-----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, PVy4XHUq2UVPka2lfwsfIOWsT9nbdp7bGrGEwsrThfptrh5adh5VhcgFdBVxayrC T8+fbPdFtwjZSN5DF4a0sw== 0000101320-99-000007.txt : 19990518 0000101320-99-000007.hdr.sgml : 19990518 ACCESSION NUMBER: 0000101320-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99628331 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 3/31/99 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________to_________________ Comission File Number: 1-6451 -------------------------------------------- SUMMIT BANCORP. (Exact name of registrant as specified in its charter) New Jersey 22-1903313 - ------------------------------------------------------------------ State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 301 Carnegie Center, P.O. Box 2066, Princeton, New Jersey 08543-2066 - --------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (609) 987-3200 - --------------------------------------------------------------------- (Registrant's telephone number, including area code) - --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of April 30, 1999 there were 171,254,033 shares of common stock, $.80 par value, outstanding. SUMMIT BANCORP FORM 10-Q INDEX Page No. -------- Part I Financial Information Item 1. Financial Statements-unaudited Consolidated Balance Sheets - March 31, 1999, December 31, 1998 and March 31, 1998................2 Consolidated Statements of Income - Three and Months Ended March 31, 1999 and 1998......................3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998..........................4 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 1999 and 1998..........................5 Notes to Consolidated Financial Statements...........................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................8 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 21 Part II. Other Information. Item 1. Legal Proceedings...........................................22 Item 2. Changes in Securities and Use of Proceeds...................23 Item 3. Defaults Upon Senior Securities.............................23 Item 4. Submission of Matters to a Vote of Security Holders.........23 Item 5. Other Information...........................................23 Item 6. Exhibits and Reports on Form 8-K............................24 Signature...................................................25 Exhibit Index.............................................. 26 1 Summit Bancorp and Subsidiaries Consolidated Balance Sheets Unaudited (In thousands) March 31, December 31, March 31, 1999 1998 1998 ---------- ---------- ---------- Assets Cash and due from banks 1,000,977 1,129,859 1,242,254 Federal funds sold and securities purchased under agreements to resell 11,701 28,829 101,096 Interest-bearing deposits with banks 27,407 26,360 6,852 Securities: Trading account securities 10,217 12,553 26,913 Securities available for sale 3,860,136 3,970,941 5,375,723 Securities held to maturity 6,583,209 6,015,810 3,898,724 ---------- ---------- ---------- Total securities 10,453,562 9,999,304 9,301,360 Loans (net of unearned discount): Commercial 7,227,814 7,156,574 6,440,091 Commercial mortgage 2,922,418 2,888,597 2,809,233 Residential mortgage 5,612,161 5,719,305 5,770,620 Consumer 5,391,314 5,362,101 4,251,983 ---------- ---------- ---------- Total loans 21,153,707 21,126,577 19,271,927 ---------- ---------- ---------- Less: Allowance for loan losses 328,302 322,814 301,264 ---------- ---------- ---------- Net loans 20,825,405 20,803,763 18,970,663 ---------- ---------- ---------- Premises and equipment 299,961 270,843 244,406 Goodwill and other intangibles 323,060 295,461 183,897 Accrued interest receivable 196,223 195,708 179,685 Due from customers on acceptances 21,499 18,089 16,511 Other assets 317,582 333,098 307,966 ---------- ---------- ---------- Total Assets 33,477,377 33,101,314 30,554,690 ========== ========== ========== Liabilities and Shareholders' Equity Deposits: Non-interest bearing demand deposits 4,754,413 4,933,787 4,680,917 Interest-bearing deposits: Savings and time deposits 17,644,605 17,250,295 16,681,913 Commercial certificates of deposit $100,000 and over 821,130 961,046 852,795 ---------- ---------- ---------- Total deposits 23,220,148 23,145,128 22,215,625 Other borrowed funds 3,281,005 3,189,988 3,629,944 Accrued expenses and other liabilities 423,632 358,542 324,949 Accrued interest payable 84,660 94,430 77,702 Bank acceptances outstanding 21,499 18,089 16,511 Long-term debt 3,734,392 3,572,710 1,588,592 ---------- ---------- ---------- Total liabilities 30,765,336 30,378,887 27,853,323 Shareholders' equity: Common stock par value $ .80: Authorized 390,000 shares 142,074 142,106 142,022 Surplus 971,955 1,013,393 1,010,444 Retained earnings 1,794,863 1,728,135 1,531,659 Employee stock ownership plan obligation (2,750) (3,394) (3,932) Accumulated other comprehensive income, net of tax 9,488 12,087 21,174 Common stock held in treasury, at cost (203,589) (169,900) - ---------- ---------- ---------- Total shareholders' equity 2,712,041 2,722,427 2,701,367 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity 33,477,377 33,101,314 30,554,690 ========== ========== ========== Common shares at period end: Issued 177,593 177,632 177,528 Treasury 4,901 3,873 - Outstanding 172,692 173,759 177,528 See accompanying Notes to Consolidated Financial Statements. 2
Summit Bancorp and Subsidiaries Consolidated Statements of Income Unaudited (In thousands, except per share data) Three Months Ended March 31, 1999 1998 Interest Income Loans 403,667 380,309 Securities: Trading account securities 82 554 Securities available for sale 59,561 85,022 Securities held to maturity 96,540 62,606 -------- -------- Total securities 156,183 148,182 Federal funds sold and securities purchased under agreements to resell 145 407 Deposits with banks 450 431 -------- -------- Total interest income 560,445 529,329 -------- -------- Interest Expense Savings and time deposits 151,402 156,868 Commercial certificates of deposit $100,000 and over 11,575 12,257 Borrowed funds, including long-term debt 92,124 71,046 -------- -------- Total interest expense 255,101 240,171 -------- -------- Net interest income 305,344 289,158 Provision for loan losses 16,500 15,000 Net interest income after -------- -------- provision for loan losses 288,844 274,158 -------- -------- Non-Interest Income Service charges on deposit accounts 30,076 30,284 Service and loan fee income 15,624 12,914 Trust income 11,926 10,227 Retail investment and insurance fees 18,028 11,664 Securities gains 217 1,426 Other 22,286 13,005 -------- -------- Total non-interest income 98,157 79,520 -------- -------- Non-Interest Expenses Salaries 80,326 76,493 Pension and other employee benefits 30,017 26,618 Furniture and equipment 22,451 20,367 Occupancy, net 19,835 18,500 Communications 9,618 9,532 Advertising and public relations 5,528 5,923 Amoritization of goodwill and other intangibles 5,871 4,723 Other 31,791 29,497 -------- -------- Total non-interest expenses 205,437 191,653 -------- -------- Net Income before taxes 181,564 162,025 Federal and state income taxes 62,823 49,608 -------- -------- Net Income 118,741 112,417 ======== ======== Net Income per Common Share: Basic 0.68 0.64 Diluted 0.68 0.63 Average Common Shares Outstanding: Basic 173,794 176,933 Diluted 175,458 179,251 See accompanying Notes to Consolidated Financial Statements. 3 Summit Bancorp and Subsidiaries Consolidated Statements of Cash Flows Unaudited (In thousands) Three Months Ended March 31, Operating activities 1999 1998 Net income $ 118,741 $ 112,417 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses and other real estate owned 16,500 15,120 Depreciation, amortization and accretion, net 16,806 17,811 Gains on sales of securities (217) (1,426) Gains on sales of mortgages held for sale (6,553) (2,315) Gains on the sales of other real estate owned (458) (1,949) Proceeds from the sales of other real estate owned 1,015 6,445 Proceeds from the sales of mortgages held for sale 273,407 143,703 Originations of mortgages held for sale (275,731) (198,210) Net decrease in trading account securities 2,336 8,303 Net change in other accrued and deferred income and expense 46,946 30,697 Net cash provided by operating activities 192,792 130,596 Investing activities Purchases of securities held to maturity (1,247,707) (266,619) Purchases of investment securities available for sale (717,850) (952,693) Proceeds from maturities of securities held to maturity 686,463 510,588 Proceeds from maturities of securities available for sale 639,319 483,576 Proceeds from the sales of securities available for sale 231,937 184,266 Net decrease (increase) in Federal funds sold, securities purchased under agreements to resell and interest bearing deposits with banks 21,281 (89,416) Net decrease (increase) in loans 66,756 (338,957) Purchases of premises and equipment, net (25,588) (12,214) Net cash used in investing activities (345,389) (481,469) Financing activities Net decrease in deposits (78,870) (113,811) Net increase in short-term borrowings 91,017 231,991 Principal payments on long-term debt (23,630) (164,487) Proceeds from the issuance of long-term debt 185,260 506,535 Dividends paid (52,967) (47,709) Purchase of common stock (106,384) - Proceeds from issuance of common stock under stock option plans 2,793 7,490 Net cash provided by financing activities 17,219 420,009 (Decrease) increase in cash and due from banks (135,378) 69,136 Beginning cash balance of acquired entities 6,496 - Cash and due from banks at beginning of period 1,129,859 1,173,118 Cash and due from banks at end of period $ 1,000,977 $1,242,254 Supplemental disclosure of cash flow information Cash paid: Interest payments $ 264,871 $ 234,071 Income tax payments 4,875 915 Noncash investing activities: Net transfer of loans to other real estate owned 4,921 1,711 See accompanying Notes to Consolidated Financial Statements
4 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 Income Stock Equity ---------- --------- ---------- --------- ---------- --------- ---------- Balance, December 31, 1997 $141,272 $987,281 $1,467,193 $(4,201) $20,875 $ - $2,612,420 Comprehensive income: Net income - - 112,417 - - - 112,417 Unrealized holding gain on securities arising during the period (net of tax of $660) - - - - 1,226 - Less: Reclassification adjustment for gains included in net income (net of tax of $499) - - - - 927 - ---------- Net unrealized holding gains on securities arising during the period (net of tax of $161) - - - - 299 - 299 ---------- Total comprehensive income 112,716 Cash dividend declared on common stock - - (47,951) - - - (47,951) Employee stock plans (938 shares) 750 23,163 - - - - 23,913 ESOP debt repayment - - - 269 - - 269 ---------- ---------- ---------- --------- --------- ---------- ---------- Balance, March 31, 1998 $142,022 $1,010,444 $1,531,659 $(3,932) $21,174 $ - $2,701,367 ========== ========== ========== ========= ========= ========== ========== Balance, December 31, 1998 $142,106 $1,013,393 $1,728,135 $(3,394) $12,087 $(169,900) $2,722,427 Comprehensive income: Net income - - 118,741 - - - 118,741 Unrealized holding (loss) on securities arising during the period (net of tax of $1,324) - - - - (2,458) - Less: Reclassification adjustment for gains included in net income (net of tax of $76) - - - - 141 - ------- ---------- Net unrealized holding losses on securities arising during the period (net of tax of $1,399)- - - - (2,599) - (2,599) ---------- Total comprehensive income 116,142 Cash dividend declared on common stock - - (52,013) - - - (52,013) Employee stock plans (545 shares) (32) (43,005) - - - 25,616 (17,421) Treasury shares issued for acquisitions (1,131 shares) - 1,567 - - - 47,079 48,646 Purchase of common stock (2,743 shares) - - - - - (106,384) (106,384) ESOP debt repayment - - - 644 - - 644 ---------- ---------- ---------- --------- --------- ---------- ---------- Balance, March 31, 1999 $142,074 $971,955 $1,794,863 $(2,750) $9,488 $(203,589) $2,712,041 ========== ========== ========== ========= ========= ========== ========== See accompanying Notes to Consolidated Financial Statements.
Summit Bancorp and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1.) Basis of Presentation The accompanying financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated financial position of Summit Bancorp and subsidiaries (Summit Bancorp or the Company), the consolidated results of operations, changes in cash flows and changes in shareholders' equity. All significant intercompany accounts and transactions have been eliminated in consolidation. In all material respects, the financial statements presented comply with the current reporting requirements of supervisory authorities. Certain prior period amounts have been reclassified to conform to the financial statement presentation of 1999. For additional information and disclosures required under generally accepted accounting principles, reference is made to Summit Bancorp's 1998 Annual Report on Form 10-K. 2.) Acquisitions On August 31, 1998, Summit Bancorp acquired W.M. Ross and Company, Inc., one of the largest privately held property and casualty insurance brokerage firms in New Jersey. The acquisition was accounted for as a purchase, with the issuance of 280 thousand shares of treasury stock. On October 30, 1998, Summit Bancorp acquired Spectrum Financial Group, Inc., an employee benefits brokerage operation. Its operations are conducted through its wholly owned subsidiary known by its registered alternative name, Madison Consulting Group. The acquisition was accounted for as a purchase, with the issuance of 383 thousand shares of treasury stock. On November 21, 1998, Summit Bancorp completed the acquisition of NSS Bancorp Inc. NSS Bancorp was headquartered in Norwalk, Connecticut and operated eight branches with $655 million in assets. This acquisition was accounted for as a purchase, with the issuance of 3.0 million shares of treasury stock. On March 31, 1999, Summit Bancorp completed the acquisition of New Canaan Bank and Trust Company. New Canaan Bank and Trust Company was headquartered in New Canaan, Connecticut and operated four branches with $182 million in assets. This acquisition was accounted for as a purchase, with the issuance of 1.1 million shares of treasury stock. The cost in excess of the fair value of net assets acquired resulted in goodwill of $35.1 million. On February 18, 1999, Summit Bancorp announced that it had entered into a definitive merger agreement to acquire Prime Bancorp. Prime Bancorp is a commercial bank with approximately $1.0 billion in assets and 27 branches located in the greater Philadelphia region. The acquisition, which will be accounted for as a purchase, is expected to be completed in the third quarter of 1999, subject to normal regulatory and Prime Bancorp shareholder approvals. Summit Bancorp expects to repurchase from time to time in the open market outstanding Summit Bancorp shares in a number equal to the approximate amount of common shares to be issued in the acquisition, or reissue treasury shares. The number of common shares to be repurchased or reissued will depend on market conditions and other factors. Pursuant to the terms of the Merger Agreement, if the merger is approved and completed, upon the effective date of the merger, shareholders of Prime will be entitled to receive 0.675 of a share of Summit common stock in exchange for each share of Prime common stock owned. 3.) Net Income per Common Share Basic net income per common share is calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted net income per common share is computed similarly to that of basic net income per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period. In thousands, except per share data Three months ended March 31, 1999 1998 - --------------------------------------------------------------- Net Income $118,741 $112,417 Basic weighted-average common shares outstanding 173,794 176,933 Plus: Common stock equivalents 1,664 2,318 ------------------- Diluted weighted-average common shares outstanding 175,458 179,251 ------------------- Net income per common share: Basic $ 0.68 $ 0.64 Diluted 0.68 0.63 - --------------------------------------------------------------- 4.) Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board "FASB" issued Statement of Financial Accounting Standards "SFAS" No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivative instruments as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The adoption of SFAS No. 133 is not expected to have a material impact on the financial position or results of operations of the Company. 5.) Subsequent Events On April 14, 1999, Summit Bancorp's Board of Directors approved a 10.0 percent increase in the quarterly cash dividend on Summit Bancorp's common stock from $0.30 to $0.33 per common share. The second quarter dividend is payable on August 2, 1999, to shareholders of record July 8, 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Summit Bancorp is a bank holding company headquartered in Princeton, New Jersey. Summit Bancorp owns three bank subsidiaries and several active non-bank subsidiaries. Summit Bancorp's bank subsidiaries provide a broad range of retail, insurance, commercial and private banking services as well as trust and investment services to individuals, businesses, not-for-profit organizations, government entities and other financial institutions. These services are provided through an extensive branch network, including supermarket branches and private banking facilities, as well as through automated teller machines, personal computers and the internet. FINANCIAL CONDITION Total assets at March 31, 1999, were $33.5 billion, an increase of $376.1 million, or 1.1 percent, from year-end 1998. The growth came most notably from the held to maturity securities portfolio and was generally funded with savings and time deposits. The purchase of New Canaan Bank and Trust Company added $208.5 million to total assets. Securities held to maturity at March 31, 1999, were $6.6 billion and were mainly comprised of $4.4 billion of U.S. Government and Federal agency securities, $2.1 billion of other securities, predominately corporate collateralized mortgage obligations ("CMOs"), and $138.6 million of state and political subdivision securities. These securities increased $567.4 million or 9.4 percent from year-end 1998, primarily as cash flows were invested in securities held to maturity. For the three months of 1999, $1.3 billion of held to maturity securities were purchased, partially offset by principal repayments and maturities of $686.5 million. At March 31, 1999, and December 31, 1998, net unrealized gains (losses) on securities held to maturity amounted to $(5.1) million and $15.0 million, respectively. At March 31, 1999, securities available for sale amounted to $3.9 billion and were predominately comprised of U.S. Government and Federal agency securities. These securities decreased $110.8 million, or 2.8 percent, from year-end 1998. The decrease resulted from $639.3 million in maturities and principal repayments and $231.9 million in sales, partially offset by $717.9 million in purchases. At March 31, 1999, total loans amounted to $21.2 billion, comparable to the balance sheet at year-end 1998. Increases in commercial loans of $71.2 million, commercial mortgages of $33.8 million and consumer loans of $29.2 million were significantly offset by the $107.1 million decrease in residential mortgages, as a result of sales and prepayments. The increase in the consumer loan portfolio can generally be attributed to purchases of home equity loans offset by a sale of the $33.0 million credit card portfolio. The increase in commercial loans was primarily related to growth in asset-based lending and commercial media. Mortgage loans held for sale amounted to $145.4 million, $183.3 million and $112.7 million for the periods ended March 31, 1999, December 31, 1998, and March 31, 1998, respectively. Total deposits were $23.2 billion at March 31, 1999, an increase of $75.0 million, or 0.3 percent, from December 31, 1998. Savings and time deposits at $17.6 billion, increased $394.3 million, or 2.3 percent, from December 31, 1998. Partially offsetting this increase was a decrease in commercial certificates of deposit $100,000 and over, which were down $139.9 million, or 14.6 percent, compared to December 31, 1998. Also decreasing were demand deposits, which decreased $179.4 million, or 3.6 percent, from year-end 1998 to $4.8 billion. The decrease in demand deposits came mainly from business and personal accounts. Other borrowed funds at March 31, 1999, increased $ 91.0 million, or 2.9 percent, from December 31, 1998, to $3.3 billion. The increase in other borrowed funds can be attributed to increases in short-term Federal Home Loan Bank advances and Federal funds purchased, partially offset by a decrease in short-term repurchase agreements. Long-term debt at March 31, 1999, increased $161.7 million, or 4.5 percent, from December 31, 1998, to $3.7 billion. The increase in long-term debt was principally the result of the increase in repurchase agreements of $100.0 million and an increase of $62.8 million in long term Federal Home Loan Bank Notes. Included in long-term debt at each of the periods presented are $150.0 million of 8.40 percent pass-through securities qualifying as Tier I Capital. The increases in other borrowed funds and long-term debt were generally used to fund the growth in the investment and loan portfolios. Total shareholders' equity at March 31, 1999, was $2.7 billion, generally unchanged from December 31, 1998. Net income for the period was offset by the purchase of treasury stock and common stock dividends. Treasury stock at March 31, 1999, amounted to $203.6 million and was comprised of 4.9 million shares. These shares will be used in conjunction with the announced acquisition of Prime Bancorp, employee benefit plans, and general corporate purposes. Included in shareholders' equity at March 31, 1999, was accumulated other comprehensive income, net of tax, amounting to $9.5 million, compared to $12.1 million at year-end 1998. Accumulated other comprehensive income is comprised principally of unrealized gains on securities available for sale. The Company's capital ratios for March 31, 1999, compared to select prior periods and regulatory requirements, are shown in the following table. The Company's bank subsidiaries met the well-capitalized requirements for each of the periods presented. The decreases in the ratios at March 31, 1999, were principally attributable to treasury stock purchases and asset growth. Minimum Mar. 31, Dec. 31, Mar. 31, Require Well Selected Capital Ratios: 1999 1998 1998 Capital Capitalized Equity to assets 8.10 8.22 8.84 - - Leverage ratio 7.67 8.00 8.88 3.00 5.00 Tier I Capital 10.48 10.86 12.63 4.00 6.00 Total risk-based capital 12.33 12.72 14.78 8.00 10.00 Non-Performing Assets Non-performing assets include non-performing loans and other real estate owned (OREO) and is shown in the following table as of the dates indicated. Non-performing assets Mar 31 Dec 31 Mar 31 (in thousands) 1999 1998 1998 Non-performing loans(1) Commercial and industrial 51,731 55,245 39,934 Commercial mortgage 36,435 26,446 32,552 Construction and development 1,899 5,046 3,397 ---------------------------- Non-performing loans 90,065 86,737 87,212 OREO,net 7,137 2,829 11,329 ---------------------------- Non-performing assets 97,202 89,566 87,212 ---------------------------- Non-performing loans to total loans .43% .41% .39% Non-performing assets to total loans and OREO .46% .42% .45% (1) Loans, not included above, past due 90 days or more amounted to $39.0 million, $45.3 million and $58.5 million at March 31, 1999, December 31, 1998, and March 31, 1998, respectively. These loans are primarily residential mortgage and consumer loans which are well secured and in the process of collection. The average balances of non-performing loans amounted to $83.8 million, $81.9 million and $81.4 million, for the three months ended March 31, 1999, December 31, 1998, and March 31, 1998, respectively. Interest income received on non-performing loans amounted to $1.0 million for the three months ended March 31, 1999, compared to $2.0 million for the three months ended December 31, 1998 and $0.6 million for the three months ended March 31, 1998. Allowance for Loan Losses A standardized process has been established to assess the adequacy of the allowance for loan losses and to identify the risks inherent in the loan portfolio. This process incorporates credit reviews and gives consideration to areas of exposure such as concentrations of credit, economic and industry conditions, trends in delinquencies and collections, collateral coverage, and the composition of the performing and non-performing loan portfolios. The allowance for loan losses is maintained at a level that management believes to be adequate to absorb anticipated loan losses. The unallocated portion of the allowance for loan losses, in excess of specific and general reserves, was $163.3 million at March 31, 1999, compared to $164.5 million at December 31, 1998. The unallocated allowance is for latent losses that existed at the balance sheet date that are not incorporated in the reserve assessment process. The unallocated portion of the loan loss allowance is therefore necessary to maintain the overall allowance at a level that is adequate to absorb estimated credit losses inherent in the total loan portfolio. The 1999 provision for loan losses has increased over the prior year primarily as a result of increased levels of non-performing loans and increased loan volume. Transactions in the allowance for loan losses, by loan category, for the three month periods ended March 31, 1999, and 1998 and selected loan quality ratios for the dates indicated are shown in the following tables: Allowance for Loan Losses Three months ended (in thousands) March 31, 1999 1998 Balance, Beginning of period 322,814 296,494 Acquisition adjustments 2,140 - Provision for loan losses 16,500 15,000 --------------------------- 341,454 311,494 --------------------------- Loans charged off Commercial and industrial 8,131 8,666 Construction and development 13 356 Commercial mortgage 1,202 260 Residential mortgage 2,626 319 Consumer 7,987 9,332 --------------------------- Total loans charged off 19,959 18,933 --------------------------- Recoveries Commercial and industrial 3,517 4,649 Construction and development 395 1,798 Commercial mortgage 548 287 Residential mortgage 319 274 Consumer 2,028 1,695 -------------------------- Total recoveries 6,807 8,703 --------------------------- Net charg offs 13,152 10,230 --------------------------- Balance, end of period 328,302 301,264 =========================== Mar. 31, Dec. 31, Mar. 31, 1999 1998 1998 Net charge offs to average loans: Quarter to date 0.25% 0.23% 0.22% Allowance to loan losses to: Total loans 1.55 1.53 1.56 Non-performing loans 364.52 372.18 397.01 Non-performing assets 337.75 360.42 345.44 Summit Bancorp and Subsidiaries Consolidated Average Balance Sheets with Resultant Interest and Rates Unaudited (Tax-equivalent basis, dollars in thousands) Three Months Ended March 31, 1999 March 31, 1998 ---------------------------------------------------------------- Balance Interest Rate Balance Interest Rate ASSETS ----------- -------- ----- ----------- -------- ----- Interest-earning assets: Federal funds sold and securities purchased under agreements to resell $10,648 $145 5.52 %$ 29,187 $ 407 5.66 % Interest-bearing deposits with banks 33,737 450 5.41 27,065 431 6.46 Securities: Trading account securities 9,969 103 4.19 33,123 582 7.13 Securities available for sale 3,956,908 59,951 6.06 5,365,951 85,643 6.38 Securities held to maturity 6,226,526 97,587 6.27 3,969,789 63,911 6.44 ----------- -------- ----- ----------- -------- ----- Total securities 10,193,403 157,641 6.19 9,368,863 150,136 6.41 ----------- -------- ----- ----------- -------- ----- Loans, net of unearned discount: Commercial 7,157,347 137,063 7.77 6,196,306 128,546 8.41 Commercial mortgage 2,874,357 57,513 8.00 2,769,941 59,136 8.54 Residential mortgage 5,717,998 101,847 7.12 5,722,445 104,786 7.32 Consumer 5,417,311 108,672 8.14 4,268,694 89,067 8.46 ----------- -------- ----- ----------- -------- ----- Total loans 21,167,013 405,095 7.76 18,957,386 381,535 8.16 ----------- -------- ----- ----------- -------- ----- Total interest-earning assets 31,404,801 563,331 7.27 28,382,501 532,509 7.61 ----------- -------- ----- ----------- -------- ----- Non-interest earning assets: Cash and due from banks 955,002 1,029,500 Allowance for loan losses (325,323) (302,071) Other assets 1,123,019 946,746 ----------- ----------- Total non-interest earning assets 1,752,698 1,674,175 ----------- ----------- Total Assets $ 33,157,499 $ 30,056,676 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Savings deposits $ 10,067,539 61,889 2.49 %$ 9,538,374 61,552 2.62 % Time deposits 7,123,211 89,513 5.10 7,257,262 95,316 5.33 Commercial certificates of deposit $100,000 and over 975,331 11,575 4.81 917,949 12,257 5.42 ----------- -------- ----- ----------- -------- ----- Total interest-bearing deposits 18,166,081 162,977 3.64 17,713,585 169,125 3.87 ----------- -------- ----- ----------- -------- ----- Other borrowed funds 3,411,876 41,487 4.93 3,485,830 46,788 5.44 Long-term debt 3,684,708 50,637 5.50 1,517,256 24,258 6.40 ----------- -------- ----- ----------- -------- ----- Total interest-bearing liabilities 25,262,665 255,101 4.10 22,716,671 240,171 4.29 ----------- -------- ----- ----------- -------- ----- Non-interest bearing liabilities: Demand deposits 4,685,198 4,292,821 Other liabilities 478,000 373,417 ----------- ----------- Total non-interest bearing liabilities 5,163,198 4,666,238 Shareholders' equity 2,731,636 2,673,767 ----------- ----------- Total Liabilities and Shareholders' Equity $ 33,157,499 $ 30,056,676 =========== =========== Net interest spread 308,230 3.17 % 292,338 3.32 % Tax-equivalent basis adjustment (2,886) ====== (3,180) ====== -------- -------- Net interest income $ 305,344 $ 289,158 ======== ======== Net interest margin 3.98 % 4.18 % ====== ======
11 RESULTS OF OPERATIONS Net income for the quarter ended March 31, 1999, was $118.7 million, or $.68 per basic share, compared to $112.4 million, or $.64 per basic share, for the first quarter of 1998. On a diluted per share basis, net income for the three months ended March 31, 1999, was $.68 per diluted share compared to $.63 for the same period in 1998. The following are key performance indicators for the three month periods ended March 31, 1999 and 1998. (in thousands) Three months ended March 31, 1999 1998 Net income $ 118,741 $ 112,417 Net income per share Basic $0.68 $0.64 Diluted 0.68 0.63 Return on: Average assets 1.45% 1.52% Average equity 17.63 17.05 Efficiency ratio 50.55 51.90 Net Interest Income Interest income on a tax-equivalent basis was $563.3 million for the three months ended March 31, 1999, an increase of $30.8 million, or 5.8 percent, compared to a year ago. Interest-earning assets averaged $31.4 billion, an increase of $3.0 billion, or 10.7 percent, compared to the prior year period. The increase in interest-earning assets contributed $57.3 million to the increase in tax-equivalent interest income, partially offset by a decline of $26.5 million due to the reduction in the yield. The rate earned on interest-earning assets decreased 34 basis points to 7.27 percent in the 1999 period. The decrease was generally the result of a lower interest rate environment as compared to last year. Interest expense increased $14.9 million, or 6.2 percent, for the three months ended March 31, 1999, compared to the same period in 1998. The $2.5 billion growth in the average balance of interest-bearing liabilities to $25.3 billion in the 1999 period contributed $31.7 million to the increase in interest expense. This increase was partially offset by a decrease of $16.8 million in interest expense resulting from a decline in rates paid on interest-bearing liabilities. Net interest income on a tax-equivalent basis was $308.2 million for the three months ended March 31, 1999, an increase of $15.9 million, or 5.4 percent, compared to the same period in 1998. The net interest spread percentage on a tax-equivalent basis (the difference between the rate earned on average interest-earning assets and the rate paid on average interest-bearing liabilities) was 3.17 percent for the three months ended March 31, 1999, compared to 3.32 percent for the prior year period. Net interest income on a tax-equivalent basis as a percentage of average interest-earning assets was 3.98 percent for the three months ended March 1999, compared to 4.18 percent during the same period in 1998. The decline in net interest spread and net interest margin can be attributed primarily a lower interest rate environment, the purchase of treasury stock, and the change in the mix of funding as long-term debt and other borrowed funds were used to fund asset growth. The rate/volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates over the periods. Changes that are not due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Rate/Volume Table March 1999 vs. March 1998 Due to Change in: (Tax-equivalent basis, in millions) Volume Rate Total Interest Income Loans Commercial $18.8 $(10.3) $8.5 Commercial mortgage 2.2 (3.8) (1.6) Residential mortgage (0.1) (2.9) (3.0) Consumer 23.1 (3.5) 19.6 ---------------------------- Total Loans 44.0 (20.5) 23.5 Securities HTM 35.4 (1.7) 33.7 Securities AFS (21.6) (4.1) (25.7) Other interest-earning assets (0.5) (0.2) (0.7) ---------------------------- Total Interest Earning Assets 57.3 (26.5) 30.8 ---------------------------- Interest Expense Deposits Savings Deposits 3.4 (3.1) 0.3 Time Deposits (1.7) (4.1) (5.8) Commercial CD's > $100M 0.7 (1.4) (0.7) ----------------------------- Total Time Deposits 2.4 (8.6) (6.2) Other interest-bearing liabilities (1.0) (4.3) (5.3) Long-term debt 30.3 (3.9) 26.4 ----------------------------- Total interest expense 31.7 (16.8) 14.9 ---------------------------- Net interest income-fully taxable equivalent $25.6 $(9.7) $15.9 ---------------------------- Non-Interest Income Non-interest income categories for the three month periods ended March 31, 1999 and 1998 are shown in the following table: (in millions) Three months ended March 31 Percent 1999 1998 Change Service charges on deposit accounts $ 30.1 $ 30.3 (0.7)% Service and loan fee income 15.6 12.9 21.0 Trust income 11.9 10.2 16.6 Retail investment and insurance fees 18.0 11.7 54.6 Other 22.4 13.0 71.4 --------------------------- Total non-interest operating income 98.0 78.1 25.4 --------------------------- Securities gains 0.2 1.4 (84.8) --------------------------- Total non-interest income $ 98.2 $ 79.5 23.4% --------------------------- Service and loan fee income increased $2.7 million, or 21.0 percent, for the quarter ended March 31, 1999, compared with 1998. The increase in service and loan fee income for the three months ended March 31, 1999, was primarily due to increased residential mortgage originations and gains on sales of those loans into the secondary market. Trust income increased $1.7 million, or 16.6 percent, for the quarter ended March 31, 1999, compared with 1998. The increase in trust income for the three months ended March 31, 1999 was generally due to increases in asset management advisory fees, personal trust fees, and fees from sales of proprietary and third party mutual funds. Retail investment and insurance fees increased $6.4 million, or 54.6 percent, for the quarter ended March 31, 1999, compared with 1998. The increase in retail investment and insurance fees for the three months ended March 31, 1999, was primarily due to increased annuity fee and insurance service fees, resulting from the acquired insurance companies. Other income increased $9.4 million, or 71.4 percent, for the quarter ended March 31, 1999, compared with 1998. The increase in other non-interest income for the three months ended March 31, 1999, was generally attributable to a net gain of $5.9 million on the sale of the $33.0 million credit card portfolio. Non-Interest Expense Non-interest expense categories for the three month periods ended March 31, 1999, and 1998, are shown in the following table: (In millions) Three months ended March 31 Percent 1999 1998 Change Salaries $80.3 $76.5 5.0% Pension and other employee benefits 30.0 26.6 12.8 Furniture and equipment 22.5 20.4 10.2 Occupancy, net 19.8 18.5 7.2 Communications 9.6 9.5 0.9 Advertising and public relations 5.5 5.9 (6.7) Amortization of goodwill and other intangibles 5.9 4.7 24.3 Other 31.8 29.6 7.4 ---------------------------- Total non-interest expense $205.4 $191.7 7.2% ---------------------------- Salaries increased $3.8 million, or 5.0 percent, for the quarter ended March 31, 1999, compared to the same quarter in 1998. In addition to annual merit increases, salaries rose approximately $2.4 million from acquisitions. There were 8,670 full-time equivalent employees at March 31, 1999, compared to 8,456 the same period a year ago. Pension and employee benefits increased $3.4 million, or 12.8 percent, for the three months ended March 31, 1999 compared with the same quarter in 1998. The increases were generally related to higher levels of core salaries, increased taxes, pension and incentive compensation expense. Furniture and equipment expenses increased $2.1 million, or 10.2 percent, for the quarter ended March 31, 1999, compared with the same quarter in 1998. This increase was primarily due to equipment maintenance, bank card service fees and increases in leasing expenses associated with computer equipment installed at branches to support teller and on-line operations. Amortization of goodwill and other intangibles increased $1.1 million or 24.3 percent, for the three months ended March 31, 1999. The increase was primarily due to the purchase acquisitions of Norwalk Savings Society and New Canaan Bank and Trust Company. Included in other expenses, which did not vary significantly from period to period, were legal and professional fees of $7.9 million for the three months ended March 31, 1999. The effective income tax rate was 34.6 percent for the three months ended March 31, 1999, compared with 30.6 percent for the comparable 1998 period. The lower effective income tax rate for 1998 was the result of the implementation of business strategies in the 1998 period that will not benefit 1999. LINES OF BUSINESS For management purposes, Summit Bancorp is segmented into the following lines of business: Retail Banking, Commercial Banking, and Investment Services and Private Banking. The investment portfolio and activities not included in these lines are reflected in Corporate and Other. The Company's profitability measurement system uses internal management accounting policies that ensure business line results reflect the underlying economics of each business unit, and the results are not necessarily comparable with similar information for any other financial institution. Net income includes revenues and expenses directly associated with each line in addition to allocations of revenue earned and expenses incurred by support units such as operations and technology. Centrally provided corporate services and general overhead are allocated on a per-unit cost basis or in proportion to the balances of assets, liabilities and operating expenses associated with the particular business line. A matched maturity funds transfer pricing methodology is employed to assign a cost of funds to the assets of each business line, as well as to assign a value of funds to the liabilities and equity of each business line. The provision for loan losses is based on the historical credit losses for each line of business. The anticipated consolidated effective income tax rate is applied to each line of business, after consideration of earnings of tax-advantaged assets within the lines of business. In 1999, the Company implemented a new business unit profitability system, which prospectively provides enhanced management reporting, including an enhanced methodology with respect to the allocation of the provisions for loan losses. Certain prior period information has been restated to conform to the 1999 presentation with respect to the allocation of funds transfer charges or credits for assigned assets, liabilities and equity. Investment Results of Operations Services/ Quarters Ended March 31, Retail Commercial Private Corporate (in millions) Banking Banking Banking and Other Consolidated 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 Net interest income $199.1 $188.3 $67.0 $63.0 $13.7 $12.8 $25.5 $25.1 $305.3 $289.2 Provision for loan losses 9.8 7.1 6.3 7.4 0.4 0.5 - - 16.5 15.0 --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 189.3 181.2 60.7 55.6 13.3 12.3 25.5 25.1 288.8 274.2 Non-interest income 55.0 45.6 12.4 10.1 30.1 20.8 0.6 3.0 98.1 79.5 Non-interest expense 132.1 132.1 31.1 27.7 31.3 22.5 10.9 9.4 205.4 191.7 --------------------------------------------------------------------------------------------- Income before taxes 112.2 94.7 42.0 38.0 12.1 10.6 15.2 18.7 181.5 162.0 Federal and state income taxes 39.2 29.6 13.7 11.5 4.2 3.5 5.7 5.0 62.8 49.6 --------------------------------------------------------------------------------------------- Net income $73.0 $65.1 $28.3 $26.5 $7.9 $7.1 $9.5 $13.7 $118.7 $112.4 ============================================================================================= Selected Average Balances: Securities $ 55.1 $ 40.8 $ - $ - $ 9.7 $ 33.0 $10,128.6 $ 9,295.1 $10,193.4 $ 9,368.9 Loans 11,827.6 10,855.2 8,105.6 7,116.3 1,233.8 985.9 - - 21,167.0 18,957.4 Assets 12,189.6 11,397.3 8,090.5 7,191.3 1,322.4 1,065.4 11,554.9 10,402.7 33,157.4 30,056.7 Deposits 19,990.1 19,230.7 1,003.6 910.9 735.7 666.6 1,121.9 1,198.2 22,851.3 22,006.4
Retail Banking Retail Banking meets the banking needs of individuals and small businesses through approximately 380 traditional and 60 supermarket branches in New Jersey, eastern Pennsylvania, and southern Connecticut. Summit also offers its customers an expanding array of 24-hour banking services through more than 600 ATMs, telephone banking centers, its PC Banking network, and the internet. Mortgage loans, home equity loans and lines of credit, direct and indirect consumer loans and small business commercial loans are offered through the Company's broad network of branches. Average loans for the quarter ended March 31, 1999, increased $972.4 million or 9.0 percent to $11.8 billion from the same period in 1998, primarily in the consumer lending area. Total average deposits for the first quarter of 1999 increased to $20.0 billion, up $759.4 million from a year ago. This increase was attributed to demand deposits and interest bearing time deposits. Net interest income for the quarter increased $10.8 million or 5.7 percent over last year. Interest income increased $12.2 million or 5.6 percent over the first quarter of 1998, resulting from the increase in loan balances and the acquisition of NSS Bancorp in November 1998. Interest expense declined $4.5 million or 3.0 percent resulting from a lower rate environment. The increase in non-interest income of $9.4 million contains a $5.9 million gain on the sale of Summit Bancorp's credit card portfolio in March of 1999 and increases from the sale of residential mortgage loan originations. Commercial Banking Commercial Banking is focused on meeting the banking requirements of large and middle-market businesses. Asset based lending, international trade services, equipment leasing, real estate financing, private placement, mezzanine financing, aircraft lending, correspondent banking, treasury services, limited partnership investments, and structured finance services are actively solicited through a network of relationship managers. Demand and interest-bearing deposit accounts and services are provided through the branch network. Total average loans for the quarter ended March 31, 1999, were $8.1 billion, an increase of $989.3 million or 13.9 percent over the same period in 1998 primarily in asset-based lending and commercial media lending. Net interest income for the first quarter of 1999 increased $4.0 million or 6.3 percent from 1998, driven by the increase in average loans. Higher loan fees, account analysis service charges, advisory fees and limited partnership gains provided for the increase over prior year in non-interest income of $2.3 million. Non-interest expense increased $3.4 million over the prior year to $31.1 million. Investment Services and Private Banking Investment Services provides a full range of trust, administrative, and custodial services to individuals and institutions, in addition to investment products and discount brokerage. The line also markets a wide variety of insurance products for the personal and corporate marketplace. This segment also includes Private Banking, which provides personal credit services for lawyers, accountants and their firms, and business loans and lines of credit. The increase in net interest income of $0.9 million or 7.0 percent is due to higher loan volumes in 1999. The major portion of the increases in non-interest income and expense over the prior period reflects the acquisitions of W.M. Ross & Company and Madison Consulting, two insurance subsidiaries, in the second half of 1998. Also contributing to the increase in non-interest income was higher fee income in trust, mutual funds and annuities. Corporate and Other Corporate and Other is primarily comprised of the treasury function, which is responsible for managing interest-rate risk and the investment portfolios. In addition, certain revenues and expenses not considered allocable to a line of business are reflected in this area. Net interest income increased $0.4 million or 1.6 percent from 1998. Asset growth was primarily due to increased securities portfolios, which averaged $10.1 billion for the first quarter of 1999, up $833.5 million or 9.0 percent from the prior year. The decrease in non-interest income in 1999 is primarily attributed to gains on security transactions in the prior period. Year 2000 Readiness Disclosure Issues surrounding the Year 2000 arise out of the fact that many existing computer programs use only two digits to identify a year in the date field. With the approach of the Year 2000, computer hardware and software that are not made Year 2000 ready might interpret "00" as year 1900 rather than year 2000. The Year 2000 problem is not just a technology issue;it also involves the Company's assessment of building equipment, environmental systems, customers, suppliers and third parties. State of Readiness: The Company has been working since 1995 to remediate its information technology ("IT") and non-IT systems for the Year 2000. As of March 31,1999 all of the 330 software systems being tracked by the Company, and the computer equipment they run on, have completed the Company's seven- phase Year 2000 project program, which is as follows: Developing a Strategic Approach, Creating Organizational Awareness, Assessing Actions and Developing Detailed Plans, Renovating (remediating), Validating (testing), Implementing (remediated code into production), and Implementing (totally future-date certified). Additionally, the Company is addressing the Y2K readiness of certain non-critical, stand-alone personal computer(PC)-based software applications. Testing of automated interfaces with customers and other third parties is on schedule for completion by June 30, 1999. Principal settlement methods associated with major payment systems involving systems of other financial institutions and governmental agencies will be tested by June 30, 1999. Non-IT systems have been evaluated and are currently being tested. Approximately 99% of systems with embedded chip technology for all building, environmental, and security systems have been remediated, tested, and confirmed as Year 2000 ready. Telecommunications, both voice and data, are over 95% complete and are expected to be fully remediated, tested, and confirmed as Year 2000 ready by July 1999. Communication with third parties that may have a material relationship with the Company has been initiated to determine whether they have appropriate plans to be Year 2000 ready. An inventory of important vendors has been completed and the Company's vendor risk assessment and preparedness evaluation activities are ongoing. The Company's plans to minimize third-party risk include contingency planning for important vendors. Approximately 85% of the Company's significant vendors have responded to the Year 2000 inquiries made by the Company. Of those who responded, approximately half claim to be currently Year 2000 compliant. Vendor responses were reviewed for completeness and incomplete responses were followed up with additional correspondence, telephone calls or both. In some cases, Year 2000 readiness information was obtained from publicly available sources, including vendor or third party websites. Confidence levels were developed based on the quality of the vendor's responses to the Company's written inquiries and the vendor's prior track record in making its commitments to the Company. With limited exception of the Company's suppliers have been found to be making satisfactory progress toward achieving Y2K readiness. The Company is seeking additional information from vendors and will initiate contingency plans if appropriate. To minimize the impact from those customers who may experience a disruption in their operations because they have not adequately considered Year 2000 issues, a program has been implemented for monitoring and measuring customer Year 2000 readiness. Customers with borrowing commitments of $1 million or more, and customers monitored by the internal risk rating system with outstanding loan balances of $500 thousand or more, have been reviewed for Year 2000 readiness, and will continue to be reviewed on a quarterly basis during 1999. Certain customers have been identified as having additional credit risk as a direct result of the Year 2000. Those risks have been considered and incorporated in the analysis of the adequacy of the loan loss allowance. All new loan customers and renewals of existing loans are assessed as part of the underwriting process. Risks of Year 2000 Issues: Management believes that the Year 2000 project is on schedule and that its efforts are adequate to address Year 2000 issues. However, failure to successfully resolve critical issues could have a material impact on the Company's operations. The primary risks associated with the Year 2000 are as follows: The first is the risk that the Company's systems are not ready for operation by January 1, 2000. These systems must be remediated, tested, and made ready for the Year 2000 in a timely manner. The second is the risk of operational disruption due to operational failures of third parties. Failure of one or more third parties to modify their systems in a timely manner may have a material and adverse effect on the Company's operations. This risk is viewed as the one that is most reasonably likely to occur, therefore appropriate contingency plans are being prepared. The third is the risk of business interruption among customers such that funding and repayment do not take place in a timely manner. As a result, there may be increases in problem loans and credit losses in future years. Costs to Address Year 2000 Issues: The estimated cost of the Year 2000 project is $23 million. The project is staffed with both external contract and internal personnel. This estimate includes the cost of retention programs for key systems personnel, a portion of which will be paid beyond January 1, 2000. To date, incremental internal costs totaling $5.2 million have been incurred. These costs include compensation and benefits for internal personnel assigned full-time to the project, the retention program, and other ancillary costs. In addition, $11.0 million of external costs, including external contract personnel and payments to third parties, have been incurred to date. The total cost incurred to date is $16.2 million. Contingency Plans: The Company has created certain remediation contingency plans and is developing business resumption contingency plans specific to the Year 2000 project. Remediation contingency plans address the actions to be taken if remediation of a mission-critical system falls behind schedule. Remediation for all mission critical systems has been completed. None of the three remediation contingency plans that were prepared for mission-critical systems had to be triggered. Business resumption contingency plans address the actions that will be taken if critical business functions cannot be carried out in the normal manner due to system or third-party failures. These plans supplement existing disaster recovery plans and are being updated to include potential Year 2000 related failures. Updates to the Company's business resumption plan for core business functions are to be completed by June 30,1999. LIQUIDITY Liquidity is the ability to meet the borrowing needs and deposit withdrawal requirements of customers and support asset growth. Principal sources of liquidity are deposit generation, access to purchased funds, maturities and repayments of loans and investment securities and interest and fee income. The consolidated statements of cash flows present the change in cash and due from banks from operating, investing and financing activities. During the first three months of 1999, net cash provided by operating activities totaled $192.8 million. Contributing to net cash provided by operating activities were the results of operations, plus noncash expenses, and proceeds from the sales of mortgages held for sale. Partially offsetting the contributions to operating cash were funds used to originate mortgage loans held for sale and noncash revenues. Net cash used in investing activities totaled $345.4 million. For the three months ended March 31, 1999, net cash used in transactions involving the investment portfolios totaled $407.8 million, while the loan portfolio contributed $66.8 million. Scheduled maturities and anticipated principal repayments of the held to maturity portfolio will approximate $1.8 billion throughout the balance of 1999. In addition, the securities available for sale portfolio provides another source of liquidity. These sources can also be used to meet the funding needs during periods of loan growth. Net cash provided by financing activities, totaled $17.2 million. During the first three months of 1999, other borrowed funds and long-term debt increased $252.6 million. This increase was partially offset by the decrease in total deposits of $78.9 million, the purchase of the Company's common stock of $106.4 million, and the payment of common stock dividends. Liquidity is also available through additional lines of credit and the ability to incur additional debt. The banking subsidiaries have established lines of credit with the Federal Reserve Bank and the Federal Home Loan Bank of New York and other correspondent banks, which further support and enhance liquidity. In addition, in November 1998 two of the Company's banking subsidiaries, Summit Bank (New Jersey) and Summit Bank (Pennsylvania), executed a distribution agreement providing for the possible issuance, from time-to-time, of senior and subordinated notes to a maximum of $3.75 billion on an underwritten or agency basis. Liquidity is also important at the Parent Company in order to provide funds for operations and to pay dividends to shareholders. Parent Company cash requirements are met primarily through management fees and dividends from its subsidiaries, the issuance of short and long-term debt and the exercise of stock options. The amount of dividends that can be assessed to the bank subsidiaries is subject to certain regulatory restrictions. LOOKING AHEAD This report contains certain forward-looking statements, either expressed or implied, which are provided to assist the reader to understand anticipated future financial performance. These forward-looking statements involve certain risks, uncertainties, estimates and assumptions made by management. Factors that may cause actual results to differ from those results expressed or implied include, but are not limited to, the interest rate environment and the overall economy, the ability of customers to repay their obligations, the adequacy of the allowance for loan losses, the progress of integrating acquired financial institutions, competition and technological changes, including the Year 2000 issue. Although management has taken certain steps to mitigate the negative effect of the above mentioned items, significant unfavorable changes could severely impact the assumptions used and have an adverse affect on profitability. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Due to the nature of the Company's business, market risk is primarily its exposure to interest rate risk. Interest rate risk is the impact that changes in interest rates have on future earnings. The principal objective in managing interest rate risk is to maximize net interest income within the acceptable levels of risk that have been previously established by policy. This risk can be reduced by various strategies, including the administration of liability costs, the reinvestment of asset maturities and the use of off-balance sheet financial instruments. The Company has limited risks associated with foreign currencies. Interest rate risk is monitored through the use of simulation modeling techniques which apply alternative interest rate scenarios to periodic forecasts of future business activity, projecting the related impact to net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in varying interest rate environments. Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flow and maturities of all financial instruments including derivatives, anticipated future business activity, deposit sensitivity and changes in market conditions. Selected core deposit rates are held constant based on the results of analysis of historical rate movements. These assumptions are inherently uncertain, and as a result, these models cannot precisely estimate the impact that higher or lower rate environments will have on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, changes in market conditions, as well as changes in management's strategies. Based on the results of the interest simulation model as of March 31, 1999, if interest rates increase or decrease 100 basis points from current rates in an immediate and parallel shock over a twelve month period, the Company would expect a decrease of $29.0 million in net interest income and an increase of $5.0 million in net interest income, respectively. The results of the interest simulation model as of March 31, 1999, do not represent a material change from the amounts previously reported as of December 31, 1998. Interest rate risk management efforts also involve the use of certain derivative financial instruments for the purpose of stabilizing net interest income in a changing interest rate environment. The derivative financial instruments portfolio consists principally of interest rate swaps. At March 31, 1999, the notional values of the swaps were $200.0 million These derivatives resulted in a reduction in net interest income of $.6 million for the first three months of 1999. The cost to terminate these contracts at March 31, 1999, would have been $1.3 million. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Based upon advice of Summit's legal department, management does not believe that the ultimate disposition of the litigation discussed below will have a material adverse effect on the financial position and results of operation of the company and its subsidiaries, taken as a whole. 1. Annette Loatman on behalf of herself and all others similarly situated v. United Jersey Bank, U.S. District Court for the District of New Jersey, Civil Action No. 95-5258 (JBS), filed on October 4, 1995, Robert M. Gundle, III, on behalf of himself and all others similarly situated v. Summit Bank, successor in interest to United Jersey Bank, U.S. District Court for the District of New Jersey, Civil Action No. 96-4477 (JBS), filed on October 14, 1996, and Annette Loatman, on behalf of herself and all others similarly situated v. United Jersey Bank, Superior Court of New Jersey, Camden County, Docket No. L-3527-96 ("the State Action"), filed April 24, 1996, dismissed without prejudice pending the outcome of the federal actions on December 9, 1996, and reinstated October 15, 1997 with Robert M. Gundle, III as an additional named plaintiff. Discovery has been extended until May 17, 1999. On March 30, 1999, plaintiffs filed a motion for partial summary judgment as to liability on their New Jersey Consumer Fraud Act claim. The Bank has filed a cross-motion for dismissal of plaintiffs' Consumer Fraud Act claim. The motions are scheduled to be argued in late May, 1999. 2. In re Payroll Express Corporation et al - John S. Pereira as Chapter 11 Trustee of the Estate of Payroll Express Corporation et al v. United Jersey Bank, United States District Court for the Southern District of New York, Civil Action No. 94-1565 (LAP) ("the Preference Action"), filed December 29, 1993; In re Payroll Express Corporation of New York and Payroll Express Corporation, United States Bankruptcy Court for the Southern District of New York. Case Nos. 92-B-43 149 (CB) and 92-B-43 150 (CB), Adversary Proceeding No. 94-8297A, filed April 22, 1994 ("the Fraudulent Conveyance Action"); Beth Israel Medical Center, et al V. United Jersey Bank and National Westminster Bank New Jersey, United States District Court for the Southern District of New York, Civil Action No. 94-8256 (LAP), filed September 28, 1993; Frederick Goldman, Inc. V. United Jersey Bank and National Westminster Bank New Jersey, United States District Court for the Southern District of New York, Civil Action No, 94-8256 (LAP), filed March 21, 1994; Towers Financial Corporation v. United Jersey Bank, United States District Court for the District of New Jersey, Civil Action No.92-3175 (WGB), filed June 2, 1992, removed to federal court September 2, 1992; New York City Transit Authority V. United Jersey Bank and National Westminster Bank New Jersey, United States District Court for the Southern District of New York, Civil Action No.95-3685 (LAP), filed May 19, 1995;and Copytone, Inc. on behalf of itself and others similarly situated v. United Jersey Bank, National Westminster Bank New Jersey and John Does I through 20, United States District Court for the Southern District of New York, Civil Action No. 95-8217 (LAP), filed November 1995. Expert discovery has been concluded and the court has scheduled a case management conference for April 22, 1999. 3. Daniel Iverson, Lawrence Cohen and Terri Cohen, on behalf of themselves and all others similarly situated v. Collective Bank, a federally chartered savings bank organized under the laws of the United States of America (improperly named as Collective Bancorp, Inc., a Delaware corporation), on behalf of itself and all others similarly situated. Superior Court of New Jersey, Atlantic County, Docket No. ATL-L-2578-95, filed on July 26, 1995. On January 27, 1999, the New Jersey Supreme Court entered an order granting Collective's motion for leave to cross appeal the Appellate Division's ruling concerning federal preemption. The Supreme Court has not yet scheduled a date to hear the parties' appeals. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The annual meeting of the shareholders of Summit Bancorp. was held April 23, 1999. The following is a brief description of each matter voted on at the meeting. PROPOSAL 1 - ELECTION OF DIRECTORS The following directors were nominated for election to the Board of Directors as Class III Directors for a three year term: Robert L. Boyle, Robert G. Cox, Elinor J. Ferdon, William R. Miller and Joseph M. Tabak. William M. Freeman was nominated for election as a Class II Director for a two year term. PROPOSAL 2 - NON- EXECUTIVE OPTION PLAN Shareholders were presented with a proposal to approve the Summit Bancorp. 1999 Non-Executive Option Plan. PROPOSAL 3 - INDEPENDENT ACCOUNTANTS Shareholders were presented with a proposal to ratify the selection of KPMG LLP, independent certified public accountants, to audit the consolidated financial statements of Summit Bancorp. and its subsidiaries for the year ending December 31, 1999. The results of the voting at the annual meeting were as follows: SHARES PROPOSAL FOR WITHHELD - ---------------------------------------------------------------------------- 1 - Election of Directors - ---------------------------------------------------------------------------- Robert L. Boyle 144,071,950 1,837,445 Robert G. Cox 144,052,176 1,857,219 Elinor J. Ferdon 144,112,333 1,797,062 William M. Freeman 144,038,204 1,871,191 William R. Miller 144,003,242 1,906,153 Joseph M. Tabak 144,067,348 1,842,047 - ----------------------------------------------------------------------------- FOR AGAINST ABSTAIN - ----------------------------------------------------------------------------- 2 - Non-Executive Option Plan 101,824,535 13,046,796 1,461,701 - ----------------------------------------------------------------------------- 3 - Independent Accountants 144,288,129 724,869 896,397 - ----------------------------------------------------------------------------- ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits (10) N. Summit Bancorp. 1999 Non-Executive Option Plan (incorporated by reference to Appendix A to the Proxy Statement of the Registrant dated March 9, 1999) (27) Summit Bancorp. Financial Data Schedule - March 31, 1999. (b) Reports on Form 8-K In a current report on Form 8-K dated April 27, 1999, the Registrant under Item 5, Other Events and Item 7, Financial Statements and Exhibits, filed a portion of the consolidated financial statements and notes thereto to be included in the Registrant's Form 10-Q for the quarterly period ended March 31, 1999, being filed herewith. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Registrant SUMMIT BANCORP. DATE:May 17, 1999 BY:/s/Paul V. Stahlin --------------- Paul V. Stahlin Senior Vice President, Comptroller and Principal Accounting Officer (Duly Authorized Officer) EXHIBIT INDEX Exhibit No. Description (10) N. Summit Bancorp. 1999 Non-Executive Option Plan (incorporated by reference to Appendix A to the Proxy Statement of the Registrant dated March 9, 1999) (27) Summit Bancorp. Financial Data Schedule - March 31, 1999. EX-27 2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 1999 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 3-MOS DEC-31-1999 MAR-31-1999 1,000,977 27,407 11,701 10,217 3,860,136 6,583,209 0 21,153,707 328,302 33,477,377 23,220,148 3,281,005 529,791 3,734,392 0 0 142,074 2,569,967 33,477,377 403,667 156,183 595 560,445 162,977 255,101 305,344 16,500 217 205,437 181,564 118,741 0 0 118,741 0.68 0.68 3.98 90,065 38,971 0 63,587 322,814 19,959 6,807 328,302 164,971 0 163,331
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