FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to_________________
Comission File Number: 1-6451
--------------------------------------------
SUMMIT BANCORP.
(Exact name of registrant as specified in its charter)
New Jersey 22-1903313
- ------------------------------------------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066
- ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(609) 987-3200
- ---------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
As of April 30, 1999 there were 171,254,033 shares of common stock,
$.80 par value, outstanding.
SUMMIT BANCORP
FORM 10-Q
INDEX
Page No.
--------
Part I Financial Information
Item 1. Financial Statements-unaudited
Consolidated Balance Sheets -
March 31, 1999, December 31, 1998 and March 31, 1998................2
Consolidated Statements of Income -
Three and Months Ended March 31, 1999 and 1998......................3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998..........................4
Consolidated Statements of Shareholders' Equity -
Three Months Ended March 31, 1999 and 1998..........................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21
Part II. Other Information.
Item 1. Legal Proceedings...........................................22
Item 2. Changes in Securities and Use of Proceeds...................23
Item 3. Defaults Upon Senior Securities.............................23
Item 4. Submission of Matters to a Vote of Security Holders.........23
Item 5. Other Information...........................................23
Item 6. Exhibits and Reports on Form 8-K............................24
Signature...................................................25
Exhibit Index.............................................. 26
1
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Balance Sheets
Unaudited
(In thousands)
<S> <C> <C> <C>
March 31, December 31, March 31,
1999 1998 1998
---------- ---------- ----------
Assets
Cash and due from banks 1,000,977 1,129,859 1,242,254
Federal funds sold and securities
purchased under agreements to resell 11,701 28,829 101,096
Interest-bearing deposits with banks 27,407 26,360 6,852
Securities:
Trading account securities 10,217 12,553 26,913
Securities available for sale 3,860,136 3,970,941 5,375,723
Securities held to maturity 6,583,209 6,015,810 3,898,724
---------- ---------- ----------
Total securities 10,453,562 9,999,304 9,301,360
Loans (net of unearned discount):
Commercial 7,227,814 7,156,574 6,440,091
Commercial mortgage 2,922,418 2,888,597 2,809,233
Residential mortgage 5,612,161 5,719,305 5,770,620
Consumer 5,391,314 5,362,101 4,251,983
---------- ---------- ----------
Total loans 21,153,707 21,126,577 19,271,927
---------- ---------- ----------
Less: Allowance for loan losses 328,302 322,814 301,264
---------- ---------- ----------
Net loans 20,825,405 20,803,763 18,970,663
---------- ---------- ----------
Premises and equipment 299,961 270,843 244,406
Goodwill and other intangibles 323,060 295,461 183,897
Accrued interest receivable 196,223 195,708 179,685
Due from customers on acceptances 21,499 18,089 16,511
Other assets 317,582 333,098 307,966
---------- ---------- ----------
Total Assets 33,477,377 33,101,314 30,554,690
========== ========== ==========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits 4,754,413 4,933,787 4,680,917
Interest-bearing deposits:
Savings and time deposits 17,644,605 17,250,295 16,681,913
Commercial certificates of
deposit $100,000 and over 821,130 961,046 852,795
---------- ---------- ----------
Total deposits 23,220,148 23,145,128 22,215,625
Other borrowed funds 3,281,005 3,189,988 3,629,944
Accrued expenses and other liabilities 423,632 358,542 324,949
Accrued interest payable 84,660 94,430 77,702
Bank acceptances outstanding 21,499 18,089 16,511
Long-term debt 3,734,392 3,572,710 1,588,592
---------- ---------- ----------
Total liabilities 30,765,336 30,378,887 27,853,323
Shareholders' equity:
Common stock par value $ .80:
Authorized 390,000 shares 142,074 142,106 142,022
Surplus 971,955 1,013,393 1,010,444
Retained earnings 1,794,863 1,728,135 1,531,659
Employee stock ownership plan obligation (2,750) (3,394) (3,932)
Accumulated other comprehensive
income, net of tax 9,488 12,087 21,174
Common stock held in treasury, at cost (203,589) (169,900) -
---------- ---------- ----------
Total shareholders' equity 2,712,041 2,722,427 2,701,367
---------- ---------- ----------
Total Liabilities and Shareholders' Equity 33,477,377 33,101,314 30,554,690
========== ========== ==========
Common shares at period end:
Issued 177,593 177,632 177,528
Treasury 4,901 3,873 -
Outstanding 172,692 173,759 177,528
See accompanying Notes to Consolidated Financial Statements.
2
</TABLE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Income
Unaudited
(In thousands, except per share data)
Three Months Ended
March 31,
1999 1998
Interest Income
Loans 403,667 380,309
Securities:
Trading account securities 82 554
Securities available for sale 59,561 85,022
Securities held to maturity 96,540 62,606
-------- --------
Total securities 156,183 148,182
Federal funds sold and securities
purchased under agreements to resell 145 407
Deposits with banks 450 431
-------- --------
Total interest income 560,445 529,329
-------- --------
Interest Expense
Savings and time deposits 151,402 156,868
Commercial certificates of
deposit $100,000 and over 11,575 12,257
Borrowed funds, including long-term debt 92,124 71,046
-------- --------
Total interest expense 255,101 240,171
-------- --------
Net interest income 305,344 289,158
Provision for loan losses 16,500 15,000
Net interest income after
-------- --------
provision for loan losses 288,844 274,158
-------- --------
Non-Interest Income
Service charges on deposit accounts 30,076 30,284
Service and loan fee income 15,624 12,914
Trust income 11,926 10,227
Retail investment and insurance fees 18,028 11,664
Securities gains 217 1,426
Other 22,286 13,005
-------- --------
Total non-interest income 98,157 79,520
-------- --------
Non-Interest Expenses
Salaries 80,326 76,493
Pension and other employee benefits 30,017 26,618
Furniture and equipment 22,451 20,367
Occupancy, net 19,835 18,500
Communications 9,618 9,532
Advertising and public relations 5,528 5,923
Amoritization of goodwill
and other intangibles 5,871 4,723
Other 31,791 29,497
-------- --------
Total non-interest expenses 205,437 191,653
-------- --------
Net Income before taxes 181,564 162,025
Federal and state income taxes 62,823 49,608
-------- --------
Net Income 118,741 112,417
======== ========
Net Income per Common Share:
Basic 0.68 0.64
Diluted 0.68 0.63
Average Common Shares Outstanding:
Basic 173,794 176,933
Diluted 175,458 179,251
See accompanying Notes to Consolidated Financial Statements.
3
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<S> <C> <C>
Three Months Ended
March 31,
Operating activities 1999 1998
Net income $ 118,741 $ 112,417
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses and other real estate owned 16,500 15,120
Depreciation, amortization and accretion, net 16,806 17,811
Gains on sales of securities (217) (1,426)
Gains on sales of mortgages held for sale (6,553) (2,315)
Gains on the sales of other real estate owned (458) (1,949)
Proceeds from the sales of other real estate owned 1,015 6,445
Proceeds from the sales of mortgages held for sale 273,407 143,703
Originations of mortgages held for sale (275,731) (198,210)
Net decrease in trading account securities 2,336 8,303
Net change in other accrued and deferred income and expense 46,946 30,697
Net cash provided by operating activities 192,792 130,596
Investing activities
Purchases of securities held to maturity (1,247,707) (266,619)
Purchases of investment securities available for sale (717,850) (952,693)
Proceeds from maturities of securities held to maturity 686,463 510,588
Proceeds from maturities of securities available for sale 639,319 483,576
Proceeds from the sales of securities available for sale 231,937 184,266
Net decrease (increase) in Federal funds sold, securities purchased under
agreements to resell and interest bearing deposits with banks 21,281 (89,416)
Net decrease (increase) in loans 66,756 (338,957)
Purchases of premises and equipment, net (25,588) (12,214)
Net cash used in investing activities (345,389) (481,469)
Financing activities
Net decrease in deposits (78,870) (113,811)
Net increase in short-term borrowings 91,017 231,991
Principal payments on long-term debt (23,630) (164,487)
Proceeds from the issuance of long-term debt 185,260 506,535
Dividends paid (52,967) (47,709)
Purchase of common stock (106,384) -
Proceeds from issuance of common stock under stock option plans 2,793 7,490
Net cash provided by financing activities 17,219 420,009
(Decrease) increase in cash and due from banks (135,378) 69,136
Beginning cash balance of acquired entities 6,496 -
Cash and due from banks at beginning of period 1,129,859 1,173,118
Cash and due from banks at end of period $ 1,000,977 $1,242,254
Supplemental disclosure of cash flow information
Cash paid:
Interest payments $ 264,871 $ 234,071
Income tax payments 4,875 915
Noncash investing activities:
Net transfer of loans to other real estate owned 4,921 1,711
See accompanying Notes to Consolidated Financial Statements
</TABLE>
4
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unaudited
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Accum. Other Total
Common Retained ESOP Comprehensive Treasury Shareholders'
Stock Surplus Earnings Obligation Income Stock Equity
---------- --------- ---------- --------- ---------- --------- ----------
Balance, December 31, 1997 $141,272 $987,281 $1,467,193 $(4,201) $20,875 $ - $2,612,420
Comprehensive income:
Net income - - 112,417 - - - 112,417
Unrealized holding gain on securities arising
during the period (net of tax of $660) - - - - 1,226 -
Less: Reclassification adjustment for gains
included in net income (net of tax of $499) - - - - 927 -
----------
Net unrealized holding gains on securities
arising during the period (net of tax of $161) - - - - 299 - 299
----------
Total comprehensive income 112,716
Cash dividend declared on common stock - - (47,951) - - - (47,951)
Employee stock plans (938 shares) 750 23,163 - - - - 23,913
ESOP debt repayment - - - 269 - - 269
---------- ---------- ---------- --------- --------- ---------- ----------
Balance, March 31, 1998 $142,022 $1,010,444 $1,531,659 $(3,932) $21,174 $ - $2,701,367
========== ========== ========== ========= ========= ========== ==========
Balance, December 31, 1998 $142,106 $1,013,393 $1,728,135 $(3,394) $12,087 $(169,900) $2,722,427
Comprehensive income:
Net income - - 118,741 - - - 118,741
Unrealized holding (loss) on securities arising
during the period (net of tax of $1,324) - - - - (2,458) -
Less: Reclassification adjustment for gains
included in net income (net of tax of $76) - - - - 141 -
------- ----------
Net unrealized holding losses on securities
arising during the period (net of tax of $1,399)- - - - (2,599) - (2,599)
----------
Total comprehensive income 116,142
Cash dividend declared on common stock - - (52,013) - - - (52,013)
Employee stock plans (545 shares) (32) (43,005) - - - 25,616 (17,421)
Treasury shares issued
for acquisitions (1,131 shares) - 1,567 - - - 47,079 48,646
Purchase of common stock (2,743 shares) - - - - - (106,384) (106,384)
ESOP debt repayment - - - 644 - - 644
---------- ---------- ---------- --------- --------- ---------- ----------
Balance, March 31, 1999 $142,074 $971,955 $1,794,863 $(2,750) $9,488 $(203,589) $2,712,041
========== ========== ========== ========= ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
Summit Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.) Basis of Presentation
The accompanying financial statements reflect, in the opinion of
management, all normal recurring adjustments necessary to present
fairly the consolidated financial position of Summit Bancorp and
subsidiaries (Summit Bancorp or the Company), the consolidated results
of operations, changes in cash flows and changes in shareholders' equity.
All significant intercompany accounts and transactions have been eliminated
in consolidation. In all material respects, the financial statements
presented comply with the current reporting requirements of
supervisory authorities. Certain prior period amounts have been
reclassified to conform to the financial statement presentation of
1999. For additional information and disclosures required under
generally accepted accounting principles, reference is made to
Summit Bancorp's 1998 Annual Report on Form 10-K.
2.) Acquisitions
On August 31, 1998, Summit Bancorp acquired W.M. Ross and Company, Inc.,
one of the largest privately held property and casualty insurance
brokerage firms in New Jersey. The acquisition was accounted for as a
purchase, with the issuance of 280 thousand shares of treasury stock.
On October 30, 1998, Summit Bancorp acquired Spectrum Financial Group,
Inc., an employee benefits brokerage operation. 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, with the issuance of 383 thousand shares
of treasury stock.
On November 21, 1998, Summit Bancorp completed the acquisition of NSS
Bancorp Inc. NSS Bancorp was headquartered in Norwalk, Connecticut and
operated eight branches with $655 million in assets. This acquisition
was accounted for as a purchase, with the issuance of 3.0 million shares
of treasury stock.
On March 31, 1999, Summit Bancorp completed the acquisition of New Canaan
Bank and Trust Company. New Canaan Bank and Trust Company was headquartered
in New Canaan, Connecticut and operated four branches with $182 million
in assets. This acquisition was accounted for as a purchase, with the
issuance of 1.1 million shares of treasury stock. The cost in excess
of the fair value of net assets acquired resulted in goodwill of $35.1
million.
On February 18, 1999, Summit Bancorp announced that it had entered into
a definitive merger agreement to acquire Prime Bancorp. Prime Bancorp is
a commercial bank with approximately $1.0 billion in assets and 27
branches located in the greater Philadelphia region. The acquisition,
which will be accounted for as a purchase, is expected to be completed
in the third quarter of 1999, subject to normal regulatory and Prime
Bancorp shareholder approvals. Summit Bancorp expects to repurchase
from time to time in the open market outstanding Summit Bancorp shares
in a number equal to the approximate amount of common shares to be issued
in the acquisition, or reissue treasury shares. The number of common
shares to be repurchased or reissued will depend on market conditions
and other factors. Pursuant to the terms of the Merger Agreement, if
the merger is approved and completed, upon the effective date of the
merger, shareholders of Prime will be entitled to receive 0.675 of a
share of Summit common stock in exchange for each share of Prime
common stock owned.
3.) Net Income per Common Share
Basic net income per common share is calculated by dividing net income by
the weighted average common shares outstanding during the period. Diluted
net income per common share is computed similarly to that of basic net
income per common share, except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if all potentially dilutive common shares, principally
stock options, were issued during the reporting period.
In thousands, except per share data
Three months ended March 31,
1999 1998
- ---------------------------------------------------------------
Net Income $118,741 $112,417
Basic weighted-average
common shares outstanding 173,794 176,933
Plus: Common stock equivalents 1,664 2,318
-------------------
Diluted weighted-average
common shares outstanding 175,458 179,251
-------------------
Net income per common share:
Basic $ 0.68 $ 0.64
Diluted 0.68 0.63
- ---------------------------------------------------------------
4.) 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. 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.
5.) Subsequent Events
On April 14, 1999, Summit Bancorp's Board of Directors approved a 10.0
percent increase in the quarterly cash dividend on Summit Bancorp's common
stock from $0.30 to $0.33 per common share. The second quarter dividend
is payable on August 2, 1999, to shareholders of record July 8, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Summit Bancorp is a bank holding company headquartered in Princeton,
New Jersey. Summit Bancorp owns three bank subsidiaries and several
active non-bank subsidiaries. Summit Bancorp's bank subsidiaries provide
a broad range of retail, insurance, commercial and private banking services
as well as trust and investment services to individuals, businesses,
not-for-profit organizations, government entities and other
financial institutions. These services are provided through an extensive
branch network, including supermarket branches and private banking
facilities, as well as through automated teller machines, personal
computers and the internet.
FINANCIAL CONDITION
Total assets at March 31, 1999, were $33.5 billion, an increase of
$376.1 million, or 1.1 percent, from year-end 1998. The growth came
most notably from the held to maturity securities portfolio and was
generally funded with savings and time deposits. The purchase of New
Canaan Bank and Trust Company added $208.5 million to total assets.
Securities held to maturity at March 31, 1999, were $6.6 billion and
were mainly comprised of $4.4 billion of U.S. Government and Federal
agency securities, $2.1 billion of other securities, predominately
corporate collateralized mortgage obligations ("CMOs"), and $138.6
million of state and political subdivision securities. These
securities increased $567.4 million or 9.4 percent from year-end 1998,
primarily as cash flows were invested
in securities held to maturity. For the three months of 1999, $1.3
billion of held to maturity securities were purchased, partially
offset by principal repayments and maturities of $686.5 million.
At March 31, 1999, and December 31, 1998, net unrealized gains
(losses) on securities held to maturity amounted to $(5.1) million
and $15.0 million, respectively.
At March 31, 1999, securities available for sale amounted to $3.9 billion
and were predominately comprised of U.S. Government and Federal
agency securities. These securities decreased $110.8 million, or
2.8 percent, from year-end 1998. The decrease resulted from $639.3
million in maturities and principal repayments and $231.9 million
in sales, partially offset by $717.9 million in purchases.
At March 31, 1999, total loans amounted to $21.2 billion, comparable to
the balance sheet at year-end 1998. Increases in commercial loans of
$71.2 million, commercial mortgages of $33.8 million and consumer loans
of $29.2 million were significantly offset by the $107.1 million decrease
in residential mortgages, as a result of sales and prepayments. The
increase in the consumer loan portfolio can generally be attributed to
purchases of home equity loans offset by a sale of the $33.0 million
credit card portfolio. The increase in commercial loans was primarily
related to growth in asset-based lending and commercial media. Mortgage loans
held for sale amounted to $145.4 million, $183.3 million and $112.7 million
for the periods ended March 31, 1999, December 31, 1998, and March 31, 1998,
respectively.
Total deposits were $23.2 billion at March 31, 1999, an increase of
$75.0 million, or 0.3 percent, from December 31, 1998. Savings and time
deposits at $17.6 billion, increased $394.3 million, or 2.3 percent,
from December 31, 1998. Partially offsetting this increase was a decrease
in commercial certificates of deposit $100,000 and over, which were down
$139.9 million, or 14.6 percent, compared to December 31, 1998. Also
decreasing were demand deposits, which decreased $179.4 million, or 3.6
percent, from year-end 1998 to $4.8 billion. The decrease in demand
deposits came mainly from business and personal accounts.
Other borrowed funds at March 31, 1999, increased $ 91.0 million, or
2.9 percent, from December 31, 1998, to $3.3 billion. The increase in
other borrowed funds can be attributed to increases in short-term Federal
Home Loan Bank advances and Federal funds purchased, partially offset
by a decrease in short-term repurchase agreements. Long-term debt at
March 31, 1999, increased $161.7 million, or 4.5 percent, from
December 31, 1998, to $3.7 billion. The increase in long-term debt
was principally the result of the increase in repurchase agreements
of $100.0 million and an increase of $62.8 million in long term
Federal Home Loan Bank Notes. Included in long-term debt at each of
the periods presented are $150.0 million of 8.40 percent pass-through
securities qualifying as Tier I Capital. The increases in other borrowed
funds and long-term debt were generally used to fund the growth in
the investment and loan portfolios.
Total shareholders' equity at March 31, 1999, was $2.7 billion,
generally unchanged from December 31, 1998. Net income for the period
was offset by the purchase of treasury stock and common stock dividends.
Treasury stock at March 31, 1999, amounted to $203.6 million and was
comprised of 4.9 million shares. These shares will be used in conjunction
with the announced acquisition of Prime Bancorp, employee benefit plans,
and general corporate purposes. Included in shareholders' equity at
March 31, 1999, was accumulated other comprehensive income, net of
tax, amounting to $9.5 million, compared to $12.1 million at year-end
1998. Accumulated other comprehensive income is comprised principally
of unrealized gains on securities available for sale.
The Company's capital ratios for March 31, 1999, compared to select
prior periods and regulatory requirements, are shown in the following
table. The Company's bank subsidiaries met the well-capitalized requirements
for each of the periods presented. The decreases in the ratios at
March 31, 1999, were principally attributable to treasury stock purchases
and asset growth.
Minimum
Mar. 31, Dec. 31, Mar. 31, Require Well
Selected Capital Ratios: 1999 1998 1998 Capital Capitalized
Equity to assets 8.10 8.22 8.84 - -
Leverage ratio 7.67 8.00 8.88 3.00 5.00
Tier I Capital 10.48 10.86 12.63 4.00 6.00
Total risk-based capital 12.33 12.72 14.78 8.00 10.00
Non-Performing Assets
Non-performing assets include non-performing loans and other real estate
owned (OREO) and is shown in the following table as of the dates indicated.
Non-performing assets Mar 31 Dec 31 Mar 31
(in thousands) 1999 1998 1998
Non-performing loans(1)
Commercial and industrial 51,731 55,245 39,934
Commercial mortgage 36,435 26,446 32,552
Construction and development 1,899 5,046 3,397
----------------------------
Non-performing loans 90,065 86,737 87,212
OREO,net 7,137 2,829 11,329
----------------------------
Non-performing assets 97,202 89,566 87,212
----------------------------
Non-performing loans to total loans .43% .41% .39%
Non-performing assets to
total loans and OREO .46% .42% .45%
(1) Loans, not included above, past due 90 days or more amounted to
$39.0 million, $45.3 million and $58.5 million at March 31, 1999,
December 31, 1998, and March 31, 1998, respectively. These loans
are primarily residential mortgage and consumer loans which are
well secured and in the process of collection.
The average balances of non-performing loans amounted to $83.8 million,
$81.9 million and $81.4 million, for the three months ended March 31,
1999, December 31, 1998, and March 31, 1998, respectively. Interest
income received on non-performing loans amounted to $1.0 million for
the three months ended March 31, 1999, compared to $2.0 million for the
three months ended December 31, 1998 and $0.6 million for the three
months ended March 31, 1998.
Allowance for Loan Losses
A standardized process has been established to assess the adequacy of
the allowance for loan losses and to identify the risks inherent in the
loan portfolio. This process incorporates credit reviews and gives
consideration to areas of exposure such as concentrations of credit,
economic and industry conditions, trends in delinquencies and
collections, collateral coverage, and the composition of the performing
and non-performing loan portfolios. The allowance for loan losses is
maintained at a level that management believes to be adequate to
absorb anticipated loan losses. The unallocated portion of the allowance
for loan losses, in excess of specific and general reserves, was $163.3
million at March 31, 1999, compared to $164.5 million at December 31,
1998. The unallocated allowance is for latent losses that existed at
the balance sheet date that are not incorporated in the reserve
assessment process. The unallocated 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 1999 provision for loan
losses has increased over the prior year primarily as a result of
increased levels of non-performing loans and increased loan volume.
Transactions in the allowance for loan losses, by loan category,
for the three month periods ended March 31, 1999, and 1998 and
selected loan quality ratios for the dates indicated are shown
in the following tables:
Allowance for Loan Losses Three months ended
(in thousands) March 31,
1999 1998
Balance, Beginning of period 322,814 296,494
Acquisition adjustments 2,140 -
Provision for loan losses 16,500 15,000
---------------------------
341,454 311,494
---------------------------
Loans charged off
Commercial and industrial 8,131 8,666
Construction and development 13 356
Commercial mortgage 1,202 260
Residential mortgage 2,626 319
Consumer 7,987 9,332
---------------------------
Total loans charged off 19,959 18,933
---------------------------
Recoveries
Commercial and industrial 3,517 4,649
Construction and development 395 1,798
Commercial mortgage 548 287
Residential mortgage 319 274
Consumer 2,028 1,695
--------------------------
Total recoveries 6,807 8,703
---------------------------
Net charg offs 13,152 10,230
---------------------------
Balance, end of period 328,302 301,264
===========================
Mar. 31, Dec. 31, Mar. 31,
1999 1998 1998
Net charge offs to average loans:
Quarter to date 0.25% 0.23% 0.22%
Allowance to loan losses to:
Total loans 1.55 1.53 1.56
Non-performing loans 364.52 372.18 397.01
Non-performing assets 337.75 360.42 345.44
<TABLE>
Summit Bancorp and Subsidiaries
Consolidated Average Balance Sheets with Resultant Interest and Rates
Unaudited
(Tax-equivalent basis, dollars in thousands)
Three Months Ended
March 31, 1999 March 31, 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Interest Rate Balance Interest Rate
ASSETS ----------- -------- ----- ----------- -------- -----
Interest-earning assets:
Federal funds sold and securities
purchased under agreements to resell $10,648 $145 5.52 %$ 29,187 $ 407 5.66 %
Interest-bearing deposits with banks 33,737 450 5.41 27,065 431 6.46
Securities:
Trading account securities 9,969 103 4.19 33,123 582 7.13
Securities available for sale 3,956,908 59,951 6.06 5,365,951 85,643 6.38
Securities held to maturity 6,226,526 97,587 6.27 3,969,789 63,911 6.44
----------- -------- ----- ----------- -------- -----
Total securities 10,193,403 157,641 6.19 9,368,863 150,136 6.41
----------- -------- ----- ----------- -------- -----
Loans, net of unearned discount:
Commercial 7,157,347 137,063 7.77 6,196,306 128,546 8.41
Commercial mortgage 2,874,357 57,513 8.00 2,769,941 59,136 8.54
Residential mortgage 5,717,998 101,847 7.12 5,722,445 104,786 7.32
Consumer 5,417,311 108,672 8.14 4,268,694 89,067 8.46
----------- -------- ----- ----------- -------- -----
Total loans 21,167,013 405,095 7.76 18,957,386 381,535 8.16
----------- -------- ----- ----------- -------- -----
Total interest-earning assets 31,404,801 563,331 7.27 28,382,501 532,509 7.61
----------- -------- ----- ----------- -------- -----
Non-interest earning assets:
Cash and due from banks 955,002 1,029,500
Allowance for loan losses (325,323) (302,071)
Other assets 1,123,019 946,746
----------- -----------
Total non-interest earning assets 1,752,698 1,674,175
----------- -----------
Total Assets $ 33,157,499 $ 30,056,676
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 10,067,539 61,889 2.49 %$ 9,538,374 61,552 2.62 %
Time deposits 7,123,211 89,513 5.10 7,257,262 95,316 5.33
Commercial certificates of
deposit $100,000 and over 975,331 11,575 4.81 917,949 12,257 5.42
----------- -------- ----- ----------- -------- -----
Total interest-bearing deposits 18,166,081 162,977 3.64 17,713,585 169,125 3.87
----------- -------- ----- ----------- -------- -----
Other borrowed funds 3,411,876 41,487 4.93 3,485,830 46,788 5.44
Long-term debt 3,684,708 50,637 5.50 1,517,256 24,258 6.40
----------- -------- ----- ----------- -------- -----
Total interest-bearing liabilities 25,262,665 255,101 4.10 22,716,671 240,171 4.29
----------- -------- ----- ----------- -------- -----
Non-interest bearing liabilities:
Demand deposits 4,685,198 4,292,821
Other liabilities 478,000 373,417
----------- -----------
Total non-interest bearing liabilities 5,163,198 4,666,238
Shareholders' equity 2,731,636 2,673,767
----------- -----------
Total Liabilities and Shareholders' Equity $ 33,157,499 $ 30,056,676
=========== ===========
Net interest spread 308,230 3.17 % 292,338 3.32 %
Tax-equivalent basis adjustment (2,886) ====== (3,180) ======
-------- --------
Net interest income $ 305,344 $ 289,158
======== ========
Net interest margin 3.98 % 4.18 %
====== ======
</TABLE>
11
RESULTS OF OPERATIONS
Net income for the quarter ended March 31, 1999, was $118.7 million, or
$.68 per basic share, compared to $112.4 million, or $.64 per basic share,
for the first quarter of 1998. On a diluted per share basis, net income
for the three months ended March 31, 1999, was $.68 per diluted share
compared to $.63 for the same period in 1998.
The following are key performance indicators for the three month periods
ended March 31, 1999 and 1998.
(in thousands) Three months ended
March 31,
1999 1998
Net income $ 118,741 $ 112,417
Net income per share
Basic $0.68 $0.64
Diluted 0.68 0.63
Return on:
Average assets 1.45% 1.52%
Average equity 17.63 17.05
Efficiency ratio 50.55 51.90
Net Interest Income
Interest income on a tax-equivalent basis was $563.3 million for the
three months ended March 31, 1999, an increase of $30.8 million, or
5.8 percent, compared to a year ago. Interest-earning assets averaged
$31.4 billion, an increase of $3.0 billion, or 10.7 percent, compared
to the prior year period. The increase in interest-earning assets
contributed $57.3 million to the increase in tax-equivalent interest
income, partially offset by a decline of $26.5 million due to the
reduction in the yield. The rate earned on interest-earning assets
decreased 34 basis points to 7.27 percent in the 1999 period. The
decrease was generally the result of a lower interest rate environment
as compared to last year.
Interest expense increased $14.9 million, or 6.2 percent, for the three
months ended March 31, 1999, compared to the same period in 1998. The
$2.5 billion growth in the average balance of interest-bearing liabilities
to $25.3 billion in the 1999 period contributed $31.7 million to the increase
in interest expense. This increase was partially offset by a decrease of
$16.8 million in interest expense resulting from a decline in rates paid
on interest-bearing liabilities.
Net interest income on a tax-equivalent basis was $308.2 million for the
three months ended March 31, 1999, an increase of $15.9 million, or 5.4
percent, compared to the same period in 1998. The net interest spread
percentage on a tax-equivalent basis (the difference between the rate
earned on average interest-earning assets and the rate paid on average
interest-bearing liabilities) was 3.17 percent for the three months
ended March 31, 1999, compared to 3.32 percent for the prior year period.
Net interest income on a tax-equivalent basis as a percentage of
average interest-earning assets was 3.98 percent for the three months
ended March 1999, compared to 4.18 percent during the same period in 1998.
The decline in net interest spread and net interest margin can be
attributed primarily a lower interest rate environment, the purchase of
treasury stock, and the change in the mix of funding as long-term debt
and other borrowed funds were used to fund asset growth.
The rate/volume table below presents an analysis of the impact on
interest income and expense resulting from changes in average volumes
and rates over the periods. Changes that are not due to volume or rate
variances have been allocated proportionally to both, based on their
relative absolute values.
Rate/Volume Table
March 1999 vs. March 1998
Due to Change in:
(Tax-equivalent basis, in millions) Volume Rate Total
Interest Income
Loans
Commercial $18.8 $(10.3) $8.5
Commercial mortgage 2.2 (3.8) (1.6)
Residential mortgage (0.1) (2.9) (3.0)
Consumer 23.1 (3.5) 19.6
----------------------------
Total Loans 44.0 (20.5) 23.5
Securities HTM 35.4 (1.7) 33.7
Securities AFS (21.6) (4.1) (25.7)
Other interest-earning assets (0.5) (0.2) (0.7)
----------------------------
Total Interest Earning Assets 57.3 (26.5) 30.8
----------------------------
Interest Expense
Deposits
Savings Deposits 3.4 (3.1) 0.3
Time Deposits (1.7) (4.1) (5.8)
Commercial CD's > $100M 0.7 (1.4) (0.7)
-----------------------------
Total Time Deposits 2.4 (8.6) (6.2)
Other interest-bearing liabilities (1.0) (4.3) (5.3)
Long-term debt 30.3 (3.9) 26.4
-----------------------------
Total interest expense 31.7 (16.8) 14.9
----------------------------
Net interest income-fully taxable equivalent $25.6 $(9.7) $15.9
----------------------------
Non-Interest Income
Non-interest income categories for the three month periods ended
March 31, 1999 and 1998 are shown in the following table:
(in millions) Three months ended March 31
Percent
1999 1998 Change
Service charges on deposit accounts $ 30.1 $ 30.3 (0.7)%
Service and loan fee income 15.6 12.9 21.0
Trust income 11.9 10.2 16.6
Retail investment and insurance fees 18.0 11.7 54.6
Other 22.4 13.0 71.4
---------------------------
Total non-interest operating income 98.0 78.1 25.4
---------------------------
Securities gains 0.2 1.4 (84.8)
---------------------------
Total non-interest income $ 98.2 $ 79.5 23.4%
---------------------------
Service and loan fee income increased $2.7 million, or 21.0 percent, for
the quarter ended March 31, 1999, compared with 1998. The increase in
service and loan fee income for the three months ended March 31, 1999,
was primarily due to increased residential mortgage originations and gains
on sales of those loans into the secondary market.
Trust income increased $1.7 million, or 16.6 percent, for the quarter
ended March 31, 1999, compared with 1998. The increase in trust income for
the three months ended March 31, 1999 was generally due to increases in
asset management advisory fees, personal trust fees, and fees from sales
of proprietary and third party mutual funds.
Retail investment and insurance fees increased $6.4 million, or 54.6
percent, for the quarter ended March 31, 1999, compared with 1998. The
increase in retail investment and insurance fees for the three months
ended March 31, 1999, was primarily due to increased annuity fee and
insurance service fees, resulting from the acquired insurance companies.
Other income increased $9.4 million, or 71.4 percent, for the quarter
ended March 31, 1999, compared with 1998. The increase in other
non-interest income for the three months ended March 31, 1999, was
generally attributable to a net gain of $5.9 million on the sale of
the $33.0 million credit card portfolio.
Non-Interest Expense
Non-interest expense categories for the three month periods ended
March 31, 1999, and 1998, are shown in the following table:
(In millions) Three months ended March 31
Percent
1999 1998 Change
Salaries $80.3 $76.5 5.0%
Pension and other employee benefits 30.0 26.6 12.8
Furniture and equipment 22.5 20.4 10.2
Occupancy, net 19.8 18.5 7.2
Communications 9.6 9.5 0.9
Advertising and public relations 5.5 5.9 (6.7)
Amortization of goodwill
and other intangibles 5.9 4.7 24.3
Other 31.8 29.6 7.4
----------------------------
Total non-interest expense $205.4 $191.7 7.2%
----------------------------
Salaries increased $3.8 million, or 5.0 percent, for the quarter ended
March 31, 1999, compared to the same quarter in 1998. In addition to
annual merit increases, salaries rose approximately $2.4 million
from acquisitions. There were 8,670 full-time equivalent employees at
March 31, 1999, compared to 8,456 the same period a year ago.
Pension and employee benefits increased $3.4 million, or 12.8 percent,
for the three months ended March 31, 1999 compared with the same quarter
in 1998. The increases were generally related to higher levels of core
salaries, increased taxes, pension and incentive compensation expense.
Furniture and equipment expenses increased $2.1 million, or 10.2 percent,
for the quarter ended March 31, 1999, compared with the same quarter in
1998. This increase was primarily due to equipment maintenance, bank card
service fees and increases in leasing expenses associated with computer
equipment installed at branches to support teller and on-line operations.
Amortization of goodwill and other intangibles increased $1.1 million or
24.3 percent, for the three months ended March 31, 1999. The increase
was primarily due to the purchase acquisitions of Norwalk Savings Society
and New Canaan Bank and Trust Company.
Included in other expenses, which did not vary significantly from period to
period, were legal and professional fees of $7.9 million for the three
months ended March 31, 1999.
The effective income tax rate was 34.6 percent for the three months ended
March 31, 1999, compared with 30.6 percent for the comparable 1998 period.
The lower effective income tax rate for 1998 was the result of
the implementation of business strategies in the 1998 period that
will not benefit 1999.
LINES OF BUSINESS
For management purposes, Summit Bancorp is segmented into the following lines
of business: Retail Banking, Commercial Banking, and Investment Services
and Private Banking. The investment portfolio and activities not included
in these lines are reflected in Corporate and Other. The Company's
profitability measurement system
uses internal management accounting policies that ensure business line
results reflect the underlying economics of each business unit, and the
results are not necessarily comparable with similar information for any
other financial institution.
Net income includes revenues and expenses directly associated with each
line in addition to allocations of revenue earned and expenses incurred
by support units such as operations and technology. Centrally
provided corporate services and general overhead are allocated on a
per-unit cost basis or in proportion to the balances of assets, liabilities
and operating expenses associated with the particular business line.
A matched maturity funds transfer pricing methodology is employed to assign
a cost of funds to the assets of each business line, as well as to assign
a value of funds to the liabilities and equity of each business line.
The provision for loan losses is based on the historical credit losses
for each line of business. The anticipated consolidated effective income
tax rate is applied to each line of business, after consideration of earnings
of tax-advantaged assets within the lines of business.
In 1999, the Company implemented a new business unit profitability system,
which prospectively provides enhanced management reporting, including an
enhanced methodology with respect to the allocation of the provisions
for loan losses. Certain prior period information has been restated to
conform to the 1999 presentation with respect to the allocation of funds
transfer charges or credits for assigned assets, liabilities and equity.
<TABLE>
Investment
Results of Operations Services/
Quarters Ended March 31, Retail Commercial Private Corporate
(in millions) Banking Banking Banking and Other Consolidated
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $199.1 $188.3 $67.0 $63.0 $13.7 $12.8 $25.5 $25.1 $305.3 $289.2
Provision for loan losses 9.8 7.1 6.3 7.4 0.4 0.5 - - 16.5 15.0
---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 189.3 181.2 60.7 55.6 13.3 12.3 25.5 25.1 288.8 274.2
Non-interest income 55.0 45.6 12.4 10.1 30.1 20.8 0.6 3.0 98.1 79.5
Non-interest expense 132.1 132.1 31.1 27.7 31.3 22.5 10.9 9.4 205.4 191.7
---------------------------------------------------------------------------------------------
Income before taxes 112.2 94.7 42.0 38.0 12.1 10.6 15.2 18.7 181.5 162.0
Federal and
state income taxes 39.2 29.6 13.7 11.5 4.2 3.5 5.7 5.0 62.8 49.6
---------------------------------------------------------------------------------------------
Net income $73.0 $65.1 $28.3 $26.5 $7.9 $7.1 $9.5 $13.7 $118.7 $112.4
=============================================================================================
Selected Average Balances:
Securities $ 55.1 $ 40.8 $ - $ - $ 9.7 $ 33.0 $10,128.6 $ 9,295.1 $10,193.4 $ 9,368.9
Loans 11,827.6 10,855.2 8,105.6 7,116.3 1,233.8 985.9 - - 21,167.0 18,957.4
Assets 12,189.6 11,397.3 8,090.5 7,191.3 1,322.4 1,065.4 11,554.9 10,402.7 33,157.4 30,056.7
Deposits 19,990.1 19,230.7 1,003.6 910.9 735.7 666.6 1,121.9 1,198.2 22,851.3 22,006.4
</TABLE>
Retail Banking
Retail Banking meets the banking needs of individuals and
small businesses through approximately 380 traditional and
60 supermarket branches in New Jersey, eastern Pennsylvania,
and southern Connecticut. Summit also offers its customers
an expanding array of 24-hour banking services through more
than 600 ATMs, telephone banking centers, its PC Banking
network, and the internet. Mortgage loans, home equity
loans and lines of credit, direct and indirect consumer
loans and small business commercial loans are offered
through the Company's broad network of branches.
Average loans for the quarter ended March 31, 1999,
increased $972.4 million or 9.0 percent to $11.8 billion
from the same period in 1998, primarily in the consumer
lending area. Total average deposits for the first quarter
of 1999 increased to $20.0 billion, up $759.4 million from a
year ago. This increase was attributed to demand
deposits and interest bearing time deposits. Net interest
income for the quarter increased $10.8 million or 5.7 percent
over last year. Interest income increased $12.2 million or
5.6 percent over the first quarter of 1998, resulting from
the increase in loan balances and the acquisition of NSS
Bancorp in November 1998. Interest expense declined $4.5
million or 3.0 percent resulting from a lower rate
environment. The increase in non-interest income of $9.4
million contains a $5.9 million gain on the sale of
Summit Bancorp's credit card portfolio in March of 1999 and
increases from the sale of residential mortgage loan originations.
Commercial Banking
Commercial Banking is focused on meeting the banking
requirements of large and middle-market businesses.
Asset based lending, international trade services,
equipment leasing, real estate financing, private
placement, mezzanine financing, aircraft lending,
correspondent banking, treasury services, limited
partnership investments, and structured finance services
are actively solicited through a network of relationship
managers. Demand and interest-bearing deposit accounts
and services are provided through the branch network.
Total average loans for the quarter ended March 31, 1999,
were $8.1 billion, an increase of $989.3 million or 13.9
percent over the same period in 1998 primarily in asset-based
lending and commercial media lending. Net interest income
for the first quarter of 1999 increased $4.0 million or
6.3 percent from 1998, driven by the increase in average
loans. Higher loan fees, account analysis service
charges, advisory fees and limited partnership gains provided
for the increase over prior year in non-interest income of
$2.3 million. Non-interest expense increased $3.4 million
over the prior year to $31.1 million.
Investment Services and Private Banking
Investment Services provides a full range of
trust, administrative, and custodial services to
individuals and institutions, in addition to investment
products and discount brokerage. The line also markets
a wide variety of insurance products for the personal
and corporate marketplace. This segment also includes
Private Banking, which provides personal credit services
for lawyers, accountants and their firms, and business
loans and lines of credit.
The increase in net interest income of $0.9 million or 7.0
percent is due to higher loan volumes in 1999. The major
portion of the increases in non-interest income and expense
over the prior period reflects the acquisitions of W.M.
Ross & Company and Madison Consulting, two insurance subsidiaries,
in the second half of 1998. Also contributing to the increase in
non-interest income was higher fee income in trust,
mutual funds and annuities.
Corporate and Other
Corporate and Other is primarily comprised of the
treasury function, which is responsible for managing
interest-rate risk and the investment portfolios. In
addition, certain revenues and expenses not considered
allocable to a line of business are reflected in this
area.
Net interest income increased $0.4 million or 1.6 percent
from 1998. Asset growth was primarily due to increased
securities portfolios, which averaged $10.1 billion for the first quarter
of 1999, up $833.5 million or 9.0 percent from the prior
year. The decrease in non-interest income in 1999 is
primarily attributed to gains on security transactions
in the prior period.
Year 2000 Readiness Disclosure
Issues surrounding the Year 2000 arise out of the fact that
many existing computer programs use only two digits to identify
a year in the date field. With the approach of the Year 2000,
computer hardware and software that are not made Year 2000
ready might interpret "00" as year 1900 rather than year
2000. The Year 2000 problem is not just a technology issue;it
also involves the Company's assessment of building equipment,
environmental systems, customers, suppliers and third parties.
State of Readiness:
The Company has been working since 1995 to remediate its
information technology ("IT") and non-IT systems for the
Year 2000. As of March 31,1999 all of the 330 software
systems being tracked by the Company, and the computer
equipment they run on, have completed the Company's seven-
phase Year 2000 project program, which is as follows: Developing
a Strategic Approach, Creating Organizational Awareness,
Assessing Actions and Developing Detailed Plans,
Renovating (remediating), Validating (testing), Implementing
(remediated code into production), and Implementing (totally
future-date certified). Additionally, the Company is
addressing the Y2K readiness of certain non-critical,
stand-alone personal computer(PC)-based software applications.
Testing of automated interfaces with customers and other
third parties is on schedule for completion by June 30,
1999. Principal settlement methods associated with major
payment systems involving systems of other financial
institutions and governmental agencies will be tested by
June 30, 1999.
Non-IT systems have been evaluated and are currently being
tested. Approximately 99% of systems with embedded chip
technology for all building, environmental, and security
systems have been remediated, tested, and confirmed as
Year 2000 ready. Telecommunications, both voice and data,
are over 95% complete and are expected to be fully
remediated, tested, and confirmed as Year 2000 ready
by July 1999.
Communication with third parties that may have a
material relationship with the Company has been initiated
to determine whether they have appropriate plans to be
Year 2000 ready. An inventory of important vendors has
been completed and the Company's vendor risk assessment
and preparedness evaluation activities are ongoing. The
Company's plans to minimize third-party risk include
contingency planning for important vendors.
Approximately 85% of the Company's significant vendors
have responded to the Year 2000 inquiries made by the
Company. Of those who responded, approximately half claim to be
currently Year 2000 compliant. Vendor responses were reviewed
for completeness and incomplete responses were followed
up with additional correspondence, telephone calls or both.
In some cases, Year 2000 readiness information was obtained
from publicly available sources, including vendor or third
party websites. Confidence levels were developed based on
the quality of the vendor's responses to the Company's
written inquiries and the vendor's prior track record in
making its commitments to the Company. With limited exception
of the Company's suppliers have been found to be making satisfactory
progress toward achieving Y2K readiness. The Company is seeking
additional information from vendors and will initiate contingency plans if
appropriate.
To minimize the impact from those customers who may
experience a disruption in their operations because
they have not adequately considered Year 2000 issues,
a program has been implemented for monitoring and
measuring customer Year 2000 readiness. Customers with
borrowing commitments of $1 million or more, and
customers monitored by the internal risk rating system
with outstanding loan balances of $500 thousand or more,
have been reviewed for Year 2000 readiness, and will continue
to be reviewed on a quarterly basis during 1999. Certain
customers have been identified as having additional credit risk
as a direct result of the Year 2000. Those risks have
been considered and incorporated in the analysis of the
adequacy of the loan loss allowance. All new loan customers
and renewals of existing loans are assessed as part of
the underwriting process.
Risks of Year 2000 Issues:
Management believes that the Year 2000 project is on schedule
and that its efforts are adequate to address Year 2000
issues. However, failure to successfully resolve critical
issues could have a material impact on the Company's
operations. The primary risks associated with the Year 2000 are
as follows:
The first is the risk that the Company's systems are not ready
for operation by January 1, 2000. These systems must
be remediated, tested, and made ready for the Year 2000 in
a timely manner.
The second is the risk of operational disruption due
to operational failures of third parties. Failure of one or
more third parties to modify their systems in a timely manner
may have a material and adverse effect on the
Company's operations. This risk is viewed as the one that is
most reasonably likely to occur, therefore appropriate
contingency plans are being prepared.
The third is the risk of business interruption among
customers such that funding and repayment do not take place in
a timely manner. As a result, there may be increases in
problem loans and credit losses in future years.
Costs to Address Year 2000 Issues:
The estimated cost of the Year 2000 project is $23 million.
The project is staffed with both external contract and
internal personnel. This estimate includes the cost of
retention programs for key systems personnel, a portion of
which will be paid beyond January 1, 2000. To date,
incremental internal costs totaling $5.2 million have
been incurred. These costs include compensation and benefits
for internal personnel assigned full-time to the project,
the retention program, and other ancillary costs. In
addition, $11.0 million of external costs, including
external contract personnel and payments to third parties,
have been incurred to date. The total cost incurred to date
is $16.2 million.
Contingency Plans:
The Company has created certain remediation contingency plans
and is developing business resumption contingency plans
specific to the Year 2000 project. Remediation contingency
plans address the actions to be taken if remediation of a
mission-critical system falls behind schedule. Remediation
for all mission critical systems has been completed. None of
the three remediation contingency plans that were prepared for
mission-critical systems had to be triggered. Business
resumption contingency plans address the actions that will
be taken if critical business functions cannot be carried out
in the normal manner due to system or third-party failures.
These plans supplement existing disaster recovery plans and
are being updated to include potential Year 2000 related
failures. Updates to the Company's business resumption plan
for core business functions are to be completed by
June 30,1999.
LIQUIDITY
Liquidity is the ability to meet the borrowing needs and
deposit withdrawal requirements of customers and support
asset growth. Principal sources of liquidity are
deposit generation, access to purchased funds, maturities
and repayments of loans and investment securities and interest
and fee income.
The consolidated statements of cash flows present the change
in cash and due from banks from operating, investing and
financing activities. During the first three months of 1999,
net cash provided by operating activities totaled $192.8
million. Contributing to net cash provided by operating
activities were the results of operations, plus noncash
expenses, and proceeds from the sales of mortgages held for
sale. Partially offsetting the contributions to operating
cash were funds used to originate mortgage loans held for sale
and noncash revenues.
Net cash used in investing activities totaled $345.4 million.
For the three months ended March 31, 1999, net cash used
in transactions involving the investment portfolios totaled
$407.8 million, while the loan portfolio contributed
$66.8 million.
Scheduled maturities and anticipated principal repayments of
the held to maturity portfolio will approximate $1.8
billion throughout the balance of 1999. In addition,
the securities available for sale portfolio provides
another source of liquidity. These sources can also be used
to meet the funding needs during periods of loan growth.
Net cash provided by financing activities, totaled $17.2
million. During the first three months of 1999, other
borrowed funds and long-term debt increased $252.6 million.
This increase was partially offset by the decrease in
total deposits of $78.9 million, the purchase of the
Company's common stock of $106.4 million, and the payment
of common stock dividends.
Liquidity is also available through additional lines of credit
and the ability to incur additional debt. The banking
subsidiaries have established lines of credit with the
Federal Reserve Bank and the Federal Home Loan Bank of New
York and other correspondent banks, which further support
and enhance liquidity. In addition, in November 1998 two of
the Company's banking subsidiaries, Summit Bank (New Jersey)
and Summit Bank (Pennsylvania), executed a distribution
agreement providing for the possible issuance, from
time-to-time, of senior and subordinated notes to a maximum
of $3.75 billion on an underwritten or agency basis.
Liquidity is also important at the Parent Company in order
to provide funds for operations and to pay dividends
to shareholders. Parent Company cash requirements are
met primarily through management fees and dividends from
its subsidiaries, the issuance of short and long-term debt and
the exercise of stock options. The amount of dividends that can
be assessed to the bank subsidiaries is subject to
certain regulatory restrictions.
LOOKING AHEAD
This report contains certain forward-looking statements,
either expressed or implied, which are provided to assist
the reader to understand anticipated future financial
performance. These forward-looking statements involve
certain risks, uncertainties, estimates and assumptions made
by management.
Factors that may cause actual results to differ from those
results expressed or implied include, but are not limited to,
the interest rate environment and the overall economy, the
ability of customers to repay their obligations, the adequacy
of the allowance for loan losses, the progress of
integrating acquired financial institutions, competition
and technological changes, including the Year 2000 issue.
Although management has taken certain steps to mitigate
the negative effect of the above mentioned items,
significant unfavorable changes could severely impact
the assumptions used and have an adverse affect on profitability.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Due to the nature of the Company's business,
market risk is primarily its exposure to interest rate
risk. Interest rate risk is the impact that changes in
interest rates have on future earnings. The principal objective
in managing interest rate risk is to maximize net interest
income within the acceptable levels of risk that have
been previously established by policy. This risk can be
reduced by various strategies, including the administration
of liability costs, the reinvestment of asset maturities and
the use of off-balance sheet financial instruments. The
Company has limited risks associated with foreign currencies.
Interest rate risk is monitored through the use of
simulation modeling techniques which apply alternative
interest rate scenarios to periodic forecasts of future
business activity, projecting the related impact to net
interest income. The use of simulation modeling assists
management in its continuing efforts to achieve earnings growth
in varying interest rate environments.
Key assumptions in the model include anticipated prepayments
on mortgage-related instruments, contractual cash flow
and maturities of all financial instruments including
derivatives, anticipated future business activity,
deposit sensitivity and changes in market conditions.
Selected core deposit rates are held constant based on the
results of analysis of historical rate movements.
These assumptions are inherently uncertain, and as a result,
these models cannot precisely estimate the impact that higher
or lower rate environments will have on net interest
income. Actual results will differ from simulated results due
to timing, magnitude and frequency of interest rate
changes, changes in market conditions, as well as changes
in management's strategies.
Based on the results of the interest simulation model as of
March 31, 1999, if interest rates increase or decrease 100
basis points from current rates in an immediate and parallel
shock over a twelve month period, the Company would expect
a decrease of $29.0 million in net interest income and an
increase of $5.0 million in net interest income, respectively.
The results of the interest simulation model as of
March 31, 1999, do not represent a material change from
the amounts previously reported as of December 31, 1998.
Interest rate risk management efforts also involve the use
of certain derivative financial instruments for the purpose
of stabilizing net interest income in a changing interest
rate environment. The derivative financial instruments
portfolio consists principally of interest rate swaps.
At March 31, 1999, the notional values of the swaps
were $200.0 million These derivatives
resulted in a reduction in net interest income of
$.6 million for the first three months of 1999. The cost
to terminate these contracts at March 31, 1999, would have
been $1.3 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Based upon advice of Summit's legal department, 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.
Discovery has been extended until May 17, 1999. On
March 30, 1999, plaintiffs filed a motion for partial
summary judgment as to liability on their New Jersey
Consumer Fraud Act claim. The Bank has filed a cross-motion
for dismissal of plaintiffs' Consumer Fraud Act claim.
The motions are scheduled to be argued in late May, 1999.
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.
Expert discovery has been concluded and the court has
scheduled a case management conference for April 22, 1999.
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.
On January 27, 1999, the New Jersey Supreme Court entered
an order granting Collective's motion for leave to cross
appeal the Appellate Division's ruling concerning
federal preemption. The Supreme Court has not yet scheduled
a date to hear the parties' appeals.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the shareholders of Summit Bancorp. was
held April 23, 1999. The following is a brief description of
each matter voted on at the meeting.
PROPOSAL 1 - ELECTION OF DIRECTORS
The following directors were nominated for election to the
Board of Directors as Class III Directors for a three year
term: Robert L. Boyle, Robert G. Cox, Elinor J. Ferdon,
William R. Miller and Joseph M. Tabak. William M. Freeman
was nominated for election as a Class II Director for a two
year term.
PROPOSAL 2 - NON- EXECUTIVE OPTION PLAN
Shareholders were presented with a proposal to approve the
Summit Bancorp. 1999 Non-Executive Option Plan.
PROPOSAL 3 - INDEPENDENT ACCOUNTANTS
Shareholders were presented with a proposal to ratify
the selection of KPMG LLP, independent certified
public accountants, to audit the consolidated financial
statements of Summit Bancorp. and its subsidiaries for the
year ending December 31, 1999.
The results of the voting at the annual meeting were as follows:
SHARES
PROPOSAL FOR WITHHELD
- ----------------------------------------------------------------------------
1 - Election of Directors
- ----------------------------------------------------------------------------
Robert L. Boyle 144,071,950 1,837,445
Robert G. Cox 144,052,176 1,857,219
Elinor J. Ferdon 144,112,333 1,797,062
William M. Freeman 144,038,204 1,871,191
William R. Miller 144,003,242 1,906,153
Joseph M. Tabak 144,067,348 1,842,047
- -----------------------------------------------------------------------------
FOR AGAINST ABSTAIN
- -----------------------------------------------------------------------------
2 - Non-Executive
Option Plan 101,824,535 13,046,796 1,461,701
- -----------------------------------------------------------------------------
3 - Independent
Accountants 144,288,129 724,869 896,397
- -----------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10) N. Summit Bancorp. 1999 Non-Executive Option
Plan (incorporated by reference to Appendix A to the
Proxy Statement of the Registrant dated March 9, 1999)
(27) Summit Bancorp. Financial Data Schedule - March 31, 1999.
(b) Reports on Form 8-K
In a current report on Form 8-K dated April 27, 1999,
the Registrant under Item 5, Other Events and Item 7,
Financial Statements and Exhibits, filed a portion of
the consolidated financial statements and notes thereto
to be included in the Registrant's Form 10-Q for the
quarterly period ended March 31, 1999, being filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Registrant SUMMIT BANCORP.
DATE:May 17, 1999 BY:/s/Paul V. Stahlin
---------------
Paul V. Stahlin
Senior Vice President, Comptroller
and Principal Accounting Officer
(Duly Authorized Officer)
EXHIBIT INDEX
Exhibit No. Description
(10) N. Summit Bancorp. 1999 Non-Executive Option Plan
(incorporated by reference to Appendix A to the
Proxy Statement of the Registrant dated March 9, 1999)
(27) Summit Bancorp. Financial Data Schedule - March 31, 1999.
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