-----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, IGESkgNSDZgGeSPDviTyv0E7zU8FKlWWpKSczZ9R6YGP4rKbvKadbkDY6MsSZB7A LfFvSX+BsDyK80FS6ZuFyw== 0000950130-97-003324.txt : 19970729 0000950130-97-003324.hdr.sgml : 19970729 ACCESSION NUMBER: 0000950130-97-003324 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970728 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970728 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06451 FILM NUMBER: 97646456 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 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K -------- CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): July 28, 1997 Summit Bancorp. ----------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter New Jersey 1-6451 22-1903313 --------------------------------------------------------------------------- (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) 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) -1- ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. ------------------------------------------------------------------- On February 27, 1997 The Registrant entered into an Agreement and Plan of Merger with Collective Bancorp, Inc. ("Collective") which provides for the merger of Collective with and into The Registrant (the "Merger") (a) Financial Statements of Business to be Acquired. (i) The following financial information for Collective Bancorp, Inc. ("Collective") was filed as part of the Annual Report on Form 10-K of Collective for the fiscal year ended June 30, 1996 and is filed herewith: Statements of Consolidated Financial Condition at June 30, 1996 and 1995 4 Statements of Consolidated Operations for the years ended June 30, 1996, 1995 and 1994 5 Statements of Consolidated Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994 6 Statements of Consolidated Cash Flows for the years ended June 30, 1996, 1995, and 1994 7 Notes to Consolidated Financial Statements 8 Independent Auditors' Reports 29
(ii) Interim Financial Information - The following financial information for Collective was filed on Form 10-Q of Collective for the quarter ended March 31, 1997 and is filed herein: Statements of Consolidated Financial Condition at March 31, 1997 and June 30, 1996 31 Statements of Consolidated Operations for three months and nine months ended March 31, 1997 and 1996 32 Statements of Consolidated Stockholders' Equity for the nine months ended March 31, 1997 33 Statements of Consolidated Cash Flows for the nine months ended March 31, 1997 and 1996 34 Notes to Consolidated Financial Statements 35
(b) Pro Forma Financial Information. 37 (i) Pro Forma Condensed Combined Balance Sheet dated March 31, 1997. 38 (ii) Pro Forma Condensed Combined Income Statements for the three months ended March 31, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994. 39 (iii) Notes to Pro Forma Financial Information 44
-2- (c) Exhibits 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Deloitte & Touche LLP -3- Collective Bancorp, Inc. and Subsidiary STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
June 30 (Dollar amounts in thousands except per share data) 1996 1995 - --------------------------------------------------------------------------------------------------- ASSETS Cash $ 65,084 $ 66,256 Federal funds sold 3,646 3,717 --------------------------- Total cash and cash equivalents 68,730 69,973 Trading securities, at market value (note 7) -- 13,328 Loans held for sale, at amortized cost, market value of $5,231 in 1996 and $5,836 in 1995 (note 6) 5,186 5,815 Securities available for sale, at market value (notes 5 and 7) 162,284 113,635 Investment securities, at amortized cost, market value of $271,650 in 1996 and $317,221 in 1995 (note 5) 276,171 315,879 Loans receivable, net (notes 6, 12, and 15) 2,548,150 2,373,706 Mortgage-backed securities, market value of $1,896,831 in 1996 and $2,027,783 in 1995 (notes 7 and 12) 1,973,642 2,100,344 Real estate acquired in settlement of loans, net (note 8) 5,427 6,476 Land, office buildings, and equipment, net (note 9) 39,239 39,313 Other assets (notes 7, 10, and 13) 42,335 43,072 Core deposit premium (note 2) 8,191 10,873 Goodwill (note 2) 16,116 18,103 --------------------------- Total assets $5,145,471 $5,110,517 - --------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 11) Demand deposits, non-interest bearing $ 95,792 $ 76,705 Demand deposits, interest bearing 508,295 451,350 Savings and investment accounts 845,199 833,041 Savings certificates 1,805,101 1,916,727 --------------------------- Total deposits 3,254,387 3,277,823 Federal Home Loan Bank advances (note 12) -- 395,000 Other borrowed funds (notes 7 and 12) 1,473,448 1,052,920 Payable to brokers for securities purchased (note 12) -- 7,600 Advance payments by borrowers for taxes and insurance 26,852 29,462 Other liabilities (note 13) 26,480 19,920 --------------------------- Total liabilities 4,781,167 4,782,725 ---------------------------- Commitments (notes 9 and 15) Stockholders' equity (notes 5, 7, 12, 16 and 17) Common stock, par value $.01 per share; authorized - 37,000,000 shares; issued - 20,418,641 shares in 1996 and 20,356,768 shares in 1995; outstanding - 20,374,141 shares in 1996 and 20,356,768 shares in 1995 204 204 Preferred stock, par value $.01 per share; authorized 2,500,000 shares; none outstanding -- -- Additional paid-in capital 59,699 59,299 Treasury stock, at cost; 44,500 shares (1,093) -- ESOP debt (notes 12 and 14) (5,816) (6,892) Unrealized appreciation on available for sale securities, net of tax (note 13) 1,090 2,136 Retained earnings, substantially restricted 310,220 273,045 --------------------------- Total stockholders' equity 364,304 327,792 --------------------------- Total liabilities and stockholders' equity $5,145,471 $5,110,517 - --------------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
-4- Collective Bancorp, Inc. and Subsidiary STATEMENTS OF CONSOLIDATED OPERATIONS
Year Ended June 30 (Dollar amounts in thousands except per share data) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on mortgage loans $175,448 $150,044 $117,246 Interest on other loans 15,893 14,540 11,771 Interest on mortgage-backed securities 140,783 147,280 129,993 Interest and dividends on investments 23,561 24,453 10,560 ------------------------------------ Total interest and dividend income 355,685 336,317 269,570 ------------------------------------ INTEREST EXPENSE Interest on deposits (note 11) 131,500 115,570 95,186 Interest on Federal Home Loan Bank advances and other borrowed funds 82,413 80,286 28,573 ------------------------------------ Total interest expense 213,913 195,856 123,759 ------------------------------------ Net interest income before provision for loan losses 141,772 140,461 145,811 Provision for loan losses (note 6) 2,035 240 2,352 ------------------------------------ Net interest income after provision for loan losses 139,737 140,221 143,459 ------------------------------------ OTHER INCOME Loan servicing 4,143 3,891 4,279 Gain (Loss) on sale of loans and securities 1,060 (11) 2,722 Unrealized appreciation on trading securities -- 201 -- Unrealized depreciation on available for sale securities -- -- (5,648) Financial service fees and other income 10,394 9,362 6,307 ------------------------------------ Total other income 15,597 13,443 7,660 ------------------------------------ Total income before other expense 155,334 153,664 151,119 ------------------------------------ OTHER EXPENSE Compensation and employee benefits (note 14) 28,602 27,490 23,832 Occupancy expense 10,746 9,986 8,703 Advertising 1,298 1,165 812 Deposit insurance 6,085 6,796 6,093 Computer services 4,782 4,556 4,178 Loan expense 2,905 2,350 3,760 Real estate operations 687 (1,137) 444 Amortization of intangibles 4,669 4,202 1,573 Other expenses 10,757 10,070 9,295 ------------------------------------ Total other expense 70,531 65,478 58,690 ------------------------------------ Income before income taxes 84,803 88,186 92,429 Income taxes (note 13) 30,303 30,644 33,062 ------------------------------------ Net income $ 54,500 $ 57,542 $ 59,367 ------------------------------------ PER SHARE DATA Primary net income per share $2.67 $2.80 $2.89 Fully diluted net income per share $2.67 $2.80 $2.89 Dividends per common share $0.85 $0.65 $0.57 Average primary shares outstanding 20,445,766 20,569,140 20,562,753 Average fully diluted shares outstanding 20,445,766 20,579,904 20,572,028 ---------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
-5- Collective Bancorp, Inc. and Subsidiary STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Unrealized Appreciation Additional on Available (Dollar amounts in thousands Common Paid-In Treasury ESOP for Sale Retained except per share data) Stock Capital Stock Debt Securities Earnings Total - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1993 $202 $58,055 -- $(4,551) -- $180,875 $234,581 - ------------------------------------------------------------------------------------------------------------------------------ Net income for year ended June 30, 1994 -- -- -- -- -- 59,367 59,367 Stock options exercised 1 563 -- -- -- -- 564 Dividends on common stock - $.57 per share -- -- -- -- -- (11,535) (11,535) Additional ESOP debt -- -- -- (4,060) -- -- (4,060) ESOP debt repayment -- -- -- 811 -- -- 811 - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1994 203 58,618 -- (7,800) -- 228,707 279,728 - ------------------------------------------------------------------------------------------------------------------------------ Net income for year ended June 30, 1995 -- -- -- -- -- 57,542 57,542 Stock options exercised 1 681 -- -- -- -- 682 Dividends on common stock - $.65 per share -- -- -- -- -- (13,204) (13,204) ESOP debt repayment -- -- -- 908 -- -- 908 Securities valuation -- -- -- -- $2,136 -- 2,136 - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1995 204 59,299 -- (6,892) 2,136 273,045 327,792 - ------------------------------------------------------------------------------------------------------------------------------ Net income for year ended June 30, 1996 -- -- -- -- -- 54,500 54,500 Stock options exercised -- 279 -- -- -- -- 279 Dividends on common stock - $.85 per share -- -- -- -- -- (17,325) (17,325) Purchase of treasury stock -- -- $(1,093) -- -- -- (1,093) ESOP debt repayment -- -- -- 1,076 -- -- 1,076 ESOP shares released -- 121 -- -- -- -- 121 Securities valuation -- -- -- -- (1,046) -- (1,046) - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1996 $204 $59,699 $(1,093) $(5,816) $1,090 $310,220 $364,304 - ------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to the consolidated financial statements.
-6- Collective Bancorp, Inc. and Subsidiary STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended June 30 (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Operating Activities Interest received $ 351,477 $ 324,519 $ 255,888 Interest paid (213,400) (195,206) (121,475) Operating expenses (67,255) (64,940) (60,146) Sales of trading securities 13,328 -- -- Loan fees 5,070 8,272 7,316 Other income received 15,797 13,242 7,660 Income taxes paid (23,249) (30,704) (27,260) ------------------------------------ Net cash provided by operating activities 81,768 55,183 61,983 ------------------------------------ Investing Activities Loan originations (634,001) (690,833) (895,420) Purchases of loans (23,990) (95,583) (407) Purchases of mortgage-backed securities (14,023) (128,306) (1,578,796) Repayment of loan principal 381,217 286,594 416,294 Repayment of mortgage-backed security principal 145,074 150,433 749,117 Sales of loans held for sale 107,707 43,199 11,075 Reduction of payable to brokers -- -- (79,600) Purchases of investment securities (330,971) (196,846) (152,734) Sales of securities available for sale -- 18,961 26 Purchases of mortgage-backed securities available for sale (98,937) (36,407) (99,875) Sales of mortgage-backed securities available for sale 60,204 110,342 269,869 Repayment of principal on mortgage-backed securities available for sale 19,084 19,901 63,204 Maturities of investment securities 331,549 21,571 11,528 Net decrease in real estate owned 1,048 2,045 5,673 Net change in loans maturing in 3 months or less (5,000) -- -- Cash obtained from acquisitions -- 90,929 264,938 Other investing, net (533) (5,636) (13,958) ------------------------------------ Net cash used for investing activities (61,572) (409,636) (1,029,066) ------------------------------------ Financing Activities Net change in deposits (23,436) 174,043 (74,114) Net change in Federal Home Loan Bank advances (395,000) 30,000 230,000 Net change in other borrowed funds 420,528 157,005 718,742 Net (decrease) increase in advance payments by borrowers for taxes and insurance (2,610) 3,543 (1,179) Dividends paid (16,304) (12,172) (10,913) Other financing, net (4,617) 1,057 (15,083) ------------------------------------ Net cash (used for) provided by financing activities (21,439) 353,476 847,453 ------------------------------------ Net decrease in cash and cash equivalents (1,243) (977) (119,630) Cash and cash equivalents, beginning of period 69,973 70,950 190,580 ------------------------------------ Cash and cash equivalents, end of period $ 68,730 $ 69,973 $ 70,950 ------------------------------------ Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $ 54,500 $ 57,542 $ 59,367 Net change in trading securities 13,328 -- -- Amortization and accretion of deferred charges and credits, net (2,462) (5,985) (4,484) Amortization of intangibles 4,669 4,202 1,573 Accrued income and expense 16,784 6,447 13,763 Deferred income and expense (13,131) (12,618) (15,817) Provision for loan and real estate owned losses 2,312 470 3,478 Depreciation and amortization 4,692 4,217 3,292 ESOP debt repayment 1,076 908 811 ------------------------------------ Net cash provided by operations $ 81,768 $ 55,183 $ 61,983 ------------------------------------
Supplemental Schedule of 1996 Noncash Investing Activities During the year ended June 30, 1995, Collective assumed deposit liabilities and purchased real property from Sovereign Bank partially offset by the sale of certain Collective deposit liabilities. The fair values of net liabilities assumed and noncash assets acquired were $100,035,000 and $1,531,000, respectively. During fiscal 1994, mortgage-backed securities in the amount of $203,519,000 were reclassified from held to maturity to available for sale. During the year ended June 30, 1994, Collective acquired Hansen Federal Savings Bank and White Horse Federal Savings and Loan. The fair values of the noncash assets acquired were $21,208,000 and $3,050,000, respectively, and the fair values of the liabilities assumed were $248,605,000 and $37,494,000, respectively. During fiscal 1996, 1995, and 1994, the balance of loans receivable transferred to real estate acquired in settlement of loans was $9,436,000, $12,448,000, and $15,671,000,respectively. See accompanying notes to the consolidated financial statements. -7- Collective Bancorp, Inc. and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Collective Bancorp, Inc. and subsidiary ("Collective") follow accounting principles and reporting practices normally followed by thrift institutions, which are in conformity with generally accepted accounting principles. The more significant accounting policies are summarized below. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Collective and its wholly-owned subsidiary, Collective Bank. Collective's business is conducted primarily through Collective Bank and subsidiaries ("Collective Bank"). All significant intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and in banks, federal funds sold and interest-bearing deposits and securities purchased under agreements to resell with original maturities of three months or less. Investment Policy Collective classifies all mortgage-backed and investment securities as either held to maturity, available for sale, or trading in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Mortgage-backed and investment securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts over the term of the related securities using the interest method. Collective has the ability and positive intent to hold these securities to maturity, and, accordingly, adjustments are not made for temporary declines in fair value below amortized cost. A decline in the fair value of any held to maturity security that is deemed other than temporary is charged to earnings. The investment in Federal Home Loan Bank stock is carried at cost. Mortgage-backed and investment securities classified as available for sale are carried at fair (market) value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Realized gains and losses are reported in earnings. Trading securities are stated at fair value. Unrealized gains and losses are included in earnings. Loans Receivable Loans receivable, other than loans held for sale, are stated at unpaid principal balance less unearned discounts, unamortized premiums, net deferred loan origination and commitment fees, and the allowance for loan losses. Discounts and premiums are recognized in income using the level-yield method over the estimated lives of the loans. Loans held for sale are carried at the lower of cost or market with any unrealized losses charged to earnings. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the specifically identified loans or recognized as the loans are sold or prepaid. At the discretion of management, Collective provides an allowance for accrued interest on loans which are more than 90 days past due. This allowance is netted against accrued interest receivable, which is included in other assets for financial statement purposes. Income is subsequently recognized only to the -8- extent that cash payments are received and, in management's judgment, the borrower's ability to make periodic interest and principal payments is probable, in which case the loan is returned to accrual status. Real Estate Acquired in Settlement of Loans Real estate acquired in settlement of loans is carried at the lower of fair value, less estimated costs to sell, or cost (carrying value or fair value at the date of acquisition). Specific valuation allowances on real estate owned are recorded through a charge to earnings if there is a further deterioration in fair value. Subsequent costs directly related to the completion of construction or improvement of the real estate are capitalized to the extent realizable. Gains and losses on sale of real estate are recognized upon disposition of the property to the extent allowable based on accounting requirements. Carrying costs, such as maintenance, interest, and taxes, are charged to operations as incurred. Land, Office Buildings, and Equipment Land, office buildings, and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method based on the estimated useful life of the related asset. The cost of leasehold improvements is amortized over the estimated life of the improvement or the term of the lease, whichever is shorter. The asset cost and accumulated depreciation or amortization for property retirements and disposals are eliminated from the respective accounts, and any resulting gain or loss is included in income. The costs of maintenance and repairs are charged to operating expense as incurred. The cost of major additions and improvements is capitalized. Income Taxes Collective files a consolidated federal income tax return and separate state tax returns. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized. Management believes, based upon current facts, that more likely than not there will be sufficient taxable income in future years to realize any deferred tax assets. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Core Deposit Premium The premium resulting from the valuation of core deposits acquired in business combinations or in the purchase of branch offices is amortized using the interest method over a period not exceeding the estimated average remaining life of the existing customer deposit base acquired. Amortization periods are monitored to determine if events and circumstances require such periods to be reduced. Goodwill The cost in excess of the fair value of the net tangible and identified intangible assets acquired in the purchase of a banking or thrift institution ("goodwill") is amortized to expense over the estimated remaining life of the long-term interest-earning assets acquired. Goodwill recorded in the purchase of branch offices is amortized to expense using the straight line method over the estimated life of the deposits acquired, generally ten years. Sale of Loans and Mortgage-Backed Securities Gains and losses on the sale of loans and MBS's consist of both a cash and a present value gain or loss. A cash gain or loss is recognized to the extent that the sale proceeds exceed or are less than the carrying value of the loans and MBS's at the time of sale. The carrying value is determined by adjusting the -9- unpaid principal balance by net deferred loan fees, premiums, discounts, and the portion of the basis allocated to capitalized (originated) mortgage servicing rights ("OMSR") in accordance with Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights". A present value gain or loss (excess servicing) relating to sales of MBS's and loans sold with servicing retained is calculated based on the difference between the MBS or loan interest rate and the net yield to the investor excluding a normal servicing fee and considering estimated prepayments on such loans. The resulting servicing rights, both OMSR and excess, are amortized in proportion to and over the estimated period servicing income is earned using the level yield method. Amortization or accretion of these amounts is monitored and adjusted, if necessary, on a periodic basis to reflect prepayments if higher than originally anticipated. Provisions for Losses Provisions for losses include charges to reduce the carrying value of loans receivable and real estate acquired in settlement of loans to their fair value. Such provisions are based on management's estimates using past experience, known and inherent risks in the loan and real estate owned portfolios, adverse situations that may affect borrowers' ability to repay, estimated value of any underlying loan collateral or real estate owned, and current economic conditions. Provisions for losses on real estate acquired in settlement of loans are included in real estate operations expense in the Statements of Consolidated Operations. Recovery of the carrying value of such loans and real estate is dependent to a great extent on conditions that may be beyond management's control. In the opinion of management, Collective has made adequate loss provisions based on all available and relevant information affecting the loan and real estate portfolios. It must be understood, however, that there are inherent risks and uncertainties related to the operation of a financial institution. By necessity, Collective's consolidated financial statements are dependent upon estimates, appraisals, and evaluations of loans. Therefore, the possibility exists that abrupt changes in such estimates, appraisals, and evaluations might be required because of changing economic conditions and the economic prospects of borrowers. Recently Issued Accounting Standards In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114 addresses the criteria for accounting for loans that have been impaired. It requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective rate or, as a practical expedient, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Although SFAS 114 is effective for fiscal years beginning after December 15, 1994, Collective elected to adopt the Statement for its fiscal year ended June 30, 1995. Upon adoption on July 1, 1994, Collective reclassified $17,307,000 of loans foreclosed in-substance and $6,312,000 in related reserves from real estate acquired in settlement of loans to loans receivable in the Statements of Consolidated Financial Condition. In November 1993, the Accounting Standards Division of the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). This SOP provides guidance on employers' accounting for employee stock ownership plans ("ESOP"). The SOP addresses measurement of compensation cost, the treatment of dividends on shares held by an ESOP, and the financial reporting of leveraged and nonleveraged ESOP transactions. Collective adopted SOP 93-6 effective July 1, 1994. The adoption did not have a material effect on Collective's financial condition or results of operations. In October 1994, the FASB issued Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan" ("SFAS 118"). SFAS 118 amends SFAS 114 to eliminate the provisions that described how a creditor should report income on an impaired loan. It also amends certain disclosure requirements of SFAS 114. The Statement is effective for fiscal years beginning after December 31, 1994, although earlier application is encouraged. -10- Collective adopted the provisions of SFAS 118 during its fiscal year ended June 30, 1995. It did not have a material effect on Collective's financial condition or results of operations. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The Statement also requires that long-lived assets and certain identifiable intangibles be reported at the lower of carrying amount or fair value less cost to sell. The Statement is effective for Collective's fiscal year beginning July 1, 1996. The adoption of SFAS 121 is not expected to have a material effect on Collective's financial condition or results of operations. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS 65"), to require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. The Statement applies prospectively in fiscal years beginning after December 15, 1995 although earlier application is encouraged. Collective adopted the provisions of SFAS 122 in its fiscal year ended June 30, 1995. The adoption did not have a material effect on Collective's financial condition or results of operations (see note 7). In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. SFAS 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. The Statement provides a fair value based method for measuring compensation cost associated with stock-based compensation and also allows, as an alternative, the intrinsic value based method which is prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Since most stock compensation plans have no intrinsic value at grant date, the latter method often results in no recognition of compensation cost. Under SFAS 123 entities that elect to remain with the intrinsic value based method must also make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting had been applied. The Statement applies to transactions entered into in fiscal years that begin after December 15, 1995, though they may be adopted on issuance. Pro forma disclosures required for entities that elect to measure compensation cost using the intrinsic value based method must include the effects of all awards granted in fiscal years that begin after December 15, 1994. Collective intends to continue accounting for stock-based compensation under APB 25 and will include the pro forma disclosures required by SFAS 123 in financial statements issued for fiscal years beginning July 1, 1996. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS125 amends portions of SFAS 115, amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS 65, and supersedes SFAS 122. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The Statement also defines accounting treatment for servicing assets and other retained interests in the assets that are transferred. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. The adoption of the Statement is not expected to have a material effect on Collective's financial condition or results of operations. -11- Reclassifications Certain amounts in the consolidated financial statements of prior years have been reclassified to conform with the presentation used in the current year. 2. Business Combinations On May 21, 1996, Collective entered into an agreement to acquire Continental Bancorporation, a state chartered commercial bank with assets of approximately $187,000,000 (unaudited) at June 30, 1996. The acquisition is subject to regulatory approval, is anticipated to be completed by December 1996, and will be accounted for under the purchase method of accounting. On April 21, 1995, Collective purchased certain assets and assumed the deposit account liabilities of seven offices of Sovereign Bancorp, Inc. ("Sovereign") pursuant to an agreement entered into on January 17, 1995. As part of this same agreement, Sovereign purchased certain assets and assumed the deposit account liabilities of Collective's Wilmington, Delaware office. The net deposit liabilities assumed by Collective amounted to $99,818,000 and the net assets received, consisting primarily of cash, amounted to $92,210,000. The fair value of liabilities assumed exceeded the fair value of tangible assets acquired by $8,334,000. This was allocated to core deposit premium and goodwill of $2,819,000 and $5,515,000, respectively. The acquisition was accounted for by the purchase method. On May 6, 1994, Collective purchased certain assets and assumed the deposit account liabilities of White Horse Federal Savings and Loan Association from the Resolution Trust Corporation. The deposit liabilities assumed amounted to $37,494,000, and the assets received consisted primarily of cash amounting to $35,322,000. The fair value of liabilities assumed exceeded the fair value of tangible assets acquired by $2,315,000. This was allocated to core deposit premium and goodwill of $1,359,000 and $956,000, respectively. The acquisition was accounted for by the purchase method. On April 15, 1994, Collective purchased certain assets and assumed the deposit account liabilities of Hansen Federal Savings Bank from the Resolution Trust Corporation. The deposit liabilities assumed amounted to $248,605,000, and the assets received consisted primarily of cash amounting to $231,073,000. The fair value of liabilities assumed exceeded the fair value of tangible assets acquired by $19,811,000. This was allocated to core deposit premium and goodwill of $6,220,000 and $13,591,000, respectively. The acquisition was accounted for by the purchase method. The following summarizes the business combinations of Collective during the three years in the period ended June 30, 1996, all of which were accounted for by the purchase method of accounting:
Cash Name of Institution/Branches Acquired Deposits Premiums Intangibles (Dollar amounts in thousands) Date Acquired Paid Recorded - ------------------------------------------------------------------------------------------------- Hansen Federal Savings (9 offices) 04/15/94 $248,605 $18,145 $19,811 White Horse Federal Savings (2 offices) 05/06/94 37,494 2,301 2,315 Sovereign Bank (7 offices) 04/21/95 99,818 7,481 8,334 - ------------------------------------------------------------------------------------------------- Total $385,917 $27,927 $30,460 - -------------------------------------------------------------------------------------------------
The results of the acquired entities have been included in the Statements of Consolidated Operations from the dates of acquisition. The acquisitions did not have a material effect on the results of operations for the year of acquisition. If all the acquisitions had occurred at the beginning of the year of acquisition or the preceding year, the effect on such years also would have not been material. -12- The balances of purchase accounting adjustments at June 30, 1996, resulting from prior year acquisitions, and the accretion and amortization of such adjustments (net increase or decrease in income) are summarized as follows:
Balance as of June 30 Year ended June 30 --------------------- -------------------------------- (Dollar amounts in thousands) 1996 1995 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Premiums and discounts on loans receivable $ 800 $ 575 $ 225 $ (19) $ 966 Premiums and discounts on other assets and liabilities (542) 99 (641) 1,311 2,621 Core deposit premium 8,191 10,873 (2,682) (2,672) (1,330) Goodwill 16,116 18,103 (1,987) (1,530) (243) - ---------------------------------------------------------------------------------------------- Total $24,565 $29,650 $(5,085) $(2,910) $ 2,014 - ----------------------------------------------------------------------------------------------
3.Fair Values of Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Because no quoted market price exists for a significant portion of Collective's financial instruments, the fair values of such financial instruments are derived based on the amount and timing of future cash flows, estimated discount rates, as well as management's best judgment with respect to current economic conditions. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. The fair value information provided is indicative of the estimated fair values of those financial instruments and should not be interpreted as an estimate of the value of Collective, taken as a whole. The disclosures do not address the value of recognized and unrecognized non-financial assets and liabilities or the value of future anticipated business.
June 30, 1996 June 30, 1995 ----------------------- ------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 68,730 $ 68,730 $ 69,973 $ 69,973 Trading securities -- -- 13,328 13,328 Loans held for sale 5,186 5,231 5,815 5,836 Securities available for sale 162,284 162,284 113,635 113,635 Investment securities 276,171 271,650 315,879 317,221 Loans receivable 2,548,150 2,505,002 2,373,706 2,362,223 Mortgage-backed securities 1,973,642 1,896,831 2,100,344 2,027,783 Capitalized loan servicing rights 4,232 5,795 3,638 3,638 Liabilities: Deposits 3,254,387 3,249,977 3,277,823 3,286,262 Federal Home Loan Bank advances -- -- 395,000 395,000 Other borrowed funds 1,473,448 1,473,448 1,052,920 1,052,920 Off Balance Sheet Instruments: Loan servicing rights -- 8,642 -- 7,329 Nonfinancial Instruments: Core deposit intangible 8,191 93,880 10,873 65,178 - ---------------------------------------------------------------------------------------------------------------------------
-13- The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and cash equivalents - The carrying amount of these items is a reasonable estimate of their fair value. Trading securities, loans held for sale, and securities available for sale - The fair value of these items is calculated by using the quoted market price of securitized loans and securities. Investment securities - The fair values are based on quoted market prices or dealer quotes. The fair values of restricted equity securities are estimated to approximate their carrying values. Loans receivable - For certain homogeneous categories of loans, such as fixed and variable residential mortgages, fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other loan types is estimated by discounting the future cash flows and prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were fair valued at carrying value because of their floating rate or expected maturity characteristics. Mortgage-backed securities - Estimated fair value for mortgage-backed securities issued by quasi-governmental agencies is based on quoted market prices where available or discounted cash flows. The fair value of mortgage-backed securities issued by non-quasi-governmental agencies is estimated based on similar securities with quoted market prices and adjusted for any differences in credit ratings or maturities. Capitalized loan servicing rights - Capitalized loan servicing rights are comprised of excess servicing and originated mortgage servicing rights ("OMSR") in accordance with SFAS 122. The fair value of excess servicing on loans serviced for others was determined based on the estimated discounted net cash flows to be received less the normal costs of servicing. The estimated fair value of OMSR approximates the amount for which the servicing currently could be sold. Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. FHLB advances and other borrowed funds - Estimated fair value is based on rates currently available to Collective Bank for debt with similar remaining maturities. Loan servicing rights - The fair value of off balance sheet loan servicing rights approximates the amount for which the servicing currently could be sold. Core deposit valuation - The estimated fair value ascribed to core deposits is calculated based on an estimate of cost savings from the low cost of such deposits over their estimated life, discounted using an incremental cost of funds rate. 4. Securities Purchased Under Agreements to Resell Collective enters into purchases of securities under agreements to resell. There were no agreements outstanding at June 30, 1996 and 1995, but during the year securities purchased under agreements to resell were delivered by entry into accounts maintained by Collective Bank at the Federal Reserve Bank of Philadelphia. These securities averaged $17,461,000 and $57,714,000 for 1996 and 1995, respectively, with maximum amounts outstanding at any month-end of $102,969,000 and $86,390,000, respectively. -14- 5. Investment Securities Investment securities consisted of the following:
June 30, 1996 ---------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available for sale FNMA Preferred Stock $ 31,600 -- $ (236) $ 31,364 FHLMC Preferred Stock 35,875 -- -- 35,875 - ----------------------------------------------------------------------------------------------- Total $ 67,475 -- $ (236) $ 67,239 - ----------------------------------------------------------------------------------------------- Held to maturity U.S. government and agency obligations $220,460 $ 64 $(4,723) $215,801 State and municipals 9,979 138 -- 10,117 Federal Home Loan Bank stock (note 12) 45,103 -- -- 45,103 Other investments 629 -- -- 629 - ----------------------------------------------------------------------------------------------- Total $276,171 $202 $(4,723) $271,650 - -----------------------------------------------------------------------------------------------
June 30, 1995 ---------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available for sale FHLMC Preferred Stock $ 35,875 $ 187 -- $ 36,062 - ----------------------------------------------------------------------------------------------- Held to maturity U.S. government and agency obligations $279,585 $1,206 $(18) $280,773 State and municipals 12,227 155 (1) 12,381 Federal Home Loan Bank stock (note 12) 23,389 -- -- 23,389 Other investments 678 -- -- 678 - ----------------------------------------------------------------------------------------------- Total $315,879 $1,361 $(19) $317,221 - -----------------------------------------------------------------------------------------------
Investment securities at June 30, 1996:
Estimated Amortized Market (Dollar amounts in thousands) Cost Value - ----------------------------------------------------------------------------------------------- Available for sale No maturity $ 67,475 $ 67,239 - ----------------------------------------------------------------------------------------------- Held to maturity No maturity $ 45,103 $ 45,103 Due in one year or less 7,545 7,545 Due after one year through five years 106,952 105,191 Due after five years through ten years 63,296 62,396 Due after ten years 53,275 51,415 - ----------------------------------------------------------------------------------------------- Total $276,171 $271,650 - -----------------------------------------------------------------------------------------------
-15- 6. Loans Receivable Loans receivable consisted of the following:
June 30 1996 1995 ------------------------------------------------------ Estimated Estimated (Dollar amounts in thousands) Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------------- First mortgage loans - Conventional $2,026,125 $1,979,102 $1,944,946 $1,928,508 FHA 37,580 37,772 41,257 42,746 VA 43,495 43,733 47,407 49,058 Construction and development loans 39,805 39,604 26,290 26,159 - ---------------------------------------------------------------------------------------------- 2,147,005 2,100,211 2,059,900 2,046,471 - ---------------------------------------------------------------------------------------------- FHA Title I improvement loans 291 324 410 453 Loans to depositors, secured by savings accounts 3,137 3,192 4,170 4,204 Second mortgage loans 102,610 106,693 57,383 60,250 Education loans 9,463 9,520 9,992 9,923 Home equity credit lines 70,299 69,717 77,217 76,530 Commercial loans 238,706 238,759 189,816 189,662 Other loans 6,060 6,007 4,231 4,143 - ---------------------------------------------------------------------------------------------- 2,577,571 2,534,423 2,403,119 2,391,636 - ---------------------------------------------------------------------------------------------- Less - Deferred loan fees 4,976 4,976 6,511 6,511 Deferred discounts (800) (800) (575) (575) Loans in process 12,354 12,354 9,351 9,351 Allowance for loan losses 12,891 12,891 14,126 14,126 - ---------------------------------------------------------------------------------------------- Total $2,548,150 $2,505,002 $2,373,706 $2,362,223 - ----------------------------------------------------------------------------------------------
Activity in the allowance for loan losses, established primarily for mortgage loans, was as follows:
Year Ended June 30 - ---------------------------------------------------------------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Beginning balance $14,126 $18,006 $22,291 Provision for losses 2,035 240 2,352 Charge-offs and adjustments, net (3,270) (4,120) (6,637) - ---------------------------------------------------------------------------------------------- Ending balance $12,891 $14,126 $18,006 - ----------------------------------------------------------------------------------------------
-16- Nonperforming (impaired) loans at June 30, 1996 and 1995 were $23,166,000 and $21,876,000, respectively before specific allowances of $6,055,000 at June 30, 1996 and $5,753,000 at June 30, 1995. The allowance for delinquent interest on loans (included in other assets) totalled $674,000 at June 30, 1996 and $655,000 at June 30, 1995. (See note 1, "Loans Receivable", for a discussion of Collective's policy for recognizing interest income on impaired loans, including the treatment of payments received.) Nonperforming loans averaged $24,650,000, $26,077,000, and $38,768,000 for the years ended June 30, 1996, 1995, and 1994, respectively. No interest income was recognized on those loans during the period of impairment. At June 30, 1996, 1995, and 1994 the balance of loans serviced for others was $707,793,000, $695,069,000, and $725,440,000, respectively. Servicing loans generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Loan servicing income includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with loans serviced for others, Collective held borrowers' escrow balances of $7,566,000 and $8,086,000 at June 30, 1996 and 1995, respectively. At June 30, 1996 and 1995, Collective maintained an inventory of first mortgage loans held for sale of $5,186,000 and $5,815,000, respectively. No valuation allowance was established at June 30, 1996 and 1995 as the market value of those loans exceeded their carrying value. Collective originates and purchases adjustable and fixed interest rate loans. At June 30, 1996, the composition of these loans was as follows:
(Dollar amounts in thousands) Fixed Rate Adjustable Rate - ----------------------------------------------------------------------------------------------- Term to maturity Book Value Term to rate adjustment Book Value - ----------------------------------------------------------------------------------------------- 1mo. - 1yr. $ 3,220 1mo. - 1yr. $ 923,950 1yr. - 3yr. 9,899 1yr. - 2yr. 49,580 3yr. - 5yr. 25,023 2yr. - 3yr. 134,494 5yr. - 10yr. 107,954 3yr. - 5yr. 394,427 10yr. - 20yr. 349,973 5yr. - 10yr. 214,279 Over 20 yr. 364,772 - ----------------------------------------------------------------------------------------------- Total $860,841 Total $1,716,730 - -----------------------------------------------------------------------------------------------
The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the 1-year and 3-year U.S. Treasury Note rates and the Federal Home Loan Bank Eleventh District cost of funds. Future market factors may affect the correlation of the interest rate adjustment with the rates paid on the short-term deposits and borrowings that have been primarily utilized to fund these loans. At June 30, 1996, 71% of loans receivable were collateralized by property located in New Jersey while other major concentrations included the states of Pennsylvania, Delaware, and New York with 9%, 5%, and 3%, respectively. -17- 7. Mortgage-Backed Securities Mortgage-backed securities consisted of the following:
June 30, 1996 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available for sale GNMA pass-through certificates $ 6,461 $ 467 -- $ 6,928 FHLMC and FNMA pass- through certificates 86,645 2,569 $ (1,097) 88,117 - ----------------------------------------------------------------------------------------------- Total $ 93,106 $3,036 $ (1,097) $95,045 - ----------------------------------------------------------------------------------------------- Held to maturity GNMA pass-through certificates $ 3,485 $ 35 $ (12) $ 3,508 FHLMC and FNMA pass- through certificates 423,467 1,129 (18,793) 405,803 Collateralized mortgage obligations 1,546,690 872 (60,042) 1,487,520 - ----------------------------------------------------------------------------------------------- Total $1,973,642 $2,036 $(78,847) $1,896,831 - -----------------------------------------------------------------------------------------------
June 30, 1995 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Trading securities FHLMC pass-through certificates $ 13,127 $ 201 -- $ 13,328 - ----------------------------------------------------------------------------------------------- Available for sale GNMA pass-through certificates $ 8,236 $ 573 -- $ 8,809 FHLMC and FNMA pass- through certificates 66,186 2,578 -- 68,764 - ----------------------------------------------------------------------------------------------- Total $ 74,422 $3,151 -- $ 77,573 - ----------------------------------------------------------------------------------------------- Held to maturity GNMA pass-through certificates $ 3,990 $ 104 $ (9) $ 4,085 FHLMC and FNMA pass- through certificates 435,334 2,100 (10,350) 427,084 Collateralized mortgage obligations 1,661,020 4,120 (68,526) 1,596,614 - ----------------------------------------------------------------------------------------------- Total $2,100,344 $6,324 $(78,885) $2,027,783 - -----------------------------------------------------------------------------------------------
Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 1996 and 1995, mortgage-backed securities in the amount of $1,564,083,000 and $1,118,679,000, respectively, including accrued interest, with respective market values of $1,492,668,000 and $1,072,516,000, collateralized certain securities sold under agreements to repurchase (see note 12). At June 30, 1996 and 1995, the balance of unencumbered mortgage-backed securities was $512,365,000 and $1,080,082,000, respectively. Capitalized servicing rights recorded on the sale of loans and MBS amounted to approximately $1,713,000, $531,000, and $2,134,000, respectively for the years ended June 30, 1996, 1995, and 1994. The unamortized balance of capitalized servicing rights was $4,232,000 and $3,832,000 at June 30, 1996 and 1995, respectively, and is included in other assets. During fiscal 1996, 1995, and 1994, amortization of capitalized servicing rights amounted to $1,313,000, $1,089,000, and $1,338,000, respectively. Net realized gains on the sale of mortgage-backed securities were $1,202,000, $206,000, and $1,800,000 for the years ended June 30, 1996, 1995, and 1994, respectively. -18- 8. Real Estate Acquired in Settlement of Loans Real estate acquired in settlement of loans consisted of the following:
June 30 ------------------------ (Dollar amounts in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------- Real estate acquired in settlement of loans $6,119 $7,170 Allowance for losses (692) (694) - ---------------------------------------------------------------------------------------------------- Total $5,427 $6,476 - ----------------------------------------------------------------------------------------------------
Activity in the allowance for real estate losses was as follows:
Year Ended June 30 ---------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Beginning balance $694 $1,164 $3,344 Provision for losses 278 230 1,127 Charge-offs and adjustments, net (280) (700) (3,307) - ---------------------------------------------------------------------------------------------------- Ending balance $692 $ 694 $1,164 - ----------------------------------------------------------------------------------------------------
9. Land, Office Buildings, and Equipment Land, office buildings, and equipment are summarized by major classification as follows:
June 30 ------------------------- (Dollar amounts in thousands) Estimated Useful Life 1996 1995 - ---------------------------------------------------------------------------------------------------- Land -- $ 7,484 $ 7,355 Buildings and leasehold improvements 10-30 yrs. 30,274 27,834 Office equipment 5-10 yrs. 10,859 10,260 Computer equipment 3-5 yrs. 15,593 14,178 - ---------------------------------------------------------------------------------------------------- 64,210 59,627 Accumulated depreciation and amortization (24,971) (20,314) - ---------------------------------------------------------------------------------------------------- Total $39,239 $39,313 - ----------------------------------------------------------------------------------------------------
Total depreciation and amortization expense for the years ended June 30, 1996, 1995, and 1994 was $4,692,000, $4,217,000, and $3,292,000, respectively. Collective leases certain of its branch offices under operating leases. Total rental expense was $1,230,000 in 1996, $1,103,000 in 1995, and $1,226,000 in 1994. Minimum lease commitments for each of the next five fiscal years and thereafter are as follows: ----------------------------------------------------------- 1997........................................... $ 853,596 1998........................................... 611,850 1999........................................... 444,548 2000........................................... 329,529 2001........................................... 263,379 2002 and beyond................................ 899,317 -----------------------------------------------------------
10. Accrued Interest Receivable Accrued interest receivable, included in other assets, consisted of the following:
June 30 ------------------------- (Dollar amounts in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------- Investments $ 3,999 $ 4,350 Loans 15,181 13,655 Mortgage-backed securities 9,699 11,347 - ----------------------------------------------------------------------------------------------------- Total $28,879 $29,352 - -----------------------------------------------------------------------------------------------------
-19- 11 Deposits Demand, savings and investment, and certificate accounts were as follows:
June 30, 1996 June 30, 1995 (Dollar amounts --------------------------------- ------------------------------------ in thousands) Estimated Estimated By type Amount Percent Fair Value Amount Percent Fair Value - ----------------------------------------------------------------------------------------------- Demand deposits Non-interest bearing $ 95,792 2.94% $ 95,792 $ 76,705 2.34% $ 76,705 NOW 405,889 12.47% 463,792 371,186 11.32% 371,186 Super NOW 102,406 3.15% 44,503 80,164 2.45% 80,164 - ----------------------------------------------------------------------------------------------- Total 604,087 604,087 528,055 528,055 - ----------------------------------------------------------------------------------------------- Savings and investment accounts Regular savings 549,055 16.87% 549,055 556,559 16.98% 556,559 Money market 115,469 3.55% 115,469 110,426 3.37% 110,426 Clubs 8,039 0.25% 8,039 7,957 0.24% 7,957 Super money market 172,636 5.30% 172,636 158,099 4.82% 158,099 - ----------------------------------------------------------------------------------------------- Total 845,199 845,199 833,041 833,041 - ----------------------------------------------------------------------------------------------- Certificates 7-31 Day 22,361 0.69% 22,361 24,823 0.76% 24,823 91 Day 15,570 0.48% 15,577 11,104 0.34% 11,104 6 Month 188,999 5.81% 189,447 133,621 4.08% 133,603 8 Month 201,149 6.18% 201,364 5,095 0.15% 5,116 9 Month 46,450 1.43% 46,500 300,501 9.17% 301,762 12 Month 230,760 7.09% 231,357 127,432 3.89% 127,021 15 Month 77,915 2.39% 77,853 302,819 9.24% 303,950 18-24 Month 369,970 11.37% 371,702 272,793 8.32% 272,988 30 Month 19,587 0.60% 19,568 30,151 0.92% 29,707 36 Month 27,219 0.84% 27,163 57,962 1.77% 57,357 4-6 Year 84,827 2.61% 84,656 88,436 2.70% 86,679 7-10 Year 8,837 0.27% 8,999 11,468 0.35% 11,473 Regulated fixed rate 2,056 0.06% 2,047 3,431 0.10% 3,435 IRA/Keogh 380,194 11.68% 372,874 394,034 12.02% 403,084 Certificates in excess of $100,000 129,207 3.97% 129,223 153,057 4.67% 153,064 - ----------------------------------------------------------------------------------------------- Total 1,805,101 1,800,691 1,916,727 1,925,166 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Total $3,254,387 100.00% $3,249,977 $3,277,823 100.00% $3,286,262 - -----------------------------------------------------------------------------------------------
Total certificates at year end June 30, 1996 by maturity:
(Dollar amounts in thousands) Amount Avg. Rate - ----------------------------------------------------------------------------------------------- Within 1 Year $1,271,108 5.10% 1998 371,328 5.37% 1999 50,558 5.79% 2000 79,562 5.95% 2001 14,371 5.96% After 2001 18,174 5.24% - ----------------------------------------------------------------------------------------------- Total $1,805,101 - -----------------------------------------------------------------------------------------------
-20- At June 30, 1996 and 1995, Collective Bank did not have any brokered deposits. The weighted average interest rate payable on deposits at June 30, 1996 and 1995 was 4.05% and 4.13%, respectively. Interest expense on deposits was as follows:
Year Ended June 30 ---------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Certificates $ 95,450 $ 79,854 $63,759 Demand deposits 12,128 9,644 7,899 Saving and investment accounts 23,922 26,072 23,528 - ----------------------------------------------------------------------------------------------- Total $131,500 $115,570 $95,186 - -----------------------------------------------------------------------------------------------
12. Federal Home Loan Bank Advances and Other Borrowed Funds Federal Home Loan Bank advances:
June 30 -------------------------------------------- Estimated Estimated (Dollar amounts in thousands) 1996 Fair Value 1995 Fair Value - ----------------------------------------------------------------------------------------------- Maturing during fiscal 1996 -- -- $395,000 $395,000 - ----------------------------------------------------------------------------------------------- Total -- -- $395,000 $395,000 - -----------------------------------------------------------------------------------------------
Advances are collateralized by stock in the Federal Home Loan Bank of New York and certain mortgage loans under a blanket pledge agreement. At June 30, 1995, the balance of loans collateralizing Federal Home Loan Bank advances under the blanket pledge agreement was $411,110,000. The weighted average interest rate on these advances was 6.00%. Other borrowed funds:
June 30 ------------------------------------------------ Weighted Average Interest Rate At Estimated Estimated (Dollar amounts in thousands) June 30, 1996 1996 Fair Value 1995 Fair Value - ----------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase (see note 7) 5.27% $1,465,980 $1,465,980 $1,044,596 $1,044,596 Other short-term borrowings Variable 1,652 1,652 1,432 1,432 ESOP debt 7.99% 5,816 5,816 6,892 6,892 - ----------------------------------------------------------------------------------------------- Total $1,473,448 $1,473,448 $1,052,920 $1,052,920 - -----------------------------------------------------------------------------------------------
At June 30, 1995, the weighted average interest rates on securities sold under agreements to repurchase, other short-term borrowings, and ESOP debt were 5.94%, variable, and 8.77%, respectively. Collective enters into sales of securities under fixed-coupon reverse repurchase agreements and fixed-coupon dollar reverse repurchase agreements. Such agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the Statements of Consolidated Financial Condition. The dollar amount of securities underlying the agreements are book entry securities. During the period of such agreements, the securities were delivered by entry into the counterparty's account at the Federal Reserve Bank of Philadelphia (or in the case of GNMA mortgage-backed securities, to MBS Clearing Corporation or in the case of other mortgage-backed securities, to a third-party custodian's account that explicitly recognizes Collective's interest in the securities). At June 30, 1996 and 1995, agreements outstanding to repurchase the same securities were $1,179,526,000 and $826,651,000, respectively. At June 30, 1996 and 1995, agreements to repurchase substantially identical securities were $286,454,000 and $217,945,000, respectively. Agreements to repurchase the same securities and agreements to repurchase substantially identical securities averaged $1,437,905,000 and $1,114,789,000 during the years ended June 30, 1996 and 1995, respectively. The maximum amounts outstanding at any month-end under such agreements during fiscal 1996 and 1995 were $1,595,501,000 and $1,375,212,000, respectively. Accrued interest payable -21- on these agreements at June 30, 1996 and 1995 was $3,691,000 and $2,370,000, respectively. The June 30, 1996 agreements will mature through July 29, 1996. The June 1995 payable to brokers for securities purchased represents the purchase of U.S. agency securities. The purchase closed in July 1995 and was funded by the liquidation of short-term investments (cash equivalents) and short-term borrowings. 13. Income Taxes The income tax provision is comprised of the following components:
Year Ended June 30 ----------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Current provision $26,836 $26,571 $31,267 Deferred provision 3,467 4,073 1,795 - ----------------------------------------------------------------------------------------------- Total income tax provision $30,303 $30,644 $33,062 - -----------------------------------------------------------------------------------------------
The liability for income taxes at June 30, 1996 and 1995 in the Statements of Consolidated Financial Condition (included in other liabilities) includes a net deferred tax liability of $3,222,000 and $2,060,000, respectively that have been provided for the temporary differences between the tax bases and financial statement carrying amounts of assets and liabilities. The liability at June 30,1996 and 1995 includes $613,000 and $1,202,000, respectively, recorded as a result of the adoption of SFAS 115 which is netted against the unrealized appreciation adjustment recorded in stockholders' equity. The major sources of temporary differences and their deferred tax effects are as follows:
June 30 --------------------- (Dollar amounts in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------- Deferred Tax Assets: Loan loss reserve - book $ 2,782 $ 3,350 Deferred loan fees (net of expenses) 253 868 Unamortized discount on held to maturity securities 1,875 1,866 Amortizable intangibles 259 288 Directors fees 522 448 - --------------------------------------------------------------------------------------------- Total deferred tax assets 5,691 6,820 - --------------------------------------------------------------------------------------------- Deferred Tax Liabilities: Loan loss reserve - tax 5,483 4,832 Unrealized appreciation on trading and available for sale securities 613 1,234 Depreciation 1,312 1,051 Excess servicing 81 131 Purchase accounting 1,258 1,397 Other, net 166 235 - --------------------------------------------------------------------------------------------- Total deferred tax liabilities 8,913 8,880 - --------------------------------------------------------------------------------------------- Net deferred tax (liability) asset $(3,222) $(2,060) - ---------------------------------------------------------------------------------------------
-22- A reconciliation of the statutory income tax provision to the effective income tax provision is as follows:
Year Ended June 30 ---------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Income tax at federal statutory rate (35%) $29,681 $30,865 $32,429 Tax-exempt interest (164) (129) (164) ESOP dividends (157) (274) (208) Dividends received deduction (662) (544) (497) State income tax provision (net of federal benefit) 1,692 1,684 1,777 Benefit due to federal income tax rate change -- -- (136) Other, net (87) (958) (139) - ---------------------------------------------------------------------------------------------- Total income tax provision $30,303 $30,644 $33,062 - ----------------------------------------------------------------------------------------------
Savings banks that meet certain definitions, tests, and other conditions prescribed by the Internal Revenue Code ("IRC") are allowed to deduct, with limitations, a bad debt deduction. This deduction can be computed as a percentage of taxable income before such deduction or based upon actual loss experience. During fiscal years 1996, 1995, and 1994, Collective employed the percentage of taxable income method. Pursuant to SFAS 109, Collective is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987. The amount of this reserve on which no deferred taxes have been provided is approximately $27,900,000. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (1) Collective's retained earnings represented by this reserve is used for purposes other than to absorb losses from bad debts, including dividends or distributions in liquidation, (2) Collective fails to meet the definitions, tests, or other conditions provided by the IRC for a qualified Savings and Loan Association, or (3) there is a change in the federal tax law. See note 16 for proposed changes to the IRC or federal tax law affecting the bad debt deduction and tax loan loss reserve. Collective recently completed an examination by the Internal Revenue Service for the year ended December 31, 1991. There were no changes made to Collective's taxable income as originally reported to the Internal Revenue Service 14. Benefit Plans Collective maintains an Employee Stock Ownership Plan ("ESOP"), a defined contribution plan covering all eligible employees. Prior to July 1, 1994, Collective accounted for ESOP transactions in accordance with AICPA Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans" ("SOP 76-3"). Effective July 1, 1994, Collective adopted the provisions of SOP 93-6 which supersedes SOP 76-3. These accounting rules address the method of measuring compensation, the classification of dividends on ESOP shares, and the treatment of ESOP shares for the computation of earnings per share. Upon adoption, SOP 93-6 applied to unallocated shares purchased by the ESOP after December 31, 1992 while unallocated shares purchased prior to December 31, 1992 continued to be accounted for under SOP 76-3. At June 30, 1996, there were 407,679 unallocated shares in the ESOP. Of this total, 196,200 shares were subject to SOP 76-3 while 211,479, comprised of 15,486 shares committed to be released and 195,994 suspense shares (market value of $4,630,000 at June 30, 1996), were subject to SOP 93-6. Dividends received on allocated shares in the ESOP are added directly to the participant accounts while dividends received on unallocated shares are used toward repayment of principal on the ESOP debt. Amounts committed to be released and, in turn, provided for repayment of loan principal are recognized as compensation expense at fair value. Unallocated shares falling under SOP 76-3 are considered to be outstanding in calculating earnings per share. Unallocated shares subject to SOP 93-6 that have not been committed to be released are not treated as outstanding in calculating earnings per share. The ESOP allocated 118,985 and 134,723 shares of Collective's stock to employees during the plan years ended November 30, 1995 and 1994, respectively. -23- Contributions to the ESOP are allocated among the participants based on compensation. During 1988, the ESOP trustee entered into a loan agreement with a commercial bank to borrow $1,900,000, which was used to finance the purchase of 480,280 shares of common stock of Collective. The loan had a term of seven years with a rate equal to 90.1% of the prime rate of the commercial bank. This loan was refinanced on December 30, 1991. The new note which had a term of thirty nine months with a rate equal to 90.1% of the prime rate of the lender was paid off on March 31, 1995. In November 1991, the ESOP trustee entered into another loan agreement with a commercial bank to borrow $4,050,000, which was used to finance the purchase of 492,593 shares of common stock of Collective. This loan had a term of seven years with a floating rate tied to 265 basis points over the Federal Funds effective rate established by the lender or 25 basis points over the bank's prime rate, whichever method Collective elects to apply to future periods on the annual anniversary date. To date, the Federal Funds effective rate has been utilized and has proven to be lower than the prime rate alternative. In June 1993, the ESOP trustee modified the agreement with the commercial bank to provide an additional $5,000,000 line of credit. As of June 30, 1994, the entire line of credit had been drawn for the purchase of 242,836 shares. The additional $5,000,000 was an interest only loan for a period of two years with interest calculated in the same manner as the original $4,050,000 loan discussed above. In June 1995 the loan began a ten year principal repayment. At June 30, 1996, the total ESOP debt outstanding was $5,816,000. Collective also has a voluntary thrift plan (a qualifying plan under 401K of the Internal Revenue Code) in which substantially all of the employees are eligible to participate. Annual contributions to the plan are made at the discretion of the Board of Directors based upon the income of Collective as defined and funded annually. Benefits under the plan are deferred until retirement, termination, or withdrawal upon request. Contributions made for plan years ended November 30, 1995, 1994, and 1993 were $902,835, $782,063, and $766,359, respectively. 15. Commitments and Contingencies At June 30, 1996 and 1995 Collective had outstanding mortgage loan origination commitments of approximately $73,445,000 and $47,682,000, respectively, with interest rates ranging from 4.25% to 11.88% and 3.00% to 9.50%, respectively. Of the total at June 30, 1996, variable rate commitments totalled $57,779,000 at interest rates of 4.25% to 11.88% with the balance of $15,666,000 representing fixed rate commitments at 6.00% to 11.88%. At June 30, 1995, variable rate commitments totalled $17,718,000 at interest rates of 3.00% to 8.50% with the balance of $29,964,000 representing fixed rate commitments at 6.75% to 9.50%. At June 30, 1996 and 1995 Collective had outstanding non- mortgage loan origination commitments of approximately $52,989,000 and $53,974,000, respectively. Collective evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Management expects that these loans will be disbursed within the next twelve months. At June 30, 1996 and 1995, Collective had outstanding commitments on unused lines of credit of $123,822,000 and $92,991,000, respectively. These commitments may not represent future cash requirements since many commitments may not be drawn upon. Collective and its subsidiary may, from time to time, be defendants in legal proceedings relating to the conduct of their businesses. In the best judgement of management, the consolidated financial position, results of operations, and cash flows of Collective or its subsidiary will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments. Legislation pending in Congress would impose a one-time assessment, currently estimated at between 75 and 85 basis points, on the amount of deposits held as of March 31, 1995 by Savings Association Insurance Fund ("SAIF")-member institutions, including Collective Bank, a wholly-owned subsidiary of Collective, to recapitalize the SAIF to the required level of 1.25% of insured deposits. If the assessment is made at the 85 basis point proposed rate, the effect on Collective Bank would be a pre-tax charge of approximately $22 million, or $14 million after tax (36% assumed tax rate). -24- Certain proposed legislation also would require the recapitalized SAIF to be merged with the Bank Insurance Fund into a new Deposit Insurance Fund no later than January 1, 1998, provided the thrift charter has been eliminated by that date. The elimination of the thrift charter, by requiring thrifts, including Collective Bank, to convert to state or national commercial bank charters, would be effected via separate legislation enacted by the end of calendar 1997. Additional proposed legislation would repeal Section 593 of the IRC for taxable years beginning after December 31, 1995. Section 593 allows certain thrift institutions, including Collective Bank, to use a percentage-of-taxable income bad debt accounting method, if more favorable than the specific charge- off method, for federal income tax purposes. Since 1993, Collective has used the percentage-of-taxable income method in its income tax returns. The enactment of the proposed legislation could cause Collective's effective income tax rate to increase, thereby negatively impacting net income. Management cannot predict whether such proposals, or similar legislation, will be enacted, or if enacted, the ultimate effect on Collective's financial condition or results of operations, except as indicated above. 16. Stockholders' Equity The OTS sets forth capital standards applicable to all thrifts. These standards include a core capital requirement, a tangible capital requirement, and a risk-based capital requirement. The following table presents Collective Bank's position relative to the three capital requirements. Collective Bank exceeds all of the requirements at June 30, 1996. At June 30, 1996 Collective Bank exceeded the minimum capital requirements as follows:
(Dollar amounts in thousands) Amount Percent - ----------------------------------------------------------------------------------------------- Tangible Capital: Actual $337,759 6.60% Required 76,821 1.50% - ----------------------------------------------------------------------------------------------- Excess $260,938 5.10% - ----------------------------------------------------------------------------------------------- Core (Tier 1) Capital: Actual $337,759 6.60% Required 153,642 3.00% - ----------------------------------------------------------------------------------------------- Excess $184,117 3.60% - ----------------------------------------------------------------------------------------------- Risk-based Capital: Actual $344,595 17.30% Required 159,316 8.00% - ----------------------------------------------------------------------------------------------- Excess $185,279 9.30% - -----------------------------------------------------------------------------------------------
Prompt Corrective Action ("PCA") regulations that are required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") require specific supervisory actions as capital levels decrease. The specifications of the capital categories are shown below:
Tier 1 Tangible Total Risk- Tier 1 Risk- Leverage Capital Ratio Capital Ratio based Ratio based Ratio(1) Ratio - ------------------------------------------------------------------------------------------------------------- Well-capitalized N/A Greater than or Greater than or Greater than or equal to 10% equal to 6% equal to 5% Adequately capitalized N/A Greater than or Greater than or Greater than or equal to 8% equal to 4% equal to 4% Under Capitalized N/A Less than 8% Less than 4% Less than 4% Significantly undercapitalized N/A Less than 6% Less than 3% Less than 3% Critically undercapitalized Less than or N/A N/A N/A equal to 2% - -------------------------------------------------------------------------------------------------------------- (1) Total Core (Tier 1) Capital divided by risk-adjusted assets.
Because of Collective Bank's regulatory capital requirements, $65,844,000 of its retained earnings is unavailable for distribution to Collective. -25- 17. Stock Options Collective has two stock option plans which call for a total of 1,696,000 shares of common stock to be reserved for issuance for the benefit of directors, officers, and other key employees. Under the terms of the plans, options are granted at not less than the fair market value of the shares at the date of grant, require a two to five-year holding period before they may be exercised, and may not have a maximum term of more than ten years. Activity in the stock option plans for each of the three years ended June 30, 1994, 1995, and 1996 was as follows:
Option Price At time of Grant -------------------------------------- Number of Shares Per Share Total - -------------------------------------------------------------------------------------------------- Balance, June 30, 1993 512,438 $ 1.313 - $13.250 $2,604,609 Granted 82,370 4.313 - 21.000 1,509,909 Expired (4,975) 1.313 - 21.000 (67,644) Exercised (103,189) 1.313 - 13.250 (381,185) - -------------------------------------------------------------------------------------------------- Balance, June 30, 1994 486,644 2.844 - 21.000 3,665,689 Granted 79,850 15.625 - 21.500 1,395,162 Expired (5,560) 2.8375 - 21.000 (91,051) Exercised (89,242) 2.8375 - 18.250 (640,712) - -------------------------------------------------------------------------------------------------- Balance, June 30, 1995 471,692 3.1875 - 21.000 4,329,088 Granted 9,200 20.000 - 24.875 219,100 Expired (6,200) 3.1875 - 21.000 (104,556) Exercised (61,885) 3.1875 - 18.250 (280,513) - -------------------------------------------------------------------------------------------------- Balance, June 30, 1996 412,807 $3.1875 - $24.875 $4,163,119 - --------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, exercisable options were 112,140 and 130,274, respectively. The balance of shares reserved for issuance under the stock option plans was 33,790 at June 30, 1996. Collective has a restricted stock award plan which calls for a total of 75,000 shares of common stock to be reserved for issuance for the benefit of officers and other employees. Under the terms of the plan, stock granted is subject to certain transfer restrictions. These restrictions lapse over a two- year period. At June 30, 1996, 72,012 shares remained unissued under this plan. Collective also has a restricted stock award program which calls for a total of 10,000 shares of common stock to be reserved for issuance for the benefit of non-employee directors and qualified consultants. Restrictions on shares awarded under this plan lapse over a three-year period. At June 30, 1996, 2,000 shares remained unissued under this plan. -26- 18. Parent Company Financial Information The following information on Collective Bancorp, Inc. (parent company only) should be read in conjunction with the other Notes to Consolidated Financial Statements. Statements of Financial Condition
June 30 ----------------------- (Dollar amounts in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------- Assets: Cash $ 3,204 $ 8,732 Investment in subsidiary 371,910 329,824 Other assets 117 211 - ---------------------------------------------------------------------------------------------- Total $375,231 $338,767 - ---------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: ESOP debt $ 5,816 $ 6,892 Other liabilities 5,111 4,083 - ---------------------------------------------------------------------------------------------- Total liabilities 10,927 10,975 - ---------------------------------------------------------------------------------------------- Stockholders' Equity: Common stock 204 204 Additional paid-in capital 59,699 59,299 Treasury stock (1,093) -- ESOP debt (5,816) (6,892) Unrealized appreciation on available for sale securities 1,090 2,136 Retained earnings 310,220 273,045 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 364,304 327,792 - ---------------------------------------------------------------------------------------------- Total $375,231 $338,767 - ----------------------------------------------------------------------------------------------
Statements of Operations
Year Ended June 30 --------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Income and expenses: Equity in earnings of subsidiary $55,012 $58,011 $59,747 Expenses (377) (348) (298) - ---------------------------------------------------------------------------------------------- Income before taxes 54,635 57,663 59,449 Income taxes (135) (121) (82) - ---------------------------------------------------------------------------------------------- Net income $54,500 $57,542 $59,367 - ----------------------------------------------------------------------------------------------
-27- Statements of Cash Flows
Year Ended June 30 - ---------------------------------------------------------------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Operating activities: Dividend income $12,000 $19,000 $ 8,000 Operating expenses (271) (171) (437) Income taxes paid (140) (131) (66) - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 11,589 18,698 7,497 - ---------------------------------------------------------------------------------------------- Financing activities: Dividends on common stock (16,304) (12,172) (10,913) ESOP debt incurred -- -- (4,060) Net increase in other liabilities -- -- 4,060 Other financing, net (813) 682 564 - ---------------------------------------------------------------------------------------------- Net cash used for financing activities (17,117) (11,490) (10,349) - ---------------------------------------------------------------------------------------------- Net (decrease) increase in cash (5,528) 7,208 (2,852) Cash at beginning of period 8,732 1,524 4,376 - ---------------------------------------------------------------------------------------------- Cash at end of period $ 3,204 $ 8,732 $ 1,524 - ---------------------------------------------------------------------------------------------- Reconciliation of net income to net cash provided by operating activities: Net income $54,500 $57,542 $59,367 Increase (decrease) in deferred expense 105 177 (139) (Decrease) increase in accrued expense (4) (10) 16 Equity in earnings of subsidiary (55,012) (58,011) (59,747) Dividends received from subsidiary 12,000 19,000 8,000 - ---------------------------------------------------------------------------------------------- Net cash provided by operations $11,589 $18,698 $ 7,497 - ----------------------------------------------------------------------------------------------
-28- Collective Bancorp, Inc. and subsidiary INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP The Board of Directors of Collective Bancorp, Inc.: We have audited the accompanying statement of consolidated financial condition of Collective Bancorp, Inc. and subsidiary as of June 30, 1996 and the related statements of consolidated operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying financial statements of Collective Bancorp, Inc. and subsidiary as of June 30, 1995 were audited by other auditors, whose report thereon dated August 25, 1995 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collective Bancorp, Inc. and subsidiary at June 30, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Short Hills, New Jersey July 31, 1996 -29- Collective Bancorp, Inc. and Subsidiary INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of Collective Bancorp, Inc.: We have audited the statement of consolidated financial condition of Collective Bancorp, Inc. and subsidiary as of June 30, 1995 and the related statements of consolidated operations, stockholders' equity and cash flows for each of the two years in the period ended June 30, 1995 as contained in the 1996 annual report to stockholders before the restatement of the statements of consolidated cash flows to reflect the retroactive reclassification of various amounts as investing activities which were previously classified as operating activities for the year ended June 30, 1995 and 1994 (not included herein). Our audits also included the financial statement schedules listed in the Index at Item 14(a)2 for each of the two years in the period ended June 30, 1995. These financial statements and the financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Collective Bancorp, Inc. and subsidiary at June 30, 1995, and the results of their operations and their cash flows before the restatement as described in the first paragraph for each of the two years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Effective July 1, 1994, Collective Bancorp, Inc. changed its method of accounting for impairment of loans and for investments in certain debt and equity securities, to conform with Statements of Financial Accounting Standards No. 114, 115, and 118. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 25, 1995 -30- Part 1 Item 1
COLLECTIVE BANCORP, INC. AND SUBSIDIARY STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION March 31 June 30 1997 1996 --------------- --------------- ASSETS (Dollar amounts in thousands except per share data) Cash $ 65,936 $ 65,084 Federal funds sold 19,595 3,646 Securities purchased under agreement to resell 35,000 - --------------- --------------- Total cash and cash equivalents 120,531 68,730 Loans held for sale, at amortized cost, market value of $3,774 and $5,231 3,600 5,186 Securities available for sale, at market value 235,951 162,284 Investment securities, at amortized cost, market value of $302,573 and $271,650 307,534 276,171 Loans receivable 2,876,031 2,561,041 Less allowance for loan losses (13,461) (12,891) --------------- --------------- Loans receivable, net 2,862,570 2,548,150 Mortgage-backed securities, at amortized cost, market value of $1,727,576 and $1,896,831 1,860,461 1,973,642 Real estate acquired in settlement of loans, net 4,165 5,427 Land, office buildings and equipment, net 41,096 39,239 Other assets 44,810 42,335 Core deposit premium 9,980 8,191 Goodwill 26,890 16,116 --------------- --------------- Total assets $5,517,588 $5,145,471 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand deposits, non-interest bearing $ 140,083 $ 95,792 Demand deposits, interest bearing 602,199 508,295 Savings and investment accounts 863,144 845,199 Savings certificates 1,893,233 1,805,101 --------------- --------------- Total deposits 3,498,659 3,254,387 Short-term borrowings 1,573,385 1,467,633 Long-term borrowings 5,486 5,815 Advance payments by borrowers for taxes and insurance 25,536 26,852 Other liabilities 28,367 26,480 --------------- --------------- Total liabilities 5,131,433 4,781,167 --------------- --------------- Stockholders' Equity: Common stock, par value $.01 per share; authorized - 37,000,000 shares; issued - 20,496,019 shares in March 1997 and 20,418,641 shares in June 1996; outstanding - 20,446,519 shares in March 1997 and 20,374,141 shares in June 1996 205 204 Preferred stock, par value $.01 per share; authorized - 2,500,000 shares; none outstanding - - Additional paid-in capital 60,490 59,699 Treasury stock, at cost; 49,500 shares in March 1997 and 44,500 shares in June 1996 (1,230) (1,093) ESOP debt (5,008) (5,816) Unrealized appreciation on available for sale securities, net of tax 1,311 1,090 Retained earnings, substantially restricted 330,387 310,220 --------------- --------------- Total stockholders' equity 386,155 364,304 --------------- --------------- Total liabilities and stockholders' equity $5,517,588 $5,145,471 =============== ===============
-31-
COLLECTIVE BANCORP, INC. AND SUBSIDIARY STATEMENTS OF CONSOLIDATED OPERATIONS Three Months Ended Nine Months Ended March 31 March 31 1997 1996 1997 1996 --------------- ---------------- --------------- ---------------- (Dollar amounts in thousands except per share data) INTEREST INCOME: Interest on mortgage loans $51,736 $43,738 $150,078 $130,404 Interest on other loans 4,154 3,812 11,870 12,140 Interest on mortgage-backed securities 32,754 34,841 99,439 106,171 Interest and dividends on investments 7,110 6,056 20,711 17,558 --------------- ---------------- --------------- ---------------- Total interest and dividend income 95,754 88,447 282,098 266,273 --------------- ---------------- --------------- ---------------- INTEREST EXPENSE: Interest on deposits 35,521 32,103 105,614 99,131 Interest on borrowed funds 20,275 20,127 60,672 62,699 --------------- ---------------- --------------- ---------------- Total interest expense 55,796 52,230 166,286 161,830 --------------- ---------------- --------------- ---------------- NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 39,958 36,217 115,812 104,443 PROVISION FOR LOAN LOSSES 1,010 410 2,554 1,099 --------------- ---------------- --------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 38,948 35,807 113,258 103,344 --------------- ---------------- --------------- ---------------- OTHER INCOME: Loan servicing 1,063 1,239 3,021 3,167 Gain (Loss) on sale of loans and securities 266 (162) 375 1,032 Financial service fees and other income 3,328 2,453 9,492 7,390 --------------- ---------------- --------------- ---------------- Total other income 4,657 3,530 12,888 11,589 --------------- ---------------- --------------- ---------------- Total income before other expense 43,605 39,337 126,146 114,933 --------------- ---------------- --------------- ---------------- OTHER EXPENSE: Compensation and employee benefits 7,900 7,463 22,592 21,377 Occupancy expense 2,966 2,806 8,444 8,036 Advertising 345 380 1,012 915 Deposit insurance 491 1,521 3,269 4,572 SAIF recapitalization assessment - - 16,653 - Computer services 1,119 1,113 3,242 3,667 Loan expense 735 732 2,240 2,347 Real estate operations (33) 326 82 495 Amortization of intangibles 1,627 1,178 4,302 3,578 Other expenses 3,194 2,787 8,977 7,890 --------------- ---------------- --------------- ---------------- Total other expense 18,344 18,306 70,813 52,877 --------------- ---------------- --------------- ---------------- INCOME BEFORE INCOME TAXES 25,261 21,031 55,333 62,056 INCOME TAXES 9,264 7,508 19,857 22,215 --------------- ---------------- --------------- ---------------- NET INCOME $15,997 $13,523 $35,476 $39,841 =============== ================ =============== ================ PER SHARE DATA: Primary and fully diluted net income per share $0.78 $0.66 $1.73 $1.95 Dividends per common share $0.25 $0.20 $0.75 $0.60 Average primary shares outstanding 20,510,349 20,457,753 20,473,728 20,446,517 Average fully diluted shares outstanding 20,514,570 20,457,780 20,500,714 20,448,803
-32-
COLLECTIVE BANCORP, INC. AND SUBSIDIARY STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY Unrealized Appreciation Additonal on Available Common Paid-In Treasury ESOP for Sale Retained Stock Capital Stock Debt Securities Earnings Total ------------------------------------------------------------------------------------------- (Dollar amounts in thousands except per share data) BALANCE JUNE 30, 1995 $204 $59,299 - $(6,892) $2,136 $273,045 $327,792 Net income for the year - - - - - 54,500 54,500 Stock options exercised - 279 - - - - 279 Dividends on common stock - $.85 per share - - - - - (17,325) (17,325) Purchase of treasury stock - - $(1,093) - - - (1,093) ESOP debt repayment - - - 1,076 - - 1,076 ESOP shares released - 121 - - - - 121 Securities valuation - - - - (1,046) - (1,046) ------------------------------------------------------------------------------------------- BALANCE JUNE 30, 1996 204 59,699 (1,093) (5,816) 1,090 310,220 364,304 Net income fiscal year to date - - - - - 35,476 35,476 Stock options exercised 1 548 - - - - 549 Dividends on common stock - $.75 per share - - - - - (15,309) (15,309) Purchase of treasury stock - - (137) - - - (137) ESOP debt repayment - - - 808 - - 808 ESOP shares released - 243 - - - - 243 Securities valuation - - - - 221 - 221 ------------------------------------------------------------------------------------------- BALANCE MARCH 31, 1997 $205 $60,490 $(1,230) $(5,008) $1,311 $330,387 $386,155 ===========================================================================================
-33-
COLLECTIVE BANCORP, INC. AND SUBSIDIARY STATEMENTS OF CONSOLIDATED CASH FLOWS Nine Months Ended March 31 ------------------------------- 1997 1996 ------------- ------------- (Dollar amounts in thousands) OPERATING ACTIVITIES: Interest received $ $ 284,073 262,163 Interest paid (165,042) (159,794) Operating expenses (71,072) (52,273) Sales of trading securities - 13,328 Loan fees 3,299 3,721 Other income received 12,888 11,791 Income taxes paid (21,024) (16,075) ------------- ------------- Net cash provided by operating activities 43,122 62,861 ------------- ------------- INVESTING ACTIVITIES: Loan originations (633,880) (412,467) Purchases of loans (659) (17,224) Purchases of mortgage-backed securities (64) (14,042) Repayment of loan principal 339,465 269,403 Repayment of mortgage-backed security principal 120,327 99,181 Sales of loans held for sale 41,520 98,367 Purchases of investment securities (109,253) (294,630) Sales of investment securities available for sale 48,060 - Purchases of mortgage-backed securities available for sale (36,177) (90,854) Sales of mortgage-backed securities available for sale 7,018 55,157 Repayment of principal on mortgage-backed securities available for sale 14,860 13,020 Maturities of investment securities 41,211 318,960 Net decrease in real estate owned 1,893 1,844 Net change in loans maturing in 3 months or less 5,000 (6,500) Purchase of Continental Bancorporation (25,703) - Cash obtained from Continental Bancorporation acquisition 11,264 - Other investing, net 2,265 1,846 ------------- ------------- Net cash (used for) provided by investing activities (172,853) 22,061 ------------- ------------- FINANCING ACTIVITIES: Net change in deposits 114,452 (134,467) Net change in short-term borrowings 87,126 61,938 Net change in long-term borrowings (1,421) (807) Net decrease in advance payments by borrowers for taxes and insurance (1,408) (5,769) Dividends paid (15,326) (12,222) Other financing, net (1,891) (2,606) ------------- ------------- Net cash provided by (used for) financing activities 181,532 (93,933) ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51,801 (9,011) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 68,730 69,973 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $120,531 $ 60,962 ============= ============= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 35,476 $ 39,841 Net change in trading securities - 13,328 Amortization and accretion of deferred charges and credits, net (92) (2,166) Amortization of intangibles 4,302 3,578 Accrued income and expense 6,924 14,067 Deferred income and expense (10,713) (11,347) Provision for loan and real estate owned losses 2,761 1,239 Depreciation and amortization 3,656 3,514 ESOP debt repayment 808 807 ------------- ------------- Net cash provided by operations $ 43,122 $ 62,861 ============= =============
-34- COLLECTIVE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited interim consolidated financial statements of Collective Bancorp, Inc. and subsidiary ("Collective") included herein should be read in conjunction with the audited financial statements for the year ended June 30, 1996 included in Collective's 1996 Annual Report and incorporated by reference in the Form 10-K for that year. The unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. Such adjustments consist only of normal recurring accruals. The results of operations for the three and nine-month periods ended March 31, 1997 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 1997. 2. On February 27, 1997, Collective entered into an Agreement and Plan of Merger with Summit Bancorp. ("Summit") pursuant to which Collective will be merged with and into Summit and shares of Collective's common stock will be converted into whole shares of Summit's common stock and cash in lieu of fractional shares based on an exchange ratio of Summit common to Collective common of .895. The merger is subject to approval by Collective's stockholders and certain regulatory agencies. The merger is expected to be consummated during the third calendar quarter of 1997. 3. In connection with the enactment of the Deposit Insurance Funds Act of 1996 ("DIFA") on September 30, 1996, Collective Bank, a wholly-owned subsidiary of Collective Bancorp, Inc., was required to pay a one-time special assessment of $16.653 million to the Federal Deposit Insurance Corporation ("FDIC") to capitalize the Savings Association Insurance Fund ("SAIF") to its required reserve ratio. The special assessment rate of 65.7 cents per $100 of SAIF-assessable deposits was applied as of March 31, 1995. The assessment was paid in November 1996. DIFA also requires the Financing Corporation ("FICO") bond obligation to be shared by insured depository institutions pro rata beginning in the year 2000. For the transition period from January 1, 1997 to December 31, 1999, banks will pay one-fifth of the assessment rate imposed upon thrifts. During this period, the FICO assessment rates are estimated to be 1.3 basis points for banks calculated on their Bank Insurance Fund ("BIF") deposit base and 6.4 basis points for thrifts, such as Collective Bank calculated on their SAIF deposit base. DIFA directs the Treasury Department to present a report to Congress by March 31, 1997 regarding the development of a common charter for all depository institutions. The report is to include a recommendation for legislative and administrative action. DIFA requires that the BIF and the SAIF be merged into a single new fund (the Deposit Insurance Fund) on January 1, 1999, provided "no insured depository institution is a savings association on that date". 4. On August 20, 1996, the Small Business Job Protection Act of 1996 ("SBJPA") was enacted, which included a repeal of the thrift bad debt reserve method (percentage-of-taxable income method) under section 593 of the Internal Revenue Code. The repeal is effective for Collective's 1997 fiscal year. Since 1993, Collective has used the percentage-of-taxable income method in its income tax returns. Effective July 1, 1996, Collective was required to change from the reserve method to the specific charge-off method to calculate its bad debt deduction. The change in bad debt tax accounting methods has not had, nor is it expected to have, a material impact on Collective's results of operations. -35- The SBJPA also provided for the recapture of a thrift's post-1987 excess bad debt reserve resulting from the use of the reserve method for calculating the bad debt deduction. Pre-1988 excess bad debt reserves are not subject to recapture. The recaptured amount must be taken into taxable income ratably over a six-year period commencing with the thrift's tax year beginning in 1996. The timing of the recapture may be delayed for a one-or two-year period provided the residential loan requirement is met. Collective expects to meet the residential loan requirement for its 1996 and 1997 tax years. Therefore, its estimated tax liability of approximately $5.5 million, resulting from the recapture, will be payable over a six-year period commencing with Collective's 1999 fiscal year. The excess bad debt reserve recapture is not expected to have a material impact on Collective's results of operations or financial position because Collective has recorded deferred income tax provisions on its excess bad reserves since 1987. 5. On October 1, 1996, Collective acquired the outstanding capital stock of Continental Bancorporation for $25.7 million in cash pursuant to an agreement entered into on May 21, 1996. Simultaneously with the acquisition, Continental Bancorporation was liquidated and its subsidiary, Continental Bank of New Jersey ("Continental"), became a subsidiary of Collective. Continental's name was changed subsequently to Collective Bank of New Jersey. Collective Bank of New Jersey was a state-chartered, BIF- insured commercial bank with total assets of $161.3 million and deposits of $129.5 million on the date of acquisition. The acquisition was accounted for by the purchase method. It has not had, nor is it expected to have, a material effect on Collective's results of operations or financial position. Collective Bank of New Jersey was merged into Collective Bank in February 1997. -36- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma condensed combined financial statements reflect the Merger under the application of the pooling-of-interests method of accounting. This pro forma financial information is based on the estimates and assumptions set forth in the notes to such statements. The pro forma adjustments made in connection with the development of the pro forma information are preliminary and have been made solely for purposes of developing such pro forma information as necessary to comply with the disclosure requirements of the Commission. The pro forma financial information has been prepared using the historical consolidated financial statements and notes thereto appearing in Summit's Form 10-K for the year ended December 31, 1996 and Summit's Form 10-Q for the quarterly periods ended March 31, 1996 and 1997 and Collective's Form 10-K for the fiscal year ended June 30, 1996 and Collective's Form 10-Q's for the quarterly periods ended September 30, 1995 and March 31, 1997. The unaudited pro forma condensed combined financial statements do not purport to be indicative of the combined financial position or results of operations of future periods or indicative of the results that actually would have been realized had the entities been a single entity during these periods. The Pro Forma Condensed Combined Statements of Income give effect to the proposed Merger by combining the historical statements of income of Summit for the three years ended December 31, 1996, as filed on Form 10-K for the year ended December 31, 1996, and the historical statements of income of Collective for the three fiscal years ended June 30, 1996, as filed on Form 10-K for the year ended June 30, 1996 and included hereon. The Pro Forma Condensed Combined Statement of Income for the three months ended March 31, 1997 combines the unaudited statement of income of Summit for the three months ended March 31, 1997 and the unaudited statement of income of Collective for the three months ended March 31, 1997 as filed on Form 10-Q and included hereon. The Pro Forma Condensed Combined Statement of Income for the three months ended March 31, 1996 combines the unaudited statement of income of Summit for the three months ended March 31, 1996 and the unaudited statement of income of Collective for the three months ended September 30, 1995, to reflect the restatement of the historical statements of income of Summit that will be recorded on the consummation of the Merger. The Pro Forma Condensed Combined Income Statements do not give effect to anticipated expenses and nonrecurring charges related to the Merger and the estimated effect of revenue enhancements and expense savings associated with the consolidation of the operations of Summit and Collective. Had these expenses and nonrecurring charges, net of tax effect, been reflected in the Pro Forma Condensed Combined Income Statements for the three months ended March 31, 1997, Summit and Collective Pro Forma net income would decrease by approximately $33.2 million or $.28 per share. The estimated restructuring charge constitutes forward-looking information and is based on currently available information as well as numerous factors and assumptions which are subject to change and could result in a restructuring charge differing from the estimate. The pro forma financial information uses the Exchange Ratio of .895 shares of Summit Common for each share of Collective Common. -37- PRO FORMA CONDENSED COMBINED BALANCE SHEET MARCH 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS SUMMIT AND INCREASE COLLECTIVE SUMMIT COLLECTIVE (DECREASE) PRO FORMA ----------- ---------- ----------- ----------- ASSETS Cash and due from banks. $ 968,930 $ 65,936 $ 1,034,866 Interest bearing deposits with banks.... 13,457 -- 13,457 Short-term securities... 188,800 54,595 243,395 Securities.............. 6,199,177 2,403,946 $ (6,323)(1) 8,596,800 Loans................... 15,495,945 2,879,631 18,375,576 Less: Allowance for 277,011 13,461 290,472 loan losses.......... ----------- ---------- --------- ----------- Net Loans........... 15,218,934 2,866,170 18,085,104 Premises and equipment.. 201,363 41,096 242,459 Other assets............ 648,684 85,845 734,529 ----------- ---------- --------- ----------- Total Assets............ $23,439,345 $5,517,588 $ (6,323) $28,950,610 =========== ========== ========= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits................ $18,831,534 $3,498,659 $22,330,193 Other borrowed funds.... 1,374,190 1,573,385 2,947,575 Other liabilities....... 385,564 53,903 $ 32,817 (1)(3) 472,284 Long-term debt.......... 830,257 5,486 835,743 ----------- ---------- --------- ----------- Total Liabilities..... 21,421,545 5,131,433 32,817 26,585,795 Shareholders' equity Common Stock.......... 118,141 205 21,579 (1)(2) 139,925 Surplus............... 926,802 60,490 (28,037)(1)(2) 959,255 Retained earnings..... 984,161 330,387 (33,200)(3) 1,281,348 Net unrealized (loss) gain on securities, net of tax........... (11,304) 1,311 (712)(1) (10,705) Employee Stock Ownership Plan debt.. -- (5,008) (5,008) Treasury Stock........ -- (1,230) 1,230 (2) -- ----------- ---------- --------- ----------- Total Shareholders' 2,017,800 386,155 (39,140) 2,364,815 equity............... ----------- ---------- --------- ----------- Total Liabilities and $23,439,345 $5,517,588 $ (6,323) $28,950,610 Shareholders' Equity... =========== ========== ========= ===========
See Notes to Pro Forma Financial Information. -38- PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED, DOLLARS IN THOUSANDS)
SUMMIT AND COLLECTIVE SUMMIT COLLECTIVE PRO FORMA -------- ---------- ---------- Interest income Interest and fees on loans.................... $309,338 $55,890 $365,228 Interest on securities........................ 95,173 39,487 134,660 Other......................................... 1,051 377 1,428 -------- ------- -------- Total interest income....................... 405,562 95,754 501,316 Interest Expense Interest on deposits.......................... 132,795 35,521 168,316 Interest on borrowed funds.................... 32,710 20,275 52,985 -------- ------- -------- Total interest expense...................... 165,505 55,796 221,301 -------- ------- -------- Net interest income......................... 240,057 39,958 280,015 Provision for loan losses..................... 14,500 1,010 15,510 -------- ------- -------- Net interest income after provision for loan losses..................................... 225,557 38,948 264,505 Non-Interest Income Service charges on deposit accounts........... 26,271 2,890 29,161 Securities gains.............................. 1,140 266 1,406 Other......................................... 38,025 1,501 39,526 -------- ------- -------- Total non-interest income................... 65,436 4,657 70,093 Non-Interest Expense Salaries and employee benefits................ 87,659 7,900 95,559 Occupancy, furniture and equipment, net....... 33,691 2,966 36,657 Restructuring charges......................... 26,500 -- 26,500 Other......................................... 41,402 7,478 48,880 -------- ------- -------- Total non-interest expenses................. 189,252 18,344 207,596 -------- ------- -------- Income before income taxes...................... 101,741 25,261 127,002 Federal and state income taxes................ 35,256 9,264 44,520 -------- ------- -------- Net income...................................... 66,485 15,997 82,482 ======== ======= ======== Net Income Per Common Share(4).................. $ 0.68 $ 0.78 $ 0.71 ======== ======= ======== Average Common Shares Outstanding(1)(4)......... 98,271 20,515 116,251 ======== ======= ========
See Notes to Pro Forma Financial Information. -39- PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED, DOLLARS IN THOUSANDS)
SUMMIT AND COLLECTIVE SUMMIT COLLECTIVE(5) PRO FORMA -------- ------------- ---------- Interest income Interest and fees on loans................ $295,129 $47,016 $342,145 Interest on securities.................... 91,318 41,852 133,170 Other..................................... 1,306 -- 1,306 -------- ------- -------- Total interest income................... 387,753 88,868 476,621 Interest Expense Interest on deposits...................... 134,142 33,279 167,421 Interest on borrowed funds................ 27,620 21,884 49,504 -------- ------- -------- Total interest expense.................. 161,762 55,163 216,925 -------- ------- -------- Net interest income..................... 225,991 33,705 259,696 Provision for loan losses................. 15,500 286 15,786 -------- ------- -------- Net interest income after provision for loan losses............................ 210,491 33,419 243,910 Non-Interest Income Service charges on deposit accounts....... 23,456 2,269 25,725 Securities gains.......................... 757 634 1,391 Other..................................... 34,050 1,146 35,196 -------- ------- -------- Total non-interest income............... 58,263 4,049 62,312 Non-Interest Expense Salaries and employee benefits............ 86,919 6,979 93,898 Occupancy, furniture and equipment, net... 35,874 2,679 38,553 Restructuring charges..................... 110,700 -- 110,700 Other..................................... 39,242 7,294 46,536 -------- ------- -------- Total non-interest expenses............. 272,735 16,952 289,687 -------- ------- -------- Income before income taxes.................. (3,981) 20,516 16,535 Federal and state income taxes............ (1,742) 7,319 5,577 -------- ------- -------- Net income................................ (2,239) 13,197 10,958 ======== ======= ======== Net Income Per Common Share(4)............ $ (0.03) $ 0.65 $ 0.09 ======== ======= ======== Average Common Shares Outstanding(1)(4)... 93,134 20,444 111,162 ======== ======= ========
See Notes to Pro Forma Financial Information. -40- PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED, DOLLARS IN THOUSANDS)
SUMMIT AND COLLECTIVE SUMMIT COLLECTIVE(6) PRO FORMA ---------- ------------- ---------- Interest income Interest and fees on loans............... $1,191,805 $191,341 $1,383,146 Interest on securities .................. 355,288 162,296 517,584 Other.................................... 3,714 2,048 5,762 ---------- -------- ---------- Total interest income.................. 1,550,807 355,685 1,906,492 Interest Expense Interest on deposits..................... 527,535 131,500 659,035 Interest on borrowed funds............... 111,761 82,413 194,174 ---------- -------- ---------- Total interest expense................. 639,296 213,913 853,209 ---------- -------- ---------- Net interest income.................... 911,511 141,772 1,053,283 Provision for loan losses................ 62,000 2,035 64,035 ---------- -------- ---------- Net interest income after provision for loan losses........................... 849,511 139,737 989,248 Non-Interest Income Service charges on deposit accounts...... 98,949 9,373 108,322 Securities gains......................... 5,217 1,060 6,277 Other.................................... 143,297 5,164 148,461 ---------- -------- ---------- Total non-interest income.............. 247,463 15,597 263,060 Non-Interest Expense Salaries and employee benefits........... 326,380 28,602 354,982 Occupancy, furniture and equipment, net.. 136,209 10,746 146,955 Restructuring charges.................... 110,700 -- 110,700 Other.................................... 174,646 31,183 205,829 ---------- -------- ---------- Total non-interest expenses............ 747,935 70,531 818,466 ---------- -------- ---------- Income before income taxes................. 349,039 84,803 433,842 Federal and state income taxes........... 119,864 30,303 150,167 ---------- -------- ---------- Net income................................. $ 229,175 $ 54,500 $ 283,675 ========== ======== ========== Net Income Per Common Share(4)............. $ 2.44 $ 2.67 $ 2.53 ========== ======== ========== Average Common Shares Outstanding(1)(4).... 93,061 20,446 111,283 ========== ======== ==========
See Notes to Pro Forma Financial Information. -41- PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED, DOLLARS IN THOUSANDS)
SUMMIT AND COLLECTIVE SUMMIT COLLECTIVE(6) PRO FORMA ---------- ------------- ---------- Interest income Interest and fees on loans............... $1,132,584 $164,584 $1,297,168 Interest on securities................... 355,264 167,396 522,660 Other.................................... 7,769 4,337 12,106 ---------- -------- ---------- Total interest income.................. 1,495,617 336,317 1,831,934 Interest Expense Interest on deposits..................... 514,733 115,570 630,303 Interest on borrowed funds............... 111,643 80,286 191,929 ---------- -------- ---------- Total interest expense................. 626,376 195,856 822,232 ---------- -------- ---------- Net interest income.................... 869,241 140,461 1,009,702 Provision for loan losses................ 71,850 240 72,090 ---------- -------- ---------- Net interest income after provision for loan losses........................... 797,391 140,221 937,612 Non-Interest Income Service charges on deposit accounts...... 88,083 7,815 95,898 Securities gains (losses)................ 8,606 (11) 8,595 Other.................................... 127,500 5,639 133,139 ---------- -------- ---------- Total non-interest income.............. 224,189 13,443 237,632 Non-Interest Expense Salaries and employee benefits........... 336,550 27,490 364,040 Occupancy, furniture and equipment, net.. 131,401 9,986 141,387 Other.................................... 174,410 28,002 202,412 ---------- -------- ---------- Total non-interest expenses............ 642,361 65,478 707,839 ---------- -------- ---------- Income before income taxes................. 379,219 88,186 467,405 Federal and state income taxes........... 136,349 30,644 166,993 ---------- -------- ---------- Net income................................. $ 242,870 $ 57,542 $ 300,412 ========== ======== ========== Net Income Per Common Share(4)............. $ 2.77 $ 2.80 $ 2.84 ========== ======== ========== Average Common Shares Outstanding(1)(4).... 86,674 20,580 104,829 ========== ======== ==========
See Notes to Pro Forma Financial Information. -42- PRO FORMA CONDENSED COMBINED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED, DOLLARS IN THOUSANDS)
SUMMIT AND COLLECTIVE SUMMIT COLLECTIVE(6) PRO FORMA --------- ------------- ---------- Interest income Interest and fees on loans.............. $ 951,029 $129,017 $1,080,046 Interest on securities.................. 347,299 136,368 483,667 Other................................... 4,472 4,185 8,657 --------- -------- ---------- Total interest income................. 1,302,800 269,570 1,572,370 Interest Expense Interest on deposits.................... 368,847 95,186 464,033 Interest on borrowed funds.............. 107,126 28,573 135,699 --------- -------- ---------- Total interest expense................ 475,973 123,759 599,732 --------- -------- ---------- Net interest income................... 826,827 145,811 972,638 Provision for loan losses............... 91,995 2,352 94,347 --------- -------- ---------- Net interest income after provision for loan losses...................... 734,832 143,459 878,291 Non-Interest Income Service charges on deposit accounts..... 82,997 5,997 88,994 Securities gains........................ 2,232 2,722 4,954 Other................................... 124,837 (1,059) 123,778 --------- -------- ---------- Total non-interest income............. 210,066 7,660 217,726 Non-Interest Expense Salaries and employee benefits.......... 322,812 23,832 346,644 Occupancy, furniture and equipment, net. 128,178 8,703 136,881 Restructuring charges................... 13,565 -- 13,565 Other................................... 235,110 26,155 261,265 --------- -------- ---------- Total non-interest expenses........... 699,665 58,690 758,355 --------- -------- ---------- Income before income taxes................ 245,233 92,429 337,662 Federal and state income taxes.......... 88,952 33,062 122,014 --------- -------- ---------- Income before cumulative effect of a change in accounting principle........... 156,281 59,367 215,648 Cumulative effect of a change in accounting principle................... (1,731) -- (1,731) --------- -------- ---------- Net income................................ $154,550 $ 59,367 $ 213,917 ========= ======== ========== Net Income Per Common Share: Income before cumulative effect of a change in accounting principle......... $ 1.82 $ 2.89 $ 2.08 Cumulative effect of a change in accounting principle................... (0.02) -- (0.02) --------- -------- ---------- Net Income(4)............................. $ 1.80 $ 2.89 $ 2.06 ========= ======== ========== Average Common Shares Outstanding(1)(4)... 84,381 20,572 102,465 ========= ======== ==========
See Notes to Pro Forma Financial Information. -43- NOTES TO PRO FORMA FINANCIAL INFORMATION - -------- (1) Reflects the elimination of 163,700 shares of Collective Common owned by Summit at March 31, 1997. (2) The Pro Forma Condensed Combined Balance Sheet gives effect to the Merger by combining the respective balance sheets of Summit and Collective at March 31, 1997 on a pooling-of-interests basis. The capital accounts have been adjusted to reflect the issuance of 18.2 million shares of Summit Common in exchange for all the outstanding shares of Collective Common and the retirement of Collective Common held in the treasury of Collective. (3) Reflects charges of approximately $49.3 million, $33.2 million after the related tax effects, which includes estimated severance and outplacement costs, expenses related to facilities closures and consolidation costs directly attributable to the Merger. (4) Average common shares outstanding and net income per common share for Collective assume full dilution. Pro forma combined net income per common share was computed based on pro forma combined net income less preferred dividends divided by the combined weighted average number of shares outstanding during the period. Pro forma combined weighted average shares includes Collective's weighted average shares outstanding, adjusted for the exchange ratio. Common stock equivalents are not included in the pro forma calculation as they are not material. (5) Represents the results of operations of Collective for the three months ended September 30, 1995 to be consistent with the restatement of the historical financial statements of Summit that will be recorded on consummation of the Merger. (6) Represents the results of operations of Collective for the fiscal year ended June 30 that falls within Summit's year ended December 31 to be consistent with the restatement of the historical financial statements of Summit that will be recorded on consummation of the Merger. -44- SIGNATURE --------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: July 28, 1997 SUMMIT BANCORP. (Registrant) By: /s/ WILLIAM J. HEALY -------------------- WILLIAM J. HEALY Executive Vice President and Comptroller (Chief Accounting Officer) -45- EX-23.1 2 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 AUDITORS' CONSENT The Board of Directors Collective Bancorp: We consent to the incorporation by reference in Registration Statement No. 2- 78500 on Form S-8, Registration Statement No. 33-13930 on Form S-8, Registration Statement No. 33-36209 on Form S-8, Registration Statement No. 33-38172 on Form S-8, Registration Statement No. 33-53870 on Form S-3, Registration Statement No. 33-58152 on Form S-3, Registration Statement No. 33-62972 on Form S-8, Registration Statement No. 33-54667 on Form S-8, Registration Statement Registration No. 33-61353 on Form S-8, Registration Statement No. 333-02625, Registration Statement No. 333-24159 on Form S-8, and Registration Statement No. 333-29019 and 333-29019-01 on Form S-4 of Summit Bancorp, Inc. of our report dated July 31, 1996 with respect to the consolidated financial statements of Collective Bancorp, Inc. and subsidiary as of June 30, 1996 and for the year then ended, which report appears in the Current Report on Form 8-K of Summit Bancorp dated July 28, 1997. /s/ KPMG Peat Marwick LLP Short Hills, New Jersey July 28, 1997 EX-23.2 3 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 2-78500, 33-13930, 33-36209, 33-38172, 33-53870, 33-58152, 33-62972, 33-54667, 33-61353, 333-02625, 333-24159, 333-29019, 333-29019-01 of Summit Bancorp of our report dated August 25, 1995, appearing in this Report on Form 8-K of Summit Bancorp and to the reference to Deloitte & Touche LLP under the heading "Experts" in Registration Statements No. 333-29019 and 333-29019-01. DELOITTE & TOUCHE LLP Parsippany, New Jersey July 25, 1997 -----END PRIVACY-ENHANCED MESSAGE-----