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Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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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)
Registrant's telephone number, including area code (609) 987-3200
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock $.80 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
8.625% Subordinated Notes Due December 10, 2002 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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As of February 24, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $6.2 billion.
As of February 24, 1999, there were 174,234,235 shares of common stock,
$.80 par value outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Summit Bancorp 1998 Annual Report to
Shareholders (portions) (Parts I, II and IV).
Proxy Statement dated March 9, 1999 (portions) (Parts I and III).
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SUMMIT BANCORP.
Index to Form 10-K
Part I
Item 1. Business Page
a) General development of business ........................ 3
b) Financial information about industry segments .......... 3
c) Narrative description of business ...................... 4
d) Financial information about foreign and domestic
operations and export sales ............................ 11
e) Statistical information ................................ 12
Item 2. Properties ................................................. 12
Item 3. Legal Proceedings .......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ........ 15
Executive Officers of the Registrant ....................... 16
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ...................................... 17
Item 6. Selected Financial Data .................................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ........................................ 17
Item 8. Financial Statements and Supplementary Data ................ 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 17
Part III
Item 10. Directors and Executive Officers of the Registrant ......... 18
Item 11. Executive Compensation ..................................... 18
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................... 18
Item 13. Certain Relationships and Related Transactions 18
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .................................. 19
Signatures ................................................. 25
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PART I
Item 1. Business.
(a) General development of business.
Summit Bancorp. ("Summit" or the "Company") has its corporate office at 301
Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066.
Summit, the registrant, commenced operations on October 1, 1970 as a New
Jersey corporation and as a bank holding company registered under the Bank
Holding Company Act of 1956. At December 31, 1998, the Company owned three banks
("bank subsidiaries") and several active non-bank subsidiaries and had total
consolidated assets of $33.1 billion, which ranked it as the largest New
Jersey-based bank holding company. The bank subsidiaries engage in a general
banking business, and are as follows: Summit Bank ("Summit Bank NJ"), operating
in New Jersey; Summit Bank ("Summit Bank PA"), operating in Pennsylvania; and
NSS Bank ("NSS"), operating in Connecticut. The non-bank subsidiaries engage
primarily in securities brokerage, insurance brokerage, venture capital
investment, commercial finance lending, lease financing, asset-based lending,
letter of credit issuance, data processing, and reinsuring credit life and
disability insurance policies related to consumer loans made by the bank
subsidiaries. For a discussion on the development of the Company's business
during 1998, see the "Financial Review" on pages 17 through 34 of the 1998
Annual Report to Shareholders which section is incorporated herein by reference
through Exhibit 13.
On November 21, 1998, Summit completed its acquisition of NSS Bancorp,
Inc., a Connecticut corporation and bank holding company. As a result of the
purchase of NSS Bancorp, NSS Bank, a Connecticut savings bank, became a
wholly-owned subsidiary of Summit. In addition, the Company made two purchases
of insurance brokerage firms, Spectrum Financial Group, Inc. (d/b/a "Madison
Consulting Group"), on October 30, 1998, and W.M. Ross and Company ("W.M.
Ross"), on August 31, 1998. Revenues and expenses from these purchase
acquisitions have been included in the consolidated results of the Company since
their respective dates of acquisition. For additional information on these and
other acquisitions, see Note 2 of the Consolidated Financial Statements on page
43 of the 1998 Annual Report to Shareholders which information is incorporated
by reference herein.
On August 24, 1998, Summit entered into a definitive merger agreement to
acquire New Canaan Bank and Trust Company ("New Canaan"), a Connecticut bank and
trust company with assets of $182 million and four banking offices located in
Fairfield County, Connecticut. Pursuant to the merger agreement, New Canaan is
to be merged with and into NSS. The merger has received regulatory and
shareholder approval and is expected to be consummated by March 31, 1999.
On February 18, 1999, Summit announced that it entered into a definitive
agreement to acquire Prime Bancorp, Inc. ("Prime"), a Pennsylvania corporation
and bank holding company with approximately $1.0 billion in assets and 27
branches located in the greater Philadelphia region, in a stock for stock
exchange, based upon an exchange ratio of .675 shares of Summit common stock for
each share of Prime common stock. The merger is expected to be completed in the
third quarter of 1999 subject to regulatory and Prime shareholder approval. It
is anticipated that this transaction will be accounted for under the purchase
method. Summit expects to repurchase from time to time in the open market Summit
shares in a number equal to the approximate amount of common shares to be issued
in the acquisition, or reissue previously acquired shares held in treasury,
depending on market conditions and other factors.
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 Summit's
building equipment, environmental systems, customers, suppliers, and other third
parties. Summit began taking a proactive stance regarding this issue in 1995 and
has been working since than to remediate its information technology ("IT") and
non-IT systems for the Year 2000. For additional information, see Year 2000
Readiness Disclosure on page 33 of the 1998 Annual Report to Shareholders which
information is incorporated by reference herein.
(b) Financial information about industry segments.
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Summit is engaged in the business of managing or controlling banks and such
other businesses related to banking as may be authorized under the Bank Holding
Company Act of 1956, as amended. The Company is also engaged in furnishing
services to, or performing services for its present operating subsidiaries.
Reference to information about industry segments is made to Financial Review -
Lines of Business and Note 17 of the Consolidated Financial Statements on pages
26 and 27 and page 51, respectively, of the 1998 Annual Report to Shareholders
which information is incorporated by reference herein.
(c) (1) Narrative description of business.
Bank Subsidiaries
Summit Bank NJ (formerly United Jersey Bank) was organized in 1899 and is
Summit's largest bank subsidiary. Summit Bank NJ accounts for 89% of Summit's
assets. Based on the latest available data concerning deposit market share,
Summit Bank NJ ranked as the largest New Jersey-based commercial bank. Summit
Bank NJ operates 364 banking offices throughout 19 of the 21 counties in New
Jersey. Summit Bank PA (formerly First Valley Bank) was organized in 1968 and is
Summit's Pennsylvania bank subsidiary, accounting for 8% of consolidated assets.
Summit Bank PA operates 75 offices in 13 counties in eastern Pennsylvania. NSS
(formerly Norwalk Savings Society) was organized in 1849 and is Summit's
Connecticut bank subsidiary, accounting for 2% of consolidated assets. NSS
operates eight banking offices in Fairfield County, Connecticut.
The bank subsidiaries provide a broad range of retail, commercial,
investment and private banking products and services through a line of business
approach to individuals and businesses.
The Retail Banking line of business meets the banking needs of individuals
and small businesses. 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. Demand and
interest-bearing deposit accounts and services are provided through branches and
automatic teller machines.
The Commercial Banking line of business is focused on meeting the banking
requirements of large and middle-market businesses. Commercial loans and
mortgages, asset-based lending, direct and indirect leasing, and corporate
finance are actively solicited through a network of relationship managers.
The Investment Services and Private Banking line of business provides
financial products and services through bank and certain non-bank subsidiaries.
Investment Services revenues are mostly in the form of fees for services
provided. The major sources of fee income are generated from trust services,
sales of mutual funds, insurance and brokerage services, and discount brokerage
transactions. This segment also includes Private Banking which provides personal
credit services, professional services for lawyers, accountants and their firms,
and business loans and lines of credit.
Non-Bank Subsidiaries
Summit owns and operates Summit Commercial/Gibraltar Corp. and Summit
Commercial Corp., which are commercial finance companies operating in the New
York-New Jersey, the New Jersey-Baltimore and Connecticut metropolitan areas and
which specialize in making loans secured by accounts receivable, inventory and
equipment, as well as financing sales and leases of equipment. Summit, through
its wholly-owned bank subsidiary, Summit Bank PA, owns and operates Summit
Financial Services Group, Inc., which is engaged in the stock brokerage
business, the underwriting of municipal bonds, and the sale of non-deposit
investment products. Summit, through its wholly-owned bank subsidiaries, owns
and operates Summit Service Corporation, which provides data processing services
to the bank subsidiaries. Summit, through Summit Bank NJ, owns and operates
Corporate Dynamics, an employee benefits brokerage and consulting firm,
Philadelphia Benefits Corporation, a group health insurance general agency, W.M.
Ross, a property and casualty insurance brokerage firm, and Madison Consulting
Group, an employee benefits brokerage firm. Corporate Dynamics, Philadelphia
Benefits, W.M. Ross, and Madison Consulting Group operate principally in the
Mid-Atlantic region. Total revenues (excluding intercompany revenues) for all
non-bank subsidiaries as a group during the last three years accounted for less
than 10% of consolidated revenues.
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Supervision and Regulation
The banking industry is highly regulated. This regulatory framework is
intended primarily for the protection of depositors and the preservation of the
federal deposit insurance funds and not for the protection of security holders.
Statutory and regulatory controls increase a bank holding company's cost of
doing business and limit the options of its management to employ assets and
maximize income. Areas subject to regulation and supervision by the bank
regulatory agencies include: nature of business activities; minimum capital
levels; dividends; affiliate transactions; expansion of locations; acquisitions
and mergers; interest rates paid on certain types of deposits; reserves against
deposits; terms, amounts and interest rates charged to various types of
borrowers; and investments. For additional information on regulatory matters,
see Note 20 of the Consolidated Financial Statements on page 54 of the 1998
Annual Report to Shareholders which information is incorporated by reference
herein.
Bank Holding Company Regulation
Summit is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act"). As a bank holding
company, Summit is supervised by the Board of Governors of the Federal Reserve
System (the "FRB") and is required to file reports with the FRB and provide such
additional information as the FRB may require. Summit is also regulated by the
New Jersey, Pennsylvania and Connecticut Departments of Banking.
The Holding Company Act prohibits Summit, with certain exceptions, from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank and from engaging in any
business other than that of banking, managing and controlling banks or
furnishing services to subsidiary banks, except that it may, upon application,
engage in, and may own shares of companies engaged in, certain businesses found
by the FRB to be so closely related to banking "as to be a proper incident
thereto" if the FRB determines that such acquisitions will be, on balance,
beneficial to the public. The Holding Company Act requires prior approval by the
FRB of the acquisition by Summit of more than five percent of the voting stock
of any additional bank. Acquisitions in any state were permitted after September
29, 1995. See "Interstate Banking" below. Satisfactory financial condition,
particularly with regard to capital adequacy, and satisfactory Community
Reinvestment Act ratings are generally prerequisites to obtaining federal
regulatory approval to make acquisitions. All of Summit's subsidiary banks are
currently rated "outstanding" under the Community Reinvestment Act.
In addition, Summit is subject to various requirements under New Jersey,
Pennsylvania and Connecticut laws concerning future acquisitions. Such laws
require the prior approval of the relevant Department of Banking to acquire any
bank chartered by that state. Statewide branching is permitted in New Jersey,
Pennsylvania and Connecticut. Branch approvals are subject to statutory
standards relating to safety and soundness, competition, and public convenience.
The Holding Company Act does not place territorial restrictions on the
activities of non-bank subsidiaries of bank holding companies.
The policy of the FRB provides that Summit is expected to act as a source
of financial strength to each of its subsidiary banks and to commit resources to
support such subsidiary banks in circumstances in which it might not do so
absent such policy. In addition, any capital loans by Summit to any subsidiary
bank would be subordinate in right of repayment to deposits and certain other
indebtedness of such subsidiary bank.
Summit is required by the Holding Company Act to file annual reports of its
operations with the FRB and is subject to examination by the FRB. Under Section
106 of the 1970 amendments to the Holding Company Act and the regulations of the
FRB, bank holding companies and their subsidiaries are prohibited from engaging
in certain tie-in arrangements in connection with any extension of credit or
provision of any property or services. Regulations of the FRB under the Federal
Reserve Act require that reserves be maintained by a bank subsidiary of Summit
on deposits. They also place limits upon the amount of Summit's equity
securities which may be repurchased or redeemed by Summit.
Interstate Banking and Regulatory Relief Legislation in 1994
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Act") permits full nationwide interstate banking (e.g., bank holding
company ("BHC") acquisition of bank subsidiaries anywhere in the U.S.) and, as
of June 1, 1997, interstate branching by merger. Importantly, states retain the
right to require that out-of-state BHCs and banks comply with certain state
rules governing entry.
A brief summary of the Act's major provisions follows:
(A) Interstate Banking. Adequately capitalized and adequately managed BHCs
are permitted to acquire banks in any state. States cannot opt-out of this
provision. State laws may prohibit the purchase of banks 5 years of age or
less. Concentration limits are imposed (10% of bank and thrift deposits
nationwide/ 30% in the state; the state supervisor may waive this 30%
limit). States retain existing authority to impose nondiscriminatory
deposit caps.
(B) Bank/Thrift Affiliate Agency Authority. An insured bank subsidiary may
act as agent for an affiliate bank or thrift in offering specified banking
services both within and across state lines without offices of the agent
being deemed branches of the affiliates on whose behalf they act. Summit
Bank NJ and Summit Bank PA act as agents for each other pursuant to this
authority.
(C) Interstate Branching.
(1) Branching Through Bank Mergers. As of June 1, 1997, the appropriate
Federal regulator may approve the merger of adequately capitalized
banks across state lines, so long as the resulting institution is
adequately capitalized and adequately managed. Bank mergers have to
conform with state laws which impose age restrictions of up to 5 years
on acquisitions of new banks. Where the bank/BHC is effectively moving
into a new state as a result of the merger, regulators must consider
Community Reinvestment Act compliance of all bank affiliates before
approving the merger application. The 10% nationwide/30% state by state
deposit concentration limits discussed above also apply to bank
mergers; states retain current authority to impose deposit caps.
(2) Direct Branching by Banks. National and state banks are prohibited
from directly acquiring an existing branch (separate from the
acquisition of a charter), or establishing a de novo branch, in a host
state unless the law of the host state permits it. New Jersey permits
the acquisition of an existing branch but prohibits de novo;
Pennsylvania permits both; and Connecticut permits both, provided that
reciprocity exists.
(D) Laws Applicable to State Interstate Branches. Branches of out-of-state
state chartered banks are subject to the laws of the host state, including
limits on permissible activities, as if they were branches of a bank whose
headquarters are located in that host state.
(E) Other. For financial institutions that maintain one or more branches
outside the home state, the appropriate Federal banking agency must prepare
a written evaluation of the entire institution's Community Reinvestment Act
performance and a separate evaluation of the institution's performance for
each state and metropolitan statistical area, and for the non-metropolitan
portion of the state. The Act prohibits the use of interstate branches
primarily for the purpose of deposit production, and requires that the
interstate bank's level of lending in the host state relative to deposits
from the host state (using available information) be greater than half the
average of all banks with home offices in that state. The appropriate
Federal regulator may require closure of a branch which fails this test. In
the case of an interstate bank that proposes to close any branch in a low-
or moderate-income area, the branch closure notices must contain the
mailing address of the bank's Federal regulator, and a statement that
comments regarding the closure may be mailed to that regulator. If a person
from the area in which the branch is located submits a written request and
includes a statement of specific reasons, and the request is not frivolous,
the agency must consult with community leaders and convene a meeting with
such leaders and depository institutions to explore the feasibility of
obtaining adequate alternative facilities and services. The legislation
specifically states that this process shall not affect the authority of the
bank to close the branch, or the timing of the closing.
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FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), which became law in December 1991, in addition to authorizing
increased funding for the Bank Insurance Fund ("BIF") by raising the FDIC's
borrowing limits and eliminating the cap on deposit insurance premiums, imposes
extensive additional statutory requirements regarding the roles,
responsibilities, and liabilities of a bank's senior management, directors,
independent auditors, and regulators in compliance, management and financial
affairs of a bank. This Act has required additional time, effort and resources
to be devoted to compliance and internal controls.
Pursuant to FDICIA, each federal banking agency has promulgated regulations
specifying the levels at which a financial institution would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized," and when it would take
certain mandatory and discretionary supervisory actions based on the capital
level of the institution.
Insured institutions are generally prohibited from paying dividends or
management fees if after making such payments, the institution would be
"undercapitalized." An "undercapitalized" institution also is required to
develop and submit to the appropriate federal banking agency a capital
restoration plan, and each company controlling such institution must guarantee
the institution's compliance with such plan. The liability of a holding company
under any such guarantee is limited to the lesser of five percent of the
institution's total assets at the time it became undercapitalized or the amount
needed to comply with all applicable capital standards. The FDIC is accorded a
priority over the claims of unsecured creditors in any bankruptcy proceeding of
a holding company that has guaranteed an institution's compliance with a capital
restoration plan. Further, "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized" institutions are subject to increasingly
extensive requirements and limitations, including mandatory sale of stock,
forced mergers, and ultimately receivership or conservatorship. A "critically
undercapitalized" institution, beginning 60 days after it becomes "critically
undercapitalized," generally is prohibited from making any payment of principal
or interest on the institution's subordinated debt.
FDICIA caused the FDIC insurance assessments to move from flat-rate
premiums to a system of risk-based premium assessments. The risk-based insurance
assessment evaluates an institution's potential for causing a loss to the
insurance fund and bases deposit insurance premiums upon individual bank
profiles. The majority of the Company's FDIC insured deposits are covered under
the BIF. As a result of deposits acquired through the acquisition of thrift
institutions over the last several years, the Company has approximately $5.3
billion of deposits that are insured under the Savings Association Insurance
Fund ("SAIF").
The Deposit Insurance Funds Act of 1996, which became law on September 30,
1996, included measures to address the disparity in deposit insurance assessment
rates that had developed between institutions whose deposits are insured by BIF
and those whose deposits are insured by SAIF. The SAIF was recapitalized through
a special "one time only" assessment of 0.657 percent of all deposits insured by
that Fund; the proceeds of this assessment brought SAIF to its designated
reserve ratio. As part of this legislation, the assessment basis for the
Financing Corporation ("FICO") bonds issued to finance resolution of early
stages of the savings and loan crisis, was broadened to include banks; however,
banks are assessed for this purpose at only one-fifth the rate of the assessment
on savings associations until December 31, 1999. As a result of these changes,
the deposit insurance assessment for banks and for thrifts has been nearly
equalized and will be identical for comparably rated institutions after January
1, 2000, at which time banks will share equally in the FICO assessment and the
BIF and SAIF funds will be merged.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default. These provisions have
commonly been referred to as FIRREA's "cross guarantee" provisions. Liability
under the "cross guarantee" provisions is subordinate to claims (other than
claims by shareholders, including bank holding companies, in their capacity as
shareholders, and affiliates of the institution) of depositors, secured
creditors, other general or senior creditors, and holders of obligations
subordinated to depositors or other creditors.
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FIRREA gives the FDIC as conservator or receiver of a failed depository
institution express authority to repudiate contracts with such institution which
it determines to be burdensome or if such repudiation will promote the orderly
administration of the institution's affairs. Certain "qualified financial
contracts", defined to include securities contracts, commodity contracts,
forward contracts, repurchase agreements, and swap agreements, are generally
excluded from the repudiation powers of the FDIC. The FDIC is also given
authority to enforce contracts made by a depository institution, notwithstanding
any contractual provision providing for termination, default, acceleration, or
exercise of rights upon, or solely by reason of, insolvency or the appointment
of a conservator or receiver. Insured depository institutions are also
prohibited from entering into contracts for goods, products or services which
would adversely affect the safety and soundness of the institution.
The bank regulatory agencies have broad discretion to issue cease and
desist orders if they determine that the Company or its subsidiaries are
engaging in "unsafe or unsound banking practices." In addition, the Federal bank
regulatory authorities are empowered to impose substantial civil money penalties
for violations of certain Federal banking statutes and regulations.
Dividend Restrictions
Various federal and state statutory provisions limit the amount of
dividends Summit's subsidiary banks can pay to Summit without prior regulatory
approval. The Federal Reserve Act, which affects both Summit Bank NJ and Summit
Bank PA, restricts the payment of dividends in any calendar year to the net
profit of the current year combined with retained net profits of the preceding
two years; and Connecticut's banking law imposes a similar limitation on NSS
Bank. Further, Summit Bank NJ, as a New Jersey state-chartered bank, may declare
a dividend only if, after payment thereof, its capital stock would be unimpaired
and its surplus would equal at least 50 percent of its capital stock or its
surplus would not be reduced and Summit Bank PA, as a Pennsylvania-chartered
bank, may declare and pay a dividend only out of accumulated net earnings and
only if it has surplus at least equal to its capital and such surplus would not
be reduced by payment of such dividend. Summit may not pay dividends to its
shareholders if after paying such dividends it would be unable to pay its debts
as they become due in the usual course of business or its total assets would be
less than its total liabilities. In addition, under FDICIA all institutions are
prohibited from paying dividends if after doing so an institution would be
undercapitalized. For additional information on dividend restrictions and
amounts available for dividend distributions, see Note 20 of the Consolidated
Financial Statements on page 54 of the 1998 Annual Report to Shareholders which
information is incorporated by reference herein.
Regulation of Subsidiaries
Various laws and the regulations thereunder applicable to the Company and
its bank subsidiaries impose restrictions and requirements in many areas,
including capital requirements, the maintenance of reserves, establishment of
new offices, the making of loans and investments, consumer protection,
employment practices and other matters. There are various legal limitations,
including Sections 23A and 23B of the Federal Reserve Act, on the extent to
which a bank subsidiary may finance or otherwise supply funds to Summit or its
non-bank subsidiaries. Under Federal law, a bank subsidiary is subject to
individual and aggregate limits with respect to loans or extensions of credit,
or investments in the securities of, its parent and the nonbank subsidiaries of
its parent. Any such loans to nonbank affiliates must be collateralized in
keeping with a sliding scale that varies in accordance with the quality of the
collateral. See Note 20 of the Consolidated Financial Statements on page 54 of
the 1998 Annual Report to Shareholders which information is incorporated by
reference herein. Summit and its banking and other subsidiaries are also subject
to certain restrictions with respect to engaging in the business of issuing,
underwriting, public sale, flotation or distribution of securities.
The state-chartered subsidiary banks are subject to the supervision of, and
to regular examination by, the New Jersey Department of Banking and Insurance,
in the case of Summit Bank NJ, the Pennsylvania Department of Banking, in the
case of Summit Bank PA and the Connecticut Department of Banking, in the case of
NSS Bank. In addition, the subsidiary banks are subject to review by the U.S.
Department of Education with respect to student loan activity. Summit Bank NJ
and Summit Bank PA are subject to examination by the FRB. NSS Bank is subject to
examination by the FDIC. As a registered municipal securities dealer, Summit
Bank NJ is subject to the supervision of the Municipal Securities Rulemaking
Board.
None of the stocks of the subsidiary banks or other subsidiaries owned or
controlled by Summit carry statutory double liability. However, Article XIV,
Section 11 of the Constitution of the State of Arizona provides that
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the stock of Summit Credit Life Insurance Company may be subject to
assessment to restore impaired capital under certain circumstances as, and to
the extent, provided therein. There is no such provision in New Jersey,
Pennsylvania or Connecticut law governing the stock of Summit's state-chartered
banks.
Summit and its non-bank subsidiaries are subject to examination by the New
Jersey, Pennsylvania and Connecticut state bank regulatory agencies and the FRB,
and the FDIC may, at its discretion, examine the New Jersey and Pennsylvania
bank subsidiaries. As a mortgagee approved by the Department of Housing and
Urban Development and a seller-servicer of mortgages approved by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the New Jersey Housing and Mortgage Finance Agency, Summit Bank NJ and Summit
Mortgage Banking Services, Inc. are subject to regulation or supervision by
these government agencies. Summit Bank PA is a participant in the mortgage
program conducted by the Pennsylvania Housing Finance Agency and is subject to
the supervision of that agency. Summit Financial Services Group, Inc. is subject
to regulation and examination by the Securities and Exchange Commission, the
National Association of Securities Dealers, Inc., and securities regulatory
authorities of California, Connecticut, Florida, New Jersey, New York and
Pennsylvania and, as a municipal securities dealer, to regulation by the
Municipal Securities Rulemaking Board. Summit Credit Life Insurance Company is
subject to regulation and examination by the Department of Insurance of the
State of Arizona. Summit Commercial Corp. is subject to the jurisdiction of the
Connecticut and Maryland Department of Banking. Corporate Dynamics, Philadelphia
Benefits Corporation, William M. Ross and Spectrum Financial Group are licensed
as insurance brokers in over 20 states and are subject to the jurisdiction of
the insurance regulatory authorities of each state in which they are licensed to
do business. Summit Mortgage Banking Services, Inc. is subject to the
jurisdiction of the banking authorities of the states of New York and Delaware.
Summit and its subsidiaries are also subject to various reporting
requirements of Federal and state securities laws, and regulations of the
Securities and Exchange Commission and the New York Stock Exchange.
From time to time, various bills are introduced in the United States
Congress and the New Jersey, Pennsylvania or Connecticut Legislatures which
could result in additional regulation of the business of Summit and its
subsidiaries, or further increase competition or expense. Legislation has been
proposed at the Federal level that would provide banking organizations such as
Summit with greater flexibility to provide non-banking services of a financial
nature; and legislation has been proposed that would permit non-banking
companies to provide banking services and to acquire banks. It cannot be
determined at this time whether any of these proposals will become law, or if
they do become law, what effect they will have on the operations of Summit.
There is a continuing trend toward regulating every aspect of retail
banking through consumer protection laws, at significant expense to financial
institutions. At the same time, securities brokers, insurance companies,
retailers and other non-bank entities are being allowed to offer a variety of
traditional bank services without being subject to the same degree of regulation
as banks and bank holding companies. If these trends continue without providing
parity to the commercial banks in matters such as permissible services, taxation
and interest rates chargeable on loans, adverse effects on commercial banks
could ensue.
In its operations in other countries, Summit Bank NJ is also subject to
restrictions imposed by the laws and banking authorities of such countries.
References under this caption, Supervision and Regulation, to applicable
statutes are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to such
statutes.
Monetary Policy and Economic Conditions
The earnings and business of Summit and its subsidiaries are affected by
the policies of regulatory authorities, including the FRB. The monetary policies
of the FRB have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of the changing conditions in the national and international economy and in the
money markets, as a result of actions by monetary and fiscal authorities,
interest rates, credit availability and deposit levels may change due to
circumstances beyond the control of Summit or its subsidiaries.
Effects of Inflation
9
<PAGE>
A bank's asset and liability structure differs from that of an industrial
company, since its assets and liabilities fluctuate over time based upon
monetary policies and changes in interest rates. The growth in the bank's
earning assets, regardless of the effects of inflation, will increase net
interest income if the bank is able to maintain a consistent interest spread
between earning assets and supporting liabilities, of which there can be no
assurance.
A purchasing power gain or loss from holding net monetary assets during the
year represents the effect of general inflation on monetary assets and
liabilities. Almost all of the assets and liabilities of Summit are considered
monetary because they are fixed in terms of dollars and, therefore, are not
materially affected by inflation.
(c) (1) (i) Principal products and services rendered by industry segments.
See Financial Review - Lines of Business and Note 17 of the Consolidated
Financial Statements on pages 26 and 27, and 51, respectively, of the 1998
Annual Report to Shareholders which information is incorporated by reference
herein.
(c) (1) (ii) Description of new products or segments.
There were no new products or industry segments that required the
investment of a material amount of the assets of the Company or that otherwise
were material.
(c) (1) (iii) Sources and availability of raw materials.
Not applicable.
(c) (1) (iv) Importance of patents, trademarks, licenses, franchises and
concessions held.
Patents and licenses, as such, are not of importance to Summit or its
subsidiaries, but operating charters (similar to licenses) - approved banking
location authorizations granted by the New Jersey Department of Banking and
Insurance, the Pennsylvania Department of Banking, and the Connecticut
Department of Banking for state-chartered bank subsidiaries - are vital to the
operation and expansion of the bank subsidiaries. Such charters are perpetual
unless revoked by the granting authorities. Various licenses and approvals to do
business are also required by the other regulatory agencies referred to under
Supervision and Regulation above. Most of these licenses and approvals require
periodic renewal.
Summit has several registered service marks, none of which is considered
material to its business. The duration of each registration is perpetual so long
as the registrant continues to use the mark and renews the registration every
ten years.
(c) (1) (v) Seasonality of business.
Not applicable.
(c) (1) (vi) Working capital requirements related to inventory.
Not applicable.
(c) (1) (vii) Concentration of customers.
The business of the registrant and its subsidiaries is not dependent
on a single customer, nor on a small group of customers.
(c) (1) (viii) Backlog of orders.
Not applicable.
(c) (1) (ix) Government contracts.
10
<PAGE>
No material portion of the business of Summit and its subsidiaries is
subject to renegotiation of profits or termination of contracts or subcontracts
at the election of the U.S. Government.
(c) (1) (x) Competition.
Each bank subsidiary faces strong competition for local business in the
communities it serves from other banking institutions as well as from other
financial institutions. Summit's banking subsidiaries compete in the national
market with other major banking and financial institutions in the New York,
Philadelphia, and southern Connecticut areas, many of which are substantially
larger and may have greater financial resources. A number of these institutions
offer their services throughout New Jersey, Pennsylvania, and Connecticut
through bank and non-bank subsidiaries, loan production offices and
solicitations through broadcast and print media and direct mail. For
international business, Summit competes not only with a substantial number of
United States banks having foreign departments, but also with agencies and
branches of foreign banks located in the United States and with other major
banks throughout the world. The effect of liberalized branching and acquisition
laws has been to lower barriers to entry into the banking business and to
increase competition for banking business, as well as to increase both
competition for and opportunities to acquire other financial institutions.
Nationwide interstate banking has accelerated these trends.
For most of the services which the subsidiaries perform, there is
increasing competition from financial institutions other than commercial banks
due to the relaxation of regulatory restrictions. Money market and mutual funds
actively compete with banks for deposits. Savings banks, savings and loan
associations and credit unions also actively compete for deposits and for
various types of loans; such institutions, as well as securities brokers,
consumer finance companies, mortgage companies, factors, insurance companies and
pension trusts, are important competitors. Financial institutions such as these,
as well as retailers and other non-bank entities, have acquired so-called
"non-bank banks" and "unitary thrift" charters permitting them to offer
traditional banking services without being subject to the same degree of
regulation. Insurance companies, mutual fund investment counseling firms and
other business firms and individuals offer competition for personal and
corporate trust services and investment advisory services.
Competition for banking and permitted non-bank services is based on price,
nature of product, quality of service, and in the case of retail activities,
convenience of location.
(c) (1) (xi) Research and development.
Summit and its subsidiaries conduct research activities, from time to time,
relating to the development of new services. Expenditures for these activities
are not considered material to the financial condition of Summit and its
subsidiaries.
(c) (1) (xii) Cost of compliance with environmental regulations.
It is not expected that compliance with Federal, state and local provisions
relating to the protection of the environment will have any material effect on
Summit or its subsidiaries.
(c) (1) (xiii) Number of persons employed.
At December 31, 1998, there were 8,665 persons, on a full-time equivalent
basis, employed by Summit and its subsidiaries.
(d) Financial information about foreign and domestic operations and export
sales.
Summit Bank NJ operates an International Banking Department principally for
the benefit of its domestic customers and an offshore banking facility on the
island of Grand Cayman in the British West Indies. Summit Trade Finance (HK),
Limited, an indirect subsidiary of Summit Bank NJ, operating under a Hong Kong
charter, issues
11
<PAGE>
documentary letters of credit to Asian suppliers on behalf of U.S. importers.
Business at these offshore facilities constituted less than one-half of one
percent of the total assets and income of Summit Bank NJ in 1998.
(e) Statistical information.
The table below provides a cross reference to portions of Summit Bancorp's
1998 Annual Report To Shareholders incorporated by reference herein. Information
that is not applicable is indicated by (NA):
<TABLE>
<CAPTION>
Annual
Report
Description of Financial Data Pages
----------------------------- -----
<S> <C> <C>
I. Distribution of Assets, Liabilities, and Stockholders'
Equity; Interest Rates and Interest Differential
A. Average Balance Sheets 22-23
B. Analysis of Net Interest Earnings 22-23
C. Rate/Volume Analysis 24
II. Investment Portfolio
A. Book value of investment securities 44
B. Investment securities by range of maturity with
corresponding average yields 44
C. Securities of issuers exceeding ten percent of
stockholders' equity NA
III. Loan Portfolio
A. Types of loans 19
B. Maturities and sensitivities of loans to changes
in interest rates 19
C. Risk elements
1) Nonaccrual, past due and restructured loans 27,28,40
2) Potential problem loans 27
3) Foreign outstandings NA
4) Loan concentrations 45
D. Other interest bearing assets NA
IV. Summary of Loan Loss Experience
A. Analysis of the allowance for loan losses 28-29
B. Allocation of the allowance for loan losses 28-29
V. Deposits
A. Average amount and average rate paid on major
categories of deposits 22-23
B. Other categories of deposits NA
C. Deposits by foreign depositors in
domestic offices NA
D. Time deposits of $100,000 or more by
remaining maturity 30
E. Time deposits of $100,000 or more by
foreign offices NA
VI. Return on Equity and Assets 1 and 56-57
VII. Short-term Borrowings 20
</TABLE>
Item 2. Properties.
Summit owns its administrative headquarters building in West Windsor
Township, New Jersey. Summit Bank NJ owns its principal banking office located
in Hackensack, New Jersey. Summit Bank NJ also leases facilities in Cranford,
Dayton, Egg Harbor and Mays Landing, New Jersey, and owns facilities in Cologne
and Egg Harbor, New
12
<PAGE>
Jersey, all of which are used for various administrative and back office
operations. The principal banking and administrative offices of Summit Bank PA
are leased and are located in Bethlehem, Pennsylvania. The bank subsidiaries
conduct business in approximately 447 banking offices, of which approximately
47% are owned, with the remaining leased. Office space in certain of the owned
buildings is leased to others. Summit Service Corporation, a wholly owned
subsidiary of the bank subsidiaries, leases property in Ridgefield Park, New
Jersey for use as the principal data processing facility.
For additional information on properties see Note 5 and Note 9 of the
Consolidated Financial Statements on pages 45 and 46, respectively, of the 1998
Annual Report to Shareholders which information is incorporated by reference
herein.
Item 3. 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.
The plaintiffs entered into retail installment sales contracts with United
Jersey Bank/South, N.A., a predecessor of Summit Bank, a subsidiary of
registrant, but failed to keep insurance required by their contracts in force,
as a result of which the Bank obtained collateral protection insurance for them.
Plaintiffs allege that they are representatives of a class of persons who are or
were parties to consumer loan agreements with Summit Bank and/or United Jersey
Bank and/or any subsidiary of UJB Financial Corp (the prior name of Summit
Bancorp), and from whom any of those entities collected or sought to collect
collateral protection insurance premiums for the period October 4, 1989 to
October 3, 1995. Their complaints allege breach of contract and breach of the
implied covenants of good faith and fair dealing, unconscionable commercial
practices under the New Jersey Consumer Fraud Act, unjust enrichment, and breach
of fiduciary duty. Their federal court complaints also alleged violations of the
National Bank Act and Depository Institution and Monetary Control Act.
On August 28, 1997, the U.S. District Court entered an order directing
Summit Bank to compensate Loatman's attorneys for fees and costs stemming from
their efforts to enjoin the Bank and its employees from contacting plaintiff
Loatman directly. Loatman's attorneys then filed an application for a specific
amount which the Bank opposed and no decision has been rendered by the court. On
September 24, 1997, the Bank filed a notice of appeal from the August 28, 1997
order to the United States Court of Appeals for the Third Circuit. The
plaintiffs moved to dismiss the appeal and no decision has been rendered on this
motion or on the merits of the appeal.
On August 29, 1997, the U.S. District Court granted the Bank's motion for
summary judgment as to all federal claims asserted in both the Loatman and
Gundle matters, and declined to exercise supplemental jurisdiction over the
remaining counts of the complaint.
On October 15, 1997, the Superior Court of New Jersey reinstated the state
court actions. On December 19, 1997, the court denied the Bank's motion for
summary judgment, without reaching its merits, holding that questions of fact
existed which precluded summary judgment at that time.
On March 20, 1998, the Superior Court of New Jersey granted plaintiffs'
motion for class certification. The Appellate Division denied the Bank's motion
for leave to appeal from the trial court's certification of the class on April
27, 1998. On May 26, 1998, the trial court approved a form of class notice, but
ruled that it need only be provided to class members who were customers of
United Jersey Bank/South, N.A. On July 8, 1998, plaintiffs filed a
13
<PAGE>
motion to extend dissemination of class notice to the entire certified
class. The Bank opposed that motion and filed a cross-motion to decertify the
class as to all persons who were not customers of United Jersey Bank/South, N.A.
On September 11, 1998, the court granted plaintiffs' motion to extend
dissemination of class notice and denied the Bank's cross-motion to decertify
the class. On October 29, 1998, the Appellate Division denied the Bank's motion
for leave to appeal from the court's September 11, 1998 Order.
Notice of the pendency of this litigation has now been provided to the
entire plaintiff class. The parties are presently engaged in discovery.
2. In re Payroll Express Corporation et al - John S. Pereira as Chapter 11
Trustee of the Estate of Payroll Express Corporation et al v. United Jersey
Bank, United States District Court for the Southern District of New York, Civil
Action No. 94-1565 (LAP) ("the Preference Action"), filed December 29, 1993; In
re Payroll Express Corporation of New York and Payroll Express Corporation,
United States Bankruptcy Court for the Southern District of New York. Case Nos.
92-B-43 149 (CB) and 92-B-43 150 (CB), Adversary Proceeding No. 94-8297A, filed
April 22, 1994 ("the Fraudulent Conveyance Action"); Beth Israel Medical Center,
et al V. United Jersey Bank and National Westminster Bank New Jersey, United
States District Court for the Southern District of New York, Civil Action No.
94-8256 (LAP), filed September 28, 1993; Frederick Goldman, Inc. V. United
Jersey Bank and National Westminster Bank New Jersey, United States District
Court for the Southern District of New York, Civil Action No, 94-8256 (LAP),
filed March 21, 1994; Towers Financial Corporation v. United Jersey Bank, United
States District Court for the District of New Jersey, Civil Action No.92-3175
(WGB), filed June 2, 1992, removed to federal court September 2, 1992; New York
City Transit Authority V. United Jersey Bank and National Westminster Bank New
Jersey, United States District Court for the Southern District of New York,
Civil Action No.95-3685 (LAP), filed May 19, 1995; and Copytone, Inc. on behalf
of itself and others similarly situated v. United Jersey Bank, National
Westminster Bank New Jersey and John Does I through 20, United States District
Court for the Southern District of New York, Civil Action No. 95-8217 (LAP),
filed November 1995.
Payroll Express Corp. ("Payroll"), a former customer of United Jersey Bank
(now Summit Bank, a subsidiary of registrant), ("the Bank"), was primarily in
the business of providing on-site check cashing services. Customers of Payroll
deposited funds into a general deposit account ("Account") at the Bank to cover
their payrolls and cash was obtained by debiting the Account.
Payroll perpetrated a substantial check kiting scheme using the Account and
another account at National Westminster Bank, NJ ("NatWest"). NatWest apparently
discovered this scheme in late May 1992 and ceased honoring checks drawn by
Payroll on its account. The Bank was left with a loss of approximately $4
million in the Account. In March 1994, Robert Felzenberg, the President of
Payroll, pled guilty to wire and tax fraud, and was sentenced to 6 1/2 years
imprisonment.
After Payroll filed a petition in bankruptcy, a trustee (the "Trustee") was
appointed by the court. In his Preference Action, the Trustee alleges that the
Account received incoming wire transfers of at least $17,013,537.54 within the
90 days prior to the filing of bankruptcy by Payroll, that these wire transfers
were used by the Bank to reduce its losses on the check kiting scheme, and that
these monies are recoverable by the Trustee as preferences under the Bankruptcy
Code. The Bank successfully moved to withdraw the reference to the United States
District Court for the Southern District of New York. The Bank and the Trustee
then cross-moved for summary judgment and, on October 11, 1996, the court denied
both motions. Since that time, the parties have concluded fact discovery and the
expert discovery is scheduled to be concluded during the first quarter of 1999.
The Fraudulent Conveyance Action was settled in 1997 for $300,000. The
settlement was approved by the Bankruptcy Court and the matter was dismissed.
A number of Payroll's customers who had deposited money into the Account
have also filed lawsuits against the Bank alleging various common law causes of
action, including unjust enrichment, restitution, conversion, fraud, negligence
and/or breach of fiduciary duty. Only the Beth Israel Medical Center, Frederick
Goldman, New York City Transit Authority, and Copytone matters, which were
consolidated by the Court, and the Towers Financial Corporation matter are still
pending. The Bank filed motions to dismiss the consolidated complaints and, on
October 11, 1996, the court granted the Bank's motion in part, dismissing the
claims which were based on negligence, aiding and abetting the wrongful conduct
of Payroll Express, breach of fiduciary duty, fraud, equitable fraud, conspiracy
to conceal check-kiting by Payroll Express, as well as a part of the conversion
claims. The court denied the remainder of the Bank's motion but stayed the
proceedings until the completion of the Trustee's Preference Action. On
14
<PAGE>
November 17, 1996, an order was entered dismissing the Towers Financial
Corporation matter without prejudice, pending the resolution of the Trustee's
Preference Action.
3. 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.
In their complaint against Collective Bank (now Summit Bank, a subsidiary
of registrant), plaintiffs contend that, under the New Jersey Mortgage Financing
Law, a lender may not charge an attorney review fee to a borrower in connection
with a residential mortgage transaction. They contend that Collective's so doing
was a violation of that law and of the New Jersey Consumer Fraud Act. The
measure of damages sought is the total amount of review fees paid by members of
the putative (but as yet uncertified) class. Plaintiffs also seek treble damages
under the Consumer Fraud Act.
On October 2, 1997, the court entered an order granting partial summary
judgment in favor of plaintiffs. On October 17, 1997, the Bank filed a notice of
motion for leave to appeal to the Appellate Division of the Superior Court of
New Jersey. This motion was granted and the Iverson matter was consolidated with
two other pending appeals (in which other institutional lenders are the
defendants) relating to the same or similar issues. On July 9, 1998, the
Appellate Division reversed the trial court's decision and held that a bank may
charge an attorney review fee in connection with a residential mortgage loan.
The Appellate Division agreed with the trial court in declining to find that the
New Jersey statute is preempted by federal law.
On August 19, 1998, plaintiffs filed a notice of motion for leave to appeal
nunc pro tunc, along with a notice of motion for leave to appeal. The court
granted plaintiffs' nunc pro tunc motion (which was not opposed by the Bank) on
October 9, 1998. On November 19, 1998, the New Jersey Supreme Court granted
plaintiffs' motion for leave to appeal. On November 30, 1998, Collective filed a
notice of motion for leave to cross-appeal that portion of the Appellate
Division's ruling concerning federal preemption. The New Jersey Supreme Court
has not yet ruled on Collective's motion.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
15
<PAGE>
Executive Officers of the Registrant.
The following data is supplied as of March 9, 1999:
<TABLE>
<CAPTION>
Title (All positions and offices presently held with
Name Age Registrant) and year appointed to office(s)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
T. Joseph Semrod 62 Chairman of the Board and Chief Executive Officer (1981)
Robert G. Cox 58 President (1996)
John G. Collins 62 Vice Chairman (1986)
Sabry J. Mackoul 58 Senior Executive Vice President/ Commercial Banking (1998)
William J. Wolverton 55 Senior Executive Vice President/ Retail Banking (1998)
Larry L. Betsinger 61 Executive Vice President/Corporate Information Services (1990)
Alfred M. D'Augusta 57 Executive Vice President/Human Resources (1988)
John R. Feeney 49 Executive Vice President/Asset Liability Management (1996)
William J. Healy 54 Executive Vice President/Finance (1988), Chief Financial Officer
(1999), Treasurer (1999) and Assistant Secretary (1980)
Virginia Ibarra 66 Executive Vice President/Diversity (1997)
Dorinda Jenkins 41 Executive Vice President/Marketing (1997)
Joseph A. Micali, Jr. 43 Executive Vice President/Bank Operations Support (1997)
Richard F. Ober, Jr. 55 Executive Vice President (1988), General Counsel (1975) and Secretary
(1978)
Dennis Porterfield 62 Executive Vice President/Bank Investments (1991) and
Assistant Secretary (1975)
Alan N. Posencheg 57 Executive Vice President/Corporate Operations and
Information Services (1984)
George J. Soltys, Jr. 52 Executive Vice President/Corporate Planning (1996)
Timothy S. Tracey 46 Executive Vice President/Credit and Risk Management (1998)
Edmund C. Weiss, Jr. 56 Executive Vice President (1990) and Auditor (1977)
</TABLE>
The term of each of the above officers is until the next organization
meeting of the Board of Directors, which occurs immediately following the annual
meeting of shareholders, and until a successor is appointed by the Board of
Directors. Each officer may be removed at any time by the Board of Directors
without cause. Management of Summit is not aware of any family relationship
between any director or executive officer or person nominated or chosen to
become a director or executive officer. All of the executive officers named
above have been employed in executive positions by Summit, a subsidiary of
Summit or a bank holding company merged into Summit for more than the last five
years, except for Mr. Micali who joined the Company in 1997. From 1991 to 1997
Mr. Micali was employed as Senior Vice President (Operations and Systems) of
First Union Corporation and a predecessor bank.
16
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
See the Shareholders' Equity and Dividends section in the Financial Review
on page 21 and Notes 2, 11 and 20 to the Consolidated Financial Statements on
pages 43, 47 and 54, respectively, Unaudited Quarterly Financial Data on page
58, and Quarterly Common Stock Price and Dividend Information on page 21 of the
1998 Annual Report to Shareholders which information is incorporated by
reference herein. At March 15, 1999, there were 27,477 record holders of Summit
Common Stock.
On October 30, 1998 the Company, through its wholly owned subsidiary Summit
Bank, issued 383,333 shares of the Registrant's common stock to the shareholders
of Spectrum Financial Group, Inc., a New Jersey corporation ("Spectrum") in
exchange for all of the outstanding shares of Spectrum. The Registrant's common
stock was issued without registration under the Securities Act of 1933 (the
"Securities Act") in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act. In making the sale, the Company relied on
representations of the shareholders of Spectrum that they had such knowledge and
experience as to make an informed investment decision.
Item 6. Selected Financial Data.
See Summary of Selected Consolidated Financial Data on pages 56 and 57 of
the 1998 Annual Report to Shareholders which information is incorporated by
reference herein.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
See Financial Review on pages 17 through 34 of the 1998 Annual Report to
Shareholders which information is incorporated by reference herein.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See Financial Review-Asset/Liability Management on pages 30 and 31, and
Notes 1, 18 and 19 to the Consolidated Financial Statements on pages 40 through
42, 52 and 53, respectively, of the 1998 Annual Report to Shareholders which
information is incorporated by reference herein.
Item 8. Financial Statements and Supplementary Data.
See Consolidated Financial Statements and Notes to Consolidated Financial
Statements on pages 36 through 55 and page 58 of the 1998 Annual Report to
Shareholders which information is incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information on Executive Officers of the Registrant is included in
Part I of this report. A definitive proxy statement, dated March 9, 1999 (the
"Proxy Statement"), was filed with the Securities and Exchange Commission on
March 9, 1999. Information required by Item 401 of Regulation S-K is provided at
page 16 of this Annual Report on Form 10-K and in the Proxy Statement at pages
2-6 under the caption "Election of Directors", which is incorporated herein by
reference. Information required by Item 405 of Regulation S-K is provided in the
Proxy Statement at page 20 under the caption "Additional Information Regarding
Directors and Officers - Section 16(a) Beneficial Ownership Reporting
Compliance" and is incorporated herein by reference.
Item 11. Executive Compensation.
Information required by Item 402 of Regulation S-K is provided in the Proxy
Statement at pages 11-24 under the captions "Remuneration of Outside Directors",
"Summary Compensation Table", "Option/SAR Grants in Last Fiscal Year",
"Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values", "Long-Term Incentive Plans - Awards in Last Fiscal Year" and "Certain
Information As To Executive Officers", all of which information is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by Item 403 of Regulation S-K is provided at pages 7-8
of the Proxy Statement under the caption "Beneficial Ownership of Summit Common
Stock by Directors and Executive Officers", all of which is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
Information required by Item 404 of Regulation S-K is provided in the Proxy
Statement at page 20 under the caption "Additional Information Regarding
Directors and Officers", which is incorporated herein by reference.
18
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a) (1) Financial statements, Summit Bancorp. and Subsidiaries:
<TABLE>
<CAPTION>
Page*
----
<S> <C>
Consolidated Balance Sheets - December 31, 1998 and 1997 36
Consolidated Statements of Income - Three Years Ended December 31, 1998 37
Consolidated Statements of Cash Flows - Three Years Ended
December 31, 1998 38
Consolidated Statements of Shareholders' Equity - Three Years Ended
December 31, 1998 39
Notes to Consolidated Financial Statements 40
Management's Report and Independent Auditors' Report 35
Unaudited Quarterly Financial Data 58
</TABLE>
Financial statement schedules are omitted as the required information is not
applicable or the information is presented in the financial statements or
related notes thereto.
(2) Other Exhibits (All references to Forms 8-K, 10-K, 10-Q, 8-A,
S-1, S-3, S-4, S-8 and other Forms provided for by the Securities Act of 1933,
Securities Exchange Act of 1934 or the Trust Indenture Act of 1940 refer to
Securities and Exchange Commission File No. 1-6451 of Summit Bancorp., unless
otherwise specifically noted below. Specific exhibits are numbered in accordance
with Item 601 of Regulation S-K):
(3) Articles of incorporation; By-Laws.
A. Restated Certificate of Incorporation of Summit
Bancorp., as restated August 19, 1998 (incorporated
by reference to Exhibit (3) A. on Form 10-Q for the
quarter ended September 30, 1998).
B. By-Laws of Summit Bancorp., as restated October 18,
1995 (incorporated by reference to Exhibit (3)B. on
Form 10-K for the year ended December 31, 1995).
(4) Instruments defining the rights of security holders, including
indentures.
A. (i) Rights Agreement, dated as of August 16, 1989, by
and between Summit Bancorp. (under former name UJB
Financial Corp.) and First Chicago Trust Company of
New York, as Rights Agent (incorporated by reference
to Exhibit 2 to the Registration Statement on Form
8-A, filed August 28, 1989), and (ii) Notice to
Rights Agent dated August 20, 1997 (incorporated by
reference to Exhibit (3)(A)(i) on Form 10-Q for the
quarter ended September 30, 1997).
B. (deleted)
C. (deleted)
*Refers to the respective page numbers of Summit Bancorp. 1998 Annual
Report to Shareholders included as Exhibit 13. Such pages are incorporated
herein by reference
19
<PAGE>
D. Note Agreement, dated as of August 19, 1993, between
Summit Bancorp. (under former name UJB Financial Corp.)
and The Northwestern Mutual Life Insurance Company
relating to $20,000,000 of 7.95% Senior Notes Due August
25, 2003 (incorporated by reference to Exhibit (4)D. on
Form 10-Q for the quarter ended September 30, 1993).
E. (i) Fiscal and Paying Agency Agreement, dated as of
June 30, 1993, between Summit Bank, as issuer, and
Summit Bank, as fiscal and paying agent acting through
its Trust Department, relating to $50,000,000 of 6 3/4%
Subordinated Notes due June 15, 2003 of Summit Bank
(incorporated by reference to Exhibit (4)E.(i) on Form
8-K, dated April 11, 1996), and (ii) Specimen of Global
Certificate for 6 3/4% Subordinated Notes due June 15,
2003 of Summit Bank (incorporated by reference to
Exhibit (4)E.(ii) on Form 8-K, dated April 11, 1996).
F. (deleted)
G. (i) Subordinated Indenture, dated as of December 1,
1992, between Summit Bancorp. (under former name UJB
Financial Corp.) and Citibank, N.A., Trustee, relating
to $175,000,000 of 8 5/8% Subordinated Notes Due
December 10, 2002 of Summit Bancorp. (incorporated by
reference to Exhibit (4) G. on Form 10-K for the year
ended December 31, 1992), and (ii) Specimen of Summit
Bancorp.'s 8 5/8% Subordinated Notes Due December 10,
2002 (incorporated by reference to Exhibit 4 on Form
8-K, dated December 10, 1992).
H. Indenture, dated as of March 20, 1997, between Summit
Bancorp. and the First National Bank of Chicago, as
Trustee, for Subordinated Debt Securities
(incorporated by reference to Exhibit 4.1 to
Registration Statement No. 333-29019 on Form S-4
filed June 12, 1997).
I. First Supplemental Indenture, dated as of March 20,
1997, between Summit Bancorp. and the First National
Bank of Chicago, as Trustee for $154,640,000 8.40%
Junior Subordinated Deferrable Interest Debentures
due 2027 (incorporated by reference to Exhibit 4.2 to
Registration Statement No. 333-29019 on Form S-4
filed June 12, 1997).
J. Amended and restated Declaration of Trust for Summit
Capital Trust I dated March 20, 1997 (incorporated by
reference to Exhibit 4.5 to Registration Statement
No. 333-29019 on Form S-4 filed June 12, 1997).
K. Capital Securities Guarantee Agreement for Summit
Capital Trust I dated as of March 20, 1997
(incorporated by reference to Exhibit 4.7 to
Registration Statement No. 333-29019 on Form S-4
filed June 12, 1997).
(10) Material Contracts
A. Converted Summit Bancorporation Stock Option Plan of
Summit Bancorp. (incorporated by reference to Exhibit
10 to Registration Statement No. 333-02625 on Form S-8,
filed April 17, 1996).
B. (i) Master Agreement of Lease, dated January 26, 1982,
between Summit Bancorp. (under former name United
Jersey Banks) and Sha-Li Leasing Associates, Inc.
relating to equipment leases in excess of $10,000,000
in aggregate lease obligations, including form of
Equipment Schedule (incorporated by referenced to
Exhibit (10) B. (i) on Form 10-Q for the quarter ended
September 30, 1993), (ii) Assignment and Assumption of
Equipment Lease, effective December 31, 1991, between
Summit Bancorp. (under former name UJB Financial Corp.)
and UJB Financial Service Corporation (relating to
assignment of Master Agreement of Lease) (incorporated
by reference to Exhibit (10) B. (ii) on Form 10-Q for
the quarter ended September 30, 1993), and (iii) Form
of Guaranty Agreement between Summit Bancorp. (under
former name UJB Financial Corp.) and various lenders
under the Master Agreement of Lease relating to certain
equipment leases
20
<PAGE>
in excess of $10,000,000 in aggregate lease obligations
(incorporated by reference to Exhibit (10) B. (iii) on
Form 10-Q for the quarter ended September 30, 1993).
**C. (i) Summit Bancorp. 1993 Incentive Stock and Option
Plan (incorporated by reference to Attachment A to the
Proxy Statement of Registrant dated April 12, 1996),
(ii) Compensation Committee Regulations for the Grant
and Exercise of Stock Options and Restricted Stock
(adopted July 19, 1993) (incorporated by reference to
Exhibit (10) C. (ii) on Form 10-Q for the quarter ended
June 30, 1993), (iii) Compensation Committee
Interpretation of Section 5 (e) (ii) (F) (incorporated
by reference to Exhibit (10) C. (iii) on Form 10-Q for
the quarter ended March 31, 1994), (iv) Compensation
Committee Interpretation of Stock Incentive Plans
adopted June 19, 1996 (incorporated by reference to
Exhibit (10) C.(iv) on Form 10-Q for the quarter ended
June 30, 1996), (v) Compensation Committee Consent
adopted February 18, 1998 (incorporated by reference to
Exhibit (10) C. (v) on Form 10-K for the year ended
December 31, 1997) and (vi) Amendment dated April 17,
1998 to Summit Bancorp. 1993 Incentive Stock and Option
Plan (incorporated by reference to Exhibit (10) C.(vi)
on Form 10-Q for the quarter ended March 31, 1998).
**D. (i) UJB Financial Corp. (former name of Summit
Bancorp.) 1990 Stock Option Plan (incorporated by
reference to Exhibit (10) to Registration Statement No.
33 -36209 on Form S-8, filed July 26, 1990), (ii)
Compensation Committee Regulations for the Grant and
Exercise of Stock Options and Restricted Stock (adopted
July 19, 1993) (incorporated by reference to Exhibit
(10) C. (ii) on Form 10-Q for the quarter end June 30,
1993), (iii) Compensation Committee Consent dated
February 18, 1998 (Incorporated by reference to Exhibit
(10) C. (v) on Form 10-K for the year ended December
31, 1997), and (iv) Amendment dated April 17, 1998 to
UJB Financial Corp. 1990 Stock Option Plan
(incorporated by reference to Exhibit (10) C. (vi) on
Form 10-Q for the quarter ended March 31, 1998).
**E. Supplemental Executive Retirement Plan of The Summit
Bancorporation (incorporated by reference to Exhibit
(10)E. on Form 8-K, dated April 11, 1996).
**F. Management Incentive Plan, effective January 1, 1999.
**G. (i) Deferred Compensation Plan for Directors, as
revised October 17, 1979, (incorporated by reference to
Exhibit (10) G. (i) on Form 10-K for the year ended
December 31, 1994), and (ii) Amendment adopted April
25, 1994 (incorporated by reference to Exhibit (10) G.
(ii) on Form 10-K for the year ended December 31,
1994).
**H. (i) Agreement dated April 2, 1981 between Summit
Bancorp. (under former name United Jersey Banks) and T.
Joseph Semrod (incorporated by reference to Exhibit
(10) H. (i) on Form 10-K for the year ended December
31, 1994), with (ii) Amendment No. 1 dated May 5, 1981
(incorporated by reference to Exhibit (10) H.(ii) on
Form 10-K for the year ended December 31, 1994), (iii)
Amendment No. 2 dated December 15, 1982 (incorporated
by reference to Exhibit (10) H. (iii) on Form 10-K for
the year ended December 31, 1994), (iv) Amendment No. 3
dated August 20, 1986 (incorporated by reference to
Exhibit (10) H. (iv) on Form 10-K for the year ended
December 31, 1994) and (v) Amendment No. 4 dated
January 20, 1999.
**I. (i) Employment Agreement, dated March 1, 1996, between
Summit Bancorp. and Robert G. Cox (incorporated by
reference to Exhibit (10)I.(i) on Form 10-K for the
year ended December 31, 1995), (ii) Agreement, dated as
of September 1, 1995, between The Summit Bancorporation
(predecessor corporation to Summit Bancorp.) and Robert
G. Cox assumed by Summit Bancorp. (incorporated by
reference to Exhibit (10)I.(ii) on Form 10-K for the
year ended December 31, 1995) and (iii) Amendment No. 1
dated March 1, 1999 to Employment Agreement dated March
1, 1996 between Summit Bancorp. and Robert G. Cox.
21
<PAGE>
**J. Retirement Program for Outside Directors of Franklin
State Bank (incorporated by reference to Exhibit (10)J.
on Form 10-K for the year ended December 31, 1996).
**K. Franklin State Bank Deferred Compensation Plan adopted
January 10, 1984 (incorporated by reference to Exhibit
(10)K. on Form 10-K for the year ended December 31,
1996).
**L. (i) United Jersey Banks (former name of Summit
Bancorp.) 1982 Stock Option Plan (incorporated by
reference to Exhibit 4 to Registration Statement No.
2-78500 on Form S-8, filed July 21, 1982) with (ii)
Amendment No. 1, dated June 16, 1984 (incorporated by
reference to Exhibit (10) L. (ii) on Form 10-K for the
year ended December 31, 1994), (iii) Amendment No. 2,
dated December 19, 1990 (incorporated by reference to
Exhibit (10)L.(iii) on Form 10-K for the year ended
December 31, 1995), and (iv) Compensation Committee
Regulations for the Grant and Exercise of Stock Options
and Restricted Stock (adopted July 19, 1993)
(incorporated by reference to Exhibit (10) C. (ii) on
Form 10-Q for the quarter ended June 30, 1993) (File
No. 1-6451).
**M. (i) Retirement Restoration Plan, adopted April 19, 1983
(incorporated by reference to Exhibit (10) M.(i) on
Form 10-K for the year ended December 31, 1994), (ii)
Supplemental Retirement Plan, adopted August 16, 1989
(incorporated by reference to Exhibit (10) M. (ii) on
Form 10-K for the year ended December 31, 1994), (iii)
Written Consent of UJB Financial Corp. (former name of
Summit Bancorp.) Benefits Committee interpreting the
Retirement Restoration Plan, adopted August 30, 1989
(incorporated by reference to Exhibit (10) M. (iii) on
Form 10-K for the year ended December 31, 1994), (iv)
Amendments to the Retirement Restoration Plan and
Supplemental Retirement Plan adopted April 25, 1994
(incorporated by reference to Exhibit (10) M. (iv) on
Form 10-K for the year ended December 31, 1994) and (v)
Enhanced Retirement Income Plan effective, July 15,
1998.
N.-O. (deleted)
P. Twenty-year real estate lease executed and dated
December 12, 1988 from Hartz Mountain Industries,
Inc. for real property located in Ridgefield Park,
New Jersey used as a data processing facility
(incorporated by reference to Exhibit (10) P. on Form
10-K for the year ended December 31, 1993).
Q. (i) Twenty-five year real property lease, dated June 5,
1990, between Summit Bancorp. (under name of
predecessor corporation The Summit Bancorporation) and
Hartz Mountain Industries, Inc. for data processing and
operations center located in Cranford, New Jersey
(incorporated by reference to Exhibit (10)Q.(i) on Form
8-K, dated April 11, 1996), and (ii) Lease Modification
Agreement, dated February 22, 1995 and effective
October 1, 1994, between Summit Bancorp. (under name of
predecessor corporation The Summit Bancorporation) and
Hartz Mountain Industries, Inc. relating to the
twenty-five year lease for data processing and
operations center in Cranford, New Jersey (incorporated
by reference to Exhibit (10)Q.(ii) on Form 8-K, dated
April 11, 1996).
R.-V. (deleted)
**W. (i) Retirement Plan for Outside Directors of UJB
Financial Corp., (former name of Summit Bancorp.), as
amended and restated February 20, 1991 (incorporated by
reference to Exhibit (10)W.(i) on Form 10-K for the
year ended December 31, 1995), (ii) Interpretation,
dated March 15, 1993, of the Retirement Plan for
Outside Directors of UJB Financial Corp. (former name
of Summit Bancorp.) (incorporated by reference to
Exhibit (10) W. (ii) on Form 10-K for the year ended
December 31, 1992), and (iii) Amendment adopted April
25, 1994 (incorporated by reference to Exhibit (10) W.
(iii) on Form 10-K for the year ended December 31,
1994).
X.-DD. (deleted)
22
<PAGE>
**EE. (i) Form of Termination Agreement between Summit
Bancorp. and each of T. Joseph Semrod, Robert G. Cox,
John G. Collins, Sabry J. Mackoul, William J.
Wolverton, Larry L. Betsinger, Alfred M. D'Augusta,
John R. Feeney, Peter D. Halstead, William J. Healy,
Dorinda Jenkins, James S. Little, Stewart McClure, Jr.,
Joseph A. Micali, Jr., Richard F. Ober, Jr., Dennis
Porterfield, Alan N. Posencheg, Timothy S. Tracey,
Edmund C. Weiss (incorporated by reference to Exhibit
(10)EE(i) on Form 10-Q for the quarter ended March 31,
1998).
**FF. (i) Summit Bancorp. Executive Severance Plan, as
amended through October 15, 1997 (incorporated by
reference to Exhibit (10) FF (i) on Form 10-Q for the
quarter ended March 31, 1998), and (ii) Summit
Bancorp. Executive Severance Plan Participation
Letter (incorporated by reference to Exhibit (10) FF
(ii) on Form 10-Q for the quarter ended June 30,
1998).
GG.-II. (deleted)
**JJ. (i) Retirement Plan for Outside Directors of
Commercial Bancshares, Inc. adopted May 1, 1986,
(incorporated by reference to Exhibit (10)JJ. on Form
10-K for the year ended December 31, 1996) and (ii)
Compensation Committee Interpretation, dated July 19,
1993 (incorporated by reference to Exhibit (10) JJ.
(ii) on Form 10-Q for the quarter ended June 30, 1993).
**KK. (i) Commercial Bancshares, Inc. Directors Deferred
Compensation Plan adopted May 20, 1986 (substantially
identical plans were adopted by former subsidiaries of
Commercial Bancshares, Inc.) and (ii) related Master
Trust Agreement (incorporated by reference to Exhibit
(10)KK.(i) and (ii), respectively, on Form 10-K for the
year ended December 31, 1996).
**LL. (i) United Jersey Banks (former name of Summit
Bancorp.) 1987 Stock Option Plan, (incorporated by
reference to Exhibit (10)LL.(i) on Form 10-K for the
year ended December 31, 1996) with (ii) Amendment dated
April 25, 1989, (incorporated by reference to Exhibit
(10) LL. (ii) on Form 10-K for the year ended December
31, 1994), (iii) amendment dated June 30, 1990, (iv)
Compensation Committee Regulations for the Grant and
Exercise of Stock Options and Restricted Stock (adopted
July 19, 1993) (incorporated by reference to Exhibit
(10) C. (ii) on Form 10-Q for the quarter ended June
30, 1993), (v) Compensation Committee Consent dated
February 18, 1998 (incorporated by reference to Exhibit
(10) C (v) on Form 10-Q for the quarter ended March 31,
1998) and (vi) Amendment dated April 17, 1998 to United
Jersey Banks 1987 Stock Option Plan (incorporated by
reference to Exhibit (10) C. (vi) on Form 10-Q for the
quarter ended March 31, 1998).
**MM. Converted Collective Bancorp, Inc. Stock Option Plan
of Summit Bancorp. (incorporated by reference to
Exhibit (10) to Registration Statement No. 333-35075 on
Form S-8, filed September 5, 1997).
**NN. (i) Collective Federal Savings and Loan Association
Directors Deferred Compensation Plan, Amendment No. 1
effective January 1, 1989, Amendment No. 2 effective
July 22, 1997 and Rabbi Trust Agreement under
Collective Bancorp. Directors Deferred Compensation
Plan dated as of July 15, 1997 (incorporated by
reference to Exhibit (10)NN. on Form 10-K for the year
ended December 31, 1997).
(13) Portions of the Summit Bancorp 1998 Annual Report to Shareholders.
(21) Subsidiaries of the registrant.
(23) Consents of Experts and Counsel
23
<PAGE>
A. Independent Auditors' Consent - KPMG LLP
(27) Summit Bancorp. financial data schedule - December 31, 1998
** Management contract or compensatory plan or arrangement.
None of the Exhibits listed above other than portions of the Summit Bancorp
1998 Annual Report to Shareholders are furnished herewith (other than certain
copies filed with the Securities and Exchange Commission). Any of such Exhibits
will be furnished to any requesting security holder upon payment of a fee of 15
cents per page. Contact Lori A. Wierzbinsky, Assistant Corporate Secretary,
Summit Bancorp., P.O. Box 2066, Princeton, NJ 08543-2066 for a determination of
the fee necessary to fulfill any request.
b) Reports on Form 8-K.
Current Report on Form 8-K dated November 6, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Dated: March 29, 1999 By: /s/ William J. Healy
------------------------------
William J. Healy
Executive Vice President/Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ T. JOSEPH SEMROD Chairman of the Board and March 29, 1999
---------------- Director (Chief Executive Director)
T. Joseph Semrod
/s/ ROBERT G. COX President and Director March 29, 1999
-------------
Robert G. Cox
/s/ JOHN G. COLLINS Vice Chairman and Director March 29,1999
---------------
John G. Collins
/s/ WILLIAM J. HEALY Executive Vice President/Finance March 29, 1999
---------------- (Principal Financial Officer)
William J. Healy
/s/ PAUL V. STAHLIN Senior Vice President and March 29, 1999
--------------- Comptroller (Principal Accounting
Paul V. Stahlin Officer)
/s/ S. RODGERS BENJAMIN Director March 29, 1999
-------------------
S. Rodgers Benjamin
/s/ ROBERT L. BOYLE Director March 29, 1999
---------------
Robert L. Boyle
/s/ JAMES C. BRADY Director March 29, 1999
--------------
James C. Brady
/s/ T. J. DERMOT DUNPHY Director March 29, 1999
-------------------
T. J. Dermot Dunphy
/s/ ANNE EVANS ESTABROOK Director March 29, 1999
--------------------
Anne Evans Estabrook
/s/ ELINOR J. FERDON Director March 29, 1999
----------------
Elinor J. Ferdon
/s/ WILLIAM M. FREEMAN Director March 29, 1999
------------------
William M. Freeman
/s/ THOMAS H. HAMILTON Director March 29, 1999
------------------
Thomas H. Hamilton
/s/ FRED G. HARVEY Director March 29, 1999
--------------
Fred G. Harvey
25
<PAGE>
/s/ FRANCIS J. MERTZ Director March 29, 1999
----------------
Francis J. Mertz
/s/ GEORGE L. MILES, JR. Director March 29, 1999
--------------------
George L. Miles, Jr.
/s/ WILLIAM R. MILLER Director March 29, 1999
-----------------
William R. Miller
/s/ RAYMOND SILVERSTEIN Director March 29, 1999
-------------------
Raymond Silverstein
/s/ ORIN R. SMITH Director March 29, 1999
-------------
Orin R. Smith
/s/ JOSEPH M. TABAK Director March 29, 1999
---------------
Joseph M. Tabak
/s/ DOUGLAS G. WATSON Director March 29, 1999
-----------------
Douglas G. Watson
</TABLE>
26
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
(10) F. Management Incentive Plan, effective January 1, 1999
(10) H. (v) Amendment No 4 dated January 20, 1999 to Agreement
dated April 2, 1981 between Summit Bancorp. (under
former name United Jersey Banks) and T. Joseph
Semrod
(10) I. (iii) Amendment No 1 dated March 1, 1999 to Employment
Agreement dated March 1, 1996 between Summit
Bancorp. and Robert G. Cox
(10) M. (v) Enhanced Retirement Income Plan, effective July 15,
1998
13 Portions of the Summit Bancorp. 1998 Annual Report
to Shareholders
21 Subsidiaries of the Registrant
23 Independent Auditors Consent - KPMG LLP
27 Summit Bancorp. financial data schedule-December
31, 1998
SUMMIT BANCORP
MANAGEMENT INCENTIVE PLAN
January 1, 1999
1. Purpose
The Purpose of the Management Incentive Plan (MIP) is to:
Encourage the achievement of corporate and profit center performance
goals and other business development objectives.
Reinforce the importance of coordination among the sectors that
together form the total corporation.
Enable Summit to attract and retain key employees by providing the
opportunity to receive awards which reflect their contribution to
achieving corporate objectives.
2. Overview
The Plan is designed to reward the attainment of predetermined annual
performance objectives. While the measurement factors that will be considered in
determining whether performance objectives have been met will generally remain
constant, the qualitative and quantitative goals with respect to these factors
will inevitably change from year to year. The expectation is that the goals set
for each year will represent a management challenge that will be comparable to
that of any other year, in light of internal resources and the external
environment facing the business at the time.
3. Administration
The Plan shall be administered under the direction of the Compensation Committee
(The Committee) of the Board of Directors of Summit. No member of the Committee
while serving as such shall be eligible for participation in the Plan. The
Committee has exclusive and final authority in all determinations affecting the
Plan and shall have the authority to interpret the Plan, establish and revise
rules and regulations for the Plan and make an other determinations that it
believes necessary or advisable for the administration of the Plan.
4. Eligibility
All full time and part time salaried employees of Summit Bancorp and
subsidiaries (Summit) in salary grades determined by the Compensation Committee
of Summit from time to time, who are not participating in another incentive
plan, are eligible to participate in the Plan. The initial salary grades will be
A66 and above and salary grades TL1 - TL5. An employee must be on the active
payroll and in one of these salary grades for a minimum of 3 months in any Plan
year to be eligible for an incentive award.
<PAGE>
5. Incentive Award Opportunity
Each eligible salary grade is assigned to a target award opportunity
expressed as a percent of base salary. The range of earned award
opportunity is 0-150% of the target award based on attainment of corporate
performance objectives and management's assessment of individual
performance.
Annual Performance Objectives
Specific annual performance objectives are established which emphasize
different measures of Summit's performance. In recent years, these have
included achievement of Financial Plan Objectives, Peer Group Comparisons
and Franchise Positioning Objectives.
In addition to specific performance objectives:
The Chief Executive evaluates the performance of key executives
eligible for awards with respect to their leadership in support of
Summit's overall business development strategy and human resources
development.
The Chief Executive may also adjust results derived from the
guidelines to reflect top management and Board judgments concerning
the quality of the performance in the economic environment in which
the results were obtained.
7. Determination of Awards
Based on the achievement of annual performance objectives, the Committee
will determine the funding of the incentive pool as a percent of target
award guidelines. The pool is then allocated to participants based on
individual performance. Incentives may be paid up to 150 percent of target
award for performance that clearly goes beyond expectation. When
performance falls below expectation, an individual's incentive may be
reduced or withheld.
An employee's incentive award payment will be prorated, as appropriate, to
reflect his/her time in an eligible position during the Plan year. In
addition to new hires, employee movement that may result in a prorated
award include; promotion, demotion, retirement, death, leave of absence,
certain terminations without cause and movement into or out of another
incentive plan.
8. Time of Payment
All incentives earned under the Plan will be paid in cash during the first
quarter following the end of the Plan Year as defined in Section 12.
<PAGE>
9. No Right to Payment of the Incentive
The Plan does not confer enforceable rights on any participant to seek in
any manner to compel the payment of an award under the Plan; the decision
to make any payment to any participant rests within the sole and unfettered
discretion of the Committee and the Chief Executive.
In order to receive an award, a participant must be on the active payroll
as of the date of the payout unless the participant has left the payroll
through retirement, disability, death, or certain terminations as
determined by the Committee.
10. Special Limitations
The aggregate incentive paid under this Plan to the participant group shall
not exceed 50 percent of the participants' aggregate base salaries
at the end of the year for which the incentives are paid.
No incentives will normally be paid for any Plan year in which the
after-tax income is less than seven percent of average capital employed for
the year.
The above limitations notwithstanding, the Committee may, in its judgment,
provide for incentive awards to any individual whose performance clearly so
warrants. No participant in this Plan will be eligible for any other annual
incentive arrangement, except that prorated awards may be made to
participants shifted from one incentive arrangement to another during the
year.
11. Miscellaneous Provisions
In the case of an employee's death, any payment under the Plan shall be
made to his/her designated beneficiary, under the defined benefit pension
plan covering the individual, or in the absence of such designation, by
will or the laws of descent and distribution.
Neither this Plan nor any action taken hereunder shall be construed as
giving any employee any right to be retained in the employ of Summit.
Summit shall have the right to deduct from all incentive any taxes and
other amounts required by law to be withheld with respect to such awards.
The Board of Directors of Summit may amend, suspend or terminate the Plan
or any portion thereof at any time. This Plan shall be governed by the laws
of the State of New Jersey, without consideration of principles of conflict
of laws.
12. Fiscal Year
The Plan is designated to operate on an annual basis commencing January 1,
1999. The Plan year shall be January 1 through December 31.
Exhibit (10)H. (v)
Amendment No. 4
to
Agreement dated April 2, 1981 between
SUMMIT BANCORP
(formerly United Jersey Banks)
AND
T. JOSEPH SEMROD
Subparagraph (ii) of Paragraph 6 is restated in full to read as follows:
ii) The retirement benefits to which Semrod shall be entitled shall be computed
on the basis of the benefit formulas as in effect at the time of
retirement, based on a date of commencement of employment as set forth in
subparagraph (i) above, set forth in the Plan and the supplemental defined
benefit retirement plans, including but not limited to (a) the Retirement
Restoration Plan adopted April 19, 1983, (b) the Supplemental Retirement
Plan adopted August 16, 1989, (c) the Enhanced Retirement Income Plan
effective July 15, 1998, and any amendments and supplements thereto and any
replacement or successor plans and any additional supplemental defined
benefit retirement plans, subject to those limitations in such plans most
favorable to Semrod as to maximum Years of Service and ceilings on the
maximum retirement benefit payable, but not subject to any limitations
imposed by the Employee Retirement Income Security Act of 1974 (ERISA) or
its successor or replacement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 4
this 20th day of January, 1999.
SUMMIT BANCORP
By: /s/ T.J. Dermot Dunphy
-------------------------------
T.J. Dermot Dunphy
Chair, Executive Committee
/s/ T. Joseph Semrod
-------------------------------
T. Joseph Semrod
AMENDMENT NO. 1
TO
EMPLOYMENT AGREEMENT
AND
CHANGE IN CONTROL AGREEMENT
Dated as of March 1, 1999
THIS AMENDMENT NO. 1 to the Employment Agreement made the 1st day of March,
1996, by and among Summit Bancorp, a New Jersey corporation (the "Company"), and
Robert G. Cox (the "Executive") ("Employment Agreement") and the Agreement dated
as of September 1, 1995 between The Summit Bancorporation, a New Jersey
Corporation, and Robert G. Cox ("Change in Control Agreement"), assumed by
Summit Bancorp, successor by merger to The Summit Bancorporation, on March 1,
1996.
WHEREAS, the Company has designated Executive for participation in the
Summit Executive Severance Plan ("Executive Severance Plan") by Participation
Letter dated as of October 15, 1997 and executed a Termination Agreement
("Termination Agreement") with Executive dated as of October 15, 1997; and
WHEREAS, the Executive Severance Plan and Termination Agreement provide
termination benefits to Executive in the event of the termination of his
employment with Company and all its affiliates and subsidiaries; and
WHEREAS, the Executive Severance Plan and Termination Agreement include
within their terms that they supersede all prior participation letters and
understandings and agreements with respect to the Company's severance
obligations and any similar payments to the Executive due upon termination of
employment other than those specifically provided for in any employment contract
between the Company and the Executive;
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and in order to clarify the applicability of the Employment
Agreement, the Change in Control Agreement, the Executive Severance Plan and the
Termination Agreement to the Executive and to eliminate any question regarding
conflicting or overlapping severance benefits, the Company and the Executive
hereby agree as follows:
1. Sections 1, 10, and 12 of the Employment Agreement shall remain in full
force and effect.
2. Only the first sentence of Section 2 of the Employment Agreement shall
remain in full force and effect.
3. Section 6 of the Employment Agreement, with the deletion of the words
"pursuant to Sections 4 and 5" shall remain in full force and effect.
1
<PAGE>
4. Section 11 of the Employment Agreement, with the deletion of the first
sentence, shall remain in full force and effect.
5. Except as provided in Sections 1, 2, 3, and 4 of this Amendment No. 1,
all provisions of the Employment Agreement shall be null and void as of the date
of this Amendment No. 1.
6. All provisions of the Change in Control Agreement shall be null and void
as of the date of this Amendment No. 1.
7. All provisions of the Severance Plan and the Termination Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the date set forth above.
SUMMIT BANCORP. EXECUTIVE
By: /s/ T. Joseph Semrod /s/ Robert G. Cox
----------------------------- -----------------------------
T. Joseph Semrod Robert G. Cox
Chairman of the Board
and Chief Executive Officer
2
EXHIBIT 10.M.(v)
SUMMIT BANCORP
ENHANCED RETIREMENT INCOME PLAN
1. Purpose. This Plan is an enhanced retirement income plan for certain
participants in the Summit Bancorp Retirement Plan (the "Basic Plan") and
certain participants in the defined benefit plans listed on Schedule A
previously merged into the Basic Plan (The "Predecessor Plans") and has been
established primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees.
2. Eligibility. Eligibility for participation is limited to key employees of
Summit Bancorp and its subsidiary and parent corporations now existing or
hereinafter formed or acquired who are responsible for the continued growth of
the business and who are selected for participation (a "Participant") by the
Compensation Committee of the Board of Directors of Summit Bancorp. (the
"Compensation Committee") in its absolute discretion. The Compensation Committee
may in its absolute discretion place limitations, restrictions and any other
terms and conditions it determines to be advisable on the participation of an
individual Participant including conditions governing the duration of
participation. The Compensation Committee may in its discretion terminate the
participation of any Participant at any time for any reason.
3. Benefit.
(a) The benefit which Summit Bancorp (the "Corporation") shall pay to a
Participant or such Participant's beneficiaries under this Plan shall equal the
excess, if any, of (y) over (z) where:
(y) is the benefit which would be payable to such Participant or
beneficiaries under the Basic Plan, and, where applicable to a
particular Participant, a Predecessor Plan (i) if the definition of
Compensation in the Basic Plan and any applicable Predecessor Plan
included Bonus Payments (as defined at Section 3(c) below), and (ii)
if the provisions of the Basic Plan and any applicable Predecessor
Plan were administered without regard to the special limitations set
forth in Sections 415 and 401(a)(17) (or any successor provisions) of
the Internal Revenue Code of 1986, as amended ("Code)"; and
(z) is the total limited benefit which is payable to such Participant or
beneficiaries under (i) the Basic Plan, and any Predecessor Plan
applicable to a particular Participant (ii) the Corporation's
Retirement Restoration Plan, (iii) the Corporation's Supplemental
Retirement Plan and (iv) any agreement between the Participant and the
Corporation or other participating employer in the Basic Plan (whether
executed prior or subsequent to the adoption of this Plan or any other
plan of the Corporation) which provides for a payment of a retirement
benefit in addition to any benefit payable by the Basic Plan and which
states in specific terms that the Participant or his or her
beneficiaries shall not be entitled to the benefits payable under such
agreement in addition to any benefit payable under this Plan or under
any plan of the Corporation ("Limiting Agreement").
(b) Notwithstanding Section 3(a) above, benefits payable to a Participant
or beneficiaries under this Plan, when added to such benefits payable under the
Basic Plan, any applicable Predecessor Plan, the Corporation's Supplemental
Plan, the Corporation's Restoration Plan and any Limiting Agreement shall be
limited to sixty percent (60%) of the amount which would constitute such
Participant's Average Compensation under the Basic Plan if the Basic Plan
included Bonus Payments in its definition of Average Compensation.
<PAGE>
(c) "Bonus Payment" means a cash amount paid under the Corporation's
Incentive Plan adopted January 20, 1982, Management Incentive Plan adopted as of
January 1, 1998 ("MIP") or any plan adopted by the Corporation as a successor
plan to the MIP (whether a direct successor or a successor to a successor)
(collectively, "Bonus Plans"); provided, however, that:
(1) in the event aggregate Bonus Payments with respect to a particular
calendar year determined in accordance with the foregoing exceed the amount that
the Bonus Plans in effect at the time state to be the maximum amount payable
with respect to the particular calendar year under the terms of such Bonus Plans
("Maximum Amounts"), recognizing that the Compensation Committee may have, and
may exercise, discretion under one or more of the Bonus Plans to make Bonus
Payments which in the aggregate exceed the Maximum Amounts, then in such case
"Bonus Payments" with respect to a particular calendar year shall mean the
relevant Maximum Amount;
(2) in the event the participation in the Plan of a particular
Participant terminates (whether due to a termination of employment, retirement,
an expiration of a term of participation or otherwise) after earning a cash
amount under a Bonus Plan but prior to the payment thereof, for purposes of the
definition of Compensation and Average Compensation in the Basic Plan as
modified and used in this Plan such cash amount shall constitute a Bonus Payment
in January of the calendar year which next follows the calendar year with
respect to which the cash amount was earned;
(3) in the event that application of the foregoing provisions and
provisos of this Section 3(c) would result in Bonus Payments with respect to
more than five full calendar years being included in the calculation of
Compensation and Average Compensation for purposes of this Plan then only the
Bonus Payments for the five full calendar years which result in the highest
Average Compensation shall be used in the calculation of Compensation and
Average Compensation; and
(4) in the event that application of the foregoing provisions and
provisos of this Section 3(c) would result in:
(i) Bonus Payments with respect to more than five calendar years
being included in the calculation of Compensation and Average Compensation, the
Benefits Committee (as defined at Section 7 below) shall have the absolute
discretion to exclude some of such Bonus Payments from such calculation, or to
allocate some or all of such Bonus Payments to months of service other than the
months of service in which particular Bonus Payments were made, in order to
achieve an averaging effect with respect to Bonus Payments which in its opinion
is equitable in the context of the methods and procedures of the Basic Plan and
this Plan; or
(ii) Bonus Payments with respect to less than five calendar years
being included in the calculation of Compensation and Average Compensation, the
Benefits Committee shall have the absolute discretion, but not the obligation,
to include Bonus Payments in such calculation that would otherwise be excludable
if the Benefits Committee determines such to be equitable in the context of the
methods and procedures of the Basic Plan and this Plan and the purposes of this
Plan.
4. Form and Timing of Benefits. Payments of benefits under this Plan shall be
coincident in time and form with the payment of the benefit paid to, or on
behalf of, a Participant or beneficiary by the Basic Plan, unless otherwise
determined by the Benefits Committee. Any benefit payments under this Plan shall
be net of any applicable withholding obligations.
-2-
<PAGE>
5. Vesting. Subject to the right of the Corporation to discontinue the Plan as
provided in Section 10, a Participant will be vested in such Participant's right
to receive benefits under this Plan in the same manner and to the same extent as
provided under the Basic Plan but the amount of such benefits payable to a
Participant under this Plan shall be determined as of the retirement date of the
particular Participant. Notwithstanding the foregoing, however, if the
Corporation determines in its absolute discretion that a Participant or former
Participant otherwise entitled to receive benefits under this Plan has engaged
in any activities which, in the opinion of the Corporation, are detrimental to
the interests of the Corporation or any of its subsidiaries, this Plan shall be
void and have no force or effect with respect to such Participant or former
Participant, such Participant or former Participant shall have no rights under
this Plan and all rights of the Participant or former Participant under this
Plan shall terminate, be forfeited and cease to exist.
6. Funding. Benefits under this Plan shall be paid from the general assets of
the Corporation and other participating employers in the Basic Plan. This plan
is intended to be unfunded for purposes of Title I of the Employee Retirement
Income Security Act of 1974, and is not intended to meet the qualification
requirements of Section 401 of the Code. No Participant or beneficiary shall be
entitled to receive any payment for benefits under this Plan from the qualified
Trust maintained for the Basic Plan. The rights of any Participant or
beneficiary shall be no greater than those of any other unsecured creditor of
the Corporation. Notwithstanding the foregoing, the Corporation or other
participating employers in the Basic Plan may, by agreement with one or more
trustees to be selected by the Corporation or other participating employers in
the Basic Plan, create a grantor trust on such terms as the Corporation or other
participating employers in the Basic Plan shall determine to make payments to
persons entitled to benefits under this Plan in accordance with its terms.
7. Operation and Administration. This Plan shall be operated under the direction
of the Compensation Committee and administered by the Benefits Committee of
Summit Bancorp. (the "Benefits Committee"). The Benefits Committee shall have
the discretion to interpret the terms of the Plan and to make benefit
determinations thereunder. The Benefits Committee's decision in any matter
involving the interpretation and application of this Plan shall be final and
binding, subject to the authority of the Board of Directors and the Compensation
Committee to overrule any such decision.
8. Non-Assignability. Except to the extent required by law, no assignment of the
rights and interests of a Participant or beneficiary under this Plan will be
permitted nor shall such rights be subject to attachment or other legal
processes for debt.
9. Definitions. All terms under this Plan shall have the same meaning as those
terms used in the Basic Plan, unless otherwise herein defined.
10. Amendment and Discontinuance. The Corporation expects to continue this Plan
indefinitely but reserves the right to amend or discontinue it if, in its sole
judgment, such a change is deemed necessary or desirable. Any amendment or
discontinuance of the Plan shall be adopted by the Board of Directors of the
Corporation by resolution of the Board of Directors at a regular meeting of the
Board of Directors or special meeting called for such purpose or by unanimous
written consent.
11. State Law. The interpretation of this Plan shall be pursuant to the laws of
the State of New Jersey.
12. Effective Date. This Plan shall be effective as of July 15, 1998, and shall
apply to only those individuals who are selected for participation under Section
2 and who retire on or after such date.
-3-
Financial Highlights
<TABLE>
<CAPTION>
Percent Change
--------------
(Dollars in millions, except per share data) 1998 1997 1996 '98 vs.'97 '97 vs.'96
- -------------------------------------------- ---- ---- ---- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31
Before non-recurring items:
Net income $ 465.8 $ 424.7 $ 360.4 9.7% 17.8%
Net income per common share:
Basic 2.66 2.43 2.15 9.5 13.0
Diluted 2.63 2.39 2.12 10.0 12.7
After non-recurring items:
Net income 465.8 371.0 283.7 25.6 30.8
Net income per common share:
Basic 2.66 2.12 1.69 25.5 25.4
Diluted 2.63 2.09 1.67 25.8 25.1
Per common share:
Cash dividends declared 1.17 1.02 0.90 14.7 13.3
Book value 15.67 14.79 13.61 5.9 8.7
Market value 43.69 52.88 29.17 (17.4) 81.3
---------- ---------- ---------- ------- ------
Balance Sheet Data at December 31
Total assets $33,101.3 $29,964.2 $27,767.3 10.5% 7.9%
Total deposits 23,145.1 22,329.4 21,629.5 3.7 3.2
Total loans 21,126.6 18,888.4 17,386.1 11.8 8.6
Allowance for loan losses 322.8 296.5 280.6 8.9 5.7
Shareholders' equity 2,722.4 2,612.4 2,290.8 4.2 14.0
---------- ---------- ---------- ------- ------
Income Statement Data
Net interest income $ 1,173.8 $ 1,145.1 $ 1,053.3 2.5% 8.7%
Provision for loan losses 66.0 59.1 64.0 11.7 (7.7)
Non-interest income 350.2 301.9 260.0 16.0 16.1
Non-interest expense, excluding non-recurring items 782.8 733.7 693.8 6.7 5.8
Non-recurring items, net of taxes -- 53.7 76.7 (100.0) (29.9)
Net income 465.8 371.0 283.7 25.6 30.8
---------- ---------- ---------- ------- ------
Consolidated Ratios
Before non-recurring items:
Return on average assets 1.51% 1.47% 1.32%
Return on average common equity 17.50 17.08 16.48
After non-recurring items:
Return on average assets 1.51 1.28 1.04
Return on average common equity 17.50 14.92 12.95
Efficiency ratio 51.41 50.28 52.11
Allowance for loan losses to year-end loans 1.53 1.57 1.61
Non-performing loans to year-end loans 0.41 0.45 0.80
---------- ---------- ----------
Capital Ratios
Average equity to average assets 8.60% 8.61% 8.12%
Tier I capital to average assets (leverage) 8.00 8.76 7.73
Tier I capital to risk-adjusted assets 10.86 12.64 11.68
Total capital to risk-adjusted assets 12.72 14.83 14.17
---------- ---------- ----------
Other Data (at year end)
Number of banking offices 447 426 423
Number of employees (full-time equivalent) 8,665 8,566 8,402
---------- ---------- ----------
</TABLE>
<PAGE>
Summit Bancorp and Subsidiaries 17
Financial Review
The Financial Review should be read in conjunction with the Consolidated
Comparative Average Balance Sheets on pages 22 and 23, and the Consolidated
Financial Statements and Notes beginning on page 36, and the Summary of Selected
Consolidated Financial Data on page 56.
Overview
Summit Bancorp (the "Company"), with assets of $33.1 billion at December 31,
1998, ranks as one of the 30 largest banking companies in the United States. In
January 1998, Standard and Poors added the Company to the S&P 500 Index. Being
part of the S&P 500 Index provides enhanced shareholder value through broadened
market visibility and increased common stock liquidity. A number of acquisitions
were made in 1998 to expand fee-based revenues and establish new banking
markets.
During 1998, the Company broadened its insurance brokerage and consulting
business beyond the December 1997 acquisitions of Corporate Dynamics and
Philadelphia Benefits Corp. In August 1998, W.M. Ross and Company, Inc., one of
the largest privately held property and casualty insurance brokerage firms in
New Jersey was acquired. This acquisition was followed by the purchase, in
October 1998, of Madison Consulting Group, a privately held employee benefits
brokerage firm specializing in the management of school district, municipality,
and government entity employee benefits programs.
During 1998, Summit Bancorp expanded its banking presence to Connecticut.
In November 1998, NSS Bancorp ("NSS") was acquired with assets of $655 million
and eight banking offices located in Fairfield County. In addition, a definitive
merger agreement was signed, in August 1998, to acquire New Canaan Bank and
Trust Company ("New Canaan"), with assets of $182 million and four banking
offices, also located in Fairfield County. It is expected that this acquisition
will be completed in the first quarter of 1999, subject to appropriate
approvals.
On February 18, 1999, the Company announced that it entered into a
definitive agreement to acquire Prime Bancorp, a bank holding company with
approximately $1.0 billion in assets and 27 branches located in the greater
Philadelphia region. The transaction was valued at approximately $292.0 million.
It is anticipated that the acquisition will be accounted for as a purchase.
Summary of Performance
Net income for the year ended December 31, 1998, was $465.8 million, compared to
$371.0 million in 1997. Net income per diluted share for 1998 was $2.63,
compared to $2.09 in 1997.
Net income for 1997 included non-recurring charges of $83.0 million ($53.7
million, after tax) resulting from the acquisitions of Collective Bancorp, Inc.
("Collective") and B.M.J. Financial Corp. ("BMJ"). Excluding the effect of these
non-recurring charges, net income for 1997 amounted to $424.7 million, compared
to $465.8 million in 1998, an increase of $41.1 million, or 9.7%. Excluding
non-recurring charges, earnings per diluted share increased 10.0% to $2.63 in
1998, from $2.39 in 1997.
Return on average assets, excluding the effect of non-recurring charges,
improved to 1.51% in 1998, compared to 1.47% the previous year and return on
average common equity rose to 17.50%, versus 17.08% in 1997. The efficiency
ratio increased to 51.41%, from 50.28% in 1997.
[GRAPHIC]
In the printed version of the document, a bar graph appears which depicts the
following plot points:
NET INCOME BEFORE NON-RECURRING ITEMS (IN MILLIONS)
YEAR
- ----
1994 249.548
1995 300.412
1996 360.419
1997 424.745
1998 465.819
The chart below presents the growth in net income before non-recurring
items over the past five years.
Average total loans amounted to $19.8 billion for 1998, an increase of $1.3
billion, or 7.1%, from 1997. The commercial and consumer loan portfolios
accounted for $967.2 million and $595.7 million, respectively, of the overall
loan increase. These increases were partially offset by a reduction in
residential mortgage loans. Net interest income rose $28.7 million, or 2.5%, to
$1.2 billion, primarily attributable to the growth in the loan portfolios.
Non-interest income rose $48.3 million, or 16.0%, in 1998 to $350.2
million. All major categories of fee revenue increased in 1998, with the most
significant growth in the areas of investment and insurance fees, which
increased $23.5 million, or 80.3%, from 1997. The growth in this area resulted
from acquisitions of insurance brokerage and consulting firms and the
cross-selling of investment products. Non-interest expenses, excluding
non-recurring items, increased $49.1 million, or 6.7%, to $782.8 million.
Approximately $19.0 million of these expenses were related to recent
acquisitions.
Asset quality continued to improve in 1998, evidenced by the decrease in
the ratio of non-performing assets to total loans and other real estate owned
("OREO"), from 0.53% in 1997 to 0.42% in 1998. The provision for loan losses was
increased $6.9 million to $66.0 million, as a result of the growth in the loan
portfolios.
<PAGE>
18
Financial Condition
Interest-Earning Assets and
Interest-Bearing Liabilities:
Average interest-earning assets totaled $29.2 billion in 1998, an increase of
$2.0 billion, or 7.4%, compared to 1997. On average, loans increased $1.3
billion, or 7.1%, to $19.8 billion, while investment securities increased $752.0
million, or 8.7%, to $9.4 billion. The growth in interest-earning assets was
funded by increases in interest-bearing liabilities, demand deposits, and
shareholders' equity.
The average rate earned on interest-earning assets decreased 16 basis
points from 7.64% in 1997 to 7.48% in 1998. The decrease was generally the
result of the lower interest-rate environment. Three key rates affecting
investment securities, loan portfolios, and borrowed funds are the prime rate,
one-month, and three-month LIBOR. The average prime rate decreased from 8.44% in
1997 to 8.35% in 1998 and the one-month and three-month LIBOR rates decreased
from 5.64% and 5.74% in 1997 to 5.57% and 5.56% in 1998, respectively.
Average interest-bearing liabilities amounted to $23.4 billion in 1998, an
increase of $1.5 billion, or 6.7%, compared to 1997. The increase resulted from
expanded use of alternative funding sources primarily to support earning asset
growth, partially offset by a slight decrease in interest-bearing deposits. The
average balance of borrowed funds, including long-term debt, increased $1.7
billion, or 42.9%, in 1998, primarily due to increases in long-term repurchase
agreements and Federal Home Loan Bank ("FHLB") borrowings. The average interest
rate paid on interest-bearing liabilities increased 8 basis points to 4.28% in
1998, as a result of the change in the deposit mix and reliance on more
expensive borrowed funds.
Securities:
Securities available for sale are investments that may be sold in response to
changing market and interest rate conditions or for other business purposes. At
December 31, 1998, available-for-sale investments amounted to $4.0 billion, a
decrease of $1.1 billion, or 21.8%, from the 1997 year-end balance. During 1998,
proceeds from maturities and sales of these securities were invested in
held-to-maturity securities to reduce the Company's exposure to market value
adjustments to equity.
While securities available for sale decreased from year-to-year, the
average balance increased to $4.7 billion in 1998, from $3.8 billion in 1997, an
increase of $856.9 million, or 22.6%. The available-for-sale portfolio consists
of U.S. Government and Federal agency securities, equity securities, and other
securities, primarily corporate collateralized mortgage obligations ("CMOs").
U.S. Government and Federal agency securities, the largest segment of the
portfolio, averaged $3.9 billion in 1998, compared to $3.2 billion in 1997.
As a result of the lower interest-rate environment, the average yield
earned on the available-for-sale portfolio decreased 11 basis points, from 6.46%
in 1997, to 6.35% in 1998. Sales of these securities aggregated $1.3 billion in
1998, generating a gain of $6.6 million, compared to sales of $820.2 million and
a gain of $5.6 million in 1997. Maturities of investments available for sale
amounted to $2.5 billion in 1998 and $1.0 billion in 1997.
<PAGE>
At December 31, 1998, securities available for sale had net unrealized
gains of $20.0 million compared to $35.3 million, at the end of the prior year.
Securities held to maturity, which are carried at amortized historical
cost, are investments for which there is the positive intent and ability to hold
to maturity. At December 31, 1998, securities held to maturity totaled $6.0
billion, an increase of $1.9 billion, or 44.7%, from the prior year balance of
$4.2 billion. The increase was primarily the result of re-investing cash flows
from investments available for sale to investments held to maturity. The average
balance of held-to-maturity investments decreased $92.1 million, or 1.9%, to
$4.8 billion in 1998 from $4.9 billion in 1997.
The portfolio of these investments consists primarily of U.S. Government
and Federal agency securities and corporate CMOs. In 1998, U.S. Government and
Federal agency securities averaged $3.3 billion and corporate CMOs averaged $1.3
billion, compared to 1997 averages of $3.5 billion and $1.1 billion,
respectively.
The average yield earned on this portfolio was 6.36% in 1998, a decrease of
14 basis points, from 6.50% earned in 1997, resulting from the lower
interest-rate environment.
The market value of the held-to-maturity portfolio at year-end 1998 was
$6.0 billion, resulting in a net unrealized gain of $15.0 million. The average
estimated life of these securities adjusted for historical prepayment patterns
on mortgage-backed securities, was 2.8 years at December 31, 1998.
Loans:
The following chart illustrates the growth in average total loans for the past
five years.
[GRAPHIC]
In the printed version of the document, a bar graph appears which depicts the
following plot points:
TOTAL AVERAGE LOANS (IN BILLIONS)
YEAR
- ----
1994 14.120
1995 15.569
1996 17.066
1997 18.452
1998 19.771
<PAGE>
19
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year-End Loans
(In millions) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $5,965 $ 5,009 $ 4,326 $ 4,659 $ 4,455
Lease finance 810 875 579 319 317
Construction and development 382 370 316 437 693
- -----------------------------------------------------------------------------------------------
Commercial 7,157 6,254 5,221 5,415 5,465
Commercial mortgage 2,889 2,704 2,624 2,427 2,868
Residential mortgage 5,719 5,671 5,905 5,331 3,833
Consumer 5,362 4,259 3,636 3,240 2,883
- -----------------------------------------------------------------------------------------------
Total loans $21,127 $18,888 $17,386 $16,413 $15,049
- -----------------------------------------------------------------------------------------------
</TABLE>
Total loans averaged $19.8 billion during 1998, an increase of $1.3
billion, or 7.1%, compared to $18.5 billion in 1997. Growth in the average loan
balance was attributed to increases of $967.2 million in commercial loans,
$595.7 million in consumer loans, and $40.0 million in commercial mortgage
loans, partially offset by a decrease of $283.8 million in residential mortgage
loans. At December 31, 1998, total loans amounted to $21.1 billion, compared to
$18.9 billion the prior year, an increase of $2.2 billion, or 11.8%. The average
yield earned on the loan portfolio was 8.02% in 1998, compared to 8.19% in 1997,
a decrease of 17 basis points.
The commercial loan portfolio, which consists primarily of commercial and
industrial ("C&I") loans, averaged $6.7 billion in 1998, an increase of $967.2
million, or 17.0%, compared to 1997. All major areas of commercial lending
demonstrated substantial growth in 1998. The most significant growth was in
asset-based lending and lending to large corporate customers (larger middle
market credit users with revenues generally in excess of $125 million). C&I
lending generated growth throughout its market area, but was most significant in
the northern region of New Jersey. This portfolio remains diversified with no
industry concentrations greater than 10% of total C&I loans.
The average yield on the commercial loan portfolio decreased 28 basis
points to 8.24% in 1998, from 8.52% the prior year. The lower interest-rate
environment, especially the lower prime and LIBOR rates, and competitive pricing
resulted in the reduced yield on the commercial loan portfolio.
Commercial mortgage loans averaged $2.8 billion for 1998, an increase of
$40.0 million, or 1.4%, from 1997. Generally, these loans represent
owner-occupied or investment properties and complement a broader commercial
lending relationship with the borrower. At December 31, 1998, commercial
mortgage loans amounted to $2.9 billion, an increase of $184.8 million, or 6.8%,
from 1997. The average yield on commercial mortgage loans was 8.43% for 1998,
compared to 8.76% for 1997, a decrease of 33 basis points. Commercial mortgage
loans were significantly impacted by the 108 basis point decline in the five
year treasury note and the shift from floating to fixed rate products.
Residential mortgage loans averaged $5.6 billion, down $283.8 million, or
4.8%, from 1997. Mortgage loans originated in 1998 totaled $1.7 billion, an
increase of 58.4%, from the $1.0 billion originated in 1997. More than one third
of the 1998 originations were to refinance existing mortgage loans. In addition
to originations, $332.0 million of residential mortgage loans were purchased in
1998. In 1998, there were $859.3 million residential mortgages sold, compared to
$444.1 million in 1997. The sale of certain residential mortgages, primarily
fixed-rate loans, into the secondary market is an integral part of the Company's
asset/liability management. Residential mortgage loans held for sale totaled
$183.3 million at December 31, 1998, versus $75.7 million in 1997. The average
yield on residential mortgage loans was 7.28% for 1998 compared to 7.42% for
1997, a decrease of 14 basis points.
Consumer loans averaged $4.6 billion in 1998, an increase of $595.7
million, or 14.7%, from 1997. Most of the growth was generated in the home
equity portfolio which grew $1.0 billion, or 38.4%, to total $3.8 billion in
1998. The growth in home equity loans was enhanced by loan purchases, which
amounted to $743.7 million in 1998. Automobile loans totaled $1.1 billion as of
December 31, 1998, an increase of $35.4 million over 1997. Due to the lower
interest-rate environment and competitive market for these products, the average
yield earned on the consumer loan portfolio declined 11 basis points to 8.35% in
1998, compared to 8.46% earned in 1997.
The following table shows the expected life of total loans at December 31,
1998, and segregates loans with fixed interest rates from those with floating or
adjustable interest rates.
- --------------------------------------------------------------------------------
Loan Maturities
Within 1 to 5 After
(In millions) 1 Year Years 5 Years Total
- --------------------------------------------------------------------------------
Commercial $3,036 $ 3,298 $ 823 $ 7,157
Commercial mortgages 382 1,434 1,073 2,889
Residential mortgages 1,402 2,869 1,448 5,719
Consumer loans 1,233 2,736 1,393 5,362
- --------------------------------------------------------------------------------
Total $6,053 $10,337 $4,737 $21,127
================================================================================
Amount of loans based upon:
Fixed interest rates $2,581 $ 3,112 $1,437 $ 7,130
Floating or adjustable interest rates 3,472 7,225 3,300 13,997
- --------------------------------------------------------------------------------
Total $6,053 $10,337 $4,737 $21,127
================================================================================
<PAGE>
20
Deposits:
Deposits in 1998 averaged $22.1 billion, flat compared to the 1997 average. At
December 31, 1998, total deposits were $23.1 billion, an increase of $815.7
million, or 3.7%, from year-end 1997. This increase occurred in the fourth
quarter and was attributed to the NSS acquisition and the introduction of two
new retail products designed to more aggressively attract deposits. The
Navigator Account is a relationship sweep account that combines banking,
investment, and brokerage services into one account. Millennium Checking
provides free regular checking to new customers until the year 2000. The Company
expects continued growth in these products in 1999.
Interest-bearing deposits averaged $17.6 billion in 1998, down slightly
from $17.8 billion in 1997. Average demand deposits were $4.5 billion for 1998,
an increase of $373.4 million, or 9.0%, from the prior year. Growth in business
checking accounts generated most of the increase.
The following chart illustrates the growth in average demand deposits for
the past five years.
[GRAPHIC]
In the printed version of the document, a bar graph appears which depicts the
following plot points:
AVERAGE DEMAND DEPOSITS (IN BILLIONS)
YEAR
- ----
1994 3.375
1995 3.482
1996 3.857
1997 4.131
1998 4.505
Savings deposits, which include interest-bearing checking, money market,
and savings accounts, decreased $174.7 million, or 1.8%, to an average of $9.5
billion in 1998. The average cost of savings deposits decreased 5 basis points
to 2.58% in 1998, compared to 2.63% in 1997. Time deposits, which consist
primarily of retail certificates of deposit, decreased $235.7 million, or 3.2%,
in 1998 to an average of $7.1 billion. The average cost of time deposits
increased 9 basis points to 5.29% in 1998 from 5.20% in 1997.
Savings and time deposits continued to be negatively impacted by the low
rate environment, where customers looked for higher yielding returns and other
alternative investment products, such as mutual funds, annuities, and equity
securities.
Commercial certificates of deposit $100,000 and over are primarily used as
an additional funding source to support balance sheet growth, and as an
alternative to other borrowed funds. These deposits averaged $1.0 billion during
1998, an increase of $120.7 million, or 13.5%, from 1997. The average cost of
these deposits decreased 8 basis points during the year to 5.33% compared with
5.41% in 1997.
Other Borrowed Funds:
Other borrowed funds are mainly comprised of repurchase agreements, Federal
funds purchased, FHLB borrowings, and other short-term borrowings, including
commercial paper. During 1998, the average balance of other borrowed funds
increased $535.2 million, or 16.8%, to an average of $3.7 billion. The balance
of other borrowed funds was $3.2 billion at December 31, 1998, a decrease of
$208.0 million, or 6.1%, from the prior year. The average cost of other borrowed
funds decreased 12 basis points during the year to 5.38% compared with 5.50% in
1997.
These borrowings were used to fund asset growth not supported by deposit
generation. As rates declined, borrowings were shifted from this category to
long-term debt to match fund loans to stabilize interest rate risk. Commercial
paper, a funding source for the Parent Corporation, averaged $48.1 million
during 1998, an increase of $2.7 million, or 5.9%, from 1997. The average cost
of commercial paper decreased 10 basis points to 5.32% in 1998 from 5.42% in
1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Selected Other Borrowed Funds
1998 1997 1996
--------------- -------------- ---------------
(In millions) Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under agreements to repurchase:
At December 31 $1,063 4.78% $2,490 5.42% $2,263 5.36%
Average during year 1,599 5.16 2,427 5.44 2,082 5.13
Maximum month-end balance during year 1,825 -- 2,780 -- 2,299 --
Federal funds purchased:
At December 31 $1,003 4.94% $ 655 5.84% $ 200 6.22%
Average during year 1,068 5.65 473 6.02 591 5.84
Maximum month-end balance during year 1,352 -- 699 -- 1,187 --
FHLB Borrowings:
At December 31 $ 910 5.53% -- -- -- --
Average during year 701 6.34 -- -- -- --
Maximum month-end balance during year 1,335 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
21
Long-Term Debt:
During 1998, long-term debt also provided a primary source of funding for asset
growth. The average balance of long-term debt was $2.1 billion in 1998, an
increase of $1.2 billion over 1997. Due to the lower interest-rate environment,
the average cost of long-term debt decreased to 6.11% in 1998, from 7.03% in
1997.
At December 31, 1998, long-term debt totaled $3.6 billion, an increase of
$2.3 billion, compared to the prior year. Repurchase agreements accounted for
$1.3 billion of the increase, with the remaining $1.0 billion from FHLB
borrowings. The weighted average contractual maturities of repurchase agreements
and FHLB borrowings at December 31, 1998, were 4.0 years and 3.7 years,
respectively.
Certain long-term debt agreements contain limitations on the amount of
additional funded debt that can be assumed. At December 31, 1998, under the most
restrictive covenants, the amount of additional funded debt that could have been
created was $728.5 million. At December 31, 1998, long-term debt totaling $144.7
million qualified as Tier II capital for risk-based capital purposes.
In November 1998, two of the Company's banking subsidiaries, Summit Bank,
NJ and Summit Bank, PA, executed a distribution agreement providing for the
possible issuance, from time-to-time, of senior and subordinated bank notes to a
maximum of $3.75 billion on an underwritten or agency basis. Terms of the notes
will be set at time of issue, and may range in maturity from seven days to
thirty years from date of issue.
Shareholders' Equity and Dividends:
Shareholders' equity at December 31, 1998, was $2.7 billion, an increase of
$110.0 million, or 4.2%, compared to the prior year. Book value per common share
rose to $15.67, compared to $14.79 at December 31, 1997. The increase in
shareholders' equity and book value per share resulted from net income, less
common stock dividends, and the effect of the stock buyback.
The board of directors, in April 1998, authorized a stock buyback program,
providing for the repurchase of up to five percent, or 8.9 million shares, of
the Company's common stock. In 1998, 3.3 million shares of common stock were
purchased under this program. In addition, 4.7 million shares were purchased in
1998 for completed and announced acquisitions. Treasury stock amounted to $169.9
million at December 31, 1998, representing 3.9 million shares of common stock.
The following chart illustrates the growth in total average equity for the
past five years.
[GRAPHIC]
In the printed version of the document, a bar graph appears which depicts the
following plot points:
TOTAL AVERAGE EQUITY (IN BILLIONS)
YEAR
- ----
1994 1.768
1995 1.966
1996 2.212
1997 2.487
1998 2.661
Continued earnings growth prompted the board of directors to increase the
regular quarterly dividend on common stock. In the second quarter of 1998, the
dividend rate was raised from $0.27 per share to $0.30 per share. Dividends
declared on common stock totaled $1.17 per share for 1998, compared to $1.02 for
1997, an increase of 14.7%. The dividend payout ratio was 44.0% in 1998 and
42.0% in 1997.
The common stock of Summit Bancorp is traded on the New York Stock Exchange
under the symbol SUB. The quarterly market price ranges and dividends declared
per common share for the last two years are shown below.
Cash
Trade Price Dividends
----------------------
High Low Close Declared
- -------------------------------------------------------------------
1998 Quarter Ended
December 31 $45.00 $30.75 $43.69 $0.30
September 30 49.44 32.75 37.50 0.30
June 30 53.50 44.75 47.50 0.30
March 31 53.88 45.88 50.13 0.27
- -------------------------------------------------------------------
1997 Quarter Ended
December 31 $53.38 $38.38 $52.88 $0.27
September 30 45.31 33.58 44.00 0.27
June 30 35.08 28.58 33.42 0.24
March 31 33.33 28.50 29.17 0.24
- -------------------------------------------------------------------
The Company and its bank subsidiaries are subject to various regulatory
capital requirements administered by the Federal Reserve Board and Federal
Deposit Insurance Corporation. For additional information on regulatory capital,
see Note 20 of the Notes to Consolidated Financial Statements.
<PAGE>
22
Average Balance Sheets with Resultant Interest and Rates
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(Tax-equivalent basis, dollars in millions, 1998 1997
not covered by independent auditors' report) 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 $ 14.4 $ 0.9 6.07% $ 73.2 $ 4.1 5.58%
Interest-bearing deposits with banks 22.9 1.4 6.19 13.5 0.7 5.45
Trading account securities 21.2 1.3 6.21 34.0 2.5 7.39
Securities available for sale:
U.S. Government and Federal agencies 3,865.8 244.0 6.31 3,219.5 208.9 6.49
States and political subdivisions 6.9 0.4 6.41 18.1 0.8 4.28
Other securities 779.9 50.8 6.51 558.1 35.4 6.34
- --------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 4,652.6 295.2 6.35 3,795.7 245.1 6.46
- --------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Government and Federal agencies 3,286.0 208.2 6.34 3,514.8 228.3 6.49
States and political subdivisions 165.5 14.9 9.01 206.9 18.9 9.15
Other securities 1,309.8 79.8 6.09 1,131.7 68.2 6.02
- --------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 4,761.3 302.9 6.36 4,853.4 315.4 6.50
- --------------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial 6,652.3 548.0 8.24 5,685.1 484.3 8.52
Commercial mortgage 2,828.7 238.5 8.43 2,788.7 244.3 8.76
Residential mortgage 5,641.2 410.7 7.28 5,925.0 439.9 7.42
Consumer 4,648.8 388.3 8.35 4,053.1 342.8 8.46
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 19,771.0 1,585.5 8.02 18,451.9 1,511.3 8.19
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 29,243.4 2,187.2 7.48 27,221.7 2,079.1 7.64
- --------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 1,021.8 1,035.8
Allowance for loan losses (311.1) (299.2)
Other assets 980.9 924.3
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $30,935.0 $28,882.6
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 9,458.3 243.7 2.58 $ 9,633.0 253.0 2.63
Time deposits 7,087.3 375.2 5.29 7,323.0 380.8 5.20
Commercial certificates of deposit $100,000 and over 1,012.6 54.0 5.33 891.9 48.2 5.41
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 17,558.2 672.9 3.83 17,847.9 682.0 3.82
- --------------------------------------------------------------------------------------------------------------------------------
Other borrowed funds 3,721.2 200.2 5.38 3,186.0 175.2 5.50
Long-term debt 2,100.8 128.3 6.11 887.2 62.4 7.03
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 23,380.2 1,001.4 4.28 21,921.1 919.6 4.20
- --------------------------------------------------------------------------------------------------------------------------------
Demand deposits 4,504.8 4,131.4
Other liabilities 388.7 343.2
Shareholders' equity 2,661.3 2,486.9
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $30,935.0 $28,882.6
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income (tax-equivalent basis) 1,185.8 3.20% 1,159.5 3.44%
Tax-equivalent basis adjustment (12.0) (14.4)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,173.8 $1,145.1
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income as a percent of interest-earning assets
(tax-equivalent basis) 4.05% 4.26%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Average loan balances and rates include non-accruing loans.
<PAGE>
Summit Bancorp and Subsidiaries 23
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
Average Average Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 78.2 $ 5.4 6.95% $ 191.9 $ 11.5 5.97% $ 206.9 $ 8.0 3.88% $ 316.2 $ 10.2 3.23%
14.4 0.8 5.72 11.1 0.6 5.81 16.9 0.6 3.72 22.8 0.7 3.06
27.4 1.5 5.44 34.8 2.1 5.89 28.9 0.9 2.94 32.7 1.5 4.44
2,050.8 130.4 6.36 868.3 52.8 6.08 533.9 31.6 5.92 440.2 19.4 4.41
6.4 0.3 3.77 9.3 0.6 6.89 536.2 30.6 5.70 272.0 14.6 5.39
567.7 35.7 6.29 282.3 16.2 5.74 532.3 27.6 5.19 464.2 21.5 4.62
- ------------------------------------------------------------------------------------------------------------------------------------
2,624.9 166.4 6.34 1,159.9 69.6 6.00 1,602.4 89.8 5.60 1,176.4 55.5 4.72
- ------------------------------------------------------------------------------------------------------------------------------------
3,850.8 248.7 6.46 4,712.1 314.1 6.67 4,192.9 262.2 6.25 4,030.6 277.7 6.89
266.3 24.0 9.01 333.8 31.8 9.55 392.9 38.9 9.91 416.7 43.8 10.51
1,448.1 86.7 5.98 1,955.7 117.2 5.99 1,896.4 106.1 5.60 971.8 55.6 5.72
- ------------------------------------------------------------------------------------------------------------------------------------
5,565.2 359.4 6.46 7,001.6 463.1 6.61 6,482.2 407.2 6.28 5,419.1 377.1 6.96
- ------------------------------------------------------------------------------------------------------------------------------------
5,298.9 442.8 8.36 5,490.4 474.8 8.65 5,318.6 405.5 7.62 5,135.6 362.1 7.05
2,652.2 230.9 8.71 2,232.3 200.2 8.97 2,299.3 189.8 8.25 2,338.4 189.7 8.11
5,651.0 421.6 7.46 4,805.2 363.4 7.56 3,773.8 269.2 7.13 3,226.4 261.8 8.12
3,463.7 293.2 8.47 3,040.6 263.9 8.68 2,728.7 220.7 8.09 2,604.0 215.2 8.26
- ------------------------------------------------------------------------------------------------------------------------------------
17,065.8 1,388.5 8.14 15,568.5 1,302.3 8.36 14,120.4 1,085.2 7.69 13,304.4 1,028.8 7.73
- ------------------------------------------------------------------------------------------------------------------------------------
25,375.9 1,922.0 7.57 23,967.8 1,849.2 7.72 22,457.7 1,591.7 7.09 20,271.6 1,473.8 7.27
- ------------------------------------------------------------------------------------------------------------------------------------
1,284.4 1,146.1 1,190.1 1,111.0
(298.3) (316.0) (362.6) (368.1)
867.5 964.8 989.2 914.1
- ------------------------------------------------------------------------------------------------------------------------------------
$27,229.5 $25,762.7 $24,274.4 $21,928.6
- ------------------------------------------------------------------------------------------------------------------------------------
$ 9,245.6 236.6 2.56 $ 9,092.4 240.8 2.65 $ 9,578.1 213.9 2.23 $ 8,917.2 211.9 2.38
7,294.3 374.5 5.13 6,967.6 350.9 5.04 5,736.6 231.2 4.03 6,119.2 266.4 4.35
892.0 47.9 5.37 635.0 38.6 6.08 460.1 18.9 4.10 324.5 9.4 2.89
- ------------------------------------------------------------------------------------------------------------------------------------
17,431.9 659.0 3.78 16,695.0 630.3 3.78 15,774.8 464.0 2.94 15,360.9 487.7 3.17
- ------------------------------------------------------------------------------------------------------------------------------------
2,947.0 155.5 5.28 2,730.9 153.7 5.63 2,436.7 99.9 4.10 1,184.1 41.7 3.52
430.3 39.2 9.10 507.0 38.2 7.53 501.8 35.8 7.14 395.0 29.5 7.47
- ------------------------------------------------------------------------------------------------------------------------------------
20,809.2 853.7 4.10 19,932.9 822.2 4.12 18,713.3 599.7 3.20 16,940.0 558.9 3.30
- ------------------------------------------------------------------------------------------------------------------------------------
3,856.7 3,482.2 3,374.7 3,071.1
351.4 381.9 418.8 292.1
2,212.2 1,965.7 1,767.6 1,625.4
- ------------------------------------------------------------------------------------------------------------------------------------
$27,229.5 $25,762.7 $24,274.4 $21,928.6
- ------------------------------------------------------------------------------------------------------------------------------------
1,068.3 3.47% 1,027.0 3.60% 992.0 3.89% 914.9 3.97%
(15.0) (17.3) (19.4) (21.2)
- ------------------------------------------------------------------------------------------------------------------------------------
$1,053.3 $1,009.7 $ 972.6 $ 893.7
- ------------------------------------------------------------------------------------------------------------------------------------
4.21% 4.28% 4.42% 4.51%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
24
Results of Operations
Net Interest Income:
Interest income on a tax-equivalent basis was $2.2 billion in 1998, an increase
of $108.1 million, or 5.2%, compared to 1997. This increase was due to the
growth in interest-earning assets, partially offset by a reduction in yield
earned on these portfolios. On average, interest-earning assets increased $2.0
billion, or 7.4%, to $29.2 billion. Growth in the loan and investment portfolios
contributed $161.2 million to net interest income offset by a $49.4 million
reduction in rates. The average yield on interest-earning assets was 7.48% for
1998, compared to 7.64% for 1997, a decrease of 16 basis points. The decrease
was generally the result of maturing and floating-rate assets with higher rates
reinvested at lower yields.
Interest expense was $1.0 billion for 1998, an increase of $81.8 million,
or 8.9%, from a year ago. On average, interest-bearing liabilities increased
$1.5 billion, or 6.7%, resulting from increases in long-term debt and other
borrowed funds, partially offset by a modest decline in interest-bearing
deposits. The increase in other borrowed funds and long term debt accounted for
a $98.9 million increase in interest expense, offset by a $8.0 million benefit
of lower rates. The average cost of interest-bearing liabilities was 4.28% in
1998, an increase of 8 basis points from 4.20% in 1997. The increased rate
resulted from a shift into higher-yielding deposit instruments, as well as a
greater reliance on borrowed funds and long-term debt as sources of funding.
Net interest income on a tax-equivalent basis amounted to $1.2 billion in
1998, up $26.3 million, or 2.3%, compared to 1997. Net interest spread on a
tax-equivalent basis declined 24 basis points to 3.20% for the year, compared to
3.44% earned in 1997. Net interest margin decreased to 4.05% for 1998, compared
to 4.26% in 1997. The stock repurchase program, although accretive to earnings
per share, had a slight negative impact to net interest margin.
New deposit products are being promoted which have been designed to reduce
the need for more costly funding sources. Based on a flat to down interest-rate
environment, the trend of narrowing interest spread and margin is likely to
continue into 1999, but at a slower pace.
The accompanying Rate/Volume Table presents an analysis of the impact on
interest income and interest expense resulting from changes in average volumes
and rates over the past two years. Changes that are not due to volume or rate
have been allocated proportionally to both, based on their relative absolute
values.
Non-Interest Income:
Non-interest income, including securities gains, amounted to $350.2 million in
1998, compared to $301.9 million the prior year, an increase of $48.3 million,
or 16.0%. Increases were realized in all categories, with acquisitions of
insurance businesses contributing approximately $15.0 million to the growth.
Service charges on deposit accounts amounted to $125.1 million in 1998, an
increase of $10.6 million, or 9.2%, primarily as a result of new pricing
initiatives on fees for non-sufficient and unavailable funds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/Volume Table Amount of Increase (Decrease)
---------------------------------------------------------------------------
1998 versus 1997 1997 versus 1996
---------------------------------- ----------------------------------
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 $ 80.1 $(16.4) $ 63.7 $ 32.9 $ 8.6 $ 41.5
Commercial mortgage 3.5 (9.3) (5.8) 12.1 1.3 13.4
Residential mortgage (20.9) (8.3) (29.2) 20.6 (2.3) 18.3
Consumer 49.9 (4.4) 45.5 49.9 (0.3) 49.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 112.6 (38.4) 74.2 115.5 7.3 122.8
Securities held to maturity (5.8) (6.7) (12.5) (46.2) 2.2 (44.0)
Securities available for sale 54.4 (4.3) 50.1 75.5 3.2 78.7
Other interest-earning assets (3.8) 0.1 (3.7) -- (0.4) (0.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 157.4 (49.3) 108.1 144.8 12.3 157.1
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits:
Savings deposits (4.5) (4.8) (9.3) 9.9 6.5 16.4
Time deposits (12.3) 6.7 (5.6) 1.4 4.9 6.3
Commercial certificates of deposit $100,000 and over 6.5 (0.7) 5.8 -- 0.3 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits (10.3) 1.2 (9.1) 11.3 11.7 23.0
Other borrowed funds and long-term debt 98.9 (8.0) 90.9 40.5 2.4 42.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 88.6 (6.8) 81.8 51.8 14.1 65.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 68.8 $(42.5) $ 26.3 $ 93.0 $(1.8) $ 91.2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
25
Service and loan fee income increased $5.4 million, or 10.3%, to $57.6
million in 1998. Loan fees increased $5.8 million as a result of loan
originations and gains on sales of mortgage loans into the secondary market.
Partially offsetting the growth in loan fees was a decrease of $3.1 million in
mortgage servicing income, caused by loan prepayments in the serviced portfolio.
Credit card revenues increased $3.1 million.
Non-interest income categories compared to the prior year are presented in
the following table.
- --------------------------------------------------------------------------------
Increase (Decrease)
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 Amount Percent
- --------------------------------------------------------------------------------
Service charges on deposit
accounts $125,145 $114,569 $10,576 9.2%
Service and loan fee income 57,586 52,205 5,381 10.3
Investment and insurance fees 52,659 29,208 23,451 80.3
Trust income 42,854 40,155 2,699 6.7
Other 65,337 60,111 5,226 8.7
- --------------------------------------------------------------------------------
343,581 296,248 47,333 16.0
Securities gains 6,646 5,637 1,009 17.9
- --------------------------------------------------------------------------------
$350,227 $301,885 $48,342 16.0%
- --------------------------------------------------------------------------------
Investment and insurance fees were $52.7 million for the year ended
December 31, 1998, an increase of $23.5 million, or 80.3%, from 1997 levels,
most of which was related to increases in insurance fee revenue. The increase in
insurance fees was primarily attributable to the revenues generated by Corporate
Dynamics and Philadelphia Benefits Corp., acquired in December 1997. Investment
fees increased $8.0 million primarily related to the growth in sales of mutual
funds. Fees from the sales of mutual funds reached $15.1 million in 1998, an
increase of $6.8 million, or 81.6%, from 1997. The large increase was the result
of expanding third party sales of mutual funds, in addition to the Company's
proprietary Pillar Funds(R).
Trust income totaled $42.9 million in 1998, an increase of $2.7 million, or
6.7%, over the prior year. The increase was primarily the result of increased
investment advisory fees, including advisory fees from the Pillar Funds(R).
Assets under trust administration, including corporate debt issue trusteeships,
totaled $29.7 billion at December 31, 1998, compared to $26.3 billion at the end
of the prior year. At December 31, 1998, and 1997, assets under discretionary
management were $9.5 billion and $8.2 billion, respectively. Included in trust
assets are the Pillar Funds(R), which totaled $3.0 billion at December 31, 1998,
an increase of $711.0 million, or 30.7%, from the prior year end.
Other income in 1998 amounted to $65.3 million, an increase of $5.2
million, or 8.7%, compared to the prior year. Included in other income for 1998,
were realized gains of $8.1 million from limited partnership investments. These
gains were largely offset by the $6.8 million decrease in gains from sales of
full service branches and deposits compared to the prior year. The remainder of
the increase was primarily due to the $2.0 million rise in ATM access fees.
For the year ended December 31, 1998, securities gains were $6.6 million,
an increase of $1.0 million, or 17.9%, from 1997. These gains were principally
generated by sales of equity securities.
Non-Interest Expense:
Non-interest expense totaled $782.8 million in 1998, an increase of $49.1
million, or 6.7%, compared to $733.7 million, excluding $83.0 million of
restructuring charges in 1997. The restructuring charges in 1997 were recorded
in conjunction with the acquisitions of Collective and BMJ. Approximately $19.0
million of the 1998 increase was attributable to operating expenses of acquired
companies not included in 1997 results. Excluding these items, the growth in
expense in 1998 was 4.1%.
Non-interest expense categories compared to the prior year are presented in
the following table.
- --------------------------------------------------------------------------------
Increase (Decrease)
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 Amount Percent
- --------------------------------------------------------------------------------
Salaries $308,974 $290,515 $18,459 6.4%
Pension and other employee
benefits 107,659 93,711 13,948 14.9
Furniture and equipment 84,479 78,259 6,220 7.9
Occupancy, net 74,754 72,074 2,680 3.7
Communications 36,799 35,214 1,585 4.5
Amortization of goodwill and
other intangibles 19,630 19,273 357 1.9
Other 150,512 144,645 5,867 4.1
- --------------------------------------------------------------------------------
782,807 733,691 49,116 6.7
Restructuring charges -- 83,000 (83,000) (100.0)
- --------------------------------------------------------------------------------
$782,807 $816,691 $(33,884) (4.1)%
- --------------------------------------------------------------------------------
Salaries expense totaled $309.0 million in 1998, an increase of $18.5
million, or 6.4%, compared to 1997. In addition to annual merit increases,
salaries rose approximately $5.2 million from acquisitions. There were 8,665
full-time equivalent employees at December 31, 1998, compared to 8,566 in 1997,
representing an increase of 1.2%. The Company is focused on linking compensation
with revenue production. As a result of increased revenue growth, commissions
paid increased $9.8 million in 1998. Partially offsetting the increase in
salaries, was the impact of adopting Statement of Position No. 98-1, providing
for the capitalization of $2.7 million of certain salary and benefit costs
associated with internally developed software.
Pension and other employee benefits expense totaled $107.7 million for the
year ended December 31, 1998, an increase of $13.9 million, or 14.9%, from 1997.
In addition to increases related to higher salary expenses, $7.6 million of the
increase was associated with incentive programs and long-term stock performance
awards.
Furniture and equipment expense in 1998 totaled $84.5 million, an increase
of $6.2 million, or 7.9%, from 1997. The increase was primarily due to increases
in leasing expenses associated with computer equipment installed at branches to
support teller and on-line operations, and expanded ATM locations. During 1998,
net occupancy expense increased $2.7 million, or 3.7%, from the prior year. The
increase was mainly attributable to additional rent expense related to expanding
the network of supermarket branches.
<PAGE>
26
Communications expense totaled $36.8 million in 1998, an increase of $1.6
million or 4.5%, compared to 1997. The increase was generally related to
expanded voice and data transmission systems and increased usage to support
on-line operations.
Other expenses, which consist primarily of legal and professional fees, and
advertising and public relations expenses were $150.5 million in 1998, an
increase of $5.9 million, or 4.1%, compared to 1997. Companies acquired since
December 1997, generated $8.2 million of these increased expenses. Partially
offsetting these increases was a decrease in OREO expenses of $5.2 million.
Included in other expenses are $6.0 million and $4.0 million of external costs
related to the Year 2000 remediation, for 1998 and 1997, respectively.
Income Taxes:
Federal and state income tax expense for 1998 were $209.4 million, an increase
of $9.2 million, compared to $200.2 million in 1997. The combined Federal and
state effective income tax rate was 31.0% for 1998 compared to 35.1% for 1997.
The decrease in the effective income tax rate was the result of the
implementation of business strategies, including the reorganization of corporate
entities. In 1998, there were one-time non-taxable distributions from corporate
reorganizations and as a result, it is expected that the effective income tax
rate will increase in 1999.
Lines of Business
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, and Investment Services and
Private Banking. Activities not included in these lines are reflected in
Corporate and Other. Summary financial information for the lines of business for
the years 1998 and 1997, are presented in Note 17 of the Notes to the
Consolidated Financial Statements.
Line of business information is based on accounting practices that conform
to and support the current management structure, and is 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 certain indirect revenues and expenses.
A matched maturity funds transfer pricing methodology is employed to assign
a cost of funds to the earning assets of each business line, as well as to
assign a value of funds to the liabilities of each business line. The provision
for loan losses is based on the historical net charge off ratio for each line of
business. The consolidated effective income tax rate is applied to each line of
business, after consideration of certain permanent differences that can be
allocated to a specific line of business.
Retail Banking:
Retail Banking meets the banking needs of individuals and small businesses.
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. Demand and interest-bearing deposit
accounts and services are provided through branches and automatic teller
machines.
The average balance of loans increased $332.4 million, or 3.1%, from $10.8
billion in 1997, to $11.1 billion in 1998. The increased loan balance was
generated in the consumer lending area. The average balance of residential
mortgages decreased in 1998, as borrowers refinanced their floating-rate loans
into lower cost fixed-rate mortgages, which are generally sold into the
secondary market.
Net interest income decreased $32.3 million, or 3.9%, to $786.4 million in
1998 from $818.7 million in 1997. Interest income increased $14.6 million, or
1.7%, resulting from increases in the loan portfolios. Interest expense
decreased $17.5 million, resulting from the lower cost of deposits. In 1998,
there was a decrease of $64.4 million in the funds transfer price credit. The
reduced credit was the result of the lower benefit received for providing
funding for the other lines of business in the lower interest-rate environment.
The provision for loan losses increased $12.4 million, from $19.2 million
in 1997, to $31.6 million in 1998, as a result of the growth in the loan
portfolios and the increase in charge offs.
Non-interest income, which is comprised primarily of deposit and loan fees,
increased $7.4 million, or 3.9%, in 1998. The increase was basically related to
the new pricing initiatives on fees for non-sufficient and unavailable funds,
and was also due to increased gains from the sales of originated mortgage loans
into the secondary markets. Non-interest expense decreased $5.7 million, or
1.1%, from $536.8 million in 1997 to $531.1 million in 1998.
As a result of the decline in net interest income and the increase in the
loan loss provision, Retail Banking net income of $286.1 million in 1998 was
down slightly from 1997 results of $286.3 million.
Commercial Banking:
Commercial Banking is focused on meeting the banking requirements of large and
middle-market businesses. Commercial loans and mortgages, asset-based lending,
direct and indirect leasing, and corporate finance are actively solicited
through a network of relationship managers. Demand and interest-bearing deposit
accounts and services are provided through the branch network.
Net interest income increased $33.0 million, from $223.2 million in 1997 to
$256.2 million in 1998. The increase was primarily related to loan growth.
Average loans increased $829.8 million or 12.3% from 1997, as all major areas of
commercial lending showed significant growth. Partially offsetting the increased
loan balance was a decrease in the yield earned on loans due to the declining
rate environment.
The provision for loan losses in 1998 decreased $5.5 million from 1997,
resulting from the improvement in asset quality and
<PAGE>
27
the trend in charge offs.
Non-interest income increased $7.8 million, from $39.2 million in 1997, to
$47.0 million in 1998. The increase was primarily related to gains of
approximately $8.1 million realized from investments in limited partnerships.
Non-interest expense increased $3.4 million, or 3.2%, from $105.6 million in
1997, to $109.0 million in 1998.
As a result of the increase in revenues and the decline in the loan loss
provision, net income increased $34.4 million, or 44.2%, from $77.9 million in
1997, to $112.3 million in 1998.
Investment Services and Private Banking:
Investment Services revenues are mostly in the form of fees for services
provided. The major sources of fee income are generated from trust services,
sales of mutual funds, insurance and brokerage services, and discount brokerage
transactions. This segment also includes Private Banking which provides personal
credit services, professional services for lawyers, accountants and their firms,
and business loans and lines of credit.
Net interest income increased to $57.1 million in 1998, from $53.4 million
in 1997. The increase was the result of the $156.9 million increase in average
loans, representing a 16.8% increase from 1997. Loan growth was generated in
Private Banking. Partially offsetting the impact of the loan growth was a
decrease in the yield on the loan portfolios, resulting from the lower interest
rate environment.
Non-interest income is primarily comprised of fees from trust services and
investment and insurance fees. Trust services were the largest component, with
total revenues of $42.9 million in 1998, an increase of $2.7 million, or 6.7%,
from 1997. Insurance revenue totaled $17.0 million in 1998, compared to $1.6
million the prior year. Insurance fees were greatly affected by four
acquisitions: Corporate Dynamics and Philadelphia Benefits Corp. in December
1997, W.M. Ross and Company, Inc. in August 1998, and Madison Consulting Group
in October 1998. Mutual fund fees reached $15.1 million in 1998, an increase of
$6.8 million, or 81.6%, from 1997.
Non-interest expense increased $36.2 million, or 51.3%, from 1997. Expenses
of the newly acquired insurance companies amounted to $15.9 million, or 43.9%,
of the increase. Salaries and commissions, excluding the new insurance entities,
increased $6.1 million between 1998 and 1997. The remaining increase was
generally the result of additional expenses allocated to this line based on
expansion of the business.
Net income for 1998 was $31.3 million, compared with $31.0 million for the
prior year.
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 $24.3 million, from $49.8 million in 1997, to
$74.1 million in 1998. The increase was generally related to the lower benefit
provided to the other lines of business on core deposits and assigned equity, as
well as to the growth of $761.4 million in the securities portfolios.
Non-interest income increased $5.4 million in 1998, primarily related to
increased gains from securities transactions. Non-interest expense increased
$15.2 million in 1998, to $35.9 million. The increase was generally attributable
to costs associated with the Year 2000 initiative, consulting fees, and
severance costs.
Net income for 1998, amounted to $36.1 million, compared to $28.5 million
in 1997, excluding $53.7 million ($83.0 million before taxes) of restructuring
charges related to the 1997 acquisitions of Collective and BMJ.
Asset Quality
At December 31, 1998, non-performing assets, which include non-performing loans
and OREO, amounted to $89.6 million, a decrease of $9.8 million, or 9.8% from
the prior year. The ratio of non-performing assets to total loans and OREO
declined 11 basis points, from 0.53% at the end of 1997, to 0.42% at the end of
1998. The decrease was primarily attributable to the reduction in OREO,
partially offset by a slight increase in non-performing loans.
At December 31, 1998, non-performing loans totaled $86.7 million,
representing 0.41% of total loans, compared to $85.1 million, or 0.45%, at the
end of the prior year. The acquisition of NSS in November 1998, added $2.3
million of non-performing loans.
As the table on the following page demonstrates, loan quality continued to
improve. This was accomplished through loan underwriting quality control, a
proactive approach to loan monitoring, and aggressive workout strategies. Part
of the workout strategy has been the ongoing sales of substandard and
non-performing loans. During 1998, over 150 non-performing loans were sold which
reduced non-performing loans by $21.2 million, at an average realization of
79.1% of book value.
OREO is carried at the lower of cost or fair value, less estimated costs to
sell, with any deficiency charged against the valuation allowance. OREO, net of
valuation allowance, amounted to $2.8 million at December 31, 1998, a decline of
$11.4 million, or 80.1%, compared to $14.2 million at the end of the prior year.
The 1998 disposition of the OREO properties generated a gain of $6.1 million.
Loans 90 days or more past due and not included in the non-performing loan
category totaled $45.3 million at December 31, 1998, compared to $48.6 million
at the end of the prior year. These loans consist of residential mortgage and
consumer loans that are well secured and in the process of collection.
Potential problem loans are those which management believes demonstrate
signs that collection of principal and interest, in accordance with the original
contract terms, may be doubtful. These loans are not included with
non-performing loans, because they continue to perform. Potential problem loans,
primarily commercial and industrial loans, were $8.0 million and $12.5 million,
at December 31, 1998, and 1997, respectively.
<PAGE>
28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Performing Assets
(In thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Commercial and industrial $55,245 $42,644 $ 54,308 $ 52,086 $ 52,082
Construction and development 5,046 4,453 31,901 52,975 52,620
Commercial mortgage 26,446 37,993 52,922 88,500 102,241
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing loans 86,737 85,090 139,131 193,561 206,943
Other real estate owned, net 2,829 14,249 26,406 30,771 55,800
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing assets $89,566 $99,339 $165,537 $224,332 $262,743
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, not included above, past due 90 days or more (1) $45,322 $48,609 $ 79,013 $ 60,463 $ 59,780
- ------------------------------------------------------------------------------------------------------------------------------------
Impact on interest income:
Interest income that would have been recorded on non-performing loans
in accordance with their original terms $ 5,681 $ 5,340 $ 14,154 $ 20,192 $ 20,408
Interest income received and recorded on non-performing loans 1,532 1,040 1,817 2,833 2,642
- ------------------------------------------------------------------------------------------------------------------------------------
Lost income on non-performing loans $ 4,149 $ 4,300 $ 12,337 $ 17,359 $ 17,766
Non-performing assets as a percentage of:
Total assets 0.27% 0.33% 0.60% 0.84% 1.03%
Total loans and other real estate owned 0.42 0.53 0.95 1.36 1.74
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Primarily residential mortgage and consumer loans, well secured and in the
process of collection.
Allowance for Loan Losses and Related Provision:
At December 31, 1998, the allowance for loan losses was $322.8 million, compared
to $296.5 million at the end of the prior year, an increase of $26.3 million, or
8.9%. The ratio of the allowance for loan losses to total loans, at December 31,
1998, and 1997, was 1.53% and 1.57%, respectively. The allowance for loan losses
as a percentage of non-performing loans was 372.18% at December 31, 1998,
compared to 348.45% at the end of 1997.
A standardized system 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 begins with historical loss factors and includes credit
reviews and gives consideration to areas of exposure such as concentrations of
credit, economic and industry conditions, trends in delinquencies and
recoveries, collateral coverage, and the composition of the overall loan
portfolio.
All performing and non-performing loans, excluding residential and consumer
loans, are graded as part of the process. Specific reserves, when required, are
identified by individual loan, while general reserve percentages are determined
by loan category or grade, and allocated accordingly. When evidence indicates
that a loan or group of loans has been impaired, the general allowance will be
replaced by a specific reserve or the assets will be written off. The
methodologies, policies, and procedures used to determine the adequacy of the
allowance for loan losses have been consistently applied from period to period.
The allowance is maintained at a level considered sufficient to absorb estimated
losses in the loan portfolio.
At December 31, 1998, $158.3 million of the allowance for loan losses was
allocated to general and specific reserves, while $164.5 million was considered
unallocated. The amount of the allocated allowance was determined by the
Company's reserve assessment methodology. However, it does not necessarily
represent the total amount of reserves necessary to cover potential losses
inherent in the portfolios. The general and specific reserves allocated to the
commercial loan portfolios are limited to identified deterioration of credit
quality on a loan-by-loan basis and estimating the impairment of loan types
based on management's judgment of the impact of recent events and changes in
economic conditions. The reserves allocated to residential mortgage and consumer
loans are generally sufficient to absorb one year of expected losses. The
unallocated allowance is for latent losses that existed at the balance sheet
date that are not incorporated in the reserve assessment process. The unal-
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Allocation of the allowance for loan losses
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
of loans to of loans to of loans to
(In thousands) Amount total loans Amount total loans Amount total loans
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 71,726 28.2% $ 52,459 26.5% $ 45,922 24.9%
Construction and development 6,728 1.8 7,718 2.0 36,617 1.8
Commercial mortgage 21,569 13.7 26,480 14.3 20,690 15.1
Residential mortgage 19,600 27.1 12,846 30.1 13,650 34.0
Consumer 36,500 25.4 28,423 22.5 22,746 20.9
Loan commitments and other loans 2,187 3.8 1,742 4.6 7,762 3.3
Unallocated 164,504 N/A 166,826 N/A 133,224 N/A
- -----------------------------------------------------------------------------------------------------------
Total $322,814 100.0% $296,494 100.0% $280,611 100.0%
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------
Allocation of the allowance for loan losses
1995 1994
- ----------------------------------------------------------------------------------------------
Percentage Percentage
of loans to of loans to
(In thousands) Amount total loans Amount total loans
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $ 59,357 28.4% $ 68,801 29.6%
Construction and development 44,390 2.7 61,777 4.6
Commercial mortgage 31,754 14.8 31,943 19.0
Residential mortgage 23,229 32.5 26,230 25.5
Consumer 21,677 19.7 25,504 19.2
Loan commitments and other loans 26,895 1.9 3,221 2.1
Unallocated 85,858 N/A 105,860 N/A
- ----------------------------------------------------------------------------------------------
Total $293,160 100.0% $323,336 100.0%
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
29
located portion of the loan loss allowance is therefore necessary to maintain
the overall allowance at a level that is adequate to absorb estimated credit
losses inherent in the total loan portfolio.
The provision for loan losses was $66.0 million for the year ended December
31, 1998, an increase of $6.9 million, or 11.7%, from $59.1 million recorded in
1997. While the quality of the loan portfolio remains satisfactory, the
additional provision reflected the strong loan growth experienced in 1998. Net
charge offs in 1998 amounted to $45.1 million, a decrease of $8.1 million, or
15.3%, compared to $53.2 million recorded in 1997. Net charge offs represented
0.23% of average loans in 1998, compared to 0.29% in 1997. While the provision
for loan losses exceeded net charge offs in 1998 and 1997, gross charge offs
continued to exceed the provision, as much of the recoveries related to prior
year's charge offs and are not necessarily reflective of future trends.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
(In thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 296,494 $ 280,611 $ 293,160 $ 323,336 $ 361,319
Acquisition adjustments, net 5,416 9,994 8,492 6,131 1,910
Provision charged to operating expenses 66,000 59,100 64,034 72,090 94,347
Loans charged off:
Commercial and industrial 25,228 22,355 37,047 46,819 38,043
Construction and development 2,912 3,319 17,036 35,451 39,542
Commercial mortgage 2,755 12,993 25,695 25,741 21,731
Residential mortgage 8,327 19,117 7,558 8,608 9,726
Consumer 34,820 28,891 20,970 13,873 10,504
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans charged off 74,042 86,675 108,306 130,492 119,546
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and industrial 11,100 16,167 12,602 14,684 13,921
Construction and development 3,661 3,686 2,427 2,072 1,320
Commercial mortgage 4,546 5,089 2,466 1,920 2,838
Residential mortgage 1,525 957 838 667 594
Consumer 8,114 7,565 4,898 2,752 3,585
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 28,946 33,464 23,231 22,095 22,258
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge offs 45,096 53,211 85,075 108,397 97,288
Write downs on transfer to assets held
for accelerated disposition -- -- -- -- 36,952
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 322,814 $ 296,494 $ 280,611 $ 293,160 $ 323,336
- -----------------------------------------------------------------------------------------------------------------------------------
Loans:
At year end $21,126,577 $18,888,366 $17,386,059 $16,413,222 $15,048,579
Average during year 19,770,964 18,451,893 17,065,753 15,568,502 14,120,398
Net charge offs to average loans outstanding 0.23% 0.29% 0.50% 0.70% 0.69%
Allowance for loan losses to:
Total loans at year end 1.53 1.57 1.61 1.79 2.15
Non-performing loans 372.18 348.45 201.69 151.46 156.24
Non-performing assets 360.42 298.47 169.52 130.68 123.06
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
30
Asset/Liability Management
Market Risk:
Market risk, based on the Company's business, is primarily limited to interest
rate risk, which is the impact that changes in interest rates would have on
future earnings. Interest rate risk, including interest rate sensitivity and the
repricing characteristics of assets and liabilities, are managed by the
Asset/Liability Management Committee (ALCO). The principal objective of ALCO is
to maximize net interest income within acceptable levels of risk established by
policy. Interest rate risk is measured using financial modeling techniques,
including stress tests, to measure the impact of changes in interest rates on
future earnings. Net interest income, the primary source of earnings, is
affected by interest rate movements. To mitigate the impact of changes in
interest rates, the balance sheet must be structured so that repricing
opportunities exist for both assets and liabilities in approximately equivalent
amounts at approximately the same time intervals. Imbalances in these repricing
opportunities at any point in time constitute interest-sensitivity gaps, which
is the difference between interest-sensitive assets and interest-sensitive
liabilities. These static measurements do not reflect the results of any
projected activity and are best used as early indicators of potential interest
rate exposures.
As illustrated by the interest rate sensitivity analysis in the
accompanying table, sensitivity to interest rate fluctuations is measured in a
number of time frames. The gap position is presented on an adjusted basis
allowing for the impact of off-balance-sheet transactions.
An asset-sensitive gap means an excess of interest-sensitive assets over
interest-sensitive liabilities, whereas a liability-sensitive gap means an
excess of interest-sensitive liabilities over interest-sensitive assets. At
December 31, 1998, there was a 30-day liability-sensitive gap of $1.9 billion
and a one-year cumulative asset-sensitive gap of $0.9 billion. In a changing
rate environment, a mismatched gap position generally indicates that changes in
the income from interest-earning assets will not be completely proportionate to
changes in the cost of interest-bearing liabilities, resulting in net interest
income volatility. 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 to insulate net interest income
from the effects of changes in interest rates.
Interest rate sensitivities are also monitored through the use of
simulation modeling techniques which apply alternative interest rate scenarios
to periodic forecasts of future business activity and estimate the related
impact on net interest income. The use of simulation modeling assists management
in its continuing efforts to achieve earnings growth in varying interest
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 have not been changed based on the results of analyses 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 the timing, magnitude, and frequency of interest rate changes, changes in
cash flow patterns, and market conditions as well as changes in management's
strategies.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Table at December 31, 1998
(In thousands) Interest Sensitivity Period Total
---------------------------- Within
30 Day 90 Day 180 Day 365 Day One Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earning Assets:
Total securities $ 1,386,329 $ 756,347 $ 1,006,231 $ 1,522,244 $ 4,671,151
Loans, net 6,052,572 2,073,756 1,239,858 1,933,085 11,299,271
Other interest-earning assets 55,189 -- -- -- 55,189
- -------------------------------------------------------------------------------------------------------------------
7,494,090 2,830,103 2,246,089 3,455,329 16,025,611
- -------------------------------------------------------------------------------------------------------------------
Sources of Funds:
Savings and time deposits(1) 6,009,862 1,157,190 1,564,948 2,081,162 10,813,162
Commercial CDs 715,441 184,067 26,124 10,433 936,065
Other interest-bearing liabilities 2,702,910 546,987 170,662 144,568 3,565,127
Non-interest-bearing sources -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
9,428,213 1,888,244 1,761,734 2,236,163 15,314,354
- -------------------------------------------------------------------------------------------------------------------
Asset (Liability) Interval Gap (1,934,123) 941,859 484,355 1,219,166 711,257
Net effect of off-balance sheet
instruments -- 200,000 -- -- 200,000
- -------------------------------------------------------------------------------------------------------------------
Asset (Liability) Sensitivity Gap:
Period gap (1,934,123) 1,141,859 484,355 1,219,166 911,257
Cumulative gap $ (1,934,123) $ (792,264) $ (307,909) $ 911,257 $ 911,257
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Table at December 31, 1998
(In thousands) One Year Non-Interest
to Sensitive and
Two Years Over Two Years Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning Assets:
Total securities $ 1,908,372 $ 3,419,781 $ 9,999,304
Loans, net 1,871,377 7,633,115 20,803,763
Other interest-earning assets -- -- 55,189
- ----------------------------------------------------------------------------------------------------------
3,779,749 11,052,896 30,858,256
- ----------------------------------------------------------------------------------------------------------
Sources of Funds:
Savings and time deposits(1) 1,203,164 5,233,969 17,250,295
Commercial CDs -- 24,981 961,046
Other interest-bearing liabilities 2,166,173 1,031,398 6,762,698
Non-interest-bearing sources -- 5,884,217 5,884,217
- ----------------------------------------------------------------------------------------------------------
3,369,337 12,174,565 $ 30,858,256
- ----------------------------------------------------------------------------------------------------------
Asset (Liability) Interval Gap 410,412 (1,121,669)
Net effect of off-balance sheet
instruments (200,000) --
- ----------------------------------------------------------------------------------------------------------
Asset (Liability) Sensitivity Gap:
Period gap 210,412 (1,121,669)
Cumulative gap $ 1,121,669 $ --
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Included in these balances are $841.9 million of retail certificates of
deposit $100,000 and over maturing as follows: $181.1 million - less than three
months; $157.4 million - three to six months; $285.0 million - six to twelve
months; and $218.4 million - more than twelve months.
<PAGE>
31
Based on the results of the interest simulation model as of December 31,
1998, the Company would expect a decrease of approximately $17.0 million in net
interest income and an increase of $1.4 million in net interest income if
interest rates decrease or increase by 100 basis points, respectively, from
current rates in an immediate and parallel shock over a twelve-month period.
Asset and liability management efforts also involved the use of
derivatives, primarily interest rate swaps, to modify the interest rate
characteristics of designated assets and liabilities. These derivatives were
accounted for as hedges and were not recorded on the balance sheet. Income or
expense related to these instruments were accrued monthly and recognized as an
adjustment to interest income or interest expense for those balance sheet
instruments being hedged. These derivative financial instruments reduced net
interest income by $1.9 million in 1998, compared to a $1.3 million reduction in
1997.
The following table illustrates the aggregate notional amounts and expected
maturities of interest rate swaps, interest rate caps, interest rate floors, and
foreign currency contracts at December 31, 1998.
- --------------------------------------------------------------------------------
Derivative Financial Instruments
Weighted
Notional Avg. Est.
(In millions) Amount Maturity
- --------------------------------------------------------------------------------
Interest rate swaps:
Receive fixed/pay floating $ 66.2 2/99
Receive floating/pay fixed 250.0 4/00
Interest rate caps 102.7 3/00
Interest rate floors 30.0 2/99
Foreign currency contracts 41.7 3/99
- --------------------------------------------------------------------------------
$490.6 1/00
- --------------------------------------------------------------------------------
The notional values of these instruments represent the contractual balances
on which calculations of the amount of interest to be exchanged are based. The
caps were purchased to accommodate customers who desire rate protection on
variable rate loans.
The following table illustrates the interest rate swap activity for the
past two years.
- --------------------------------------------------------------------------------
Interest Rate Swap Activity
(In millions) 1998 1997
- --------------------------------------------------------------------------------
Balance, beginning of year $ 433.2 $ 386.3
Additions 250.0 350.0
Maturities/amortization (367.0) (303.1)
- --------------------------------------------------------------------------------
Balance, end of year $ 316.2 $ 433.2
- --------------------------------------------------------------------------------
The Company has limited or no market risks associated with foreign
currencies, commodities, or other marketable instruments.
Liquidity:
Liquidity management includes monitoring current and projected cash flows, as
well as economic forecasts for the industry. A liquidity contingency plan is in
place, which is designed to manage potential liquidity concerns due to changes
in interest rates, credit markets, or other external risks.
Bank liquidity is the ability to support asset growth while satisfying the
borrowing needs and deposit withdrawal requirements of customers. Traditional
sources of liquidity include asset maturities, asset repayments, and deposit
growth. In addition, borrowed funds represent another major source of funding.
The bank subsidiaries have established borrowing relationships with the FHLB and
other correspondent banks which further support and enhance liquidity. Summit
Bank, NJ and Summit Bank, PA executed a distribution agreement, in November
1998, providing for the possible issuance 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 Corporation in order to provide
funds for operations and to pay dividends to shareholders. Parent Corporation
cash requirements are met primarily through management fees and dividends from
its subsidiaries and the issuance of short and long-term debt.
The Consolidated Statements of Cash Flows on page 38 present the changes in
cash from operating, investing, and financing activities. At December 31, 1998,
the balance of cash was $1.1 billion, a decrease of $43.3 million, from the end
of the prior year.
Net cash provided by operating activities totaled $498.0 million in 1998
and $486.0 million in 1997. The primary source of funds is net income from
operations which increased $41.1 million in 1998, after eliminating the effect
of the restructuring charges in 1997. In 1998, the net increase in originations
of mortgages held for sale was generally offset by the increase in accrued
expenses and other liabilities and the increase in other assets.
Net cash used in investing activities totaled $2.4 billion in 1998,
compared to $1.4 billion in 1997. The additional usage resulted from increased
purchases of securities held to maturity and increases in the loan portfolios.
Partially offsetting the additional usage were increases in maturities of
investment securities.
Net cash provided by financing activities amounted to $1.8 billion in 1998
and $0.7 billion in 1997. The increase in 1998 resulted primarily from
additional long-term debt, partially offset by a reduction in short-term
borrowings and purchases of treasury stock.
The securities portfolios are also a source of liquidity, providing cash
flows from maturities and periodic repayments of principal. During 1998,
maturities of investment securities totaled $4.8 billion. Contractual and
anticipated principal payments from the securities portfolios are expected to be
approximately $4.8 billion in 1999. In addition, all or part of the $4.0 billion
securities available for sale portfolio could be sold. Cash flows are also
derived from loan maturities, which in 1999 are projected to approximate $6.1
billion, adjusted for anticipated prepayments.
<PAGE>
32
Results of Operations --
1997 Compared with 1996
For the year ended December 31, 1997, the Company reported net income of $371.0
million, or $2.09 per diluted share, compared to net income of $283.7 million,
or $1.67 per diluted share, in 1996. Results for 1997 included merger-related
restructuring charges of $83.0 million ($53.7 million, after tax) associated
with the acquisitions of Collective and BMJ. Net income for 1996 included
restructuring charges of $110.7 million ($70.0 million, after tax) and a
one-time special assessment to recapitalize the Savings Association Insurance
Fund, amounting to $11.1 million ($6.7 million, after tax). Excluding the
effects of these non-recurring charges, net income for 1997 was $424.7 million,
or $2.39 per diluted share, compared to $360.4 million, or $2.12 per diluted
share, for the year ended December 31, 1996.
The Company's performance for 1997 was highlighted by loan growth,
continued success in controlling expenses while integrating recent mergers, and
improved asset quality. These factors all contributed to enhanced performance
measures. Excluding the effect of non-recurring items, return on average assets
improved to 1.47% in 1997, compared to 1.32% in the prior year, and return on
average common equity rose to 17.08% in 1997, versus 16.48% in 1996. The
efficiency ratio also improved from 52.11% in 1996, to 50.28% in 1997.
Interest income on a tax-equivalent basis was $2.1 billion in 1997, an
increase of $157.1 million, or 8.2%, compared to 1996. This increase was
primarily due to the growth in the average balance of interest-earning assets,
which increased $1.8 billion, or 7.3%, to $27.2 billion. Growth in the loan and
investment portfolios contributed $1.4 billion and $459.0 million, respectively,
to this increase. The average yield on interest-earning assets was 7.64% for
1997 compared to 7.57% for 1996, an increase of 7 basis points.
Interest expense for 1997 was $919.6 million, an increase of $65.9 million,
or 7.7%, from 1996. The increase in average interest-bearing liabilities of $1.1
billion, or 5.3%, in 1997 generated $51.8 million of the increase in interest
expense. The average cost of interest-bearing liabilities rose from 4.10% in
1996 to 4.20% in 1997.
Net interest income on a tax-equivalent basis amounted to $1.2 billion in
1997, an increase of $91.2 million, or 8.5%, from $1.1 billion earned in 1996.
Net interest spread on a tax-equivalent basis declined 3 basis points to 3.44%
in 1997, compared to 3.47% in 1996. Net interest margin increased to 4.26% in
1997, from 4.21% in 1996, benefiting from a $373.4 million increase in
non-interest bearing demand deposits.
Non-interest income, including securities gains, amounted to $301.9 million
in 1997, compared to $260.0 million the prior year, an increase of $41.8
million, or 16.1%. Generally, all of the major categories of non-interest income
increased in 1997. Service charges on deposit accounts increased $8.6 million,
or 8.1%, service and loan fee income increased $7.6 million, or 17.1%,
investment and insurance fees increased $8.4 million, or 40.3%, and trust income
increased $3.5 million, or 9.7%. Included in the $11.9 million increase in other
non-interest income was an increase of $8.3 million in gains from the sales of
branches from 1996. Securities gains in 1997 amounted to $5.6 million, an
increase of $1.8 million over 1996.
Non-interest expense for 1997 were $816.7 million, an increase of $1.1
million compared to 1996. Included in non-interest expenses in 1997 and 1996
were non-recurring charges of $83.0 million and $121.8 million, respectively,
related to restructuring charges and a special assessment, previously noted.
Excluding the effect of these non-recurring items, non-interest expenses
increased $39.9 million or 5.7% in 1997, compared to 1996.
Salaries expense was $290.5 million in 1997, an increase of $22.7 million,
or 8.5%, compared to 1996. The increase was generally due to higher staff levels
and annual merit increases. Pension and other employee benefits expense totaled
$93.7 million for 1997, up $6.0 million, or 6.8%, from 1996.
Net occupancy expense decreased to $72.1 million in 1997, down from $77.2
million for 1996. Contributing to the 6.7% decrease was a reduction in rental
and maintenance expenses from closing 28 traditional full service branches.
Furniture and equipment expense amounted to $78.3 million in 1997, an increase
of $8.5 million, or 12.2%, from 1996. The increased expense was primarily
related to equipment upgrades to enhance customer service through new
client-server network applications and branch automation. Communications expense
was $35.2 million in 1997, an increase of $1.9 million, or 5.8%, compared to
1996. The increase was attributable to costs incurred in connection with branch
rewiring and technology upgrades. Amortization of goodwill and intangibles
increased $3.5 million, or 22.6% in 1997, resulting from acquisitions made late
in 1996.
Other expenses were $144.6 million in 1997, up $2.4 million, or 1.7%, from
1996. Increases of $6.4 million in advertising and public relations expenses and
$4.0 million of expenses associated with the Year 2000 issues, contributed to
the rise in other expenses. Partially offsetting these increases was a $4.2
million decrease in deposit premium expense and a $1.9 million decrease in OREO
expense.
Federal and state income tax expenses increased from $150.0 million in 1996
to $200.2 million in 1997, primarily due to the increase in pre-tax income. The
combined Federal and state effective income tax rate was 35.1% for 1997 and
34.6% for 1996.
<PAGE>
33
Year 2000 Readiness Disclosure
State of Readiness:
The Company has been working since 1995 to remediate its information technology
("IT") and non-IT systems for the Year 2000. Programming changes and testing for
internal mission-critical computer systems have been substantially completed in
1998, and the Company remains on schedule to have all of the 330 software
systems being tracked by the Company remediated, tested, and Year 2000 ready by
March 31, 1999. The Year 2000 project includes seven phases. The first three
phases, which include: Developing a Strategic Approach; Creating Organizational
Awareness; and Assessing Actions and Developing Detailed Plans, have been
completed. The remaining four phases and their approximate percentage of
completion are as follows: Renovating (remediating) - 99%; Validating (testing)
- - 97%; Implementing (remediated code into production) - 96%; and Implementing
(totally future-date certified) - 95%. All of the mission-critical software
systems have been remediated and are being tested, with approximately 92% of the
testing completed. Testing of automated interfaces with customers and other
third parties is scheduled 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. Systems
with embedded chip technology for all building, environmental, and security
systems are scheduled to be remediated, tested, and confirmed as Year 2000 ready
by March 31, 1999. Telecommunications, both voice and data, are expected to be
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 initial inventory and risk assessment of vendors and a
preliminary evaluation of vendor responses was completed in 1998. Because the
quality of responses from vendors has been inconsistent, the Company is seeking
additional information from those third party providers found to pose a
significant risk. The Company's plans to minimize third party risk include
contingency planning for important vendors.
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 $3.9 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, $10.0 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 $13.9 million.
Contingency Plans:
The Company is developing remediation and business resumption contingency plans
specific to the Year 2000 project. Remediation contingency plans address the
actions to be taken if the current approach to remediating a mission-critical
system is falling behind schedule. Remediation contingency plans with trigger
dates for review and implementation have been developed for those mission-
critical IT systems that have not completed testing.
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.
<PAGE>
34
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
recognition of all derivative instruments as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, on a prospective basis. 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.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement is an amendment
of SFAS No. 65, "Accounting for Certain Mortgage Banking Activities" and
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities should classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This Statement is effective for the
first fiscal quarter beginning after December 15, 1998. The adoption of SFAS No.
134 is not expected to have a material impact on the financial position or
results of operations of the Company.
Reaching Higher -- Looking Ahead
This report contains certain forward-looking statements, either expressed or
implied, which are provided to assist the reader in understanding anticipated
future financial performance. These forward-looking statements involve certain
risks, uncertainties, estimates, and assumptions made by management.
One of the Company's primary objectives is to achieve balanced asset and
revenue growth, and at the same time expand market presence and diversify the
line of financial products. However, it is recognized that objectives, no matter
how focused, are subject to factors beyond the control of the Company which can
impede our ability to achieve these goals.
Factors that may cause actual results to differ from those results
expressed or implied, include, but are not limited to, the overall economy and
the interest rate environment; the ability of customers to repay their
obligations; the adequacy of the allowance for loan losses; the planned date of
completion for the Year 2000 project, the adequacy of contingency planning
preparations, unexpected project costs for the Year 2000 project, any
unidentified significant hardware or software requiring remediation and third
party Year 2000 readiness status; the progress of integrating acquisitions;
competition; significant changes in accounting, tax, or regulatory practices and
requirements; litigation and other claims against the Company; and technological
changes. Although management has taken certain steps to mitigate any negative
effect of the aforementioned items, significant unfavorable changes could
severely impact the assumptions used and have an adverse effect on
profitability.
<PAGE>
35
Management's Report
Summit Bancorp and its subsidiaries are responsible for the preparation,
integrity, and fair presentation of the audited consolidated financial
statements and notes contained on pages 36 through 55 in this report. The
statements were prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts that are based
on management's estimates and judgments. Other financial information presented
throughout the annual report is prepared on a basis consistent with these
financial statements.
The consolidated financial statements of Summit Bancorp have been audited
by KPMG LLP, independent auditors, whose selection has been ratified by the
shareholders. Their audit was made in accordance with generally accepted
auditing standards and considered the internal control structure to the extent
deemed necessary to support their independent auditors' report appearing herein.
Summit Bancorp is responsible for establishing and maintaining an effective
internal control structure to provide reasonable assurance that the financial
statements are presented in conformity with generally accepted accounting
principles. There are inherent limitations in the effectiveness of any internal
control structure, no matter how well designed, including the possibility of
human error, the circumvention or overriding of controls, and the consideration
of cost in relation to the benefit of the control. Accordingly, even an
effective internal control structure can provide only reasonable assurance with
respect to financial statement preparation. Furthermore, because of changes in
conditions, the effectiveness of an internal control structure may vary over
time. To monitor compliance, Summit Bancorp maintains an internal audit program.
This program includes a review for compliance with written policies and
procedures and a review of the adequacy and effectiveness of internal controls.
The Audit Committee of the Board of Directors of Summit Bancorp, composed
entirely of outside directors, meets periodically with the independent auditors,
management, and internal auditors to review the work of each and ensure that
each is properly discharging its responsibilities. The independent auditors and
internal auditors have full and free access to the Committee to discuss the
results of their audit work, their evaluation of internal controls, and the
quality of financial reporting.
Independent Auditors' Report
The Shareholders and Board of Directors Summit Bancorp:
We have audited the accompanying consolidated balance sheets of Summit
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
January 19, 1999
<PAGE>
<TABLE>
<CAPTION>
36 Consolidated Balance Sheets Summit Bancorp and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------
(In thousands)
At December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,129,859 $ 1,173,118
Federal funds sold and securities purchased under agreements to resell 28,829 4,460
Interest-bearing deposits with banks 26,360 14,072
Securities:
Trading account securities 12,553 35,216
Securities available for sale 3,970,941 5,074,896
Securities held to maturity (fair value approximates $6,030,840 and $4,151,582) 6,015,810 4,157,543
- ----------------------------------------------------------------------------------------------------------------
Total securities 9,999,304 9,267,655
- ----------------------------------------------------------------------------------------------------------------
Loans 21,126,577 18,888,366
Less: Allowance for loan losses 322,814 296,494
- ----------------------------------------------------------------------------------------------------------------
Net loans 20,803,763 18,591,872
- ----------------------------------------------------------------------------------------------------------------
Premises and equipment 270,843 244,913
Goodwill and other intangibles 295,461 188,620
Accrued interest receivable 195,708 175,170
Due from customers on acceptances 18,089 15,814
Other assets 333,098 288,478
- ----------------------------------------------------------------------------------------------------------------
Total Assets $ 33,101,314 $ 29,964,172
- ----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits $ 4,933,787 $ 4,530,690
Interest-bearing deposits:
Savings and time deposits 17,250,295 16,914,485
Commercial certificates of deposit $100,000 and over 961,046 884,261
- ----------------------------------------------------------------------------------------------------------------
Total deposits 23,145,128 22,329,436
- ----------------------------------------------------------------------------------------------------------------
Other borrowed funds 3,189,988 3,397,953
Accrued expenses and other liabilities 358,542 290,197
Accrued interest payable 94,430 71,602
Bank acceptances outstanding 18,089 15,814
Long-term debt 3,572,710 1,246,750
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 30,378,887 27,351,752
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.80:
Authorized 390,000 shares; issued 177,632 and 176,590 142,106 141,272
Surplus 1,013,393 987,281
Retained earnings 1,728,135 1,467,193
Employee stock ownership plan obligation (3,394) (4,201)
Accumulated other comprehensive income, net of tax 12,087 20,875
Treasury stock (3,873 shares at cost) (169,900) --
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,722,427 2,612,420
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 33,101,314 $ 29,964,172
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income Summit Bancorp and Subsidiaries 37
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $1,580,658 $1,505,840 $1,383,150
Securities:
Trading account securities 1,224 2,438 1,481
Securities available for sale 292,953 243,103 164,953
Securities held to maturity 298,085 308,508 351,150
- -------------------------------------------------------------------------------------------------------------
Total securities 592,262 554,049 517,584
Federal funds sold and securities purchased under agreements to resell 876 4,084 5,441
Deposits with banks 1,416 733 821
- -------------------------------------------------------------------------------------------------------------
Total interest income 2,175,212 2,064,706 1,906,996
- -------------------------------------------------------------------------------------------------------------
Interest Expense
Savings and time deposits 618,873 633,774 611,142
Commercial certificates of deposit $100,000 and over 54,020 48,245 47,892
Other borrowed funds and long-term debt 328,513 237,598 194,673
- -------------------------------------------------------------------------------------------------------------
Total interest expense 1,001,406 919,617 853,707
- -------------------------------------------------------------------------------------------------------------
Net interest income 1,173,806 1,145,089 1,053,289
Provision for loan losses 66,000 59,100 64,034
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,107,806 1,085,989 989,255
- -------------------------------------------------------------------------------------------------------------
Non-Interest Income
Service charges on deposit accounts 125,145 114,569 105,967
Service and loan fee income 57,586 52,205 44,577
Investment and insurance fees 52,659 29,208 20,820
Trust income 42,854 40,155 36,607
Securities gains 6,646 5,637 3,862
Other 65,337 60,111 48,209
- -------------------------------------------------------------------------------------------------------------
Total non-interest income 350,227 301,885 260,042
- -------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries 308,974 290,515 267,854
Pension and other employee benefits 107,659 93,711 87,718
Furniture and equipment 84,479 78,259 69,732
Occupancy, net 74,754 72,074 77,242
Communications 36,799 35,214 33,292
Amortization of goodwill and other intangibles 19,630 19,273 15,724
Restructuring charges -- 83,000 110,700
Savings Association Insurance Fund assessment -- -- 11,059
Other 150,512 144,645 142,270
- -------------------------------------------------------------------------------------------------------------
Total non-interest expense 782,807 816,691 815,591
- -------------------------------------------------------------------------------------------------------------
Income before taxes 675,226 571,183 433,706
Federal and state income taxes 209,407 200,218 150,031
- -------------------------------------------------------------------------------------------------------------
Net Income $ 465,819 $ 370,965 $ 283,675
- -------------------------------------------------------------------------------------------------------------
Net Income per Common Share:
Basic $ 2.66 $ 2.12 $ 1.69
Diluted 2.63 2.09 1.67
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
38 Consolidated Statements of Cash Flows Summit Bancorp and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 465,819 $ 370,965 $ 283,675
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses and other real estate owned 66,120 60,738 66,516
Depreciation, amortization, and accretion, net 50,883 76,353 36,212
Restructuring charges -- 83,000 110,700
Deferred income tax 11,682 (23,318) 14,383
Gains on sales of securities (6,646) (5,637) (3,862)
Gains on sales of mortgages held for sale (17,086) (7,516) (2,995)
Gains on the sales of other real estate owned (6,068) (4,663) (4,242)
Proceeds from sales of other real estate owned 21,576 34,258 36,177
Proceeds from sales of mortgages held for sale 876,397 451,656 484,591
Originations of mortgages held for sale (1,035,090) (485,452) (479,467)
Net decrease (increase) in trading account securities 21,248 (10,423) 16,066
Net (increase) decrease in accrued interest receivable and other assets (11,207) 53,880 (18,222)
Net increase (decrease) in accrued interest payable, accrued expenses,
and other liabilities 60,343 (107,854) (117,587)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 497,971 485,987 421,945
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of securities held to maturity (4,192,516) (714,874) (849,873)
Purchases of securities available for sale (2,467,055) (3,070,103) (978,013)
Proceeds from maturities of securities held to maturity 2,318,432 1,197,368 1,174,445
Proceeds from maturities of securities available for sale 2,519,623 1,005,560 505,112
Proceeds from sales of securities available for sale 1,257,363 825,870 198,645
Net (increase) decrease in Federal funds sold, securities purchased under
agreements to resell, and interest-bearing deposits with banks (31,705) 169,630 57,407
Net increase in loans (1,702,668) (775,555) (405,951)
Purchases of premises and equipment, net (61,466) (39,566) (12,374)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,359,992) (1,401,670) (310,602)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase (decrease) in deposits 367,858 (150,175) (519,648)
Net (decrease) increase in short-term borrowings (344,491) 666,336 300,069
Principal payments on long-term debt, net (268,505) (101,436) (34,009)
Proceeds from issuance of long-term debt, net of related expenses 2,594,231 441,300 300,200
Dividends paid (199,759) (167,663) (149,489)
Proceeds from issuance of common stock under stock option plans 16,939 38,495 20,158
Purchase of common stock (362,289) (21,859) (92,268)
Redemptions of preferred stock -- -- (42,620)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,803,984 704,998 (217,607)
- --------------------------------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (58,037) (210,685) (106,264)
Beginning cash balance of acquired entities 14,778 56,296 29,797
Cash and due from banks, beginning of year 1,173,118 1,327,507 1,403,974
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 1,129,859 $ 1,173,118 $ 1,327,507
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure
Cash paid:
Interest payments $ 978,844 $ 905,933 $ 850,313
Income tax payments 150,581 211,163 146,657
Noncash investing activities:
Net transfer of securities held to maturity to securities available for sale -- 805,854 --
Net transfer of loans to other real estate owned 5,486 20,485 25,725
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity Summit Bancorp and Subsidiaries 39
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
Retained ESOP
Stock Surplus Earnings Obligation
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 170,648(1) $ 864,428 $ 1,094,624 $ (6,892)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance of immaterial pooled
acquisitions (6,530 shares) 5,224 29,612 14,054 --
Comprehensive income:
Net income -- -- 283,675 --
Unrealized holding gains on securities
arising during the period (net of tax of $803) -- -- -- --
Less: Reclassification adjustment for gains
included in net income (net of tax of $1,352) -- -- -- --
Net unrealized holding loss on securities
arising during the period (net of tax of $549) -- -- -- --
Total comprehensive income
Cash dividend declared -- -- (154,461) --
Exercise of stock options and other, net (1,791 shares) 1,433 29,268 -- --
Purchase of common stock at cost (3,555 shares) (2,844) (89,424) -- --
Shares issued for acquisitions (3,495 shares) 2,796 84,527 -- --
Redemption of preferred stock (42,620) -- -- --
ESOP debt repayment -- -- -- 1,076
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 134,637 918,411 1,237,892 (5,816)
- --------------------------------------------------------------------------------------------------------------------------
Beginning balance of immaterial pooled
acquisitions (6,047 shares) 4,837 34,705 25,562 --
Adjustment for the pooling of a company with
different fiscal year end (197 shares) (158) (4,771) 9,288 539
Comprehensive income:
Net income -- -- 370,965 --
Unrealized holding gains on securities arising
during the period (net of tax of $9,300) -- -- -- --
Less: Reclassification adjustment for gains
included in net income (net of tax of $1,973) -- -- -- --
Net unrealized holding gains on securities
arising during the period (net of tax of $7,327) -- -- -- --
Total comprehensive income
Cash dividend declared on common stock -- -- (176,514) --
Exercise of stock options and other, net (2,444 shares) 1,956 42,084 -- --
Shares acquired and issued for acquisitions (495 shares) -- (3,148) -- --
ESOP debt repayment -- -- -- 1,076
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 141,272 987,281 1,467,193 (4,201)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 465,819 --
Unrealized holding losses on securities arising
during the period (net of tax of $2,406) -- -- -- --
Less: Reclassification adjustment for gains
included in net income (net of tax of $2,326) -- -- -- --
Net unrealized holding losses on securities
arising during the period (net of tax of $4,732) -- -- -- --
Total comprehensive income
Cash dividend declared on common stock -- -- (204,877) --
Exercise of stock options and other, net (1,552 shares) 834 22,557 -- --
Treasury shares issued for acquisitions (3,637 shares) -- 3,555 -- --
Purchase of common stock (8,020 shares) -- -- -- --
ESOP debt repayment -- -- -- 807
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 142,106 $ 1,013,393 $ 1,728,135 $ (3,394)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(In thousands) Accumulated
Other Total
Comprehensive Treasury Shareholders'
Income Stock Equity
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 7,300 $ -- $ 2,130,108
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance of immaterial pooled
acquisitions (6,530 shares) (567) -- 48,323
Comprehensive income:
Net income -- -- 283,675
Unrealized holding gains on securities
arising during the period (net of tax of $803) 1,491
Less: Reclassification adjustment for gains
included in net income (net of tax of $1,352) 2,510
------
Net unrealized holding loss on securities
arising during the period (net of tax of $549) (1,019) -- (1,019)
--------
Total comprehensive income 282,656
Cash dividend declared -- -- (154,461)
Exercise of stock options and other, net (1,791 shares) -- -- 30,701
Purchase of common stock at cost (3,555 shares) -- -- (92,268)
Shares issued for acquisitions (3,495 shares) -- -- 87,323
Redemption of preferred stock -- -- (42,620)
ESOP debt repayment -- -- 1,076
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,714 -- 2,290,838
- -------------------------------------------------------------------------------------------------------
Beginning balance of immaterial pooled
acquisitions (6,047 shares) (278) -- 64,826
Adjustment for the pooling of a company with
different fiscal year end (197 shares) 1,832 -- 6,730
Comprehensive income:
Net income -- -- 370,965
Unrealized holding gains on securities arising
during the period (net of tax of $9,300) 17,271
Less: Reclassification adjustment for gains
included in net income (net of tax of $1,973) 3,664
------
Net unrealized holding gains on securities
arising during the period (net of tax of $7,327) 13,607 -- 13,607
--------
Total comprehensive income 384,572
Cash dividend declared on common stock -- -- (176,514)
Exercise of stock options and other, net (2,444 shares) -- -- 44,040
Shares acquired and issued for acquisitions (495 shares) -- (3,148)
ESOP debt repayment -- -- 1,076
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 20,875 -- 2,612,420
- -------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 465,819
Unrealized holding losses on securities arising
during the period (net of tax of $2,406) (4,468)
Less: Reclassification adjustment for gains
included in net income (net of tax of $2,326) 4,320
------
Net unrealized holding losses on securities
arising during the period (net of tax of $4,732) (8,788) -- (8,788)
--------
Total comprehensive income 457,031
Cash dividend declared on common stock -- -- (204,877)
Exercise of stock options and other, net (1,552 shares) -- 24,298 47,689
Treasury shares issued for acquisitions (3,637 shares) -- 168,091 171,646
Purchase of common stock (8,020 shares) -- (362,289) (362,289)
ESOP debt repayment -- -- 807
- -------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 12,087 $ (169,900) $ 2,722,427
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $42,620 of preferred stock at December 31, 1995.
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
40 Notes to Consolidated Financial Statements
Note 1 Summary of Significant
Accounting Policies
The Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles and prevailing industry standards. The
following is a description of the significant accounting policies used in the
preparation of the Consolidated Financial Statements.
Business
Summit Bancorp (the "Company") is a bank holding company registered under the
Bank Holding Company Act of 1956. Through its bank and non-bank subsidiaries, a
full range of financial services are provided to its customers in a competitive
environment. Summit Bancorp is regulated by various Federal and state agencies
and is subject to periodic examinations by those regulatory authorities.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the
Company after elimination of all significant intercompany accounts and
transactions. Certain prior period amounts have been reclassified to conform to
the financial statement presentation of 1998. The reclassifications have no
effect on shareholders' equity or net income as previously reported.
Prior period financial statements have been restated to include the accounts
and results of operations for all material acquisitions accounted for as a
pooling-of-interests combination. For acquisitions using the purchase method of
accounting, results of operations are included from the date of acquisition. The
assets and liabilities of companies acquired under the purchase method of
accounting have been adjusted to estimated fair values at the date of
acquisition; the resulting net premium is being amortized into income over the
estimated remaining lives of the related assets and liabilities.
In the preparation of financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from these estimates.
Securities
Securities are classified into one of three categories: trading account,
held to maturity, and available for sale.
Securities that are purchased specifically for short-term appreciation with
the intent of selling in the near future are classified as trading account
securities. Trading account securities are carried at fair value with realized
and unrealized gains and losses reported in non-interest income.
Debt securities purchased with the intent and ability to hold until maturity
are classified as securities held to maturity and are carried at cost, adjusted
for amortization of premiums and accretion of discounts using the level yield
method.
All other securities, including equity securities, are classified as
securities available for sale. Securities available for sale may be sold prior
to maturity in response to changes in interest rates, prepayment risk,
asset/liability management, or other factors. These securities are carried at
fair value with unrealized gains and losses, including the effect of hedges, if
any, reported net of tax, as a separate component of shareholders' equity.
Realized gains and losses, which are generally computed using the specific
identification method, are reported in non-interest income.
Loans
Loans are generally carried at the principal amount outstanding, net of unearned
discounts and deferred loan origination fees and costs. Interest income on loans
is accrued and credited to interest income as earned. Loan origination fees and
certain direct loan origination costs are deferred and amortized over the
estimated life of the loan in interest income as an adjustment to the yield
using the level yield method. Other loan fees are recognized as earned and are
included in non-interest income.
Residential mortgage loans that are serviced for others are not included in
the Consolidated Balance Sheet. Fees earned for servicing loans are reported as
non-interest income primarily when the related loan payments are collected. Loan
servicing costs are charged to non-interest expense as incurred.
Loans held for sale consist of residential mortgages and are carried at the
lower of cost or market using the aggregate method. Gains and losses on loans
sold are included in non-interest income.
Non-performing loans consist of commercial and industrial, lease finance,
construction and development, and commercial mortgage loans for which the
accrual of interest has been discontinued. These loans are classified as
non-performing and are considered impaired when they are 90 days or more past
due as to principal or interest, or where reasonable doubt exists as to timely
collectibility.
At the time a loan is placed on non-accrual status, previously accrued and
uncollected interest is reversed against interest income. Interest income on
non-accrual loans may be credited to income on a cash basis; however, if
ultimate collectibility of principal is in doubt, interest collections are
applied as principal reductions. A loan is transferred to accrual status when it
is contractually current and its future collectibility is expected.
Consumer loans and residential mortgages, which are collectively evaluated,
are specifically excluded from the population of impaired loans. Interest
accruals on consumer and residential mortgages cease at 90 days, at which time
previously accrued interest is reversed. Generally, consumer loans which are not
secured by real estate are charged off when they are 120 days past due. All
other loans, or portions thereof, are charged off, when deemed uncollectible.
The impairment of a non-performing loan is measured based on the present
value of the expected future cash flows, discounted at the loan's effective
interest rate, or on the underlying value of collateral for collateral dependent
loans. The impaired loan's carrying value in excess of the expected cash flows
or collateral value, is specifically reserved for or is charged to the allowance
for loan losses.
<PAGE>
Summit Bancorp and Subsidiaries 41
Allowance for Loan Losses
The allowance for loan losses is a valuation reserve available for losses
incurred or inherent in the loan portfolio and other extensions of credit.
Credit losses arise primarily from the loan portfolio, but may also be derived
from other credit-related sources including commitments to extend credit,
guarantees, and standby letters of credit. Additions are made to the allowance
through periodic provisions which are charged to expense. All losses of
principal are charged to the allowance when incurred or when a determination is
made that a loss is expected. Subsequent recoveries, if any, are credited to the
allowance.
The adequacy of the allowance for loan losses is determined through a
quarterly review of outstanding loans and commitments to extend credit. The
impact of economic conditions on the creditworthiness of the borrowers is
considered, as well as loan loss experience, changes in the composition and
volume of the loan portfolio, and management's assessment of the risks inherent
in the loan portfolio. These and other factors are used in assessing the overall
adequacy of the allowance for loan losses and the resulting provision for loan
losses.
Premises and Equipment
Premises, furniture, equipment, and leasehold improvements are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method. Premises, furniture, and equipment
are depreciated over the estimated useful life of the assets, or terms of the
leases, as applicable. Estimated useful lives are ten to forty years for
premises, and three to ten years for furniture and equipment. Leasehold
improvements are generally amortized over the terms of the leases. Included in
premises and equipment are capitalized software costs, including salaries and
benefits for internally developed software. These costs are amortized over the
estimated useful life of the software. Maintenance and repairs are charged to
non-interest expenses as incurred, while renewals and major improvements are
capitalized. Upon disposition, premises, furniture, and equipment are removed
from the property accounts at their carrying amount with the resulting gain or
loss credited or charged to non-interest income.
Other Real Estate Owned (OREO)
Included in "Other Assets," OREO is carried at the lower of cost or fair value,
less estimated cost to sell. When a property is acquired, the excess of the
carrying amount over fair value, if any, is charged to the allowance for loan
losses. An allowance for OREO has been established, through charges to OREO
expense, to maintain properties at the lower of cost or fair value less
estimated cost to sell. Operating results, including rental income, operating
expenses, and gains and losses realized from the sale of these properties, are
included in non-interest expenses.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired through purchase acquisitions. The
amortization of goodwill is on a straight-line basis over the estimated periods
to be benefited, ranging from ten to twenty-five years, and is included in
non-interest expense.
Other intangible assets primarily consist of core deposit intangibles which
represent the intangible value of depositor relationships assumed in purchase
acquisitions. The amortization of these intangibles over their estimated periods
of benefit, ranging from five to ten years, and is included in non-interest
expense.
Mortgage Servicing Rights
Mortgage servicing rights are recorded when purchased or originated mortgage
loans are sold, with servicing rights retained. The cost of each mortgage loan
is allocated between the mortgage servicing right and the loan (without the
servicing right) based on their relative fair values. Mortgage servicing rights,
which are classified in "Other Assets," are amortized over the estimated net
servicing life and, on a quarterly basis, are evaluated for impairment based on
their fair value.
The fair value is estimated using the present value of expected future cash
flows along with numerous assumptions including servicing income, cost of
servicing, discount rates, prepayment anticipations, and default rates. On a
quarterly basis, the servicing rights are measured for impairment. The portfolio
is stratified by loan type and interest rate, and impairment adjustments, if
any, are recognized through the use of a valuation allowance.
Derivative Financial Instruments
Off-balance-sheet financial derivatives are used as part of the overall
asset/liability management process. These instruments are used to manage risk
related to changes in interest rates. At December 31, 1998, the portfolio of
derivative financial instruments consisted primarily of interest rate swaps,
caps, and floors.
Interest rate swaps are agreements with counterparties to exchange periodic
interest payments calculated on a notional principal amount and are accounted
for under the accrual method. To qualify for accounting under the accrual
method, the swaps must be designated to interest-bearing assets or liabilities
and must modify their interest rate characteristics over the term of the
agreement or the designated instrument, whichever is shorter. The net periodic
interest payments or receipts arising from these instruments are recognized in
interest income or interest expense as yield adjustments to the designated asset
or liability.
Interest rate caps and floors are agreements in which, for an upfront premium
and on a predetermined future date, the counterparty agrees to pay an interest
amount based on the movement of specified market interest rates either above or
below a predetermined level. The payments, if applicable, are derived from the
measured rate variance multiplied by the contractual notional volume. To qualify
for accrual accounting, interest rate caps and floors must be designated to
interest-bearing assets or liabilities and must modify their interest rate
characteristics over the term of the agreement or the designated instrument,
whichever is shorter.
<PAGE>
42
Costs of interest rate caps and floors are deferred and amortized in interest
income or interest expense as adjustments to the yield of the designated
instrument. Unamortized costs are included in "Other Assets." Payments received
on these caps and floors are recognized using the accrual method as adjustments
to interest income or interest expense of the designated instruments.
Derivatives that are not used to manage interest rate risk are carried at
market value, with the changes in market value recognized in earnings.
Additionally, changes in the fair value of derivatives are also reported in the
financial statements if they are hedging on-balance sheet financial instruments
accounted for at fair value, with the changes in market value recorded, net of
tax, in shareholders' equity.
If derivatives are terminated, realized gains and losses on these instruments
are deferred and amortized in interest income and interest expense as yield
adjustments to the designated asset or liability over the shorter of the
remaining life of the agreement or the designated asset or liability. If the
designated asset or liability related to a derivative matures, is sold,
extinguished, or terminated, the amount of the previously unrecognized gain or
loss is recognized at that time in earnings.
Stock-Based Compensation
Stock-based compensation is accounted for using the intrinsic value based method
as prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." Included in the Notes to
Consolidated Financial Statements are the proforma disclosures required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which assumes the fair value based method of
accounting has been adopted.
Retirement Plans
Several formal non-contributory retirement plans exist which cover substantially
all full-time employees. Annual contributions are made to the plans in amounts
at least equal to the minimum regulatory requirements and no greater than the
maximum amount that can be deducted for Federal income tax purposes. The costs
associated with these benefits are accrued based on actuarial assumptions and
included in non-interest expense.
Restructuring Charges
Restructuring charges are recorded in conjunction with acquisitions and the
subsequent merger of the acquired entity's operations. These charges include
only identified direct and incremental costs associated with these acquisitions.
Charges for personnel expenses include severance pay and benefits for
terminated employees including external placement costs. Terminated employees
include employees of both acquired entities and the Company, whose jobs have
been eliminated due to redundant operations. Charges for real estate result from
the costs incurred when branches and other operation facilities are considered
duplicate operations. These facilities are sold and consolidated, including
lease-termination costs, write-downs of owned properties, leasehold
improvements, and other facility-related costs. Charges for professional fees
include costs for investment banking, accounting, and legal fees. Charges for
data processing include costs associated with the termination of contracts and
the disposal or write-off of duplicate or non-usable software or hardware
systems. Additional charges include costs incurred for account conversions,
regulatory communications, and other merger costs.
Income Taxes
The amount provided for Federal income taxes is based on income reported for
Consolidated Financial Statement purposes, after elimination of Federal
tax-exempt income. The amount provided for state income taxes is based on income
reported by each subsidiary on a stand-alone basis.
Deferred Federal and state tax assets and liabilities are recognized for the
expected future tax consequences of existing differences between financial
statement and tax bases of existing assets and liabilities, as well as for
operating losses. The effect of a change in the tax rate on deferred taxes is
recognized in the period of the enactment date.
A consolidated Federal income tax return is filed with the amount of income
tax expense or benefit computed and allocated to each subsidiary on a separate
return basis.
Net Income per Common Share
Basic net income per common share is calculated by dividing net income, less the
dividends on preferred stocks, if any, by the average common shares outstanding
during the period.
Diluted net income per share is computed in a manner similar to that of basic
net income per 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 were issued during the reporting period.
<PAGE>
43
Note 2 Business Combinations
Acquisitions
On March 1, 1997, the acquisition of B.M.J. Financial Corp. (BMJ) was completed.
This transaction was accounted for as a pooling of interests, and was recorded
as an adjustment to shareholders' equity on January 1, 1997, as it was not
considered material to the Consolidated Financial Statements.
The acquisition of Collective Bancorp, Inc. (Collective) was completed on
August 1, 1997, in a pooling-of-interests transaction, and all financial
information has been restated.
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 thousand shares of treasury stock.
These acquisitions were accounted for as purchases, and Corporate Dynamics' and
Philadelphia Benefits Corp.'s results of operations have been included from
acquisition date. The cost in excess of the fair value of net assets acquired
resulted in goodwill of $18.9 million.
W.M. Ross and Company, Inc., a property and casualty insurance brokerage
firm, was acquired on August 31, 1998, with the issuance of 280 thousand shares
of treasury stock. The acquisition was accounted for as a purchase, and W.M.
Ross and Company's results of operations have been included since acquisition
date. The cost in excess of the fair value of net assets acquired resulted in
goodwill of $12.4 million.
On October 30, 1998, Spectrum Financial Group, Inc., an employee benefits
brokerage operation, was acquired by issuing 383 thousand shares of treasury
stock. Its operations are conducted through its wholly owned subsidiary known by
its registered alternative name, Madison Consulting Group. The acquisition was
accounted for as a purchase, and Madison Consulting Group's results of
operations have been included since acquisition date. The cost in excess of the
fair value of net assets acquired resulted in goodwill of $14.1 million.
The acquisition of NSS Bancorp, Inc., (NSS), which operates eight branches in
Connecticut, was completed on November 21, 1998. This transaction was accounted
for as a purchase and NSS's results of operations have been included since
acquisition date.
On August 25, 1998, a definitive merger agreement was announced to acquire
New Canaan Bank and Trust Company (New Canaan) which operates four branches in
Connecticut. At December 31, 1998, New Canaan had total assets of $181.6
million, loans of $104.9 million, and deposits of $161.6 million. The
transaction is expected to be consummated in the first quarter of 1999 and will
be accounted for as a purchase.
A summary of completed bank acquisitions for the past three years is provided
below.
Restructuring Charges
Restructuring charges of $110.7 million were recorded in 1996 related to the
acquisitions of The Summit Bancorporation, The Flemington National Bank and
Trust Company, Garden State Bancshares, and a major in-store branch initiative.
The charges for these transactions have been fully paid and utilized to
integrate these acquisitions into the Company's operations as of December 31,
1998.
During 1997, the Company recorded restructuring charges of $83.0 million for
merger-related expenses associated with the Collective and BMJ acquisitions.
The Collective acquistion accounted for $56.5 million of the 1997
restructuring charges while the remaining $26.5 million was attributed to BMJ.
Charges recorded for personnel, real estate, and professional fee expenses
amounted to $26.2 million, $18.5 million, and $13.6 million, respectively.
Charges for data processing were $16.0 million and the remaining $8.7 million
was for account conversions, regulatory communications, and other merger costs.
Charges resulting from the BMJ acquisition have been fully utilized.
Collective's operations were merged into Summit Bank NJ in the first quarter of
1998. At December 31, 1998, the remaining liability balance associated with the
restructuring charges amounted to $15.6 million, and are for continuing payment
of severance arrangements to terminated employees, and for real estate that is
currently not in operation. It is expected that the remaining liability will be
used in 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Summary of Completed Bank Acquisitions Goodwill &
Intangibles Cash Shares Method of
(In millions) Date Assets Loans Deposits Recorded Paid Issued Accounting
- -----------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NSS Bancorp, Inc. Nov. 21 $ 654.9 $ 410.0 $ 448.0 $100.1 $ -- 3.0 Purchase
1997
Collective Bancorp, Inc. Aug. 1 5,478.6 2,910.6 3,472.5 -- -- 27.3 Pooling
B.M.J. Financial Corp. Mar. 1 676.0 449.0 552.0 -- -- 6.0 Pooling
1996
Central Jersey Financial Corporation Dec. 7 446.6 200.5 376.8 42.4 -- 3.5 Purchase
Continental Bancorporation* Oct. 1 161.3 61.4 129.5 16.9 25.7 -- Purchase
The Summit Bancorporation Mar. 1 5,654.1 3,562.2 4,693.7 -- -- 51.1 Pooling
The Flemington National Bank and Trust Company Feb. 23 285.9 190.6 257.5 -- -- 2.0 Pooling
Garden State Bancshares, Inc.** Jan. 16 311.8 208.8 281.8 -- -- 4.5 Pooling
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Amounts included in the August 1, 1997, Collective Bancorp, Inc. acquisition.
** Amounts included in the March 1, 1996, The Summit Bancorporation acquisition.
<PAGE>
44
Note 3 Securities
The following table provides the major components of securities available for
sale and held to maturity at amortized cost and fair value.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1998
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal agencies $2,900,023 $ 18,928 $ 14,659 $2,904,292
States and political subdivisions 15,209 1 -- 15,210
Other securities:
Mortgage-backed 621,538 796 2,187 620,147
Other debt 67,912 778 68 68,622
Equities, net 346,250 17,068 648 362,670
- ------------------------------------------------------------------------------------------------------
Total other 1,035,700 18,642 2,903 1,051,439
- ------------------------------------------------------------------------------------------------------
$3,950,932 $ 37,571 $ 17,562 $3,970,941
- ------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government and Federal agencies $3,830,785 $ 18,248 $ 6,672 $3,842,361
States and political subdivisions 144,563 7,156 4 151,715
Other securities:
Mortgage-backed 1,980,713 7,581 10,360 1,977,934
Other debt 59,749 433 1,352 58,830
- ------------------------------------------------------------------------------------------------------
Total other 2,040,462 8,014 11,712 2,036,764
- ------------------------------------------------------------------------------------------------------
$6,015,810 $ 33,418 $ 18,388 $6,030,840
- ------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------ --------
Gross Gross
Amortized Unrealized Unrealized Fair Carrying
(In thousands) Cost Gains Losses Value Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Government and Federal agencies $4,419,632 $ 24,330 $ 12,893 $4,431,069 $2,277,428
States and political subdivisions 11,087 34 -- 11,121 12,906
Other securities:
Mortgage-backed 295,067 1,536 783 295,820 317,669
Other debt 41,706 721 2,524 39,903 31,116
Equities, net 272,068 24,928 13 296,983 232,932
- -----------------------------------------------------------------------------------------------------------------
Total other 608,841 27,185 3,320 632,706 581,717
- -----------------------------------------------------------------------------------------------------------------
$5,039,560 $ 51,549 $ 16,213 $5,074,896 $2,872,051
- -----------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government and Federal agencies $3,022,413 $ 15,523 $ 23,174 $3,014,762 $2,345,444
States and political subdivisions 180,715 8,597 72 189,240 227,526
Other securities:
Mortgage-backed 895,177 930 8,260 887,847 2,717,237
Other debt 59,238 529 34 59,733 131,886
- -----------------------------------------------------------------------------------------------------------------
Total other 954,415 1,459 8,294 947,580 2,849,123
- -----------------------------------------------------------------------------------------------------------------
$4,157,543 $ 25,579 $ 31,540 $4,151,582 $5,422,093
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Included in interest on securities held to maturity and securities available
for sale is tax-exempt income on certain state and municipal securities which
amounted to $10.4 million, $13.3 million, and $16.6 million for 1998, 1997, and
1996, respectively.
Gross realized gains on securities available for sale amounted to $12.3
million, $8.3 million, and $9.3 million, while gross realized losses amounted to
$5.7 million, $2.4 million, and $3.9 million for the years 1998, 1997, and 1996,
respectively. These amounts are included in non-interest income as securities
gains in the Consolidated Statements of Income. Also included in securities
gains are gains and losses realized from the early redemption of securities.
The carrying value of investment securities pledged to secure public funds
and securities sold under agreements to repurchase, as well as for other
purposes required by law, was $3.8 billion at December 31, 1998.
The table below provides the remaining contractual yields of debt securities
within the investment portfolios. The carrying value of securities at December
31, 1998, is distributed by contractual maturity. Mortgage-backed securities and
other securities which may have principal prepayment provisions are distributed
based on contractual maturity, adjusted for historical prepayments. Expected
maturities will differ materially from contractual maturities as a result of
early prepayments and calls.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Within After one year After five years
one year through five years through ten years
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------
Securities Available for Sale:
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and Federal agencies $ 167,772 5.82% $ 230,176 6.03% $ 169,634 6.46%
States and political subdivisions 3,595 4.27 -- -- -- --
Other securities:
Mortgage-backed 25,358 6.21 58,867 6.32 75,678 6.17
Other debt -- -- -- -- 970 7.84
Equities, net 362,670 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total other 388,028 6.21 58,867 6.32 76,648 6.19
- ----------------------------------------------------------------------------------------------------------------------
$ 559,395 5.84% $ 289,043 6.09% $ 246,282 6.38%
- ----------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government and Federal agencies $ 8,991 6.24% $ 100,451 6.09% $ 277,546 6.18%
States and political subdivisions 24,508 6.15 85,249 5.99 19,541 6.03
Other securities:
Mortgage-backed 83,550 6.74 386,896 6.16 96,957 6.53
Other debt 393 7.81 28,335 7.78 21,326 5.99
- ----------------------------------------------------------------------------------------------------------------------
Total other 83,943 6.75 415,231 6.27 118,283 6.43
- ----------------------------------------------------------------------------------------------------------------------
$ 117,442 6.59% $ 600,931 6.20% $ 415,370 6.24%
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------
After
ten years Total
- --------------------------------------------------------------------- Carrying
(In thousands) Amount Yield Value
- ---------------------------------------------------------------------------------
Securities Available for Sale:
<S> <C> <C> <C>
U.S. Government and Federal agencies $2,336,710 6.27% $2,904,292
States and political subdivisions 11,615 5.71 15,210
Other securities:
Mortgage-backed 460,244 6.276 20,147
Other debt 67,652 6.87 68,622
Equities, net -- -- 362,670
- ---------------------------------------------------------------------------------
Total other 527,896 6.35 1,051,439
- ---------------------------------------------------------------------------------
$2,876,221 6.28% $3,970,941
- ---------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Government and Federal agencies $3,443,797 6.39% $3,830,785
States and political subdivisions 15,265 6.24 144,563
Other securities:
Mortgage-backed 1,413,310 6.44 1,980,713
Other debt 9,695 6.43 59,749
- ---------------------------------------------------------------------------------
Total other 1,423,005 6.44 2,040,462
- ---------------------------------------------------------------------------------
$4,882,067 6.40% $6,015,810
- ---------------------------------------------------------------------------------
</TABLE>
<PAGE>
45
Note 4 Loans
The composition of the loan portfolio, net of unearned discount and deferred
loan origination fees and costs, at December 31 was as follows:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Commercial and industrial $ 5,964,667 $ 5,009,707
Lease finance 809,935 874,533
Construction and development 381,972 369,500
- --------------------------------------------------------------------------------
Total commercial loans 7,156,574 6,253,740
Commercial mortgage 2,888,597 2,703,793
Residential mortgage 5,719,305 5,671,200
- --------------------------------------------------------------------------------
Total mortgage loans 8,607,902 8,374,993
Home equity 3,783,985 2,734,582
Automobile 1,110,919 1,075,487
Other consumer 467,197 449,564
- --------------------------------------------------------------------------------
Total consumer loans 5,362,101 4,259,633
$21,126,577 $18,888,366
- --------------------------------------------------------------------------------
The Company's credit policy emphasizes diversification of risk among
industries and borrowers. Concentrations of credit risk, whether on or off the
balance sheet, exist in relation to certain groups of customers or
counterparties. A group concentration arises when a number of customers or
counterparties have similar economic characteristics that would compromise their
ability to meet contractual obligations or be similarly affected by changes in
economic or other conditions. The Company does not have a significant exposure
to any individual customer, counterparty, or group concentration.
The Company's business is concentrated in New Jersey, eastern Pennsylvania,
and southern Connecticut. A significant portion of the total loan portfolio is
secured by real estate or other collateral located in these states. This
concentration is mitigated by the diversification of the loan portfolio among
commercial, commercial mortgage, residential mortgage and consumer loans. The
commercial and industrial loan portfolio represents approximately 28% of the
entire loan portfolio and has no concentration greater than 10% in any specific
industry.
At December 31, 1998, the ten largest commercial and commercial mortgage
loans had outstanding balances of $423.9 million and unexercised commitments of
$333.4 million.
Included in the commercial and commercial mortgage loan portfolios are
impaired loans for which the accrual of interest has been discontinued.
Non-performing loans were $86.7 million and $85.1 million at December 31, 1998
and 1997, respectively. These loans will return to accrual status only if they
become contractually current and future collectibility of amounts due is
reasonably assured.
The average balance of non-performing loans for 1998 and 1997 was $76.9
million and $104.1 million, respectively. The amount of cash basis interest
income that was received on these loans was $2.6 million in 1998 and $2.5
million in 1997.
Transactions in the allowance for loan losses were as follows:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, January 1 $296,494 $280,611 $293,160
Acquisition adjustment 5,416 9,994 8,492
Provision charged to expense 66,000 59,100 64,034
- --------------------------------------------------------------------------------
367,910 349,705 365,686
- --------------------------------------------------------------------------------
Charge offs 74,042 86,675 108,306
Recoveries 28,946 33,464 23,231
- --------------------------------------------------------------------------------
Net charge offs 45,096 53,211 85,075
- --------------------------------------------------------------------------------
Balance, December 31 $322,814 $296,494 $280,611
- --------------------------------------------------------------------------------
The allocation of the allowance for loan losses at December 31, was as
follows:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Allowance allocated to non-performing loans $ 16,377 $ 20,021
Allowance allocated to performing loans 141,933 109,647
Unallocated allowance 164,504 166,826
- --------------------------------------------------------------------------------
$322,814 $296,494
- --------------------------------------------------------------------------------
Included in residential mortgage loans are mortgage loans held for sale,
which approximated $183.3 million at December 31, 1998, and $75.7 million at
December 31, 1997. These loans are accounted for at the lower of aggregate cost
or market value.
Unearned discount on loans and leases at December 31, 1998 and 1997, were
$90.5 million and $108.9 million, respectively.
Note 5 Premises and Equipment
The major components of premises and equipment at December 31 were as follows:
- -----------------------------------------------------------------------------
(In thousands) 1998 1997
- -----------------------------------------------------------------------------
Land $ 30,353 $ 32,680
Premises and leasehold improvements 342,322 302,982
Furniture and equipment 240,764 248,578
- -----------------------------------------------------------------------------
613,439 584,240
Less accumulated depreciation and amortization 342,596 339,327
- -----------------------------------------------------------------------------
$270,843 $244,913
- -----------------------------------------------------------------------------
Amounts charged to non-interest expense for depreciation and amortization
amounted to $34.8 million in 1998, $36.2 million in 1997, and $33.3 million in
1996.
<PAGE>
46
Note 6 Other Assets
The major components of other assets at December 31 were as follows:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets, net $117,343 $124,420
Prepaid expenses 61,508 50,789
Mortgage servicing rights, net 18,205 7,908
Limited partnership investments 11,617 6,264
Other real estate owned, net 2,829 14,249
Other 121,596 84,848
- --------------------------------------------------------------------------------
$333,098 $288,478
- --------------------------------------------------------------------------------
Note 7 Deposits
The following is an expected maturity distribution of savings and time deposits
at December 31:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Due in one year or less $15,722,588 $14,885,258
Due between one and two years 1,157,263 1,435,677
Due between two and three years 185,595 334,794
Due between three and four years 104,738 89,925
Due between four and five years 66,042 145,541
Due over five years 14,069 23,290
- --------------------------------------------------------------------------------
$17,250,295 $16,914,485
- --------------------------------------------------------------------------------
As of December 31, 1998 and 1997, there were $1.8 billion and $1.5 billion of
time deposits greater than $100,000, of which $961.0 million and $884.3 million
were classified as commercial certificates of deposit. At year-end 1998 and
1997, there were $20.5 million and $20.7 million, respectively, of overdraft
deposit relationships classified as loans.
The total amount of public funds held on deposit as of December 31, 1998 and
1997, was $1.3 billion and $1.2 billion, on which $180.5 million and $196.7
million of securities were pledged as collateral, respectively.
Note 8 Other Borrowed Funds
Other borrowed funds at December 31 consisted of the following:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Securities sold under agreements to repurchase $1,062,591 $2,490,309
Federal funds purchased 1,003,100 655,425
Federal Home Loan Bank advances 910,000 --
Treasury tax and loan 87,792 137,819
Commercial paper 41,899 39,799
Other 84,606 74,601
- --------------------------------------------------------------------------------
$3,189,988 $3,397,953
- --------------------------------------------------------------------------------
Lines of credit, at the Parent Corporation, are available to support
commercial paper borrowings and for general corporate purposes. Interest on
these lines of credit approximates the prime lending rate at the time of
borrowing. Unused lines amounted to $36.0 million at December 31, 1998.
Note 9 Lease Commitments
Non-interest expense include rentals for premises and equipment of $72.0 million
in 1998, $62.6 million in 1997, and $55.2 million in 1996, after a reduction for
sublease rentals of $3.7 million, $3.6 million, and $3.7 million in each of the
respective years. At December 31, 1998, the Company was obligated under a number
of non-cancelable leases for premises and equipment, many of which provide for
increased rentals based upon increases in real estate taxes and the cost of
living index. These leases, most of which have renewal provisions, are
principally non-financing leases. Minimum rentals under the terms of these
leases for the years 1999 through 2003 are $60.4 million, $50.1 million, $40.9
million, $29.8 million, and $20.6 million, respectively. Minimum rentals due
after 2004 are $118.0 million.
Note 10 Long-Term Debt
Long-term debt at December 31 consisted of the following:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Long-term repurchase agreements, 5.06% to
5.63%, due 1999 through 2003 $1,725,125 $ 399,125
FHLB borrowings, 4.00% to 8.45%,
due 1999 through 2016 1,443,790 440,710
8.625% Subordinated notes due
December 10, 2002* 175,000 175,000
8.40% Capital Trust Pass-through
Securities due March 15, 2027* 150,000 150,000
6.75% Subordinated notes due June 15, 2003 49,643 49,564
7.95% Senior notes due August 25, 2003* 20,000 20,000
Collateralized mortgage obligations 5,758 8,150
ESOP Debt due June 30, 2005* 3,394 4,201
- --------------------------------------------------------------------------------
$3,572,710 $1,246,750
- --------------------------------------------------------------------------------
* Indicates Parent Corporation obligation.
The long-term repurchase agreements are secured by U.S. Government and
Federal Agency securities having a book value of $2.6 billion dollars. These
agreements generally have callable features, which would likely be exercised in
a rising rate environment.
The banking subsidiaries are members of the Federal Home Loan Bank (FHLB) and
have access to term financing from the FHLB having a maturity of up to 30 years.
The FHLB borrowings had original maturities greater than one year and are
secured by securities and residential mortgages under a blanket collateral
agreement.
<PAGE>
47
The 8.625% subordinated notes were issued in 1992 and are unsecured. Interest
is payable semi-annually on June 10 and December 10 of each year. The
subordinated notes are not subject to redemption prior to maturity. As of
December 31, 1998, $105.0 million of this debt qualified as Tier II capital.
On March 20, 1997, Summit Capital Trust I (Trust), a statutory business
trust, and a wholly-owned subsidiary of the Company, issued $150.0 million of
8.40% Capital Trust Pass-through Securities to investors (Capital Securities)
and $4.6 million of Common Securities to the Parent Corporation (Common
Securities), both due March 15, 2027 (collectively, Trust Securities). The
Capital Securities have a preference over the Common Securities with respect to
liquidation and other distributions and qualify as Tier I capital. Proceeds from
the issuance of the Trust Securities were immediately used by the Trust to
purchase $154.6 million of 8.40% Junior Subordinated Deferrable Interest
Debentures, due March 15, 2027, of the Parent Corporation (Subordinated
Debentures), said Subordinated Debentures constituting the primary assets of the
Trust. The Subordinated Debentures are redeemable in whole or in part prior to
maturity after March 15, 2007, at premiums which decline annually through the
date of maturity. The Trust is obligated to distribute all proceeds of a
redemption, whether voluntary or upon maturity, to holders of Trust Securities.
The Company's obligations with respect to the Capital Securities and the
Subordinated Debentures, when taken together, provide a full and unconditional
guarantee on a subordinated basis by the Company of the Trust's obligations to
pay amounts when due on the Capital Securities.
Summit Bank NJ issued $50 million of 6.75% subordinated notes in 1993.
Interest is payable semi-annually on June 15 and December 15 of each year. The
6.75% subordinated notes are not subject to redemption prior to maturity. As of
December 31, 1998, $39.7 million of this debt qualified as Tier II capital.
The 7.95% ten-year maturity private placement senior notes were issued in
1993 with interest payable quarterly. The Company has the option to prepay the
notes, subject to certain prepayment provisions.
The collateralized mortgage obligations are secured by investments in
mortgage-backed securities. These mortgage-backed securities have interest rates
ranging from 7.25% to 9.50%.
Principal amounts due on long-term debt for the years 1999 through 2003 are
$205.0 million, $495.6 million, $483.2 million, $172.5 million, and $2.2
billion, respectively.
Note 11 Shareholders' Equity
On April 18, 1997, the shareholders voted in favor of increasing the authorized
number of common shares from 130 million to 260 million. The authorized number
of shares has been adjusted to 390 million as a result of the September 24,
1997, three-for-two common stock split and the par value of the stock was
reduced to $.80 per share from $1.20 per share.
In April 1998, the board of directors authorized a stock repurchase program
providing for the buyback of up to five percent, or 8.9 million shares, of the
Company's outstanding common stock. During 1998, 3.3 million shares of common
stock were acquired under the program and an additional 4.7 million shares were
purchased in connection with corporate acquisitions. The total cost of the
repurchases was $362.3 million. The treasury stock is used for employee benefit
plans, general corporate purposes, and planned acquisitions.
The following table summarizes common stock reserved, available, treasury,
issued and outstanding, and the total shares authorized as of December 31:
- --------------------------------------------------------------------------------
Number of shares (In thousands) 1998 1997
- --------------------------------------------------------------------------------
Unissued and reserved 5,250 7,115
Unissued and available 207,118 206,295
Treasury 3,873 --
Issued and outstanding 173,759 176,590
- --------------------------------------------------------------------------------
Total shares authorized 390,000 390,000
- --------------------------------------------------------------------------------
The total shares unissued and reserved represents the amount of shares
registered with the Securities and Exchange Commission under current
registration statements.
There were 6.0 million shares of preferred stock authorized as of December
31, 1998 and 1997, with no shares issued. All previously outstanding Series B
and C preferred stock was redeemed and retired, in whole, at their stated value
on December 15, 1996.
A Shareholder Rights Plan exists which is designed to ensure fair and equal
treatment for all shareholders in the event of any proposal to acquire the
Company. The terms of the Plan provide that each share of common stock also
represents one "right." Each right will entitle the holder to buy 1/150 of a
share of a new series of preferred stock, Series R, upon the occurrence of
certain events. In addition, upon the occurrence of certain other events,
holders of the rights will be entitled to purchase either shares of this new
preferred stock or shares in an "acquiring person" at half their fair market
value as determined under the plan.
<PAGE>
48
Note 12 Benefit Plans
The Company has a trusteed non-contributory defined benefit retirement plan
covering substantially all of its employees. The benefits are based on years of
service and the employees' final average compensation. The funding policy is to
contribute annually an amount that can be deducted for Federal income tax
purposes. Contributions are intended to provide not only for benefits attributed
for service to date, but also for those expected to be earned in the future. In
addition to pension benefits, certain health care and life insurance benefits
are made available to retired employees. The cost of such benefits are accrued
based on actuarial assumptions from the date of hire to the date the employee is
fully eligible to receive benefits.
Increasing or decreasing the assumed health care cost trend by one percent in
each year would not have a significant impact on the accumulated postretirement
benefit obligation as of January 1, 1998, and the aggregate of the service and
interest components of net benefit expense for the year ended December 31, 1998.
The Company also maintains non-qualified supplemental retirement plans for
certain officers of the company. The plans, which are unfunded, provide benefits
in excess of that permitted to be paid by the pension plan under provisions of
the tax law. The plans' cost was $4.3 million for 1998, $3.2 million for 1997,
and $2.8 million in 1996. At December 31, 1998, the projected benefit obligation
amounted to $28.6 million and the accrued liability amounted to $10.0 million.
Various incentive plans have been established with the intention of providing
added incentive to middle and senior management to increase the profits of the
Company. The amount of the awards are subject to limits as set forth in the
plans. Accruals for the plans amounted to $13.8 million, $11.7 million, and $9.8
million in 1998, 1997, and 1996, respectively.
There is a Savings Incentive Plan which covers employees with one or more
years of service. The plan permits eligible employees to make contributions to
the plan of up to 15% of their base compensation. Under the current plan, the
employer matches 100% of the first 3%, and 50% of the next 3% of employee
contributions. Matching contributions to the plan amounted to $5.4 million, $7.0
million, and $5.6 million in 1998, 1997, and 1996, respectively.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Post-Retirement Benefits
--------------------------------- ------------------------------------
(In thousands) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benefit obligation for services rendered to date Jan. 1 $ 268,689 $ 239,892 $ 230,626 $ 27,104 $ 29,921 $ 36,159
Service cost 13,869 10,876 11,226 376 303 422
Interest cost 20,662 19,293 17,862 1,745 1,997 2,191
Actuarial (gain) loss 28,679 6,518 (9,072) (219) (2,259) (1,401)
Plan amendments -- -- -- -- -- (4,571)
Acquisition -- 8,242 (4,305) -- -- --
Benefits paid (19,161) (16,132) (6,445) (3,168) (2,858) (2,879)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation for services rendered to date Dec. 31 $ 312,738 $ 268,689 $ 239,892 $ 25,838 $ 27,104 $ 29,921
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets fair value Jan. 1 $ 299,703 $ 250,289 $ 219,119 -- -- --
Actual return on plan assets 35,208 43,699 22,548 -- -- --
Employer contribution 11,606 14,220 15,067 -- -- --
Acquisition -- 7,627 -- -- -- --
Benefits paid (19,161) (16,132) (6,445) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets fair value Dec. 31 $ 327,356 $ 299,703 $ 250,289 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets over (under) benefit obligation $ 14,618 $ 31,014 $ 10,397 $ (25,838) $ (27,104) $ (29,921)
Unrecognized transition asset (147) (2,713) (5,292) 14,076 15,082 16,087
Unrecognized prior service cost (2,528) (2,840) 327 (207) (755) (619)
Unrecognized net actuarial gain (loss) 10,487 (6,556) 5,096 (5,766) (5,267) (3,347)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Cost $ 22,430 $ 18,905 $ 10,528 $ (17,735) $ (18,044) $ (17,800)
- ------------------------------------------------------------------------------------------------------------------------------------
Net benefit expense components
Service cost $ 13,869 $ 10,876 $ 11,226 $ 376 $ 303 $ 422
Interest cost 20,662 19,293 17,862 1,745 1,997 2,191
Actuarial loss recognized 935 84 587 -- -- --
Actual return on plan assets (24,506) (21,822) (19,211) -- -- --
Net deferral and amortization (2,878) (2,887) (2,449) 739 802 829
- ------------------------------------------------------------------------------------------------------------------------------------
Net benefit expense $ 8,082 $ 5,544 $ 8,015 $ 2,860 $ 3,102 $ 3,442
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of Dec. 31
Discount rate 6.75% 7.50% 7.50% 6.75% 7.50% 7.50%
Rate of compensation increase 4.75 5.00 5.00 4.75 5.00 5.00
Expected return on plan assets 9.50 9.00 9.00 N/A N/A N/A
Medical benefits cost rate of increase N/A N/A N/A 10.00 11.00 12.00
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
49
Note 13 Stock-Based Compensation
At December 31, 1998, the Company had two types of stock award programs, The
Long-Term Performance Stock Program and Stock Option Programs.
Restricted stock awards and performance stock awards are issued under The
Long-Term Performance Stock Program to reward executives and to retain them by
distributing stock over a period of time. The stock awards granted were 552
thousand shares in 1998, 258 thousand shares in 1997, and 201 thousand shares in
1996. Included in the stock awards granted in 1998 were 80 thousand shares
granted for the retention of key employees in conjunction with the Year 2000
initiative. The fair market value per share of these grants was $46.15 in 1998,
$29.91 in 1997, and $24.64 in 1996. These shares vest over several years and are
recognized as compensation to the employee. The compensation cost charged to
non-interest expense for vested stock awards was $8.7 million, $3.4 million, and
$2.1 million for 1998, 1997, and 1996, respectively.
The Stock Option Programs are designed with a broad scope to align the
interests of a large number of employees with shareholder interests. These
options are intended to be either incentive stock options or non-qualified
options. Options have been granted to purchase common stock principally at the
fair market value of the stock at the date of grant. Options are exercisable
starting one year after the date of grant and generally expire ten years from
the date of grant. Upon exercise of these options, proceeds received in excess
of par value of the shares are credited to surplus.
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used for grants in 1998, 1997, and 1996, respectively: dividend yield of
2.04%, 3.29%, and 3.60%; expected volatility rate of 22%, 23%, and 25%;
risk-free interest rates of 4.63%, 6.42%, and 5.40%; and expected lives of 5
years.
The weighted-average fair value at grant-date for the options awarded during
1998, 1997, and 1996 were $6.99, $3.79, and $5.10, respectively.
The following table summarizes information about stock options at December
31, 1998:
<TABLE>
<CAPTION>
(Shares in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------- ---------------------------------
Weighted-Avg.
Range of Options Remaining Weighted-Avg. Options Weighted-Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2.37 to $11.99 1,023 2.3 years $ 8.66 1,023 $ 8.66
12.00 to 23.99 2,267 5.5 17.60 2,267 17.60
24.00 to 35.99 1,517 7.9 29.07 1,517 29.07
36.00 to 52.00 2,050 9.1 48.61 2 38.46
- ---------------------------------------------------------------------------------------------------------------------------------
$ 2.37 to $52.00 6,857 6.6 years $28.08 4,809 $19.33
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock-based
compensation. Under APB Opinion No. 25, compensation cost for the stock options
is not recognized because the exercise price of the stock options equals the
market price of the underlying stock on the date of grant. Had compensation
expense been recorded for stock options granted as determined under SFAS No.
123, net income would have been reduced by $8.9 million in 1998, $3.7 million in
1997, and $3.6 million in 1996, impacting per share net income by $.05, $.02,
and $.02 in 1998, 1997, and 1996, respectively.
The following is a summary of the status of the Stock Options Programs and
changes during the past three years:
- ----------------------------------------------------------------------------
Weighted-Avg.
(Shares in thousands) Shares Exercise Price
- ----------------------------------------------------------------------------
Outstanding, December 31, 1995 7,043 $ 12.31
Granted 1,208 23.68
Acquired -- --
Exercised 1,537 11.58
Forfeited and expired 41 20.38
- ----------------------------------------------------------------------------
Outstanding, December 31, 1996
(5,121 exercisable shares at a
weighted-avg. exercise price of $12.92) 6,673 14.49
- ----------------------------------------------------------------------------
Granted 1,680 29.75
Acquired 303 14.76
Exercised 2,621 13.58
Forfeited and expired 112 25.96
- ----------------------------------------------------------------------------
Outstanding, December 31, 1997
(4,311 exercisable shares at a
weighted-avg. exercise price of $15.00) 5,923 18.97
- ----------------------------------------------------------------------------
Granted 2,150 48.71
Acquired 137 17.79
Exercised 1,205 17.07
Forfeited and expired 148 43.26
- ----------------------------------------------------------------------------
Outstanding, December 31, 1998
(4,809 exercisable shares at a
weighted-avg. exercise price of $19.33) 6,857 $ 28.08
- ----------------------------------------------------------------------------
<PAGE>
50
Note 14 Other Income and Other Expenses
Other income consisted of the following:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Automated teller access fees $ 16,867 $ 14,877 $ 12,129
International fees 12,747 11,963 10,912
Gain on sale of assets/deposits 4,310 11,157 2,825
Limited partnership investments 8,141 -- --
Trading account gains (losses) 95 (1,583) 477
Other 23,177 23,697 21,866
- --------------------------------------------------------------------------------
$ 65,337 $ 60,111 $ 48,209
- --------------------------------------------------------------------------------
Other expenses consisted of the following:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Legal and professional fees $ 36,797 $ 34,620 $ 30,488
Advertising and public relations 25,402 22,718 16,274
Printing, stationery, and supplies 7,692 8,758 9,583
Deposit insurance premiums 5,314 5,678 9,865
Other real estate owned (3,458) 1,764 3,623
Other 78,765 71,107 72,437
- --------------------------------------------------------------------------------
$ 150,512 $ 144,645 $ 142,270
- --------------------------------------------------------------------------------
Note 15 Income Taxes
The following table details the components of the provision for income taxes:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current provision:
Federal $ 180,691 $ 208,080 $ 116,850
State 17,034 15,456 18,798
- --------------------------------------------------------------------------------
197,725 223,536 135,648
Deferred provision (benefit):
Federal 9,521 (19,121) 13,129
State 2,161 (4,197) 1,254
- --------------------------------------------------------------------------------
11,682 (23,318) 14,383
- --------------------------------------------------------------------------------
$ 209,407 $ 200,218 $ 150,031
- --------------------------------------------------------------------------------
A summary of the differences between the actual income tax provision and the
amounts computed by applying the statutory Federal income tax rate to income is
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax at statutory rate $ 236,329 $ 199,914 $ 151,797
Increase (decrease) in taxes resulting from:
Tax-exempt interest income (6,285) (7,865) (8,571)
State taxes, net of Federal tax effect 12,477 7,318 13,034
Non-taxable distributions from
corporate reorganizations (39,900) -- --
Other, net 6,786 851 (6,229)
- -----------------------------------------------------------------------------------
$ 209,407 $ 200,218 $ 150,031
- -----------------------------------------------------------------------------------
</TABLE>
The significant Federal and state temporary differences, which comprise the
deferred tax assets and liabilities presented at December 31 are as follows:
- -------------------------------------------------------------------------------
(In thousands) 1998 1997
- -------------------------------------------------------------------------------
Deferred tax assets:
Provision for loan losses $ 129,987 $ 114,433
Provision for other real estate owned 1,757 1,020
Restructuring charges 6,175 22,550
Other 34,035 39,387
- -------------------------------------------------------------------------------
171,954 177,390
Deferred tax liabilities:
Leasing operations (39,879) (32,982)
Net unrealized gain on securities (7,024) (11,629)
Other (7,708) (8,359)
- -------------------------------------------------------------------------------
(54,611) (52,970)
-------------------------------------------------------------------------------
Net deferred tax asset $ 117,343 $ 124,420
-------------------------------------------------------------------------------
Included in deferred tax assets, "Other," is a valuation allowance which has
been established against certain Federal and state temporary differences. The
valuation allowance was $6.6 million at December 31, 1998, and $7.0 million at
December 31, 1997. At December 31, 1998, there was a deferred state tax asset of
$5.7 million resulting from operating loss carryforwards, which is partially
reserved by the valuation allowance.
Management believes, based upon current facts, that more likely than not,
there will be sufficient taxable income in future years to realize the deferred
tax assets. However, there can be no assurance about the level of future
earnings.
Included in shareholders' equity are income tax benefits attributable to
vested stock awards and the exercise of non-qualified stock options of $11.3
million, $14.4 million, and $4.6 million for the years ended December 31, 1998,
1997, and 1996, respectively.
Note 16 Net Income per Common Share
Net income per common share was computed as follows:
- --------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $465,819 $370,965 $283,675
Less: Preferred dividends -- -- 2,544
- --------------------------------------------------------------------------------
Net income available to common
shareholders $465,819 $370,965 $281,131
- --------------------------------------------------------------------------------
Weighted-average common shares
outstanding 175,076 175,128 166,673
Plus: Common stock equivalents 1,967 2,331 2,115
- --------------------------------------------------------------------------------
Diluted weighted-average common
shares outstanding 177,043 177,459 168,788
- --------------------------------------------------------------------------------
Net income per common share:
Basic $ 2.66 $ 2.12 $ 1.69
Diluted 2.63 2.09 1.67
- --------------------------------------------------------------------------------
At December 31, 1998 and 1996, there were 2.0 million and 236.9 thousand
stock options not included as common stock equivalents because the exercise
prices exceeded the average market value.
<PAGE>
51
Note 17 Lines of Business
The Company, for management purposes, is segmented into the following lines
of business: Retail Banking, Commercial Banking, and Investment Services and
Private Banking. Activities not included in these lines are reflected in
Corporate and Other. The lines have been structured according to the customer
groups served.
Financial performance of the business lines is monitored with an internal
profitability measurement system. Line of business information is based on
management accounting practices that conform to and support the current
management structure and is not necessarily comparable with similar information
for any other financial institution. The profitability measurement system uses
internal management accounting policies that ensure business lines results
reasonably refiect the underlying economics of each business compiled on a
consistent basis.
Retail Banking sells and delivers retail banking products and services to
individuals and small businesses through approximately 380 traditional and 60
supermarket branches in New Jersey, eastern Pennsylvania, and southern
Connecticut. In addition to traditional retail banking services, retail offers
its customers an expanding array of 24-hour banking services through more than
600 ATMs, telephone banking centers, and its PC Banking network. It also
includes a broad selection of small business and consumer loan and deposit
products and a complete range of full-service mortgage banking activities.
Commercial Banking provides a full array of commercial financial services,
including asset-based lending, international trade services, equipment leasing,
real estate financing, private placement, mezzanine financing, aircraft lending,
correspondent banking, treasury services, and structured finance. The Company is
New Jersey's largest based commercial and industrial lender servicing over 30
thousand clients within 15 major industry groups.
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. Private Banking
provides personal credit services, professional services for lawyers,
accountants and their firms, and business loans and lines of credit.
Corporate and Other includes 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.
A matched maturity funds transfer pricing methodology is employed to assign a
cost of funds to the earning assets, as well as value of funds to the
liabilities of each business line. Provision for loan losses is allocated based
on management's assessment of the historical net charge off ratio for each
business segment. Income tax is allocated based upon the consolidated effective
tax rate after consideration of certain permanent differences that can be
allocated to a specific line of business.
The table below summarizes results by line of business as if operated on a
stand-alone basis for 1998 and 1997. It is impractical to disclose 1996 results
due to system limitations resulting from acquisitions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Results of Operations Investment Services/
Years ended December 31, Retail Banking Commercial Banking Private Banking
---------------- ------------------ ---------------
(In millions) 1998 1997 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 786.4 $ 818.7 $ 256.2 $ 223.2 $ 57.1 $ 53.4
Provision for loan losses 31.6 19.2 32.4 37.9 2.0 2.0
- -----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 754.8 799.5 223.8 185.3 55.1 51.4
Non-interest income 195.1 187.7 47.0 39.2 97.8 70.1
Non-interest expense 531.1 536.8 109.0 105.6 106.8 70.6
Restructuring charges -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
Income (loss) before taxes 418.8 450.4 161.8 118.9 46.1 50.9
Federal and state income taxes 132.7 164.1 49.5 41.0 14.8 18.9
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 286.1 $ 286.3 $ 112.3 $ 77.9 $ 31.3 $ 32.0
- -----------------------------------------------------------------------------------------------------
Selected Average Balances:
- -----------------------------------------------------------------------------------------------------
Securities $ 42.5 $ 40.3 $ -- $ -- $ 21.1 $ 32.7
Loans 11,114.1 10,781.7 7,567.7 6,737.9 1,089.2 932.3
Assets 11,558.1 11,298.5 7,644.4 6,813.6 1,165.1 993.3
Deposits 19,131.3 19,290.1 959.2 849.5 721.6 675.2
- -----------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------
Corporate and Other Consolidated
------------------- ----------------
1998 1997 1998 1997
- ----------------------------------------------
<C> <C> <C> <C>
$ 74.1 $ 49.8 $ 1,173.8 $ 1,145.1
-- -- 66.0 59.1
- ----------------------------------------------
74.1 49.8 1,107.8 1,086.0
10.3 4.9 350.2 301.9
35.9 20.7 782.8 733.7
-- 83.0 -- 83.0
- ----------------------------------------------
48.5 (49.0) 675.2 571.2
12.4 (23.8) 209.4 200.2
- ----------------------------------------------
$ 36.1 $ (25.2) $ 465.8 $ 371.0
- ----------------------------------------------
- ----------------------------------------------
$ 9,371.5 $8,610.1 $ 9,435.1 $ 8,683.1
-- -- 19,771.0 18,451.9
10,567.4 9,777.2 30,935.0 28,882.6
1,250.9 1,164.5 22,063.0 21,979.3
- ----------------------------------------------
</TABLE>
<PAGE>
52
Note 18 Off-Balance-Sheet
Financial Instruments
In the ordinary course of business, the Company and its subsidiaries enter into
a variety of financial instruments that are recorded off the balance sheet. This
reporting is considered appropriate when either the exchange of the underlying
asset or liability has not yet occurred or the notional amounts are used solely
as a means to determine the cash flows to be exchanged.
These off-balance-sheet financial instruments are primarily divided into two
categories: credit-related financial instruments and derivative financial
instruments. Credit-related financial instruments are principally customer
related, while derivative financial instruments are acquired primarily for
asset/liability management purposes.
The following table summarizes the notional amount of off-balance-sheet
financial instruments at December 31:
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Credit-related instruments:
Commitments to extend credit $7,872,805 $7,490,740
Standby letters of credit 353,300 339,158
Commercial letters of credit 99,956 250,945
Derivative instruments:
Interest rate swaps 316,187 433,167
Interest rate caps 102,674 717,869
Interest rate floors 30,000 430,000
Foreign exchange contracts 41,711 52,241
- --------------------------------------------------------------------------------
Credit-Related Financial Instruments
Commitments to extend credit are legally binding agreements to lend to a
customer provided all established contractual conditions are met. These
commitments generally have fixed expiration dates and usually require the
payment of a fee.
Standby letters of credit are conditional guarantees issued to ensure the
performance of a customer to a third party and are generally terminated through
the fulfillment of a specific condition or through the lapse of time.
Commercial letters of credit are conditional commitments, generally less than
180 days, issued to guarantee payment by a customer to a third party upon proof
of an international trade shipment. The short-term nature of these instruments
limits their credit risk.
Fees received from credit-related financial instruments are recognized over
the terms of the contracts and are generally included in other non-interest
income.
The credit risk associated with these financial instruments is essentially
the same as that involved in extending loans to customers and is incorporated in
the assessment of the adequacy of the allowance for loan losses. Credit risk is
managed through the total amount of arrangements outstanding and by applying
normal credit policies. Many of the commitments to extend credit are expected to
expire without being drawn upon and, therefore, the amounts do not necessarily
represent future cash flow requirements.
Derivative Financial Instruments
Activities involving interest rate swaps are primarily attributed to
asset/liability risk management efforts aimed at stabilizing net interest income
through periods of changing interest rates. The interest rate swaps were
acquired to hedge interest rate risk on certain interest-earning assets and
interest-bearing liabilities.
Interest rate swaps are contractual agreements between two parties to
exchange interest payments at particular intervals, computed on different terms,
on a specified notional amount. The notional amounts represent the base on which
interest due each counterparty is calculated and do not represent the potential
for gains or losses associated with the market risk or credit risk of such
transactions.
Under the terms of the interest rate swaps at December 31, 1998, there were
$66.2 million of swap contracts to receive fixed payments of 5.60% with an
expected maturity at February 1999 and an average payout based on the
three-month LIBOR. Additionally, there were $250.0 million of interest rate
swaps to receive payments at the effective Federal funds rate and to make fixed
payments averaging 5.46% with an weighted average maturity of 16 months.
Interest rate caps and floors are agreements which for an up front premium,
and on predetermined future dates, the counterparty agrees to pay an interest
amount based on the movement of specified market interest rates either above or
below a strike rate. The payments, if applicable, are derived from the measured
rate differential multiplied by the contractual notional volume.
These derivative transactions have resulted in decreases of $1.9 million,
$1.3 million, and $2.0 million in net interest income during 1998, 1997, and
1996 respectively.
Credit-related losses can occur in the event of non-performance by the
counterparties to the derivative financial instruments. The credit risk that
results from interest rate swaps, interest rate floors, and interest rate caps
is represented by the fair value of contracts that have a positive value at the
reporting date. At December 31, 1998, the total amount of credit risk was $1.1
million; however, this amount can increase or decrease if interest rates change.
To minimize the risk of credit losses, the Company monitors the credit standing
of the counterparties and establishes exposure limits for individual
counterparties.
The Company enters into contracts to purchase or sell foreign currency to be
delivered at a future date to facilitate customer transactions. The notional
amount represents the outstanding contracts at year end.
<PAGE>
53
Note 19 Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of these
financial instruments, the fair values of such financial instruments are derived
based on the amount and timing of future cash flows and estimated discount
rates, as well as management's best judgment with respect to current economic
conditions. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair
values of those financial instruments and should not be interpreted as an
estimate of the value of the Company taken as a whole. The disclosures do not
address the value of recognized and unrecognized non-financial assets and
liabilities or the value of future anticipated business.
The following methods and assumptions were used to estimate the fair values
of significant financial instruments at December 31, 1998, and 1997.
Financial Assets
Cash, short-term investments, and customer acceptances have relatively short
maturities, or no defined maturities, but are payable on demand, with little or
no credit risk. The carrying amounts reported in the Consolidated Balance Sheets
approximate fair value.
Trading account securities and securities available for sale are reported at
their respective fair values in the Consolidated Balance Sheets. These values
were based on quoted market prices. The fair values of securities held to
maturity were also based upon quoted market prices.
The loan portfolios are segmented based upon loan type and repricing
characteristics. The fair value of most fixed-rate loans is estimated using
discounted cash flow models taking into consideration current offering rates for
loans of similar remaining maturities. The fair value of variable-rate loans is
estimated by adjusting their carrying value to include the value of historical
pricing differentials. Non-performing loans are primarily valued based upon the
net realizable value of the loan's underlying collateral. To maintain
comparability with 1998 reported fair values, the 1997 fair value of loans has
been restated using the same methodologies as noted above.
Financial Liabilities
The fair value of core deposit intangibles, which represents the value of a core
deposit base with an expected duration, is estimated in the overall fair value
of demand and savings deposits. This is computed by assigning term assumptions
to non-maturing categories and discounting the estimated future cash flows using
market rates of deposits with similar remaining maturities. To maintain
comparability with 1998 reported fair values, the 1997 fair value of deposits
has been restated using this same methodology.
The fair values for medium- to long-term deposit liabilities are calculated
by discounting estimated future cash flows using market rates of deposits with
similar remaining maturities.
The fair values for borrowed funds are calculated by discounting estimated
future cash flows using market rates of borrowed funds with similar remaining
maturities. Due to the short maturities of bank acceptances, their carrying
value approximates fair value.
The fair value of long-term debt is based upon quoted market prices. For
long-term debt issuances where quoted market prices are not available, the fair
values are determined using discounted cash flow analyses.
The estimated fair values of accrued interest receivable and accrued interest
payable are considered to be equal to the amounts recognized in the Consolidated
Balance Sheets.
Off-Balance-Sheet Instruments
The estimated fair values of derivative financial instruments are based upon
quoted market prices, without consideration of the market values related to the
hedged on-balance-sheet financial instruments. For commitments to extend credit
and letters of credit, the fair values would approximate fees currently charged
to enter into similar agreements.
The following table presents the carrying amounts and estimated fair values
of financial instruments at December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In millions) 1998 1997
- ----------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and short term
investments $ 1,185.0 $ 1,185.0 $ 1,191.7 $ 1,191.7
Trading account securities 12.6 12.6 35.2 35.2
Securities available for sale 3,970.9 3,970.9 5,074.9 5,074.9
Securities held to maturity 6,015.8 6,030.8 4,157.5 4,151.6
Loans, net 20,803.8 20,998.1 18,591.9 19,182.5
Accrued interest receivable 195.7 195.7 175.2 175.2
Due from customers on
acceptances 18.1 18.1 15.8 15.8
Financial liabilities:
Deposits $ 23,145.1 $ 21,832.1 $ 22,329.4 $ 20,923.8
Other borrowed funds 3,190.0 3,192.3 3,398.0 3,409.5
Long-term debt 3,572.7 3,662.5 1,246.8 1,277.8
Accrued interest payable 94.4 94.4 71.6 71.6
Bank acceptances outstanding 18.1 18.1 15.8 15.8
Off-balance-sheet instruments:
Interest rate swaps NA $ (2.4) NA $ (0.7)
Interest rate floors and caps NA 0.1 NA 7.0
Loan commitments NA (42.0) NA (35.9)
Standby letters of credit NA (2.5) NA (2.4)
Commercial letters of credit NA (0.1) NA (0.3)
Foreign currency contracts NA (1.0) NA 0.0
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
54
Note 20 Regulatory Matters
Cash and Due From Banks
The subsidiary banks are required to maintain reserve balances based principally
upon transaction-type deposits. These reserves are in the form of vault cash and
non-interest bearing balances with a Federal Reserve Bank. The average amount of
required reserves amounted to $407.4 million and $508.5 million in 1998 and
1997, respectively.
Loans to Affiliates
The Company's subsidiary banks are restricted, with certain limited exceptions,
by the Federal Reserve Act from extending credit to affiliated companies,
including the Parent Corporation. Each subsidiary bank is also subject to
collateral security requirements for any loans or extensions of credit permitted
by exception. Further, a subsidiary bank may only engage in most transactions
with other subsidiaries if terms and conditions are at least as favorable to the
bank as those prevailing for transactions with unaffiliated companies. Such
secured loans and other regulated transactions are limited in amount to each of
its affiliates, including the Parent Corporation. The limitation is 10% of the
bank's capital stock and defined surplus per affiliate, and 20% in aggregate to
all of its affiliates. At December 31, 1998, the Parent Corporation had
available credit from its subsidiary banks of approximately $135.0 million.
Subsidiary Dividends
Certain regulatory limitations exist on the availability of subsidiary bank
undistributed net assets for the payment of dividends to the Parent Corporation
without prior approval of bank regulatory authorities.
These restrictions limit the banks' payment of dividends in any calendar year
to the net profit of the current year combined with retained net profits of the
preceding two years. In addition to these statutory restrictions, the subsidiary
banks are required to maintain adequate levels of capital. At December 31, 1998,
the total undistributed net assets of the subsidiary banks was $2.5 billion, of
which $94.2 million was available, under the most restrictive limitations, for
the payment of dividends to the Parent Corporation.
Capital Requirements
The Company is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have an adverse material impact on the
Company. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain amounts and ratios (set
forth in the table below) of Tier I leverage to average assets and Tier I and
total risk-based capital to risk-weighted assets.
At December 31, 1998, the Company and its banking subsidiaries were well
capitalized under the regulatory framework for prompt and corrective action. To
be well capitalized, Tier I leverage, Tier I risk-based capital and Total
risk-based capital must equal or exceed the well capitalized ratios set forth in
the table below. There are no conditions or events that management believes have
changed the Company's or its subsidiary banks' well capitalized ratings.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Capital Ratios for Summit Bancorp and Subsidiary Banks
(In thousands) Minimum Statutory
At December 31, Required Well Capital at Minimum
1998 1997 Capital Capitalized December 31, 1998 Capital
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I Leverage
Summit Bancorp 8.00% 8.76% | $2,567,190 $1,282,860
Summit Bank NJ 6.81 7.29 | 4.00% 5.00% 1,952,740 1,146,305
Summit Bank PA 8.30 8.03 | 232,790 112,193
NSS Bank 8.28 -- 48,480 23,421
Tier I Risk-Based Capital
Summit Bancorp 10.86% 12.64% | $2,567,190 $ 945,891
Summit Bank NJ 9.36 10.65 | 4.00% 6.00% 1,952,740 834,862
Summit Bank PA 10.01 10.10 | 232,790 93,028
NSS Bank 13.50 -- 48,480 14,369
Total Risk-Based Capital
Summit Bancorp 12.72% 14.83% | $3,007,831 $1,891,781
Summit Bank NJ 11.06 12.50 | 8.00% 10.00% 2,308,255 1,669,725
Summit Bank PA 11.62 11.87 | 270,301 186,057
NSS Bank 14.75 -- 52,982 28,739
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
55
Note 21 Parent Corporation Information
(In thousands)
- --------------------------------------------------------------------------------
Condensed Balance Sheets
December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 2,207 $ 2,958
Securities purchased under agreements
to resell 257,798 419,148
Interest-bearing deposits with banks -- 5,000
Securities available for sale 27,444 41,627
Investment in subsidiaries 2,560,630 2,351,698
Due from subsidiaries 299,197 246,186
Premises and equipment, net 819 943
Other assets 58,862 36,829
- --------------------------------------------------------------------------------
Total Assets $3,206,957 $3,104,389
- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 89,597 $ 98,329
Commercial paper 41,899 39,799
Long-term debt 353,034 353,841
- --------------------------------------------------------------------------------
Total liabilities 484,530 491,969
Total shareholders' equity 2,722,427 2,612,420
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $3,206,957 $3,104,389
- --------------------------------------------------------------------------------
(In thousands)
- -------------------------------------------------------------------------------
Condensed Statements of Income
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Operating Income
Dividends from subsidiaries $ 408,600 $ 333,597 $ 237,003
Management fees from subsidiaries 45,703 34,689 34,090
Interest from subsidiaries 33,969 30,964 22,063
Securities gains 6,193 5,458 5,831
Other interest 788 1,009 1,119
Other 1,198 -- 616
- -------------------------------------------------------------------------------
Total operating income 496,451 405,717 300,722
- -------------------------------------------------------------------------------
Operating Expense
Service charges by subsidiaries 44,006 39,269 37,055
Interest 32,473 30,073 19,726
Salaries and employee benefits 13,827 8,783 5,265
Other 2,133 2,837 1,718
- -------------------------------------------------------------------------------
Total operating expense 92,439 80,962 63,764
- -------------------------------------------------------------------------------
Income before taxes and equity in
undistributed net income of
subsidiaries 404,012 324,755 236,958
Federal and state income tax benefits (33,627) (4,695) (7,061)
- -------------------------------------------------------------------------------
437,639 329,450 244,019
Equity in undistributed net income
of subsidiaries 28,180 41,515 39,656
- -------------------------------------------------------------------------------
Net Income $ 465,819 $ 370,965 $ 283,675
- -------------------------------------------------------------------------------
(In thousands)
- -------------------------------------------------------------------------------
Condensed Statements of Cash Flows
Years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Operating Activities
Net income $ 465,819 $ 370,965 $ 283,675
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 798 1,018 1,098
(Increase) decrease in other assets (1,000) (14,562) 5,667
(Decrease) increase in accrued
expenses and other liabilities (12,652) (2,427) 19,299
Equity in undistributed net
income of subsidiaries (28,180) (41,515) (39,656)
Securities gains (6,193) (5,458) (5,831)
- -------------------------------------------------------------------------------
Net cash provided by operating
activities 418,592 308,021 264,252
- -------------------------------------------------------------------------------
Investing Activities
Proceeds from sales of securities
available for sale 14,419 13,911 27,434
Net decrease (increase) in securities
purchased under agreements to resell 166,350 (282,563) 54,665
Purchase of securities available for sale (3,244) (8,186) (17,826)
Payments received on advances to
subsidiaries 215,059 205,510 451,776
Advances to subsidiaries (268,070) (214,446) (507,884)
Purchases of premises and equipment,
net (26) -- (744)
Capital contributions to subsidiaries (15) (35,455) (1,500)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 124,473 (321,229) 5,921
- -------------------------------------------------------------------------------
Financing Activities
Net increase (decrease) in commercial
paper 2,100 (677) 1,973
Proceeds from issuance of long-term
debt -- 154,640 --
Principal payments on long-term debt (807) (8,659) (690)
Dividends paid (199,759) (167,663) (149,489)
Purchase of common stock (362,289) (21,859) (92,268)
Proceeds from issuance of common
stock 16,939 38,495 20,158
Redemption of preferred stock -- -- (42,620)
- -------------------------------------------------------------------------------
Net cash used in financing
activities (543,816) (5,723) (262,936)
- -------------------------------------------------------------------------------
(Decrease) increase in cash and due
from banks (751) (18,931) 7,237
Cash and due from banks at
beginning of year 2,958 19,612 12,302
Beginning cash balance of acquired
entities -- 2,277 73
- -------------------------------------------------------------------------------
Cash and due from banks at end
of year $ 2,207 $ 2,958 $ 19,612
- -------------------------------------------------------------------------------
<PAGE>
56 Summary of Selected Consolidated Financial Data
<TABLE>
<CAPTION>
(Not covered by independent auditors' report) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Summary of Operations (in thousands, except per share data)
Interest income $ 2,175,212 $ 2,064,706 $ 1,906,996
Interest expense 1,001,406 919,617 853,707
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 1,173,806 1,145,089 1,053,289
Provision for loan losses 66,000 59,100 64,034
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,107,806 1,085,989 989,255
Non-interest income 350,227 301,885 260,042
Non-interest expense 782,807 733,691 693,832
Non-recurring charges -- 83,000 121,759
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 675,226 571,183 433,706
Federal and state income taxes 209,407 200,218 150,031
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change in accounting principle 465,819 370,965 283,675
Cumulative effect of a change in accounting principle -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 465,819 $ 370,965 $ 283,675
- ---------------------------------------------------------------------------------------------------------------------------
Net Income (loss) per Common Share:
Before non-recurring items:
Basic $ 2.66 $ 2.43 $ 2.15
Diluted 2.63 2.39 2.12
After non-recurring items:
Basic 2.66 2.12 1.69
Diluted 2.63 2.09 1.67
- ---------------------------------------------------------------------------------------------------------------------------
Common Share Data
Cash dividends declared $ 1.17 $ 1.02 $ 0.90
Book value at year end 15.67 14.79 13.61
Market value at year end 43.69 52.88 29.17
Common stock dividend payout ratio 43.98% 48.11% 53.25%
Average common shares outstanding (in thousands):
Basic 175,076 175,128 166,673
Diluted 177,043 177,459 168,788
- ---------------------------------------------------------------------------------------------------------------------------
Operating Ratios
Before non-recurring items:
Return on average assets 1.51% 1.47% 1.32%
Return on average common equity 17.50 17.08 16.48
After non-recurring items:
Return on average assets 1.51 1.28 1.04
Return on average common equity 17.50 14.92 12.95
Net interest margin 4.05 4.26 4.21
Efficiency ratio 51.41 50.28 52.11
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at year end, in thousands)
Assets $ 33,101,314 $29,964,172 $27,767,271
Deposits 23,145,128 22,329,436 21,629,531
Loans 21,126,577 18,888,366 17,386,059
Shareholders' equity 2,722,427 2,612,420 2,290,838
Long-term debt 3,572,710 1,246,750 695,793
Allowance for loan losses 322,814 296,494 280,611
- ---------------------------------------------------------------------------------------------------------------------------
Loan Quality Ratios & Capital Ratios
Allowance for loan losses to year-end loans 1.53% 1.57% 1.61%
Net charge offs to average loans 0.23 0.29 0.50
Non-performing loans to year-end loans 0.41 0.45 0.80
Total equity to assets 8.22 8.72 8.25
Tier I capital to average assets (leverage) 8.00 8.76 7.73
Tier I capital to risk-adjusted assets 10.86 12.64 11.68
Total capital to risk-adjusted assets 12.72 14.83 14.17
- ---------------------------------------------------------------------------------------------------------------------------
Other Data
Number of banking offices 447 426 423
Number of full-time equivalent employees 8,665 8,566 8,402
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in non-interest income are securities gains of $6.6 million, $5.6
million, $3.9 million, $8.6 million, and $5.0 million, for 1998 through 1994,
respectively.
<PAGE>
<TABLE>
<CAPTION>
Summit Bancorp and Subsidiaries 57
1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,831,934 $ 1,572,370 $ 1,452,643 $ 1,557,627 $ 1,795,491 $ 1,918,257 $ 1,856,435 $ 1,563,822
822,232 599,732 558,889 725,422 1,051,193 1,204,203 1,151,157 915,814
- -----------------------------------------------------------------------------------------------------------------------------------
1,009,702 972,638 893,754 832,205 744,298 714,054 705,278 648,008
72,090 94,347 115,902 167,006 193,825 337,011 98,446 50,349
- -----------------------------------------------------------------------------------------------------------------------------------
937,612 878,291 777,852 665,199 550,473 377,043 606,832 597,659
235,252 217,726 224,187 222,826 184,930 210,922 203,921 165,336
705,459 709,400 734,756 709,352 647,456 618,572 575,478 519,259
-- 48,955 21,500 -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
467,405 337,662 245,783 178,673 87,947 (30,607) 235,275 243,736
166,993 122,014 74,861 56,002 23,613 (16,101) 70,527 67,290
- -----------------------------------------------------------------------------------------------------------------------------------
300,412 215,648 170,922 122,671 64,334 (14,506) 164,748 176,446
-- (1,731) 11,761 -- -- -- (10,730) --
- -----------------------------------------------------------------------------------------------------------------------------------
$ 300,412 $ 213,917 $ 182,683 $ 122,671 $ 64,334 $ (14,506) $ 154,018 $ 176,446
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1.89 $ 1.60 $ 1.21 $ 0.84 $ 0.46 $ (0.14) $ 1.28 $ 1.38
1.87 1.59 1.19 0.83 0.46 (0.14) 1.27 1.37
1.89 1.37 1.19 0.84 0.46 (0.14) 1.19 1.38
1.87 1.36 1.17 0.83 0.46 (0.14) 1.19 1.37
- -----------------------------------------------------------------------------------------------------------------------------------
$ 0.79 $ 0.63 $ 0.46 $ 0.40 $ 0.40 $ 0.68 $ 0.74 $ 0.67
13.04 11.40 10.80 9.99 9.52 9.38 10.09 9.43
23.75 16.09 16.00 16.17 9.75 4.75 12.59 13.83
41.80% 45.99% 38.66% 47.62% 86.96% NA 62.18% 48.55%
157,244 153,698 151,080 141,859 132,059 130,103 124,667 123,014
159,249 155,520 154,167 143,676 132,407 130,103 125,465 123,913
- -----------------------------------------------------------------------------------------------------------------------------------
1.17% 1.03% 0.85% 0.58% 0.31% (0.07)% 0.86% 1.01%
15.49 14.35 11.63 8.68 4.90 (1.35) 12.56 15.07
1.17 0.88 0.83 0.58 0.31 (0.07) 0.81 1.01
15.49 12.28 11.41 8.68 4.90 (1.35) 11.72 15.07
4.28 4.42 4.51 4.36 3.96 3.90 4.19 4.26
55.72 57.07 60.91 62.91 65.29 61.79 61.68 60.86
- -----------------------------------------------------------------------------------------------------------------------------------
$ 26,647,452 $ 25,484,073 $ 22,605,545 $ 21,703,789 $ 21,141,670 $20,484,690 $ 20,186,099 $ 18,555,497
21,232,926 19,981,071 18,956,204 18,576,238 17,766,920 16,599,532 15,441,669 14,710,661
16,413,222 15,048,579 13,552,381 13,325,622 13,620,423 13,787,122 13,956,994 12,637,375
2,130,108 1,813,445 1,691,108 1,548,832 1,317,495 1,277,819 1,359,933 1,267,943
431,754 552,736 492,052 389,267 271,062 395,432 450,541 503,250
293,160 323,336 361,319 378,793 393,246 361,423 185,441 144,359
- -----------------------------------------------------------------------------------------------------------------------------------
1.79% 2.15% 2.67% 2.84% 2.89% 2.62% 1.33% 1.14%
0.70 0.69 1.12 1.35 1.19 1.14 0.47 0.29
1.18 1.38 2.44 3.45 4.30 4.33 1.93 1.09
7.99 7.12 7.48 7.14 6.23 6.24 6.74 6.83
7.63 7.13 7.50 6.98 6.03 5.89 6.68 6.80
11.32 10.51 10.90 10.13 8.82 8.44 NA NA
13.87 13.10 13.73 12.70 10.31 10.07 NA NA
- -----------------------------------------------------------------------------------------------------------------------------------
433 439 435 419 417 413 402 393
8,593 8,800 9,049 8,986 9,216 9,173 9,173 9,154
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
58 Unaudited Quarterly Financial Data Summit Bancorp and Subsidiaries
---------------------------------------------------------------------
(In thousands, except per share data) 1998
---------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $ 555,450 $ 552,045 $ 538,388 $ 529,329
Interest expense 257,675 260,065 243,495 240,171
- -----------------------------------------------------------------------------------------------------------------
Net interest income 297,775 291,980 294,893 289,158
Provision for loan losses 15,000 18,000 18,000 15,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 282,775 273,980 276,893 274,158
Non-interest income 90,115 90,449 90,143 79,520
Non-interest expense 205,069 194,166 191,919 191,653
Non-recurring charges -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 167,821 170,263 175,117 162,025
Federal and state income taxes 50,757 52,402 56,640 49,608
- -----------------------------------------------------------------------------------------------------------------
Net income $ 117,064 $ 117,861 $ 118,477 $ 112,417
- -----------------------------------------------------------------------------------------------------------------
Net Income per Common Share:
Before non-recurring items:
Basic $ 0.67 $ 0.68 $ 0.67 $ 0.64
Diluted 0.67 0.67 0.66 0.63
After non-recurring items:
Basic 0.67 0.68 0.67 0.64
Diluted 0.67 0.67 0.66 0.63
- -----------------------------------------------------------------------------------------------------------------
Common Share Data
Cash dividends declared $ 0.30 $ 0.30 $ 0.30 $ 0.27
Book value at quarter end 15.67 15.19 14.85 15.22
Market value at quarter end 43.69 37.50 47.50 50.13
Common stock dividend payout ratio 44.78% 44.12% 44.78% 42.19%
Average common shares outstanding:
Basic 173,920 173,379 176,127 176,933
Diluted 175,674 175,080 178,232 179,251
- -----------------------------------------------------------------------------------------------------------------
Operating Ratios
Before non-recurring items:
Return on average assets 1.45% 1.50% 1.56% 1.52%
Return on average common equity 17.16 17.95 17.86 17.05
Efficiency ratio 53.23 50.71 49.81 51.90
After non-recurring items:
Return on average assets 1.45 1.50 1.56 1.52
Return on average common equity 17.16 17.95 17.86 17.05
- -----------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at period end)
Assets $ 33,101,314 $ 31,852,214 $ 31,142,043 $ 30,554,690
Deposits 23,145,128 22,146,853 22,106,450 22,215,625
Loans 21,126,577 20,300,663 19,704,103 19,271,927
Shareholders' equity 2,722,427 2,627,974 2,582,582 2,701,367
Long-term debt 3,572,710 2,401,826 1,881,289 1,588,592
Allowance for loan losses 322,814 314,271 308,753 301,264
- -----------------------------------------------------------------------------------------------------------------
Tax-Equivalent Yields and Rates
Interest-earning assets 7.31% 7.45% 7.56% 7.61%
Interest-bearing liabilities 4.22 4.35 4.28 4.29
Net interest spread 3.09 3.10 3.28 3.32
Net interest margin 3.94 3.96 4.16 4.18
- -----------------------------------------------------------------------------------------------------------------
Loan Quality & Capital Ratios
Allowance for loan losses
to quarter-end loans 1.53% 1.55% 1.57% 1.56%
Net charge offs to average loans 0.23 0.25 0.22 0.22
Non-performing assets to
quarter-end loans and OREO 0.42 0.41 0.41 0.45
Total equity to assets 8.22 8.25 8.29 8.84
Tier I capital to avg. assets (leverage) 8.00 8.25 8.39 8.88
Tier I capital to risk-adjusted assets 10.86 11.29 11.68 12.63
Total capital to risk-adjusted assets 12.72 13.33 13.76 14.78
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
(In thousands, except per share data) 1997
----------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations
Interest income $ 529,060 $ 517,501 $ 516,831 $ 501,314
Interest expense 238,583 229,719 230,016 221,299
- ------------------------------------------------------------------------------------------------------------------
Net interest income 290,477 287,782 286,815 280,015
Provision for loan losses 14,000 14,500 15,090 15,510
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 276,477 273,282 271,725 264,505
Non-interest income 86,785 74,172 71,528 69,400
Non-interest expense 191,130 180,786 181,333 180,442
Non-recurring charges -- 56,500 -- 26,500
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 172,132 110,168 161,920 126,963
Federal and state income taxes 59,919 38,956 56,862 44,481
- ------------------------------------------------------------------------------------------------------------------
Net income $ 112,213 $ 71,212 $ 105,058 $ 82,482
- ------------------------------------------------------------------------------------------------------------------
Net Income per Common Share:
Before non-recurring items:
Basic $ 0.64 $ 0.62 $ 0.60 $ 0.57
Diluted 0.63 0.61 0.59 0.56
After non-recurring items:
Basic 0.64 0.41 0.60 0.47
Diluted 0.63 0.40 0.59 0.47
- ------------------------------------------------------------------------------------------------------------------
Common Share Data
Cash dividends declared $ 0.27 $ 0.27 $ 0.24 $ 0.24
Book value at quarter end 14.79 14.33 14.17 13.71
Market value at quarter end 52.88 44.00 33.42 29.17
Common stock dividend payout ratio 42.19% 43.55% 40.00% 42.11%
Average common shares outstanding:
Basic 175,816 175,396 174,905 174,377
Diluted 178,126 177,864 177,123 176,706
- ------------------------------------------------------------------------------------------------------------------
Operating Ratios
Before non-recurring items:
Return on average assets 1.51% 1.50% 1.46% 1.41%
Return on average common equity 17.34 17.02 17.16 16.77
Efficiency ratio 50.74 49.64 50.03 50.70
After non-recurring items:
Return on average assets 1.51 0.98 1.46 1.17
Return on average common equity 17.34 11.19 17.16 13.95
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (at period end)
Assets $ 29,964,172 $ 29,091,106 $ 29,224,687 $ 28,907,850
Deposits 22,329,436 21,938,028 22,167,140 22,330,582
Loans 18,888,366 18,630,663 18,597,663 18,376,154
Shareholders' equity 2,612,420 2,517,439 2,484,062 2,398,015
Long-term debt 1,246,750 1,001,617 910,766 835,744
Allowance for loan losses 296,494 294,114 294,066 290,471
- ------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Yields and Rates
Interest-earning assets 7.62% 7.63% 7.66% 7.64%
Interest-bearing liabilities 4.27 4.20 4.19 4.12
Net interest spread 3.35 3.43 3.47 3.52
Net interest margin 4.21 4.26 4.28 4.29
- ------------------------------------------------------------------------------------------------------------------
Loan Quality & Capital Ratios
Allowance for loan losses
to quarter-end loans 1.57% 1.58% 1.58% 1.58%
Net charge offs to average loans 0.25 0.31 0.25 0.35
Non-performing assets to
quarter-end loans and OREO 0.53 0.58 0.71 0.83
Total equity to assets 8.72 8.65 8.50 8.30
Tier I capital to avg. assets (leverage) 8.76 8.72 8.54 8.41
Tier I capital to risk-adjusted assets 12.64 12.73 12.63 12.41
Total capital to risk-adjusted assets 14.83 15.13 15.04 14.84
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 21
Summit Bancorp, Subsidiary Structure
------------------------------------
as of March 17, 1999
Name Incorp./(Auth)
----- --------------
Summit Bancorp. New Jersey (PA)
Asset Management Corp. New Jersey
First Valley Corporation Pennsylvania
FirstVal Properties, Inc. Pennsylvania
Summit Bank Pennsylvania
Ninth North-Val, Inc. Pennsylvania
Eight North-Val, Inc. Pennsylvania
Sixth North-Val, Inc. Pennsylvania
Summit Financial Services Group, Inc. Pennsylvania (NJ)(NY)(CT)(FL)
UJB Financial Service Corp.
(DBA Summit Service Corp.)(19.4%) New Jersey
India, Inc. Delaware (NJ)
NSS Bank Connecticut
The NSS Realty Corporation Connecticut
Summit Bank New Jersey
34 West-Rt. 22/523 Corporation New Jersey (MD)
Corporate Dynamics New Jersey (PA)
Flemington National Investment Co. New Jersey
GLP, Inc. New Jersey
MJD Asset Corporation New Jersey
New Jersey Affiliated Financial Services, Inc. New Jersey
One Main Properties-Millburn, Inc. New Jersey
Palservco, Inc. New Jersey
Philadelphia Benefits Corporation Pennsylvania (NJ)
Pipco-On-The-Hudson, Inc. New Jersey
Alternative Financial Group, Inc. Pennsylvania
NewPip Properties Co., Ltd. New Jersey
Pipco Delaware, Ltd. Delaware
Pipco Parsippany, Inc. New Jersey
PipHyde Park, Limited New York
PipQuarryCo, Inc. New Jersey
Pro Five, Inc. New Jersey
SJK Asset Corporation New Jersey
Securitization Subsidiary I, Inc. New Jersey
Rockof Corp. New York
CTC Investment Co. Delaware
STC Investment Holding Company New Jersey
S.A.R. Realty Holding Corporation New Jersey
Sethmark Holding Corp. New York
Sethmark Capital Corporation New York
Smithcrest Realty, Inc. New Jersey
Somerset Investment Company, Inc. New Jersey
Spectrum Financial Group, Inc. New Jersey
Shikiar Associates, Inc.
(DBA Madiason Consulting Group) New Jersey
Summit Commercial Leasing Corporation New Jersey (several)
Summit International Trade Finance Corp. New Jersey
Summit Trade Finance (HK), Limited Hong Kong
Summit Mortgage Banking Services, Inc. New Jersey (NY)(DE)PA)
Summit Municipal Lien Investment Corp. New Jersey
Summit Participation Corp. New York
The Old Reliable Corporation, Inc. New Jersey
UJB Financial Service Corporation
(DBA Summit Service Corp.)(80.6%) New Jersey
Ver Valen, Inc. New Jersey
W.M. Ross & Co., Inc. New Jersey
Millburn Service Plan, Inc. New Jersey
Multi-Capital Corp. New Jersey
Ross Alternative Risk Managers, Inc. New Jersey
Summit Capital Trust I Delaware
Summit Commercial Corp. New Jersey(CT)(MD)
Summit Commercial/Gibraltar Corp. New York
Summit Credit Life Insurance Company Arizona
Summit Financial Payment Systems, Inc. New Jersey
Summit Corporate Secretary, Inc. New Jersey
Summit Venture Capital, Inc. New Jersey
The Summit Mortgage Company, Inc. New Jersey(NY)
United Jersey Financial Corp. New Jersey
Note: Summit Bancorp. holds 9.2% of the issued and outstanding shares of
the Class A Common Stock of the NYCE Corporation.
Note: Summit Bank (NJ) and Summit Bank (PA) hold equity stakes in numerous
limited partnerships operating low-incoming housing for tax credits.
EXHIBIT 23
Independent Auditor's Consent
-----------------------------
The Board of Directors
Summit Bancorp:
We consent to incorporation by reference in Registration Statement No. 33-13930
on Form S-8, Registration Statement No. 33-36209 on Form S-8, Registration
Statement No. 33-38172 on Form S-8, Registration Statement No. 33-53870 on Form
S-3, Registration Statement No. 33-58152 on Form S-3, Registration Statement No.
33-62972 on Form S-8, Registration Statement No. 33-54667 on Form S-8,
Registration Statement No. 33-61353 on Form S-8, Registration Statement No.
333-02625 on Form S-8, Registration Statement No. 333-24159 on Form S-8,
Registration Statement No. 333-35075 on Form S-8, Registration Statement No.
333-69119 on Form S-8, Registration Statement No. 333-71435 on Form S-3, and
Registration Statement No. 333-71877 on Form S-8 of Summit Bancorp of our report
dated January 19, 1999, relating to the consolidated balance sheets of Summit
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1998 which report is
incorporated by reference in the December 31, 1998 Annual Report on Form 10-K of
Summit Bancorp.
KPMG LLP
Short Hills, New Jersey
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 10-K FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,129,859
<INT-BEARING-DEPOSITS> 26,360
<FED-FUNDS-SOLD> 28,829
<TRADING-ASSETS> 12,553
<INVESTMENTS-HELD-FOR-SALE> 3,970,941
<INVESTMENTS-CARRYING> 6,015,810
<INVESTMENTS-MARKET> 6,030,840
<LOANS> 21,126,577
<ALLOWANCE> 322,814
<TOTAL-ASSETS> 33,101,314
<DEPOSITS> 23,145,128
<SHORT-TERM> 3,189,988
<LIABILITIES-OTHER> 471,061
<LONG-TERM> 3,572,710
0
0
<COMMON> 142,106
<OTHER-SE> 2,580,321
<TOTAL-LIABILITIES-AND-EQUITY> 33,101,314
<INTEREST-LOAN> 1,580,658
<INTEREST-INVEST> 592,262
<INTEREST-OTHER> 2,292
<INTEREST-TOTAL> 2,175,212
<INTEREST-DEPOSIT> 672,893
<INTEREST-EXPENSE> 1,001,406
<INTEREST-INCOME-NET> 1,173,806
<LOAN-LOSSES> 66,000
<SECURITIES-GAINS> 6,646
<EXPENSE-OTHER> 782,807
<INCOME-PRETAX> 675,226
<INCOME-PRE-EXTRAORDINARY> 465,819
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 465,819
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.63
<YIELD-ACTUAL> 4.05
<LOANS-NON> 86,737
<LOANS-PAST> 45,322
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,018
<ALLOWANCE-OPEN> 301,910
<CHARGE-OFFS> 74,042
<RECOVERIES> 28,946
<ALLOWANCE-CLOSE> 322,814
<ALLOWANCE-DOMESTIC> 158,310
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 164,504
</TABLE>
