Banking industry consolidation continued at its red-hot pace Monday as two New Jersey companies announced a $1.2 billion merger agreement, but Wall Street's reaction this time was less than enthusiastic.

UJB Financial Corp. of Princeton, paying 2.4 times book value plus some shareholder dilution for Summit Bancorp. of Chatham, insisted that cost reductions and the companies' combined 26% market penetration in New Jersey would yield a formidable, $22 billion-asset "strategic partnership."

The offer for $5.5 billion-asset Summit was 0.9-share, or $31.95, equivalent to 14 times projected 1996 earnings. The premium is the same as NationsBank Corp. agreed last week to pay for Bank South Corp. of Atlanta.

But while UJB's offer kept the takeover ante high, it did not strike the same positive note in the stock market as NationsBank's deal. UJB, which had been viewed as a superregional takeover target, decided to take what was largely an in-state initiative. (For markets report, see back page.)

"This company remains a legitimate target, considering the fact that half the top 25 banks in the country are headquartered within 200 miles of Princeton," said Dean Witter analyst Anthony R. Davis. "That doesn't go away just because this is a $22 billion-asset company."

Shares of UJB fell $2.875 to $33.75 Monday, while Summit's rose $3 to $28.75.

UJB said it will take a one-time charge of $85 million before taxes, or $54 million after taxes, in the first quarter to cover merger-related expenses.

UJB chairman T. Joseph Semrod, who would be chairman and chief executive officer of the renamed Summit Bank Corp. after the merger, defended the premium at a New York press conference.

"Summit is an excellent franchise," he said. "We think that upon reflection people will think the price is very reasonable, from both sides."

UJB said it will extract cost savings from Summit Bancorp. of $78 million before taxes, or 48%, which includes 25 branch closings. The after- tax savings would be $46 million.

UJB said these savings will help it earn back an anticipated 12%, or $2 a share, book-value dilution in 1996. It expects the deal to add 6% to earnings per share in 1997.

"We will in fact deliver those cost savings on time and it will be the accretive transaction we're telling you it's going to be," insisted Summit president and CEO Robert G. Cox, who would be president and a director of the Princeton-based Summit Bank Corp.

Mr. Cox and Mr. Semrod declined to specify how many jobs would be eliminated in the consolidation. They said an announcement would come in a week or two. The companies did reveal that 63%, or $49 million, of the $78 million in 1997 savings would come from job cuts.

The new entity would be the second-largest New Jersey bank, with $15.5 billion of deposits, and one of the top three in 13 of the state's 21 counties. First Union Corp. - which Mr. Semrod pointedly noted is from Charlotte, N.C. - will be No. 1 in New Jersey, with $16 billion of deposits, when it completes its acquisition of First Fidelity Bancorp. at the end of the year.

UJB also owns a Pennsylvania bank with 72 branches.

Looming in the background of Monday's deal was the idea that it may be prelude to a future transaction. The new Summit will be an attractive target for larger banks seeking a good opportunity in the Garden State.

When asked whether he was angling for a "double dip" for his shareholders, Mr. Cox replied: "If out-of-state organizations that are larger think the new Summit is an attractive organization, then that's terrific, isn't it, for our shareholders going forward?"

Analysts said the new Summit would be at a competitive disadvantage against bigger banks.

"I don't really see how growing to $22 billion is going to make them more competitive against the resources that First Union can bring to the table," said Merrill Ross, an analyst with Wheat First Butcher Singer Inc. in Richmond, Va. "First Union still has leading market share in the state and $123 billion of (total) assets. I don't really see how they've solved the problem."

UJB and Summit executives said they had been discussing a merger, off and on, for 11 years. The talks turned serious five and a half weeks ago, and an agreement was signed on Sunday.

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