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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 September 30, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File Number: 1-6451
SUMMIT BANCORP.
(Exact name of registrant as specified in its charter)
New Jersey 22-1903313
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066
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(Address of principal executive offices) (Zip Code)
(609) 987-3200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
As of October 31, 2000 there were 174,315,275 shares of
common stock, $.80 par value, outstanding.
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<PAGE>
Summit Bancorp
Form 10-Q
Index
Page No.
Part I Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets-
September 30, 2000, December 31, 1999, and September 30, 1999.....1
Consolidated Statements of Income-
Three and Nine Months Ended September 30, 2000, and 1999..........2
Consolidated Statements of Shareholders' Equity-
Nine Months Ended September 30, 2000, and 1999....................3
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 2000, and 1999....................4
Notes to Consolidated Financial Statements (unaudited)...............5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........22
Part II. Other Information
Item 1. Legal Proceedings....................................................23
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.....................................23
Signature............................................................24
Exhibit Index........................................................25
ii
<PAGE>
Summit Bancorp and Subsidiaries
Consolidated Balance Sheets
Unaudited
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
------------ ------------ ------------
Assets
<S> <C> <C> <C>
Cash and due from banks $ 1,137,376 $ 1,160,577 $ 1,084,844
Federal funds sold and securities purchased
under agreements to resell 4,075 5,000 3,384
Interest-bearing deposits with banks 27,131 32,870 45,742
Securities:
Trading account 23,596 20,118 13,072
Available for sale 6,599,104 5,199,121 5,187,430
Held to maturity 4,705,468 5,597,383 5,951,191
------------ ------------ ------------
Total securities 11,328,168 10,816,622 11,151,693
Loans (net of unearned discount):
Commercial 9,673,065 8,134,497 8,127,470
Commercial mortgage 3,252,707 3,174,370 3,130,815
Residential mortgage 5,524,123 5,747,927 5,510,204
Consumer 6,955,496 6,170,162 5,967,565
------------ ------------ ------------
Total loans 25,405,391 23,226,956 22,736,054
Less: Allowance for loan losses 334,441 328,828 328,815
------------ ------------ ------------
Net loans 25,070,950 22,898,128 22,407,239
------------ ------------ ------------
Goodwill and other intangibles 564,906 519,362 528,393
Premises and equipment 322,186 315,632 315,398
Accrued interest receivable 271,563 214,797 223,690
Due from customers on acceptances 26,334 22,311 23,467
Corporate owned life insurance 313,356 8,515 8,470
Other assets 398,953 385,161 371,018
------------ ------------ ------------
Total Assets $ 39,464,998 $ 36,378,975 $ 36,163,338
============ ============ ============
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits $ 5,266,650 $ 4,966,400 $ 4,871,911
Interest-bearing deposits:
Savings and time deposits 20,453,268 18,653,398 18,615,599
Commercial certificates of deposit $100,000 and over 924,729 1,018,848 863,655
------------ ------------ ------------
Total deposits 26,644,647 24,638,646 24,351,165
------------ ------------ ------------
Other borrowed funds 5,116,787 4,593,064 4,525,690
Accrued expenses and other liabilities 368,882 357,152 349,910
Accrued interest payable 124,501 100,845 91,260
Bank acceptances outstanding 26,334 22,311 23,467
Long-term debt 4,153,961 3,864,777 3,970,698
------------ ------------ ------------
Total liabilities 36,435,112 33,576,795 33,312,190
Shareholders' equity:
Common stock par value $ .80: Authorized 390,000 shares;
issued 177,263; 177,471; and 177,510 shares 141,810 141,977 142,008
Surplus 914,455 959,934 956,934
Retained earnings 2,157,357 1,948,985 1,896,194
Employee stock ownership plan obligation -- (1,250) (1,250)
Accumulated other comprehensive loss, net of tax (82,109) (85,841) (48,612)
Common stock held in treasury, at cost (3,671; 4,825; 2,744 shares) (101,627) (161,625) (94,126)
------------ ------------ ------------
Total shareholders' equity 3,029,886 2,802,180 2,851,148
------------ ------------ ------------
Total Liabilities and Shareholders' Equity $ 39,464,998 $ 36,378,975 $ 36,163,338
============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Income
Unaudited
(In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Interest Income
Loans $ 532,021 $ 428,820 $1,502,664 $1,239,532
Securities:
Trading account 688 134 1,768 351
Available for sale 109,585 75,728 312,626 195,358
Held to maturity 76,885 95,778 244,096 293,168
---------- ---------- ---------- ----------
Total securities 187,158 171,640 558,490 488,877
Other interest income 741 858 2,377 2,065
---------- ---------- ---------- ----------
Total interest income 719,920 601,318 2,063,531 1,730,474
---------- ---------- ---------- ----------
Interest Expense
Savings and time deposits 214,958 165,873 586,498 474,622
Commercial certificates of deposit $100,000 and over 13,636 9,931 39,300 30,966
Borrowed funds, including long-term debt 153,270 104,206 419,888 289,643
---------- ---------- ---------- ----------
Total interest expense 381,864 280,010 1,045,686 795,231
---------- ---------- ---------- ----------
Net interest income 338,056 321,308 1,017,845 935,243
Provision for loan losses 25,000 76,500 69,500 109,500
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 313,056 244,808 948,345 825,743
---------- ---------- ---------- ----------
Non-Interest Income
Service charges on deposit accounts 32,686 31,199 96,093 90,842
Service and loan fee income 16,527 14,559 51,893 46,194
Insurance service fees 13,993 8,300 39,588 24,540
Trust income 13,981 13,130 41,439 37,900
Retail investment fees 9,836 9,921 33,395 30,691
Corporate owned life insurance 5,445 -- 5,445 --
Securities gains 373 4,744 3,219 7,055
Other 25,142 22,846 63,412 61,561
---------- ---------- ---------- ----------
Total non-interest income 117,983 104,699 334,484 298,783
---------- ---------- ---------- ----------
Non-Interest Expenses
Salaries 96,700 87,158 278,102 250,090
Pension and other employee benefits 29,939 28,420 92,496 87,569
Furniture and equipment 26,117 23,872 77,052 68,840
Occupancy, net 21,389 20,218 64,924 59,316
Amortization of goodwill and other intangibles 9,878 8,257 28,790 20,596
Communications 9,462 9,331 28,381 28,645
Advertising and public relations 5,857 5,758 18,194 17,213
Other 37,542 28,943 114,912 92,341
---------- ---------- ---------- ----------
Total non-interest expenses 236,884 211,957 702,851 624,610
---------- ---------- ---------- ----------
Net income before taxes 194,155 137,550 579,978 499,916
Federal and state income taxes 60,691 43,931 191,499 167,219
---------- ---------- ---------- ----------
Net Income $ 133,464 $ 93,619 $ 388,479 $ 332,697
========== ========== ========== ==========
Net Income per Common Share:
Basic $ 0.77 $ 0.54 $ 2.23 $ 1.93
Diluted 0.76 0.53 2.22 1.91
Average Common Shares Outstanding:
Basic 173,850 173,979 174,111 172,809
Diluted 174,789 175,527 175,092 174,423
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Summit Bancorp and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unaudited
(In thousands)
Accum. Other Total
Common Retained ESOP Comprehensive Treasury Shareholders'
Stock Surplus Earnings Obligation (Loss) Stock Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 -- -- 332,697 -- -- -- 332,697
Unrealized loss on securities arising
during the period (net of tax $30,215) -- -- -- -- (56,113) --
Less: Reclassification adjustment for
gains included in net income
(net of tax $2,469) -- -- -- -- 4,586 --
--------
Net unrealized loss on securities
arising during the period
(net of tax $32,684) -- -- -- -- (60,699) -- (60,699)
----------
Total comprehensive income -- -- -- -- -- -- 271,998
Cash dividend declared on common stock -- -- (164,638) -- -- -- (164,638)
Employee stock plans (837 shares) (98) (46,451) -- -- -- 40,824 (5,725)
Treasury shares issued for acquisitions
(8,541 shares) -- (10,008) -- -- -- 352,677 342,669
Purchase of common stock (8,371 shares) -- -- -- -- -- (317,727) (317,727)
ESOP debt repayment -- -- -- 2,144 -- -- 2,144
----------------------------------------------------------------------------------------
Balance, September 30, 1999 $142,008 $956,934 $1,896,194 $(1,250) $(48,612) $(94,126) $2,851,148
========================================================================================
Balance, December 31, 1999 $141,977 $959,934 $1,948,985 $(1,250) $(85,841) $(161,625) $2,802,180
Comprehensive income:
Net income -- -- 388,479 -- -- -- 388,479
Unrealized gain on securities arising
during the period (net of tax $3,213) -- -- -- -- 5,839 --
Less: Reclassification adjustment for
gains included in net income
(net of tax $1,112) -- -- -- -- 2,107 --
--------
Net unrealized gain on securities
arising during the period
(net of tax $2,101) -- -- -- -- 3,732 -- 3,732
----------
Total comprehensive income -- -- -- -- -- -- 392,211
Cash dividend declared on common stock -- -- (180,107) -- -- -- (180,107)
Employee stock plans (1,093 shares) (167) (19,321) -- -- -- 33,701 14,213
Treasury shares issued for acquisitions
(3,912 shares) -- (26,158) -- -- -- 129,903 103,745
Purchase of common stock (3,851 shares) -- -- -- -- -- (103,606) (103,606)
ESOP debt repayment -- -- -- 1,250 -- -- 1,250
----------------------------------------------------------------------------------------
Balance, September 30, 2000 $141,810 $914,455 $2,157,357 $ -- $(82,109) $(101,627) $3,029,886
========================================================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
Summit Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------------------
Operating Activities 2000 1999
--------------- --------------
<S> <C> <C>
Net income $ 388,479 $ 332,697
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 69,500 109,500
Depreciation, amortization and accretion, net 62,566 46,537
Gains on sales of securities (3,219) (7,055)
Gains on sales of residential mortgages held for sale (5,141) (12,766)
(Gains) loss on sales of other real estate owned
(2,219) 1,144
Proceeds from the sales of other real estate owned 6,402 4,206
Proceeds from the sales of residential mortgages held for sale 291,390 565,515
Originations of mortgages held for sale (548,069) (606,424)
Net decrease in trading account securities (3,478) (519)
Net change in other accrued and deferred income and expense (42,523) 5,153
--------------- --------------
Net cash provided by operating activities 213,688 437,988
--------------- --------------
Investing Activities
Purchases of securities held to maturity (962) (1,657,196)
Purchases of securities available for sale (2,026,333) (2,965,316)
Proceeds from maturities of securities held to maturity 940,058 1,747,995
Proceeds from maturities of securities available for sale 672,817 1,402,988
Proceeds from sales of securities available for sale 45,898 543,431
Net increase in federal funds sold, securities purchased under
agreements to resell and interest bearing deposits with banks 5,642 24,809
Net increase in loans (1,727,120) (894,856)
Purchases of premises and equipment, net (64,558) (50,170)
Purchase of corporate owned life insurance (300,000) --
--------------- --------------
Net cash used in investing activities (2,454,558) (1,848,315)
--------------- --------------
Financing Activities
Net increase in deposits 1,702,663 205,299
Net increase in short-term borrowings 536,475 1,327,754
Principal payments on long-term debt (1,279,438) (190,343)
Proceeds from the issuance of long-term debt 1,514,261 471,185
Dividends paid (176,129) (160,028)
Purchase of common stock (103,606) (317,727)
Proceeds from issuance of common stock under stock option plans 8,305 8,245
--------------- --------------
Net cash provided by financing activities 2,202,531 1,344,385
--------------- --------------
Decrease in cash and due from banks (38,339) (65,942)
Beginning cash balance of acquired entities 15,138 20,927
Cash and due from banks at beginning of period 1,160,577 1,129,859
--------------- --------------
Cash and due from banks at end of period $ 1,137,376 $ 1,084,844
=============== ==============
Supplemental disclosure of cash flow information Cash paid:
Interest payments $ 1,022,030 $ 799,861
Income tax payments 178,433 131,176
Noncash investing activities:
Net transfer of loans to other real estate owned 1,378 6,446
</TABLE>
4
<PAGE>
Summit Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1.) Basis of Presentation
The accompanying financial statements reflect, in the opinion of management, all
normal recurring adjustments necessary to present fairly the consolidated
financial position of Summit Bancorp and subsidiaries ("Summit Bancorp"), and
its consolidated results of operations, changes in shareholders' equity and
changes in cash flows. All significant inter-company 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 2000. For additional
information and disclosures required under generally accepted accounting
principles, reference is made to Summit Bancorp's 1999 Annual Report on Form
10-K.
2.) Acquisitions
On September 11, 2000, Summit Bancorp completed the acquisition of Howard Lawson
and Co. LLC, a Philadelphia, Pennsylvania-based middle market investment banking
and corporate advisory firm. The acquisition supports Summit Bancorp's strategy
to expand fee based advisory service capabilities. The transaction was accounted
for as a purchase. The cost in excess of the fair value of net assets acquired
resulted in goodwill of $9.2 million, amortized over a 10 year period.
On March 29, 2000, Summit Bancorp completed the acquisition of NMBT Corp.
("NMBT"). NMBT was headquartered in New Milford, Connecticut and through its
subsidiary bank operated ten branches in western Connecticut with $430.0 million
in assets. This acquisition was accounted for as a purchase, with the issuance
of 2.6 million shares of treasury stock. The cost in excess of the fair value of
net assets acquired resulted in goodwill and other intangibles of $36.6 million,
amortized over a 20 year period.
On March 17, 2000, Summit Bancorp completed its acquisition of selected assets
of Patgo Insurance Agency, Inc., Patgo South, Inc., Patgo International, Inc.
and Crown Insurance Agency, Inc. These companies provided both property and
casualty insurance and group benefit services. This acquisition was accounted
for as a purchase with the cost in excess of the fair value of net assets
acquired resulting in goodwill and other intangibles of $4.3 million, amortized
over a 10 year period.
On February 29, 2000, Summit Bancorp completed its acquisition of Meeker Sharkey
Financial Group. Meeker Sharkey Financial Group offered an array of property and
casualty products, group health insurance benefits and retirement plan services.
This transaction was accounted for as a purchase with the issuance of 1.3
million shares of treasury stock. The cost in excess of the fair value of net
assets acquired resulted in goodwill and other intangibles of $24.1 million,
amortized over a 10 year period.
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
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Net Income $ 133,464 $ 93,619 $ 388,479 $ 332,697
=====================================================================================================================
Basic weighted-average common shares outstanding 173,850 173,979 174,111 172,809
Plus: Common stock equivalents 939 1,548 981 1,614
---------------------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding 174,789 175,527 175,092 174,423
=====================================================================================================================
Net Income per Common Share:
Basic $ 0.77 $ 0.54 $ 2.23 $ 1.93
Diluted 0.76 0.53 2.22 1.91
=====================================================================================================================
</TABLE>
5
<PAGE>
4.) Restructuring Charges
During the fourth quarter of 1999, a restructuring charge of $27.9 million
pretax, ($17.1 million, or $0.10 per diluted share after tax) was recorded in
conjunction with the realignment of key lines of business and lines of support.
The realignment eliminated approximately 260 positions. Employees affected by
the realignment were notified at the time of the restructure. The table below
displays the status of accrual reserves for business restructuring charges at
September 30, 2000. The majority of the restructuring charge is expected to be
utilized by year-end December 31, 2000.
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Restructuring Charges
(In millions)
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Recorded Utilization Remaining
Type of cost Liability to date Liability
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Severance and benefits $ 26.1 $ 24.6 $ 1.5
Real estate and other 1.8 0.6 1.2
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Total $ 27.9 $ 25.2 $ 2.7
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5.) Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." However, most of the
provisions of SFAS 125 have been carried forward without reconsideration. SFAS
No. 140 revises the standards for accounting and reporting for securitizations
and other transfers of financial assets and collateral, servicing of financial
assets, extinguishments of liabilities, and requires certain disclosures. While
certain provisions of SFAS No. 140 are currently in effect, other provisions
contained in SFAS No. 140 are not effective until fiscal years ending after
December 15, 2000 and for certain transactions entered into after March 31,
2001. The adoption of SFAS No. 140 is not expected to have a material impact on
the financial statements of Summit Bancorp.
In June 2000, the Securities and Exchange Commission ("SEC") issued SEC Staff
Accounting Bulletin ("SAB") No. 101 B. This statement delays the effective date
of SAB No. 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. SAB No. 101 summarizes certain staff views in
applying generally accepted accounting principals ("GAAP") to revenue
recognition in financial statements. The adoption of SAB No. 101 is not expected
to have a material impact on the financial statements of Summit Bancorp.
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." This statement delays the effective date of FASB Statement
No. 133 one year. SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
standard 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 now effective for all fiscal years
beginning after June 15, 2000, 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 Summit Bancorp.
6.) Subsequent Events
On October 1, 2000, Summit Bancorp and FleetBoston Financial Corporation
("FleetBoston") signed a definitive merger agreement providing for the merger of
Summit Bancorp into FleetBoston and a related stock option agreement, forms of
which agreements were filed with the Securities and Exchange Commission on a
Form 8-K dated October 1, 2000. Under terms of the merger agreement, Summit
Bancorp shareholders will receive 1.02 shares of FleetBoston common stock for
each share of Summit Bancorp in a fixed-stock exchange. The transaction is
expected to be generally tax-free to shareholders for U.S. Federal income tax
purposes (other than cash received for fractional shares) and is expected to be
accounted for as a pooling-of-interests. Subject to, among other requirements,
obtaining shareholder
6
<PAGE>
and regulatory approval, the merger is expected to close in the first quarter of
2001. Board approval of the merger agreement constitutes a "change in control"
under the Summit Bancorp 1999 non-executive stock option plan and the Summit
Bancorp 1993 incentive stock and option plan. As a result of the occurrence of a
change in control all previously unvested outstanding stock options and
restricted stock became immediately vested. The vesting of restricted stock will
result in compensation expense of approximately $22.0 million pretax in the
fourth quarter of 2000. In addition, there may be other merger related costs
incurred in the fourth quarter of amounts not yet determined.
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 bank subsidiaries in New Jersey, Pennsylvania, and
Connecticut 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 and the Internet. On October 1, 2000,
Summit Bancorp and FleetBoston Financial Corporation ("FleetBoston") signed a
definitive merger agreement providing for the merger of Summit Bancorp into
FleetBoston. Under terms of the agreement, Summit Bancorp shareholders will
receive 1.02 shares of FleetBoston common stock for each share of Summit Bancorp
in a fixed-stock exchange. The transaction is expected to be generally tax-free
to shareholders (other than cash received for fractional shares) and is expected
to be accounted for as a pooling-of-interests. The merger is subject to
shareholder and regulatory approval and is expected to close in the first
quarter of 2001.
FINANCIAL CONDITION
Total assets at September 30, 2000, were $39.5 billion, an increase of $3.1
billion, or 8.5 percent, from year-end 1999. The growth came most notably from
the loan portfolios and was primarily funded with an increase in deposits and
borrowed funds. The increase in total assets attributable to acquisitions was
approximately $439.9 million.
Total securities at September 30, 2000, were $11.3 billion, an increase of
$511.5 million, or 4.7 percent, from year-end 1999. The growth in total
securities due to acquisitions was $101.8 million. Securities held to maturity,
which are carried at amortized historical cost, are investments for which there
is a positive intent and ability to hold to maturity. Securities held to
maturity at September 30, 2000, were $4.7 billion and comprised U.S. Government
and Federal agency securities totaling $3.1 billion, other securities,
predominately corporate collateralized mortgage obligations ("CMOs") totaling
$1.6 billion, and securities of state and political subdivisions totaling $94.0
million. Held to maturity securities decreased $891.9 million, or 15.9 percent,
from year-end 1999 due primarily to principal repayments and maturities of
$940.1 million. At September 30, 2000, and December 31, 1999, net unrealized
losses on securities held to maturity amounted to $152.9 million and $209.3
million, respectively.
Securities available for sale are investments that may be sold in response to
changing market and interest rate conditions or for other business purposes.
Activity in this portfolio is initiated primarily to manage liquidity and
interest rate risk and to take advantage of certain market conditions. At
September 30, 2000, securities available for sale amounted to $6.6 billion and
predominately comprised $4.7 billion of U.S. Government and Federal agency
securities and $1.5 billion of CMOs. Total available for sale securities
increased $1.4 billion, or 26.9 percent, from year-end 1999. The increase
resulted primarily from $2.0 billion in purchases partially offset by sales and
maturities of $715.5 million. These purchases were partially funded by the cash
flows from the securities held to maturity portfolio.
The loan portfolio, which represents Summit's largest asset, is a significant
source of both interest and fee income. Elements of the loan portfolio are
subject to differing levels of credit and interest rate risk. Summit's lending
strategy stresses portfolio diversification by product, geography, and industry.
At September 30, 2000, total loans amounted to $25.4 billion, an increase of
$2.2 billion, or 9.4 percent, from year-end 1999. The growth in total loans due
to acquisitions was $269.3 million. The largest increases were in commercial and
consumer loans, which grew $1.5 billion and $785.3 million respectively.
Commercial mortgages increased $78.3 million and residential
7
<PAGE>
mortgages decreased $223.8 million from year-end 1999. The increase in
commercial loans was primarily related to loan growth in commercial services,
specialized industries and syndicated loans. The increase in the consumer loan
portfolio was primarily attributed to home equity loan promotions and purchases.
Residential mortgages totaling $390.0 million were sold since year-end December
31, 1999. Mortgage loans held for sale amounted to $89.1 million and $65.5
million for the periods ended September 30, 2000, and December 31, 1999,
respectively.
Corporate owned life insurance increased $304.8 million from year-end 1999
primarily related to the implementation of a corporate owned life insurance
program in June of 2000.
Deposits, which include non-interest bearing demand deposits and
interest-bearing savings and time deposits, are a fundamental source of funding.
Summit offers a variety of products designed to attract and retain customers,
with the primary focus on building and expanding relationships. Total deposits
were $26.6 billion at September 30, 2000, an increase of $2.0 billion, or 8.1
percent, from December 31, 1999. Acquisitions during the period contributed
$303.3 million to the increase. Savings and time deposits, at $20.5 billion,
increased $1.8 billion, or 9.7 percent, from December 31, 1999. The growth came
most notably from retail certificates of deposit, which increased $1.5 billion
from December 31, 1999, as a result of the introduction of several new
certificate of deposit products. In addition, the Summit Navigator Account,
increased $1.2 billion, or 40.0 percent, from year-end 1999. The Summit
Navigator Account is a relationship sweep account that combines banking,
investment, and brokerage services into one account. These increases more than
offset the decline of $708.1 million in other deposit products largely resulting
from a shift in the deposit mix. Non-interest bearing demand deposits also
increased by $300.3 million, or 6.1 percent, from year-end 1999 to total $5.3
billion at September 30, 2000. The increase in demand deposits came mainly from
business and personal accounts. Partially offsetting these deposit increases was
a decline in commercial certificates of deposit $100,000 and over of $94.1
million, or 9.2 percent, compared to December 31, 1999, related to using
alternative funding sources to support balance sheet growth.
Other borrowed funds mainly comprised repurchase agreements, Federal funds
purchased, Federal Home Loan Bank borrowings ("FHLB"), and other short-term
borrowings. Other borrowed funds totaled $5.1 billion at September 30, 2000, an
increase of $523.7 million, or 11.4 percent, from December 31, 1999. The
increase in other borrowed funds is the result of asset growth and a change in
funding mix.
Total long-term debt was $4.2 billion at September 30, 2000, an increase of
$289.2 million, or 7.5 percent, from year-end 1999. The increase was primarily
due to a shift in the funding mix.
Total shareholders' equity at September 30, 2000, was $3.0 billion, an increase
of $227.7 million, or 8.1 percent, from December 31, 1999. The increase was
primarily attributed to retained profits. Treasury stock at September 30, 2000,
amounted to $101.6 million a reduction of $60.0 million, or 37.1 percent
compared to December 31, 1999, and comprised 3.7 million shares. The reduction
in treasury stock was the result of the issuance of shares for employee benefit
plans and the purchase acquisitions of NMBT and Meeker Sharkey Financial Group.
Included in shareholders' equity at September 30, 2000, was accumulated other
comprehensive loss, net of tax, totaling $82.1 million, compared to a loss of
$85.8 million at year-end 1999. Accumulated other comprehensive loss is
comprised principally of unrealized gains and losses, net of tax, on securities
available for sale.
Summit Bancorp's capital ratios for September 30, 2000, compared to select prior
periods and regulatory requirements, are shown in the following table. Summit
Bancorp's bank subsidiaries met the well-capitalized requirements for each of
the periods presented. The decreases in the ratios at September 30, 2000, were
principally attributable to asset growth.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Minimum
Sept. 30, Dec.31, Sept. 30, Required Well
Selected Capital Ratios: 2000 1999 1999 Capital Capitalized
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity to assets 7.68 % 7.70 % 7.88 % -- % -- %
Leverage ratio 6.95 7.06 7.24 4.00 5.00
Tier I capital 9.08 9.46 9.59 4.00 6.00
Total risk-based 10.51 11.06 11.35 8.00 10.00
------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Non-performing Assets
Non-performing assets include non-performing loans and other real estate owned
("OREO") and are shown in the following table as of the dates indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Non-performing Assets Sept. 30, Dec. 31, Sept. 30,
(In thousands) 2000 1999 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-performing loans:
Commercial and industrial $115,880 $ 78,303 $ 64,312
Commercial mortgage 20,905 18,480 14,084
Construction and development 2,085 3,538 6,539
------------------------------------------------------------------------------------------------------
Non-performing loans 138,870 100,321 84,935
OREO, net 4,568 6,881 8,782
------------------------------------------------------------------------------------------------------
Non-performing assets $143,438 $ 107,202 $ 93,717
------------------------------------------------------------------------------------------------------
Loans, not included above, past due 90 days or more $ 53,337 $ 41,378 $ 39,245
------------------------------------------------------------------------------------------------------
Non-performing loans to total loans 0.55 % 0.43 % 0.37 %
Non-performing assets to total loans and OREO 0.56 0.46 0.41
------------------------------------------------------------------------------------------------------
</TABLE>
Average non-performing loans were $110.9 million and $96.0 million for the nine
months ended September 30, 2000, and September 30, 1999, respectively. Interest
income received on non-performing loans amounted to $2.0 million for the nine
months ended September 30, 2000, compared to $2.3 million for the nine months
ended September 30, 1999. Loans which are past due 90 days or more but are not
included in non-performing assets are primarily residential mortgage and
consumer loans which are generally well secured and in the process of
collection.
Potential problem loans, which are excluded from non-performing assets, are
loans where information about possible credit problems of borrowers causes
management to have doubts as to the ability of such borrowers to comply with
loan repayment terms. These loans amounted to $43.3 million at September 30,
2000, compared to $11.9 million and $7.1 million at December 31, 1999, and
September 30, 1999, respectively.
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 and other extensions of
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.
A process has been established to assess the appropriateness of the allowance
for loan losses and to identify the risks inherent in the loan portfolio. This
process consists of the identification of specific reserves for identified
problem loans, the calculation of general reserves, which includes a combination
of formula-driven allocations and minimum reserve levels by loan type and grade,
and the determination of the unallocated reserves.
Specific reserves are determined through assessment of the borrower's ability to
repay and the fair value of the underlying collateral, for collateral dependent
loans, for each non-performing loan. If the carrying value of a loan exceeds the
discounted expected cash flows or the value of the underlying collateral, the
excess is specifically reserved or charged off. The level of specific reserves
is generally the smallest component of the allowance for loan losses.
The calculation of the general reserve involves several steps. A historical loss
factor is applied to each loan and unused commitment by business segment and
loan grade. The historical loss factors are calculated using a trailing six
quarter loss migration analysis. Adjustments are then made to the historical
loss factors based on six quantitative objective elements (delinquency,
non-performing assets, watch lists, charge offs, concentrations of credit, and
recoveries) and three subjective elements (economic conditions, the rating
assigned by the internal credit audit
9
<PAGE>
department, and other factors). This methodology is applied to the commercial
portfolio. For the commercial loan portfolios, the historical loss factor,
inclusive of the adjustment, is then compared to minimum reserve levels for each
loan grade. The larger of the two factors is used in the determination of the
reserves. The methodology for the retail portfolio involves a six quarter loss
migration analysis which may be adjusted due to rising trends or charge offs.
The reserves calculated for the residential and consumer loans employ a
historical six quarter loss migration analysis.
The last component of the loan loss reserve is the unallocated reserve. The
unallocated reserve is based upon management's evaluation of the underlying
inherent risk in the loan portfolio. The analysis of the appropriate level of
reserves, in the aggregate, is based on the level of specific and general
reserves previously discussed and is also inclusive of: industry concentrations,
delinquency trends, economic trends, loan growth relative to the overall
allowance, the level of substandard assets, and the amount of allocated and
unallocated reserves relative to the total loan portfolio. The unallocated
portion of the allowance for loan losses, in excess of specific and general
reserves, was $128.1 million at September 30, 2000, compared to $119.8 million
at December 31, 1999.
The provision for loan losses for the third quarter of 2000 was $25.0 million, a
$51.5 million decrease from the same period a year ago, and $69.5 million for
the nine months ended, a decrease of $40.0 million, from the same period a year
ago. The decrease in the provision for loan losses for the three months and nine
months ended September 30, 2000, was primarily attributed to an additional
provision of $60.0 million in September of 1999. The provision for loan losses
is charged to expense to bring the allowance for loan losses to a level deemed
appropriate by management to cover the credit risk inherent in the loan
portfolio. The provision for loan losses may vary from quarter to quarter due to
loan growth, the level of charge offs, or an increase in the inherent risk in
the loan portfolio. The allowance as a percentage of total loans was 1.32
percent at September 30, 2000, compared to 1.42 percent and 1.45 percent at
December 31, 1999, and September 30, 1999, respectively.
The following tables show the transactions in the allowance for loan losses, by
loan category, for the three and nine month periods ended September 30, 2000,
and September 30, 1999, and selected loan quality ratios for the periods ended
September 30, 2000, December 31, 1999, and September 30, 1999.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 334,851 $ 321,700 $ 328,828 $ 322,814
Allowance of acquired institutions - 9,584 4,357 11,724
Provision for loan losses 25,000 76,500 69,500 109,500
---------------------------------------------------------------------------------------------------------------------
359,851 407,784 402,685 444,038
---------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial and industrial 23,597 75,830 63,038 104,229
Construction and development - - - 13
Commercial mortgage 941 1 1,199 2,273
Residential mortgage 676 578 2,655 3,526
Consumer 6,533 6,918 19,183 22,083
---------------------------------------------------------------------------------------------------------------------
Total loans charged off 31,747 83,327 86,075 132,124
---------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and industrial 3,918 2,193 11,262 8,058
Construction and development - 142 38 989
Commercial mortgage 35 15 74 756
Residential mortgage 19 31 169 466
Consumer 2,365 1,977 6,288 6,632
---------------------------------------------------------------------------------------------------------------------
Total recoveries 6,337 4,358 17,831 16,901
---------------------------------------------------------------------------------------------------------------------
Net charge offs 25,410 78,969 68,244 115,223
---------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 334,441 $ 328,815 $ 334,441 $ 328,815
=====================================================================================================================
---------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Selected Loan Quality Ratios
------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
------------------------------------------------------------------------------
Net charge offs to average loans:
Quarter-to-date 0.40 % 0.32 % 1.41 %
Year-to-date 0.37 0.61 0.72
Allowance for loan losses to:
Total loans at period end 1.32 % 1.42 % 1.45 %
Non-performing loans 240.83 327.78 387.14
Non-performing assets 233.16 306.74 350.86
------------------------------------------------------------------------------
11
<PAGE>
<TABLE>
<CAPTION>
Summit Bancorp and Subsidiaries
Consolidated Average Balance Sheets with Resultant Interest and Rates
Unaudited
(Tax-equivalent basis, dollars in thousands)
Three Months Ended
---------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
---------------------------------------- -----------------------------------
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 $ 16,758 $ 358 8.50 % $ 27,872 $ 415 5.91 %
Interest-bearing deposits with banks 24,868 383 6.13 31,803 443 5.53
Securities:
Trading account 27,578 688 9.92 15,309 144 3.73
Available for sale 6,367,946 109,783 6.90 4,858,464 75,988 6.26
Held to maturity 4,875,569 77,637 6.37 6,167,783 96,797 6.28
------------- -------- --------- ----------- --------- --------
Total securities 11,271,093 188,108 6.68 11,041,556 172,929 6.26
------------- -------- --------- ----------- --------- --------
Loans, net of unearned discount:
Commercial 9,457,393 214,724 9.03 7,771,020 153,101 7.82
Commercial mortgage 3,221,955 66,027 8.20 3,049,055 61,698 8.09
Residential mortgage 5,764,662 105,001 7.29 5,549,722 98,495 7.10
Consumer 6,854,520 147,364 8.55 5,792,765 116,741 8.00
------------- -------- --------- ----------- --------- --------
Total loans 25,298,530 533,116 8.38 22,162,562 430,035 7.70
------------- -------- --------- ----------- --------- --------
Total interest-earning assets 36,611,249 721,965 7.85 33,263,793 603,822 7.20
------------- -------- --------- ----------- --------- --------
Non-interest earning assets:
Cash and due from banks 1,053,562 957,042
Allowance for loan losses (335,419) (332,077)
Other assets 1,874,377 1,395,619
------------- -----------
Total non-interest earning assets 2,592,520 2,020,584
------------- -----------
Total Assets $ 39,203,769 $ 35,284,377
============= ===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 11,885,675 93,629 3.13 % $ 11,661,211 78,980 2.69 %
Time deposits 8,328,543 121,329 5.80 7,001,622 86,893 4.92
Commercial certificates of
deposit $100,000 and over 858,923 13,636 6.32 788,110 9,931 5.00
------------- -------- --------- ----------- --------- --------
Total interest-bearing deposits 21,073,141 228,594 4.32 19,450,943 175,804 3.59
------------- -------- --------- ----------- --------- --------
Other borrowed funds 5,771,444 94,942 6.54 3,815,511 48,115 5.00
Long-term debt 3,823,246 58,328 6.10 4,036,142 56,091 5.56
------------- -------- --------- ----------- --------- --------
Total interest-bearing liabilities 30,667,831 381,864 4.95 27,302,596 280,010 4.07
------------- -------- --------- ----------- --------- --------
Non-interest bearing liabilities:
Demand deposits 5,071,040 4,697,696
Other liabilities 491,828 510,525
------------- -----------
Total non-interest bearing 5,562,868 5,208,221
liabilities
Shareholders' equity 2,973,070 2,773,560
------------- -----------
Total Liabilities and Shareholders'
Equity $ 39,203,769 $ 35,284,377
============= ===========
Net Interest Spread 340,101 2.90 % 323,812 3.13 %
========= ========
Tax-equivalent basis adjustment (2,045) (2,504)
-------- ---------
Net Interest Income $ 338,056 $ 321,308
======== =========
Net Interest Margin 3.70 % 3.86 %
========= ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Summit Bancorp and Subsidiaries
Consolidated Average Balance Sheets with Resultant Interest and Rates
Unaudited
(Tax-equivalent basis, dollars in thousands)
Year to Date
----------------------------------------------------------------------------------
September 30, 2000 September 30, 1999
--------------------------------------- ------------------------------------
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 $ 13,265 $ 689 6.94 % $ 22,626 $ 910 5.38 %
Interest-bearing deposits with banks 40,560 1,688 5.56 29,773 1,155 5.19
Securities:
Trading account 24,966 1,878 10.05 12,186 430 4.72
Available for sale 6,099,929 313,249 6.85 4,271,410 196,296 6.13
Held to maturity 5,174,904 246,443 6.35 6,315,080 296,255 6.25
----------- --------- -------- ----------- ---------- ---------
Total securities 11,299,799 561,570 6.63 10,598,676 492,981 6.20
----------- --------- -------- ----------- ---------- ---------
Loans, net of unearned discount:
Commercial 8,837,929 581,019 8.78 7,437,604 431,955 7.76
Commercial mortgage 3,190,401 193,915 8.10 2,940,324 177,265 8.04
Residential mortgage 5,816,278 315,833 7.24 5,600,750 298,973 7.12
Consumer 6,560,157 415,260 8.46 5,557,732 335,173 8.06
----------- --------- -------- ----------- ---------- ---------
Total loans 24,404,765 1,506,027 8.24 21,536,410 1,243,366 7.72
----------- --------- -------- ----------- ---------- ---------
Total interest-earning assets 35,758,389 2,069,974 7.73 32,187,485 1,738,412 7.22
----------- --------- -------- ----------- ---------- ---------
Non-interest earning assets:
Cash and due from banks 1,052,800 956,920
Allowance for loan losses (332,906) (329,462)
Other assets 1,645,253 1,232,417
-----------
Total non-interest earning assets 2,365,147 1,859,875
----------- -----------
Total Assets $ 38,123,536 $ 34,047,360
=========== ===========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings deposits $ 11,828,148 266,613 3.01 % $ 10,997,588 212,085 2.58 %
Time deposits 7,744,729 319,885 5.52 7,023,997 262,537 5.00
Commercial certificates of
deposit $100,000 and over 882,943 39,300 5.95 852,874 30,966 4.85
----------- --------- -------- ----------- ---------- ---------
Total interest-bearing deposits 20,455,820 625,798 4.09 18,874,459 505,588 3.58
----------- --------- -------- ----------- ---------- ---------
Other borrowed funds 5,506,542 254,939 6.18 3,497,126 128,244 4.90
Long-term debt 3,788,917 164,949 5.80 3,900,156 161,399 5.52
----------- --------- -------- ----------- ---------- ---------
Total interest-bearing liabilities 29,751,279 1,045,686 4.69 26,271,741 795,231 4.05
----------- --------- -------- ----------- ---------- ---------
Non-interest bearing liabilities:
Demand deposits 4,973,625 4,559,519
Other liabilities 490,544 502,457
----------- -----------
Total non-interest bearing 5,464,169 5,061,976
liabilities
Shareholders' equity 2,908,088 2,713,643
----------- -----------
Total Liabilities and Shareholders'
Equity $ 38,123,536 $ 34,047,360
=========== ===========
Net Interest Spread 1,024,288 3.04 % 943,181 3.17 %
======== =========
Tax-equivalent basis adjustment (6,443) (7,938)
--------- ----------
Net Interest Income $ 1,017,845 $ 935,243
========= ==========
Net Interest Margin 3.83 % 3.92 %
======== =========
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2000, was $133.5 million, or
$0.77 per basic share, compared to $93.6 million, or $0.54 per basic share, for
the third quarter of 1999. On a diluted per share basis, net income for the
three months ended September 30, 2000, was $0.76 per diluted share compared to
$0.53 for the same period in 1999. The 1999 operating results include the impact
of $60.0 million, or $0.20 per share after tax additional provision for loan
losses.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
(In thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial data:
Net income $ 133,464 $ 93,619 $ 388,479 $ 332,697
Per share-diluted 0.76 0.53 2.22 1.91
Return on average assets 1.35 % 1.05 % 1.36 % 1.31 %
Return on average equity 17.86 13.39 17.84 16.39
Efficiency ratio 51.82 49.96 51.94 50.56
-----------------------------------------------------------------------------------------------------------------
Cash-basis financial data*:
Net income $ 142,926 $ 101,663 $ 415,875 $ 352,663
Per share-diluted 0.82 0.58 2.38 2.02
Return on average tangible assets 1.47 % 1.16 % 1.48 % 1.40 %
Return on average tangible equity 23.35 17.26 23.33 19.82
Efficiency Ratio 49.66 48.01 49.81 48.89
-----------------------------------------------------------------------------------------------------------------
</TABLE>
* Cash-basis financial data excludes the after tax impact of amortization of
goodwill and other intangibles.
Net Interest Income
Interest income on a tax-equivalent basis was $2.1 billion for the nine months
ended September 30, 2000, an increase of $331.6 million, or 19.1 percent,
compared to a year ago. Interest-earnings assets averaged $35.8 billion, an
increase of $3.6 billion, or 11.1 percent, compared to the prior year period.
The growth in interest-earning assets contributed $216.6 million to the increase
in tax-equivalent interest income while the increase in yield contributed $115.0
million. The rate earned on interest-earning assets increased 51 basis points to
7.73 percent for the nine months ended September 30, 2000. The increase was the
result of a higher interest rate environment compared to last year as both the
average Prime rate and the average London Interbank Offering Rate ("LIBOR") were
significantly higher than the prior year.
Interest expense increased $250.5 million, or 31.5 percent, for the nine months
ended September 30, 2000, compared to the same period a year ago.
Interest-bearing liabilities averaged $29.8 billion for the nine months ended
September 30, 2000, an increase of $3.5 billion, or 13.2 percent, compared to
the prior year. The growth in interest-bearing liabilities contributed $129.1
million to the increase in interest expense while the increase in rates paid on
interest-bearing liabilities contributed the remaining $121.4 million. The rate
paid on interest-bearing liabilities increased 64 basis points to 4.69 percent
due to the higher interest-rate environment and continued disintermediation that
led to a more expensive deposit mix.
Net interest income on a tax-equivalent basis was $1.0 billion for the nine
months ended September 30, 2000, an increase of $81.1 million, or 8.6 percent,
compared to the same period in 1999. The net interest spread percentage on a
tax-equivalent basis (the difference between the tax equivalent rate earned on
average interest-earning assets and the tax equivalent rate paid on average
interest-bearing liabilities) was 3.04 percent for the nine months then ended,
compared to 3.17 percent for the prior year period. Net interest margin (net
interest income on a tax-equivalent basis as a percentage of average
interest-earning assets) was 3.83 percent for the nine months ended September
30, 2000, compared to 3.92 percent during the same period in 1999. The decline
in net interest spread
14
<PAGE>
and margin was primarily caused by rates on interest-bearing liabilities rising
more rapidly than yields on interest-earning assets.
The rate/volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates over the
periods. Changes that are not due to volume or rate variances have been
allocated proportionally to both, based on their relative absolute values.
<TABLE>
<CAPTION>
Rate/Volume Table Amount of Increase (Decrease)
------------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2000 versus 1999 2000 versus 1999
------------------------------------------------------------------------
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 $ 36.3 $ 25.3 $ 61.6 $ 88.1 $60.9 $ 149.0
Commercial mortgage 3.5 0.8 4.3 15.3 1.3 16.6
Residential mortgage 3.9 2.6 6.5 11.7 5.2 16.9
Consumer 22.7 8.0 30.7 63.5 16.7 80.2
-----------------------------------------------------------------------------------------------------------------------
Total loans 66.4 36.7 103.1 178.6 84.1 262.7
Securities held to maturity (20.5) 1.4 (19.1) (54.5) 4.6 (49.9)
Securities available for sale 25.4 8.3 33.7 91.8 25.2 117.0
Other interest earning assets (0.1) 0.5 0.4 0.7 1.1 1.8
-----------------------------------------------------------------------------------------------------------------------
Total Interest Income $ 71.2 $ 46.9 $ 118.1 $ 216.6 $ 115.0 $ 331.6
-----------------------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits
Savings deposits $ 1.6 $ 13.1 $ 14.7 $ 17.0 $ 37.5 $ 54.5
Time deposits 17.7 16.7 34.4 28.5 28.9 57.4
Commercial Certificates of
Deposits>$100M 0.9 2.8 3.7 1.1 7.2 8.3
-----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 20.2 32.6 52.8 46.6 73.6 120.2
Other borrowed funds 29.2 17.6 46.8 87.0 39.6 126.6
Long-term debt (3.0) 5.3 2.3 (4.5) 8.2 3.7
-----------------------------------------------------------------------------------------------------------------------
Total Interest Expense 46.4 55.5 101.9 129.1 121.4 250.5
-----------------------------------------------------------------------------------------------------------------------
Net Interest Income (fully taxable equivalent) $24.8 $ (8.6) $16.2 $ 87.5 $ (6.4) $ 81.1
-----------------------------------------------------------------------------------------------------------------------
Decrease in tax-equivalent adjustment 0.5 1.5
-----------------------------------------------------------------------------------------------------------------------
Increase in Net Interest Income $16.7 $ 82.6
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Non-Interest Income
Non-interest income categories for the three and nine month periods ended
September 30, 2000, and 1999 are shown in the following table:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
(In millions) Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------------------------------------------------------------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 32.7 $ 31.2 4.8 % $ 96.1 $ 90.8 5.8 %
Service and loan fee income 16.5 14.6 13.5 51.9 46.2 12.3
Insurance service fees 14.0 8.3 68.6 39.6 24.5 61.3
Trust income 14.0 13.1 6.5 41.4 37.9 9.3
Retail investment fees 9.8 9.9 (0.9) 33.4 30.7 8.8
Corporate owned life insurance 5.4 - - 5.4 - -
Other 25.2 22.9 10.0 63.5 61.6 3.0
---------------------------------------------------------------------------------------------------------------------
Total non-interest operating income 117.6 100.0 17.7 331.3 291.7 13.6
Securities gains 0.4 4.7 (92.1) 3.2 7.1 (54.4)
---------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 118.0 $ 104.7 12.7 % $ 334.5 $ 298.8 12.0 %
=====================================================================================================================
</TABLE>
Service charges on deposit accounts increased $1.5 million, or 4.8 percent, for
the three months ended September 30, 2000, compared with 1999 and increased $5.3
million, or 5.8 percent, for the nine months then ended, compared with the same
period a year ago. This was primarily due to an increase in account maintenance
charges from a larger demand deposit base as well as increased volume of
insufficient fund fees.
Service and loan fee income increased $1.9 million, or 13.5 percent, for the
quarter ended September 30, 2000, compared with 1999, and increased $5.7
million, or 12.3 percent, for the nine months ended, compared with the same
period a year ago. The increases were primarily due to increased volume of
commercial loan and merchant credit card processing fees, partially offset by a
decline in mortgage origination and mortgage servicing income.
Insurance service fees increased $5.7 million, or 68.6 percent, for the quarter
ended September 30, 2000, compared to the same period a year ago and increased
$15.0 million, or 61.3 percent, for the nine months ended September 30, 2000,
compared with the same period a year ago. The increases were primarily due to
the acquisition of Meeker Sharkey Financial Group and Patgo Insurance Agency
Inc.
Trust income increased $0.9 million, or 6.5 percent, for the quarter ended
September 30, 2000, compared with 1999 and increased $3.5 million, or 9.3
percent, for the nine months then ended, compared with the same period a year
ago. This was primarily due to an increase in advisory fees from the Pillar
Funds, Summit Bancorp's proprietary mutual funds.
Retail investment fees remained flat for the quarter ended September 30, 2000,
compared with 1999 and increased $2.7 million, or 8.8 percent, for the nine
months ended September 30, 2000, compared with the same period a year ago. The
growth for the nine months ended was a result of increased brokerage fees and
higher trading volumes, as well as increased fees from the sale of annuities.
In June 2000, Summit Bancorp implemented a corporate owned life insurance
program. The cash surrender value of the policy increased $5.4 million for the
three and nine months ended September 30, 2000.
The increase in other income for the three months ended September 30, 2000 was
attributable to the sale of $233.0 million in residential mortgages, which
generated a gain of $5.8 million.
16
<PAGE>
Non-Interest Expense
Non-interest expense categories for the three and nine month periods ended
September 30, 2000, and 1999 are shown in the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(In millions) Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
-------------------------------------------------------------------------------------------------------------------
Percent Percent
2000 1999 Change 2000 1999 Change
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $ 96.7 $ 87.2 10.9 % $278.1 $ 250.1 11.2 %
Pension and other employee benefits 29.9 28.4 5.3 92.5 87.6 5.6
Furniture and equipment 26.1 23.9 9.4 77.1 68.8 11.9
Occupancy, net 21.4 20.2 5.8 64.9 59.3 9.5
Amortization of goodwill and other
intangibles 9.9 8.3 19.6 28.8 20.6 39.8
Communications 9.5 9.3 1.4 28.4 28.6 (0.9)
Advertising and public relations 5.9 5.8 1.7 18.2 17.2 5.7
Other 37.5 28.9 29.7 114.9 92.4 24.4
-------------------------------------------------------------------------------------------------------------------
Total non-interest expense $236.9 $212.0 11.8 % $702.9 $624.6 12.5 %
===================================================================================================================
</TABLE>
Salaries and benefits increased $11.1 million, or 9.6 percent, for the quarter
ended September 30, 2000, compared to the same quarter in 1999 and $32.9
million, or 9.8 percent for the nine months ended September 30, 2000, compared
with the same period a year ago. In addition to the annual merit increases,
salaries and benefits rose approximately $6.8 million from acquisitions for the
three months ended September 30, 2000, and $19.8 million for the nine month
period then ended. Partially offsetting these increases was the benefit of the
fourth quarter 1999 corporate realignment, which resulted in a reduction of
approximately 260 employees.
Furniture and equipment expenses increased $2.2 million, or 9.4 percent, for the
quarter ended September 30, 2000, compared with the same quarter in 1999 and
$8.3 million, or 11.9 percent, for the nine months ended September 30, 2000,
compared with the same period a year ago. This increase was primarily due to the
recent bank acquisitions and increased amortization expense relating to computer
equipment and software.
Occupancy expense increased $1.2 million, or 5.8 percent, for the quarter ended
September 30, 2000, compared with the same quarter in 1999 and $5.6 million, or
9.5 percent, for the nine months ended September 30, 2000, compared with the
same period a year ago. The increase was largely a result of recent bank
acquisitions.
Amortization of goodwill and other intangibles increased $1.6 million, or 19.6
percent, for the three months ended September 30, 2000, compared to the same
period a year ago and $8.2 million, or 39.8 percent, for the nine months ended
September 30, 2000, compared with the same period a year ago. The increase was
due to the purchase acquisitions of Prime Bancorp, New Canaan Bank & Trust
Company, Meeker Sharkey Financial Group, and NMBT.
Other expenses increased $8.6 million, or 29.7 percent, for the three months
ended September 30, 2000, compared with the same quarter in 1999 and $22.6
million, or 24.4 percent, for the nine months ended September 30, 2000, compared
with the same period a year ago. This was a result of increased consultant fees,
increased second mortgage servicing fees resulting from home equity purchases,
an increase in commissions due to increased sales of insurance and retail
investment products, and an increase in charge offs. Also contributing to the
increase were higher employment agency fees due to a tight labor market and
recent bank acquisitions.
The effective income tax rate was 31.3 percent for the three months ended
September 30, 2000, compared with 31.9 percent for the same quarter in 1999 and
33.0 percent for the nine months ended September 30, 2000, compared with 33.5
percent for the same period a year ago.
17
<PAGE>
LINES OF BUSINESS
For management purposes, Summit Bancorp is segmented into the following lines of
business: Retail Banking, Corporate Banking and The Private Bank. Activities not
included in these lines are reflected in Other. The lines have been structured
according to the customer groups served. Financial performance of 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 from any other financial institution. The profitability
measurement system uses internal management accounting policies that ensure
business line results reflect the underlying economics of each business line and
are compiled on a consistent basis.
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 on an "ability to
pay" basis related to each particular business line's contribution to income. A
matched maturity funds transfer pricing methodology is employed to assign a cost
of funds to the earning assets, as well as a value of funds to the liabilities
of each business line. The provision for loan losses is allocated based on
management's assessment of the historical net charge off ratio for each business
segment. Income taxes are allocated based upon the consolidated effective tax
rates, after consideration of certain permanent differences that may be
allocated to a specific line of business.
The following tables summarize results by lines of business as if operated on a
stand-alone basis for the three months and nine months ended September 2000 and
1999. Certain prior period information has been restated to conform to the
current period presentation.
<TABLE>
<CAPTION>
Results of Operations
Quarter Ended September 30, Retail Banking Corporate Banking The Private Bank Other Consolidated
---------------- ----------------- ----------------- ------------------- ---------------
(In millions) 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 199 $ 207 $ 102 $ 72 $ 17 $ 15 $ 20 $ 27 $ 338 $ 321
Provision for loan losses 5 8 20 68 - - - - 25 76
---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 194 199 82 4 17 15 20 27 313 245
Non-interest income 57 55 17 12 39 32 5 6 118 105
Non-interest expense 134 131 54 44 39 34 10 3 237 212
---------------------------------------------------------------------------------------------
Income before taxes 117 123 45 (28) 17 13 15 30 194 138
Federal and state
income taxes 41 46 15 (13) 5 3 - 8 61 44
---------------------------------------------------------------------------------------------
Net income $ 76 $ 77 $ 30 $ (15) $ 12 $ 10 $ 15 $ 22 $ 133 $ 94
=============================================================================================
Selected Average Balances:
Securities $ - $ 55 $ 22 $ - $ 16 $ 16 $11,233 $10,971 $11,271 $11,042
Loans 11,867 11,781 11,823 9,043 1,609 1,339 - - 25,299 22,163
Assets 12,223 12,164 11,832 8,994 1,736 1,430 13,413 12,696 39,204 35,284
Deposits 22,663 21,403 1,555 1,060 930 798 996 888 26,144 24,149
18
<PAGE>
Results of Operations
Nine Months Ended September Retail Banking Corporate The Private Other Consolidated
30, Banking Bank
---------------- ---------------- ---------------- ---------------- ----------------
(In millions) 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-------------------------------
Net interest income $ 605 $ 609 $ 282 $ 207 $ 49 $ 43 $ 82 $ 76 $ 1,018 $ 935
Provision for loan losses 18 27 51 81 1 1 - - 70 109
------------------------------------------------------------------------------------------
Net interest income after
provision for loan 587 582 231 126 48 42 82 76 948 826
losses
Non-interest income 157 160 52 36 115 94 10 9 334 299
Non-interest expense 403 407 152 96 117 98 30 24 702 625
------------------------------------------------------------------------------------------
Income before taxes 341 335 131 66 46 38 62 61 580 500
Federal and state income taxes 118 115 43 20 16 13 15 19 192 167
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Net income $ 223 $ 220 $ 88 $ 46 $ 30 $ 25 $ 47 $ 42 $ 388 $ 333
==========================================================================================
Selected Average Balances:
Securities $ - $ 55 $ 17 $ - $ 19 $ 12 $11,264 $10,532 $11,300 $10,599
Loans 11,819 11,732 11,046 8,522 1,540 1,282 - - 24,405 21,536
Assets 12,185 12,105 11,053 8,486 1,664 1,373 13,222 12,083 38,124 34,047
Deposits 22,237 20,692 1,384 1,024 889 768 919 950 25,429 23,434
</TABLE>
Retail Banking
Retail Banking sells and delivers retail banking products and services to
individuals and small businesses through more than 400 traditional and
approximately 80 supermarket branches in New Jersey, eastern Pennsylvania, and
Connecticut. In addition to traditional banking services, Retail Banking offers
its customers an expanding array of 24-hour banking services through
approximately 600 automated teller machines, telephone banking centers, and the
Internet. It also includes a broad selection of small business and consumer
loans, deposit products, and a complete range of full-service mortgage banking
activities.
Average loans for the three months ended September 30, 2000, increased $86.0
million, or 0.7 percent, to $11.9 billion from the same period in 1999,
primarily due to home equity loan purchases and promotions. The increases were
offset by the sale of $233.0 million of residential mortgage loans. Total
average deposits for the quarter ended September 30, 2000, increased to $22.7
billion, up $1.3 billion from the same period a year ago. The increase was
attributable to the growth in the Summit Navigator Account and retail
certificates of deposit. Net interest income for the quarter decreased $8.0
million, or 3.9 percent, over the same period a year ago, primarily due to lower
margins resulting from higher costing borrowed funds and deposit mix.
Non-interest income for the quarter ended September 30, 2000, was flat from the
same period a year ago. Included in non-interest income were gains of $5.8
million from the sale of residential mortgages offset by comparable gains on the
sale of residential mortgages in the same period a year ago. Net income for the
quarter ended September 30, 2000 was $76.0 million, compared to $77.0 million
for the same period a year ago.
Corporate Banking
Corporate 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. Demand and
interest-bearing deposit accounts and services are provided through the branch
network.
Total average loans for the quarter ended September 30, 2000, were $11.8
billion, an increase of $2.8 billion, or 31.6 percent, over the same period in
1999 primarily in commercial services, specialized industries, and syndicated
loans. Net interest income for the quarter ended September 30, 2000, increased
$30.0 million, or 41.7 percent, from 1999. The increase in net interest income
was primarily due to higher margins and increased volume of commercial loans.
Non-interest income for the quarter ended September 30, 2000, increased $5.0
million, or 41.7 percent, from
19
<PAGE>
the prior year due to an increase in loan and deposit fee income as well as
additional capital market fee income. Non-interest expense for the three months
ended September 30, 2000, increased $10.0 million over the prior year to $54.0
million due to higher salaries and benefits expense and higher origination fees
due to commercial loan growth. Net income was $30.0 million for the three months
ended September 30, 2000. The 1999 operating results include the impact of a
$60.0 million additional provision for loan losses.
The Private Bank
The Private Bank provides personal credit services, professional services for
lawyers and accountants as well as their firms, and business loans and lines of
credit. This segment also includes investment services that provide a full range
of trust, administrative, and custodial services to individuals and
institutions, in addition to investment products and discount brokerage. In
addition, the line markets a wide variety of insurance products for the personal
and corporate marketplace.
Net interest income for the quarter increased $2.0 million, or 13.3 percent,
from 1999 primarily due to higher loan volumes. Non-interest income increased
$7.0 million, or 21.9 percent, from the same period a year ago. This was
primarily due to an increase in insurance service fees related to the
acquisition of Meeker Sharkey and Patgo Insurance agency. Non-interest expense
increased $5.0 million, or 14.7 percent from the same period a year ago,
primarily related to acquisitions. Net income for the quarter was $12.0 million,
up $2.0 million, or 20.0 percent, from the same period a year ago.
Other
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.
Net interest income was $20.0 million for the three months ended September 30,
2000, a decrease of $7.0 million, or 25.9 percent, from 1999, primarily due to
higher rates on borrowed funds. Securities averaged $11.3 billion for the three
months ended September 30, 2000, up $262 million, or 2.4 percent, from the same
period a year ago. Non-interest expenses were $10 million, an increase of $7
million, as a result of increased consulting fees and operational charge offs.
Net income for the three months ended September 30, 2000, was $15.0 million, a
decrease of $7.0 million or 31.8 percent, from the same period a year ago.
LIQUIDITY
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. Through September
30, 2000, no funds have been drawn from this source.
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 amount of
dividends that can be assessed to the bank subsidiaries is subject to certain
regulatory restrictions. Lines of credit are available at the Parent Corporation
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 $33.0 million at September 30, 2000.
During 1999, a shelf registration statement providing for the possible issuance,
from time to time, of senior and subordinated debt securities and preferred
stock to a maximum of $1.0 billion was declared effective by the Securities and
Exchange Commission. Terms of the securities will be set at the time of
issuance. As of September 30, 2000, none of this debt or preferred stock had
been issued.
20
<PAGE>
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 effectively manage potential liquidity concerns due
to changes in interest rates, credit markets, or other external risks.
The Consolidated Statements of Cash Flows present the change in cash and due
from banks from operating, investing and financing activities. During the first
nine months of 2000, net cash provided by operating activities totaled $202.6
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 $2.5 billion. For the nine months
ended September 30, 2000, net cash used in transactions involving the investment
portfolios totaled $368.5 million, while the loan portfolio used net cash of
$1.7 billion.
Scheduled maturities and anticipated principal repayments of the available for
sale and held to maturity securities portfolios will approximate $487.1 million
throughout the balance of 2000. In addition, all or part of the remaining
securities available for sale could be sold, providing 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 $2.2 billion. During the first
nine months of 2000, other borrowed funds and long-term debt increased $771.3
million and deposits increased $1.7 billion. These increases were partially
offset by the payment of common stock dividends and the repurchase of Summit
Bancorp's common stock.
Pursuant to the Board of Directors' December 1997 authorization, Summit Bancorp
established a grantor trust to hold cash and other property for payments with
respect certain unfunded benefit and severance plans and agreements, which under
the terms of the trusts will be required to be funded due to the change in
control. Under the merger agreement Summit Bancorp is permitted to fund the
grantor trust with cash and other property, in an amount not to exceed $60.0
million.
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.
One of Summit Bancorp'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 Summit Bancorp 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 interest rate environment and the
overall economy, the ability of customers to repay their obligations, the
adequacy of the allowance for loan losses, including realizable collateral
valuations, charge offs and recoveries, the progress of integrating acquired
financial institutions, competition and technological changes. Although
management has taken certain steps to mitigate any negative effect of the above
mentioned items, significant unfavorable changes could severely impact the
assumptions used and have an adverse affect on profitability.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Due to the nature of Summit Bancorp's business, market risk is primarily limited
to its exposure to interest rate risk, which is the impact that changes in
interest rates would have on future earnings. The principal objective in
managing interest rate risk is to maximize net interest income within the
acceptable levels of risk 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.
Interest rate risk is monitored through the use of simulation modeling
techniques which apply alternative interest rate scenarios to periodic forecasts
of future business activity and estimate the related impact 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 flows 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 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
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.
Based on the results of the interest simulation model, as of September 30, 2000,
Summit Bancorp would expect a decrease of approximately $81.0 million in net
interest income and an increase of approximately $47.0 million in net interest
income if interest rates increase or decrease by 100 basis points, respectively,
from current interest rates in an immediate and parallel shock over a
twelve-month period. At December 31, 1999, Summit Bancorp expected a decrease of
$66.5 million in net interest income and an increase of $74.2 million in net
interest income if interest rates increased or decreased by 100 basis points,
respectively. The interest simulation model does not include asset and liability
strategies that could be deployed to mitigate the impact of changes in the
interest rate environment.
Interest rate risk management efforts also involve the use of certain derivative
financial instruments, primarily interest rate swaps, for the purpose of
stabilizing net interest income in a changing interest rate environment. At
September 30, 2000, the notional values of these instruments totaled $30.0
million. These derivatives resulted in a reduction in net interest income of
$0.9 million for the first nine months of 2000. The cost to terminate these
contracts at September 30, 2000, would have been $320.0 thousand.
Summit Bancorp has limited risks associated with foreign currencies, commodities
or other marketable instruments.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
No reportable events.
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.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10) S. Summit Bancorp Benefits Protection Trust Agreement dated
as of September 29, 2000.
(27) Summit Bancorp Financial Data Schedule - September 30,
2000.
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 16, 2000, Item 5,
Other Events. Current Report on Form 8-K dated October 1,
2000, Item 5, Other Events.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT BANCORP
Registrant
DATE: November 14, 2000 by: /s/ PAUL V. STAHLIN
----------------------------------
PAUL V. STAHLIN
Senior Vice President, Comptroller
and Principal Accounting Officer
(Duly Authorized Officer)
24
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
(10) S. Summit Bancorp Benefits Protection Trust Agreement dated
as of September 29, 2000.
(27) Summit Bancorp Financial Data Schedule - September 30,
2000.
25
