-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPNVPOsi3i5SQmZFELUeOb+Om3BJLXjofHlX5axzEzIwxn15q931LTOpx/zf5lfo whaneR1tEO2M/G/5jpEt8A== 0000101320-98-000006.txt : 19980817 0000101320-98-000006.hdr.sgml : 19980817 ACCESSION NUMBER: 0000101320-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT BANCORP/NJ/ CENTRAL INDEX KEY: 0000101320 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 221903313 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06451 FILM NUMBER: 98690041 BUSINESS ADDRESS: STREET 1: 301 CARNEGIE CENTER STREET 2: P O BOX 2066 CITY: PRINCETON STATE: NJ ZIP: 08543-2066 BUSINESS PHONE: 6099873200 MAIL ADDRESS: STREET 1: PO BOX 2066 CITY: PRINCETON STATE: NJ ZIP: 08543-2066 FORMER COMPANY: FORMER CONFORMED NAME: UJB FINANCIAL CORP /NJ/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: UNITED JERSEY BANKS DATE OF NAME CHANGE: 19890815 10-Q 1 FORM 10-Q 6/30/98 ============================================================================== FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 ----------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from-------------------- to----------------------- Commission File Number: 1-6451 ---------------------------------------------------- SUMMIT BANCORP. - ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-1903313 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 301 Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066 - ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (609) 987-3200 - ---------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of July 31, 1998 there were 173,805,211 shares of common stock, $.80 par value, outstanding. ============================================================================ SUMMIT BANCORP FORM 10-Q INDEX Page No. Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1998, December 31, 1997 and June 30, 1997....................................... 2 Consolidated Statements of Income - Three and Six Months Ended June 30, 1998 and 1997....3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997............. 4 Consolidated Statements of Shareholders' Equity - Six Months Ended June 30, 1998 and 1997..............5 Notes to Consolidated Financial Statements...............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................19 Part II. Other Information. Item 1. Legal Proceedings................................20 Item 2. Changes in Securities and Use of Proceeds........20 Item 3. Defaults Upon Senior Securities..................20 Item 4. Submission of Matters to a Vote of Security Holders............................. 21 Item 5. Other Information................................21 Item 6. Exhibits and Reports on Form 8-K.................21 Signature.............................................. 22 Exhibit Index.......................................... 23 1 Summit Bancorp and Subsidiaries Consolidated Balance Sheets Unaudited (In thousands)
June 30, December 31, June 30, 1998 1997 1997 ------------ ------------ ----------- Assets Cash and due from banks $ 1,153,023 $ 1,173,118 $ 1,153,517 Federal funds sold and securities purchased under agreements to resell 176,000 4,460 143,497 Interest-bearing deposits with banks 34,476 14,072 6,879 Securities: Trading account securities 23,797 35,216 43,407 Securities available for sale 4,295,945 5,074,896 3,513,390 Securities held to maturity 5,070,615 4,157,543 5,138,227 ------------ ------------ ----------- Total securities 9,390,357 9,267,655 8,695,024 ------------ ------------ ----------- Loans (net of unearned discount): Commercial 6,682,510 6,253,740 5,708,203 Commercial mortgage 2,863,378 2,703,793 2,800,499 Residential mortgage 5,635,144 5,671,200 6,011,423 Consumer 4,523,071 4,259,633 4,077,538 ------------ ------------ ----------- Total loans 19,704,103 18,888,366 18,597,663 Less: Allowance for loan losses 308,753 296,494 294,066 ------------ ------------ ----------- Net loans 19,395,350 18,591,872 18,303,597 Premises and equipment 249,156 244,913 239,734 Goodwill and other intangibles 179,206 188,620 179,159 Accrued interest receivable 188,559 175,170 155,228 Due from customers on acceptances 16,608 15,814 13,852 Other assets 359,308 288,478 334,200 ------------ ------------ ----------- Total Assets $31,142,043 $29,964,172 $29,224,687 ============ ============ =========== Liabilities and Shareholders' Equity Deposits: Non-interest bearing demand deposits $ 4,785,430 $ 4,530,690 $ 4,327,962 Interest-bearing deposits: Savings and time deposits 16,409,298 16,914,485 17,014,270 Commercial certificates of deposit $100,000 and over 911,722 884,261 824,908 ------------ ------------ ----------- Total deposits 22,106,450 22,329,436 22,167,140 Other borrowed funds 4,152,961 3,397,953 3,332,234 Accrued expenses and other liabilities 317,030 290,197 262,734 Accrued interest payable 85,123 71,602 53,899 Bank acceptances outstanding 16,608 15,814 13,852 Long-term debt 1,881,289 1,246,750 910,766 ------------ ------------ ----------- Total liabilities 28,559,461 27,351,752 26,740,625 ------------ ------------ ----------- Shareholders' equity: Common stock par value $ .80: Authorized 390,000 shares; issued 177,654, outstanding 173,934 at June 30, 1998; issued and outstanding 176,590 at December 31, 1997 and 175,364 at June 30, 1997 142,123 141,272 140,291 Surplus 1,006,812 987,281 965,194 Retained earnings 1,596,600 1,467,193 1,378,999 Employee stock ownership plan obligation (3,663) (4,201) (4,739) Accumulated other comprehensive income, net 22,669 20,875 4,317 Treasury stock; 3,720 shares at June 30, 1998 (181,959) - - ------------ ------------ ----------- Total shareholders' equity 2,582,582 2,612,420 2,484,062 ------------ ------------ ----------- Total Liabilities and Shareholders' Equity $31,142,043 $29,964,172 $29,224,687 ============ ============ =========== See accompanying Notes to Consolidated Financial Statements.
2 Summit Bancorp and Subsidiaries Consolidated Statements of Income Unaudited (In thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ---------- Interest Income Loans $ 392,005 $ 376,091 $ 772,314 $ 741,321 Securities: Trading account securities 331 731 885 1,104 Securities available for sale 76,324 55,031 161,346 104,281 Securities held to maturity 69,117 83,416 131,723 168,451 ----------- ----------- ----------- ---------- Total securities 145,772 139,178 293,954 273,836 ----------- ----------- ----------- ---------- Federal funds sold and securities purchased under agreements to resell 236 1,344 643 2,597 Deposits with banks 375 218 806 391 ----------- ----------- ----------- ---------- Total interest income 538,388 516,831 1,067,717 1,018,145 ----------- ----------- ----------- ---------- Interest Expense Savings and time deposits 153,706 157,787 310,574 315,047 Commercial certificates of deposit $100,000 and over 12,302 12,120 24,559 23,174 Borrowed funds, including long-term debt 77,487 60,109 148,533 113,094 ----------- ----------- ----------- ---------- Total interest expense 243,495 230,016 483,666 451,315 ----------- ----------- ----------- ---------- Net interest income 294,893 286,815 584,051 566,830 Provision for loan losses 18,000 15,090 33,000 30,600 ----------- ----------- ----------- ---------- Net interest income after provision for loan losses 276,893 271,725 551,051 536,230 ----------- ----------- ----------- ---------- Non-Interest Income Service charges on deposit accounts 31,653 28,347 61,937 56,580 Service and loan fee income 15,199 12,928 28,113 24,263 Trust and investment services income 14,986 11,370 28,430 22,698 Securities gains 3,072 775 4,498 2,206 Other 25,233 18,108 46,685 35,181 ----------- ----------- ----------- ---------- Total non-interest income 90,143 71,528 169,663 140,928 ----------- ----------- ----------- ---------- Non-Interest Expenses Salaries 74,422 72,296 150,915 142,855 Pension and other employee benefits 27,202 22,534 53,820 47,654 Furniture and equipment 20,816 19,895 41,183 38,154 Occupancy, net 17,605 17,855 36,105 36,286 Communications 9,044 8,566 18,576 17,331 Merger-related charges - - - 26,500 Other 42,830 40,187 82,973 79,495 ----------- ----------- ----------- ---------- Total non-interest expenses 191,919 181,333 383,572 388,275 ----------- ----------- ----------- ---------- Income before income taxes 175,117 161,920 337,142 288,883 Federal and state income taxes 56,640 56,862 106,248 101,343 ----------- ----------- ----------- ---------- Net Income $ 118,477 $ 105,058 $ 230,894 $ 187,540 =========== =========== =========== ========== Net Income per Common Share: Basic $ 0.67 $ 0.60 $ 1.31 $ 1.07 =========== =========== =========== ========== Diluted 0.66 0.59 1.29 1.06 =========== =========== =========== ========== Average Common Shares Outstanding: Basic 176,127 174,905 176,528 174,642 =========== =========== =========== ========== Diluted 178,232 177,123 178,739 176,916 =========== =========== =========== ========== See accompanying Notes to Consolidated Financial Statements.
3 Summit Bancorp and Subsidiaries Consolidated Statements of Cash Flows Unaudited (In thousands)
Six Months Ended June 30, ------------------------ Operating activities 1998 1997 ----------- ----------- Net income $ 230,894 $ 187,540 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses and other real estate owned 33,120 31,356 Depreciation, amortization and accretion, net 48,258 38,689 Merger-related charges - 26,500 Gains on sales of securities (4,498) (2,206) Gains on sales of mortgages held for sale (7,273) (3,289) Gains on sales of other real estate owned (2,314) (1,757) Proceeds from sales of other real estate owned 9,784 14,779 Proceeds from sales of mortgages held for sale 395,987 198,740 Originations of mortgages held for sale (474,198) (195,465) Net decrease (increase) in trading account securities 11,370 (18,005) Net increase in accrued interest receivable and other assets (90,251) (16,554) Net increase (decrease) in accrued interest payable, accrued expenses and other liabilities 35,328 (52,579) ----------- ----------- Net cash provided by operating activities 186,207 207,749 Investing activities ----------- ----------- Purchases of securities held to maturity (2,031,896) (234,158) Purchases of securities available for sale (1,294,197) (1,224,192) Proceeds from maturities of securities held to maturity 1,104,088 397,046 Proceeds from maturities of securities available for sale 1,363,435 353,778 Proceeds from sales of securities available for sale 732,133 497,103 Net (increase) decrease in Federal funds sold, securities purchased under agreements to resell and interest-bearing deposits with banks (191,944) 37,786 Net increase in loans (753,147) (487,120) Purchases of premises and equipment, net (44,506) (7,082) ----------- ----------- Net cash used in investing activities (1,116,034) (666,839) ----------- ----------- Financing activities Net decrease in deposits (222,986) (314,623) Net increase in short-term borrowings 755,008 400,867 Principal payments on long-term debt (170,941) (27,266) Proceeds from issuance of long-term debt 805,895 231,500 Dividends paid (95,667) (79,498) Purchase of Common Stock (192,289) - Proceeds from issuance of common stock under dividend reinvestment and other stock plans 30,712 17,824 ----------- ----------- Net cash provided by financing activities 909,732 228,804 ----------- ----------- Decrease in cash and due from banks (20,095) (230,286) Beginning cash balance of acquired entities - 56,296 Cash and due from banks at beginning of period 1,173,118 1,327,507 ----------- ----------- Cash and due from banks at end of period $ 1,153,023 $ 1,153,517 =========== =========== Supplemental disclosure of cash flow information Cash paid: Interest payments $ 470,145 $ 445,190 Income tax payments 45,358 115,848 Noncash investing activities: Net transfer of securities from held to maturity to available for sale resulting from acquisitions - 96,000 Net transfer of loans to other real estate owned 3,831 12,781 See accompanying Notes to Consolidated Financial Statements.
4 Summit Bancorp and Subsidiaries Consolidated Statements of Shareholders' Equity Unaudited (In thousands)
Accum. Other Total Common Retained ESOP Treasury Comprehensive Shareholders' Stock Surplus Earnings Obligation Stock Income Equity ------- ---------- --------- ----------- --------- -------------- -------------- Balance, December 31, 1996 $134,637 $ 918,411 $1,237,892 $ (5,816)$ -$ 5,714 $ 2,290,838 Adjustment for the pooling of a company with a different fiscal year end (158) (4,771) 9,288 539 - 1,832 6,730 ------- ---------- --------- ----------- --------- -------------- -------------- Adjusted beginning balance 134,479 913,640 1,247,180 (5,277) - 7,546 2,297,568 Balances at beginning of period of immaterial pooled acquisition (6,047 shares) 4,837 34,705 25,562 - - (278) 64,826 Comprehensive income: Net income - - 187,540 - - - 187,540 Unrealized holding losses on securities arising during the period - - - - - (2,951) (2,951) -------------- Total comprehensive income 184,589 Cash dividend declared on common stock - - (81,283) - - - (81,283) Common stock issued: Dividend reinvestment and other stock plans (181 shares) 145 5,394 - - - - 5,539 Exercise of stock options, net (1,037 shares) 830 11,455 - - - - 12,285 ESOP debt repayment - - - 538 - - 538 ------- ---------- --------- ----------- --------- -------------- -------------- Balance, June 30, 1997 $140,291 $ 965,194 $1,378,999 $ (4,739)$ -$ 4,317 $ 2,484,062 ======== ========== ========== =========== ========== ============== ============== Balance, December 31, 1997 $141,272 $ 987,281 $1,467,193 $ (4,201)$ -$ 20,875 $ 2,612,420 Comprehensive income: Net income - - 230,894 - - - 230,894 Unrealized holding gains on securities arising during the period - - - - - 1,794 1,794 -------------- Total comprehensive income 232,688 Cash dividends declared on common stock - - (101,487) - - - (101,487) Common stock issued: Dividend reinvestment and other stock plans (345 shares) 276 17,799 - - - - 18,075 Exercise of stock options, net (917 shares) 575 1,732 - - 10,330 - 12,637 Purchase of treasury stock (3,926 shares) (192,289) (192,289) ESOP debt repayment - - - 538 - - 538 ------- ---------- --------- ----------- --------- -------------- -------------- Balance, June 30, 1998 $142,123 $1,006,812 $1,596,600 $ (3,663)$ (181,959)$ 22,669 $ 2,582,582 ======== ========== ========== =========== ========== ============== ============== See accompanying Notes to Consolidated Financial Statements.
5 Summit Bancorp and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1.) Basis of Presentation The accompanying financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated financial position of Summit Bancorp and subsidiaries (the "Company"), the consolidated results of operations, changes in cash flows and changes in shareholders' equity. All significant intercompany accounts and transactions have been eliminated in consolidation. In all material respects, the financial statements presented comply with the current reporting requirements of supervisory authorities. Certain prior period amounts have been reclassified to conform to the financial statement presentation of 1998. For additional information and disclosures required under generally accepted accounting principles, reference is made to the Company's 1997 Annual Report on Form 10-K. On January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". The Statement defines total comprehensive income as all changes in equity during a period from transactions and other events and circumstances from nonowner sources. The Company's other comprehensive income is generally comprised of unrealized holding gains and losses on securities available for sale. Disclosure of comprehensive income for the 1998 and 1997 periods is presented in the accompanying Consolidated Statements of Shareholders' Equity. Effective January 1, 1998, the Company adopted Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" issued by the American Institute of Certified Public Accountants. This statement establishes standards for the capitalization of computer software developed or obtained for internal use. The impact of adopting this statement was not material to the financial condition or results of operations of the Company. 2.) Acquisitions and Restructuring Charges On March 1, 1997, the Company completed the acquisition of B.M.J. Financial Corp. ("BMJ"). This acquisition was accounted for as a pooling of interests, and was recorded as an adjustment to shareholders' equity as of January 1, 1997, without restating the consolidated financial statements for 1996 and prior years. Merger-related charges of $26.5 million ($16.7 million, after tax) were recorded at the time of the acquisition. On August 1, 1997, the Company completed the acquisition of Collective Bancorp, Inc. ("Collective"). This acquisition was accounted for as a pooling of interests and all financial information, prior to the acquisition date, has been restated to reflect the combined financial information. Merger-related charges of $56.5 million ($37.1 million, after tax) were recorded at the time of the acquisition. On December 12, 1997, the Company acquired Corporate Dynamics, an employee benefits consulting firm, and Philadelphia Benefits Corp., a group health insurance agency, with the issuance of 495,000 shares of common stock. These acquisitions were accounted for as purchases. On June 18, 1998, the Company announced that it had entered into a definitive agreement to acquire NSS Bancorp. Inc., a bank holding company headquartered in Norwalk, Connecticut. Under the terms of the agreement, each share of NSS Bancorp, Inc. common stock will be exchanged for 1.232 shares of the Company's common stock. The transaction, which will be accounted for as a purchase, is expected to be completed in the fourth quarter of 1998, subject to NSS Bancorp, Inc. shareholder and regulatory approval. In connection with this acquisition, the Company has purchased its common stock of which approximately 2.8 million shares will be reissued to effect the acquisition. 6 3.) Net Income per Common Share The Company calculates net income per common share in accordance with SFAS No. 128, "Earnings per Share." Basic net income per common share is calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted net income per common share is computed similar to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period.
(In thousands, except per share data) - -------------------------------------------------------------------------------- Three months ended June 30, Six months ended June 30, 1998 1997 1998 1997 --------------------------- ------------------------ Net Income $118,477 $105,058 $230,894 $187,540 =============================================================================== Basic weighted-average common shares outstanding 176,127 174,905 176,528 174,642 Plus: Common stock equivalents 2,105 2,218 2,211 2,274 - --------------------------------------------------------------------------------- Diluted weighted-average common shares outstanding 178,232 177,123 178,739 176,916 ================================================================================ Net income per common share: Basic $0.67 $0.60 $1.31 $1.07 Diluted 0.66 0.59 1.29 1.06 ================================================================================
4.) Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related information." SFAS No. 131 establishes standards and disclosure requirements for the way companies report information about operating segments, including related product information. Operating segments are defined based upon the way management organizes segments for making operations decisions and evaluating performance. Information such as segment net earnings, revenues, expense items and certain balance sheet amounts are required to be presented. These amounts are to be reconciled to the Company's combined financial information. SFAS No. 131 is effective for financial statements issued for annual periods ending after December 15, 1998, and interim periods beginning in 1999. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." This Statement standardizes the disclosure requirements for pension and other postretirement benefits by requiring additional information that will facilitate financial analysis, and eliminating certain disclosures that are considered no longer useful. SFAS No. 132 supersedes the disclosure requirements in SFAS Nos. 87, 88 and 106. This Statement is effective for fiscal years beginning after December 15, 1997, and will be adopted December 31, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, and for hedging activities. SFAS No. 133 supersedes the disclosure requirements in SFAS No. 80, 105 and 119. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The adoption of SFAS No. 133 is not expected to have a material impact on the financial position or results of operations of the Company. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ----------------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS. --------------------------------------------- Summit Bancorp is a bank holding company located in Princeton, New Jersey. The Company owns two bank subsidiaries and several active non-bank subsidiaries. The Company's bank subsidiaries provide a broad range of retail, commercial and private banking services as well as trust and investment services to individuals, businesses, not-for- profit organizations, government entities and other financial institutions. These services are provided through an extensive branch network, including supermarket branches and private banking facilities, as well as through automated teller machines and personal computers. FINANCIAL CONDITION Total assets at June 30, 1998, were $31.1 billion, an increase of $1.2 billion or 3.9 percent from year-end 1997, which can generally be attributed to an increase in the loan portfolios. Securities held to maturity at June 30, 1998, were $5.1 billion and were mainly comprised of $3.5 billion of U.S. Government and Federal agency securities, $1.4 billion of other securities, predominately corporate collateralized mortgage obligations ("CMOs"), and $165.0 million of state and political subdivision securities. These securities increased $913.1 million or 22.0 percent from year-end 1997, primarily as cash flows from securities available for sale were reinvested in securities held to maturity. For the six months of 1998, $2.0 billion of held to maturity securities were purchased, partially offset by principal repayments and maturities of $1.1 billion. At June 30, 1998, and December 31, 1997, net unrealized gains(losses) on securities held to maturity amounted to $ 9.5 million and $(6.0) million, respectively. At June 30, 1998, securities available for sale amounted to $4.3 billion and were predominately comprised of U.S. Government and Federal agency securities. These securities decreased $779.0 million or 15.3 percent from year-end 1997, primarily as cash flows from securities available for sale were reinvested in securities held to maturity. The decrease resulted from $1.4 billion in maturities and principal repayments and $732.1 million in sales, partially offset by $1.3 billion in purchases. At June 30, 1998, total loans amounted to $19.7 billion and increased $815.7 million or 4.3 percent from year-end 1997. Commercial loans increased $428.8 million or 6.9 percent as compared to December 31, 1997. The increase in commercial loans was primarily related to growth in large corporate (larger middle market credit users with revenues in excess of $125 million), real estate and asset-based lending. Commercial mortgage loans increased $159.6 million or 5.9 percent. Residential mortgage loans decreased $36.1 million or .6 percent from December 31, 1997. Consumer loans increased $263.4 million or 6.2% from year end December 1997. Total deposits were $22.1 billion at June 30, 1998, a decrease of $223.0 million or 1.0 percent from December 31, 1997. Savings and time deposits continued to be impacted by the investors desire for investment alternatives such as mutual funds, annuities and the stock market. Savings and time deposits at $16.4 billion decreased $505.2 million or 3.0 percent from December 31, 1997. Partially offsetting these decreases, was an increase in demand deposits of $254.7 million or 5.6 percent from year-end 1997 to $4.8 billion. The increase in demand deposits was generated in both business and personal accounts. Also increasing were commercial certificates of deposit $100,000 and over which were up $27.5 million, or 3.1 percent compared to December 31, 1997. Other borrowed funds at June 30, 1998, increased $755.0 million or 22.2 percent from December 31, 1997, to $4.2 billion. The increase in borrowed funds can be attributed to increases in short-term Federal Home Loan Bank advances and Federal funds purchased, partially offset by a decrease in short-term repurchase agreements. Long-term debt at June 30, 1998, increased $634.5 million, or 50.9 percent from December 31, 1997 to $1.9 billion. The increase in long-term debt was principally the result of the increase in long-term repurchase agreements of $725.0 million. Included in long-term debt at each of the periods 8 presented, is $150.0 million of capital qualifying securities. The increases in other borrowed funds and long-term debt were generally used to fund the growth in the loan and investment portfolios and to replace the reduction in deposits. Approximately 3.9 million shares of Company common stock was repurchased during the second quarter, at a cost of $192.3 million. The treasury stock will be used for employee benefit plans, the acquisition of NSS Bancorp Inc., and for general corporate purposes. Partially offsetting the decrease in shareholders' equity resulting from the buyback, was net income for the period less dividends paid on common stock. Total shareholders' equity at June 30, 1998, decreased $29.8 million from the December 31, 1997, balance of $2.612 billion. Included in shareholders' equity at June 30, 1998, was accumulated other comprehensive income, net of tax, amounting to $22.7 million, compared to $20.9 million at year-end 1997. Accumulated other comprehensive income is comprised principally of unrealized holding gains/losses on the securities available for sale portfolio. The Company's capital ratios for June 30, 1998, as compared to select prior periods and regulatory requirements, are shown in the following table. The Company's bank subsidiaries meet the well-capitalized requirements for each of the periods presented. The decreases in the June 30, 1998, ratios are principally attributable to the treasury stock repurchase previously referenced.
- -------------------------------------------------------------------------------------- Minimum June 30, Dec. 31, June 30, Required Well Selected Capital Ratios: 1998 1997 1997 Capital Capitalized Equity to assets 8.29% 8.72% 8.50 % - - Leverage ratio 8.39 8.76 8.54 3.00% 5.00% Tier I capital 11.68 12.64 12.63 4.00 6.00 Total risk-based capital 13.76 14.83 15.04 8.00 10.00 - ----------------------------------------------------------------------------------
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. - --------------------------------------------------------------------------------
Non-Performing Assets (In thousands) June 30, 1998 Dec. 31, 1997 June 30, 1997 - ------------------------------------------------------------------------------- Non-performing loans (1): Commercial and industrial $46,405 $42,644 $46,675 Commercial mortgage 22,484 37,993 47,931 Construction and development 2,566 4,453 15,571 - ------------------------------------------------------------------------------ Non-performing loans 71,455 85,090 110,177 OREO, net 8,913 14,249 21,807 - ----------------------------------------------------------------------------- Non-performing assets $80,368 $99,339 $131,984 - ----------------------------------------------------------------------------- Non-performing loans to total loans .36% .45% .59% Non-performing assets to total loans and OREO .41 .53 .71 - ----------------------------------------------------------------------------
(1) Loans, not included above, past due 90 days or more amounted to $57.0 million, $48.6 million and $71.5 million at June 30, 1998, December 31, 1997, and June 30, 1997, respectively. These loans are primarily residential mortgage and consumer loans which are well secured and in the process of collection. The average balance of non-performing loans for the six months ended June 30, 1998, was $75.5 million. Interest income received on non-performing loans amounted to $1.0 million for the six months ended June 30, 1998, compared to $1.3 million in the same period a year ago. 9 Allowance for Loan Losses A standardized process has been established to assess the adequacy of the allowance for loan losses and to identify the risks inherent in the loan portfolio. This process incorporates credit reviews and gives consideration to areas of exposure such as concentrations of credit, economic and industry conditions, trends in delinquencies and collections, collateral coverage, and the composition of the performing and non-performing loan portfolios. The allowance for loan losses is maintained at a level that management believes to be adequate to absorb anticipated loan losses. The unallocated portion of the allowance for loan losses, in excess of specific and general reserves, was $182.8 million at June 30, 1998, compared to $166.8 million at December 31, 1997. Transactions in the allowance for loan losses, by loan category, for the three and six month periods ended June 30, 1998, and 1997 and selected loan quality ratios for the dates indicated are shown in the following tables:
- ------------------------------------------------------------------------------ Allowance for Loan Losses Three months Six months ended June 30, ended June 30, (In thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Balance, beginning of period $301,264 $290,471 $296,494 $280,611 Acquisition adjustments, net - - - 9,994 Provision for loan losses 18,000 15,090 33,000 30,600 - ------------------------------------------------------------------------------ 319,264 305,561 329,494 321,205 - ----------------------------------------------------------------------------- Loans charged off: Commercial and industrial 2,824 6,295 11,490 14,429 Construction and development 939 2,148 1,295 2,872 Commercial mortgage 1,847 1,652 2,107 5,928 Residential mortgage 3,330 4,534 3,649 5,568 Consumer 8,524 6,495 17,856 13,985 - ------------------------------------------------------------------------------- Total loans charged off 17,464 21,124 36,397 42,782 - -------------------------------------------------------------------------------- Recoveries: Commercial and industrial 1,755 4,907 6,404 7,533 Construction and development 1,019 3,042 2,817 3,225 Commercial mortgage 1,431 79 1,718 832 Residential mortgage 555 101 829 593 Consumer 2,193 1,500 3,888 3,460 - ------------------------------------------------------------------------------- Total recoveries 6,953 9,629 15,656 15,643 - ------------------------------------------------------------------------------- Net charge offs 10,511 11,495 20,741 27,139 - -------------------------------------------------------------------------------- Balance, end of period $308,753 $294,066 $308,753 $294,066 ================================================================================
- ------------------------------------------------------------------------------ June 30, Dec. 31, June 30, 1998 1997 1997 - ----------------------------------------------------------------------------- Net charge offs to average loans: Quarter-to-date .22% .25% .25% Year-to-date .22 .29 .30 Allowance for loan losses to: Total loans 1.57 1.57 1.58 Non-performing loans 432.09 348.45 266.90 Non-performing assets 384.17 298.47 222.80 - ----------------------------------------------------------------------------
10 RESULTS OF OPERATIONS Net income for the quarter ended June 30, 1998, was $118.5 million, or $.67 per basic share compared to $105.1 million or $.60 per basic share for the second quarter of 1997. On a diluted per share basis, net income for the three months ended, was $.66 per diluted share compared to $.59 for the same period in 1997. For the six months ended June 30, 1998, net income was $230.9 million or $1.31 per basic share compared to $187.5 million or $1.07 per basic share, after merger-related charges. On a diluted basis, net income for the six months ended, was $1.29 per diluted share, compared to $1.06 for the six months ended June 30, 1997. The results for the six months ended June 30, 1997, included merger-related restructuring charges of $26.5 million ($16.7 million, after tax) recorded in the first quarter of 1997, associated with the acquisition of BMJ. The following are key performance indicators for the three and six month periods ended June 30, 1998, and 1997.
- ------------------------------------------------------------------------------------- (In thousands, except per share) - -------------------------------------------------------------------------------------- Three months ended June 30, Six months ended June 30, Before merger-related charges 1998 1997 1998 1997 - -------------------------------------------------------------------------------------- Net income $118,477 $105,058 $230,894 $204,220 Net income per share: Basic $0.67 $0.60 $1.31 $1.17 Diluted 0.66 0.59 1.29 1.15 Dividends per share 0.30 0.24 0.57 0.48 Return on: Average assets 1.56% 1.46% 1.54% 1.43% Average common equity 17.86 17.16 17.46 16.97 Efficiency ratio 49.81 50.03 50.83 50.36 - ------------------------------------------------------------------------------------- After merger-related charges - ------------------------------------------------------------------------------------- Net income $118,477 $105,058 $230,894 $187,540 Net income per share: : Basic $0.67 $0.60 $1.31 $1.07 Diluted 0.66 0.59 1.29 1.06 Return on: Average assets 1.56% 1.46% 1.54% 1.32% Average common equity 17.86 17.16 17.46 15.59 - -------------------------------------------------------------------------------------
Net Interest Income Interest income on a tax-equivalent basis was $1.1 billion for the six months ended June 30, 1998, an increase of $48.6 million, or 4.7 percent, compared to a year ago. Interest-earning assets averaged $28.6 billion, an increase of $1.5 billion, or 5.7 percent compared to the prior year period. The increase in interest-earning assets contributed $65.0 million to the increase in tax-equivalent interest income, partially offset by a decline of $16.4 million due to the reduction in the yield on interest-earning assets. While the average balance of interest-earning assets increased over the period, the rate earned on the overall balance decreased 6 basis points from 7.65 percent in 1997 to 7.59 percent in 1998. The decrease was generally the result of maturing assets being reinvested in a lower interest rate environment. 11 Interest expense increased $32.3 million, or 7.2 percent, for the six months ended June 30, 1998, compared to the same period in 1997. The increase in the rate paid for interest-bearing liabilities contributed $7.9 million to the increase in interest expense. The increase in the rate paid on interest-bearing liabilities was largely attributable to the increase in the average rate paid on time deposits, from 5.15 percent in the 1997 period to 5.31 percent in 1998 as a result of a shift from lower rate savings and money market accounts to higher cost tiered and retail CDs. The remaining $24.4 million in interest expense was attributable to an increase in interest-bearing liabilities used to fund the growth in the loan and investment portfolios. Interest-bearing liabilities averaged $22.8 billion, an increase of $875.7 million, or 4.0 percent, from the prior year period. The rate/volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates over the periods. Changes that are not due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values.
- -------------------------------------------------------------------------------------- Rate/Volume Table Amount of Increase(Decrease) - -------------------------------------------------------------------------------------- Three months ended June 30, Six months ended June 30, 1998 versus 1997 1998 versus 1997 - -------------------------------------------------------------------------------------- Due to change in: Due to change in: - --------------------------------------------------------------------------------------- (Tax-equivalent basis, in millions) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------- Interest Income Loans: Commercial $30.4 $(13.6) $16.8 $40.7 $(8.7) $32.0 Commercial mortgage 4.3 (5.6) (1.3) 0.5 (3.1) (2.6) Residential mortgage (5.4) (1.7) (7.1) (11.6) (3.0) (14.6) Consumer 8.0 (0.7) 7.3 16.5 (0.6) 15.9 - --------------------------------------------------------------------------------------- Total loans 37.3 (21.6) 15.7 46.1 (15.4) 30.7 Securities held to maturity (13.4) (1.2) (14.6) (35.1) (2.4) (37.5) Securities available for sale 27.6 (6.4) 21.2 57.0 0.1 57.1 Other interest-earning asset (1.3) 0.0 (1.3) (3.0) 1.3 (1.7) - ---------------------------------------------------------------------------------------- Total interest income $50.2 $(29.2) $21.0 $65.0 $(16.4) $48.6 - ---------------------------------------------------------------------------------------- Interest Expense Deposits: Savings deposits $(1.8) $(1.0) $(2.8) $(2.3) $(1.0) $(3.3) Time deposits (12.3) 11.0 (1.3) (13.3) 12.1 (1.2) Commercial CD's > $100 M 0.2 0.0 0.2 1.1 0.3 1.4 - -------------------------------------------------------------------------------------- Total deposits (13.9) 10.0 (3.9) (14.5) 11.4 (3.1) Other interest-bearing liabilities 28.1 (10.7) 17.4 38.9 (3.5) 35.4 - -------------------------------------------------------------------------------------- Total interest expense 14.2 (0.7) 13.5 24.4 7.9 32.3 - -------------------------------------------------------------------------------------- Net interest income $36.0 $(28.5) $7.5 $40.6 $(24.3) $16.3 ======================================================================================
Net interest income on a tax-equivalent basis was $590.4 million for the six months ended June 30, 1998, an increase of $16.3 million, or 2.8 percent, compared to the same period in 1997. The net interest spread percentage on a tax-equivalent basis (the difference between the rate earned on average interest-earning assets and the rate paid on average interest bearing liabilities) was 3.31 percent for the six months ended June 30, 1998, compared to 3.49 percent for the prior year period. Net interest margin (net interest income on a tax-equivalent basis as a percentage of average interest-earning assets) was 4.17 percent for the six months ended June 1998, compared to 4.28 percent during the same period in 1997. The decline in net interest spread and net interest margin can primarily be attributed to maturing assets being invested in a lower interest rate environment, and a change in the mix of funding, from deposits to borrowings. 12 Summit Bancorp and Subsidiaries Consolidated Average Balance Sheets with Resultant Interest and Rates Unaudited (Tax-equivalent basis, dollars in thousands)
Three Months Ended June 30, ------------------------------------------------------------------ 1998 1997 -------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------------ --------- -------- ------------ --------- -------- Assets Interest-earning-assets: Federal funds sold and securities purchased under agreements to resell $ 15,035 $ 236 6.30 % $ 91,877 $ 1,344 5.87 % Interest-bearing deposits with banks 24,770 375 6.07 15,822 218 5.53 Securities: Trading account securities 22,661 360 6.37 37,073 764 8.27 Securities available for sale 4,816,731 76,938 6.39 3,427,850 55,692 6.50 Securities held to maturity 4,402,545 70,391 6.40 5,236,067 85,033 6.50 ------------ --------- -------- ------------ --------- -------- Total securities 9,241,937 147,689 6.39 8,700,990 141,489 6.50 ------------ --------- -------- ------------ --------- -------- Loans: Commercial 6,528,314 137,113 8.42 5,628,057 120,320 8.57 Commercial mortgage 2,833,291 59,696 8.43 2,795,811 61,002 8.73 Residential mortgage 5,721,791 104,842 7.33 6,015,922 111,924 7.44 Consumer 4,359,659 91,587 8.43 4,004,200 84,250 8.44 ------------ --------- -------- ------------ --------- -------- Total loans 19,443,055 393,238 8.11 18,443,990 377,496 8.21 ------------ --------- -------- ------------ --------- -------- Total interest-earning assets 28,724,797 541,538 7.56 27,252,679 520,547 7.66 ------------ --------- -------- ------------ --------- -------- Non-interest earning assets: Cash and due from banks 1,005,805 987,413 Allowance for loan losses (305,566) (299,375) Other assets 965,884 936,257 ------------ ------------ Total non-interest earning assets 1,666,123 1,624,295 ------------ ------------ Total Assets $30,390,920 $28,876,974 ============ ============ Liabilities and Shareholders' Equity Interest-bearing liabilities: Savings deposits $ 9,419,197 60,329 2.57 $ 9,686,602 63,083 2.61 Time deposits 7,071,065 93,377 5.30 7,347,987 94,704 5.17 Commercial certificates of deposit $100,000 and over 906,884 12,302 5.44 893,680 12,120 5.44 ------------ --------- -------- ------------ --------- -------- Total interest-bearing deposits 17,397,146 166,008 3.83 17,928,269 169,907 3.80 ------------ --------- -------- ------------ --------- -------- Other borrowed funds 3,690,155 50,105 5.45 3,219,353 44,064 5.49 Long-term debt 1,742,456 27,382 6.29 880,643 16,045 7.29 ------------ --------- -------- ------------ --------- -------- Total interest-bearing liabilities 22,829,757 243,495 4.28 22,028,265 230,016 4.19 ------------ --------- -------- ------------ --------- -------- Non-interest bearing liabilities: Demand deposits 4,510,854 4,060,779 Other liabilities 389,433 332,565 ------------ ------------ Total non-interest bearing liabilities 4,900,287 4,393,344 Shareholders' Equity 2,660,876 2,455,365 ------------ ------------ Total Liabilities and Shareholders' Equity $30,390,920 $28,876,974 ============ --------- ============ --------- Net interest income (tax-equivalent basis) 298,043 3.28 % 290,531 3.47 % --------- ======== --------- ======== Tax-equivalent basis adjustment (based on a Federal income tax rate of 35%) (3,150) (3,716) --------- --------- Net interest income $294,893 $286,815 ========= ========= Net interest income as a percent of interest earning assets (tax-equivalent basis) 4.16 % 4.28 % ======== ========
13 Summit Bancorp and Subsidiaries Consolidated Average Balance Sheets with Resultant Interest and Rates Unaudited (Tax-equivalent basis, dollars in thousands)
Six Months Ended June 30, -------------------------------------------------------------------------- 1998 1997 -------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate Assets ------------ ----------- ---------- ------------ ----------- ---------- Interest-earning-assets: Federal funds sold and securities purchased under agreements to resell $ 22,072 $ 643 5.87 % $ 98,452 $ 2,597 5.32 % Interest-bearing deposits with banks 25,911 806 6.27 14,163 391 5.57 Securities: Trading account securities 27,863 942 6.82 34,623 1,138 6.63 Securities available for sale 5,089,824 162,581 6.39 3,303,193 105,431 6.38 Securities held to maturity 4,187,363 134,302 6.41 5,288,703 171,786 6.50 ------------ ----------- ---------- ------------ ----------- ---------- Total securities 9,305,050 297,825 6.40 8,626,519 278,355 6.45 ------------ ----------- ---------- ------------ ----------- ---------- Loans: Commercial 6,363,227 265,659 8.42 5,523,801 233,659 8.53 Commercial mortgage 2,801,791 118,832 8.48 2,798,087 121,448 8.68 Residential mortgage 5,722,116 209,628 7.33 6,032,323 224,231 7.43 Consumer 4,314,428 180,654 8.44 3,933,338 164,749 8.45 ------------ ----------- ---------- ------------ ----------- ---------- Total loans 19,201,562 774,773 8.14 18,287,549 744,087 8.21 ------------ ----------- ---------- ------------ ----------- ---------- Total interest-earning assets 28,554,595 1,074,047 7.59 27,026,683 1,025,430 7.65 ------------ ----------- ---------- ------------ ----------- ---------- Non-interest earning assets: Cash and due from banks 1,017,587 1,058,270 Allowance for loan losses (303,828) (297,594) Other assets 956,368 920,682 ------------ ------------ Total non-interest earning assets 1,670,127 1,681,358 ------------ ------------ Total Assets $30,224,722 $28,708,041 ============ ============ Liabilities and Shareholders' Equity Interest-bearing liabilities: Savings deposits $ 9,478,456 121,881 2.59 $ 9,662,614 125,173 2.61 Time deposits 7,163,649 188,693 5.31 7,428,550 189,874 5.15 Commercial certificates of deposit $100,000 and over 912,386 24,559 5.43 872,346 23,174 5.36 ------------ ----------- ---------- ------------------------ ---------- Total interest-bearing deposits 17,554,491 335,133 3.85 17,963,510 338,221 3.80 ------------ ----------- ---------- ------------------------ ---------- Other borrowed funds 3,588,557 96,893 5.44 3,135,772 85,150 5.48 Long-term debt 1,630,478 51,640 6.33 798,497 27,944 7.00 ------------ ----------- ---------- ------------------------ ---------- Total interest-bearing liabilities 22,773,526 483,666 4.28 21,897,779 451,315 4.16 ------------ ----------- ---------- ------------------------ ---------- Non-interest bearing liabilities: Demand deposits 4,402,440 4,050,466 Other liabilities 381,470 333,241 ------------ ------------ Total non-interest bearing liabilities4,783,910 4,383,707 Shareholders' Equity 2,667,286 2,426,555 ------------ ------------ Total Liabilities and Shareholders' Equity$30,224,722 $28,708,041 ============ ----------- ============ ----------- Net interest income (tax-equivalent basis) 590,381 3.31 % 574,115 3.49 % ----------- ========== ----------- ========== Tax-equivalent basis adjustment (based on a Federal income tax rate of 35%) (6,330) (7,285) ----------- ----------- Net interest income $ 584,051 $ 566,830 =========== =========== Net interest income as a percent of interest earning assets (tax-equivalent basis) 4.17 % 4.28 % ========== ==========
14 Non-Interest Income Non-interest income categories for the three and six month periods ended June 30, 1998, and 1997, are shown in the following table:
- ------------------------------------------------------------------------------------------- (In millions) Three months ended June 30, Six months ended June 30, - ------------------------------------------------------------------------------------------- Percent Percent 1998 1997 Change 1998 1997 Change - ------------------------------------------------------------------------------------------- Service charges on deposit accounts $31.7 $28.3 11.7% $61.9 $56.6 9.5% Service and loan fee income 15.2 12.9 17.6 28.1 24.2 15.9 Trust and investment services income 15.0 11.4 31.8 28.4 22.7 25.3 Other 25.2 18.1 39.3 46.8 35.2 32.7 - -------------------------------------------------------------------------------------------- Total non-interest operating income 87.1 70.7 23.1 165.2 138.7 19.1 Securities gains 3.0 0.8 296.4 4.5 2.2 103.9 - -------------------------------------------------------------------------------------------- Total non-interest income $90.1 $71.5 26.0% $169.7 $140.9 20.4% ============================================================================================
The increase in income from service charges on deposits for the three and six month periods ended June 30, 1998, was primarily the result of the increase in rates and a change in the method used to assess charges for nonsufficient funds. The increase in service and loan fee income for the three and six months ended June 30, 1998, was primarily due to increased originations and gains on sales of mortgage loans. The increase in trust and investment services fees for the three and six month periods ended June 30, 1998, was generally due to increases in asset management advisory fees and fees from sales of proprietary and third party mutual funds. The increase in other non-interest income for the 1998 periods was largely attributable to increased insurance fees generated by Corporate Dynamics and Philadelphia Benefits Corp., the recently acquired subsidiaries. Also contributing to the increase were gains on the sale of branches and deposits and ATM access fees. Non-Interest Expenses Non-interest expense categories for the three and six month periods ended June 30, 1998, and 1997, are shown in the following table:
- --------------------------------------------------------------------------------------------- (In millions) Three months ended June 30, Six months ended June 30, - --------------------------------------------------------------------------------------------- Percent Percent 1998 1997 Change 1998 1997 Change - --------------------------------------------------------------------------------------------- Salaries $74.4 $72.3 2.9% $150.9 $142.9 5.6% Pension and other employee benefits 27.2 22.5 20.7 53.8 47.7 12.9 Furniture and equipment 20.8 19.9 4.6 41.2 38.2 7.9 Occupancy, net 17.6 17.8 (1.4) 36.1 36.3 (0.5) Communications 9.1 8.6 5.6 18.6 17.3 7.2 Other 42.8 40.2 6.6 83.0 79.4 4.4 - ---------------------------------------------------------------------------------------------- Total non-interest operating expenses 191.9 181.3 5.8 383.6 361.8 6.0 - ---------------------------------------------------------------------------------------------- Merger-related charges - - - - 26.5 (100.0) - ---------------------------------------------------------------------------------------------- Total non-interest expenses $191.9 $181.3 5.8% $383.6 $388.3 (1.2)% - ----------------------------------------------------------------------------------------------
15 Salaries and employee benefits increased $2.1 million or 2.9 percent and $4.7 million or 20.7 percent, respectively, for the quarter ended June 30, 1998, compared to 1997. For the six months ended June 30, 1998, compared to 1997, these costs increased $8.0 million or 5.6 percent and $6.1 million or 12.9 percent, respectively. Salaries and employee benefits reflect merit increases and increased incentive compensation linked to sales efforts. Partially offsetting the increases in salaries and benefits expense was the impact of adopting Statement of Position No. 98-1 providing for the capitalization of certain salary and benefit costs associated with internally developed software, which for the six months ended June 30, 1998, amounted to $1.4 million and $0.3 million, respectively. Furniture and equipment expenses increased $0.9 million or 4.6 percent for the quarter ended June 30, 1998, compared with 1997, and increased $3.0 million or 7.9 percent for the six months ended June 30, 1998, compared with the same period a year ago. This increase was primarily due to increases in leasing expenses associated with computer equipment. Communications expense increased $0.5 million or 5.6 percent for the three months ended June 30, 1998, compared with 1997, and increased $1.3 million or 7.2 percent for the six months ended 1998 when compared with the six months ended 1997. The increase was primarily due to expanded on line telephone system usage and equipment costs. Other expenses, which did not vary significantly from period to period, were largely comprised of legal and professional fees of $15.5 million, advertising and public relations expenses of $12.3 million and amortization of goodwill and intangibles of $9.4 million for the six months ended June 30, 1998. The effective income tax rate was 32.3 percent for the three months ended June 30, 1998, and 31.5 percent for the six months then ended, compared with 35.1 percent for each of the comparable 1997 periods. The decrease in the effective income tax rate was the result of the implementation of business strategies, including the realignment of corporate entities. The lower effective income tax rate is expected to continue throughout the remainder of 1998. YEAR 2000 The Company began taking a proactive stance regarding this issue in 1995 and has been working to prepare its computer systems and applications for the Year 2000. This process involves reviewing, modifying and replacing existing hardware and software as necessary and communicating with external providers and customers to determine whether they are addressing their Year 2000 issues appropriately. The Company remains on schedule with its initial plans to have all of its software tested and Year 2000 ready by first quarter, 1999. At June 30, 1998, approximately 85 percent of all software code has been remediated and is in testing. Testing has been completed on 43 percent of this software. Of the mission critical systems 65 percent are in testing and 20 percent have been completed. The cost for the millennium conversion, which is being expensed as incurred, is estimated to be $23 million and will be funded through operating cash flows. The Company has also initiated discussions with third parties, such as vendors, customers, governmental entities and others, to attempt to obtain assurance that they have appropriate plans to be Year 2000 compliant. At June 30, 1998, the Company has started to evaluate third party compliance with Year 2000 issues. Failure of the Company or third parties to correct Year 2000 issues could cause disruption of operations resulting in increased operating costs. In addition, to the extent customers' financial positions are weakened as a result of Year 2000 issues, credit quality could be adversely affected. The Company believes at this time that its efforts are adequate to address its Year 2000 concerns. However, since it cannot predict whether its vendors and customers will be successful in becoming Year 2000 compliant it is formulating detailed contingency plans to address the potential of a disruption of operations. 16 In addition, the Company receives guidance from the Federal Financial Institutions Examination Council (FFIEC), the formal interagency body empowered to prescribe uniform principles, standards, and examination procedures for the examination of financial institutions by the federal regulatory agencies, and participates in scheduled federal Year 2000 examinations. These examinations are being conducted to assess each financial institution's Year 2000 efforts. The cost of the project and the expected completion dates are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially. LIQUIDITY Liquidity is the ability to meet the borrowing needs and deposit withdrawal requirements of customers and support asset growth. Principal sources of liquidity are deposit generation, access to purchased funds, maturities and repayments of loans and investment securities and interest and fee income. The consolidated statements of cash flows present the change in cash and due from banks from operating, investing and financing activities. During the first six months of 1998, net cash provided by operating activities totaled $186.2 million. Contributing to net cash provided by operating activities were the results of operations, plus noncash expenses, and proceeds from the sales of mortgages held for sale. Partially offsetting the contributions to operating cash were funds used to originate mortgage loans held for sale and noncash revenues. Net cash used in investing activities totaled $1.1 billion. For the six months ended June 30, 1998, net cash used in transactions involving the investment portfolios totaled $126.4 million, while the growth in the loan portfolio used $753.1 million. Scheduled maturities and anticipated principal repayments of the held to maturity portfolio will approximate $0.8 billion throughout the balance of 1998. In addition, the securities available for sale portfolio is another source of liquidity. These sources can also be used to meet the funding needs during periods of loan growth. Net cash provided by financing activities totaled $.9 billion. During the first six months of 1998, other borrowed funds and long-term debt increased $1.4 billion. This increase was partially offset by the decrease in total deposits of $223.0 million, the purchase of the Company's common stock of $192.3 million, and the payment of common stock dividends. Liquidity is also available through additional lines of credit and the ability to incur additional debt. The banking subsidiaries have established lines of credit with the Federal Reserve Bank and the Federal Home Loan Bank of New York and other correspondent banks which further support and enhance liquidity. Liquidity is also important at the Parent Company in order to provide funds for operations and to pay dividends to shareholders. Parent Company cash requirements are met primarily through management fees and dividends from its subsidiaries, the issuance of short and long-term debt and the exercise of stock options. The amount of dividends that can be assessed to the bank subsidiaries is subject to certain regulatory restrictions. 17 LOOKING AHEAD This report contains certain forward-looking statements, either expressed or implied, which are provided to assist the reader to understand anticipated future financial performance. These forward-looking statements involve certain risks, uncertainties, estimates and assumptions made by management. Factors that may cause actual results to differ from those results expressed or implied include, but are not limited to, the interest rate environment and the overall economy, the ability of customers to repay their obligations, the adequacy of the allowance for loan losses, the progress of integrating acquired financial institutions, competition and technological changes, including the Year 2000 issue. Although management has taken certain steps to mitigate the negative effect of the above mentioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse affect on profitability. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - ------------------------------------------------------ Due to the nature of the Company's business, the Company's market risk is primarily its exposure to interest rate risk. Interest rate risk is the impact that changes in interest rates have on future earnings. The principal objective in managing interest rate risk is to maximize net interest income within the acceptable levels of risk that have been previously established by policy. This risk can be reduced by various strategies, including the administration of liability costs, the reinvestment of asset maturities and the use of off-balance sheet financial instruments. The Company has limited risks associated with foreign currencies and commodities. Interest rate risk is monitored through the use of simulation modeling techniques which apply alternative interest rate scenarios to periodic forecasts of future business activity and estimate the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in varying interest rate environments. Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flow and maturities of all financial instruments including derivatives, anticipated future business activity, deposit sensitivity and changes in market conditions. Selected core deposit rates are held constant based on the results of analysis of historical rate movements. These assumptions are inherently uncertain, and as a result, these models cannot precisely estimate the impact that higher or lower rate environments will have on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in market conditions as well as changes in management's strategies. Based on the results of the interest simulation model as of June 30, 1998, if interest rates increase or decrease 100 basis points from current rates in an immediate and parallel shock over a twelve month period, the Company would expect a decrease of $10.0 million in net interest income and an increase of $4.0 million in net interest income, respectively. The results of the interest simulation model as of June 30, 1998, do not represent a material change from the amounts previously reported as of December 31, 1997. Interest rate risk management efforts also involve the use of certain derivative financial instruments for the purpose of stabilizing net interest income in a changing interest rate environment. The derivative financial instruments portfolio consists of interest rate swaps and floors. At June 30, 1998, the notional values of the swaps and floors were $424.0 million and $430.0 million, respectively. These derivatives resulted in a net interest income reduction of $1.0 million for the first six months of 1998. The cost to terminate these contracts at June 30, 1998, would have been $.3 million. 19 PART II. OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS. - -------------------------- Management does not believe that the ultimate disposition of the litigation discussed below will have a material adverse effect on the financial position and results of operation of the Company and its subsidiaries, taken as a whole. 1. Annette Loatman on behalf of herself and all others similarly ------------------------------------------------------------- situated v. United Jersey Bank, U.S. District Court for the District ------------------------------ of New Jersey, Civil Action No. 95-5258 (JBS), filed on October 4, 1995. Robert M. Gundle, III, on behalf of himself and all others ---------------------------------------------------------- similarly situated v. Summit Bank, successor in interest to United - ------------------------------------------------------------------- Jersey Bank, U.S. District Court for the District of New Jersey, Civil - ----------- Action No. 96-4477 (JBS), filed on October 14, 1996, and Annette -------- Loatman, on behalf of herself and all others similarly situated v. - ------------------------------------------------------------------- United Jersey Bank, Superior Court of New Jersey, Camden County, - ------------------- Docket No. L-3527-96 ("the State Action"), filed April 24, 1996, dismissed without prejudice pending the outcome of the federal actions on December 9, 1996, and reinstated October 15, 1997 with Robert M. Gundle, III as an additional named plaintiff. Reported on Form 10-K for the period ended December 31, 1997, and on Form 10-Q for the period ended March 31, 1998. In the State Action, on April 27, 1998, the Appellate Division denied the Bank's motion for leave to appeal from the trial court's certification of the class. The trial court has approved the form of notice to the class but has ruled that it need only be sent, at this time, to putative members of the class who were customers of United Jersey Bank/South, N.A. 2. Daniel Iverson, Lawrence Cohen and Terri Cohen, on behalf of ------------------------------------------------------------ themselves and all others similarly situated v. Collective Bank, a ----------------------------------------------------------------- federally chartered savings bank organized under the laws of the ----------------------------------------------------------------- United States of America (improperly named as Collective Bancorp, ---------------------------------------------------------------- Inc., a Delaware corporation), on behalf of itself and all others ----------------------------------------------------------------- similarly situated. Superior Court of New Jersey, Atlantic County, ------------------ Docket No. ATL-L-2578-95, filed on July 26, 1995, New Jersey Superior Court, Appellate Division, Docket No. A-2251-97T5F. Reported on Form 10-K for the period ended December 31, 1997, and on the Form 10-Q for the period ended March 31, 1998. On July 9, 1998, the New Jersey Appellate Division reversed the decision of the trial court and held that a bank may charge an attorney review fee in connection with a residential mortgage loan. 3. McAdoo CERCLA Matters. United States of America v. Alcan Aluminum, ----------------------------------------------------------------- Inc., et al United States of America v. Alcan Aluminum et al, United ------------------------------------------------------------ States District Court, Eastern District of Pennsylvania, Civil Action No.88-4970; United States of America and the Commonwealth of -------------------------------------------------- Pennsylvania v. Air Products and Chemicals, Inc. et al, United States ------------------------------------------------------ District Court for the Eastern District of Pennsylvania, Civil Action No. 97-7140; United States of America and the Commonwealth of -------------------------------------------------- Pennsylvania v. Air Products and Chemicals, Inc. et al, United States ------------------------------------------------------ District Court for the Eastern District of Pennsylvania, Civil Action No. 97-7144. Reported on Form 10-K for the period ended December 31, 1997. On May 6, 1998, the court approved the consent decrees in each of the actions. The cases are now closed. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. - ------------------------------------------------- Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. - ---------------------------------------- Not applicable. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ Not applicable ITEM 5. OTHER INFORMATION. - --------------------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. - ----------------------------------------- (a) Exhibits - ------------ (10) FF (ii) Summit Bancorp. Executive Severance Plan Participation Letter. (27) Summit Bancorp. financial data schedule-June 30, 1998 (b) Reports on Form 8-K - ----------------------- None. 21 SIGNATURE - --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT BANCORP. ----------------- Registrant DATE: August 13, 1998 BY: /s/ WILLIAM J. HEALY --------------------- William J. Healy Executive Vice President, Comptroller and Chief Accounting Officer (Duly Authorized Officer) 22 EXHIBIT INDEX ---------------- Exhibit No. Description - -------------- ------------------------------------------------------------ *(10) FF (ii) Summit Bancorp. Executive Severance Plan Participation Letter. (27) Summit Bancorp. financial data schedule-June 30, 1998 * Management contract or compensatory plan or arrangement. 23 EX-10 2 EXHIBIT (10) FF (II) Exhibit (10) FF (ii) Date Participant Home Street Address City, State ZIP Re: Executive Severance Plan ------------------------ Dear Salutation: On October 15, 1997, the Board of Directors of Summit Bancorp. (the "Company") amended and restated the Summit Bancorp. Executive Severance Plan (as amended, the "Plan"). A copy of the Plan, reflecting all amendments, is attached hereto and made a part hereof as if fully set forth in this letter. Unless the context otherwise requires or unless otherwise defined in this letter, capitalized terms used in this letter have the meanings assigned to them in the Plan. The Committee, as a matter of separate inducement and not in lieu of any salary or other compensation for services, has selected you to participate in the Plan, subject to the terms and conditions of the Plan and this letter. This letter constitutes your Participation Letter under the Plan. Your participation in the Plan commences as of October 15, 1997. You cease to be a Participant in the Plan upon the earliest to occur of (i) October 15, 2002 (the "Expiration Date"), (ii) the Date of Termination, and (iii) your Retirement. The Expiration Date will be automatically extended for an additional year (each such anniversary being the new Expiration Date) unless at least 90 calendar days prior to the then Expiration Date, the Company notifies you that the then Expiration Date will not be extended (it being understood that the automatic extension operates in successive years so long as no notice is given). The payments and benefits to which you as a Participant in the Plan may become entitled will be determined under the Plan. It is an express condition to your entitlement to the payments of amounts and the provision of benefits provided for by paragraph 5(a) of the Plan that the Company receive on the Date of Termination a Release, Covenant Not to Sue, Non-Disclosure and Non-Solicitation Agreement executed by you, or your legal representative (in the event of your death or Disability) in the form set forth in Exhibit A to the Plan, and that such Agreement be effective. For purposes of this letter and the Plan, notices and all communications provided for in this letter or the Plan shall be in writing and shall be treated as having been duly given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, addressed as follows: (i) if to you, your address indicated on the first page of this letter; (ii) if to the Company or the Subsidiary, Summit Bancorp., 301 Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066, Attention: Corporate Secretary; or (iii) to such other address as either party may have furnished to the other in writing in accordance with this paragraph, except that notices of change of address shall be effective only upon receipt. All questions pertaining to the construction, regulation, validity and effect of the provisions hereof will be determined in accordance with the law of the State of New Jersey. Your participation in the Plan is conditioned on your acknowledgment of the terms of this letter. You also agree that this letter and your participation in the Plan supersedes all prior participation letters and understandings relating to severance benefits payable by the Company or the Subsidiary under severance plans of the Company and its Subsidiaries, and all such prior letters and understandings shall be null and void except for your Termination Agreement, dated as of October 15, 1997. Please sign the enclosed copy of this letter and deliver it to the Company in order to evidence such acknowledgment and agreement. Sincerely, SUMMIT BANCORP. By: _______________________________________ Richard F. Ober, Jr., Secretary Acknowledged and Agreed: _____________________________________ Participant Dated:_______________________________ EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1998 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 6-MOS DEC-31-1998 JUN-30-1998 1,153,023 34,476 176,000 23,797 4,295,945 5,070,615 5,080,125 19,704,103 308,753 31,142,043 22,106,450 4,152,961 418,761 1,881,289 0 0 142,123 2,440,459 31,142,043 772,314 293,954 1,449 1,067,717 335,133 483,666 584,051 33,000 4,498 383,572 337,142 337,142 0 0 230,894 1.31 1.29 4.17 71,455 56,960 0 33,033 296,494 36,397 15,656 308,753 125,962 0 182,791
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