.1 6.3 7.4 0.4 0.5 - - 16.5 15.0
---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 189.3 181.2 60.7 55.6 13.3 12.3 25.5 25.1 288.8 274.2
Non-interest income 55.0 45.6 12.4 10.1 30.1 20.8 0.6 3.0 98.1 79.5
Non-interest expense 132.1 132.1 31.1 27.7 31.3 22.5 10.9 9.4 205.4 191.7
---------------------------------------------------------------------------------------------
Income before taxes 112.2 94.7 42.0 38.0 12.1 10.6 15.2 18.7 181.5 162.0
Federal and
state income taxes 39.2 29.6 13.7 11.5 4.2 3.5 5.7 5.0 62.8 49.6
---------------------------------------------------------------------------------------------
Net income $73.0 $65.1 $28.3 $26.5 $7.9 $7.1 $9.5 $13.7 $118.7 $112.4
=============================================================================================
Selected Average Balances:
Securities $ 55.1 $ 40.8 $ - $ - $ 9.7 $ 33.0 $10,128.6 $ 9,295.1 $10,193.4 $ 9,368.9
Loans 11,827.6 10,855.2 8,105.6 7,116.3 1,233.8 985.9 - - 21,167.0 18,957.4
Assets 12,189.6 11,397.3 8,090.5 7,191.3 1,322.4 1,065.4 11,554.9 10,402.7 33,157.4 30,056.7
Deposits 19,990.1 19,230.7 1,003.6 910.9 735.7 666.6 1,121.9 1,198.2 22,851.3 22,006.4
</TABLE>
Retail Banking
Retail Banking meets the banking needs of individuals and
small businesses through approximately 380 traditional and
60 supermarket branches in New Jersey, eastern Pennsylvania,
and southern Connecticut. Summit also offers its customers
an expanding array of 24-hour banking services through more
than 600 ATMs, telephone banking centers, its PC Banking
network, and the internet. Mortgage loans, home equity
loans and lines of credit, direct and indirect consumer
loans and small business commercial loans are offered
through the Company's broad network of branches.
Average loans for the quarter ended March 31, 1999,
increased $972.4 million or 9.0 percent to $11.8 billion
from the same period in 1998, primarily in the consumer
lending area. Total average deposits for the first quarter
of 1999 increased to $20.0 billion, up $759.4 million from a
year ago. This increase was attributed to demand
deposits and interest bearing time deposits. Net interest
income for the quarter increased $10.8 million or 5.7 percent
over last year. Interest income increased $12.2 million or
5.6 percent over the first quarter of 1998, resulting from
the increase in loan balances and the acquisition of NSS
Bancorp in November 1998. Interest expense declined $4.5
million or 3.0 percent resulting from a lower rate
environment. The increase in non-interest income of $9.4
million contains a $5.9 million gain on the sale of
Summit Bancorp's credit card portfolio in March of 1999 and
increases from the sale of residential mortgage loan originations.
Commercial Banking
Commercial Banking is focused on meeting the banking
requirements of large and middle-market businesses.
Asset based lending, international trade services,
equipment leasing, real estate financing, private
placement, mezzanine financing, aircraft lending,
correspondent banking, treasury services, limited
partnership investments, and structured finance services
are actively solicited through a network of relationship
managers. Demand and interest-bearing deposit accounts
and services are provided through the branch network.
Total average loans for the quarter ended March 31, 1999,
were $8.1 billion, an increase of $989.3 million or 13.9
percent over the same period in 1998 primarily in asset-based
lending and commercial media lending. Net interest income
for the first quarter of 1999 increased $4.0 million or
6.3 percent from 1998, driven by the increase in average
loans. Higher loan fees, account analysis service
charges, advisory fees and limited partnership gains provided
for the increase over prior year in non-interest income of
$2.3 million. Non-interest expense increased $3.4 million
over the prior year to $31.1 million.
Investment Services and Private Banking
Investment Services provides a full range of
trust, administrative, and custodial services to
individuals and institutions, in addition to investment
products and discount brokerage. The line also markets
a wide variety of insurance products for the personal
and corporate marketplace. This segment also includes
Private Banking, which provides personal credit services
for lawyers, accountants and their firms, and business
loans and lines of credit.
The increase in net interest income of $0.9 million or 7.0
percent is due to higher loan volumes in 1999. The major
portion of the increases in non-interest income and expense
over the prior period reflects the acquisitions of W.M.
Ross & Company and Madison Consulting, two insurance subsidiaries,
in the second half of 1998. Also contributing to the increase in
non-interest income was higher fee income in trust,
mutual funds and annuities.
Corporate and Other
Corporate and Other is primarily comprised of the
treasury function, which is responsible for managing
interest-rate risk and the investment portfolios. In
addition, certain revenues and expenses not considered
allocable to a line of business are reflected in this
area.
Net interest income increased $0.4 million or 1.6 percent
from 1998. Asset growth was primarily due to increased
securities portfolios, which averaged $10.1 billion for the first quarter
of 1999, up $833.5 million or 9.0 percent from the prior
year. The decrease in non-interest income in 1999 is
primarily attributed to gains on security transactions
in the prior period.
Year 2000 Readiness Disclosure
Issues surrounding the Year 2000 arise out of the fact that
many existing computer programs use only two digits to identify
a year in the date field. With the approach of the Year 2000,
computer hardware and software that are not made Year 2000
ready might interpret "00" as year 1900 rather than year
2000. The Year 2000 problem is not just a technology issue;it
also involves the Company's assessment of building equipment,
environmental systems, customers, suppliers and third parties.
State of Readiness:
The Company has been working since 1995 to remediate its
information technology ("IT") and non-IT systems for the
Year 2000. As of March 31,1999 all of the 330 software
systems being tracked by the Company, and the computer
equipment they run on, have completed the Company's seven-
phase Year 2000 project program, which is as follows: Developing
a Strategic Approach, Creating Organizational Awareness,
Assessing Actions and Developing Detailed Plans,
Renovating (remediating), Validating (testing), Implementing
(remediated code into production), and Implementing (totally
future-date certified). Additionally, the Company is
addressing the Y2K readiness of certain non-critical,
stand-alone personal computer(PC)-based software applications.
Testing of automated interfaces with customers and other
third parties is on schedule for completion by June 30,
1999. Principal settlement methods associated with major
payment systems involving systems of other financial
institutions and governmental agencies will be tested by
June 30, 1999.
Non-IT systems have been evaluated and are currently being
tested. Approximately 99% of systems with embedded chip
technology for all building, environmental, and security
systems have been remediated, tested, and confirmed as
Year 2000 ready. Telecommunications, both voice and data,
are over 95% complete and are expected to be fully
remediated, tested, and confirmed as Year 2000 ready
by July 1999.
Communication with third parties that may have a
material relationship with the Company has been initiated
to determine whether they have appropriate plans to be
Year 2000 ready. An inventory of important vendors has
been completed and the Company's vendor risk assessment
and preparedness evaluation activities are ongoing. The
Company's plans to minimize third-party risk include
contingency planning for important vendors.
Approximately 85% of the Company's significant vendors
have responded to the Year 2000 inquiries made by the
Company. Of those who responded, approximately half claim to be
currently Year 2000 compliant. Vendor responses were reviewed
for completeness and incomplete responses were followed
up with additional correspondence, telephone calls or both.
In some cases, Year 2000 readiness information was obtained
from publicly available sources, including vendor or third
party websites. Confidence levels were developed based on
the quality of the vendor's responses to the Company's
written inquiries and the vendor's prior track record in
making its commitments to the Company. With limited exception
the Company's suppliers have been found to be making satisfactory
progress toward achieving Y2K readiness. The Company is seeking
additional information from vendors and will initiate contingency plans if
appropriate. The Company has not assessed the enforceability of any
representations by these vendors as to their Year 2000 compliance status,
preferring to focus its Year 2000 resources on developing appropriate
contingency plans where it does not have sufficient confidence in a vendor's
Year 2000 status. These representations may or may not be enforceable,
depending on the facts and circumstances of particular vendor
relationships, but the Company has not relied on the enforceability of
such representations in its Year 2000 readiness efforts.
To minimize the impact from those customers who may
experience a disruption in their operations because
they have not adequately considered Year 2000 issues,
a program has been implemented for monitoring and
measuring customer Year 2000 readiness. Customers with
borrowing commitments of $1 million or more, and
customers monitored by the internal risk rating system
with outstanding loan balances of $500 thousand or more,
have been reviewed for Year 2000 readiness, and will continue
to be reviewed on a quarterly basis during 1999. Certain
customers have been identified as having additional credit risk
as a direct result of the Year 2000. Those risks have
been considered and incorporated in the analysis of the
adequacy of the loan loss allowance. All new loan customers
and renewals of existing loans are assessed as part of
the underwriting process.
Risks of Year 2000 Issues:
Management believes that the Year 2000 project is on schedule
and that its efforts are adequate to address Year 2000
issues. However, failure to successfully resolve critical
issues could have a material impact on the Company's
operations. The primary risks associated with the Year 2000 are
as follows:
The first is the risk that the Company's systems are not ready
for operation by January 1, 2000. These systems must
be remediated, tested, and made ready for the Year 2000 in
a timely manner.
The second is the risk of operational disruption due
to operational failures of third parties. Failure of one or
more third parties to modify their systems in a timely manner
may have a material and adverse effect on the
Company's operations. This risk is viewed as the one that is
most reasonably likely to occur, therefore appropriate
contingency plans are being prepared.
The third is the risk of business interruption among
customers such that funding and repayment do not take place in
a timely manner. As a result, there may be increases in
problem loans and credit losses in future years.
Costs to Address Year 2000 Issues:
The estimated cost of the Year 2000 project is $23 million.
The project is staffed with both external contract and
internal personnel. This estimate includes the cost of
retention programs for key systems personnel, a portion of
which will be paid beyond January 1, 2000. To date,
incremental internal costs totaling $5.2 million have
been incurred. These costs include compensation and benefits
for internal personnel assigned full-time to the project,
the retention program, and other ancillary costs. In
addition, $11.0 million of external costs, including
external contract personnel and payments to third parties,
have been incurred to date. The total cost incurred to date
is $16.2 million.
Contingency Plans:
The Company has created certain remediation contingency plans
and is developing business resumption contingency plans
specific to the Year 2000 project. Remediation contingency
plans address the actions to be taken if remediation of a
mission-critical system falls behind schedule. Remediation
for all mission critical systems has been completed. None of
the three remediation contingency plans that were prepared for
mission-critical systems had to be triggered. Business
resumption contingency plans address the actions that will
be taken if critical business functions cannot be carried out
in the normal manner due to system or third-party failures.
These plans supplement existing disaster recovery plans and
are being updated to include potential Year 2000 related
failures. Updates to the Company's business resumption plan
for core business functions are to be completed by
June 30,1999.
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 three months of 1999,
net cash provided by operating activities totaled $192.8
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 $345.4 million.
For the three months ended March 31, 1999, net cash used
in transactions involving the investment portfolios totaled
$407.8 million, while the loan portfolio contributed
$66.8 million.
Scheduled maturities and anticipated principal repayments of
the held to maturity portfolio will approximate $1.8
billion throughout the balance of 1999. In addition,
the securities available for sale portfolio provides
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 $17.2
million. During the first three months of 1999, other
borrowed funds and long-term debt increased $252.6 million.
This increase was partially offset by the decrease in
total deposits of $78.9 million, the purchase of the
Company's common stock of $106.4 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. In addition, in November 1998 two of
the Company's banking subsidiaries, Summit Bank (New Jersey)
and Summit Bank (Pennsylvania), executed a distribution
agreement providing for the possible issuance, from
time-to-time, of senior and subordinated notes to a maximum
of $3.75 billion on an underwritten or agency basis.
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.
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.
